filings.toolsItem 6. SELECTED FINANCIAL DATA
103K characters. Original on sec.gov ·
Item 6. SELECTED FINANCIAL DATA
The following table includes selected financial data for each of our last five fiscal years and includes the results of operations from the acquisition of Linear from March 10, 2017. See Note 6, Acquisitions, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for information on the Linear acquisition. The Company’s fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October. Fiscal 2019, 2017, 2016, and 2015 are 52-week fiscal years. Fiscal 2018 was a 53-week fiscal year. The additional week in fiscal 2018 was included in the first quarter ended February 3, 2018. Therefore, fiscal 2018 included an additional week of operations as compared to other periods presented.
| (thousands, except per share amounts) | 2019 | 2018 (1) | 2017 (1) | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Statement of Income data: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 5,991,065 | $ | 6,224,689 | $ | 5,246,354 | $ | 3,421,409 | $ | 3,435,092 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 1,363,011 | $ | 1,506,980 | $ | 805,379 | $ | 861,664 | $ | 696,878 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income per common share | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 3.68 | $ | 4.05 | $ | 2.32 | $ | 2.79 | $ | 2.23 | ||||||||||||||||||||||||||||||||||||||||||||||
| Diluted | $ | 3.65 | $ | 4.00 | $ | 2.29 | $ | 2.76 | $ | 2.20 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared per common share | $ | 2.10 | $ | 1.89 | $ | 1.77 | $ | 1.66 | $ | 1.57 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance Sheet data: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 21,392,641 | $ | 20,438,366 | $ | 21,118,283 | $ | 7,970,278 | $ | 7,058,777 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt | $ | 5,491,919 | $ | 6,332,674 | $ | 7,851,084 | $ | 1,732,177 | $ | 869,935 | ||||||||||||||||||||||||||||||||||||||||||||||
| (1) Balances for fiscal 2018 and fiscal 2017 have been restated to reflect the adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). See Note 2a, Principles of Consolidation, of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Therefore, balances from fiscal 2016 and fiscal 2015 may not be comparable to other periods presented. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (all tabular amounts in thousands except per share amounts)
The following discussion includes a comparison of our Results of Operations and Liquidity and Capital Resources for the fiscal year ended November 2, 2019 (fiscal 2019) and the fiscal year ended November 3, 2018 (fiscal 2018). Our fiscal year is the 52-week or 53-week period ending on the Saturday closest to the last day in October. Fiscal 2019 and fiscal 2017 were 52-week fiscal periods, while fiscal 2018 was a 53-week period. The additional week in fiscal 2018 was included in the first quarter ended February 3, 2018. Therefore, fiscal 2018 included an additional week of operations as compared to fiscal 2019 and fiscal 2017.
Results of Operations
With the exception of items impacted by the adoption of ASU 2014-09 and resulting restatements, a discussion of changes in our results of operations from the fiscal year ended October 28, 2017 (fiscal 2017) to fiscal 2018 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 the fiscal year ended November 3, 2018 filed with the Securities and Exchange Commission on November 27, 2018.
Overview
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 (1) | 2017 (1) | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 5,991,065 | $ | 6,224,689 | $ | 5,246,354 | $ | (233,624) | (4) | % | $ | 978,335 | 19 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross margin % | 67.0 | % | 68.3 | % | 60.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 1,363,011 | $ | 1,506,980 | $ | 805,379 | $ | (143,969) | (10) | % | $ | 701,601 | 87 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income as a % of revenue | 22.8 | % | 24.2 | % | 15.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Diluted EPS | $ | 3.65 | $ | 4.00 | $ | 2.29 | $ | (0.35) | (9) | % | $ | 1.71 | 75 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| _______________________________________ (1) Balances have been restated to reflect the adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. |
Acquisition of Linear Technology Corporation
On March 10, 2017 (Acquisition Date), we completed the acquisition of Linear Technology Corporation (Linear), a designer, manufacturer and marketer of high performance analog integrated circuits. The total consideration paid to acquire Linear was approximately $15.8 billion, consisting of $11.1 billion in cash financed through existing cash on hand, net proceeds from bridge and term loan facilities and proceeds received from the issuance of senior unsecured notes, $4.6 billion from the issuance of our common stock and $0.1 billion of consideration related to the replacement of outstanding equity awards held by Linear employees. The acquisition of Linear is referred to as the Acquisition. The Consolidated Financial Statements included in this Annual Report on Form 10-K include the financial results of Linear prospectively from the Acquisition Date. See Note 6, Acquisitions and Note 14, Debt, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information.
