SYNAPTICS Inc 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements and Factors That May Affect Results This Quarterly Report on Form 10-Q for the quarter ended December 26, 2020 (this “Report”) contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, including our expectations regarding the potential impacts on our business of the COVID-19 pandemic, and can be identified by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements may include words such as “expect,” “anticipate,” “intend,” “believe,” “estimate,” “plan,” “target,” “strategy,” “continue,” “may,” “will,” “should,” variations of such words, or other words and terms of similar meaning. All forward-looking statements reflect our best judgment and are based on several factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Such factors include, but are not limited to following: our dependence on our solutions for the mobile product applications market and the PC product applications market for a substantial portion of our revenue; risks related to the volatility of our net revenue from our solutions for mobile product applications; our dependence on one or more large customers; the risk that our business, results of operations and financial condition (including liquidity) and prospects may be materially and adversely affected by heath epidemics, including the COVID-19 pandemic; our exposure to industry downturns and cyclicality in our target markets; the risk that our product solutions for new markets will not be successful; our ability to maintain and build relationships with our customers; our dependence on third parties to maintain satisfactory manufacturing yields and deliverable schedule; and the risks as identified in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections of our Annual Report on Form 10-K for the fiscal year ended June 27, 2020, and other risks as identified from time to time in our SEC reports. Forward-looking statements are based on information available to us on the date hereof, and we do not have, and expressly disclaim, any obligation to publicly release any updates or any changes in our expectations, or any change in events, conditions, or circumstances on which any forward-looking statement is based. Our actual results and the timing of certain events could differ materially from the forward-looking statements. These forward-looking statements do not reflect the potential impact of any mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing. Statements made in this Report, unless the context otherwise requires, include the use of the terms “us,” “we,” “our,” the “Company” and “Synaptics” to refer to Synaptics Incorporated and its consolidated subsidiaries. Impact of COVID-19 On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, which continues to rapidly spread broadly in the U.S. and globally. In response to the outbreak, governmental authorities implemented numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions. In certain countries in which we operate governments took rapid and effective measures to stem the spread, while in other countries in which we operate governments were slow to react or have missed opportunities to effectively contain the spread. Although some of these restrictions and other containment measures have since been lifted or scaled back, ongoing surges of COVID-19 have resulted in the re-imposition of certain restrictions and containment measures and may lead to other restrictions being re-implemented in the future in response to efforts to reduce the rapid spread of COVID-19. The health and wellbeing of our workforce is our highest priority. Many of our employees are able to work from home to minimize the potential risk of spread of COVID-19 in our office environment. For those employees that are comfortable returning to an office work environment, we implemented various return to work protocols, based on guidance from local and global health organizations, to monitor and assess the health of our employees, including temperature checks and risk assessments, and further require all employees that do work in the office to wear face coverings and social distance while in communal locations in the office. While the severity and duration of business disruption to our customers and suppliers due to the COVID-19 pandemic remains uncertain, we expect that it will continue to weigh on our business and consolidated results of operations in the near term and may further impact our financial condition (including liquidity) in the future. The full extent of the impact of the COVID-19 pandemic to our business, operations and financial results will depend on numerous evolving factors that we may not be able to anticipate. While we have not incurred significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the full impact COVID-19 will have on our future results due to numerous uncertainties, including the effectiveness of recently approved vaccines against the virus and its mutations, timing and effectiveness of the broad deployment of vaccines to mitigate or stem the spread of the virus, severity of the disease, the duration of the current outbreak, the severity and duration of future surges of the outbreak, further containment actions that may be taken by governmental authorities, the impact to the businesses of our customers and suppliers and other factors. We will continue to evaluate the nature and scope of the impact to our business, consolidated results of operations, and financial condition, and may take actions altering our business operations and managing our costs and liquidity that we deem necessary or 27 appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences . We are optimistic that the recent changes in the United States to a more science-based, disciplined, and deliberate approach to addressing the virus and the ancillary effects of steps taken to slow the spread may temper the potential mid- to longer-term negative economic impact. Overview We are a leading worldwide developer and supplier of custom-designed human interface semiconductor product solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We currently generate revenue from the markets for smartphones, tablets, personal computer, or PC, products, primarily notebook computers, Internet of Things, or IoT, products which include smart devices with voice, speech and video solutions, wireless connectivity and other select electronic devices, including devices in automobiles, with our custom human interface solutions. The solutions we deliver either contain or consist of our touch-, display driver-, fingerprint authentication-based-, voice and speech-, wireless- or video- semiconductor solutions, which include our chip, and, as applicable, customer-specific firmware and software. Many of our customers have manufacturing operations in China, and many of our OEM customers have established design centers in Asia. With our expanding global presence, including offices in China, Hong Kong, India, Japan, Korea, Poland, Switzerland, Taiwan, the United Kingdom, and the United States, we are well positioned to provide local sales, operational, and engineering support services to our existing customers, as well as potential new customers, on a global basis. Our manufacturing operations are based on a variable cost model in which we outsource all of our production requirements and generally drop ship our products directly to our customers from our contract manufacturers’ facilities, eliminating the need for significant capital expenditures and allowing us to minimize our investment in inventories. This approach requires us to work closely with our contract manufacturers and semiconductor fabricators to ensure adequate production capacity to meet our forecasted volume requirements. We provide our contract manufacturers with six-month rolling forecasts and issue purchase orders based on our anticipated requirements for the next 90 days. However, we generally do not have long-term supply contracts with our contract manufacturers. We use third-party wafer manufacturers to supply wafers and third-party packaging manufacturers to package our proprietary ASICs. In certain cases, we rely on a single source or a limited number of suppliers to provide other key components of our products. Our cost of revenue includes all costs associated with the production of our products, including materials; logistics; amortization of intangibles related to acquired developed technology; backlog; supplier arrangements; manufacturing, assembly, and test costs paid to third-party manufacturers; and related overhead costs associated with our indirect manufacturing operations personnel. Additionally, we charge all warranty costs, losses on inventory purchase obligations, and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value, to cost of revenue. Our gross margin generally reflects the combination of the added value we bring to our OEM customers’ products by meeting their custom design requirements and the impact of our ongoing cost-improvement programs. These cost-improvement programs include reducing materials and component costs and implementing design and process improvements. Our newly introduced products may have lower margins than our more mature products, which have realized greater benefits associated with our ongoing cost-improvement programs. As a result, new product introductions may initially negatively impact our gross margin. Our research and development expenses include costs for supplies and materials related to product development, as well as the engineering costs incurred to design ASICs and human interface solutions for OEM customers prior to and after our OEMs’ commitment to incorporate those solutions into their products. In addition, we expense in-process research and development projects acquired as part of a business acquisition, which have not yet reached technological feasibility, and which have no foreseeable alternative future use. We continue to commit to the technological and design innovation required to maintain our position in our existing markets, and to adapt our existing technologies or develop new technologies for new markets. Selling, general, and administrative expenses include expenses related to sales, marketing, and administrative personnel; internal sales and outside sales representatives’ commissions; market and usability research; outside legal, accounting, and consulting costs; and other marketing and sales activities. Acquired intangibles amortization, included in operating expenses, consists primarily of amortization of customer relationship and tradenames intangible assets recognized under the purchase method for business combinations. Restructuring costs primarily reflect severance and facilities consolidation costs related to the restructuring of our operations to reduce operating expenses. These headcount and facilities related costs were in cost of revenue, research and development, and selling, general and administrative expenses. 28 Gain on sale of audio technology assets includes the sale of certain intangible assets related to our audio business. See below under “Divestiture s ”. Interest and other expense, net, primarily reflects interest expense on our convertible notes and revolving line of credit as well as the amortization of debt issuance costs and discount on our convertible notes, partially offset by interest income earned on our cash, cash equivalents and short-term investments. Equity investment loss includes amortization of intangible assets as well as our portion of the net loss reflected under the equity method of accounting in connection with our investment in OXi Technology Ltd. Acquisitions DisplayLink On July 17, 2020, we entered into a definitive agreement to acquire all of the equity interests in DisplayLink Corporation, or DisplayLink, a leader in high-performance video compression technology. The acquisition closed on July 31, 2020. As of December 26, 2020, our preliminary purchase consideration was $442.8 million, subject to certain additional post-closing adjustments. The results of DisplayLink are included in our condensed consolidated financial statements for the period