SYNAPTICS INCORPORATED Forward-Looking Statements and Factors That May Affect Results
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth elsewhere in this report and under Item 1A. Risk Factors. Impact of COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic, which continues to spread in theU.S. and globally. Governmental authorities have 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. 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 have introduced 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 in public locations. While the severity and duration of business disruption to our customers and suppliers due to the COVID-19 pandemic is still 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 predict. 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 severity of the disease, the duration of the outbreak, a potential future recurrence 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 further actions altering our business operations and managing our costs and liquidity that we deem necessary or appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences.
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 believe our results to date reflect the combination of our customer focus and the strength of our intellectual property and our engineering know-how, which allow us to develop or engineer products that meet the demanding design specifications of our OEMs. We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. All of our revenue, except an inconsequential amount, is recognized at a point in time, either on shipment or delivery of the product, depending on customer terms and conditions. Our net revenue decreased from$1,666.9 million for fiscal 2016 to$1,333.9 million for fiscal 2020. For fiscal 2016, we derived 12.4% of our net revenue from the PC product applications market, 83.9% of our net revenue from the mobile product applications market and 3.7% from the IoT product applications market. For fiscal 2020, revenue from the PC product applications market accounted for 23.8% of our net revenue, revenue from the mobile product applications market accounted for 52.4% of our net revenue, and revenue from the IoT product applications market accounted for 23.8% of our net revenue. Many of our customers have manufacturing operations inChina , and many of our OEM customers have established design centers inAsia . With our global presence, including offices inChina ,Hong Kong ,India ,Japan ,South Korea ,Poland , 35
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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 do not have long-term supply contracts with most of 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, and 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 their commitment to incorporate those solutions into their products. 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 is the amortization of the cost of our acquired intangible assets related to customer relationships and tradenames which are amortized over their estimated useful lives ranging from 3 to 7 years.
Restructuring costs primarily reflect severance and facilities consolidation costs related to restructuring of our operations to reduce operating costs. These headcount- and facilities-related costs were in cost of revenue, research and development, and selling, general and administrative. See Note 13 Restructuring Activities to the consolidated financial statements contained elsewhere in this report.
Gain on sale of assets includes the sale of our TDDI product line for LCD mobile displays. See below under "Divestiture".
Equity investment loss includes amortization of intangible assets reflected under the equity method of accounting in connection with our investment inOXi Technology Ltd. See Note 1 Organization and Summary of Significant Accounting Policies to the consolidated financial statements contained elsewhere in this report. Divestiture InDecember 2019 , we entered into an asset purchase agreement with a third party to sell the assets of our 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 had a carrying value of approximately$33.6 million as of the closing date of the transaction inApril 2020 for cash consideration of$138.7 million . The gain on sale of this business component was$105.1 . 36
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity withU.S. generally accepted accounting principles, or GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, cost of revenue, inventories, product warranty, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, goodwill, intangible assets, investments, and contingencies. We base our estimates on historical experience, applicable laws and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, interpretations, and judgments we use in applying our most critical accounting policies can have a significant impact on the results that we report in our consolidated financial statements. TheSEC considers an entity's most critical accounting policies to be those policies that are both most important to the portrayal of the entity's financial condition and results of operations and those that require the entity's most difficult, subjective, or complex judgments, often as a result of the need to make assumptions and estimates about matters that are inherently uncertain. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our revenue is primarily generated from the sale of ASIC chips, either directly
to a customer or to a distributor. Revenues are recognized when control of the
promised goods or services is transferred to our customers, in an amount that
reflects the consideration we expect to receive in exchange for those goods or
services. All of our revenue, except an inconsequential amount, is recognized at
a point in time, either on shipment or delivery of the product, depending on
customer terms and conditions. We generally warrant our products for a period of
12 months from the date of sale and estimate probable product warranty costs at
the time we recognize revenue as the warranty is considered an assurance
warranty and not a performance obligation. Non-product revenue is recognized
over the same period of time such performance obligations are satisfied. We then
select an appropriate method for measuring satisfaction of the performance
obligations.