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.
| 2019 | 2018 (1) | 2017 (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | % of Total Product Revenue (2) | Y/Y% | Revenue | % of Total Product Revenue (2) | Y/Y% | Revenue | % of Total Product Revenue (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Industrial | $ | 3,003,927 | 50 | % | (4) | % | $ | 3,129,569 | 50 | % | 35 | % | $ | 2,324,686 | 44 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Communications | 1,284,087 | 21 | % | 12 | % | 1,151,359 | 18 | % | 27 | % | 908,594 | 17 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Automotive | 933,143 | 16 | % | (8) | % | 1,009,927 | 16 | % | 33 | % | 758,115 | 14 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer | 769,908 | 13 | % | (18) | % | 933,834 | 15 | % | (26) | % | 1,254,959 | 24 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 5,991,065 | 100 | % | (4) | % | $ | 6,224,689 | 100 | % | 19 | % | $ | 5,246,354 | 100 | % |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
(2)The sum of the individual percentages may not equal the total due to rounding.
Industrial - Industrial end market revenues decreased in fiscal 2019, as compared to fiscal year 2018, primarily as a result of a decrease in demand for products sold into the automation and memory test sectors of this end market and one less week of operations in fiscal 2019 as compared to fiscal 2018, partially offset by an increase in demand for products sold into the aerospace and defense sector of this end market. Industrial end market revenue increased in fiscal 2018, as compared to fiscal 2017, primarily as a result of the Acquisition, which accounted for approximately $414.5 million of the increase, a broad-based increase in demand for our products in this end market and an additional week of operations in fiscal 2018 as compared to fiscal 2017.
Communications - Communications end market revenue increased in fiscal 2019, as compared to fiscal year 2018, as a result of an increase in demand for our products sold into the wireless sector of this end market, partially offset by one less week of operations in fiscal 2019 as compared to fiscal 2018. Communications end market revenue increased in fiscal 2018, as compared to fiscal 2017, primarily as a result of the Acquisition, which accounted for approximately $43.5 million of the increase, a broad-based increase in demand for our products in this end market and an additional week of operations in fiscal 2018 as compared to fiscal 2017.
Automotive - Automotive end market revenue decreased in fiscal 2019, as compared to fiscal 2018, primarily as a result of a broad-based decrease in demand for our products and one less week of operations in fiscal 2019, as compared to fiscal 2018. Automotive end market revenue increased in fiscal 2018, as compared to fiscal 2017, primarily as a result of the Acquisition, which accounted for approximately $92.6 million, a broad-based increase in demand for our products in this end market and an additional week of operations in fiscal 2018 as compared to fiscal 2017.
Consumer - Consumer end market revenues decreased in fiscal 2019, as compared to fiscal 2018, primarily as a result of decreased demand for products used in portable consumer applications and one less week of operations in fiscal 2019 as compared to the fiscal 2018. Consumer end market revenue decreased in fiscal 2018, as compared to fiscal 2017, primarily as a result of a decreased demand for products used in portable consumer applications, partially offset by an increase in revenue due to the Acquisition and an additional week of operations in fiscal 2018 as compared to fiscal 2017.
Revenue by Sales Channel
The following tables summarize revenue by 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 the U.S. government, government prime contractors and some commercial customers.
| 2019 | 2018 (1) | 2017 (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue | % of Total Revenue (2) | Revenue | % of Total Revenue (2) | Revenue | % of Total Revenue (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributors | $ | 3,409,161 | 57 | % | $ | 3,424,145 | 55 | % | $ | 2,749,335 | 52 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Direct customers | 2,506,065 | 42 | % | 2,721,885 | 44 | % | 2,424,514 | 46 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | 75,839 | 1 | % | 78,659 | 1 | % | 72,505 | 1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 5,991,065 | 100 | % | $ | 6,224,689 | 100 | % | $ | 5,246,354 | 100 | % |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
(2)The sum of the individual percentages may not equal the total due to rounding.
As indicated in the above table, the percentage of total revenue sold via each channel has remained relatively consistent in fiscal 2019, fiscal 2018 and fiscal 2017.
Revenue Trends by Geographic Region
Revenue by geographic region, based upon the geographic location of the distributors or OEMs who purchased the Company's products, for fiscal 2019, fiscal 2018 and fiscal 2017 was as follows:
| Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 (1) | 2017 (1) | $ Change | % Change (2) | $ Change | % Change (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 2,020,886 | $ | 2,277,084 | $ | 2,110,545 | $ | (256,198) | (11) | % | $ | 166,539 | 8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Rest of North and South America | 55,059 | 46,276 | 48,620 | 8,783 | 19 | % | (2,344) | (5) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Europe | 1,374,673 | 1,405,686 | 1,164,725 | (31,013) | (2) | % | 240,961 | 21 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Japan | 657,632 | 714,846 | 586,521 | (57,214) | (8) | % | 128,325 | 22 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| China | 1,316,275 | 1,215,949 | 898,645 | 100,326 | 8 | % | 317,304 | 35 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rest of Asia | 566,540 | 564,848 | 437,298 | 1,692 | — | % | 127,550 | 29 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 5,991,065 | $ | 6,224,689 | $ | 5,246,354 | $ | (233,624) | (4) | % | $ | 978,335 | 19 | % |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
(2)The sum of the individual percentages may not equal the total due to rounding.
In fiscal 2019, fiscal 2018 and fiscal 2017, the predominant countries comprising “Rest of North and South America” are Canada and Mexico; the predominant countries comprising “Europe” are Germany, the Netherlands and Sweden; and the predominant countries comprising “Rest of Asia” are South Korea and Taiwan.
