filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of the Company are included herewith:
| (1) | Report of Independent Registered Public Accounting Firm | Page 36 | ||||||
| (2) | Consolidated Statements of Operations for the three years ended October 2, 2020 | Page 38 | ||||||
| (3) | Consolidated Statements of Comprehensive Income for the three years ended October 2, 2020 | Page 39 | ||||||
| (4) | Consolidated Balance Sheets at October 2, 2020, and September 27, 2019 | Page 40 | ||||||
| (5) | Consolidated Statements of Cash Flows for the three years ended October 2, 2020 | Page 41 | ||||||
| (6) | Consolidated Statements of Stockholders’ Equity for the three years ended October 2, 2020 | Page42 | ||||||
| (7) | Notes to Consolidated Financial Statements | Page 43 through 60 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Skyworks Solutions, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Skyworks Solutions, Inc. and subsidiaries (the Company) as of October 2, 2020 and September 27, 2019, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three-year period ended October 2, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of October 2, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 2, 2020 and September 27, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended October 2, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 2, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in fiscal 2020 due to the adoption of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 842, Leases.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the Gross Unrecognized Tax Benefits
As discussed in Notes 2 and 8 to the consolidated financial statements, the Company has recorded gross unrecognized tax benefits of $117.6 million in domestic and foreign jurisdictions as of October 2, 2020. The Company records unrecognized tax benefits when there is more than a 50% likelihood that its tax positions will not be sustained upon examination by the taxing authorities. This determination requires management of the Company to apply judgment in the interpretation of domestic and international tax laws and regulations.
We identified the assessment of the gross unrecognized tax benefits as a critical audit matter because of the high degree of auditor judgment involved in evaluating the Company’s interpretation of domestic and international tax laws and regulations, including the need to involve professionals with specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s unrecognized tax benefit process, including controls over the interpretation of domestic and international tax laws and regulations. We involved domestic and international tax professionals with specialized skills and knowledge, who assisted in:
–assessing the Company’s ongoing compliance with applicable domestic and international tax laws and regulations,
–reading the Company’s documentation that provided the basis for its tax positions,
–evaluating the impact of changes in the Company’s tax structure, changes in domestic and international tax laws and regulations, and similar settlements with applicable taxing authorities, and
–evaluating the Company’s interpretation of domestic and international tax laws and regulations based on our understanding and interpretation of the domestic and international tax laws and regulations.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Irvine, California
November 16, 2020
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Net revenue | $ | 3,355.7 | $ | 3,376.8 | $ | 3,868.0 | |||||||||||
| Cost of goods sold | 1,742.8 | 1,773.0 | 1,917.3 | ||||||||||||||
| Gross profit | 1,612.9 | 1,603.8 | 1,950.7 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 464.1 | 424.1 | 404.5 | ||||||||||||||
| Selling, general, and administrative | 231.4 | 198.3 | 207.8 | ||||||||||||||
| Amortization of intangibles | 11.8 | 22.6 | 18.3 | ||||||||||||||
| Restructuring, impairment, and other charges | 13.8 | 6.8 | 0.8 | ||||||||||||||
| Total operating expenses | 721.1 | 651.8 | 631.4 | ||||||||||||||
| Operating income | 891.8 | 952.0 | 1,319.3 | ||||||||||||||
| Other income (expense), net | (0.1) | 9.0 | 12.8 | ||||||||||||||
| Income before income taxes | 891.7 | 961.0 | 1,332.1 | ||||||||||||||
| Provision for income taxes | 76.9 | 107.4 | 413.7 | ||||||||||||||
| Net income | $ | 814.8 | $ | 853.6 | $ | 918.4 | |||||||||||
| Earnings per share: | |||||||||||||||||
| Basic | $ | 4.84 | $ | 4.92 | $ | 5.06 | |||||||||||
| Diluted | $ | 4.80 | $ | 4.89 | $ | 5.01 | |||||||||||
| Weighted average shares: | |||||||||||||||||
| Basic | 168.5 | 173.5 | 181.3 | ||||||||||||||
| Diluted | 169.9 | 174.5 | 183.2 | ||||||||||||||
| Cash dividends declared and paid per share | $ | 1.82 | $ | 1.58 | $ | 1.34 |
See accompanying Notes to Consolidated Financial Statements.
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Net income | $ | 814.8 | $ | 853.6 | $ | 918.4 | |||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||
| Fair value of investments | 0.1 | 0.3 | (0.1) | ||||||||||||||
| Pension adjustments | — | 0.5 | — | ||||||||||||||
| Foreign currency translation adjustment | — | — | (0.2) | ||||||||||||||
| Comprehensive income | $ | 814.9 | $ | 854.4 | $ | 918.1 |
See accompanying Notes to Consolidated Financial Statements.
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
| As of | |||||||||||
| October 2, 2020 | September 27, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 566.7 | $ | 851.3 | |||||||
| Marketable securities | 408.1 | 203.3 | |||||||||
| Receivables, net of allowance of $0.6 and $0.8, respectively | 393.6 | 465.3 | |||||||||
| Inventory | 806.0 | 609.7 | |||||||||
| Other current assets | 143.2 | 105.0 | |||||||||
| Total current assets | 2,317.6 | 2,234.6 | |||||||||
| Property, plant, and equipment, net | 1,249.5 | 1,205.6 | |||||||||
| Operating lease right-of-use assets | 167.9 | — | |||||||||
| Goodwill | 1,189.8 | 1,189.8 | |||||||||
| Intangible assets, net | 53.5 | 107.9 | |||||||||
| Deferred tax assets, net | 55.3 | 40.8 | |||||||||
| Marketable securities | 5.2 | 27.6 | |||||||||
| Other long-term assets | 67.9 | 33.3 | |||||||||
| Total assets | $ | 5,106.7 | $ | 4,839.6 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | 226.9 | 190.5 | |||||||||
| Accrued compensation and benefits | 113.5 | 76.0 | |||||||||
| Other current liabilities | 108.0 | 107.5 | |||||||||
| Total current liabilities | 448.4 | 374.0 | |||||||||
| Long-term tax liabilities | 311.3 | 312.4 | |||||||||
| Long-term operating lease liabilities | 150.7 | — | |||||||||
| Other long-term liabilities | 32.1 | 30.9 | |||||||||
| Total liabilities | 942.5 | 717.3 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, no par value: 25.0 shares authorized, no shares issued | — | — | |||||||||
| Common stock, $0.25 par value: 525.0 shares authorized; 232.3 shares issued and 165.6 shares outstanding at October 2, 2020, and 230.2 shares issued and 170.1 shares outstanding at September 27, 2019 | 41.4 | 42.5 | |||||||||
| Additional paid-in capital | 3,403.7 | 3,188.0 | |||||||||
| Treasury stock, at cost | (4,093.5) | (3,412.9) | |||||||||
| Retained earnings | 4,820.4 | 4,312.6 | |||||||||
| Accumulated other comprehensive loss | (7.8) | (7.9) | |||||||||
| Total stockholders’ equity | 4,164.2 | 4,122.3 | |||||||||
| Total liabilities and stockholders’ equity | $ | 5,106.7 | $ | 4,839.6 |
See accompanying Notes to Consolidated Financial Statements.
