ANALOG DEVICES, INC. amounts)
The following discussion includes a comparison of our Results of Operations and Liquidity and Capital Resources for the fiscal years endedOctober 30, 2021 (fiscal 2021), the fiscal year endedOctober 31, 2020 (fiscal 2020) and the fiscal year endedNovember 2, 2019 (fiscal 2019). Our fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October. Fiscal 2021, fiscal 2020 and fiscal 2019 were 52-week fiscal periods. Impact of COVID-19 on our Business The pandemic caused by the novel strain of the coronavirus (COVID-19) and the numerous measures implemented by government authorities in response, have impacted and likely will continue to impact our workforce and operations, the operations of our customers and those of our respective vendors and suppliers. We have significant operations worldwide, including inthe United States ,the Philippines ,Ireland ,Malaysia ,Thailand ,China andIndia . Each of these countries has been affected by the pandemic and taken measures to try to contain it, resulting in disruptions at some of our manufacturing operations and facilities. The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, modifying employee work locations and cancelling physical participation in meetings, events and conferences) and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and shareholders. While we are confident that our strategy and long-term contingency planning have positioned us well to weather the current uncertainty, we cannot at this time fully quantify or forecast the impact of COVID-19 on our business. The full extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations will depend on future developments, which are highly uncertain such as the continued duration and severity of the pandemic, the spread of more contagious variants of the virus, the adoption rate of vaccines, the actions to contain the virus or treat its impact, or how quickly and to what extent normal economic and operating conditions can resume. Acquisition of Maxim Integrated Products, Inc. OnAugust 26, 2021 (Acquisition Date), we completed the acquisition of Maxim Integrated Products, Inc. (Maxim), an independent manufacturer of innovative analog and mixed-signal products and technologies. Pursuant to the Agreement and Plan of Merger, dated as ofJuly 12, 2020 (the Merger Agreement), Maxim stockholders received, for each outstanding share of Maxim common stock, 0.6300 of a share of the Company's common stock as of the Acquisition Date, for total consideration of approximately$28.0 billion of our common stock. The acquisition of Maxim is referred to as the Acquisition. The consolidated financial statements included in this Annual Report on Form 10-K include the financial results of Maxim prospectively from the Acquisition Date. See Note 6, Acquisitions, of the Notes to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information. Results of Operations A discussion of changes in our results of operations from fiscal 2019 to fiscal 2020 has been omitted from this Form 10-K, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for fiscal 2020 filed with theSecurities and Exchange Commission onNovember 24, 2020 . 28 --------------------------------------------------------------------------------
Overview
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change % Change $ Change % Change
Revenue $ 7,318,286 $ 5,603,056 $ 5,991,065 $ 1,715,230 31 % $ (388,009) (6) %
Gross margin % 61.8 % 65.9 % 67.0 %
Net income $ 1,390,422 $ 1,220,761 $ 1,363,011 $ 169,661 14 % $ (142,250) (10) %
Net income as a % of
revenue 19.0 % 21.8 % 22.8 %
Diluted EPS $ 3.46 $ 3.28 $ 3.65 $ 0.18 5 % $ (0.37) (10) %
Revenue Trends by End Market
The following table summarizes revenue by end market. The categorization of
revenue by end market is determined using a variety of data points including the
technical characteristics of the product, the "sold to" customer information,
the "ship to" customer information and the end customer product or application
into which our product will be incorporated. As data systems for capturing and
tracking this data and our methodology evolves and improves, the categorization
of products by end market can vary over time. When this occurs, we reclassify
revenue by end market for prior periods. Such reclassifications typically do not
materially change the sizing of, or the underlying trends of results within each
end market.