The sales decrease in the United States year-over-year in fiscal 2019 was primarily a result a of a broad-based decrease in demand for our products and one less week of operations in fiscal 2019 as compared to fiscal 2018, partially offset by an increase in demand for products sold into the aerospace and defense sectors of the Industrial end market. The sales increase in the United States year-over-year in fiscal 2018 was primarily a result of the Acquisition, which accounted for approximately $255.3 million of the increase, contributing to an increase in demand for our products sold into the Industrial, Communications and Automotive end markets and an additional week of operations in fiscal 2018, as compared to fiscal 2017, partially offset by a decrease in demand for our products sold into the Consumer end market.
The sales decrease in Europe year-over-year in fiscal 2019 was primarily a result of a broad-based decrease in demand for our products and one less week of operations in fiscal 2019 as compared to fiscal 2018, partially offset by an increase in demand for products sold into the Communications end market and aerospace and defense sectors of the Industrial end market. The sales increase in Europe year-over-year in fiscal 2018 was primarily a result of the Acquisition, which accounted for
approximately $145.9 million of the increase, and contributing to an increase in demand for our products sold into the Industrial end market and an additional week of operations in fiscal 2018, as compared to fiscal 2017.
The sales decrease in Japan year-over-year in fiscal 2019 was primarily a result of a broad-based decrease in demand for our products and one less week of operations in fiscal 2019 as compared to fiscal 2018, partially offset by an increase in demand for products sold into the Automotive end market. The sales increase in Japan year-over-year in fiscal 2018 was a result of the Acquisition, which accounted for approximately $89.2 million of the increase.
The sales increase in China year-over-year in fiscal 2019 was primarily a result of an increase in demand for our products sold into the Communications end market, partially offset by decreased demand for products sold into the Consumer and Automotive end markets and one less week of operations in fiscal 2019 as compared to fiscal 2018. The sales increase in China year-over-year in fiscal 2018 was primarily a result of the Acquisition, which accounted for approximately $93.1 million of the increase, contributing to a broad-based increase in demand for our products sold into all end markets and an additional week of operations in fiscal 2018 as compared to fiscal 2017.
Sales in the Rest of Asia year-over-year in fiscal 2019 remained relatively flat as increase in demand for our products sold into the Communications and Automotive end markets, were partially offset by decreased demand for products sold into the Industrial end market and one less week of operations in fiscal 2019 as compared to fiscal 2018. The sales increase in the Rest of Asia year-over-year in fiscal 2018 was primarily a result of the Acquisition, which accounted for approximately $63.4 million of the increase, contributing to a broad-based increase in demand for our products sold into the Industrial, Communications and Automotive end markets and an additional week of operations in fiscal 2018 as compared to fiscal 2017.
Gross Margin
| Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 (1) | 2017 (1) | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross margin | $ | 4,013,750 | $ | 4,250,396 | $ | 3,168,241 | $ | (236,646) | (6) | % | $ | 1,082,155 | 34 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross margin % | 67.0 | % | 68.3 | % | 60.4 | % |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
Gross margin percentage in fiscal 2019 decreased by 130 basis points compared to fiscal 2018, primarily as a result of lower internal utilization of our wafer fabrication facilities and a write-down of inventory primarily associated with a customer within our Communications end market.
Gross margin percentage in fiscal 2018 increased by 790 basis points compared to fiscal 2017, primarily because fiscal 2017 included cost of sales adjustments of $358.7 million related to the sale of acquired Linear inventory written up to fair value. Additionally, the increase in gross margin percentage in fiscal 2018, as compared to fiscal 2017 was a result of a mix shift in favor of higher margin products being sold resulting from the Acquisition and lower cost of sales resulting from favorable factory variances related to increased utilization at our manufacturing facilities. The increase in gross margin percentage in fiscal 2018 was partially offset by increases in amortization expense of developed technology intangible assets and depreciation expense related to fixed assets as a result of a full year of expense for each related to the Acquisition.
Research and Development (R&D)
| Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| R&D expenses | $ | 1,130,348 | $ | 1,165,047 | $ | 968,133 | $ | (34,699) | (3) | % | $ | 196,914 | 20 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| R&D expenses as a % of revenue | 18.9 | % | 18.7 | % | 18.5 | % |
R&D expenses decreased in fiscal 2019 as compared to fiscal 2018 primarily as a result of decreases in variable compensation expense and one less week of operations in fiscal 2019 as compared to fiscal 2018, partially offset by increases in operational spending and R&D employee and related 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 have hundreds of R&D projects underway, none of which we believe are material on an individual basis. 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, and therefore, we expect to continue to make significant R&D investments in the future.