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | 814.8 | $ | 853.6 | $ | 918.4 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Share-based compensation | 156.6 | 80.1 | 107.8 | ||||||||||||||
| Depreciation | 318.3 | 314.9 | 272.5 | ||||||||||||||
| Amortization of intangible assets, including inventory step-up | 46.0 | 56.7 | 26.7 | ||||||||||||||
| Deferred income taxes | (13.4) | (6.1) | 27.3 | ||||||||||||||
| Asset impairment charges | 11.8 | — | — | ||||||||||||||
| Changes in fair value of contingent consideration | — | (3.1) | (11.9) | ||||||||||||||
| Other, net | 3.8 | 16.8 | (0.7) | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Receivables, net | 71.7 | 190.5 | (193.8) | ||||||||||||||
| Inventory | (190.4) | (119.6) | 11.9 | ||||||||||||||
| Accounts payable | 61.1 | (33.0) | (126.0) | ||||||||||||||
| Other current and long-term assets and liabilities | (75.8) | 16.6 | 228.4 | ||||||||||||||
| Net cash provided by operating activities | 1,204.5 | 1,367.4 | 1,260.6 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | (389.4) | (398.4) | (422.3) | ||||||||||||||
| Purchased intangibles | (9.1) | (25.0) | (8.6) | ||||||||||||||
| Purchases of marketable securities | (790.5) | (360.5) | (683.7) | ||||||||||||||
| Sales and maturities of marketable securities | 607.6 | 447.0 | 368.2 | ||||||||||||||
| Payments for acquisitions, net of cash | — | — | (404.0) | ||||||||||||||
| Net cash used in investing activities | (581.4) | (336.9) | (1,150.4) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Repurchase of common stock - payroll tax withholdings on equity awards | (33.1) | (22.8) | (48.0) | ||||||||||||||
| Repurchase of common stock - stock repurchase program | (647.5) | (657.6) | (759.5) | ||||||||||||||
| Dividends paid | (307.0) | (273.9) | (243.2) | ||||||||||||||
| Net proceeds from exercise of stock options | 57.1 | 22.1 | 38.8 | ||||||||||||||
| Proceeds from employee stock purchase plan | 22.8 | 19.7 | 18.2 | ||||||||||||||
| Net cash used in financing activities | (907.7) | (912.5) | (993.7) | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (284.6) | 118.0 | (883.5) | ||||||||||||||
| Cash and cash equivalents at beginning of period | 851.3 | 733.3 | 1,616.8 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 566.7 | $ | 851.3 | $ | 733.3 | |||||||||||
| Supplemental cash flow disclosures: | |||||||||||||||||
| Income taxes paid | $ | 110.8 | $ | 124.4 | $ | 135.9 | |||||||||||
| Non-cash investing in capital expenditures, accrued but not paid | $ | 78.7 | $ | 101.5 | $ | 108.0 |
See accompanying Notes to Consolidated Financial Statements.
SKYWORKS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
| Shares of common stock | Par value of common stock | Shares of treasury stock | Value of treasury stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total stockholders**’** equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 29, 2017 | 183.1 | $ | 45.8 | 42.9 | $ | (1,925.0) | $ | 2,893.8 | $ | 3,059.6 | $ | (8.5) | $ | 4,065.7 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 918.4 | — | 918.4 | |||||||||||||||||||||||||||||||||||||||
| Exercise and settlement of share-based awards, net of shares withheld for taxes | 2.0 | 0.5 | 0.4 | (48.0) | 57.8 | — | — | 10.3 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 107.3 | (1.9) | — | 105.4 | |||||||||||||||||||||||||||||||||||||||
| Stock repurchase program | (7.7) | (1.9) | 7.7 | (759.5) | 1.9 | — | — | (759.5) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | — | (243.2) | — | (243.2) | |||||||||||||||||||||||||||||||||||||||
| Pre-combination service on replacement awards | — | — | — | — | 0.2 | — | — | 0.2 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (0.3) | (0.3) | |||||||||||||||||||||||||||||||||||||||
| Balance at September 28, 2018 | 177.4 | $ | 44.4 | 51.0 | $ | (2,732.5) | $ | 3,061.0 | $ | 3,732.9 | $ | (8.8) | $ | 4,097.0 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 853.6 | — | 853.6 | |||||||||||||||||||||||||||||||||||||||
| Exercise and settlement of share-based awards, net of shares withheld for taxes | 1.6 | 0.3 | 0.3 | (22.8) | 42.2 | — | — | 19.8 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 82.5 | — | — | 82.5 | |||||||||||||||||||||||||||||||||||||||
| Stock repurchase program | (8.9) | (2.2) | 8.9 | (657.6) | 2.2 | — | — | (657.6) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | — | (273.9) | — | (273.9) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 0.8 | 0.8 | |||||||||||||||||||||||||||||||||||||||
| Balance at September 27, 2019 | 170.1 | $ | 42.5 | 60.1 | $ | (3,412.9) | $ | 3,188.0 | $ | 4,312.6 | $ | (7.9) | $ | 4,122.3 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 814.8 | — | 814.8 | |||||||||||||||||||||||||||||||||||||||
| Exercise and settlement of share-based awards, net of shares withheld for taxes | 1.8 | 0.5 | 0.3 | (33.1) | 79.4 | — | — | 46.8 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 134.7 | — | — | 134.7 | |||||||||||||||||||||||||||||||||||||||
| Stock repurchase program | (6.3) | (1.6) | 6.3 | (647.5) | 1.6 | — | — | (647.5) | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | — | (307.0) | — | (307.0) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 0.1 | 0.1 | |||||||||||||||||||||||||||||||||||||||
| Balance at October 2, 2020 | 165.6 | $ | 41.4 | 66.7 | $ | (4,093.5) | $ | 3,403.7 | $ | 4,820.4 | $ | (7.8) | $ | 4,164.2 | |||||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc., together with its consolidated subsidiaries (“Skyworks” or the “Company”), is empowering the wireless networking revolution. The Company’s analog semiconductors are connecting people, places, and things, spanning a number of new applications within the aerospace, automotive, broadband, cellular infrastructure, connected home, entertainment and gaming, industrial, medical, military, smartphone, tablet, and wearable markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All Skyworks subsidiaries are included in the Company’s consolidated financial statements and all intercompany balances are eliminated in consolidation. Certain items in the fiscal years 2019 and 2018 financial statements have been reclassified to conform to the fiscal 2020 presentation.
Fiscal Year
The Company’s fiscal year ends on the Friday closest to September 30. Fiscal 2020 consisted of 53 weeks and ended on October 2, 2020. Fiscal 2019 and 2018 each consisted of 52 weeks and ended on September 27, 2019 and September 28, 2018, respectively.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, expenses, comprehensive income and accumulated other comprehensive loss during the reporting period. The Company evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment. Judgment is required in determining the reserves for and fair value of items such as overall fair value assessments of assets and liabilities, particularly those classified as Level 2 or Level 3 in the fair value hierarchy, marketable securities, inventory, intangible assets associated with business combinations, share-based compensation, loss contingencies, and income taxes. In addition, judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows for any necessary impairment testing. Actual results could differ significantly from these estimates.
Cash and Cash Equivalents
The Company invests excess cash in time deposits, certificate of deposits, money market funds, U.S. Treasury securities, agency securities, other government securities, corporate debt securities and commercial paper. The Company considers highly liquid investments as cash equivalents including money market funds and investments with maturities of 90 days or less when purchased.
Investments
The Company classifies its investment in marketable debt securities as “available-for-sale.” Available-for-sale securities are carried at fair value with unrealized holding gains or losses recorded in other comprehensive income, net of tax. Gains or losses are included in earnings in the period in which they are realized. The cost of securities sold is determined based on the specific identification method. The cost of available-for-sale debt securities is adjusted for premiums and discounts, with the amortization or accretion of such amounts included as a portion of interest. Available-for-sale debt securities with an original maturity date greater than three months and less than one year are classified as current investments. Available-for-sale debt securities with an original maturity date exceeding one year are classified as long-term.
Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principle or most advantageous market in an orderly transaction between market participants at the measurement date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
-
Level 1 - Quoted prices in active markets for identical assets or liabilities.
-
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
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Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company.
It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.
The Company measures certain assets and liabilities at fair value on a recurring basis in three levels, based on the market in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. It recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred.
The carrying value of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities approximates fair value due to the short-term maturities of these assets and liabilities.
Inventory
Inventory is stated at the lower of cost or net realizable value on a first-in, first-out basis. 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.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated depreciation, with significant renewals and betterments being capitalized and retired equipment written off in the respective periods. Maintenance and repairs are expensed as incurred.
Depreciation is calculated using the straight-line method over the estimated useful lives, which range from five to thirty years for buildings and improvements and three to ten years for machinery and equipment. Leasehold improvements are depreciated over the lesser of the economic life or the life of the associated lease.