Fiscal 2021 Fiscal 2020 Fiscal 2019
% of % of % of
Total Total Total
Product Product Product
Revenue Revenue (1) Y/Y% Revenue Revenue (1) Y/Y% Revenue Revenue (1)
Industrial $ 4,011,485 55 % 34 % $ 2,998,259 54 % (1) % $ 3,014,890 50 %
Automotive 1,248,635 17 % 60 % 778,297 14 % (16) % 929,671 16 %
Communications 1,198,461 16 % 1 % 1,191,169 21 % (8) % 1,294,233 22 %
Consumer 859,705 12 % 35 % 635,331 11 % (16) % 752,271 13 %
Total Revenue $ 7,318,286 100 % 31 % $ 5,603,056 100 % (6) % $ 5,991,065 100 %
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(1)The sum of the individual percentages may not equal the total due to rounding. Revenue increased across all end markets in fiscal 2021 as compared to fiscal 2020 primarily as a result of higher broad-based demand for our products sold into the Automotive, Consumer and Industrial end markets. Revenue in the Communications end market was also slightly higher in fiscal 2021 compared to fiscal 2020 as the timing of infrastructure deployment cycles in certain regions offset higher demand. Incremental revenue as a result of the Acquisition also contributed to higher revenue in each end market in fiscal 2021, as compared to fiscal 2020. Revenue by Sales Channel The following table summarizes revenue by sales channel. We sell our products globally through a direct sales force, third party distributors, independent sales representatives and via our website. Distributors are customers that buy products with the intention of reselling them. Direct customers are non-distributor customers and consist primarily of original equipment manufacturers (OEMs). Other customers include theU.S. government, government prime contractors and certain commercial customers for which revenue is recorded over time. 29 --------------------------------------------------------------------------------
Fiscal 2021 Fiscal 2020 Fiscal 2019
% of % of % of
Total Total Total
Product Product Product
Revenue Revenue (1) Revenue Revenue (1) Revenue Revenue (1)
Distributors $ 4,589,944 63 % $ 3,216,302 57 % $ 3,409,161 57 %
Direct customers 2,600,353 36 % 2,300,493 41 % 2,506,065 42 %
Other 127,989 2 % 86,261 2 % 75,839 1 %
Total Revenue $ 7,318,286 100 % $ 5,603,056 100 % $ 5,991,065 100 %
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(1)The sum of the individual percentages may not equal the total due to rounding. The percentage of total revenue sold via each channel can fluctuate from time to time based on end customer demand. In fiscal 2021, higher demand within our Automotive and Industrial end markets resulted in increased revenue through our distributor channel. Revenue Trends byGeographic Region Revenue by geographic region, based upon the geographic location of the distributors or OEMs who purchased the Company's products, for fiscal 2021, fiscal 2020 and fiscal 2019 was as follows: Change Fiscal Year 2021 over 2020 2020 over 2019 % Change % Change 2021 2020 2019 $ Change (1) $ Change
(1)
United States$ 2,389,439 $ 1,887,443 $ 2,020,886 $ 501,996 27 %$ (133,443) (7) % Rest of North and South America 42,830 41,250 55,059 1,580 4 % (13,809) (25) % Europe 1,592,989 1,245,695 1,374,673 347,294 28 % (128,978) (9) % Japan 787,966 521,720 657,632 266,246 51 % (135,912) (21) % China 1,614,396 1,348,011 1,316,275 266,385 20 % 31,736 2 % Rest of Asia 890,666 558,937 566,540 331,729 59 % (7,603) (1) % Total Revenue$ 7,318,286 $ 5,603,056 $ 5,991,065 $ 1,715,230 31 %$ (388,009) (6) %
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(1)The sum of the individual percentages may not equal the total due to rounding. In all periods presented, the predominant countries comprising "Rest ofNorth and South America " areCanada andMexico ; the predominant countries comprising "Europe" areGermany ,Sweden , andthe Netherlands ; and the predominant countries comprising "Rest ofAsia " areTaiwan ,Malaysia ,South Korea andSingapore . Total revenue increased in fiscal 2021 as compared to fiscal 2020 due to broad-based, global demand in the semiconductor industry as well as the incremental impact of revenue from the Acquisition. We saw increases across all end markets in territories, with the exception of sales into the Communication end market inChina , which was impacted by infrastructure deployment cycles as noted above. 30 --------------------------------------------------------------------------------
Gross Margin
Change
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change % Change $ Change
% Change
Gross margin $ 4,525,012 $ 3,690,478 $ 4,013,750 $ 834,534 23 % $ (323,272) (8) %
Gross margin % 61.8 % 65.9 % 67.0 %
Gross margin percentage in fiscal 2021 decreased by 410 basis points compared to
fiscal 2020, primarily as a result of recording additional costs related to the
Acquisition, including $331.1 million and $155.4 million of cost of goods sold
related to the fair value adjustments recorded to inventory and amortization
expense of intangible assets, respectively. These increases in cost of sales as
a result of the Acquisition were partially offset by the favorable impact of
higher utilization of our factories due to increased customer demand.
Research and Development (R&D)
Change
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change % Change $ Change
% Change
R&D expenses $ 1,296,126 $ 1,050,519 $ 1,130,348 $ 245,607 23 % $ (79,829) (7) %
R&D expenses as a % of
revenue 18 % 19 % 19 %
R&D expenses increased in fiscal 2021 as compared to fiscal 2020 primarily as a
result of higher R&D employee-related variable compensation expense, incremental
R&D expenses incurred as a result of the Acquisition and higher salary and
benefit expenses.
R&D expenses as a percentage of revenue will fluctuate from year-to-year
depending on the amount of revenue and the success of new product development
efforts, which we view as critical to our future growth. We expect to continue
the development of innovative technologies and processes for new products. We
believe that a continued commitment to R&D is essential to maintain product
leadership with our existing products as well as to provide innovative new
product offerings. Therefore, we expect to continue to make significant R&D
investments in the future.