Selling, Marketing, General and Administrative (SMG&A)
| Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SMG&A expenses | $ | 648,094 | $ | 695,540 | $ | 690,533 | $ | (47,446) | (7) | % | $ | 5,007 | 1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| SMG&A expenses as a % of revenue | 10.8 | % | 11.2 | % | 13.2 | % |
SMG&A expenses decreased in fiscal 2019 as compared to fiscal 2018, primarily as a result of decreases in variable compensation expense, acquisition-related costs and one less week of operations in fiscal 2019 as compared to fiscal 2018, partially offset an increase in operational spending.
Amortization of Intangibles
| Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization expenses | $ | 429,041 | $ | 428,902 | $ | 297,351 | $ | 139 | — | % | $ | 131,551 | 44 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization expenses as a % of revenue | 7.2 | % | 6.9 | % | 5.7 | % |
Amortization expenses was relatively flat in fiscal 2019 as compared to fiscal 2018 as we did not have any significant acquisitions of intangible assets in fiscal 2019. Intangible assets are being amortized on a straight-line basis over their estimated useful lives.
Special Charges
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.
Repositioning Action: During fiscal 2019, we recorded special charges of $88.1 million as a result of organizational initiatives to reposition our global workforce skill set to align with our long-term strategic plan. Approximately $73.9 million of these actions was for severance and fringe benefit costs in accordance with either our ongoing benefit plan or statutory requirements. The remaining $14.2 million related to the write-off of acquired intellectual property due to the Company’s decision to discontinue certain product development strategies. Once fully implemented, the repositioning actions are expected to result in net annualized cash savings of approximately $48.0 million.
Closure of manufacturing facilities: As a result of our fiscal 2018 decision to consolidate certain wafer and test facility operations acquired as part of the Acquisition, we recorded special charges of $7.6 million during fiscal 2019, totaling $52.0 million on a cumulative basis through November 2, 2019. Over the next one to three years, we plan to close our Hillview wafer fabrication facility located in Milpitas, California and our Singapore test facility. We intend to transfer Hillview wafer fabrication production to our other internal facilities and to external foundries. In addition, we are planning to transition testing operations currently handled in our Singapore facility to our facilities in Penang, Malaysia and the Philippines, in addition to our outsourced assembly and test partners. The special charge recognized as a result of this action consists of severance and related benefit costs. We expect that this action will result in estimated annual salary, variable compensation and employee benefit savings of approximately $60.0 million once fully implemented.
Operating Income
| Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 (1) | 2017 (1) | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 1,710,608 | $ | 1,899,589 | $ | 1,162,761 | $ | (188,981) | (10) | % | $ | 736,828 | 63 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income as a % of revenue | 28.6 | % | 30.5 | % | 22.2 | % |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
The decrease in operating income in fiscal 2019 as compared to fiscal 2018 was primarily the result of a $236.6 million decrease in gross margin and a $34.3 million increase in special charges, partially offset by a $47.4 million decrease in SMG&A expenses and a $34.7 million decrease in R&D expenses as more fully described above under the headings Gross Margin, Special Charges, Selling, Marketing, General and Administrative (SMG&A) and Research and Development (R&D).
The increase in operating income in fiscal 2018 as compared to fiscal 2017 was the result of a $1.1 billion increase in gross margin, partially offset by a $196.9 million increase in R&D expenses, a $131.6 million increase in amortization expense, an $11.8 million increase in special charges, and a $5.0 million increase in SMG&A expenses.
Nonoperating (Income) Expenses
| Change | |||||||||||||||||||||||||||||||||||||||||
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | $ Change | $ Change | |||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 229,075 | $ | 253,589 | $ | 250,840 | $ | (24,514) | $ | 2,749 | |||||||||||||||||||||||||||||||
| Interest income | (10,229) | (9,383) | (30,333) | (846) | 20,950 | ||||||||||||||||||||||||||||||||||||
| Other, net | 6,034 | 69 | 7,507 | 5,965 | (7,438) | ||||||||||||||||||||||||||||||||||||
| Total nonoperating expenses | $ | 224,880 | $ | 244,275 | $ | 228,014 | $ | (19,395) | $ | 16,261 |
The year-over-year decrease in nonoperating expense in fiscal 2019 was primarily the result of a decrease in interest expense including lower amortized finance fees, which were accelerated as a result of principal repayments related to our previously outstanding 3-year and 5-year term loans, partially offset by an increase in other, net expenses resulting from the impairment of investments during fiscal 2019.
See Note 14, Debt, of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information on debt issuances and commitments related to the Acquisition.
Provision for Income Taxes
| Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 (1) | 2017 (1) | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 122,717 | $ | 148,334 | $ | 129,368 | $ | (25,617) | (17) | % | $ | 18,966 | 15 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Effective income tax rate | 8.3 | % | 9.0 | % | 13.8 | % |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
Our effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where our income is earned. Our effective income tax rate can also be impacted each year by discrete factors or events.
The Tax Cuts and Jobs Act of 2017 (Tax Legislation), enacted on December 22, 2017, contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21.0%, implementing a territorial tax system, and imposing a one-time tax on deemed repatriated earnings of foreign subsidiaries. We completed our accounting for the income tax effects of the Tax Legislation during fiscal 2019, in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118.
