(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially and adversely from those referred to herein due to a number of factors, including, but not limited to, those described below and in Item 1A "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
We, together with our consolidated subsidiaries, are empowering the wireless networking revolution. Our highly innovative analog semiconductors are connecting people, places, and things spanning a number of new and previously unimagined applications within the aerospace, automotive, broadband, cellular infrastructure, connected home, entertainment and gaming, industrial, medical, military, smartphone, tablet, and wearable markets.
Impact of COVID-19
RESULTS OF OPERATIONS
Fiscal Years Ended October 1, 2021, October 2, 2020, and September 27, 2019. The following table sets forth the results of our operations expressed as a percentage of net revenue. See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 2, 2020, filed with the SEC on November 17, 2020, as amended by Amendment No. 1 to such Annual Report on Form 10-K, filed with the SEC on January 29, 2021 (the "2020 10-K"), for Management's Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended September 27, 2019.
October 1, October 2, September 27, 2021 2020 2019 Net revenue 100.0 % 100.0 % 100.0 % Cost of goods sold 50.8 51.9 52.5 Gross profit 49.2 48.1 47.5 Operating expenses: Research and development 10.3 13.7 12.5 Selling, general, and administrative 6.3 6.9 5.9 Amortization of intangibles 0.7 0.4 0.7 Restructuring, impairment, and other charges 0.2 0.4 0.2 Total operating expenses 17.6 21.5 19.3 Operating income 31.6 26.6 28.2 Interest expense (0.3) - - Other income (expense), net - - 0.3 Income before income taxes 31.3 26.6 28.5 Provision for income taxes 2.0 2.3 3.2 Net income 29.3 % 24.3 % 25.3 %
Net Revenue Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Net revenue $ 5,109.1 52.3% $ 3,355.7 (0.6)% $ 3,376.8
We market and sell our products directly to OEMs of communications and electronics products, third-party original design manufacturers and contract manufacturers, and indirectly through electronic components distributors. We generally experience seasonal peaks during our fourth and first fiscal quarters (which correspond to the second half of the calendar year), primarily as a result of increased worldwide production of consumer electronics in anticipation of increased holiday sales, whereas our second and third fiscal quarters are typically lower and in line with seasonal industry trends.
Gross Profit Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Gross profit $ 2,512.4 55.8% $ 1,612.9 0.6% $ 1,603.8 % of net revenue 49.2 % 48.1 % 47.5 %
Gross profit represents net revenue less cost of goods sold. Our cost of goods sold consists primarily of purchased materials, labor, and overhead (including depreciation and share-based compensation expense) associated with product manufacturing. As part of our normal course of business, we intend to improve gross profit with efforts to increase unit volumes, improve manufacturing efficiencies, lower manufacturing costs of existing products, and by introducing new and higher value-added products.
The increase in gross profit in fiscal 2021, as compared to fiscal 2020, was primarily the result of a favorable product mix and higher unit volumes with a gross profit impact of $950.2 million, partially offset by lower average selling prices and an increase in amortization of acquisition intangibles, including inventory step-up, as a result of the Acquisition completed during the period. Gross profit as a percentage of net revenue is estimated to decrease in fiscal 2022 due to amortization of intangibles acquired during fiscal 2021.
Research and Development Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Research and development $ 532.3 14.7% $ 464.1 9.4% $ 424.1 % of net revenue 10.4 % 13.8 % 12.6 %
Research and development expenses consist primarily of direct personnel costs including share-based compensation expense, costs for pre-production evaluation and testing of new devices, masks, engineering prototypes, and design tool costs.
The increase in research and development expense in fiscal 2021, as compared to fiscal 2020, was primarily related to headcount-related expenses, including share-based compensation, as a result of our increased investment in developing new technologies and products.
Selling, General, and Administrative Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Selling, general, and administrative $ 322.5 39.4% $ 231.4 16.7% $ 198.3 % of net revenue 6.3 % 6.9 % 5.9 %
Selling, general, and administrative expenses include legal and related costs, accounting, treasury, human resources, information systems, customer service, bad debt expense, sales commissions, share-based compensation expense, advertising, marketing, costs associated with business combinations completed or contemplated during the period, and other costs.
The increase in selling, general, and administrative expenses in fiscal 2021, as compared to fiscal 2020, was primarily related to increases in costs associated with the Acquisition completed during the period and increases in headcount-related expenses, including share-based compensation.
Amortization of Intangibles Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Amortization of intangibles $ 36.0 205.1% $ 11.8 (47.8)% $ 22.6 % of net revenue 0.7 % 0.4 % 0.7 %
The increase in amortization expense for fiscal 2021, as compared to fiscal 2020, was primarily due to additional intangible assets acquired during fiscal 2021. See Note 3 to Item 8 of this Annual Report on Form 10-K for a detailed discussion of intangible assets acquired. Amortization expense is estimated to increase in fiscal 2022 due to amortization of intangibles acquired during fiscal 2021.
Restructuring, Impairment, and Other Charges Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Restructuring, impairment, and other charges $ 8.9 (35.5)% $ 13.8 102.9% $ 6.8 % of net revenue 0.2 % 0.4 % 0.2 %
Restructuring, impairment, and other charges incurred in fiscal 2021 were primarily related to an impairment on property, plant, and equipment.
Restructuring, impairment, and other charges incurred in fiscal 2020 were primarily related to the abandonment of a previously capitalized in-process research and development ("IPR&D") project.
Interest Expense Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Interest expense $ (13.4) 100.0% $ - -% $ - % of net revenue (0.3) % - % - %
The increase in interest expense for fiscal 2021, as compared to fiscal 2020, was due to the issuance of the Notes in May 2021 and the borrowing of the Term Loans (as defined below) in July 2021. Interest expense is estimated to increase in fiscal 2022 as our average borrowings outstanding are expected to be higher than in fiscal 2021.
Provision for Income Taxes Fiscal Years Ended October 1, October 2, September 27, 2021 Change 2020 Change 2019 (dollars in millions) Provision for income taxes $ 100.4 30.6% $ 76.9 (28.4)% $ 107.4 % of net revenue 2.0 % 2.3 % 3.2 %
The annual effective tax rate for fiscal 2021 of 6.3% was less than the United States federal statutory rate of 21.0% resulting primarily from foreign earnings taxed at rates lower than the federal statutory rate, a benefit related to a change in the reserve for uncertain tax positions, a benefit from foreign-derived intangible income deduction ("FDII"), windfall tax deductions, research and development credits, and foreign tax credits, partially offset by a tax on global intangible low-taxed income ("GILTI").
The decrease in the effective tax rate for fiscal 2021, as compared to the 11.2% effective rate for fiscal 2020, was primarily due to benefits related to favorable changes in the reserves for uncertain tax positions.
During fiscal 2021, we concluded an IRS examination of our federal income tax returns for fiscal 2015 and 2016. With the conclusion of the audit, we decreased the reserve for uncertain tax positions, including interest and penalties, which resulted in the recognition of an income tax benefit of $34.8 million in fiscal 2021. In addition, the statute of limitations expired on the federal income tax return for fiscal 2017 and, as a result, we decreased the related reserve for uncertain tax positions of $25.5 million.
The increase in income tax expense in fiscal 2021, as compared to fiscal 2020, was primarily due to increased income from operations, partially offset by a decrease in the reserve for uncertain tax positions.
See Note 9 to Item 8 of this Annual Report on Form 10-K for additional information regarding income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Set forth below is a summary of our cash flows for the periods indicated:
Fiscal Years Ended October 1, October 2, September 27, (in millions) 2021 2020 2019 Cash and cash equivalents at beginning of period $ 566.7 $ 851.3 $ 733.3 Net cash provided by operating activities 1,772.0 1,204.5 1,367.4 Net cash used in investing activities (3,133.2) (581.4) (336.9) Net cash provided by (used in) financing activities 1,677.4 (907.7) (912.5) Cash and cash equivalents at end of period $ 882.9 $ 566.7 $ 851.3
Cash provided by operating activities:
Cash used in investing activities:
Cash provided by financing activities:
For a description of contractual obligations, such as taxes, leases, and debt, see Note 9, Note 11, and Note 17 to Item 8 of this Annual Report on Form 10-K, respectively.
Based on our historical results of operations, we expect that our cash, cash equivalents, and marketable securities on hand, and the cash we expect to generate from operations, and funds from our Revolver, will be sufficient to fund our short-term and long-term liquidity requirements primarily arising from:
cash and capital resources. If we are unable to obtain sufficient cash or capital to meet our needs on a timely basis and on favorable terms, our business and operations could be materially and adversely affected.
Our invested cash balances primarily consist of highly liquid marketable securities that are available to meet near-term cash requirements including:
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments in applying our most critical accounting policies that can have a significant impact on the results we report in our financial statements. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex, or subjective judgments or estimates. Based on this definition, our most critical accounting policies include revenue recognition, which impacts the recording of net revenue; inventory valuation, which impacts the cost of goods sold and gross margin; business combinations, which impacts the fair value of acquired assets and assumed liabilities; and income taxes, which impacts the income tax provision. These policies and significant judgments involved are discussed further below. We have other significant accounting policies that do not generally require subjective estimates or judgments or would not have a material impact on our results of operations. Our significant accounting policies are described in Note 2 to Item 8 of this Annual Report on Form 10-K.
Revenue Recognition. We recognize revenue in accordance with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 606 Revenue from Contracts with Customers net of estimated reserves. Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for product returns, price protection, price adjustments, and stock rotation for products sold to certain electronic component distributors. We base these estimates on the expected value method considering all reasonably available information, including our historical experience and current expectations, and are reflected in the transaction price when sales are recorded.
Inventory Valuation. We value our inventory at the lower of cost or net realizable value. Reserves for excess and obsolete inventory are established on a quarterly basis and are based on a detailed analysis of aged material, salability of our inventory, market conditions, and product life cycles. Once reserves are established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory. Our reserves contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding historical experience, market conditions, and technological obsolescence. Changes in actual demand or market conditions could adversely impact our reserve calculations.
Income Taxes. The application of tax laws and regulations to calculate our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at the largest amount that we feel is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant tax authority.
Business Combinations. We allocate the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired, including IPR&D, based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset's estimated useful life. Our valuation of acquired assets and assumed liabilities requires significant estimates, especially with respect to intangible assets. The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates:
the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Nov 24, 2021
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