Selling, Marketing, General and Administrative (SMG&A)
Change
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change % Change $ Change % Change
SMG&A expenses $ 915,418 $ 659,923 $ 648,094 $ 255,495 39 % $ 11,829 2 %
SMG&A expenses as a % of
revenue 13 % 12 % 11 %
SMG&A expenses increased in fiscal 2021 as compared to fiscal 2020, primarily as
a result of higher costs due to acquisition-related transaction costs,
incremental SMG&A expenses incurred as a result of the Acquisition and higher
variable compensation expense and salary and benefit expenses.
Amortization of Intangibles
Change
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change % Change $ Change % Change
Amortization expenses $ 536,811 $ 429,455 $ 429,041 $ 107,356 25 % $ 414 - %
Amortization expenses as a % of
revenue 7 % 8 % 7 %
Amortization expenses increased in fiscal 2021 as compared to fiscal 2020,
primarily as a result of
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Special Charges, Net
We monitor global macroeconomic conditions on an ongoing basis and continue to
assess opportunities for improved operational effectiveness and efficiency, as
well as a better alignment of expenses with revenues. As a result of these
assessments, we have undertaken various restructuring actions over the past
several years.
Closure of Manufacturing Facilities: We recorded special charges as a result of
our decision to consolidate certain wafer and test facility operations acquired
as part of the acquisition of Linear. The special charges include severance and
fringe benefit costs, in accordance with the Company's ongoing benefit plan or
statutory requirements at foreign locations and one-time termination benefits
for the impacted employees and other exit costs. These one-time termination
benefits are being recognized over the future service period required for
employees to earn these benefits. In addition, as a result of management's plan
to close certain wafer and test facility operations acquired as part of the
acquisition of Linear Technology Corporation (Linear), the Company sold its
facility in Singapore and ceased production at its Hillview manufacturing
facility in Milpitas, California during fiscal 2021.
Repositioning Actions: In fiscal 2020, we recorded special charges of $49.4
million as a result of organizational initiatives to better align its global
workforce with its long-term strategic plan. The special charges include
severance and fringe benefit costs, in accordance with the Company's ongoing
benefit plan or statutory requirements at foreign locations and the write-off of
acquired intellectual property due to the Company's decision to discontinue
certain product development strategies.
Other: The other special charges of $83.4 million recognized during fiscal 2021
include severance and benefit costs as well as charges recorded from
acceleration of equity awards in connection with the termination of a limited
number of employees as part of the integration of the Acquisition.
Operating Income
Change
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change % Change $ Change % Change
Operating income $ 1,692,201 $ 1,498,244 $ 1,710,608 $ 193,957 13 % $ (212,364) (12) %
Operating income as a % of
revenue 23.1 % 26.7 % 28.6 %
The increase in operating income in fiscal 2021 as compared to fiscal 2020 was
primarily the result of a $834.5 million increase in gross margin, partially
offset by a $255.5 million increase in SMG&A expenses, a $245.6 million increase
in R&D expenses, a $107.4 million increase in amortization expenses and a $32.1
million increase in special charges, net as more fully described above under the
headings Gross Margin, Selling, Marketing, General and Administrative (SMG&A),
Research and Development (R&D), Amortization of Intangibles and Special Charges,
Net.
Nonoperating (Income) Expense
Change
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change $ Change
Total Nonoperating expense $ 363,487 $ 186,627
The year-over-year increase in nonoperating expense in fiscal 2021 as compared
to fiscal 2020 was primarily the result of a loss on the extinguishment of debt
related to debt transactions in the fourth quarter of fiscal 2021, partially
offset by gains recorded on other investments and a decrease in interest expense
related to our debt obligations in the period.
(Benefit From) Provision for Income Taxes
Change
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change % Change $ Change % Change
(Benefit from) provision for
income taxes $ (61,708) $ 90,856 $ 122,717 $ (152,564) (168) % $ (31,861) (26) %
Effective income tax rate (4.6) % 6.9 % 8.3 %
Our effective tax rates for fiscal 2021 and fiscal 2020 were below the
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impacted by incremental profit related to the Acquisition. Additionally, in
fiscal 2021, we recorded a net deferred tax benefit of $188.8 million from
deferred tax assets related to an intra-entity transfer of intangible assets.
For fiscal 2021 and fiscal 2020, our pretax income was primarily generated in
Ireland at a tax rate of 12.5%.