The tax rate for fiscal 2019 was below the U.S. statutory tax rate of 21% partially due to lower statutory tax rates applicable to our operations in the foreign jurisdictions from which we earn income and tax incentives such as the foreign derived intangible income deduction and research and development tax credits. These items are partially offset by the global intangible low-tax income (GILTI) tax. The tax rate for fiscal 2019 includes a $17.2 million tax benefit from a voluntary accounting policy change in the statutory statements of a foreign subsidiary, an $11.2 million tax benefit from an increase in tax credits upon filing our fiscal 2018 federal income tax return and excess tax benefits from stock-based compensation payments of $28.7 million.
Similarly, our tax rate for fiscal 2018 was below our then blended U.S. federal statutory tax rate of 23.4%, primarily due to lower statutory tax rates applicable to our operations in the foreign jurisdictions in which we earn income and $25.6 million of tax benefit related to the release of uncertain tax positions due to lapses in statute of limitations. In addition, our effective tax rate for fiscal 2018 includes a provisional estimate for a discrete tax benefit of $637.0 million from remeasuring our U.S. deferred tax assets and liabilities at the lower 21.0% U.S. federal statutory tax rate and a provisional estimate of $691.0 million for the discrete tax charge from the Tax Legislation’s one-time transition tax associated with our undistributed foreign earnings, which is comprised of a $755.0 million transitional tax less a deferred tax liability of $64.0 million that was recorded in prior years and excess tax benefits from stock-based compensation payments of $26.2 million.
Non-U.S. jurisdictions accounted for approximately 75.9% of our total revenues for both fiscal 2019 and fiscal 2018. This revenue generated outside of the U.S. results in a material portion of our pretax income being taxed outside the U.S. In fiscal 2019, this was primarily in Ireland and Singapore, at tax rates ranging from 12.5% to 17% and in fiscal 2018, this was primarily in Bermuda, Ireland and Singapore, at tax rates ranging from 0 to 33.3%. The impact on our provision for income taxes on income earned in foreign jurisdictions being taxed at rates different than the U.S. federal statutory rate was a benefit of approximately $242.9 million and a foreign effective tax rate of approximately 21.1% for fiscal 2019 as compared to a benefit of approximately $420.8 million and a foreign effective tax rate of approximately 5.2% for fiscal 2018. Our foreign effective tax rates for both periods are inclusive of certain non-deductible expenses which can result in tax rates higher than the applicable statutory tax rates. In addition, our effective income tax rate can be impacted each year by amounts for discrete factors or events and acquisition-related accounting adjustments.
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 | 2019 over 2018 | 2018 over 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 (1) | 2017 (1) | $ Change | % Change | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 1,363,011 | $ | 1,506,980 | $ | 805,379 | $ | (143,969) | (10) | % | $ | 701,601 | 87 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income, as a % of revenue | 22.8 | % | 24.2 | % | 15.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Diluted EPS | $ | 3.65 | $ | 4.00 | $ | 2.29 | $ | (0.35) | (9) | % | $ | 1.71 | 75 | % |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
The decrease in net income in fiscal 2019 as compared to fiscal 2018 was a result of a $189.0 million decrease in operating income, partially offset by a $25.6 million decrease in provision for income taxes and a $19.4 million decrease in nonoperating expense.
The increase in net income in fiscal 2018 as compared to fiscal 2017 was a result of a $736.8 million increase in operating income, partially offset by a $19.0 million increase in provision for income taxes and a $16.3 increase in nonoperating expense.
The impact of inflation and foreign currency exchange rate movement on our results of operations during the past three fiscal years has not been significant.
Liquidity and Capital Resources
At November 2, 2019, our principal source of liquidity was $648.3 million of cash and cash equivalents, of which approximately $295.7 million was held in the United States. The balance of our cash and cash equivalents was held outside the United States in various foreign subsidiaries. As we intend to reinvest substantially all of our foreign earnings indefinitely, certain cash held outside the United States may not be available for repatriation as dividends to the United States in the future. If such funds are needed for U.S. operations, we would be required to accrue and pay foreign withholding and U.S. state income taxes to the extent not already subject to taxation. 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.
On the Acquisition Date, we entered into a 90-day Bridge Credit Agreement that provided for unsecured loans in an aggregate principal amount of up to $4.1 billion and borrowed under a term loan agreement consisting of a 3-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2020 and a 5-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2022. During fiscal year 2019, we refinanced both term loans into one 3-year unsecured term loan in the principal amount of $1.25 billion, due March 10, 2022. As of November 2, 2019, we have repaid $325 million of principal on the 3-year unsecured term loan. See Note 13, Revolving Credit Facility and Note 14, Debt of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further information.
