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.

OVERVIEW

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, industrial, medical, military, smartphone, tablet and wearable markets. Our key customers include Amazon, Apple, Arris, Bose, Cisco, DJI, Ericsson, Foxconn, Garmin, Gemalto (a Thales company), General Electric, Google, Honeywell, HTC, Huawei, Itron, Lenovo, LG Electronics, Microsoft, Motorola, Netgear, Northrop Grumman, OPPO, Rockwell Collins, Samsung, Sierra Wireless, Sonos, Technicolor, VIVO, Xiaomi and ZTE.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED SEPTEMBER 27, 2019**,** SEPTEMBER 28, 2018**, AND** SEPTEMBER 29, 2017**.**

The table below 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 September 28, 2018, filed with the SEC on November 15, 2018, as amended by Amendment No. 1 to such Annual Report on Form 10-K, filed with the SEC on January 25, 2019 (the “2018 10-K”), for Management’s Discussions and Analysis of Financial Condition and Results of Operations for the fiscal year ended September 29, 2017.

	September 27, 2019			September 28, 2018			September 29, 2017
Net revenue	100.0	%		100.0	%		100.0	%
Cost of goods sold	52.5			49.6			49.6
Gross profit	47.5			50.4			50.4
Operating expenses:
Research and development	12.5			10.4			9.7
Selling, general and administrative	5.9			5.4			5.6
Amortization of intangibles	0.7			0.5			0.8
Restructuring and other charges	0.2			—			—
Total operating expenses	19.3			16.3			16.1
Operating income	28.2			34.1			34.3
Other income (expense), net	0.3			0.3			0.1
Income before income taxes	28.5			34.4			34.4
Provision for income taxes	3.2			10.7			6.7
Net income	25.3	%		23.7	%		27.7	%

GENERAL

During the fiscal year ended September 27, 2019, the following key factors contributed to our overall results of operations, financial position and cash flows:

•

Net revenue decreased 12.7% to $3,376.8 million, as compared to fiscal 2018. This decrease in revenue was primarily driven by weakness in smartphone demand and Huawei being added to the Entity List, partially offset by the increasing number of IoT applications, our expanding analog product portfolio supporting new vertical markets including automotive, consumer, industrial, infrastructure, medical, and military, and our success in capturing a higher share of the increasing radio frequency and analog content per device as smartphone models continue to evolve.

•

Our ending cash, cash equivalents and marketable securities balance increased 3.1% to $1,082.2 million in fiscal 2019 from $1,050.2 million in fiscal 2018. This increase was primarily the result of a 8.5% increase in cash from operations to $1,367.4 million in fiscal 2019 from $1,260.6 million in fiscal 2018, partially offset by the repurchase of 8.9 million shares of our common stock for $657.6 million, capital expenditures of $398.4 million, and cash dividends of $273.9 million.

NET REVENUE

	Fiscal Years Ended
	September 27, 2019			Change	September 28, 2018			Change	September 29, 2017
(dollars in millions)
Net revenue	$	3,376.8		(12.7)%	$	3,868.0		5.9%	$	3,651.4

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.

The $491.2 million decrease in net revenue in fiscal 2019, as compared to fiscal 2018, is primarily related to weakness in smartphone demand and Huawei being added to the Entity List, partially offset by the increasing number of IoT applications, our expanding analog product portfolio supporting new vertical markets including automotive, consumer, industrial, infrastructure, medical, and military, and our success in capturing a higher share of the increasing radio frequency and analog content per device as smartphone models continue to evolve.

For information regarding net revenue by geographic region and customer concentration, see Note 15 to Item 8 of this Annual Report on Form 10-K.

GROSS PROFIT

	Fiscal Years Ended
	September 27, 2019			Change	September 28, 2018			Change	September 29, 2017
(dollars in millions)
Gross profit	$	1,603.8		(17.8)%	$	1,950.7		5.9%	$	1,841.8
% of net revenue	47.5		%		50.4		%		50.4		%

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. Erosion of average selling prices of established products is typical of the semiconductor industry. Consistent with trends in the industry, we anticipate that average selling prices for our established products will continue to decline over time. As part of our normal course of business, we mitigate the gross margin impact of declining average selling prices with efforts to increase unit volumes, reduce material costs, improve manufacturing efficiencies, lower manufacturing costs of existing products and by introducing new and higher value-added products.

The $346.9 million decrease in gross profit in fiscal 2019, as compared to fiscal 2018, was primarily the result of lower unit volumes and lower average selling prices with a gross profit impact of $546.5 million. In addition, we incurred a $66.1 million inventory-related charge due to lower expected demand as a result of Huawei being added to the Entity List. These negative impacts were partially offset by favorable product mix that positively impacted gross profit by $265.7 million. As a result of these impacts, gross profit margin decreased to 47.5% of net revenue for fiscal 2019 as compared to 50.4% in fiscal 2018.