Our tax rate for fiscal 2020 was also impacted by discrete items, primarily
related to $25.9 million of income tax benefits resulting from the resolution of
the Internal Revenue Service audit of Linear's pre-acquisition federal income
tax returns for fiscal 2015 through fiscal 2017, as well as other income tax
benefits recorded upon the filing of our fiscal 2019 federal income tax return
and excess tax benefits from stock-based compensation payments of $16.2 million .
See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K for further discussion.
Net Income
Change
Fiscal Year 2021 over 2020 2020 over 2019
2021 2020 2019 $ Change % Change $ Change
% Change
Net income $ 1,390,422 $ 1,220,761 $ 1,363,011 $ 169,661 14 % $ (142,250) (10) %
Net income, as a % of
revenue 19.0 % 21.8 % 22.8 %
Diluted EPS $ 3.46 $ 3.28 $ 3.65 $ 0.18 5 % $ (0.37) (10) %
The increase in net income in fiscal 2021 as compared to fiscal 2020 was a
result of a $194.0 million increase in operating income and a $152.6 million
decrease in provision for income taxes resulting in a net income tax benefit,
partially offset by a $176.9 million increase in nonoperating expense, as more
fully described above under the headings Operating Income, (Benefit From)
Provision for Income Taxes and Nonoperating (Income) Expense.
Liquidity and Capital Resources
At October 30, 2021 , our principal source of liquidity was $1,978.0 million of
cash and cash equivalents, of which approximately $876.6 million was held in the
United States and the balance of our cash and cash equivalents was held outside
the United States in various foreign subsidiaries. We manage our worldwide cash
requirements by, among other things, reviewing available funds held by our
foreign subsidiaries and the cost effectiveness by which those funds can be
accessed in the United States . We do not expect current regulatory restrictions
or taxes on repatriation to have a material adverse effect on our overall
liquidity, financial condition or results of operations. Our cash and cash
equivalents consist of highly liquid investments with maturities of three months
or less, including money market funds. We maintain these balances with high
credit quality counterparties, continually monitor the amount of credit exposure
to any one issuer and diversify our investments in order to minimize our credit
risk.
We believe that our existing sources of liquidity and cash expected to be
generated from future operations, together with existing and anticipated
available short- and long-term financing, will be sufficient to fund operations,
capital expenditures, research and development efforts and dividend payments (if
any) in the immediate future and for at least the next twelve months.
Fiscal Year
2021 2020 2019
Net cash provided by operating activities $ 2,735,069
37 % 36 % 38 %
Net cash provided by (used for) investing activities
$ (180,523) $ (293,186) Net cash used for financing activities$ (3,959,664)
A discussion of changes in our liquidity and capital resources from fiscal 2019 to fiscal 2020 has been omitted from this Form 10-K, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for fiscal 2020 filed with theSecurities and Exchange Commission onNovember 24, 2020 . The following changes contributed to the net change in cash and cash equivalents from fiscal 2020 to fiscal 2021. Operating Activities Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. The increase in cash provided by operating activities during fiscal 2021 as compared to fiscal 2020 was primarily a result of higher net income and an increase from changes in working capital. Net income in fiscal 2021 also included larger non-cash expenses from the Acquisition that were not included in fiscal 2020. 33 -------------------------------------------------------------------------------- Investing Activities Investing cash flows generally consist of capital expenditures, cash used for acquisitions and proceeds from or purchases of investments. The increase in cash provided by (used for) investing activities during fiscal 2021 as compared to fiscal 2020 was primarily the result of cash received from the Acquisition, partially offset by an increase in cash used for capital expenditures. Financing Activities Financing cash flows consist primarily of payments of dividends to stockholders, repurchases of common stock, issuance and repayment of debt, and proceeds from the sale of shares of common stock pursuant to employee equity incentive plans. The increase in cash used for financing activities during fiscal 2021 as compared to fiscal 2020 was primarily the result of an increase in common stock repurchases in connection with our accelerated share repurchase program and higher dividend payments, partially offset by a net increase in debt in fiscal 2021 as we terminated some debt and raised additional proceeds from debt compared to the net decrease in debt in 2020. Working Capital Fiscal Year 2021 2020 $ Change % Change Accounts receivable, net$ 1,459,056 $ 737,536 $ 721,520 98 % Days sales outstanding (1) 55 45 Inventory$ 1,200,610 $ 608,260 $ 592,350 97 % Days cost of sales in inventory (1) 118 116
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(1)We use the average of the current year and prior year ending net accounts receivable and ending inventory balance in our calculation of days sales outstanding and days cost of sales in inventory, respectively. Cost of sales amounts used in the calculation of days cost of sales in inventory for fiscal 2021 include Acquisition accounting adjustments related to the sale of acquired inventory written up to fair value, amortization of developed technology intangible assets acquired and depreciation related to the write-up of fixed assets to fair value. The calculations above include the financial results of Maxim prospectively from the Acquisition Date. The increase in accounts receivable for fiscal 2021 compared to fiscal 2020 was primarily the result of the Acquisition as well as normal variations in the timing of collections and billings. Inventory in dollars increased in fiscal 2021 as compared to fiscal 2020, primarily as a result of the Acquisition as well as our efforts to balance manufacturing production, demand and inventory levels. Our inventory levels are impacted by our need to support forecasted sales demand and variations between those forecasts and actual demand. During the fourth quarter of fiscal 2021, the inventory values on the Consolidated Balance Sheet were also impacted by additional costs related to the Acquisition and the requirement to account for acquired inventory at fair-value. Current liabilities increased to$2,770.3 million atOctober 30, 2021 from$1,365.0 million