We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with existing and anticipated available 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 | |||||||||||||||||||||||||||||
| 2019 | 2018 (1) | 2017 (1) | |||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 2,253,100 | $ | 2,442,361 | $ | 1,154,365 | |||||||||||||||||||||||
| Net cash provided by operating activities as a % of revenue | 37.6 | % | 39.2 | % | 22.0 | % | |||||||||||||||||||||||
| Net cash used for investing activities | $ | (293,186) | $ | (313,998) | $ | (6,618,014) | |||||||||||||||||||||||
| Net cash (used for) provided by financing activities | $ | (2,126,794) | $ | (2,358,042) | $ | 5,586,805 |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
At November 2, 2019, cash and cash equivalents totaled $648.3 million. The following changes contributed to the net change in cash and cash equivalents in fiscal 2019 and fiscal 2018. A discussion of changes in our results of operations from fiscal 2017 to fiscal 2018 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 the fiscal year ended November 3, 2018 filed with the Securities and Exchange Commission on November 27, 2018.
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. The decrease in cash provided by operating activities during fiscal 2019, as compared to fiscal 2018, was primarily a result of changes in tax liabilities related to the one-time transition tax as a result of the Tax Legislation.
Investing Activities
Investing cash flows consist primarily of capital expenditures and cash used for acquisitions. The decrease in cash used for investing activities during fiscal 2019, as compared to fiscal 2018, was primarily the result of decreased payments for acquisitions, partially offset by increased capital spending.
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 decrease in cash used for financing activities during fiscal 2019, as compared to fiscal 2018, was primarily due to an increase in proceeds from debt related to the June 2019 term loan agreement and a decrease in debt repayments, partially offset by increases in stock repurchases and dividend payments.
Working Capital
| Fiscal Year | ||||||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||||||||||||
| Accounts receivable, net | $ | 635,136 | $ | 639,717 | $ | (4,581) | (1) | % | ||||||||||||||||||
| Days sales outstanding (1) (2) | 39 | 39 | ||||||||||||||||||||||||
| Inventory | $ | 609,886 | $ | 586,760 | $ | 23,126 | 4 | % | ||||||||||||||||||
| Days cost of sales in inventory (1) (2) | 110 | 105 |
(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
(2)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.
The decrease in accounts receivable for fiscal 2019 compared to fiscal 2018 was primarily the result of normal variations in the timing of collections and billings.
Inventory in dollars increased in fiscal 2019 as compared to fiscal 2018, primarily as a result of 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.
Current liabilities increased to $1.5 billion at November 2, 2019 from $1.1 billion recorded at the end of fiscal 2018. The increase was primarily due to increases in the current portion of our debt and income taxes payable.
Debt
As of November 2, 2019, we had $5.5 billion of carrying value outstanding on our debt. The difference in the carrying value of the debt and the principal is due to the unamortized discount and issuance fees on these instruments that will accrete to the face value over the term of the debt. Our debt obligations consist of the following:
$500.0 Million Aggregate Principal Amount of 2.875% Senior Unsecured Notes (2023 Notes)
On June 3, 2013, we issued the 2023 Notes with semi-annual fixed interest payments due on June 1 and December 1 of each year, commencing December 1, 2013.
$850.0 Million Aggregate Principal Amount of 3.9% Senior Unsecured Notes (2025 Notes) and $400.0 Million Aggregate Principal Amount of 5.3% Senior Unsecured Notes (2045 Notes)
On December 14, 2015, we issued the 2025 Notes and the 2045 Notes with semi-annual fixed interest payments due on June 15 and December 15 of each year, commencing June 15, 2016.
$400 Million Aggregate Principal Amount of 2.5% Senior Unsecured Notes (2021 Notes), $550 Million Aggregate Principal Amount of 3.125% Senior Unsecured Notes (December 2023 Notes), $900 Million Aggregate Principal Amount of 3.5% Senior Unsecured Notes (2026 Notes) and $250 Million Aggregate Principal Amount of 4.5% Senior Unsecured Notes (2036 Notes)
On December 5, 2016, we issued the 2021 Notes, the December 2023 Notes, the 2026 Notes and the 2036 Notes with semi-annual fixed interest payments due on June 5 and December 5 of each year, commencing June 5, 2017.
$300.0 Million Aggregate Principal Amount of 2.85% Senior Unsecured Notes (2020 Notes) and $450.0 Million Aggregate Principal Amount of 2.95% Senior Unsecured Notes (January 2021 Notes)
On March 12, 2018, we issued the 2020 Notes with semi-annual fixed interest payments due on March 12 and September 12 of each year, commencing September 12, 2018, and the January 2021 Notes with semi-annual fixed interest payments due on January 12 and July 12 of each year, commencing July 12, 2018.
The indentures governing the 2020 Notes, 2021 Notes, January 2021 Notes, 2023 Notes, December 2023 Notes, 2025 Notes, 2026 Notes, 2036 Notes and 2045 Notes 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 of November 2, 2019, we were compliant with these covenants. See Note 14, Debt, 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.
$5.0 Billion Aggregate Principal Term Loans
On the Acquisition Date, we drew down on a 3-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2020 and a 5-year unsecured term loan in the principal amount of $2.5 billion, due March 10, 2022. The term loans bore interest at a rate per annum equal to the Eurodollar Rate plus a margin based on our debt ratings from time to time of between 0.75% and 1.63% in the case of the 3-year unsecured term loan, and a margin of between 0.88% and 1.75% in the case of the 5-year unsecured term loan. As of November 2, 2019, we have repaid the 3-year and 5-year unsecured term loans in full.