Leases
The Company determines if an arrangement is a lease at its inception. Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate in determining the present value of lease payments considering the term of the lease, which is derived from information available at the lease commencement date. The lease term includes renewal options when it is reasonably certain that the option will be exercised and excludes termination options. To the extent that the Company’s agreements have variable lease payments, the Company includes variable lease payments that depend on an index or a rate and excludes those that depend on facts or circumstances occurring after the commencement date, other than the passage of time.
Lease expense for these leases is recognized on a straight-line basis over the lease term. The Company has elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying asset. Operating leases are included in operating lease ROU assets, other current liabilities, and long-term operating lease liabilities in the Company's condensed consolidated balance sheet.
Valuation of Long-Lived Assets
Definite lived intangible assets are carried at cost less accumulated amortization. Amortization is calculated based on the pattern of benefit to be recognized from the underlying asset over its estimated useful life. Carrying values for long-lived assets and definite lived intangible assets are reviewed for possible impairment as circumstances warrant. Factors considered important that could result in an impairment review include significant underperformance relative to expected, historical or projected future operating results, significant changes in the manner of use of assets or the Company’s business strategy, or significant negative industry or economic trends. In addition, impairment reviews are conducted at the judgment of
management whenever asset values are deemed to be unrecoverable relative to future undiscounted cash flows expected to be generated by that particular asset group. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset group and its eventual disposition. Such estimates require management to exercise judgment and make assumptions regarding factors such as future revenue streams, operating expenditures, cost allocation and asset utilization levels, all of which collectively impact future operating performance. The Company’s estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows is less than the carrying value of an asset group, the Company would recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset group.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are tested at least annually as of the first day of the fourth fiscal quarter for impairment or more frequently if indicators of impairment exist during the fiscal year. The Company assesses its conclusion regarding segments and reporting units in conjunction with its annual goodwill impairment test and has determined that it has one reporting unit for the purposes of allocating and testing goodwill.
The Company’s impairment analysis compares its fair value to its net book value to determine if there is an indicator of impairment. In the Company’s calculation of fair value, it considers the closing price of its common stock on the selected testing date, the number of shares of its common stock outstanding and other marketplace activity such as a related control premium. If the calculated fair value is determined to be less than the book value of the reporting unit, an impairment loss is recognized equal to that excess; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Revenue Recognition
The Company derives its revenue primarily from the sale of semiconductor products under individual customer purchase orders, some of which have underlying master sales agreements that specify terms governing the product sales. In the absence of a sales agreement, the Company’s standard terms and conditions apply. Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company applies a five-step approach as defined in FASB ASC 606, Revenue from Contracts with Customers (Topic 606), in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the corresponding performance obligation is satisfied.
Each distinct promise to transfer products is considered to be an identified performance obligation for which revenue is recognized at a point in time upon transfer of control of the products to the customer. Transfer of control occurs upon shipment to the distributor or direct customer or when products are pulled from consignment inventory by the customer. Point in time recognition is determined as products manufactured under non-cancellable orders create an asset with an alternative use to the Company. Returns under the Company’s general assurance warranty of products have not been material, and warranty-related services are not considered a separate performance obligation.
Pricing adjustments and estimates of returns are treated as variable consideration for purposes of determining the transaction price. Sales returns are generally accepted at the Company’s discretion or from distributors with stock rotation rights. Stock rotation allows distributors limited levels of returns and is based on the distributor’s prior purchases. Price protection represents price discounts granted to certain distributors and is based on negotiations on sales to end customers. Variable consideration is estimated using the expected value method considering all reasonably available information, including the Company’s historical experience and its current expectations, and is reflected in the transaction price when sales are recorded. The Company records net revenue excluding taxes collected on its sales to trade customers.
Accounts receivable represents the Company’s unconditional right to receive consideration from its customer. Substantially all payments are collected within the Company’s standard terms, which 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 sheet in any of the periods presented. All incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.
Share-Based Compensation
The Company recognizes compensation expense for all share-based payment awards made to employees and directors including non-qualified employee stock options, share awards and units, employee stock purchase plan and other special share-based awards based on estimated fair values.
The fair value of share-based payment awards is amortized over the requisite service period, which is defined as the period during which an employee is required to provide service in exchange for an award. The Company uses a straight-line attribution method for all grants that include only a service condition. Awards with both performance and service conditions are expensed over the service period for each separately vesting tranche.
Share-based compensation expense recognized during the period includes actual expense on vested awards and expense associated with unvested awards. Forfeitures are recorded as incurred.
The Company determines the fair value of share-based option awards based on the Company’s closing stock price on the date of grant using a Black-Scholes options pricing model. Under the Black-Scholes model, a number of variables are used including, but not limited to: the expected stock price volatility over the term of the award, the risk-free rate, the expected life of the award and dividend yield. The determination of fair value of restricted and certain performance stock awards and units is based on the value of the Company’s stock on the date of grant with performance awards and units adjusted for the actual outcome of the underlying performance condition.
For more complex performance awards including units with market-based performance conditions the Company employs a Monte Carlo simulation valuation method to calculate the fair value of the awards based on the most likely outcome. Under the Monte Carlo simulation, a number of variables and assumptions are used including, but not limited to: the expected stock price volatility over the term of the award, a correlation coefficient, the risk-free rate, and dividend yield.
Research and Development Costs
Research and development costs are expensed as incurred.
Loss Contingencies
The Company records its best estimates of a loss contingency when it is considered probable and the amount can be reasonably estimated. When a range of loss can be reasonably estimated with no best estimate in the range, the minimum estimated liability related to the claim is recorded. As additional information becomes available, the Company assesses the potential liability related to the potential pending loss contingency and revises its estimates. Material loss contingencies are disclosed if there is at least a reasonable possibility that a loss or an additional loss may have been incurred and include estimated legal costs.
Restructuring
A liability for post-employment benefits is recorded when payment is probable and the amount is reasonably estimable. Contract exit costs include contract termination fees and future contractual commitments for lease payments. A liability for contract exit costs is recognized in the period in which the Company terminates the contract or on the cease-use date for leased facilities.
Foreign Currencies
The Company’s functional currency is the United States dollar. Gains and losses related to foreign currency transactions and conversion of foreign denominated cash balances are included in current results.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. This method also requires the recognition of future tax benefits such as net operating loss carry forwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The carrying value of the Company’s net deferred tax assets assumes the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets
resulting in additional income tax expense in its Consolidated Statement of Operations. Management evaluates the realizability of the deferred tax assets and assesses the adequacy of the valuation allowance quarterly. Likewise, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.
The determination of recording or releasing tax valuation allowances is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate future taxable income against which benefits of its deferred tax assets may or may not be realized. This assessment requires management to exercise judgment and make estimates with respect to its ability to generate revenues, gross profits, operating income, and taxable income in future periods. Amongst other factors, management must make assumptions regarding overall business and semiconductor industry conditions, operating efficiencies, the Company’s ability to develop products to its customers’ specifications, technological change, the competitive environment, and changes in regulatory requirements which may impact its ability to generate taxable income and, in turn, realize the value of its deferred tax assets.
The calculation of the Company’s tax liabilities includes addressing uncertainties in the application of complex tax regulations and is based on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company recognizes liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its recognition threshold and measurement attribute of whether it is more likely than not that the positions the Company has taken in tax filings will be sustained upon tax audit, and the extent to which, additional taxes would be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period in which it is determined the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. The Company recognizes any interest or penalties, if incurred, on any unrecognized tax liabilities or benefits as a component of income tax expense.
Earnings Per Share
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the potentially dilutive incremental shares issuable upon the assumed exercise of stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the stock purchase plan using the treasury share method. Shares issuable upon the vesting of performance stock awards are likewise included in the calculation of diluted earnings per share as of the date the condition(s) have been satisfied.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). This ASU requires lessees to reflect leases with a term greater than one year on their balance sheet as assets and obligations. The Company adopted the standard in the first quarter of fiscal 2020, using the modified retrospective approach, whereby the Company was not required to adjust comparative period financial statements for the new standard. Upon adoption, the Company recorded an ROU asset of $141.4 million and a lease liability of $143.1 million. This standard did not have a material impact on the Consolidated Statement of Operations or Consolidated Statement of Cash Flows.