recorded at the end of fiscal 2020. The increase was primarily due to the Acquisition, including$516.7 million of Maxim debt obligations classified as current and$584.9 million of accrued liabilities. Revolving Credit Facility Our Third Amended and Restated Revolving Credit Agreement, dated as ofJune 23, 2021 , withBank of America N.A . as administrative agent and the other banks identified therein as lenders (Revolving Credit Agreement) amended and restated our Second Amended and Restated Credit Agreement dated as ofJune 28, 2019 and provides for a five year unsecured revolving credit facility in an aggregate principal amount not to exceed$2.5 billion (subject to certain terms and conditions). InMarch 2020 , we borrowed$350.0 million under this revolving credit facility and utilized the proceeds for the repayment of existing indebtedness and working capital requirements. We repaid the$350.0 million plus interest inApril 2020 . InSeptember 2021 , we borrowed$400.0 million under this revolving credit facility and utilized the proceeds for the repayment of existing indebtedness and working capital requirements. We repaid the$400.0 million plus interest inOctober 2021 . We may borrow under this revolving credit facility in the future and use the proceeds for repayment of existing indebtedness, stock repurchases, acquisitions, capital expenditures, working capital and other lawful corporate purposes. The terms of the Revolving Credit Agreement impose restrictions on our ability to undertake certain transactions, to create certain liens on assets and to incur certain subsidiary indebtedness. In addition, the Revolving Credit Agreement contains a consolidated leverage ratio covenant of total consolidated funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of not greater than 3.5 to 1.0. As ofOctober 30, 2021 , we were in compliance with these covenants. See Note 13, Revolving Credit Facility, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our revolving credit facility. 34 --------------------------------------------------------------------------------
Debt
As ofOctober 30, 2021 , we had$6.8 billion of carrying value outstanding on our debt. OnNovember 4, 2021 , we redeemed Maxim's 3.375% Senior Notes due 2023 in the aggregate principal amount of$500.0 million . The difference in the carrying value of the debt and the principal is due to the unamortized discount and issuance fees and other adjustments on these instruments. The indentures governing certain of our debt instruments contain covenants that may limit our ability to: incur, create, assume or guarantee any debt or borrowed money secured by a lien upon a principal property; enter into sale and lease-back transactions with respect to a principal property; and consolidate with or merge into, or transfer or lease all or substantially all of our assets to, any other party. As ofOctober 30, 2021 , we were compliant with these covenants. See Note 14, Debt, and Note 15, Subsequent Events, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on our outstanding debt. Stock Repurchase Program InSeptember 2021 , we entered into accelerated share repurchase agreements (ASR) with third party financial institutions to repurchase$2.5 billion of our common stock. We paid$2.5 billion and received an initial delivery of 12.3 million shares of common stock, which represented approximately 80% of the notional amount of the ASR. The final settlement of the transaction under the ASR is expected to occur in the first half of fiscal 2022. Our common stock repurchase program has been in place sinceAugust 2004 . Since inception, our Board of Directors has authorized us to repurchase$16.7 billion of our common stock under the program, which includes the$8.5 billion authorization approved by the Board of Directors onAugust 25, 2021 . Under the program, we may repurchase outstanding shares of our common stock from time to time in the open market and through privately negotiated transactions. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares authorized under the program. As ofOctober 30, 2021 ,$7.4 billion remained available for repurchase under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. We also repurchase shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units/awards or the exercise of stock options. Future repurchases of common stock will be dependent upon our financial position, results of operations, outlook, liquidity, and other factors we deem relevant. Capital Expenditures Net additions to property, plant and equipment were$343.7 million in fiscal 2021 and were funded with a combination of cash on hand and cash generated from operations. We expect capital expenditures for fiscal 2022 to be between 6% and 8% of revenue, which is above our historical levels primarily due to our plans to expand internal manufacturing capacity. These capital expenditures will be funded with a combination of cash on hand and cash expected to be generated from future operations, together with existing and anticipated available short- and long-term financing.Analog Devices Foundation During the first quarter of fiscal 2020, we contributed 335,654 shares of our common stock to theAnalog Devices Foundation . As of the date of the contribution, the shares had a fair value of approximately$40.0 million . This expense was recorded in SMG&A in the Consolidated Statement of Income. Dividends OnNovember 22, 2021 , our Board of Directors declared a cash dividend of$0.69 per outstanding share of common stock. The dividend will be paid onDecember 14, 2021 to all shareholders of record at the close of business onDecember 3, 2021 and is expected to total approximately$362.5 million . We currently expect quarterly dividends to continue in future periods, although they remain subject to determination and declaration by our Board of Directors. The payment of future dividends, if any, will be based on several factors, including our financial performance, outlook and liquidity. 35 -------------------------------------------------------------------------------- Contractual Obligations The table below summarizes our material contractual obligations in specified periods as ofOctober 30, 2021 : Payment due by period Less than More than (thousands) Total 1 Year 1-3 Years 3-5 Years 5 Years Contractual obligations: Debt obligations (1)$ 6,776,865 $ 500,000 $ 500,000 $ 400,000 $ 5,376,865 Interest payments associated with debt obligations 2,460,541 171,718 340,784 320,139 1,627,900 Transition tax (2) 793,176 137,106 320,315 335,755 - Operating leases (3) 393,002 61,855 103,418 84,059 143,670 Inventory-related purchase commitments (4) 291,200 52,800 91,733 63,333 83,334 Total$ 10,714,784 $ 923,479 $ 1,356,250 $ 1,203,286 $ 7,231,769