Revenue from sales to distributors is recognized upon shipment of the product to
the distributors (sell-in basis). Master sales agreements are in place with
certain customers, and these agreements typically contain terms and conditions
with respect to payment, delivery, warranty and supply. In the absence of a
master sales agreement, we consider a customer's purchase order or our standard
terms and conditions to be the contract with the customer.
Our pricing terms are negotiated independently, on a stand-alone basis. In
determining the transaction price, we evaluate whether the price is subject to
refund or adjustment to determine the net consideration which we expect to
receive for the sale of such products. In limited situations, we make sales to
certain customers under arrangements where we grant stock rotation rights, price
protection and price allowances; variable consideration associated with these
rights is expected to be inconsequential. These adjustments and incentives are
accounted for as variable consideration, classified as other current liabilities
under the new revenue standard and are shown as customer obligations within
Other Accrued Liabilities as disclosed in Note 1 Organization and Summary of
Significant Accounting Policies to the consolidated financial statements
contained elsewhere in this report. We estimate the amount of variable
consideration for such arrangements based on the expected value to be provided
to customers, and we do not believe that there will be significant changes to
our estimates of variable consideration. When incentives, stock rotation rights,
price protection, volume discounts, or price allowances are applicable, they are
estimated and recorded in the period the related revenue is recognized. Stock
rotation reserves are based on historical return rates and recorded as a
reduction to revenue with a corresponding reduction to cost of goods sold for
the estimated cost of inventory that is expected to be returned and recorded as
prepaid expenses and other current assets. In limited circumstances, we enter
into volume based tiered pricing arrangements and we estimate total unit volumes
under such arrangement to determine the expected transaction price for the units
expected to be transferred. Such arrangements are accounted for as contract
liabilities within other accrued liabilities. Sales returns liabilities are
recorded as refund liabilities within other accrued liabilities.
Our accounts receivable balance is from contracts with customers and represents
our unconditional right to receive consideration from customers. Payments are
generally due within three months of completion of the performance obligation
and subsequent invoicing and, therefore, do not include significant financing
components. To date, there have been no material impairment losses on accounts
receivable.
37
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We invoice customers and recognize all of our revenue, except an inconsequential
amount, at a point in time, either on shipment or delivery of the product,
depending on customer terms and conditions. We account for shipping and handling
costs as fulfillment costs before the customer obtains control of the goods. We
classify shipping and handling costs as fulfillment costs before the customer
obtains control of the goods. We continue to account for collection of all taxes
on a net basis.
We incur commission expense that is incremental to obtaining contracts with
customers. Sales commissions (which are recorded in the selling, general and
administrative expense line item in the consolidated statements of operations)
are expensed when the product is shipped because such commissions are owed after
shipment.
Inventory
We state our inventories at the lower of cost or net realizable value. We base
our assessment of the ultimate realization of inventories on our projections of
future demand and market conditions. Sudden declines in demand, rapid product
improvements, or technological changes, or any combination of these factors can
cause us to have excess or obsolete inventories. On an ongoing basis, we review
for estimated excess, obsolete or unmarketable inventories and write down our
inventories to their net realizable value based on our forecasts of future
demand and market conditions. If actual market conditions are less favorable
than our forecasts, additional inventory write-downs may be required. The
following factors influence our estimates: changes to or cancellations of
customer orders, unexpected or sudden decline in demand, rapid product
improvements, technological advances, and termination or changes by our OEM
customers of any product offerings incorporating our product solutions.
Periodically, we purchase inventory from our contract manufacturers when a
customer delays its delivery schedule or cancels its order. In those
circumstances, we record a write-down, if necessary, to reduce the carrying
value of the inventory purchased to its net realizable value. The effect of
these write-downs is to establish a new cost basis in the related inventory,
which we do not subsequently write up. We also record a liability and charge to
cost of revenue for estimated losses on inventory we are obligated to purchase
from our contract manufacturers when such losses become probable from customer
delays, order cancellations, or other factors.