Upon adoption, the Company elected the package of three practical expedients that permits the Company to maintain its historical conclusions about lease identification, lease classification and initial direct costs for leases that exist at the date of adoption. Further, the Company elected the practical expedient to not separate lease and non-lease components.
3. MARKETABLE SECURITIES
The Company's portfolio of available-for-sale marketable securities consists of the following (in millions):
| Current | Noncurrent | ||||||||||||||||||||||
| Available-for-sale: | October 2, 2020 | September 27, 2019 | October 2, 2020 | September 27, 2019 | |||||||||||||||||||
| U.S. Treasury and government | $ | 129.4 | $ | 34.2 | $ | 5.0 | $ | 20.0 | |||||||||||||||
| Corporate bonds and notes | 276.8 | 66.2 | — | 5.9 | |||||||||||||||||||
| Municipal bonds | 1.9 | 102.9 | 0.2 | 1.7 | |||||||||||||||||||
| Total | $ | 408.1 | $ | 203.3 | $ | 5.2 | $ | 27.6 |
The contractual maturities of noncurrent available-for-sale marketable securities were due within two years or less. There were gross unrealized gains of $0.3 million on U.S. Treasury securities and $0.2 million on corporate bonds and notes as of October 2, 2020, and $0.1 million in gross unrealized losses on municipal bonds as of September 27, 2019.
4. FAIR VALUE
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at fair value on a recurring basis such as its financial instruments. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the fiscal year ended October 2, 2020.
Assets and liabilities recorded at fair value on a recurring basis consisted of the following (in millions):
| As of October 2, 2020 | As of September 27, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measurements | Fair Value Measurements | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents* | $ | 566.7 | $ | 561.2 | $ | 5.5 | $ | — | $ | 851.3 | $ | 809.5 | $ | 41.8 | $ | — | |||||||||||||||||||||||||||||||
| U.S. Treasury and government securities | 134.4 | 43.2 | 91.2 | — | 54.2 | 28.4 | 25.8 | — | |||||||||||||||||||||||||||||||||||||||
| Corporate bonds and notes | 276.8 | — | 276.8 | — | 72.1 | — | 72.1 | — | |||||||||||||||||||||||||||||||||||||||
| Municipal bonds | 2.1 | — | 2.1 | — | 104.6 | — | 104.6 | — | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 980.0 | $ | 604.4 | $ | 375.6 | $ | — | $ | 1,082.2 | $ | 837.9 | $ | 244.3 | $ | — |
- Cash equivalents included in Levels 1 and 2 consist of money market funds and corporate bonds and notes, commercial paper, and agency securities purchased with less than ninety days until maturity.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets and liabilities, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and are subsequently re-measured if there are indicators of impairment. During fiscal 2020, the Company abandoned a previously capitalized IPR&D project and recorded an impairment charge of $9.8 million.
5. INVENTORY
Inventory consists of the following (in millions):
| As of | |||||||||||
| October 2, 2020 | September 27, 2019 | ||||||||||
| Raw materials | $ | 37.8 | $ | 24.4 | |||||||
| Work-in-process | 566.4 | 336.2 | |||||||||
| Finished goods | 198.9 | 245.7 | |||||||||
| Finished goods held on consignment by customers | 2.9 | 3.4 | |||||||||
| Total inventory | $ | 806.0 | $ | 609.7 |
6. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment, net consists of the following (in millions):
| As of | |||||||||||
| October 2, 2020 | September 27, 2019 | ||||||||||
| Land and improvements | $ | 11.8 | $ | 11.7 | |||||||
| Buildings and improvements | 424.8 | 354.4 | |||||||||
| Furniture and fixtures | 46.5 | 33.8 | |||||||||
| Machinery and equipment | 2,556.1 | 2,311.5 | |||||||||
| Construction in progress | 140.7 | 172.5 | |||||||||
| Total property, plant, and equipment, gross | 3,179.9 | 2,883.9 | |||||||||
| Accumulated depreciation | (1,930.4) | (1,678.3) | |||||||||
| Total property, plant, and equipment, net | $ | 1,249.5 | $ | 1,205.6 |
7. GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill balance was $1,189.8 million as of October 2, 2020, and September 27, 2019. The Company performed an impairment test of its goodwill as of the first day of the fourth fiscal quarter in accordance with its regularly scheduled testing. The results of this test indicated that the Company’s goodwill was not impaired. There were no other indicators of impairment noted during the fiscal year ended October 2, 2020.
Intangible assets consist of the following (in millions):
| As of | As of | |||||||||||||||||||||||||||||||||||||
| Weighted average amortization period (years) | October 2, 2020 | September 27, 2019 | ||||||||||||||||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||||||||||||||||||
| Customer relationships | 5.0 | $ | 18.2 | $ | (15.8) | $ | 2.4 | $ | 25.6 | $ | (19.5) | $ | 6.1 | |||||||||||||||||||||||||
| Developed technology and other | 3.8 | 101.0 | (81.6) | 19.4 | 94.4 | (48.9) | 45.5 | |||||||||||||||||||||||||||||||
| Trademarks | 3.0 | 1.6 | (1.5) | 0.1 | 1.6 | (1.3) | 0.3 | |||||||||||||||||||||||||||||||
| Technology licenses | 3.0 | 26.3 | (14.2) | 12.1 | $ | 24.9 | (4.8) | 20.1 | ||||||||||||||||||||||||||||||
| IPR&D | 19.5 | — | 19.5 | $ | 35.9 | — | 35.9 | |||||||||||||||||||||||||||||||
| Total intangible assets | $ | 166.6 | $ | (113.1) | $ | 53.5 | $ | 182.4 | $ | (74.5) | $ | 107.9 |
Fully amortized intangible assets are eliminated from both the gross and accumulated amortization amounts in the first quarter of each fiscal year. Accrued technology licenses payable of $11.5 million and $20.1 million have been included in other current liabilities within the consolidated balance sheets as of October 2, 2020, and September 27, 2019, respectively.
Annual amortization expense for the next five fiscal years related to definite-lived intangible assets, excluding IPR&D, is expected to be as follows (in millions):
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||||||||||
| Amortization expense, cost of goods sold | $ | 6.0 | $ | 0.1 | $ | 0.1 | $ | 0.1 | $ | 0.1 | $ | 1.7 | |||||||||||||||||||||||
| Amortization expense, operating expense | $ | 17.0 | $ | 5.0 | $ | 1.0 | $ | 1.0 | $ | 1.0 | $ | 0.9 | |||||||||||||||||||||||
| Total amortization expense | $ | 23.0 | $ | 5.1 | $ | 1.1 | $ | 1.1 | $ | 1.1 | $ | 2.6 |
8. INCOME TAXES
Income before income taxes consists of the following components (in millions):
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| United States | $ | 435.9 | $ | 427.2 | $ | 712.2 | |||||||||||
| Foreign | 455.8 | 533.8 | 619.9 | ||||||||||||||
| Income before income taxes | $ | 891.7 | $ | 961.0 | $ | 1,332.1 |
The provision for income taxes consists of the following components(in millions):
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Current tax expense (benefit): | |||||||||||||||||
| Federal | $ | 44.4 | $ | 85.3 | $ | 347.7 | |||||||||||
| State | — | (0.1) | 0.3 | ||||||||||||||
| Foreign | 49.5 | 23.5 | 31.2 | ||||||||||||||
| 93.9 | 108.7 | 379.2 | |||||||||||||||
| Deferred tax expense (benefit): | |||||||||||||||||
| Federal | (6.8) | (0.4) | 20.3 | ||||||||||||||
| Foreign | (10.2) | (0.9) | 14.2 | ||||||||||||||
| (17.0) | (1.3) | 34.5 | |||||||||||||||
| Provision for income taxes | $ | 76.9 | $ | 107.4 | $ | 413.7 |
The actual income tax expense is different than that which would have been computed by applying the federal statutory tax rate to income before income taxes. A reconciliation of income tax expense as computed at the United States federal statutory income tax rate to the provision for income tax expense is as follows (in millions):
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Tax expense at United States statutory rate | $ | 187.3 | $ | 201.8 | $ | 327.4 | |||||||||||
| Foreign tax rate difference | (86.6) | (115.3) | (111.9) | ||||||||||||||
| Tax on deemed repatriation | 0.2 | 8.1 | 224.6 | ||||||||||||||
| Effect of stock compensation | (10.3) | (1.6) | (25.6) | ||||||||||||||
| Change of tax rate on deferred taxes | — | — | 18.3 | ||||||||||||||
| Research and development credits | (23.0) | (25.7) | (19.9) | ||||||||||||||
| Change in tax reserve | 10.1 | 14.0 | 6.7 | ||||||||||||||
| Domestic production activities deduction | — | — | (13.9) | ||||||||||||||
| Global Intangible Low-Taxed Income | 35.9 | 54.3 | — | ||||||||||||||
| Foreign Derived Intangible Income | (41.2) | (41.5) | — | ||||||||||||||
| Settlements with Tax Authorities | (0.5) | 4.3 | — | ||||||||||||||
| Other, net | 5.0 | 9.0 | 8.0 | ||||||||||||||
| Provision for income taxes | $ | 76.9 | $ | 107.4 | $ | 413.7 |
The Company operates in foreign jurisdictions with income tax rates lower than the United States tax rate of 21.0% for the fiscal years ended October 2, 2020, and September 27, 2019. The Company’s tax benefits related to foreign earnings taxed at a rate less than the United States federal rate were $86.6 million and $115.3 million for the fiscal years ended October 2, 2020, and September 27, 2019, respectively.