RESEARCH AND DEVELOPMENT

	Fiscal Years Ended
	September 27, 2019			Change	September 28, 2018			Change	September 29, 2017
(dollars in millions)
Research and development	$	424.1		4.8%	$	404.5		13.9%	$	355.2
% of net revenue	12.5		%		10.4		%		9.7		%

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 2019, as compared to fiscal 2018, was primarily related to an increase in employee-related compensation expense and product development-related expenses. Research and development expense increased as a percentage of net revenue as a result of our increased investment in developing new technologies and products, as well as the decrease in net revenue.

SELLING, GENERAL AND ADMINISTRATIVE

	Fiscal Years Ended
	September 27, 2019			Change	September 28, 2018			Change	September 29, 2017
(dollars in millions)
Selling, general and administrative	$	198.3		(4.6)%	$	207.8		1.6%	$	204.6
% of net revenue	5.9		%		5.4		%		5.6		%

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 decrease in selling, general and administrative expenses in fiscal 2019, as compared to fiscal 2018, was primarily related to a decrease in share-based compensation expense. Selling, general and administrative expenses increased as a percentage of net revenue primarily due to the decrease in net revenue.

AMORTIZATION OF INTANGIBLES

	Fiscal Years Ended
	September 27, 2019			Change	September 28, 2018			Change	September 29, 2017
(dollars in millions)
Amortization of intangibles, cost of goods sold	$	34.1		305.4%	$	8.4		100.0%	$	—
Amortization of intangibles, operating expense	22.6			23.5%	18.3			(33.7)%	27.6
Total amortization of intangibles, including inventory step-up	56.7				26.7				27.6
% of net revenue	1.7		%		0.7		%		0.8		%

The increase in amortization for fiscal 2019, as compared to fiscal 2018, was primarily due to amortization attributable to the Avnera acquisition completed in the fourth quarter of fiscal 2018.

RESTRUCTURING AND OTHER CHARGES

	Fiscal Years Ended
	September 27, 2019			Change	September 28, 2018			Change	September 29, 2017
(dollars in millions)
Restructuring and other charges	$	6.8		750.0%	$	0.8		33.3%	$	0.6
% of net revenue	0.2		%		—		%		—		%

Restructuring and other charges incurred in fiscal 2019 were primarily related to employee severance and other termination benefits as well as charges on a leased facility resulting from restructuring plans initiated during the period. We do not anticipate any further significant charges associated with these restructuring activities and the remaining cash payments related to these restructuring plans are not material.

Restructuring and other charges incurred in fiscal 2018 are related to charges on a leased facility.

PROVISION FOR INCOME TAXES

	Fiscal Years Ended
	September 27, 2019			Change	September 28, 2018			Change	September 29, 2017
(dollars in millions)
Provision for income taxes	$	107.4		(74.0)%	$	413.7		67.6%	$	246.8
% of net revenue	3.2		%		10.7		%		6.7		%

The annual effective tax rate for fiscal 2019 of 11.2% was less than the United States federal statutory rate of 21.0% primarily due to benefits of 12.0% related to foreign earnings taxed at a rate less than the United States federal rate, 4.3% related to benefits from the foreign derived intangible income (“FDII”) deduction, 0.2% related to stock windfall deductions, and 2.7% related to the recognition of federal research and development tax credits, partially offset by increases in income tax rate expense impact of 5.7% related to global intangible low-taxed income (“GILTI”) expense, 1.5% related to a change in our tax reserves, and 0.5% from the partial settlement of the Internal Revenue Service (“IRS”) audit of our fiscal 2015 and 2016 income tax returns.

The decrease in the effective tax rate for fiscal 2019, as compared to the 31.1% effective rate for fiscal 2018, was primarily due to the enactment of the 2017 Tax Reform Act including a one-time charge related to the mandatory deemed repatriation tax on foreign earnings and a one-time charge related to the revaluation of our deferred tax assets and liabilities.

See Note 8 to Item 8 of this Annual Report on Form 10-K for additional information regarding income taxes.

LIQUIDITY AND CAPITAL RESOURCES

	Fiscal Years Ended
(in millions)	September 27, 2019				September 28, 2018				September 29, 2017
Cash and cash equivalents at beginning of period	$	733.3			$	1,616.8			$	1,083.8
Net cash provided by operating activities	1,367.4				1,260.6				1,456.3
Net cash used in investing activities	(336.9		)		(1,150.4		)		(325.9		)
Net cash used in financing activities	(912.5		)		(993.7		)		(597.4		)
Cash and cash equivalents at end of period	$	851.3			$	733.3			$	1,616.8

Cash provided by operating activities:

Cash provided by operating activities consists of net income for the period adjusted for certain non-cash items and changes in certain operating assets and liabilities. The $106.8 million increase in cash provided by operating activities for fiscal 2019, as compared to fiscal 2018, was primarily related to favorable changes in working capital driven by higher cash collections and the timing of capital expenditures and vendor payments.

Cash used in investing activities:

Cash used in investing activities consists primarily of cash paid for acquisitions net of cash acquired, capital expenditures, purchased intangibles, cash received from the sale of capital assets, and cash related to the sale or maturity of investments. The $813.5 million decrease in cash used in investing activities for fiscal 2019, as compared to fiscal 2018, was primarily related to $404.0 million paid for the Avnera acquisition in fiscal 2018 and a $401.9 million difference in the net purchase and sale of marketable securities.

Cash used in financing activities:

Cash used in financing activities consists primarily of cash transactions related to equity. The $81.2 million decrease in cash used in financing activities for fiscal 2019, as compared to fiscal 2018, was primarily related to $101.9 million decrease in stock repurchase activity, partially offset by an increase in dividend payments.

Liquidity:

Cash, cash equivalents and marketable securities totaled $1,082.2 million as of September 27, 2019, representing an increase of $32.0 million from September 28, 2018. The increase resulted from $1,367.4 million in cash generated from operations, which was partially offset by $657.6 million used to repurchase 8.9 million shares of stock, $398.4 million in capital expenditures, and $273.9 million in cash dividend payments during fiscal 2019. 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 will be sufficient to fund our research and development, capital expenditures, potential acquisitions, working capital, quarterly cash dividend payments (if such dividends are declared by the Board of Directors), outstanding commitments and other liquidity requirements associated with existing operations for at least the next 12 months. However, we cannot be certain that our cash on hand and cash generated from operations will be available in the future to fund all of our capital and operating requirements. In addition, any future strategic investments and acquisitions may require additional 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: term deposits, certificate of deposits, money market funds, U.S. Treasury securities, agency securities, other government securities, corporate debt securities and commercial paper.

OFF-BALANCE SHEET ARRANGEMENTS

All significant contractual obligations are recorded on our consolidated balance sheet or fully disclosed in the notes to our consolidated financial statements. We have no material off-balance sheet arrangements as defined in SEC Regulation S-K Item 303(a)(4)(ii).

CONTRACTUAL CASH FLOWS

Set forth below is a summary of our contractual payment obligations related to our operating leases, other commitments and long-term liabilities at September 27, 2019 (in millions):

		Payments Due By Period
Obligation		Total				Less Than 1 Year				1-3 Years				3-5 Years				Thereafter
Other long-term liabilities (1)		$	315.5			$	—			$	38.2			$	38.2			$	239.1
Operating lease obligations		219.9				26.7				50.7				44.8				97.7
Other commitments (2)		19.3				8.6				10.7				—				—
Total		$	554.7			$	35.3			$	99.6			$	83.0			$	336.8

---

(1)	Other long-term liabilities primarily include our gross unrecognized tax benefits, repatriation tax payable, and executive deferred compensation. Gross unrecognized tax benefits and executive deferred compensation are both classified as beyond five years due to the uncertain nature of the liabilities.

(2)	Other commitments consist of contractual license and royalty payments and other purchase obligations. See Note 10 to Item 8 of this Annual Report on Form 10-K.

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, or 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; assessment of goodwill and long-lived assets, which impacts the impairment of the respective assets; share-based compensation, which impacts cost of goods sold and operating expenses; loss contingencies, which impacts operating expenses; 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 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 is 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.

Goodwill and Long-Lived Assets. We evaluate goodwill and long-lived assets for impairment annually on the first day of the fourth fiscal quarter and whenever events or circumstances arise that may indicate that the carrying value of the goodwill or other intangibles may not be recoverable.

Our impairment analysis contains uncertainties because it requires management to make assumptions and to apply judgment to items such as: determination of the reporting unit and asset groupings, estimated control premiums, discount rates, future cash flows, the profitability of future business strategies and useful lives.

Share-Based Compensation. We have share-based compensation plans which include non-qualified stock options, restricted and performance share awards and units, as well as an employee stock purchase plan and other special share-based awards. Note 9 of Item 8 of this Annual Report on Form 10-K details our current share-based compensation programs.

We determine the fair value of our share-based compensation items with pricing models as of the date of grant using a number of subjective variables and assumptions including, but not limited to: our expected stock price volatility over the term of the award, correlation coefficients, risk-free rate, the expected life of the award, dividend yield, and estimated performance against metrics. Compensation expense is recognized over the requisite service period of the underlying awards. Management periodically evaluates these assumptions and updates share-based compensation expense accordingly.

Loss Contingencies. We record an estimate for loss contingencies such as a legal proceeding or claims if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. We disclose material loss contingencies if there is at least a reasonable possibility that a loss has been incurred.

Our loss contingency analysis contains uncertainties because it requires management to assess the degree of probability of an unfavorable outcome and to make a reasonable estimate of the amount of potential loss.

Income Taxes. We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between tax and financial reporting. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets.

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.

OTHER MATTERS

Inflation did not have a material impact on our results of operations during the three-year period ended September 27, 2019.