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Results of Operations
The following sets forth certain of our consolidated statements of income data
for fiscal 2020 and 2019 along with comparative information regarding the
absolute and percentage changes in these amounts (in millions, except
percentages):
2020 2019 $ Change % Change
Mobile product applications $ 698.9 $ 900.1 $ (201.2 ) (22.4 %)
PC product applications 317.4 258.9 58.5 22.6 %
IoT product applications 317.6 313.2 4.4 1.4 %
Net revenue 1,333.9 1,472.2 (138.3 ) (9.4 %)
Gross margin 543.1 497.1 46.0 9.3 %
Operating expenses:
Research and development 302.5 342.7 (40.2 ) (11.7 %)
Selling, general, and administrative 127.0 131.3 (4.3 ) (3.3 %)
Acquired intangibles amortization 11.7 11.7 - 0.0 %
Restructuring costs 33.0 17.7 15.3 86.4 %
Operating income/(loss) 68.9 (6.3 ) 75.2 (1193.7 %)
Interest and other income, net 7.9 3.9 4.0 102.6 %
Interest expense (22.5 ) (21.2 ) (1.3 ) 6.1 %
Gain on sale of assets 105.1 - 105.1 nm
Impairment recovery on investments, net - 2.8 (2.8 ) (100.0 %)
Income/(loss) before provision for 159.4 (20.8 ) 180.2 (866.3 %)
income taxes
Provision for income taxes 38.6 0.3 38.3 12766.7 %
Equity investment loss (2.0 ) (1.8 ) (0.2 ) 11.1 %
Net income/(loss) $ 118.8 $ (22.9 ) $ 141.7 (618.8 %)
nm - not meaningful
The following sets forth certain of our consolidated statements of operations data as a percentage of net revenues for fiscal 2020 and 2019:
Percentage
Point
Increase
2020 2019 (Decrease)
Mobile product applications 52.4 % 61.1 % (8.7 %)
PC product applications 23.8 % 17.6 % 6.2 %
IoT product applications 23.8 % 21.3 % 2.5 %
Net revenue 100.0 % 100.0 %
Gross margin 40.7 % 33.8 % 6.9 %
Operating expenses:
Research and development 22.7 % 23.3 % (0.6 %)
Selling, general, and administrative 9.5 % 8.9 % 0.6 %
Acquired intangibles amortization 0.9 % 0.8 % 0.1 %
Restructuring costs 2.5 % 1.2 % 1.3 %
Operating income/(loss) 5.2 % (0.4 %) 5.6 %
Interest and other income, net 0.6 % 0.3 % 0.3 %
Interest expense (1.7 %) (1.4 %) (0.3 %)
Gain on sale of assets 7.9 % 0.0 % 7.9 %
Impairment recovery on investments, net 0.0 % 0.2 % (0.2 %)
Income/(loss) before provision for income taxes 11.9 % (1.4 %) 13.3 %
Provision for income taxes 2.9 % 0.0 % 2.9 %
Equity investment loss (0.1 %) (0.1 %) 0.0 %
Net income/(loss) 8.9 % (1.6 %) 10.5 %
39
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Fiscal 2020 Compared with Fiscal 2019
Net Revenue.
Net revenue was$1,333.9 million for fiscal 2020 compared with$1,472.2 million for fiscal 2019, a decrease of$138.3 million , or 9.4%. Of our fiscal 2020 net revenue,$698.9 million , or 52.4%, of net revenue was from the mobile product applications market,$317.4 million , or 23.8%, of net revenue was from the PC product applications market, and$317.6 million , or 23.8%, of net revenue was from the IoT product applications market. The overall decrease in net revenue for fiscal 2020 was attributable to a$201.2 million , or 22.4%, decrease in net revenue from mobile product applications, partially offset by an increase of$58.5 million , or 22.6%, in net revenue from PC product applications and an increase of$4.4 million , or 1.4%, in net revenue from IoT product applications. The decrease in mobile product applications was driven by a decrease in the units sold (23.5% less units), including the divestment of our TDDI business during the fourth quarter of fiscal 2020. The increase in net revenue from PC product applications was driven by an increase in the units sold (11.8% increase in units) and an increase in average selling prices (which increased 9.7%). The increase in net revenue from IoT product applications was primarily driven by an increase in the units sold (4.0% increase in units), partially offset by a decrease in average selling prices (decreased 2.5%).
Gross Margin.