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(1)Debt obligations are assumed to be held to maturity. (2)Tax obligation relates to the one-time tax on deemed repatriated earnings under the Tax Cuts and Jobs Act of 2017 enacted in fiscal 2018. See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion. This amount includes transition tax payable attributable to the Acquisition of$266.1 million . (3)Certain of our operating lease obligations include escalation clauses. These escalating payment requirements are reflected in the table. (4)In connection with the Acquisition, we acquired a supplier commitment for the purchase of materials and supplies in advance or with minimum purchase quantities. As ofOctober 30, 2021 , our total liabilities associated with uncertain tax positions was$170.5 million , which are included in non-current income taxes payable in our Consolidated Balance Sheets contained in Item 8 of this Annual Report on Form 10-K. Due to the complexity associated with our tax uncertainties, we cannot make a reasonably reliable estimate of the period in which we expect to settle the non-current liabilities associated with these uncertain tax positions. Therefore, we have not included these uncertain tax positions in the above contractual obligations table. The expected timing of payments and the amounts of the obligations discussed above are estimated based on current information available as ofOctober 30, 2021 . New Accounting Pronouncements From time to time, new accounting pronouncements are issued by theFinancial Accounting Standards Board (FASB) and are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards will not have a material impact on our future financial condition and results of operations. See Note 2s, New Accounting Pronouncements, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for a description of recently issued and adopted accounting pronouncements, including the dates of adoption and impact on our historical financial condition and results of operations. Critical Accounting Policies and Estimates Management's discussion and analysis of the financial condition and results of operations is based upon the Consolidated Financial Statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future based on available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management's estimates and projections, there could be a material effect on our financial statements. We also have other policies that we consider key accounting policies; however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective. Revenue Recognition Recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration that we expect to receive in exchange for those products or services. We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the performance obligations have been identified, (3) the transaction price to the customer has been determined, (4) the transaction price has been allocated to the performance obligations in the 36 -------------------------------------------------------------------------------- contract, and (5) the performance obligations have been satisfied. The majority of our shipping terms permit us to recognize revenue at point of shipment or delivery. Certain shipping terms require the goods to be through customs or be received by the customer before title passes. In those instances, we defer the revenue recognized until title has passed. Shipping costs are charged to selling, marketing, general and administrative expense as incurred. Sales taxes are excluded from revenue. Revenue from contracts withthe United States government, government prime contractors and certain commercial customers is recorded over time using either units delivered or costs incurred as the measurement basis for progress toward completion. These measures are used to measure results directly and is generally the best measure of progress toward completion in circumstances in which a reliable measure of output can be established. Estimated revenue in excess of amounts billed is reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance, estimated gross margin, including the impact of final contract settlements, and estimated losses are recognized in the period in which the changes or losses are determined. Performance Obligations: Substantially all of our contracts with customers contain a single performance obligation, the sale of mixed-signal integrated circuit (IC) products. Such sales represent a single performance obligation because the sale is one type of good or includes multiple goods that are neither capable of being distinct nor separable from the other promises in the contract. This performance obligation is satisfied when control of the product is transferred to the customer, which occurs upon shipment or delivery. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates and with an original expected duration of one year or less. We generally warrant that our products will meet their published specifications, and that we will repair or replace defective products, for one year from the date title passes from us to the customer. Specific accruals are recorded for known product warranty issues. Transaction Price: The transaction price reflects our expectations about the consideration we will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to direct customers and sales to distributors in which both the sale to the distributor and the sale to the end customer occur within the same reporting period. Variable consideration includes sales in which the amount of consideration that we will receive is unknown as of the end of a reporting period. Such consideration primarily includes credits issued to the distributor due to price protection and sales made to distributors under agreements that allow certain rights of return, referred to as stock rotation. Price protection represents price discounts granted to certain distributors to allow the distributor to earn an appropriate margin on sales negotiated with certain customers and in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Stock rotation allows distributors limited levels of returns in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. A liability for distributor credits covering variable consideration is made based on management's estimate of historical experience rates as well as considering economic conditions and contractual terms. To date, actual distributor claims activity has been materially consistent with the provisions we have made based on our historical estimates. Contract Balances: Accounts receivable represents our unconditional right to receive consideration from our customers. Payments