The Tax Reform Act includes, among other things, a reduction of the United States corporate tax rate from 35.0% to 21.0%, a mandatory deemed repatriation tax on foreign earnings, repeal of the corporate alternative minimum tax and the domestic production activities deduction, and expensing of certain capital investments. The law makes fundamental changes to the
taxation of multinational entities, including a shift from worldwide taxation with deferral to a hybrid territorial system, featuring a participation exemption regime, a minimum tax on low-taxed foreign earnings, and new measures to deter base erosion and promote export from the United States. As a result of this legislation, during fiscal 2018 the Company recognized a one-time transition tax related to the deemed repatriation of foreign earnings of $224.6 million and a charge related to the revaluation of its deferred tax assets at the new corporate tax rate of $18.3 million. During fiscal 2020 and fiscal 2019, the Company recorded discrete income tax expense adjustments of $0.2 million and $8.1 million, respectively, to the prior year provisional estimates. The Company had accrued $18.6 million and $177.0 million of the deemed repatriation tax in short-term and long-term liabilities within the consolidated balance sheet, respectively, as of October 2, 2020. The Company had accrued $18.8 million and $195.9 million of the deemed repatriation tax in short-term and long-term liabilities within the consolidated balance sheet, respectively, as of September 27, 2019.
In addition to the introduction of a modified territorial tax system, the Tax Reform Act includes new sets of provisions aimed at preventing or decreasing U.S. tax base erosion: the GILTI provisions, the base erosion and anti-abuse tax (“BEAT”) provisions, and the FDII provisions. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company has made an accounting policy election to account for taxes due on GILTI inclusions as a component of current-period tax expense. The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The FDII provisions allow a U.S. corporation an immediate deduction for a portion of its FDII. The amount of the deduction will depend in part on the Company’s U.S. taxable income. The GILTI and FDII provisions became effective for the Company in fiscal 2019 and resulted in a $54.3 million tax expense and a $41.5 million tax benefit, respectively. In fiscal 2020, the GILTI and FDII provisions resulted in $35.9 million tax expense and $41.2 million tax benefit, respectively. The Company has analyzed the BEAT provisions for fiscal 2020, 2019, and 2018, and has determined that it is not subject to the minimum tax imposed by the BEAT provisions.
The Company’s federal income tax returns for fiscal 2015, fiscal 2016, fiscal 2018, and fiscal 2019 are currently under IRS examination. During the year ended September 27, 2019, the Company effectively settled a portion of this IRS examination. As a result, the Company accrued a tax payable of $3.8 million, including interest.
On October 2, 2010, the Company expanded its presence in Asia by launching operations in Singapore. The Company operates under a tax holiday in Singapore, which is effective through September 30, 2030. The current tax holiday is conditioned upon the Company’s compliance with certain employment and investment thresholds in Singapore. The impact of the tax holiday decreased Singapore’s taxes by $63.1 million, $32.8 million, and $38.4 million for the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018, respectively, which resulted in tax benefits of $0.37, $0.19, and $0.21 of diluted earnings per share, respectively.
Deferred income tax assets and liabilities consist of the tax effects of temporary differences related to the following (in millions):
| Fiscal Years Ended | |||||||||||
| October 2, 2020 | September 27, 2019 | ||||||||||
| Deferred tax assets: | |||||||||||
| Inventory | $ | 12.1 | $ | 10.1 | |||||||
| Bad debts | 0.1 | 0.2 | |||||||||
| Accrued compensation and benefits | 10.1 | 5.9 | |||||||||
| Product returns, allowances, and warranty | 0.4 | 0.3 | |||||||||
| Restructuring | — | 0.6 | |||||||||
| Share-based and other deferred compensation | 25.9 | 21.2 | |||||||||
| Net operating loss carry forwards | 7.4 | 11.3 | |||||||||
| Non-United States tax credits | 16.5 | 20.7 | |||||||||
| State tax credits | 115.5 | 106.4 | |||||||||
| Leases | 43.4 | — | |||||||||
| Property, plant, and equipment | 24.3 | 17.7 | |||||||||
| Other, net | 5.8 | 5.9 | |||||||||
| Deferred tax assets | 261.5 | 200.3 | |||||||||
| Less valuation allowance | (137.4) | (129.1) | |||||||||
| Net deferred tax assets | 124.1 | 71.2 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Prepaid insurance | (0.9) | (0.5) | |||||||||
| Property, plant, and equipment | (26.4) | (19.3) | |||||||||
| Intangible assets | (7.6) | (17.4) | |||||||||
| Leases | (41.5) | — | |||||||||
| Other, net | (6.6) | (6.3) | |||||||||
| Net deferred tax liabilities | (83.0) | (43.5) | |||||||||
| Total net deferred tax assets | $ | 41.1 | $ | 27.7 |
In accordance with GAAP, management has determined that it is more likely than not that a portion of the Company's historic and current year income tax benefits will not be realized. As of October 2, 2020, the Company has a valuation allowance of $137.4 million. This valuation allowance is comprised of $118.8 million related to United States state tax credits and $18.6 million related to foreign deferred tax assets. The Company does not anticipate sufficient taxable income or tax liability to utilize these state and foreign credits. If these benefits are recognized in a future period, the valuation allowance on deferred tax assets will be reversed and up to a $137.4 million income tax benefit may be recognized. The Company will need to generate $124.1 million of future United States federal taxable income to utilize its United States deferred tax assets as of October 2, 2020. The Company believes that future reversals of taxable temporary differences, and its forecast of continued earnings in its domestic and foreign jurisdictions, support its decision to not record a valuation allowance on other deferred tax assets. The Company will continue to assess its valuation allowance in future periods. The net valuation allowance increased by $8.3 million and $10.5 million in fiscal 2020 and fiscal 2019, respectively, primarily related to increases for foreign and state net operating loss and tax credit carryovers.
As of October 2, 2020, the Company has United States federal net operating loss carry forwards of approximately $8.1 million. The utilization of these net operating losses is subject to certain annual limitations as required under Internal Revenue Code section 382 and similar state income tax provisions. The United States federal net operating loss carry forwards expire at various dates through 2035. The Company also has state income tax credit carry forwards of $115.4 million, net of federal benefits, for which the Company has provided a valuation allowance. The state tax credits relate primarily to California research tax credits that can be carried forward indefinitely.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
| Unrecognized tax benefits | |||||
| Balance at September 27, 2019 | $ | 103.3 | |||
| Increases based on positions related to prior years | 2.8 | ||||
| Decreases based on positions related to prior years | (3.9) | ||||
| Increases based on positions related to current year | 15.5 | ||||
| Decreases relating to settlements with taxing authorities | — | ||||
| Decreases relating to lapses of applicable statutes of limitations | (0.1) | ||||
| Balance at October 2, 2020 | $ | 117.6 |
Of the total unrecognized tax benefits at October 2, 2020, $95.3 million would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, due to the Company’s valuation allowance and certain positions that were required to be capitalized.