Gross margin as a percentage of net revenue was 40.7%, or$543.1 million , for fiscal 2020 compared with 33.8%, or$497.1 million , for fiscal 2019. The 690 basis point increase in gross margin was primarily due to a$23.0 million decrease in acquired intangibles amortization that was charged to cost of revenue during the year, and a favorable mix due primarily to our mobile and PC business products which have improved gross margins in fiscal 2020. 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 decreased$40.2 million , to$302.5 million , for fiscal 2020 compared with fiscal 2019. The decrease in research and development expenses primarily reflected (i) a$16.3 million decrease in employee compensation and employment-related costs, resulting from a 15.7% decrease in research and development headcount due to restructuring actions initiated in both fiscal 2019 and 2020 to reduce costs; (ii) a$8.3 million decrease in non-employee services; (iii) a$7.7 million decrease in infrastructure costs related to facilities; (iv) a$4.3 million decrease in travel and entertainment related costs as a result of reduced headcount as well as travel restrictions related to the COVID-19 pandemic; and (v) a$4.1 million decrease in supplies and project related costs; which was partially offset by a$2.4 million in-process research and development charge in fiscal 2020 related to an acquisition inAugust 2019 . Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased$4.3 million , to$127.0 million , for fiscal 2020 compared with fiscal 2019. The decrease in selling, general, and administrative expenses primarily reflected (i) a$2.0 million decrease in employee compensation and employment-related costs, resulting from a 14.6% decrease in selling, general, and administrative headcount due to restructuring actions initiated in both fiscal 2019 and 2020 to reduce costs; (ii) a$4.8 million decrease in non-employee services; (iii) a$3.8 million decrease in travel and entertainment related costs as a result of travel restrictions related to the COVID-19 pandemic; partially offset by (i) a$3.7 million increase in legal fees ; (ii) and a$2.7 million increase in bad debt expense. Acquired Intangibles Amortization. Acquired intangibles amortization reflects the amortization of intangibles acquired through recent acquisitions. See Note 5 Acquired Intangibles to the consolidated financial statements contained elsewhere in this report. 40 -------------------------------------------------------------------------------- Restructuring Costs. Restructuring costs primarily reflect employee severance costs and facilities consolidation costs related to the restructuring of operations to reduce operating costs. These headcount-related costs included personnel in operations, research and development, and selling, general and administrative functions. Restructuring costs incurred in fiscal 2020 were$33.0 million , which were due to restructuring plans implemented in the second and fourth quarters of fiscal 2020 as well as the completion of the fiscal 2019 activities initiated in the fourth quarter of fiscal 2019. The second quarter restructuring activities were completed in fiscal 2020 and the restructuring activities initiated in the fourth quarter of fiscal 2020 are expected to be completed in the first half of fiscal 2021. Restructuring costs incurred in fiscal 2019 were$17.7 million , which were due to restructuring plans implemented in the first and fourth quarters of fiscal 2019. The first quarter restructuring activities were completed in fiscal 2019. The fourth quarter restructuring activities were completed in the first half of fiscal 2020. See Note 13 Restructuring Activities to the consolidated financial statements contained elsewhere in this report.
Non-Operating Income.
Interest and Other Income, Net. Interest and other income, net was$7.9 million for fiscal 2020 compared with$3.9 million for fiscal 2019. The increase in interest and other income, net was due to the increase in cash and cash equivalent balances in fiscal 2020, partially offset by lower interest rates late in fiscal 2020. Interest Expense. Interest expense was$22.5 million and$21.2 million , in fiscal 2020 and 2019, respectively, which represents interest and amortization of debt issuance costs and discount on the$525.0 million aggregate principal amount of the Notes issued onJune 26, 2017 . See Note 6 Debt to the consolidated financial statements contained elsewhere in this report. Gain on Sale of Assets. Gain on sale of assets includes the sale of our TDDI product line for LCD mobile displays. See Note 1 Organization and Summary of Significant Accounting Policies, under Divestiture, to the consolidated financial statements contained elsewhere in this report.
Provision for Income Taxes.
As a result of the decrease in theU.S. tax rate from the comprehensive tax legislation enacted inDecember 2017 bythe United States government, commonly known as the Tax Cuts and Jobs Act, ourU.S. statutory tax rate is lower than tax rates in many foreign jurisdictions in which we operate. This resulted in an increase to our effective tax rate relating to foreign tax rate differential for our fiscal 2019. However, this was largely offset by the remeasurement and release of various uncertain tax positions. See Note 11 Income Taxes to the consolidated financial statements contained elsewhere in this report for the table reconciling the provision for income taxes from the federal statutory rate for fiscal 2020, 2019 and 2018.
It is reasonably possible that the amount of liability for unrecognized tax
benefits may change within the next 12 months; an estimate of the range of
possible changes could result in a decrease of
Fiscal 2019 Compared with Fiscal 2018.
For discussion related to the results of operations and changes in financial condition for fiscal 2019 compared to fiscal 2018, please refer to "Part II, Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our fiscal 2019 Form 10-K, which was filed with theSEC onAugust 23, 2019 . 41
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Quarterly Results of Operations
The following table sets forth our unaudited quarterly results of operations for the eight quarters in the two-year period endedJune 27, 2020 . The following table should be read in conjunction with the financial statements and related notes contained elsewhere in this report. We have prepared this unaudited information on the same basis as our audited financial statements. This table includes all adjustments, which are of a normal and recurring nature that we consider necessary for a fair presentation of our financial position and results of operations for the quarters presented. Past results of operations are not necessarily indicative of future operating performance; accordingly, you should not draw any conclusions about our future results from the results of operations for any quarter presented. Three Months Ended (in millions, except per share amounts) June March December September June March December September (unaudited) 2020 2020 2019 2019 2019 2019 2018 2018 Net revenue$ 277.6 $ 328.1 $ 388.3 $ 339.9 $ 295.1 $ 334.0 $ 425.5 $ 417.6 Cost of revenue 155.6 192.5 229.0 213.7 204.7 218.0 275.7 276.7 Gross margin 122.0 135.6 159.3 126.2 90.4 116.0 149.8 140.9 Operating expenses: Research and development 63.7 75.8 77.0 86.0 85.9 82.6 84.2 90.0 Selling, general, and administrative 36.4 31.6 31.5 27.5 27.6 34.2 35.6 33.9 Acquired intangibles amortization 2.9 2.9 3.0 2.9 2.9 3.0 2.9 2.9 Restructuring costs 6.8 6.3 13.3 6.6 7.3 - 2.1 8.3
Total operating expenses 109.8 116.6 124.8 123.0 123.7 119.8 124.8
135.1
Operating income/(loss) 12.2 19.0 34.5 3.2 (33.3 ) (3.8 ) 25.0 5.8
Interest and other
income, net 0.8 2.3 3.1 1.7 1.3 1.0 1.0 0.6
Interest expense (6.3 ) (5.5 ) (5.4 ) (5.3 ) (5.3 ) (5.3 ) (5.3 ) (5.3 )
Gain on sale of assets 105.1 - - - - - - -
Impairment recovery on
investments, net - - - - - - - 2.8
Income/(loss) before
income taxes 111.8 15.8 32.2 (0.4 ) (37.3 ) (8.1 ) 20.7 3.9
Provision/(benefit) for
income taxes 21.3 10.2 12.0 (4.9 ) 8.4 (15.3 ) 7.5 (0.3 )
Equity investment loss (0.5 ) (0.6 ) (0.4 ) (0.5 ) (0.5 ) (0.5 ) (0.4 ) (0.4 ) Net income/(loss)
90.0 5.0 19.8 4.0 $ (46.2 ) 6.7 12.8 3.8
Net income/(loss) per
share:
Basic $ 2.64 $ 0.15 $ 0.59 $ 0.12 $ (1.35 ) $ 0.19 $ 0.37 $ 0.11
Diluted $ 2.55 $ 0.14 $ 0.58 $ 0.12 $ (1.35 ) $ 0.19 $ 0.36 $ 0.11
Shares used in computing
net
income/(loss) per
share:
Basic 34.1 34.0 33.5 33.0 34.3 34.4 34.5 35.1
Diluted 35.3 35.0 34.4 33.6 34.3 35.0 35.1 36.1
Liquidity and Capital Resources
Our cash and cash equivalents were$763.4 million as of the end of fiscal 2020 compared with$327.8 million as of the end of fiscal 2019, an increase of$435.6 million . This increase reflected cash flows provided by operating activities of$221.8 million ,$119.9 million of cash provided by investing activities and$93.9 million of cash provided by financing activities. 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 ofJune 27, 2020 ,$213.6 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations inthe United States , we would be required to accrue and pay foreign withholding taxes to repatriate certain of these funds. Cash Flows from Operating Activities. For fiscal 2020, the$221.8 million in net cash provided by operating activities was primarily attributable to net income of$118.8 million plus adjustments for non-cash charges, including acquired intangibles amortization of$51.4 million , share-based compensation costs of$49.3 million , depreciation and amortization of$26.7 million , and a reduction of$105.1 million for gain on sale of assets, as well as other non-cash adjustments of$28.9 million , and a net change in operating assets and liabilities of$51.8 million . The net change in operating assets and liabilities related primarily to a$43.0 million decrease in inventories, a$31.0 million decrease in accounts receivable, a$29.1 million increase in accrued compensation, and a$13.8 million increase in income taxes payable; partially offset by a$36.2 million decrease in accounts payable and a$29.9 million decrease in other accrued liabilities. Our days sales outstanding decreased from 70 days to 63 days from fiscal 2019 to fiscal 2020. Our inventory turns increased to six in fiscal 2020 from five in 2019. 42 -------------------------------------------------------------------------------- For fiscal 2019, the$154.2 million in net cash provided by operating activities was primarily attributable to net loss of$22.9 million plus adjustments for non-cash charges, including acquired intangibles amortization of$74.4 million , share-based compensation costs of$59.0 million , and depreciation and amortization of$35.6 million , as well as other non-cash adjustments of$0.1 million , and a net change in operating assets and liabilities of$8.0 million . The net change in operating assets and liabilities related primarily to a$64.3 million decrease in accounts receivable, a$20.5 million increase in other accrued liabilities, a$4.9 million increase in accrued compensation, a$3.9 million decrease in other assets and a$3.6 million decrease in prepaid expenses and other current assets; partially offset by a$55.8 million decrease in accounts payable, a$27.5 million increase in inventories and a$6.8 million decrease in acquisition related liabilities. Our days sales outstanding increased from 67 days to 70 days from fiscal 2018 to fiscal 2019. Our inventory turns decreased to five in fiscal 2019 from seven in 2018. Cash Flows from Investing Activities. Net cash provided by investing activities for fiscal 2020 was$119.9 million and net cash used in investing activities in 2019 was$20.9 million . Net cash provided by investing activities for fiscal 2020 consisted primarily of$138.7 million of proceeds from sale of assets, partially offset by$16.3 million used for the purchases of capital assets. Net cash used in investing activities for fiscal 2019 consisted primarily of$23.7 million used for the purchases of capital assets. Cash Flows from Financing Activities. Net cash provided by financing activities for fiscal 2020 was$93.9 million and net cash used in financing activities for fiscal 2019 was$106.6 million . Our net cash provided by financing activities for fiscal 2020 was primarily attributable to$100.0 million proceeds from borrowing under the line-of-credit and$34.5 million of proceeds from issuance of shares, partially offset by$30.2 million used to repurchase shares of our common stock in the open market and$9.7 million used for payroll taxes for RSUs, MSUs and PSUs. Our net cash used in financing activities for fiscal 2019 was primarily attributable to$118.5 million used to repurchase shares of our common stock in the open market and$9.4 million used for payroll taxes for RSUs; partially offset by$21.3 million of proceeds from issuance of shares. For discussion related to the statement of cash flows for fiscal 2018, please refer to "Part II, Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our fiscal 2018 Form 10-K, which was filed with theSEC onAugust 24, 2018 . Common Stock Repurchase Program. As ofJune 27, 2020 , our Board of Directors has authorized the purchase of up to an aggregate of$1.4 billion of our common stock pursuant to our common stock repurchase program, which expires inJuly 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 is based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities. Common stock purchased under this program is held as treasury stock. FromApril 2005 through the end of fiscal 2020, we purchased 31,749,195 shares of our common stock in the open market for an aggregate cost of$1.2 billion . As ofJune 27, 2020 , we had$177.4 million unpurchased common stock remaining under our common stock repurchase program. Convertible Debt. OnJune 20, 2017 , we entered into a purchase agreement, or the Purchase Agreement, withWells Fargo Securities, LLC , as representative of the initial purchasers named therein, or collectively, the Initial Purchasers, pursuant to which we issued and sold, and the Initial Purchasers purchased,$500 million aggregate principal amount of our 0.50% convertible senior notes due in 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 onJune 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 onJune 26, 2017 , which we used to repurchase shares of our common stock, to retire our outstanding bank debt, and to provide additional cash resources to fund the Conexant and Marvell Business Acquisitions. The Notes bear interest at a rate of 0.50% per year. Interest accrued fromJune 26, 2017 and is payable semi-annually in arrears, onJune 15 andDecember 15 of each year, beginning onDecember 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. 43
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The Notes will mature on
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 precedingMarch 15, 2022 under certain defined circumstances. On or afterMarch 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. CommencingJune 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 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.
InFebruary 2020 , we entered into the First Amendment to Amended and Restated Credit Agreement, or the Amendment, with the lenders that are party thereto, or the Lenders, andWells Fargo Bank, National Association , as administrative agent for the Lenders, related to that certain Amended and Restated Credit Agreement, datedSeptember 27, 2017 , or the Credit Agreement. 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 costs 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 Notes, (v) add certain technical amendments to address LIBOR transition matters, and (vi) include or revise certain definitions and certain customary representations, warranties and acknowledgments. The Credit Agreement provides for a revolving credit facility in a principal amount of up to$200 million , 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. Future proceeds under the revolving credit facility are available for working capital and general corporate purposes. As ofJune 27, 2020 , there was a$100.0 million balance outstanding under the revolving credit facility. 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. Debt issuance costs of$2.3 million relating to the revolving credit facility will be amortized over 60 months. 44 -------------------------------------------------------------------------------- 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 us and the Administrative Agent, 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.$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 generally will be freely tradeable after their issuance under Rule 145 of the Securities Act unless held by an affiliate of the acquired 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 the Credit Agreement will be sufficient to meet our working capital and other cash requirements for at least the next 12 months, including our debt service obligations. Our future capital requirements will depend on many factors, including our revenue, 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 introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing, the 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. 45
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Contractual Obligations and Commercial Commitments
The following table sets forth a summary of our material contractual obligations and commercial commitments as of the end of fiscal 2020 (in millions):
Payments due by period
Less than 1-3 3-5Contractual Obligations Total 1 year Years
Years Thereafter
Long-term debt (1) $ 633.0 $ 5.4 $ 627.6 $ - $ -
Leases 22.8 7.2 10.3 3.2 2.1
Purchase obligations and other
commitments (2) 49.9 43.9 6.0 - -
Transition tax payable (3) 8.1 - 2.7 5.4 -
Total $ 713.8 $ 56.5 $ 646.6 $ 8.6 $ 2.1
(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 tax amount for the transition tax liability associated with
our deemed repatriation of accumulated foreign earnings as a result of the
Tax Cuts and Jobs Act, enacted into law on
The amounts in the table above exclude unrecognized tax benefits related to uncertain tax positions of$20.1 million . As ofJune 27, 2020 , we were unable to make a reasonably reliable estimate of when settlement with a taxing authority may occur in connection with our gross unrecognized tax benefit.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to materially affect our financial condition, revenues or expenses, results of operations, liquidity, or capital resources. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support; engage in leasing, hedging, or research and development services; or have other relationships that expose us to liability that is not reflected in our financial statements.
Recently Issued Accounting Pronouncements Not Yet Effective
InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This ASU requires measurement and recognition of expected credit losses for financial assets. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for us beginning in the first quarter of fiscal 2021. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We do not expect this standard to have a material impact on our financial statements. InAugust 2020 , the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments, requiring bifurcation only if the convertible debt feature qualifies as a derivative under ASC 815 or for convertible debt issued at a substantial premium. The ASU removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception, permitting more contracts to qualify for it. In addition, the guidance eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The ASU is effective for annual reporting periods beginning afterDecember 15, 2021 , including interim reporting periods within those annual periods, with early adoption permitted no earlier than the fiscal year beginning afterDecember 15, 2020 . We are currently evaluating the impact of the new guidance on our consolidated financial statements. 46
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