from August 1, 2020 through December 26, 2020. For further discussion of the DisplayLink acquisition, see Note 6 included in the condensed consolidated financial statements contained elsewhere in this Report. Broadcom On July 2, 2020, we entered into definitive agreements with Broadcom to acquire certain assets and assume certain liabilities of, and obtain non-exclusive licenses relating to, Broadcom’s existing Wi-Fi, Bluetooth and GPS/GNSS products and business in the IoT market, or Broadcom Business Acquisition, for an aggregate consideration of $250 million in cash which closed on July 23, 2020. We also entered into certain transition agreements with Broadcom for a period of three years. The results of the Broadcom Business Acquisition are included in our condensed consolidated financial statements for the period from July 24, 2020 through December 26, 2020. For further discussion of the Broadcom Business Acquisition, see Note 6 included in the condensed consolidated financial statements contained elsewhere in this Report. Divestitures In December 2019, we entered into an asset purchase agreement with a third party to sell the assets of our LCD Touch Controller and Display Driver Integration, or TDDI, product line for LCD mobile displays. We retained our automotive TDDI product line and our discrete touch and discrete display driver product lines supporting LCD and OLED for the mobile market. The assets sold under the asset purchase agreement for cash consideration of $138.7 million and had a carrying value of approximately $33.6 million as of the closing date of the transaction in April 2020. The gain on sale of this business component was $105.1 million. In December 2020, we completed the sale of limited audio technology intangible assets, received a fully-paid up perpetual license back from the buyer and, as an element of the transaction licensed other audio technology intangible assets to the buyer under a fully-paid up perpetual license arrangement. Under the asset purchase agreement and the intellectual property license agreement, we received $35.0 million in cash. The gain on the sale of the audio technology assets was $34.2 million. Investment In December 2020, we invested $5.0 million in Eta Compute in exchange for preferred stock. This investment provides us with a partnership which enables us to better address expanded industry opportunities for artificial intelligence applications. The investment is accounted for under the cost method. Critical Accounting Policies and Estimates Business Combinations We have applied significant estimates and judgments in order to determine the fair value of the identified assets acquired, liabilities assumed and goodwill recognized in connection with our business combinations to ensure the value of the assets and liabilities acquired are recognized at fair value as of the acquisition date. In measuring the fair value, we utilize valuation techniques consistent with the market approach, income approach, or cost approach. 29 The valuation of the identifiable assets and liabilities includes assumptions made in performing the valuation, such as projected revenue, weighted average cost of capital, discount rates, estimated useful lives, and other relevant assessments. These assessments can be significantly affected by our estimates, judgments, and assumptions. If actual results are not consistent with our estimates, judgments, or assumptions, or if additional or new information arises in the future that affects our fair value estimates, then adjustments to our initial fair value estimates may have a material impact to our purchase accounting or our results of operations. Other than the above item, there have been no significant changes in our critical accounting policies and estimates during the six months ended December 26, 2020, compared with our critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended June 27, 2020. Results of Operations Certain of the data used in our condensed consolidated statements of income for the periods indicated, together with comparative absolute and percentage changes in these amounts, were as follows (in millions, except percentages): Three Months Ended December Six Months Ended December 2020 2019 $ Change % Change 2020 2019 $ Change % Change IoT product applications $ 155.1 $ 89.0 $ 66.1 74.3 % $ 269.5 $ 176.8 $ 92.7 52.4 % PC product applications 91.5 81.6 9.9 12.1 % 172.0 149.4 22.6 15.1 % Mobile product applications 111.0 217.7 (106.7 ) (49.0 %) 244.5 402.0 (157.5 ) (39.2 %) Net revenue 357.6 388.3 (30.7 ) (7.9 %) 686.0 728.2 (42.2 ) (5.8 %) Gross margin 150.4 159.3 (8.9 ) (5.6 %) 284.9 285.5 (0.6 ) (0.2 %) Operating expenses: Research and development 77.3 77.0 0.3 0.4 % 158.2 163.0 (4.8 ) (2.9 %) Selling, general, and administrative 39.5 31.5 8.0 25.4 % 74.8 59.0 15.8 26.8 % Acquired intangibles amortization 8.7 3.0 5.7 190.0 % 15.4 5.9 9.5 161.0 % Restructuring costs 0.6 13.3 (12.7 ) (95.5 %) 6.2 19.9 (13.7 ) (68.8 %) Gain on sale of audio technology assets (34.2 ) — (34.2 ) 100.0 % (34.2 ) — (34.2 ) 100.0 % Operating income 58.5 34.5 24.0 69.6 % 64.5 37.7 26.8 71.1 % Interest and other expense, net (6.0 ) (2.3 ) (3.7 ) (160.9 %) (10.7 ) (5.9 ) (4.8 ) (81.4 %) Income before provision for income taxes 52.5 32.2 20.3 63.0 % 53.8 31.8 22.0 69.2 % Provision for income taxes 2.4 12.0 (9.6 ) (80.0 %) 6.0 7.1 (1.1 ) (15.5 %) Equity investment loss (0.5 ) (0.4 ) (0.1 ) (25.0 %) (1.0 ) (0.9 ) (0.1 ) (11.1 %) Net income $ 49.6 $ 19.8 $ 29.8 150.5 % $ 46.8 $ 23.8 $ 23.0 96.6 % 30 Certain of the data used in our condensed consolidated statements of income presented here as a percentage of net revenue for the periods indicated were as follows: Three Months Ended Percentage Point Six Months Ended Percentage Point December Increase/ December Increase/ 2020 2019 (Decrease) 2020 2019 (Decrease) IoT product applications 43.4 % 22.9 % 20.5 % 39.3 % 24.3 % 15.0 % PC product applications 25.6 % 21.0 % 4.6 % 25.1 % 20.5 % 4.6 % Mobile product applications 31.0 % 56.1 % (25.1 %) 35.6 % 55.2 % (19.6 %) Net revenue 100.0 % 100.0 % 0.0 % 100.0 % 100.0 % 0.0 % Gross margin 42.1 % 41.0 % 1.1 % 41.5 % 39.2 % 2.3 % Operating expenses: Research and development 21.6 % 19.8 % 1.8 % 23.1 % 22.4 % 0.7 % Selling, general, and administrative 11.0 % 8.1 % 2.9 % 10.9 % 8.1 % 2.8 % Acquired intangibles amortization 2.4 % 0.8 % 1.6 % 2.2 % 0.8 % 1.4 % Restructuring costs 0.2 % 3.4 % (3.2 %) 0.9 % 2.7 % (1.8 %) Gain on sale of audio technology assets (9.6 %) 0.0 % (9.6 %) (5.0 %) 0.0 % (5.0 %) Operating income 16.4 % 8.9 % 7.5 % 9.4 % 5.2 % 4.2 % Interest and other expense, net (1.7 %) (0.6 %) (1.1 %) (1.6 %) (0.8 %) (0.8 %) Income before provision for income taxes 14.7 % 8.3 % 6.4 % 7.8 % 4.4 % 3.4 % Provision for income taxes 0.7 % 3.1 % (2.4 %) 0.9 % 1.0 % (0.1 %) Equity investment loss (0.1 %) (0.1 %) 0.0 % (0.1 %) (0.1 %) 0.0 % Net income 13.9 % 5.1 % 8.8 % 6.8 % 3.3 % 3.5 % Net Revenue Net revenue was $357.6 million for the three months ended December 26, 2020, compared with $388.3 million for the three months ended December 28, 2019, a decrease of $30.7 million, or 7.9%. Of this net revenue, $155.1 million, or 43.4%, was from IoT product applications, and $91.5 million, or 25.6%, was from PC product applications, and $111.0 million, or 31.0%, was from Mobile product applications. The decrease in net revenue for the three months ended December 26, 2020 was primarily attributable to a decrease in net revenue from Mobile product applications, partially offset by an increase in net revenue from IoT product applications and PC product applications. Net revenue from Mobile product applications decreased as a result of a decline in units sold (which decreased 36%) as well as lower average selling prices due to product sales mix (which declined 20%) for Mobile product applications. The decline in unit sales in Mobile product applications was primarily due to the divestiture of our TDDI business in the fourth quarter of fiscal 2020. Net revenue from IoT product applications, which includes products from both acquisitions that closed in July 2020, increased as a result of higher average selling prices for IoT product applications due to our product sales mix (which increased 48%) and an increase in units sold (which increased 18%). Net revenue from PC product applications increased due to a growth in units sold (which increased 12%) for PC product applications. Net revenue was $686.0 million for the six months ended December 26, 2020, compared with $728.2 million for the six months ended December 28, 2019, a decrease of $42.2 million, or 5.8%. Of this net revenue, $269.5 million, or 39.3%, was from IoT product applications, and $172.0 million, or 25.1%, was from PC product applications, and $244.5 million, or 35.6%, was from Mobile product applications. The decrease in net revenue for the three months ended December 26, 2020 was attributable to a decrease in net revenue from Mobile product applications, partially offset by an increase in net revenue from IoT product applications and PC product applications. Net revenue from Mobile product applications decreased as a result of a decline in units sold (which decreased 30%) as well as lower average selling prices (a decline of 13%) for Mobile product applications. The decline in unit sales in Mobile product applications was primarily due to the divestiture of our TDDI business in the fourth quarter of fiscal 2020. Net revenue from IoT product applications, which includes products from both acquisitions that closed in July 2020, increased as a result of higher average selling prices for IoT product applications due to our product sales mix (which increased 36%) and an increase in units sold (which increased 12%). Net revenue from PC product applications increased due to a growth in units sold (which increased 10%) for PC product applications as well as slightly higher average selling prices. Gross Margin Gross margin as a percentage of net revenue was 42.1%, or $150.4 million, for the three months ended December 26, 2020, compared with 41.0%, or $159.3 million, for the three months ended December 28, 2019. The 110 basis point increase in gross margin for the three months ended December 26, 2020, was primarily due to a favorable product mix and product cost reductions, partially 31 offset by a $ 20.5 million in crease in amortization for amortizable intangibles primarily related to the acquisition of DisplayLink and the Broadcom Business Acquisition and $ 11.9 million of inventory fair value adjustments associated with the DisplayLink a cquisition . Gross margin as a percentage of net revenue was 41.5%, or $284.9 million, for the six months ended December 26, 2020, compared with 39.2%, or $285.5 million, for the six months ended December 28, 2019. The 230 basis point increase in gross margin for the six months ended December 28, 2019, was primarily due to a favorable product mix and product cost reductions, partially offset by a $27.7 million increase in amortization for amortizable intangibles primarily related to the acquisition of DisplayLink and the Broadcom Business Acquisition and $21.7 million of inventory fair value adjustments associated with the DisplayLink acquisition We continuously introduce new product solutions, that may have life cycles of less than one year. Further, because we sell our technology solutions in designs that are generally unique or specific to an OEM customer’s application, gross margin varies on a product-by-product basis, making our cumulative gross margin a blend of our product specific designs. As a fabless manufacturer, our gross margin percentage is generally not materially impacted by our shipment volume. We charge losses on inventory purchase obligations and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value (including warranty costs) to cost of revenue. Operating Expenses Research and Development Expenses . Research and development expenses remained flat at $77.3 million for the three months ended December 26, 2020, compared with $77.0 million for the three months ended December 28, 2019. A majority of expenses have declined from the three months ended December 28, 2019 to the three months ended December 26, 2020, as a result of a reduction in average headcount. However, the declines in other expenses have been offset by acquisition related product development services. Research and development expenses decreased $4.8 million to $158.2 million for the six months ended December 26, 2020, compared with the six months ended December 28, 2019. The decrease in research and development expenses reflected a net $3.6 million decrease in personnel-related costs, which was due to a reduction in average headcount for the six months ended December 26, 2020 as compared to the six months ended December 28, 2019, as a result of restructuring activities to reduce operating costs, partially offset by increased headcount as a result of recent acquisitions; a $3.7 million decrease due to acquired in-process research and development recorded in the first quarter of fiscal 2020; a $2.0 million decrease in travel related costs; a $1.6 million decrease in software license and maintenance costs; and a $1.3 million decrease in facilities and infrastructure costs; partially offset by an increase of $3.5 million in project related costs and a $3.0 million increase in intellectual property amortization. Selling, General, and Administrative Expenses . Selling, general, and administrative expenses increased $8.0 million to $39.5 million for the three months ended December 26, 2020, compared with the three months ended December 28, 2019. The increase in selling, general, and administrative expenses primarily reflected a $6.5 million increase in stock based compensation costs which were incurred in connection with grants of awards primarily to new employees in fiscal 2020 and the first half of fiscal 2021, as well as a $1.4 million increase in legal and accounting fees related to recent acquisitions. Selling, general, and administrative expenses increased $15.8 million to $74.8 million for the six months ended December 26, 2020, compared with the six months ended December 28, 2019. The increase in selling, general, and administrative expenses primarily reflected a $13.2 million increase in stock based compensation costs which were incurred in connection with grants of awards primarily to new employees in fiscal 2020 and the first half of fiscal 2021, as well as a $1.1 million increase in foreign exchange losses. Acquired Intangibles Amortization. Acquired intangibles amortization reflects the amortization of intangibles acquired through acquisitions. For further discussion of acquired intangibles amortization, see Note 7 Acquired Intangibles and Goodwill included in the condensed consolidated financial statements contained elsewhere in this Report. Restructuring Costs. Restructuring costs of $6.2 million in the six months ended December 26, 2020 reflect severance costs for restructuring of our operations to reduce ongoing operating costs. Restructuring activities commenced in each of fiscal 2020 and the first half of fiscal 2021 and are all expected to be complete by the end of fiscal 2021. See Note 16 Restructuring Activities included in the condensed consolidated financial statements contained elsewhere in this Report. Gain on sale of audio technology assets . Gain on sale of audio technology assets includes the sale of certain intangible assets related to our audio business. See Note 6 Acquisitions, Divestiture and Investment included in the condensed consolidated financial statements contained elsewhere in this Report. Interest and Other Expense, Net . Interest and other expense, net primarily includes the amortization of debt discount and issuance costs, as well as interest on our debt, partially offset by interest income earned on our cash, cash equivalents and short-term investments. Interest and other expense, net increased $3.7 million to $6.0 million for the three months ended December 26, 2020, as compared to $2.3 million for the three months ended December 28, 2019. The increase in interest and other expense, net is primarily 32 due to a decrease in interest income as a result of lower cash balances and interest rates and higher interest expense on our debt due to borrowings under our revolving line of credit. I nterest and other expense, net in c reased $ 4.8 million to $ 10.7 million for the six months ended December 26, 2020 , as compared to $ 5.9 million for the six months ended December 28, 2019 . The in c rease in interest and other expense, net is primarily due to a de crease in interest income as a result of lower cash balances and interest rates and higher interest expense on our debt due to borrowings under our revolving line of credit . Provision for Income Taxes On March 27, 2020, the Coronavirus Aid, Relief and Economic Security, or CARES, Act was enacted and signed into law. The CARES Act did not have a material impact on the income tax provision for the three and six months ended December 26, 2020. We account for income taxes under the asset and liability method. The provision for income taxes recorded in interim periods is based on our estimate of the annual effective tax rate applied to year-to-date income before provision for income taxes, adjusted for discrete items required to be recognized in the period in which they are incurred. In each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual tax rate changes, we make a cumulative adjustment in that quarter. Our quarterly tax provision and our quarterly estimate of the annual effective tax rate can be subject to volatility due to several factors, including our ability to accurately forecast annual income before provision for income taxes in each of the tax jurisdictions in which we operate. The provision for income taxes of $2.4 million and $12.0 million for the three months ended December 26, 2020 and December 28, 2019, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months ended December 26, 2020 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes, non-deductible officer compensation, the impact of accounting for qualified stock options and GILTI, partially offset by the benefit of income taxed at lower rates, research credits and foreign tax credits. The effective tax rate for the three months ended December 28, 2019, diverged from the combined U.S. federal and state statutory tax rate, primarily because of foreign withholding taxes and GILTI partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates. The provision for income taxes of $6.0 million and $7.1 million for the six months ended December 26, 2020 and December 28, 2019, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months ended December 26, 2020 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes, non-deductible officer compensation, the impact of accounting for qualified stock options and GILTI, partially offset by the benefit of income taxed at lower rates, research credits and foreign tax credits. The effective tax rate for the six months ended December 28, 2019, diverged from the combined U.S. federal and state statutory tax rate, primarily because of foreign withholding taxes and GILTI partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates. Liquidity and Capital Resources Our cash and cash equivalents were $309.9 million as of December 26, 2020, compared with $763.4 million as of June 27, 2020, representing a decrease of $453.5 million. The decrease primarily reflected $623.0 million used for the acquisition of businesses, net of cash and cash equivalents acquired, $25.8 million used for payroll taxes for restricted stock units, market stock units and performance stock units, and $12.2 million used for purchases of property and equipment, partially offset by $88.0 million of proceeds from maturities of investments, $77.9 million of net cash provided by operating activities, $34.2 million of proceeds from sale of audio technology assets and $11.2 of proceeds from issuance of shares. At this time, we consider earnings of our foreign subsidiaries indefinitely invested overseas and have made no provision for income or withholding taxes, other than the one-time transition tax incurred as part of the Tax Cuts and Jobs Act, that may result from a future repatriation of those earnings. As of December 26, 2020, $198.4 million of cash, cash equivalents and short-term investments was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we would be required to accrue and pay foreign withholding taxes to repatriate certain of these funds. Cash Flows from Operating Activities. Operating activities during the six months ended December 26, 2020 generated $77.9 million compared with $120.0 million net cash generated during the six months ended December 28, 2019. For the six months ended December 26, 2020, the primary operating activities were adjustments for non-cash charges of $75.2 million and a net change in operating assets and liabilities of $44.1 million. The net change in operating assets and liabilities was primarily attributable to a $46.9 million increase in accounts receivable, net, a $24.6 million decrease in accrued compensation, $15.3 million decrease in income taxes payable and a $11.9 million decrease in other accrued liabilities, partially offset by a $62.0 million decrease in inventories. From June 27, 2020 to December 26, 2020, our days sales outstanding remained flat at 63 days. Our annual inventory turns increased from six to nine over the same time period. Cash Flows from Investing Activities. Cash used in investing activities during the six months ended December 26, 2020 primarily consisted of $623.0 million used for the acquisition of businesses and $12.2 million for purchases of property and equipment, partially offset by $88.0 million in proceeds from maturities of investments and $34.2 million of proceeds from sale of audio technology assets. 33 Cash Flows from Financing Activities. Net cash used in financing activities for the six months ended December 26, 2020 was $14.6 million compared with $12.2 million for the six months ended December 28, 2019 . Net cash used in financing activities for the six months ended December 26, 2020 consisted of $25.8 million used for payroll taxes on RSUs , MSUs and PSUs , partially offset by $1 1.2 of proceeds from issuance of shares . Common Stock Repurchase Program. As of December 26, 2020, our board has cumulatively authorized $1.4 billion for our common stock repurchase program, which will expire in July 2021. The program authorizes us to purchase our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors. The number of shares purchased and the timing of purchases are based on the level of our cash balances, general business and market conditions, and other factors. Common stock purchased under this program is held as treasury stock. From April 2005 through December 26, 2020, we purchased 31,749,195 shares of our common stock in the open market for an aggregate cost of $1.2 billion. During the three months ended December 26, 2020, we did not repurchase any shares of our common stock. As of December 26, 2020, the remaining available authorization under our common stock repurchase program was $177.4 million. Convertible Debt On June 20, 2017, we entered into a purchase agreement, or the Purchase Agreement, with Wells Fargo Securities, LLC, as representative of the initial purchasers named therein, collectively, the Initial Purchasers, pursuant to which we agreed to issue and sell, and the Initial Purchasers agreed to purchase, $500 million aggregate principal amount of our 0.50% convertible senior notes due 2022, or the Notes, in a private placement transaction. Pursuant to the Purchase Agreement, we also granted the Initial Purchasers a 30-day option to purchase up to an additional $25 million aggregate principal amount of Notes, which was exercised in full on June 21, 2017. The net proceeds, after deducting the Initial Purchasers’ discounts, were $514.5 million, which included proceeds from the Initial Purchasers’ exercise of their option to purchase additional Notes. We received the net proceeds on June 26, 2017, which we used to repurchase shares of our common stock, retire our outstanding bank debt, and provide additional cash resources to fund the acquisition of Conexant Systems, LLC and the assets of Marvell Technology Group, Ltd.’s multimedia solutions business. The Notes bear interest at a rate of 0.50% per year. Interest has accrued since June 26, 2017 and is payable semi-annually in arrears, on June 15 and December 15 of each year, beginning on December 15, 2017. The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any our liabilities that are not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. The Notes mature on June 15, 2022, or the Maturity Date, unless earlier repurchased, redeemed or converted. Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at their option at any time prior to the close of business on the business day immediately preceding March 15, 2022 under certain defined circumstances, including (1) if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter or (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day. On or after March 15, 2022 until the close of business on the business day immediately preceding the Maturity Date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at the option of the holder. Upon conversion, we will pay or deliver, at our election, shares of common stock, cash, or a combination of cash and shares of common stock. The conversion rate for the Notes is initially 13.6947 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $73.02 per share of common stock). The conversion rate is subject to adjustment in certain circumstances. Upon the occurrence of a fundamental change (as defined in the Notes indenture), holders of the Notes may require us to repurchase for cash all or a portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. Commencing June 20, 2020, we may redeem for cash all or any portion of the Notes, at our option, if the last reported sale price of our common stock, as determined by us, has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal 34 to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest up to, but excluding, the redemption date. Our policy is to settle the principal amount of our Notes with cash upon conversion or redemption. Bank Credit Facility. We have a $200.0 million revolving credit facility, pursuant to that certain Amended and Restated Credit Agreement, dated September 27, 2017, or the Credit Agreement, which includes a $20 million sublimit for letters of credit and a $20 million sublimit for swingline loans. Under the terms of the Credit Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments in an aggregate principal amount of up to $100 million to the extent existing or new lenders agree to provide such increased or additional commitments, as applicable. Proceeds under the revolving credit facility are available for working capital and general corporate purposes. In February 2020, we entered into the First Amendment to the Amended and Restated Credit Agreement, or the Amendment, with the lenders that are party thereto, or the Lenders, and Wells Fargo Bank, National Association, as administrative agent for the Lenders. Pursuant to the Amendment, the Credit Agreement was amended to, among other things, (i) modify the definition of Consolidated EBITDA (as defined in the Credit Agreement) to increase the maximum limit on the add back of certain restructuring and integration cost and expenses to 30% from 15% of Consolidated EBITDA, (ii) modify the negative covenant for Consolidated Total Leverage Ratio (as defined in the Credit Agreement) at the end of any fiscal quarter to 4.75:1.00 from 3.50:1.00, and for any four quarter period following a Material Acquisition (as defined in the Credit Agreement) to 5:00:1.00 from 3.75:1.00, (iii) modify the circumstances under which the maturity date of the Credit Agreement would be accelerated in advance of the maturity date of the Notes to eliminate the acceleration of the maturity date of the Credit Agreement if we meet certain specified leverage and liquidity covenants, (iv) add a minimum liquidity covenant for each two-week period beginning on the date that is 120 days prior to the maturity date of the Company’s existing convertible senior notes, (v) add certain technical amendments to address LIBOR transition matters, and (vi) include or revise certain definitions and certain customary representation, warranties and acknowledgments. As of December 26, 2020, there was $100.0 million balance outstanding under the revolving credit facility. The weighted average annualized interest rate on these borrowings for the three months ended December 26, 2020 was 2.73%. The revolving credit facility is required to be repaid in full on the earlier of (i) September 27, 2022, and (ii) the date 91 days prior to the Maturity Date of the Notes if the Notes have not been refinanced in full by such date, subject to certain exceptions based on specific covenant calculations. Debt issuance costs of $2.3 million relating to the revolving credit facility will be amortized over 60 months Our obligations under the Credit Agreement are guaranteed by the material domestic subsidiaries of our Company, subject to certain exceptions (such material subsidiaries, together with our Company, collectively, the Credit Parties). The obligations of the Credit Parties under the Credit Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of the existing and future personal property of the Credit Parties, including, without limitation, 65% of the voting capital stock of certain of the Credit Parties’ direct foreign subsidiaries, subject to certain exceptions. The revolving credit facility bears interest at our election of a Base Rate plus an Applicable Margin or LIBOR plus an Applicable Margin. Swingline loans bear interest at a Base Rate plus an Applicable Margin. The Base Rate is a floating rate that is the greater of the Prime Rate, the Federal Funds Rate plus 50 basis points, or LIBOR plus 100 basis points. The Applicable Margin is based on a sliding scale which ranges from 0.25 to 100 basis points for Base Rate loans and 100 basis points to 175 basis points for LIBOR loans. We are required to pay a commitment fee on any unused commitments under the Credit Agreement which is determined on a leverage-based sliding scale ranging from 0.175% to 0.25% per annum. Interest and fees are payable on a quarterly basis. The LIBOR index is expected to be discontinued at the end of 2021. Under our credit facility, when the LIBOR index is discontinued, we will switch to a comparable or successor rate as selected by the Administrative Agent and the Company, which may include the Secured Overnight Financing Rate, or SOFR. Under the Credit Agreement, there are various restrictive covenants, including three financial covenants which limit the consolidated total leverage ratio, or leverage ratio, the consolidated interest coverage ratio, or interest coverage ratio, a restriction which places a limit on the amount of capital expenditures that may be made in any fiscal year, a restriction that permits up to $50 million per fiscal quarter of accounts receivable financings, and sets the Specified Leverage Ratio. The leverage ratio is the ratio of debt as of the measurement date to earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four consecutive quarters ending with the quarter of measurement. The current leverage ratio shall not exceed 4.75 to 1.00 provided that for the four fiscal quarters ending after the date of a material acquisition, such maximum leverage ratio shall be adjusted to 5.0 to 1.00, and thereafter 4.75 to 1.0. The interest coverage ratio is EBITDA to interest expense for the four consecutive quarters ending with the quarter of measurement. The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the Credit Agreement. The Specified Leverage Ratio is the ratio used in determining, among other things, whether we are permitted to make dividends and/or prepay certain indebtedness, at a fixed ratio of 2.25 to 1.00. 35 $100 Million Shelf Registration. We have registered an aggregate of $100.0 million of common stock and preferred stock for issuance in connection with acquisitions, which shares will generally be freely tradeable after their issuance under the Securities Act unless held by an affiliate of the Company , in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144 of the Securities Act. Liquidity and Capital Resources. Although consequences of the COVID-19 pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future, we believe our existing cash and cash equivalents, anticipated cash flows from operating activities, and available credit under our revolving credit facility will be sufficient to meet our working capital and other cash requirements, including the DisplayLink acquisition, the Broadcom Business Acquisition, and our debt service obligations, for at least the next 12 months. On April 2, 2020, the Company borrowed $100 million under the Credit Agreement in order to increase its cash position and preserve financial flexibility out of an abundance of caution as a result of the ongoing uncertainty and volatility in the global markets driven by the COVID-19 pandemic. Our future capital requirements will depend on many factors, including our revenue, the effectiveness of recently approved vaccines including the deployment of those vaccines to help reduce the length, duration and severity of the COVID-19 pandemic, the timing and extent of spending to support product development efforts, costs associated with restructuring activities net of projected savings from those activities, costs related to protecting our intellectual property, the expansion of sales and marketing activities, timing of introduction of new products and enhancements to existing products, costs to ensure access to adequate manufacturing, costs of maintaining sufficient space for our workforce, the continuing market acceptance of our product solutions, our common stock repurchase program, and the amount and timing of our investments in, or acquisitions of, other technologies or companies. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our future long-term working capital needs, take advantage of business opportunities or to respond to competitive pressures could be limited or severely constrained. Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not currently anticipate the need to remit undistributed earnings of our foreign subsidiaries to meet our working capital and other cash requirements, but if we did remit such earnings, we may be required to accrue and pay certain state and foreign taxes to repatriate these funds, which would adversely impact our financial position and results of operations. Contractual Obligations and Commercial Commitments Our material contractual obligations and commercial commitments as of December 26, 2020 were as follows (in millions): Remaining in Fiscal Year 2021 Fiscal Year 2022 Fiscal Year 2023 Fiscal Year 2024 Fiscal Year 2025 Thereafter Total Long-term debt (1) $ 2.6 $ 627.7 $ — $ — $ — $ — $ 630.3 Leases 6.0 10.2 6.3 4.8 3.9 13.2 44.4 Purchase obligations and other commitments (2) 34.6 8.1 8.8 1.4 — — 52.9 Transition tax payable (3) — 0.9 1.8 2.4 3.0 — 8.1 Total $ 43.2 $ 646.9 $ 16.9 $ 8.6 $ 6.9 $ 13.2 $ 735.7 (1) Represents the principal and interest payable through the maturity date of the underlying contractual obligation. (2) Purchase obligations and other commitments include payments due for inventory purchase obligations with contract manufacturers, long-term software tool licenses, and other licenses. (3) Represents the remaining balance of the one-time transition tax liability associated with our deemed repatriation of accumulated foreign earnings as a result of the enactment of the Tax Cuts and Jobs Act into law on December 22, 2017. The amounts in the table above exclude unrecognized tax benefits of $22.1 million. As of December 26, 2020, we were unable to make a reasonably reliable estimate of when cash settlement with a taxing authority may occur in connection with our gross unrecognized tax benefit. 36 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 26, 2020, our market risk related to interest rates on our cash and cash equivalents, and foreign currency exchange risks has not changed materially from the risks disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 27, 2020.