The Company anticipates reversals within the next 12 months related to items such as the lapse of the statute of limitations, audit closures, and other items that occur in the normal course of business. Due to open examinations, an estimate of anticipated reversals within the next 12 months cannot be made. During the fiscal years 2020, 2019, and 2018, the Company recognized $4.6 million, $6.0 million, and $4.1 million, respectively, of interest or penalties related to unrecognized tax benefits. Accrued interest and penalties of $16.1 million and $12.7 million related to uncertain tax positions have been included in long-term tax liabilities within the consolidated balance sheet as of October 2, 2020, and September 27, 2019, respectively.
The Company’s major tax jurisdictions as of October 2, 2020, are the United States, California, Canada, Mexico, Japan, and Singapore. For the United States, the Company has open tax years dating back to fiscal 2001 due to the carry forward of tax attributes. For California, the Company has open tax years dating back to fiscal 1999 due to the carry forward of tax attributes. For Canada, the Company has open tax years dating back to fiscal 2013. For Mexico, the Company has open tax years back to fiscal 2014. For Japan, the Company has open tax years back to fiscal 2014. For Singapore, the Company has open tax years dating back to fiscal 2014. The Company is subject to audit examinations by the respective taxing authorities on a periodic basis, of which the results could impact its financial position, results of operations or cash flows.
9. STOCKHOLDERS’ EQUITY
Common Stock
At October 2, 2020, the Company is authorized to issue 525.0 million shares of common stock, par value $0.25 per share, of which 232.3 million shares are issued and 165.6 million shares are outstanding.
Holders of the Company’s common stock are entitled to dividends in the event declared by the Company’s Board of Directors out of funds legally available for such purpose. Dividends may not be paid on common stock unless all accrued dividends on preferred stock, if any, have been paid or declared and set aside. In the event of the Company’s liquidation, dissolution or winding up, the holders of common stock will be entitled to share pro rata in the assets remaining after payment to creditors and after payment of the liquidation preference plus any unpaid dividends to holders of any outstanding preferred stock.
Each holder of the Company’s common stock is entitled to one vote for each such share outstanding in the holder’s name. No holder of common stock is entitled to cumulate votes in voting for directors. The Company’s restated certificate of incorporation as amended to date (the “Certificate of Incorporation”) provides that, unless otherwise determined by the Company’s Board of Directors, no holder of stock has any preemptive right to purchase or subscribe for any stock of any class which the Company may issue or sell.
Preferred Stock
The Company’s Certificate of Incorporation has authorized and permits the Company to issue up to 25.0 million shares of preferred stock without par value in one or more series and with rights and preferences that may be fixed or designated by the Company’s Board of Directors without any further action by the Company’s stockholders. The designation, powers, preferences, rights and qualifications, limitations, and restrictions of the preferred stock of each series will be fixed by the certificate of designation relating to such series, which will specify the terms of the preferred stock. At October 2, 2020, the Company had no shares of preferred stock issued or outstanding.
Stock Repurchase
On January 30, 2019, the Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to repurchase up to $2.0 billion of its common stock from time to time prior to January 30, 2021, on the open market or in privately negotiated transactions as permitted by securities laws and other legal requirements. This authorized stock repurchase program replaced in its entirety the January 31, 2018, stock repurchase program. The timing and amount of any shares of the Company’s common stock that are repurchased under the repurchase program are determined by the Company’s management based on its evaluation of market conditions and other factors.
During the fiscal year ended October 2, 2020, the Company paid approximately $647.5 million (including commissions) in connection with the repurchase of 6.3 million shares of its common stock (paying an average price of $102.74 per share) under the January 30, 2019, stock repurchase plan. As of October 2, 2020, $978.8 million remained available under the January 30, 2019, stock repurchase plan.
During the fiscal year ended September 27, 2019, the Company paid approximately $657.6 million (including commissions) in connection with the repurchase of 8.9 million shares of its common stock (paying an average price of $74.26 per share). During the fiscal year ended September 28, 2018, the Company paid approximately $759.5 million (including commissions) in connection with the repurchase of 7.7 million shares of its common stock (paying an average price of $98.84 per share).
Dividends
On November 2, 2020, the Company announced that the Board of Directors had declared a cash dividend on the Company’s common stock of $0.50 per share. This dividend is payable on December 10, 2020, to the Company’s stockholders of record as of the close of business on November 19, 2020. Future dividends are subject to declaration by the Board of Directors. The dividends charged to retained earnings in fiscal 2020 and 2019 were as follows (in millions except per share data):
| Fiscal Years Ended | |||||||||||||||||||||||
| October 2, 2020 | September 27, 2019 | ||||||||||||||||||||||
| Per Share | Total | Per Share | Total | ||||||||||||||||||||
| First quarter | $ | 0.44 | $ | 75.1 | $ | 0.38 | $ | 67.1 | |||||||||||||||
| Second quarter | 0.44 | 74.9 | 0.38 | 66.0 | |||||||||||||||||||
| Third quarter | 0.44 | 73.5 | 0.38 | 65.7 | |||||||||||||||||||
| Fourth quarter | 0.50 | 83.5 | 0.44 | 75.1 | |||||||||||||||||||
| $ | 1.82 | $ | 307.0 | $ | 1.58 | $ | 273.9 | ||||||||||||||||
Employee Stock Benefit Plans
As of October 2, 2020, the Company has the following equity compensation plans under which its equity securities were authorized for issuance to its employees and/or directors:
◦the 2002 Employee Stock Purchase Plan
◦the Non-Qualified Employee Stock Purchase Plan
◦the 2005 Long-Term Incentive Plan
◦the 2008 Director Long-Term Incentive Plan
◦the 2015 Long-Term Incentive Plan
Except for the Non-Qualified Employee Stock Purchase Plan, each of the foregoing equity compensation plans was approved by the Company’s stockholders.
As of October 2, 2020, a total of 65.2 million shares are authorized for grant under the Company’s share-based compensation plans, with 0.4 million options outstanding. The number of common shares reserved for future awards to employees and directors under these plans was 11.0 million at October 2, 2020. The Company currently grants new equity awards to employees under the 2015 Long-Term Incentive Plan and to non-employee directors under the 2008 Director Long-Term Incentive Plan.
2015 Long-Term Incentive Plan. Under this plan, officers, employees, and certain consultants may be granted stock options, restricted stock awards and units, performance stock awards and units and other share-based awards. The plan has been approved by the stockholders. Under the plan, up to 19.4 million shares have been authorized for grant. A total of 10.4 million shares are available for new grants as of October 2, 2020. The maximum contractual term of options under the plan is seven years from the date of grant. Options granted under the plan at the determination of the compensation committee generally vest ratably over four years. Restricted stock awards and units granted under the plan at the determination of the compensation committee generally vest over three or more years. With respect to restricted stock awards, dividends are accumulated from the grant date and paid when the underlying shares vest. If the underlying shares are forfeited for any reason, the rights to the dividends with respect to such shares are forfeited. No dividends or dividend equivalents are accumulated or paid with respect to restricted stock unit awards or other awards until the shares underlying such awards vest and are issued to the award holder. Performance stock awards and units are contingently granted depending on the achievement of certain predetermined performance goals and generally vest over two or more years.
2008 Director Long-Term Incentive Plan. Under this plan, non-employee directors may be granted stock options, restricted stock awards, and other share-based awards. The plan has been approved by the stockholders. Under the plan a total of 1.5 million shares have been authorized for grant. A total of 0.6 million shares are available for new grants as of October 2, 2020. The maximum contractual term of options granted under the plan is ten years from the date of grant. Options granted under the plan are generally exercisable over four years. Restricted stock awards and units granted under the plan generally vest over one or more years. With respect to restricted stock awards, dividends are accumulated from the grant date and paid when the underlying shares vest. If the underlying shares are forfeited for any reason, the rights to the dividends with respect to such shares are forfeited.
Employee Stock Purchase Plans. The Company maintains a domestic and an international employee stock purchase plan. Under these plans, eligible employees may purchase common stock through payroll deductions of up to 10% of their compensation. The price per share is the lower of 85% of the fair market value of the common stock at the beginning or end of each offering period (six months). The plans provide for purchases by employees of up to an aggregate of 11.6 million shares. Shares of common stock purchased under these plans in the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018, were 0.3 million, 0.3 million, and 0.2 million, respectively. At October 2, 2020, there are 1.8 million shares available for purchase. The Company recognized compensation expense of $6.6 million, $5.8 million, and $5.2 million for the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018, respectively, related to the employee stock purchase plan. The unrecognized compensation expense on the employee stock purchase plan at October 2, 2020, was $3.1 million. The weighted average period over which the cost is expected to be recognized is approximately four months.
Stock Options
The following table represents a summary of the Company’s stock options:
| Shares (in millions) | Weighted average exercise price | Weighted average remaining contractual life (in years) | Aggregate intrinsic value (in millions) | ||||||||||||||||||||
| Balance outstanding at September 27, 2019 | 1.3 | $ | 65.38 | ||||||||||||||||||||
| Granted | — | $ | 98.72 | ||||||||||||||||||||
| Exercised | (0.9) | $ | 63.69 | ||||||||||||||||||||
| Canceled/forfeited | — | $ | 50.23 | ||||||||||||||||||||
| Balance outstanding at October 2, 2020 | 0.4 | $ | 70.28 | 2.2 | $ | 27.8 | |||||||||||||||||
| Exercisable at October 2, 2020 | 0.3 | $ | 70.10 | 1.9 | $ | 24.6 |
The weighted-average grant date fair value per share of employee stock options granted during the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018, was $24.49, $21.74, and $68.32, respectively.
Restricted and Performance Awards and Units
The following table represents a summary of the Company’s restricted and performance awards and units:
| Shares (in millions) | Weighted average grant date fair value | ||||||||||
| Non-vested awards outstanding at September 27, 2019 | 2.9 | $ | 89.14 | ||||||||
| Granted (1) | 1.4 | $ | 99.68 | ||||||||
| Vested | (1.0) | $ | 85.35 | ||||||||
| Canceled/forfeited | (0.4) | $ | 93.44 | ||||||||
| Non-vested awards outstanding at October 2, 2020 | 2.9 | $ | 94.77 | ||||||||
| (1) includes performance stock awards granted and earned assuming target performance under the underlying performance metrics |
The weighted average grant date fair value per share for awards granted during the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018, was $99.68, $78.41, and $108.86, respectively.
The following table summarizes the total intrinsic value for stock options exercised and awards vested (in millions):
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Awards | $ | 100.9 | $ | 67.7 | $ | 134.4 | |||||||||||
| Options | $ | 44.2 | $ | 26.4 | $ | 75.0 |
Valuation and Expense Information
The following table summarizes pre-tax share-based compensation expense by financial statement line and related tax benefit (in millions):
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Cost of goods sold | $ | 23.2 | $ | 13.0 | $ | 14.4 | |||||||||||
| Research and development | 68.7 | 41.6 | 42.6 | ||||||||||||||
| Selling, general and administrative | 64.7 | 25.5 | 50.8 | ||||||||||||||
| Total share-based compensation expense | $ | 156.6 | $ | 80.1 | $ | 107.8 | |||||||||||
| Share-based compensation tax benefit | $ | 10.3 | $ | 1.6 | $ | 25.6 | |||||||||||
| Capitalized share-based compensation expense at period end | $ | 10.6 | $ | 4.7 | $ | 2.9 |
The following table summarizes total compensation costs related to unvested share-based awards not yet recognized and the weighted average period over which it is expected to be recognized at October 2, 2020:
| Unrecognized compensation cost for unvested awards (in millions) | Weighted average remaining recognition period (in years) | ||||||||||
| Awards | $ | 170.7 | 1.6 | ||||||||
| Options | $ | 0.3 | 0.5 |
The fair value of the restricted stock awards and units is equal to the closing market price of the Company’s common stock on the date of grant.
The Company issued performance stock unit awards during fiscal 2020, fiscal 2019, and fiscal 2018 that contained market-based conditions. The fair value of these performance stock unit awards was estimated on the date of the grant using a Monte Carlo simulation with the following weighted average assumptions:
| Fiscal Year Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Volatility of common stock | 32.22 | % | 32.65 | % | 35.54 | % | |||||||||||
| Average volatility of peer companies | 33.96 | % | 37.07 | % | 36.78 | % | |||||||||||
| Average correlation coefficient of peer companies | 0.61 | 0.47 | 0.47 | ||||||||||||||
| Risk-free interest rate | 1.62 | % | 2.98 | % | 1.74 | % | |||||||||||
| Dividend yield | 1.78 | % | 1.84 | % | 1.15 | % |
The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Expected volatility | 34.26 | % | 34.47 | % | 35.86 | % | |||||||||||
| Risk-free interest rate | 1.65 | % | 2.76 | % | 2.00 | % | |||||||||||
| Dividend yield | 1.78 | % | 1.84 | % | 1.15 | % | |||||||||||
| Expected option life (in years) | 4.0 | 4.0 | 4.0 |
The Company used a historical volatility calculated by the mean reversion of the weekly-adjusted closing stock price over the expected life of the options. The risk-free interest rate assumption is based upon observed treasury bill interest rates appropriate for the expected life of the Company’s employee stock options. The dividend yield was calculated based on the annualized dividend and the stock price on the date of grant.
The expected life of employee stock options represents a calculation based upon the historical exercise, cancellation, and forfeiture experience for the Company across its demographic population. The Company believes that this historical data is the best estimate of the expected life of a new option and that generally all groups of the Company’s employees exhibit similar behavior.
10. LEASES
The Company’s lease arrangements consist primarily of corporate, manufacturing, and other facility agreements as well as various machinery and office equipment agreements. The leases expire at various dates through 2033, some of which include options to extend the lease term. The options with the longest potential total lease term consist of options for extension of up to three five-year periods following expiration of the original lease term.
During the fiscal year ended October 2, 2020, the Company recorded $28.1 million of operating lease expense and $7.6 million of variable lease expense. During the fiscal years ended September 27, 2019, and September 28, 2018, the Company recorded $18.7 million and $20.5 million of rent expense, respectively. The Company’s finance leases and short-term leases are immaterial.
Supplemental cash information and non-cash activities related to operating leases are as follows (in millions):
| Fiscal Year Ended | |||||||||||
| October 2, 2020 | |||||||||||
| Operating cash outflows from operating leases | $ | 25.4 | |||||||||
| Operating lease assets obtained in exchange for new lease liabilities | $ | 31.0 |
Maturities of lease liabilities under operating leases by fiscal year are as follows (in millions):
| As of | |||||
| October 2, 2020 | |||||
| 2021 | $ | 25.7 | |||
| 2022 | 28.7 | ||||
| 2023 | 25.1 | ||||
| 2024 | 21.7 | ||||
| 2025 | 20.6 | ||||
| Thereafter | 81.6 | ||||
| Total lease payments | 203.4 | ||||
| Less: imputed interest | (24.5) | ||||
| Present value of lease liabilities | 178.9 | ||||
| Less: current portion (included in other current liabilities) | (28.2) | ||||
| Total | $ | 150.7 |
Future minimum lease liabilities under non-cancelable operating leases are as follows (in millions):
| As of | |||||
| September 27, 2019 | |||||
| 2020 | $ | 26.7 | |||
| 2021 | 25.9 | ||||
| 2022 | 24.8 | ||||
| 2023 | 23.3 | ||||
| 2024 | 21.5 | ||||
| Thereafter | 97.7 | ||||
| Total | $ | 219.9 |
Weighted-average remaining lease term and discount rate related to operating leases are as follows:
| As of | |||||
| October 2, 2020 | |||||
| Weighted-average remaining lease term (years) | 8.2 | ||||
| Weighted-average discount rate | 3.3 | % |
11. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against the Company, including those pertaining to patent infringement, intellectual property, environmental hazards, product liability and warranty, safety and health, employment, and contractual matters.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark, and other intellectual property rights to technologies that are important to the Company’s business and have demanded and may in the future demand that the Company license their technology. The outcome of any such litigation cannot be predicted with certainty and some such lawsuits, claims or proceedings may be disposed of unfavorably to the Company. Generally speaking, intellectual property disputes often have a risk of injunctive relief, which, if imposed against the Company, could materially and adversely affect the Company’s financial condition, or results of operations. From time to time the Company may also be involved in legal proceedings in the ordinary course of business.
The Company monitors the status of legal proceedings and other contingencies on an ongoing basis to ensure loss contingencies are recognized and/or disclosed in its financial statements and footnotes. The Company does not believe there are any pending legal proceedings that are reasonably possible to result in a material loss. The Company is engaged in various legal actions in the normal course of business and, while there can be no assurances, the Company believes the outcome of all pending litigation involving the Company will not have, individually or in the aggregate, a material adverse effect on its business or financial statements.
12. GUARANTEES AND INDEMNITIES
The Company has made no significant contractual guarantees for the benefit of third parties. However, the Company generally indemnifies its customers from third-party intellectual property infringement litigation claims related to its products, and, on occasion, also provides other indemnities related to product sales. In connection with certain facility leases, the Company has indemnified its lessors for certain claims arising from the facility or the lease.
The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the state of Delaware. The duration of the indemnities varies, and in many cases is indefinite. The indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales and in many cases are subject to geographic and other restrictions. In certain instances, the Company’s indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets and does not expect that such obligations will have a material adverse impact on its financial statements.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| Net income | $ | 814.8 | $ | 853.6 | $ | 918.4 | |||||||||||
| Weighted average shares outstanding – basic | 168.5 | 173.5 | 181.3 | ||||||||||||||
| Dilutive effect of equity-based awards | 1.4 | 1.0 | 1.9 | ||||||||||||||
| Weighted average shares outstanding – diluted | 169.9 | 174.5 | 183.2 | ||||||||||||||
| Net income per share – basic | $ | 4.84 | $ | 4.92 | $ | 5.06 | |||||||||||
| Net income per share – diluted | $ | 4.80 | $ | 4.89 | $ | 5.01 | |||||||||||
| Anti-dilutive common stock equivalents | 0.1 | 1.4 | 0.2 |
Basic earnings per share are calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding during the period. The calculation of diluted earnings per share includes the dilutive effect of equity-based awards that were outstanding during the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018, using the treasury stock method. Shares issuable upon the vesting of performance stock awards are likewise included in the calculation of diluted earnings per share as of the date the condition(s) have been satisfied. Certain of the Company’s outstanding share-based awards, noted in the table above, were excluded because they were anti-dilutive, but they could become dilutive in the future.
14. SEGMENT INFORMATION AND CONCENTRATIONS
The Company has a single reportable operating segment which designs, develops, manufactures, and markets similar proprietary semiconductor products, including intellectual property. In reaching this conclusion, management considers the definition of the chief operating decision maker (“CODM”), how the business is defined by the CODM, the nature of the information provided to the CODM and how that information is used to make operating decisions, allocate resources, and assess performance. The Company’s CODM is the president and chief executive officer. The results of operations provided to and analyzed by the CODM are at the consolidated level and accordingly, key resource decisions and assessment of performance are performed at the consolidated level. The Company assesses its determination of operating segments at least annually.
Geographic Information
The Company presents net revenue by geographic area based upon the location of the OEMs’ headquarters as it believes that doing so best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Net revenue by geographic area is as follows (in millions):
| Fiscal Years Ended | |||||||||||||||||
| October 2, 2020 | September 27, 2019 | September 28, 2018 | |||||||||||||||
| United States | $ | 2,012.8 | $ | 1,860.4 | $ | 1,946.2 | |||||||||||
| China | 700.7 | 718.7 | 982.8 | ||||||||||||||
| South Korea | 254.6 | 365.5 | 432.7 | ||||||||||||||
| Taiwan | 240.4 | 271.1 | 339.1 | ||||||||||||||
| Europe, Middle East, and Africa | 122.9 | 134.9 | 144.6 | ||||||||||||||
| Other Asia-Pacific | 24.3 | 26.2 | 22.6 | ||||||||||||||
| Total | $ | 3,355.7 | $ | 3,376.8 | $ | 3,868.0 |
The Company’s revenue from external customers is generated principally from the sale of semiconductor products that facilitate various wireless communication applications. Accordingly, the Company considers its product offerings to be similar in nature and therefore not segregated for reporting purposes. Accrued customer liabilities of $20.3 million and $38.5 million have been included in other current liabilities within the consolidated balance sheets as of October 2, 2020 and September 27, 2019, respectively.
Net property, plant, and equipment balances, based on the physical locations within the indicated geographic areas are as follows (in millions):
| As of | |||||||||||
| October 2, 2020 | September 27, 2019 | ||||||||||
| Japan | $ | 507.0 | $ | 491.9 | |||||||
| Mexico | 364.9 | 351.5 | |||||||||
| Singapore | 237.4 | 229.9 | |||||||||
| United States | 124.8 | 117.6 | |||||||||
| Rest of world | 15.4 | 14.7 | |||||||||
| $ | 1,249.5 | $ | 1,205.6 |
Concentrations
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade accounts receivable. Trade accounts receivable are primarily derived from sales to manufacturers of communications and consumer products and electronic component distributors. The Company performs ongoing credit evaluations of customers.
In fiscal 2020, 2019, and 2018, Apple, through sales to multiple distributors, contract manufacturers and direct sales for multiple applications including smartphones, tablets, desktop, and notebook computers, watches and other devices, in the aggregate accounted for 56%, 51%, and 47% of the Company’s net revenue, respectively.
At October 2, 2020, the Company’s three largest accounts receivable balances comprised 70% of aggregate gross accounts receivable. This concentration was 67% and 66% at September 27, 2019, and September 28, 2018, respectively.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly and annual results (in millions, except per share data). Amounts may not total for the fiscal year due to rounding:
| First quarter | Second quarter | Third quarter | Fourth quarter | Fiscal year | |||||||||||||||||||||||||
| Fiscal 2020 | |||||||||||||||||||||||||||||
| Net revenue | $ | 896.1 | $ | 766.1 | $ | 736.8 | $ | 956.8 | $ | 3,355.7 | |||||||||||||||||||
| Gross profit | 444.3 | 375.6 | 334.1 | 458.9 | 1,612.9 | ||||||||||||||||||||||||
| Net income | 257.1 | 181.1 | 129.7 | 246.9 | 814.8 | ||||||||||||||||||||||||
| Per share data (1) | |||||||||||||||||||||||||||||
| Net income, basic | $ | 1.51 | $ | 1.07 | $ | 0.78 | $ | 1.48 | $ | 4.84 | |||||||||||||||||||
| Net income, diluted | $ | 1.50 | $ | 1.06 | $ | 0.77 | $ | 1.46 | $ | 4.80 | |||||||||||||||||||
| Fiscal 2019 | |||||||||||||||||||||||||||||
| Net revenue | $ | 972.0 | $ | 810.4 | $ | 767.0 | $ | 827.4 | $ | 3,376.8 | |||||||||||||||||||
| Gross profit | 485.1 | 400.2 | 312.5 | 406.0 | 1,603.8 | ||||||||||||||||||||||||
| Net income | 284.9 | 214.0 | 144.1 | 210.6 | 853.6 | ||||||||||||||||||||||||
| Per share data (1) | |||||||||||||||||||||||||||||
| Net income, basic | $ | 1.61 | $ | 1.23 | $ | 0.83 | $ | 1.23 | $ | 4.92 | |||||||||||||||||||
| Net income, diluted | $ | 1.60 | $ | 1.23 | $ | 0.83 | $ | 1.22 | $ | 4.89 |
(1) Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding and included common stock equivalents in each period. Therefore, the sums of the quarters do not necessarily equal the full year earnings per share.
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.