$1.25 Billion Principal Term Loan
On June 28, 2019, we entered into a term loan credit agreement with JPMorgan Chase Bank, N.A. as administrative agent and the other banks identified therein as lenders, under which we borrowed unsecured term loans in the aggregate principal amount of $1.25 billion, maturing March 10, 2022, to refinance our then-outstanding 3-year and 5-year unsecured term loans. Loans under the term loan credit agreement may be either Eurodollar Rate Loans or Base Rate Loans at our option. Each Eurodollar Rate Loan will bear interest at a rate per annum equal to the Adjusted LIBO Rate plus a margin based on our debt ratings from time to time of between 0.625% and 1.500%. Each Base Rate Loan will bear interest at a rate per annum equal to the Base Rate plus a margin based on our debt ratings from time to time of between 0.00% and 0.500%. As of November 2, 2019, we have repaid $325.0 million of principal on the term loans.
Revolving Credit Facility
On June 28, 2019, we entered into a second amended and restated revolving credit agreement with Bank of America N.A. as administrative agent and the other banks identified therein as lenders (Revolving Credit Agreement), which further amended and restated our amended and restated revolving credit agreement dated as of September 23, 2016. The Revolving Credit Agreement provides for a five year unsecured revolving credit facility in an aggregate principal amount of up to $1.25 billion, expiring on June 28, 2024. Loans under the Revolving Credit Agreement can be Eurocurrency Rate Loans or Base Rate Loans at our option. Each Eurocurrency Rate Loan will bear interest at a rate per annum equal to the Eurocurrency Rate plus a margin based on our debt ratings from time to time of between 0.690% and 1.375%. Each Base Rate Loan will bear interest at a rate per annum equal to the Base Rate plus a margin based on our debt ratings from time to time of between 0.00% and 0.375%. In December 2018, we borrowed $75.0 million under the previous revolving credit facility and utilized the proceeds for the repayment of existing indebtedness and working capital requirements. We repaid the $75.0 million plus interest of $0.2 million in January 2019.
As of November 2, 2019, we have no outstanding borrowings under the revolving credit facility, but we may borrow 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 4.0 to 1.0. The debt covenant will be reduced over time to 3.5 to 1.0, beginning in fiscal 2020 depending upon facts and circumstances. As of November 2, 2019, we were compliant 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.
Stock Repurchase Program
Our common stock repurchase program has been in place since August 2004. In the aggregate, our Board of Directors has authorized us to repurchase $8.2 billion of our common stock under the program. 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.
In connection with the Acquisition, we temporarily suspended the share repurchase program. On August 21, 2018, we reinstated the share repurchase program, and as of November 2, 2019, we had repurchased a total of approximately 154.4 million shares of its common stock for approximately $6.1 billion under this program. An additional $2.1 billion remains available for repurchase of shares under the current authorized program. The repurchased shares are held as authorized but unissued shares of common stock. We also, from time to time, repurchase shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock units/awards or the exercise of stock options.
Capital Expenditures
Net additions to property, plant and equipment were $275.4 million in fiscal 2019 and were funded with a combination of cash on hand and cash generated from operations. We expect capital expenditures for fiscal 2020 to be slightly below 4% of
fiscal 2020 revenue. These capital expenditures will be funded with a combination of cash on hand and cash generated from operations.
Dividends
On November 25, 2019, our Board of Directors declared a cash dividend of $0.54 per outstanding share of common stock. The dividend will be paid on December 17, 2019 to all shareholders of record at the close of business on December 6, 2019 and is expected to total approximately $198.9 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.
Contractual Obligations
The table below summarizes our contractual obligations and the amounts we owe under these contracts in specified periods as of November 2, 2019:
| Payment due by period | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Less than | More than | |||||||||||||||||||||||||||||||||||||||||||||||||
| (thousands) | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||||||||||||||||||||||||||||||||
| Contractual obligations: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Transition tax (1) | $ | 659,773 | $ | 33,032 | $ | 119,379 | $ | 171,608 | $ | 335,754 | ||||||||||||||||||||||||||||||||||||||||
| Operating leases (2) | 448,721 | 79,789 | 108,331 | 70,430 | 190,171 | |||||||||||||||||||||||||||||||||||||||||||||
| Debt obligations (3) | 5,525,000 | 300,000 | 1,775,000 | 1,050,000 | 2,400,000 | |||||||||||||||||||||||||||||||||||||||||||||
| Interest payments associated with debt obligations | 1,456,063 | 182,268 | 314,539 | 234,356 | 724,900 | |||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation plan (4) | 48,302 | 1,148 | — | — | 47,154 | |||||||||||||||||||||||||||||||||||||||||||||
| Pension funding (5) | 7,565 | 7,565 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 8,145,424 | $ | 603,802 | $ | 2,317,249 | $ | 1,526,394 | $ | 3,697,979 |
(1)The Tax Legislation, enacted on December 22, 2017, contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21.0%, implementing a territorial tax system, and imposing a one-time tax on deemed repatriated earnings of foreign subsidiaries that we elected to pay over a period of eight years that begins in fiscal 2019 on an interest free basis.