are typically due within 30 to 45 days of invoicing and do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on the Consolidated Balance Sheets in any of the periods presented. Inventory Valuation We value inventories at the lower of cost (first-in, first-out method) or market. Because of the cyclical nature of the semiconductor industry, changes in inventory levels, obsolescence of technology, and product life cycles, we write down inventories to net realizable value. We employ a variety of methodologies to determine the net realizable value of inventory. While a portion of the calculation is determined via reference to the age of inventory and lower of cost or market calculations, an element of the calculation is subject to significant judgments made by us about future demand for our inventory. If actual demand for our products is less than our estimates, additional adjustments to existing inventories may need to be recorded in future periods. To date, our actual results have not been materially different than our estimates, and we do not expect them to be materially different in the future. Long-Lived Assets We review property, plant, and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Recoverability of these assets is determined by comparison of their carrying value to the estimated future undiscounted cash flows that the assets are expected to generate over their remaining estimated lives. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. Although we have recognized no material impairment 37 -------------------------------------------------------------------------------- adjustments related to our property, plant, and equipment and identified intangible assets during the past three fiscal years, except those made in conjunction with restructuring actions, deterioration in our business in the future could lead to such impairment adjustments in future periods. Evaluation of impairment of long-lived assets requires estimates of future operating results that are used in the preparation of the expected future undiscounted cash flows. Actual future operating results and the remaining economic lives of our long-lived assets could differ from the estimates used in assessing the recoverability of these assets. These differences could result in impairment charges, which could have a material adverse impact on our results of operations. In addition, in certain instances, assets may not be impaired but their estimated useful lives may have decreased. In these situations, we amortize the remaining net book values over the revised useful lives.Goodwill Goodwill is subject to impairment tests annually or more frequently if events or changes in circumstances suggest that the carrying value of goodwill may not be recoverable, utilizing either the qualitative or quantitative method. We test goodwill for impairment at the reporting unit level, which we determined is consistent with our identified operating segments, on an annual basis on the first day of the fourth quarter (on or aboutAugust 1 ) or more frequently if we believe indicators of impairment exist or we reorganize our operating segments or reporting units. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value. When using the qualitative method, we consider several factors, including the following: -the amount by which the fair values of each reporting unit exceeded their carrying values as of the date of the most recent quantitative impairment analysis, which indicated there would need to be substantial negative developments in the markets in which these reporting units operate in order for there to be potential impairment; -the carrying values of these reporting units as of the assessment date compared to their previously calculated fair values as of the date of the most recent quantitative impairment analysis; -the current forecasts as compared to the forecasts included in the most recent quantitative impairment analysis; -public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors' businesses; -changes in the value of majorU.S. stock indices that could suggest declines in overall market stability that could impact the valuation of our reporting units; -changes in our market capitalization and overall enterprise valuation to determine if there were any significant decreases that could be an indication that the valuation of our reporting units had significantly decreased; and -whether there had been any significant increases to the weighted-average cost of capital rates for each reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach. If we elect not to use this option, or we determine that it is more likely than not that the fair value of a reporting unit is less than its net book value, then we perform the quantitative goodwill impairment test. The quantitative goodwill impairment test requires an entity to compare the fair value of a reporting unit with its carrying amount. If fair value is determined to be less than carrying value, an impairment loss is recognized for the amount of the carrying value that exceeds the amount of the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Additionally, we consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. We determine the fair value of our reporting units using a weighting of the income and market approaches. Under the income approach, we use a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, we use the guideline public company method. Under this method we utilize information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. In order to assess the reasonableness of the calculated reporting unit fair values, we reconcile the aggregate fair values of our reporting units determined, as described above, to our total company market capitalization, allowing for a reasonable control premium. During fiscal 2021 and fiscal 2020, we elected to use the quantitative method of assessing goodwill for all of our reporting units. In all periods presented, we concluded the reporting units' fair values exceeded their carrying amounts as of the assessment dates and no risk of impairment existed. 38 -------------------------------------------------------------------------------- Business Combinations Under the acquisition method of accounting, we recognize tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of the fair value of the purchase consideration over the value of the net assets acquired as goodwill. The accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to intangible assets and the fair value of contingent payment obligations. Critical estimates in valuing purchased technology, customer lists and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges which could be material. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed. We record contingent consideration resulting from a business combination at its fair value on the acquisition date. We generally determine the fair value of the contingent consideration using the income approach methodology of valuation. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustment to operating expenses within the Consolidated Statements of Income. Changes in the fair value of the contingent consideration can result from changes in assumed discount periods and rates, and from changes pertaining to the achievement of the defined milestones. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the amount of contingent consideration expense we record in any given period. Accounting for Income Taxes We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of income tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of certain expenses for tax and financial statement purposes. We assess the likelihood of the realization of deferred tax assets and record a corresponding valuation allowance as necessary if we determine those deferred tax assets may not be realized due to the uncertainty of the timing and amount to be realized of certain state and international tax credit carryovers. In reaching our conclusion, we evaluate certain relevant criteria including the existence of deferred tax liabilities that can be used to realize deferred tax assets, the taxable income in prior carryback years in the impacted state and international jurisdictions that can be used to absorb net operating losses and taxable income in future years. Our judgments regarding future profitability may change due to future market conditions, changes inU.S. or international tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets, which may result in an increase or decrease to our income tax provision in future periods. We account for uncertain tax positions by first determining if it is "more likely than not" that a tax position will be sustained by the appropriate taxing authorities prior to recording any benefit in the financial statements. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained. For those tax positions where it is more likely than not that a tax position will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We classify interest and penalties related to uncertain tax positions within the (benefit from) provision for income taxes line of the Consolidated Statements of Income. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in known facts or circumstances, changes in tax law, effectively settled issues under audit, and new guidance on legislative interpretations. A change in these factors could result in the recognition of an increase or decrease to our income tax provision, which could materially impact our consolidated financial position and results of operations. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement and royalty arrangements among related entities. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and income tax liabilities. In the event our assumptions are incorrect, the differences could have a material impact on our income tax provision and operating results in the period in which such determination is made. In addition to the factors described above, our current and expected effective tax rate is based on then-current tax law. Significant changes during the year in enacted tax law could affect these estimates. See Note 12, Income Taxes, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion. 39 -------------------------------------------------------------------------------- Stock-Based Compensation Stock-based compensation expense associated with stock options and related awards is recognized in the Consolidated Statements of Income. Determining the amount of stock-based compensation to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of stock options and market-based restricted stock units. We calculate the grant-date fair values of stock options using the Black-Scholes valuation model. The grant-date fair value of restricted stock units with a service condition and restricted stock units with both service and performance conditions are calculated using the value of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting. For restricted stock units with both service and performance conditions, this grant-date fair value is also impacted by the number of units that are expected to vest during the performance period and is adjusted through the related stock-based compensation expense at each reporting period based on the probability of achievement of that performance condition. If we determine that an award is unlikely to vest, any previously recorded stock-based compensation expense is reversed in the period of that determination. The grant date fair value of restricted stock units or performance-based stock options with both service and market conditions are calculated using the Monte Carlo simulation model to estimate the probability of satisfying the performance condition stipulated in the award grant, including the possibility that the market condition may not be satisfied. The use of valuation models requires us to make estimates of key assumptions such as expected option term and stock price volatility to determine the fair value of a stock option. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. We recognize the expense related to equity awards on a straight-line basis over the vesting period. See Note 2r, Stock-based Compensation, and Note 3, Stock-Based Compensation and Shareholders' Equity, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for more information related to stock-based compensation. Contingencies From time to time, in the ordinary course of business, various claims, charges and litigation are asserted or commenced against us arising from, or related to, among other things, contractual matters, patents, trademarks, personal injury, environmental matters, product liability, insurance coverage, employment or employment benefits. We periodically assess each matter to determine if a contingent liability should be recorded. In making this determination, we may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated. If a loss is probable and reasonably estimable, we record a contingent loss. In determining the amount of a contingent loss, we consider advice received from experts in the specific matter, current status of legal proceedings, settlement negotiations that may be ongoing, prior case history and other factors. If the judgments and estimates made by us are incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations. 40
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