(2)Certain of our operating lease obligations include escalation clauses. These escalating payment requirements are reflected in the table.
(3)Debt obligations are assumed to be held to maturity.
(4)These payments relate to obligations under our deferred compensation plan. The deferred compensation plan allows certain members of management and other highly-compensated employees and non-employee directors to defer receipt of all or any portion of their compensation. The amount in the “More than 5 Years” column of the table represents the remaining total balance under the deferred compensation plan to be paid to participants who have not terminated employment. Since we cannot reasonably estimate the timing of withdrawals for participants who have not yet terminated employment, we have included the future obligation to these participants in the “More than 5 Years” column of the table.
(5)Our funding policy for our foreign defined benefit plans is consistent with the local requirements of each country. The payment obligations in the table are estimates of our expected contributions to these plans for fiscal year 2019. The actual future payments may differ from the amounts presented in the table and reasonable estimates of payments beyond one year are not practical because of potential future changes in variables, such as plan asset performance, interest rates and the rate of increase in compensation levels.
As of November 2, 2019, our total liabilities associated with uncertain tax positions was $27.7 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 deferred taxes and 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 deferred taxes and uncertain tax positions. Therefore, we have not included these deferred taxes and 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 of November 2, 2019.
Off-balance Sheet Arrangements
As of November 2, 2019, we had no off-balance sheet financing arrangements.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial 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 with U.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. As a result of the adoption of new revenue accounting rules in the first quarter of fiscal 2019, we revised our revenue recognition policy. We now 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. Under this rule, 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 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 with the 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. As allowed under ASU 2014-09, we have opted to not disclose the amount of unsatisfied performance obligations as these contracts have original expected durations of less than one year. 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 its 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 finite lived 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 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.
We review indefinite-lived intangible assets for impairment annually, on the first day of the fourth quarter (on or about August 4) or more frequently if indicators of impairment exist. We perform a qualitative assessment on our indefinite-lived intangible assets to determine whether it is more likely-than not that the indefinite-lived intangible asset is impaired. If it is determined that the fair value of the indefinite-lived intangible asset is less than the carrying value, we would compare the fair value of the intangible asset with its carrying amount and recognize an impairment equal to any amount by which the carrying value of the assets exceeds the fair value.
Goodwill
Goodwill is subject to annual impairment tests or more frequently if indicators of potential impairment exist and suggest that the carrying value of goodwill may not be recoverable from estimated discounted future cash flows. We test goodwill for impairment at the reporting unit level, which we determined to be the same level as our eight identified operating segments, on an annual basis in the fourth quarter (on or about August 4) or more frequently if we believe indicators of impairment exist. 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. 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 its current market capitalization, allowing for a reasonable control premium.
In fiscal 2017 and prior periods, we did not elect to use the qualitative option for assessing goodwill and instead proceeded directly to the quantitative goodwill impairment analysis. In fiscal 2018, we used the qualitative method of assessing goodwill for all eight of our reporting units.
In our latest annual impairment evaluation that occurred as of August 4, 2019, we used the qualitative method of assessing goodwill for seven of our eight reporting units and the quantitative method for one reporting unit. For each of the reporting units evaluated using the qualitative method, we determined that it was not more likely than not that the fair values were less than their net book values. In making this determination, we considered 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 August 4, 2019 compared to the 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, such as significant declines in market capitalization or significant goodwill impairment charges that could be an indication that the goodwill of our reporting units was potentially impaired;
–changes in the value of major U.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 (WACC) rates for each reporting unit, which could materially lower our prior valuation conclusions under a discounted cash flow approach.
For the reporting unit we assessed goodwill using the quantitative method, we calculated its fair value and compared it with its carrying value. In calculating fair value, we used a weighting of the income and market approaches. Under the income approach, we used a discounted cash flow methodology which required 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 used the guideline public company method. Under this method we utilized information from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit, to create valuation multiples that were applied to the operating performance of the reporting unit, in order to obtain its fair value. As a result of this analysis, we concluded the reporting unit’s fair value exceeded its carrying amount as of the assessment date and no risk of impairment existed.
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 must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of 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 revenue and expense for tax and financial statement purposes, as well as the interest and penalties relating to these uncertain tax positions. We assessed the likelihood of the realization of deferred tax assets and concluded that a valuation allowance is needed to reserve the amount of the deferred tax assets that may not be realized due to the uncertainty of the timing and amount of the realization of certain state credit carryovers. In reaching our conclusion, we evaluated 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 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 in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made, which in turn, may result in an increase or decrease to our tax provision in a subsequent period.
We account for uncertain tax positions by 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 benefit 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 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 audit activity. A change in these factors would result in the recognition of a tax benefit or an additional charge to the tax provision.
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 accruals. 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 of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for further discussion.
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 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 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.
Previous: Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK