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SYNA Synaptics

Filed: 4 Feb 21, 5:01pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 26, 2020

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             .

Commission file number 000-49602

 

SYNAPTICS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

77-0118518

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1251 McKay Drive

San Jose, California 95131

(Address of principal executive offices) (Zip code)

(408) 904-1100

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.001 per share

SYNA

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

Number of shares of Common Stock outstanding at January 29, 2021: 34,952,361

 

 

 

 


 

 

SYNAPTICS INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 26, 2020

TABLE OF CONTENTS

 

 

 

 

  

 

  

Page

Part I. Financial Information

  

 

 

 

 

 

   

 

Item 1.

   

Condensed Consolidated Financial Statements (Unaudited):

  

3

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets—December 26, 2020 and June 27, 2020

  

3

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended December 26, 2020 and December 28, 2019

 

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

5

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows—Three and Six Months Ended December 26, 2020 and December 28, 2019

  

6

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

7

 

 

 

 

 

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

27

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

37

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

37

 

 

Part II. Other Information

  

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

38

 

 

 

 

 

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

38

 

 

 

 

 

 

Item 6.

  

Exhibits

  

39

 

 

 

 

 

 

 

Signatures

  

40

 

 

 


 

 

PART I—FINANCIAL INFORMATION

 

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value and share amounts)

(unaudited)

 

 

 

December

 

 

June

 

 

 

2020

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

309.9

 

 

$

763.4

 

Short-term investments

 

 

7.0

 

 

 

 

Accounts receivable, net of allowances of $5.8 at December 2020 and June 2020

 

 

249.3

 

 

 

195.3

 

Inventories

 

 

73.1

 

 

 

102.0

 

Prepaid expenses and other current assets

 

 

32.3

 

 

 

16.9

 

Total current assets

 

 

671.6

 

 

 

1,077.6

 

Property and equipment at cost, net of accumulated depreciation of $129.0 and $131.2 at

   December 2020 and June 2020, respectively

 

 

93.6

 

 

 

84.3

 

Goodwill

 

 

568.6

 

 

 

360.8

 

Acquired intangibles, net

 

 

354.6

 

 

 

93.4

 

Non-current other assets

 

 

103.8

 

 

 

77.7

 

 

 

$

1,792.2

 

 

$

1,693.8

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

74.4

 

 

$

60.6

 

Accrued compensation

 

 

37.5

 

 

 

59.5

 

Income taxes payable

 

 

16.2

 

 

 

33.0

 

Other accrued liabilities

 

 

97.4

 

 

 

91.0

 

Total current liabilities

 

 

225.5

 

 

 

244.1

 

Long-term debt

 

 

100.0

 

 

 

100.0

 

Convertible notes, net

 

 

496.1

 

 

 

486.6

 

Other long-term liabilities

 

 

82.6

 

 

 

44.0

 

Total liabilities

 

 

904.2

 

 

 

874.7

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

$0.001 par value; 120,000,000 shares authorized, 66,677,341 and 65,871,648 shares

   issued, and  34,928,146 and 34,122,453 shares outstanding, at December 2020

   and June 2020, respectively

 

 

0.1

 

 

 

0.1

 

Additional paid-in capital

 

 

1,362.3

 

 

 

1,340.2

 

Treasury stock:  31,749,195 common treasury shares at December

   2020 and June 2020, at cost

 

 

(1,222.6

)

 

 

(1,222.6

)

Retained earnings

 

 

748.2

 

 

 

701.4

 

Total stockholders' equity

 

 

888.0

 

 

 

819.1

 

 

 

$

1,792.2

 

 

$

1,693.8

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

3


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December

 

 

December

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

$

357.6

 

 

$

388.3

 

 

$

686.0

 

 

$

728.2

 

Cost of revenue

 

 

207.2

 

 

 

229.0

 

 

 

401.1

 

 

 

442.7

 

Gross margin

 

 

150.4

 

 

 

159.3

 

 

 

284.9

 

 

 

285.5

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

77.3

 

 

 

77.0

 

 

 

158.2

 

 

 

163.0

 

Selling, general, and administrative

 

 

39.5

 

 

 

31.5

 

 

 

74.8

 

 

 

59.0

 

Acquired intangibles amortization

 

 

8.7

 

 

 

3.0

 

 

 

15.4

 

 

 

5.9

 

Restructuring costs

 

 

0.6

 

 

 

13.3

 

 

 

6.2

 

 

 

19.9

 

Gain on sale of audio technology assets

 

 

(34.2

)

 

 

 

 

 

(34.2

)

 

 

 

Total operating expenses

 

 

91.9

 

 

 

124.8

 

 

 

220.4

 

 

 

247.8

 

Operating income

 

 

58.5

 

 

 

34.5

 

 

 

64.5

 

 

 

37.7

 

Interest and other expense, net

 

 

(6.0

)

 

 

(2.3

)

 

 

(10.7

)

 

 

(5.9

)

Income before provision for income taxes

   and equity investment loss

 

 

52.5

 

 

 

32.2

 

 

 

53.8

 

 

 

31.8

 

Provision for income taxes

 

 

2.4

 

 

 

12.0

 

 

 

6.0

 

 

 

7.1

 

Equity investment loss

 

 

(0.5

)

 

 

(0.4

)

 

 

(1.0

)

 

 

(0.9

)

Net income and Comprehensive income

 

$

49.6

 

 

$

19.8

 

 

$

46.8

 

 

$

23.8

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.43

 

 

$

0.59

 

 

$

1.36

 

 

$

0.72

 

Diluted

 

$

1.36

 

 

$

0.58

 

 

$

1.29

 

 

$

0.70

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34.8

 

 

 

33.5

 

 

 

34.5

 

 

 

33.2

 

Diluted

 

 

36.5

 

 

 

34.4

 

 

 

36.4

 

 

 

34.1

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

4


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except share amounts)

(unaudited)

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Earnings

 

 

Equity

 

Balance at June 2020

 

 

65,871,648

 

 

$

0.1

 

 

$

1,340.2

 

 

$

(1,222.6

)

 

$

701.4

 

 

$

819.1

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.8

)

 

 

(2.8

)

Issuance of common stock for share-

   based award compensation plans

 

 

296,917

 

 

 

 

 

 

10.4

 

 

 

 

 

 

 

 

 

10.4

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(5.6

)

 

 

 

 

 

 

 

 

(5.6

)

Share-based compensation attributable to acquisition

 

 

 

 

 

 

 

 

3.2

 

 

 

 

 

 

 

 

 

3.2

 

Share-based compensation

 

 

 

 

 

 

 

 

14.4

 

 

 

 

 

 

 

 

 

14.4

 

Balance at September 2020

 

 

66,168,565

 

 

 

0.1

 

 

 

1,362.6

 

 

 

(1,222.6

)

 

 

698.6

 

 

 

838.7

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49.6

 

 

 

49.6

 

Issuance of common stock for share-

   based award compensation plans

 

 

508,776

 

 

 

 

 

 

0.8

 

 

 

 

 

 

 

 

 

0.8

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(20.2

)

 

 

 

 

 

 

 

 

(20.2

)

Share-based compensation

 

 

 

 

 

 

 

 

19.1

 

 

 

 

 

 

 

 

 

19.1

 

Balance at December 2020

 

 

66,677,341

 

 

$

0.1

 

 

$

1,362.3

 

 

$

(1,222.6

)

 

$

748.2

 

 

$

888.0

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Earnings

 

 

Equity

 

Balance at June 2019, as reported

 

 

64,283,948

 

 

$

0.1

 

 

$

1,266.1

 

 

$

(1,192.4

)

 

$

583.5

 

 

$

657.3

 

Cumulative effect of changes in accounting

   principles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.9

)

 

$

(0.9

)

Balance at June 2019, as adjusted

 

 

64,283,948

 

 

 

0.1

 

 

 

1,266.1

 

 

 

(1,192.4

)

 

 

582.6

 

 

 

656.4

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.0

 

 

 

4.0

 

Issuance of common stock for share-

   based award compensation plans

 

 

209,110

 

 

 

 

 

 

1.7

 

 

 

 

 

 

 

 

 

1.7

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(1.5

)

 

 

 

 

 

 

 

 

(1.5

)

Purchases of treasury stock

 

 

 

 

 

 

 

 

-

 

 

 

(17.0

)

 

 

 

 

 

(17.0

)

Share-based compensation

 

 

 

 

 

 

 

 

11.2

 

 

 

-

 

 

 

 

 

 

11.2

 

Balance at September 2019

 

 

64,493,058

 

 

 

0.1

 

 

 

1,277.5

 

 

 

(1,209.4

)

 

 

586.6

 

 

 

654.8

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19.8

 

 

 

19.8

 

Issuance of common stock for share-

   based award compensation plans

 

 

895,755

 

 

 

 

 

 

11.8

 

 

 

 

 

 

 

 

 

11.8

 

Payroll taxes for deferred stock units

 

 

 

 

 

 

 

 

(7.2

)

 

 

 

 

 

 

 

 

(7.2

)

Share-based compensation

 

 

 

 

 

 

 

 

12.1

 

 

 

 

 

 

 

 

 

12.1

 

Balance at December 2019

 

 

65,388,813

 

 

$

0.1

 

 

$

1,294.2

 

 

$

(1,209.4

)

 

$

606.4

 

 

$

691.3

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

5


 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

 

 

 

Six Months Ended

 

 

 

December

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

46.8

 

 

$

23.8

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Share-based compensation costs

 

 

33.5

 

 

 

23.3

 

Depreciation and amortization

 

 

10.2

 

 

 

15.3

 

Acquired intangibles amortization

 

 

57.0

 

 

 

29.3

 

Gain on sale of audio technology assets

 

 

(34.2

)

 

 

 

Deferred taxes

 

 

(5.8

)

 

 

 

Amortization of convertible debt discount and issuance costs

 

 

9.5

 

 

 

9.1

 

Amortization of debt issuance costs

 

 

0.4

 

 

 

0.2

 

Amortization of cost of development services

 

 

4.2

 

 

 

 

Acquired in-process research and development

 

 

 

 

 

3.7

 

Equity investment loss

 

 

1.0

 

 

 

0.9

 

Foreign currency remeasurement loss

 

 

(0.6

)

 

 

(0.3

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(46.9

)

 

 

(16.4

)

Inventories

 

 

62.0

 

 

 

55.6

 

Prepaid expenses and other current assets

 

 

(8.6

)

 

 

(2.5

)

Other assets

 

 

(7.9

)

 

 

0.8

 

Accounts payable

 

 

9.1

 

 

 

(7.4

)

Accrued compensation

 

 

(24.6

)

 

 

15.1

 

Income taxes payable

 

 

(15.3

)

 

 

(0.5

)

Other accrued liabilities

 

 

(11.9

)

 

 

(30.0

)

Net cash provided by operating activities

 

 

77.9

 

 

 

120.0

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash and cash equivalents acquired

 

 

(623.0

)

 

 

 

Proceeds from sale of audio technology assets

 

 

34.2

 

 

 

 

Purchase of in-process research and development

 

 

 

 

 

(2.5

)

Proceeds from maturities of investments

 

 

88.0

 

 

 

 

Purchases of property and equipment

 

 

(12.2

)

 

 

(8.2

)

Cost method investment

 

 

(5.0

)

 

 

 

Net cash used in investing activities

 

 

(518.0

)

 

 

(10.7

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Purchases of treasury stock

 

 

 

 

 

(17.0

)

Proceeds from issuance of shares

 

 

11.2

 

 

 

13.5

 

Payroll taxes for deferred stock and market stock units

 

 

(25.8

)

 

 

(8.7

)

Net cash used in financing activities

 

 

(14.6

)

 

 

(12.2

)

Effect of exchange rate changes on cash and cash equivalents

 

 

1.2

 

 

 

(0.1

)

Net increase/(decrease) in cash and cash equivalents

 

 

(453.5

)

 

 

97.0

 

Cash and cash equivalents at beginning of period

 

 

763.4

 

 

 

327.8

 

Cash and cash equivalents at end of period

 

$

309.9

 

 

$

424.8

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

27.1

 

 

$

7.9

 

Cash refund on taxes

 

$

0.3

 

 

$

1.3

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment in current liabilities

 

$

0.7

 

 

$

1.9

 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

 

6


 

 

SYNAPTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and U.S. generally accepted accounting principles, or U.S. GAAP. Certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations. In our opinion, the financial statements include all adjustments, which are of a normal and recurring nature and necessary for the fair presentation of the results of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 27, 2020.

The consolidated financial statements include our financial statements and those of our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.

Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. Our fiscal 2021 and 2020 are 52-week periods ending June 26, 2021 and June 27, 2020, respectively. The fiscal periods presented in this report are 13-week and 26-week periods ended December 26, 2020, and December 28, 2019, respectively.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, cost of revenue, inventories, loss on purchase commitments, product warranty, accrued liabilities, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, goodwill, intangible assets, investments and loss contingencies. We base our estimates on historical experience, applicable laws and regulations, and various other assumptions that we believe to be reasonable under the circumstances, including our expectations regarding the potential impacts on our business of the COVID-19 pandemic, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Cash Equivalents and Short-Term Investments

Cash equivalents consist of highly liquid investments with original maturities of three months or less.  Our cash equivalents as of December 26, 2020 included bank deposits with a carrying value of $0.9 million, which approximates fair value, and as of June 27, 2020 they included money market accounts with a carrying value of $521.1 million, which approximates fair value, and are included in cash and cash equivalents on the condensed consolidated balance sheets.

Short-term investments consist of bank deposits with original maturities of greater than three months but less than one year when purchased.  All of our short-term investments are classified as investments recorded at amortized cost, which approximates fair value.  

Foreign Currency Transactions and Foreign Exchange Contracts

The U.S. dollar is our functional and reporting currency.  We remeasure our monetary assets and liabilities not denominated in the functional currency into U.S. dollar equivalents at the rate of exchange in effect on the balance sheet date. We measure and record non-monetary balance sheet accounts at the historical rate in effect at the date of transaction. We remeasure foreign currency expenses at the weighted average exchange rate in the month that the transaction occurred. Our foreign currency transactions and remeasurement gains and losses are included in selling, general, and administrative expenses in the condensed consolidated statements of income and resulted in net losses of $1.1 million and $1.0 million in the three and six months ended December 26, 2020, respectively, and net losses of $0.4 million and net gains of $0.1 million in the three and six months ended December 28, 2019, respectively.

7


 

Leases

We determine if a contract is a lease or contains a lease at the inception of the contract and reassess that conclusion if the contract is modified. All leases are assessed for classification as an operating lease or a finance lease. Operating lease right-of-use, or ROU, assets are included in non-current other assets on our condensed consolidated balance sheet. Operating lease liabilities are separated into a current portion, included within accrued liabilities on our condensed consolidated balance sheet, and a non-current portion, included within other long-term liabilities on our condensed consolidated balance sheet. We do not have any finance lease ROU assets or liabilities. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We do not obtain and control the right to use the identified asset until the lease commencement date.

Our lease liabilities are recognized at the applicable lease commencement date based on the present value of the lease payments required to be paid over the lease term. Because the interest rate implicit in the lease is not readily determinable, we generally use our incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. We factor in publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Our ROU assets are also recognized at the applicable lease commencement date. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.

The term of our leases equals the non-cancellable period of the lease, including any rent-free periods provided by the lessor, and also include options to renew or extend the lease (including by not terminating the lease) that we are reasonably certain to exercise. We establish the term of each lease at lease commencement and reassess that term in subsequent periods when one of the triggering events outlined in Topic 842 occurs. Operating lease cost for lease payments is recognized on a straight-line basis over the lease term.

Our lease contracts often include lease and non-lease components. For our leases, we have elected the practical expedient offered by the standard to not separate lease from non-lease components and account for them as a single lease component.

We have elected, for all classes of underlying assets, not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less. Lease cost for short-term leases is recognized on a straight-line basis over the lease term.

 

 

2. Revenue Recognition

We account for revenue using Accounting Standards Codification Topic 606, or ASC 606, Revenue from Contracts with Customers. Our revenue is primarily generated from the sale of application specific integrated circuit chips, or ASIC chips, either directly to a customer or to a distributor. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. All of our revenue, except an inconsequential amount, is recognized at a point in time, either on shipment or delivery of the product, depending on customer terms and conditions. We generally warrant our products for a period of 12 months from the date of sale and estimate probable product warranty costs at the time we recognize revenue as the warranty is considered an assurance warranty and not a performance obligation. Non-product revenue is recognized over the same period of time such performance obligations are satisfied. We then select an appropriate method for measuring satisfaction of the performance obligations.

Revenue from sales to distributors is recognized upon shipment of the product to the distributors (sell-in basis). Master sales agreements are in place with certain customers, and these agreements typically contain terms and conditions with respect to payment, delivery, warranty and supply. In the absence of a master sales agreement, we consider a customer's purchase order or our standard terms and conditions to be the contract with the customer.

Our pricing terms are negotiated independently, on a stand-alone basis. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration which we expect to receive for the sale of such products. In limited situations, we make sales to certain customers under arrangements where we grant stock rotation rights, price protection and price allowances; variable consideration associated with these rights is expected to be inconsequential. These adjustments and incentives are accounted for as variable consideration, classified as other current liabilities under the revenue standard, and are shown as customer obligations in Note 9 Other Accrued Liabilities and Other Long-Term Liabilities. We estimate the amount of variable consideration for such arrangements based on the expected value to be provided to customers, and we do not believe that there will be significant changes to our estimates of variable consideration. When incentives, stock rotation rights, price protection, volume discounts, or price allowances are applicable, they are estimated and recorded in the period the related revenue is recognized. Stock rotation reserves are based on historical return rates and recorded as a reduction to revenue with a corresponding reduction to cost of goods sold for the estimated cost of inventory that is expected to be returned and recorded as prepaid expenses and

8


 

other current assets. In limited circumstances, we enter into volume-based tiered pricing arrangements and we estimate total unit volumes under such arrangements to determine the expected transaction price for the units expected to be transferred. Such arrangements are accounted for as contract liabilities within other accrued liabilities. Sales returns liabilities are recorded as refund liabilities within other accrued liabilities.

Our accounts receivable balance is from contracts with customers and represents our unconditional right to receive consideration from customers. Payments are generally due within three months of completion of the performance obligation and subsequent invoicing and therefore, do not include significant financing components. To date, there have been 0 material bad debt charges recorded on accounts receivable. There were $0.2 million in contract assets recorded on the condensed consolidated balance sheets as of December 26, 2020 and $0.4 million as of June 27, 2020. Contract assets are presented as part of prepaid expenses and other current assets. Contract liabilities and refund liabilities were $5.4 million and $29.2 million, respectively, as of December 26, 2020, and $3.2 million and $25.8 million, respectively, as of June 27, 2020. Both contract liabilities and refund liabilities are presented as customer obligations in Note 9 Other Accrued Liabilities and Other Long-Term Liabilities. During the six months ended December 26, 2020, and the six months ended December 28, 2019, we recognized $1.1 million and $0.3 million, respectively, in revenue related to contract liabilities, which was outstanding as of the beginning of each such fiscal year.

We invoice customers for each delivery upon shipment and recognize revenue in accordance with delivery terms. As of December 26, 2020, we did 0t have any remaining unsatisfied performance obligations with an original duration greater than one year. Accordingly, under the optional exception provided by ASC 606, we do not disclose revenues allocated to future performance obligations of partially completed contracts. We account for shipping and handling costs as fulfillment costs before the customer obtains control of the goods and include these costs in cost of revenue. We account for collection of all taxes on a net basis.  

We incur commission expense that is incremental to obtaining contracts with customers. Sales commissions (which are recorded as a selling, general and administrative expense in the condensed consolidated statements of income) are expensed when the product is shipped because such commissions are owed after shipment.

Revenue from contracts with customers disaggregated by geographic area based on customer location and groups of similar products is presented in Note 14 Segment, Customers, and Geographical Information.

 

 

3. Net Income Per Share

The computation of basic and diluted net income per share was as follows (in millions, except per share data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December

 

 

December

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

49.6

 

 

$

19.8

 

 

$

46.8

 

 

$

23.8

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares, basic

 

 

34.8

 

 

 

33.5

 

 

 

34.5

 

 

 

33.2

 

Effect of dilutive share-based awards and convertible notes

 

 

1.7

 

 

 

0.9

 

 

 

1.9

 

 

 

0.9

 

Shares, diluted

 

 

36.5

 

 

 

34.4

 

 

 

36.4

 

 

 

34.1

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.43

 

 

$

0.59

 

 

$

1.36

 

 

$

0.72

 

Diluted

 

$

1.36

 

 

$

0.58

 

 

$

1.29

 

 

$

0.70

 

Our basic net income per share amounts for each period presented have been computed using the weighted average number of shares of common stock outstanding over the period measured. Our diluted net income per share amounts for each period presented include the weighted average effect of potentially dilutive shares. We use the treasury stock method to determine the dilutive effect of our stock options, restricted stock units, or RSUs, market stock units, or MSUs, performance stock units, or PSUs, and our convertible notes.

Dilutive net income per share amounts do not include the potential weighted average effect of 179,491 and 775,347 shares of common stock related to certain share-based awards that were outstanding during the three months ended December 26, 2020 and December 28, 2019, respectively, and 502,657 and 1,074,778 shares of common stock related to certain share-based awards that were

9


 

outstanding during the six months ended December 26, 2020 and December 28, 2019, respectively. These share-based awards were not included in the computation of diluted net income per share because their effect would have been antidilutive.

 

 

4. Fair Value

Our carrying values of cash equivalents and short-term investments approximate their fair values due to the short period of time to maturity.  

The fair values of our accounts receivable and accounts payable approximate their carrying values because of the short-term nature of those instruments. Intangible assets, property and equipment, and goodwill are measured at fair value on a non-recurring basis if impairment is indicated. The interest rate on our bank debt is variable, which is subject to change from time to time to reflect a market interest rate; accordingly, the carrying value of our bank debt approximates fair value.

The convertible notes are recorded at amortized cost of $496.1 million and $486.6 million as of December 26, 2020 and June 27, 2020, respectively and the fair value of the convertible notes was approximately $676.1 and $542.5 million as of December 26, 2020 and June 27, 2020, respectively, based on the last trading price of the convertible notes for the periods presented.  

 

 

5. Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and consisted of the following (in millions):

 

 

 

December

 

 

June

 

 

 

2020

 

 

2020

 

Raw materials and work-in-progress

 

$

43.6

 

 

$

53.6

 

Finished goods

 

 

29.5

 

 

 

48.4

 

 

 

$

73.1

 

 

$

102.0

 

 

We record a write-down, if necessary, to reduce the carrying value of inventory to its net realizable value. The effect of these write-downs is to establish a new cost basis in the related inventory, which we do not subsequently write up. We also record a liability and charge to cost of revenue for estimated losses on inventory we are obligated to purchase from our contract manufacturers when such losses become probable from customer delays, order cancellations, or other factors.

 

 

6.

Acquisitions, Divestiture and Investment

Acquisitions

DisplayLink

On July 17, 2020, we entered into a definitive agreement to acquire 100% of equity interest in DisplayLink Corporation, or DisplayLink, a leader in high-performance video compression technology, for $305 million in cash adjusted for (i) estimated cash and cash equivalents and short-term investments at the closing (ii) estimated indebtedness outstanding immediately prior to the closing, (iii) unpaid portion as of the closing of certain transaction expenses incurred by DisplayLink, and (iv) the amount that the estimated working capital of DisplayLink exceeds or falls short, respectively, of a certain specified target working capital set forth in an Agreement and Plan of Merger, or the Merger Agreement, with $3.1 million of the purchase price held in escrow accounts for adjustments after closing and to secure the Seller Parties’ indemnification obligations under the Merger Agreement. The acquisition closed on July 31, 2020, or the DisplayLink Closing Date, whereupon we obtained high-performance video compression technology which will further enhance our current IoT business.   

This acquisition has been accounted for using the purchase method of accounting in accordance with the business acquisition guidance. Under the purchase accounting method, the total estimated purchase consideration of the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their relative fair values. The excess of the purchase consideration over the net tangible and identifiable intangible assets acquired and liabilities has been recorded as goodwill. Our estimate of the fair values of the acquired intangible assets at December 26, 2020, is preliminary and subject to change and has been based on established and accepted valuation techniques performed with the assistance of our third-party valuation specialists.  The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired and related deferred income taxes. The Company

10


 

expects to continue to obtain information for the purpose of determining the fair value of the net assets acquired at the acquisition date throughout the remainder of the measurement period.

The adjusted purchase price paid for DisplayLink was $442.8 million.

The following table summarizes the preliminary amounts recorded for the estimated fair values of the assets acquired and liabilities assumed as of the DisplayLink Closing Date (in millions):

 

Cash and cash equivalents

 

$

40.9

 

Short-term investments

 

 

94.0

 

Accounts receivable, net

 

 

7.1

 

Inventory

 

 

33.1

 

Prepaid expenses and other current assets

 

 

9.1

 

Property and equipment

 

 

6.8

 

Intangible assets

 

 

193.0

 

Right-of-use lease asset

 

 

20.0

 

Non-current other assets

 

 

0.6

 

Total identifiable assets acquired

 

 

404.6

 

Accounts payable

 

 

(5.2

)

Other accrued liabilities

 

 

(9.9

)

Short-term lease liabilities

 

 

(1.7

)

Long-term lease liabilities

 

 

(18.2

)

Other long-term liabilities

 

 

(31.8

)

Total liabilities

 

 

(66.8

)

Net identifiable assets acquired

 

 

337.8

 

Goodwill

 

 

105.0

 

Net assets acquired

 

$

442.8

 

 

 

 

 

 

 

During the three months ended December 26, 2020, the Company recorded measurement period adjustments of $2.3 million to goodwill comprising of increases of $2.3 million in prepaid expenses and $0.4 million in other long-term liabilities for a net increase of $1.9 million to the fair value of other acquired net tangible assets.

 

The following table summarizes the preliminary estimated fair value of the intangible assets as of the DisplayLink Closing Date (in millions):

 

 

 

Estimated Weighted Average Useful Lives in Years

 

 

Estimated Fair

Value

 

 

 

 

 

 

 

 

 

 

Developed technology

 

 

3.0

 

 

$

82.0

 

Customer contracts and related relationships

 

 

3.0

 

 

 

54.0

 

In process research and development

 

N/A

 

 

 

51.0

 

Trade names

 

 

4.0

 

 

 

3.0

 

Licensed technology

 

 

2.5

 

 

 

3.0

 

Estimated fair value of acquired intangibles

 

 

 

 

 

$

193.0

 

 

 

 

 

 

 

 

 

 

 

We estimated the fair value of the identified intangible assets using a discounted cash flow model for each of the underlying identified intangible assets.  These fair value measurements were based on significant inputs not observable in the market and thus represent a Level 3 measurement.  Key assumptions include the level and timing of expected future cash flows, conditions and demands specific to each intangible asset over its remaining useful life, and discount rates we believe to be consistent with the inherent risks associated with each type of asset, which range from 11.0% to 11.5%.  The fair value of these intangible assets is primarily affected by the projected revenue, gross margins, operating expenses, the technology migration curve, customer ramp up

11


 

period and the anticipated timing of the projected income associated with each intangible asset coupled with the discount rates used to derive their estimated present values.  We believe the level and timing of expected future cash flows appropriately reflects market participant assumptions.

In-process research and development consists of a next generation docking and video interface products for the IoT market. We expect to complete the in-process research and development project in early fiscal 2023.

 

The value of goodwill reflects the anticipated synergies of the combined operations and workforce of DisplayLink as of the DisplayLink Closing Date. As of December 26, 2020, NaN of the goodwill is expected to be deductible for income tax purposes.  

Prior to the DisplayLink acquisition, we did not have an existing relationship or transactions with DisplayLink.  

The condensed consolidated financial statements include approximately $45.0 million of revenue from DisplayLink from the DisplayLink Closing Date through December 26, 2020. It is impracticable to determine the effect on net income attributable to DisplayLink as we integrated a substantial portion of DisplayLink into our ongoing operations during the first quarter of fiscal 2021.

The following unaudited pro forma financial information (in millions, except per share data) presents the combined results of operations for us and DisplayLink as if the DisplayLink acquisition had occurred on June 30, 2019. The unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to be indicative of the actual operating results that would have been recorded had the DisplayLink acquisition actually taken place on June 30, 2019 and should not be taken as indicative of future consolidated operating results. Additionally, the unaudited pro forma financial results do not include any anticipated synergies or other expected benefits from the DisplayLink acquisition.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December

 

 

December

 

 

 

2020 (1)

 

 

2019

 

 

2020 (1)

 

 

2019

 

Revenue

 

$

357.6

 

 

$

414.1

 

 

$

693.3

 

 

$

779.1

 

Net income/(loss)

 

 

68.5

 

 

 

(10.6

)

 

 

48.4

 

 

 

(6.3

)

 

 

(1)

Includes results of Broadcom Wireless Connectivity Business

Pro forma adjustments used to arrive at pro forma net income/(loss) included adjustments for historical amortization expense, the addition of intangible amortization expense for the value of intangibles under the purchase price allocation, transaction costs and restructuring costs.  The total pro forma adjustments for the three months ended December 26, 2020 and December 28, 2019 were an increase to net income/(loss) of $6.9 million and a decrease of net income/(loss) of $9.7 million, respectively.  The total pro forma adjustments for the six months ended December 26, 2020 and December 28, 2019 were an increase to net income/(loss) of $8.0 million and a decrease of net income/(loss) of $18.4 million, respectively.

Broadcom Wireless Connectivity Business

On July 2, 2020, we entered into definitive agreements with Broadcom to acquire certain assets and assume certain liabilities of, and obtain non-exclusive licenses relating to, Broadcom’s existing Wi-Fi, Bluetooth and GPS/GNSS products and business in the IoT market, or Broadcom Business Acquisition, for an aggregate consideration of $250 million in cash which closed on July 23, 2020, or the Broadcom Business Acquisition Closing Date.  We also entered into certain transition agreements with Broadcom for a period of three years. We acquired these assets and assumed certain liabilities from Broadcom in order to obtain wireless connectivity technology which will enhance our current IoT business.

The acquisition has been accounted for using the purchase method of accounting in accordance with the business acquisition guidance. Under the purchase accounting method, the total estimated purchase consideration of the acquisition was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their relative fair values. The excess of the purchase consideration over the net tangible and identifiable intangible assets acquired and liabilities has been recorded as goodwill. Our estimate of the fair values of the acquired intangible assets at the Broadcom Business Acquisition Closing Date is preliminary and was based on established and accepted valuation techniques performed with the assistance of our third-party valuation specialists.

12


 

The following table summarizes the adjusted purchase price paid for the Broadcom Business Acquisition (in millions):

 

Cash

 

$

250.1

 

Adjustments to consideration transferred, net

 

 

1.5

 

Roadmap products - estimated cost of development

 

 

(25.0

)

 

 

$

226.6

 

 

 

 

 

 

We entered into a derivative and roadmap product agreement and an asset purchase agreement with Broadcom. The derivative and roadmap product agreement includes the purchase of derivative and roadmap product development services to be performed by Broadcom. We estimated the value of the development services to be approximately $25.0 million, accounted for it separate from the business combination, and included $10.0 million in prepaid expenses and other current assets and $15.0 million ($10.8 million after amortization as of December 26, 2020) in non-current other assets in our condensed consolidated balance sheets. The estimated value of the development services is amortizing over the period of time estimated to complete the development or approximately thirty months. The amortization of the estimated cost of development is included in research and development in our condensed consolidated statements of comprehensive income. In addition, under the terms of the asset purchase agreement we provided replacement equity compensation awards to the transferred employees and Broadcom agreed to make cash payments to transferred employees as incentive to accept employment offers from our company. We determined $3.5 million of value related to these arrangements should be included as consideration transferred, which was partially offset by $2.0 million of cash payments to transferred employees as a reduction of consideration transferred.

 

The following table summarizes the amounts recorded for the estimated fair values of the assets acquired and liabilities assumed as of the Broadcom Business Acquisition Closing Date (in millions):

 

Property and equipment

 

$

1.0

 

Acquired intangible assets

 

 

123.0

 

Total identifiable assets acquired

 

 

124.0

 

Liabilities assumed

 

 

(0.2

)

Goodwill

 

 

102.8

 

Net assets acquired

 

$

226.6

 

 

 

 

 

 

 

We estimated the fair value of the identified intangible assets using a discounted cash flow model for each of the underlying identified intangible assets.  These fair value measurements were based on significant inputs not observable in the market and thus represent a Level 3 measurement.  Key assumptions include the level and timing of expected future cash flows, conditions and demands specific to each intangible asset over its remaining useful life, and discount rates we believe to be consistent with the inherent risks associated with each type of asset, which is 2.2% for order backlog and 13.0% for the rest of the intangible assets.  The fair value of these intangible assets is primarily affected by the projected revenue, gross margins, operating expenses, the technology migration curve, customer ramp up period and the anticipated timing of the projected income associated with each intangible asset coupled with the discount rates used to derive their estimated present values.  We believe the level and timing of expected future cash flows appropriately reflects market participant assumptions.

The following table summarizes the preliminary estimate of the intangible assets as of the Broadcom Business Acquisition Closing Date (in millions):

 

 

 

Estimated Weighted Average Useful Lives in Years

 

 

Estimated Fair

Value

 

 

 

 

 

 

 

 

 

 

Developed technology

 

 

6.0

 

 

$

93.0

 

Customer contracts and related relationships

 

 

6.0

 

 

 

18.0

 

Order backlog

 

 

0.5

 

 

 

12.0

 

Estimated fair value of acquired intangibles

 

 

 

 

 

$

123.0

 

 

 

 

 

 

 

 

 

 

 

13


 

 

The value of goodwill reflects the anticipated synergies of the combined operations and workforce of the transferred Broadcom Business assets as of the Broadcom Business Acquisition Closing Date. As of December 26, 2020, all of the goodwill is expected to be deductible for income tax purposes.  

Prior to the Broadcom Business Acquisition, we did not have an existing relationship or transactions with Broadcom.  

The condensed consolidated financial statements include approximately $39.4 million of revenue from the Broadcom Business Acquisition from the Broadcom Business Acquisition Closing Date through December 26, 2020. It is impracticable to determine the effect on net income attributable to the Broadcom Business Acquisition as we had integrated a substantial portion of the Broadcom Business Acquisition into our ongoing operations during the quarter.

We determined it is impractical to include pro forma information given the difficulty in obtaining the historical financial information for the Broadcom Business Acquisition as the business was part of Broadcom and did not have discrete financial information prior to the acquisition. Inclusion of such information would require us to make estimates and assumptions regarding the acquired business historical financial results that we believe may ultimately prove inaccurate.

 

 

Divestiture

In December 2020, we completed the sale of limited audio technology intangible assets, received a fully-paid up perpetual license back from the buyer and, as an element of the transaction, licensed other audio technology intangible assets to the buyer under a fully-paid up perpetual license arrangement.  Under the asset purchase agreement and the intellectual property license agreement, we received $35.0 million in cash.  The gain on the sale of the audio technology assets was $34.2 million.

 

 

Investment

In December 2020, we invested $5.0 million in Eta Compute in exchange for preferred stock.  This investment provides us with a partnership which enables us to better address expanded industry opportunities for artificial intelligence applications.  The investment is accounted for under the cost method.

 

 

7. Acquired Intangibles and Goodwill

Acquired Intangibles

The following table summarizes the life, the gross carrying value and the related accumulated amortization of our acquired intangible assets (in millions):

 

 

 

 

 

 

 

December 2020

 

 

June 2020

 

 

 

Weighted Average

Life in Years

 

 

Gross Carrying

Value

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

Gross Carrying

Value

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

Audio and video

   technology

 

 

5.4

 

 

$

138.6

 

 

$

(87.7

)

 

$

50.9

 

 

$

138.6

 

 

$

(76.5

)

 

$

62.1

 

Customer relationships

 

 

4.2

 

 

 

125.5

 

 

 

(47.6

)

 

 

77.9

 

 

 

81.8

 

 

 

(61.4

)

 

 

20.4

 

Wireless connectivity technology

 

 

6.0

 

 

 

93.0

 

 

 

(6.5

)

 

 

86.5

 

 

 

 

 

 

 

 

 

 

Video interface technology

 

 

3.0

 

 

 

82.0

 

 

 

(11.4

)

 

 

70.6

 

 

 

 

 

 

 

 

 

 

Display driver technology

 

 

7.0

 

 

 

20.4

 

 

 

(16.0

)

 

 

4.4

 

 

 

164.0

 

 

 

(158.2

)

 

 

5.8

 

Backlog

 

 

0.5

 

 

 

12.0

 

 

 

(10.0

)

 

 

2.0

 

 

 

 

 

 

 

 

 

 

Licensed technology

   and other

 

 

4.1

 

 

 

13.0

 

 

 

(6.8

)

 

 

6.2

 

 

 

7.7

 

 

 

(5.5

)

 

 

2.2

 

Patents

 

 

8.0

 

 

 

4.4

 

 

 

(2.9

)

 

 

1.5

 

 

 

4.4

 

 

 

(2.6

)

 

 

1.8

 

Tradename

 

 

5.1

 

 

 

4.8

 

 

 

(1.2

)

 

 

3.6

 

 

 

1.8

 

 

 

(0.7

)

 

 

1.1

 

In process research and development

 

N/A

 

 

 

51.0

 

 

 

 

 

 

51.0

 

 

 

 

 

 

 

 

 

 

Acquired intangibles totals

 

 

5.1

 

 

$

544.7

 

 

$

(190.1

)

 

$

354.6

 

 

$

398.3

 

 

$

(304.9

)

 

$

93.4

 

 

The total amortization expense for the acquired intangible assets was $31.6 million and $11.1 million for the three months ended December 26, 2020 and December 28, 2019, respectively, and $57.0 million and $29.3 million for the six months ended December 26, 2020 and December 28, 2019, respectively. During the three months ended December 26, 2020 and December 28, 2019, $22.9 million and $8.2 million, respectively, and $41.6 million and $23.5 million for the six months ended December 26, 2020 and December 28, 2019, respectively, of amortization expense was included in our condensed consolidated statements of comprehensive income in cost of revenue; the remainder was included in acquired intangibles amortization.

14


 

 

The following table presents expected annual fiscal year aggregate amortization expense as of December 26, 2020 (in millions):

 

Remainder of 2021

 

$

53.1

 

2022

 

 

99.0

 

2023

 

 

86.1

 

2024

 

 

25.9

 

2025

 

 

19.0

 

Thereafter

 

 

20.5

 

To be determined

 

 

51.0

 

Future amortization

 

$

354.6

 

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired.  Changes in our goodwill balance for the six months ended December 26, 2020 were as follows (in millions):

 

Beginning balance

 

$

360.8

 

Acquisition activity

 

 

207.8

 

Ending balance

 

$

568.6

 

 

 

8. Leases

Our leases mainly include our worldwide office and research and development facilities which are all classified as operating leases. Certain leases include renewal options that are under our discretion. The leases expire at various dates through fiscal year 2029, some of which include options to extend the lease for up to 5 years. For the six months ended December 26, 2020, we recorded approximately $5.0 million of operating leases expense. Our short-term leases are immaterial and we do not have finance leases.

As of December 26, 2020, the components of leases and lease costs are as follows (in millions):

 

 

 

December

 

 

June

 

 

 

2020

 

 

2020

 

Operating lease right-of-use assets

 

$

37.2

 

 

$

21.0

 

Operating lease liabilities

 

$

10.5

 

 

$

6.5

 

Operating lease liabilities, long-term

 

 

28.9

 

 

 

14.6

 

Total operating lease liabilities

 

$

39.4

 

 

$

21.1

 

 

Supplemental cash flow information related to leases is as follows (in millions):

 

 

 

Six Months Ended

 

 

 

December

 

 

 

2020

 

 

2019

 

Cash paid for operating leases included in operating cash flows

 

$

3.9

 

 

$

4.7

 

Supplemental non-cash information related to lease liabilities arising from obtaining right-of-use assets

 

 

21.7

 

 

1.5

 

15


 

 

As of December 26, 2020, the weighted average remaining lease term is 6.2 years, and the weighted average discount rate is 4.02%.  

Future minimum lease payments for the operating lease liabilities are as follows (in millions):

 

 

 

Operating

 

 

 

Lease

 

Fiscal Year

 

Payments

 

Remainder of 2021

 

$

6.0

 

2022

 

 

10.2

 

2023

 

 

6.3

 

2024

 

 

4.8

 

2025

 

 

3.9

 

Thereafter

 

 

13.2

 

Total future minimum operating lease payments

 

 

44.4

 

Less: interest

 

 

(5.0

)

Total lease liabilities

 

$

39.4

 

 

 

9. Other Accrued Liabilities and Other Long-Term Liabilities

Other accrued liabilities consisted of the following (in millions):

 

 

 

December

 

 

June

 

 

 

2020

 

 

2020

 

Customer obligations

 

$

34.6

 

 

$

29.0

 

Inventory obligations

 

 

26.9

 

 

 

27.9

 

Operating lease liabilities

 

 

10.5

 

 

 

6.5

 

Other

 

 

25.4

 

 

 

27.6

 

 

 

$

97.4

 

 

$

91.0

 

 

Other long-term liabilities consisted of the following (in millions):

 

 

 

December

 

 

June

 

 

 

2020

 

 

2020

 

Operating lease liabilities, long-term

 

$

28.9

 

 

$

14.6

 

Deferred tax liability

 

 

23.9

 

 

 

 

Income taxes payable, long-term

 

 

16.0

 

 

 

16.4

 

Other

 

 

13.8

 

 

 

13.0

 

 

 

$

82.6

 

 

$

44.0

 

 

 

 

 

 

 

 

 

 

 

 

10. Indemnifications and Contingencies

Indemnifications

In connection with certain agreements, we are obligated to indemnify the counterparty against third party claims alleging infringement of certain intellectual property rights by us. We have also entered into indemnification agreements with our officers and directors. Maximum potential future payments under these agreements cannot be estimated because these agreements generally do not have a maximum stated liability. However, historical costs related to these indemnification provisions have not been significant. We have not recorded any liability in our condensed consolidated financial statements for such indemnification obligations.

Contingencies

We have in the past, and may in the future, receive notices from third parties that claim our products infringe their intellectual property rights. We cannot be certain that our technologies and products do not and will not infringe issued patents or other proprietary rights of third parties.

16


 

Any infringement claims, with or without merit, could result in significant litigation costs and diversion of management and financial resources, including the payment of damages, which could have a material adverse effect on our business, financial condition, and results of operations.

 

 

11. Debt

Convertible Debt

Our convertible debt consists of an original $525 million aggregate principal amount of 0.50% convertible senior notes due 2022, or the Notes, which were issued in a private placement transaction. The net proceeds from the Notes, after deducting discounts, were $514.5 million.

The Notes bear interest at a rate of 0.50% per year, which is payable semi-annually in arrears, on June 15 and December 15 of each year. The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any our liabilities that are not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

The Notes mature on June 15, 2022, or the Maturity Date, unless earlier repurchased, redeemed or converted.

Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at their option at any time prior to the close of business on the business day immediately preceding March 15, 2022 under certain defined circumstances, including (1) if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter or (2) during the 5 business day period after any 5 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day.

On or after March 15, 2022 until the close of business on the business day immediately preceding the Maturity Date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at the option of the holder. Upon conversion, we will pay or deliver, at our election, shares of common stock, cash, or a combination of cash and shares of common stock.

The conversion rate for the Notes is initially 13.6947 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $73.02 per share of common stock). The conversion rate is subject to adjustment in certain circumstances.

Upon the occurrence of a fundamental change (as defined in the Notes indenture), holders of the Notes may require us to repurchase for cash all or a portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the fundamental change repurchase date.

Commencing June 20, 2020, we may redeem for cash all or any portion of the Notes, at our option, if the last reported sale price of our common stock, as determined by us, has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest up to, but excluding, the redemption date. This criteria has not been met as of December 26, 2020. Our policy is to settle the principal amount of our Notes with cash upon conversion or redemption.

As of the issuance date of the Notes, we recorded $82.1 million of the principal amount to equity, representing the debt discount for the difference between our estimated nonconvertible debt borrowing rate of 4.39% and the coupon rate of the Notes of 0.50% using a five-year life, which coincides with the term of the Notes. In addition, we allocated the total of $11.1 million of debt issuance costs, consisting of the initial purchaser’s discount of $10.5 million and legal, accounting, and printing costs of $579,000, pro rata, to the equity and debt components of the Notes, or $1.9 million and $9.2 million, respectively. The debt discount and the debt issuance costs allocated to the debt component of the Notes are amortized as interest expense using the effective interest method over five years.

17


 

The contractual interest expense and amortization of discount on the Notes for the six months ended December 26, 2020, were as follows (in millions):

 

 

 

Six Months Ended

 

 

 

December

 

 

 

2020

 

Interest expense

 

$

1.3

 

Amortization of discount and debt issuance costs

 

 

9.5

 

Total interest

 

$

10.8

 

 

The unamortized amounts of the debt issuance costs and discount associated with the Notes as of December 26, 2020 were $2.9 million and $26.0 million, respectively.

 

Revolving Credit Facility

In February 2020, we entered into the First Amendment to Amended and Restated Credit Agreement, or the Amendment, with the lenders that are party thereto, or the Lenders, and Wells Fargo Bank, National Association, as administrative agent for the Lenders, related to that certain Amended and Restated Credit Agreement, dated September 27, 2017, or the Credit Agreement. Pursuant to the Amendment, the Credit Agreement was amended to, among other things, (i) modify the definition of Consolidated EBITDA (as defined in the Credit Agreement) to increase the maximum limit on the add back of certain restructuring and integration cost and expenses to 30% from 15% of Consolidated EBITDA, (ii) modify the negative covenant for Consolidated Total Leverage Ratio (as defined in the Credit Agreement) at the end of any fiscal quarter to 4.75:1.00 from 3.50:1.00, and for any four quarter period following a Material Acquisition (as defined in the Credit Agreement) to 5:00:1.00 from 3.75:1.00, (iii) modify the circumstances under which the maturity date of the Credit Agreement would be accelerated in advance of the maturity date of the Notes to eliminate the acceleration of the maturity date of the Credit Agreement if we meet certain specified leverage and liquidity covenants, (iv) add a minimum liquidity covenant for each two-week period beginning on the date that is 120 days prior to the maturity date of the Notes, (v) add certain technical amendments to address LIBOR transition matters, and  (vi) include or revise certain definitions and certain customary representation, warranties and acknowledgments.    

The Credit Agreement provides for a revolving credit facility in a principal amount of up to $200 million, which includes a $20 million sublimit for letters of credit and a $20 million sublimit for swingline loans. Under the terms of the Credit Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments in an aggregate principal amount of up to $100 million to the extent existing or new lenders agree to provide such increased or additional commitments, as applicable.  Future proceeds under the revolving credit facility are available for working capital and general corporate purposes. As of December 26, 2020, there was a $100.0 million balance outstanding under the revolving credit facility.  The weighted average annualized interest rate on these borrowings for the three months ended December 26, 2020 was 2.73%.

The revolving credit facility is required to be repaid in full on the earlier of (i) September 27, 2022, and (ii) the date 91 days prior to the Maturity Date of the Notes if the Notes have not been refinanced in full by such date, subject to certain exceptions. Debt issuance costs relating to the revolving credit facility of $2.3 million, included in non-current other assets on our consolidated balance sheet, are being amortized over 60 months.

Our obligations under the Credit Agreement are guaranteed by the material domestic subsidiaries of our company, subject to certain exceptions (such material subsidiaries, together with our company, collectively, the Credit Parties). The obligations of the Credit Parties under the Credit Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of the existing and future personal property of the Credit Parties, including, without limitation, 65% of the voting capital stock of certain of the Credit Parties’ direct foreign subsidiaries, subject to certain exceptions.

The revolving credit facility bears interest at our election of a Base Rate plus an Applicable Margin or LIBOR plus an Applicable Margin. Swingline loans bear interest at a Base Rate plus an Applicable Margin. The Base Rate is a floating rate that is the greater of the Prime Rate, the Federal Funds Rate plus 50 basis points, or LIBOR plus 100 basis points. The Applicable Margin is based on a sliding scale which ranges from 0.25 to 100 basis points for Base Rate loans and 100 basis points to 175 basis points for LIBOR loans. We are required to pay a commitment fee on any unused commitments under the Credit Agreement which is determined on a leverage-based sliding scale ranging from 0.175% to 0.25% per annum. Interest and fees are payable on a quarterly basis. The LIBOR index is expected to be discontinued at the end of 2021. Under our credit facility, when the LIBOR index is discontinued, we will switch to a comparable or successor rate as selected by us and the Administrative Agent, which may include the Secured Overnight Financing Rate, or SOFR.

18


 

Under the Credit Agreement, there are various restrictive covenants, including three financial covenants which limit the consolidated total leverage ratio, or leverage ratio, the consolidated interest coverage ratio, or interest coverage ratio, a restriction which places a limit on the amount of capital expenditures that may be made in any fiscal year, a restriction that permits up to $50 million per fiscal quarter of accounts receivable financings, and sets the Specified Leverage Ratio. The leverage ratio is the ratio of debt as of the measurement date to earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four consecutive quarters ending with the quarter of measurement. The current leverage ratio shall not exceed 4.75 to 1.00 provided that for the four fiscal quarters ending after the date of a material acquisition, such maximum leverage ratio shall be adjusted to 5.0 to 1.00, and thereafter 4.75 to 1.0. The interest coverage ratio is EBITDA to interest expense for the four consecutive quarters ending with the quarter of measurement. The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the Credit Agreement. The Specified Leverage Ratio is the ratio used in determining, among other things, whether we are permitted to make dividends and/or prepay certain indebtedness, at a fixed ratio of 2.25 to 1.00.  As of December 26, 2020, we remain in compliance with the restrictive covenants.

 

12. Share-Based Compensation

Share-based compensation and the related tax benefit recognized in our condensed consolidated statements of income were as follows (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December

 

 

December

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of revenue

 

$

1.0

 

 

$

0.6

 

 

$

1.8

 

 

$

1.3

 

Research and development

 

 

9.5

 

 

 

8.1

 

 

 

20.5

 

 

 

15.6

 

Selling, general, and administrative

 

 

12.9

 

 

 

6.4

 

 

 

22.6

 

 

 

9.4

 

Total

 

$

23.4

 

 

$

15.1

 

 

$

44.9

 

 

$

26.3

 

Income tax benefit on share-based compensation

 

$

(5.4

)

 

$

(1.8

)

 

$

(9.0

)

 

$

(2.7

)

 

Included in the preceding table is share-based compensation for our cash-settled phantom stock units, which we granted in October 2019 (see Phantom Stock Units below) (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December

 

 

December

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of revenue

 

$

0.1

 

 

$

0.1

 

 

$

0.2

 

 

$

0.1

 

Research and development

 

 

3.4

 

 

 

2.5

 

 

 

9.2

 

 

 

2.5

 

Selling, general, and administrative

 

 

0.7

 

 

 

0.4

 

 

 

2.0

 

 

 

0.4

 

Total

 

$

4.2

 

 

$

3.0

 

 

$

11.4

 

 

$

3.0

 

 

Historically, we have issued new shares in connection with our equity-settled share-based compensation plans, however, treasury shares are also available for issuance. Any additional shares repurchased under our common stock repurchase program will be available for issuance under our share-based compensation plans.

Share-Based Compensation Plans

On October 29, 2019, our stockholders approved: (i) our 2019 Equity and Incentive Compensation Plan, or the 2019 Incentive Plan, to replace our Amended and Restated 2010 Incentive Compensation Plan, or 2010 Incentive Plan, and (ii) our 2019 Employee Stock Purchase Plan, or the 2019 ESPP, to replace our Amended and Restated 2010 Employee Stock Purchase Plan. Upon approval of the 2019 Incentive Plan, new awards are no longer issued under the replaced share-based compensation plan. Awards outstanding at October 29, 2019 under our prior share-based compensation plans were not impacted by the approval of the 2019 Incentive Plan and continue to remain outstanding by their terms under the applicable share-based compensation plan. Shares underlying certain share-based awards forfeited under the 2010 Incentive Plan subsequent to the approval of the 2019 Incentive Plan automatically transfer to and become available for award issuance from the 2019 Incentive Plan.

The 2019 Incentive Plan authorizes our Board of Directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, RSUs, cash incentive awards, performance shares, PSUs, and other stock-based awards.  The cumulative number of shares approved by stockholders under the 2019 Incentive Plan was 2,590,000 as of October 27, 2020. The

19


 

2019 ESPP authorizes the Company to provide eligible employees with an opportunity to acquire an equity interest in the Company through the purchase of stock at a discount, with an initial authorization of 1,500,000 shares.

Effective August 19, 2019, we adopted the 2019 Inducement Equity Plan. 650,000 shares of our common stock have been reserved for issuance under the 2019 Inducement Equity Plan, subject to adjustment for stock dividends, stock splits, or other changes in our common stock or capital structure. The 2019 Inducement Equity Plan is intended to comply with Rule 5635(c)(4) of the Nasdaq Stock Market Listing Rules, which provide an exception to the Nasdaq Stock Market Listing Rules’ on the shareholder approval requirement for the issuance of securities with regards to grants to employees of the Company or its subsidiaries as an inducement material to such individuals entering into employment with the Company or its subsidiaries. An individual was eligible to receive an award under the 2019 Inducement Equity Plan only if he or she was not previously an employee or director of our Company (or is returning to work after a bona-fide period of non-employment), and an award under the 2019 Inducement Equity Plan is a material inducement for him or her to accept employment with our Company. As a result of approval by our stockholders of our amended and restated 2019 Incentive Plan on October 27, 2020, 0 new awards will be granted under the 2019 Inducement Equity Plan.

Stock Options

Stock option activity was as follows:

 

 

 

Stock

 

 

Weighted

 

 

Aggregate

 

 

 

Option

 

 

Average

 

 

Intrinsic

 

 

 

Awards

 

 

Exercise

 

 

Value

 

 

 

Outstanding

 

 

Price

 

 

(in millions)

 

Outstanding as of June 2020

 

 

329,786

 

 

$

69.78

 

 

 

 

 

Exercised

 

 

(76,060

)

 

 

61.73

 

 

 

 

 

Expired

 

 

(53,561

)

 

 

75.48

 

 

 

 

 

Outstanding and Exercisable as of December 2020

 

 

200,165

 

 

 

71.31

 

 

$

3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 24, 2020 of $86.15 and excludes the impact of stock options that were not in-the-money.

Restricted Stock Units

RSU activity was as follows:

 

 

 

 

 

 

 

Aggregate

 

 

 

RSU

 

 

Intrinsic

 

 

 

Awards

 

 

Value

 

 

 

Outstanding

 

 

(in millions)

 

Balance as of June 2020

 

 

1,360,324

 

 

 

 

 

Granted

 

 

768,662

 

 

 

 

 

Delivered

 

 

(510,713

)

 

 

 

 

Forfeited

 

 

(152,363

)

 

 

 

 

Balance as of December 2020

 

 

1,465,910

 

 

$

126.3

 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 24, 2020 of $86.15.

Of the shares delivered, 151,595 shares valued at $11.8 million were withheld to meet statutory tax withholding requirements.

20


 

Market Stock Units

Our 2019 Incentive Plan and our Amended and Restated 2010 Incentive Compensation Plan provide for the grant of MSU awards to our employees, consultants, and directors, and our 2019 Inducement Equity Plan provides for the grant of MSU awards to certain of our employees. An MSU is a promise to deliver shares of our common stock at a future date based on the achievement of market-based performance requirements in accordance with the terms of the MSU grant agreement.

We have granted MSU awards to our executive officers and other management members under our Amended and Restated 2010 Incentive Compensation Plan, our 2019 Incentive Plan and our 2019 Inducement Equity Plan, which are designed to vest in three or four tranches with the target quantity for each tranche equal to one-third or one-fourth of the total MSU grant. The first tranche vests based on a one-year performance period; the second tranche vests based on a two-year performance period; the third tranche vests based on a three-year performance period; and the fourth tranche (in the case of four-year vesting) vests based on a four-year performance period.

For MSU awards granted in fiscal 2021, performance is measured based on our achievement of a specified level of total stockholder return, or TSR, relative to the TSRs of each company in the Russell 2000 Index. The potential payout ranges from 0% to 200% of the target grant quantity based on our TSR performance relative to the TSRs of each company in the Russell 2000 Index.  NaN payout will occur if our TSR performance falls below the 25th percentile of the TSRs of each company in the Russell 2000 Index, and a 200% payout will occur if our TSR performance exceeds the 75th percentile of the TSRs of each company in the Russell 2000 Index. Performance payouts between the 25th and 75th percentiles will be determined on a linear basis with performance at the 50th percentile equal to 100% of target.

For MSU awards granted in fiscal 2021, the first tranche and the second tranche can payout up to 200%, and the payout for the third tranche will be calculated based on the total target quantity for the entire grant multiplied by the payout factor, based on performance for the three-year performance period, less shares issued for the first tranche and the second tranche.

For outstanding MSU awards granted prior to fiscal 2021, performance is measured based on our achievement of a specified level of TSR relative to the TSR of the S&P Semiconductor Select Industry Index, or SPSISC Index. The potential payout ranges from 0% to 200% of the target grant quantity and is adjusted on a two-to-one ratio based on our TSR performance relative to SPSISC Index TSR.

For MSU awards granted prior to fiscal 2021 and vesting over three years, the payout for the first tranche and the second tranche will not exceed 100% and the payout for the third tranche will be calculated based on the total target quantity for the entire grant multiplied by the payout factor, based on performance for the three-year performance period, less shares issued for the first tranche and the second tranche. For MSUs vesting over four years, the payout for the first tranche, the second tranche and the third tranche will not exceed 100% and the payout for the fourth tranche will be calculated based on the total target quantity for the entire grant multiplied by the payout factor, based on performance for the four-year performance period, less shares issued for the first tranche, the second tranche and the third tranche.

Delivery of shares earned, if any, will take place on the dates provided in the applicable MSU grant agreement, assuming the grantee is still an employee, consultant, or director of our Company at the end of the applicable performance period. On the delivery date, we withhold shares to cover statutory tax withholding requirements and deliver a net quantity of shares to the employee, consultant, or director after such withholding. Until delivery of shares, the grantee has no rights as a stockholder with respect to any shares underlying the MSU award.

MSU activity was as follows:

 

 

 

 

 

 

 

Aggregate

 

 

 

MSU

 

 

Intrinsic

 

 

 

Awards

 

 

Value

 

 

 

Outstanding

 

 

(in millions)

 

Balance as of June 2020

 

 

391,532

 

 

 

 

 

Granted

 

 

101,009

 

 

 

 

 

Performance adjustment

 

 

77,534

 

 

 

 

 

Delivered

 

 

(208,275

)

 

 

 

 

Forfeited

 

 

(14,773

)

 

 

 

 

Balance as of December 2020

 

 

347,027

 

 

$

29.9

 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 24, 2020 of $86.15.  

21


 

We value MSUs using the Monte Carlo simulation model on the date of grant and amortize the compensation expense over the three- or four-year performance and service period on a ratable basis. The unrecognized share-based compensation cost of our outstanding MSUs was approximately $23.8 million as of December 26, 2020, which will be recognized over a weighted average period of approximately 1.5 years.

Performance Stock Units

Our 2019 Incentive Plan and our Amended and Restated 2010 Incentive Compensation Plan provide for the grant of PSU awards to our employees, consultants, and directors. A PSU is a promise to deliver shares of our common stock at a future date based on the achievement of performance-based requirements in accordance with the terms of the PSU grant agreement.

We have granted PSUs to our executive officers and other management members under our Amended and Restated 2010 Incentive Compensation Plan, our 2019 Incentive Plan and our 2019 Inducement Equity Plan, which are designed to vest in three tranches with the target quantity for each tranche equal to one-third of the total PSU grant. The grants have a specific one-year performance period and vesting occurs over three service periods with the final service period ending approximately three years from the grant date. Performance is measured based on the achievement of a specified level of certain performance criteria (for PSUs granted in fiscal 2021 it is based on a combination of our design win revenue, non-GAAP gross margin percentage and non-GAAP operating expenses and for the PSUs granted prior to fiscal 2021 it is based on non-GAAP earnings per share). The potential payout ranges from 0% to 200% of the target grant quantity and is adjusted on a linear basis with a payout triggering if our measurement results equals greater than 65% of the target with a maximum payout achieved at 135% of target.

Delivery of shares earned, if any, will take place on the dates provided in the applicable PSU grant agreement, assuming the grantee is still an employee, consultant, or director of our Company at the end of the applicable service period. On the delivery date, we withhold shares to cover statutory tax withholding requirements and deliver a net quantity of shares to the employee, consultant, or director after such withholding. Until delivery of shares, the grantee has no rights as a stockholder with respect to any shares underlying the PSU award.

PSU activity was as follows:

 

 

 

 

 

 

 

Aggregate

 

 

 

PSU

 

 

Intrinsic

 

 

 

Awards

 

 

Value

 

 

 

Outstanding

 

 

(in millions)

 

Balance as of June 2020

 

 

333,848

 

 

 

 

 

Awarded

 

 

174,231

 

 

 

 

 

Performance adjustment

 

 

84,111

 

 

 

 

 

Released

 

 

(201,835

)

 

 

 

 

Forfeited

 

 

(48,671

)

 

 

 

 

Balance as of December 2020

 

 

341,684

 

 

$

29.4

 

 

22


 

 

The aggregate intrinsic value was determined using the closing price of our common stock on December 24, 2020 of $86.15.

We value PSUs using the aggregate intrinsic value on the date of grant adjusted for estimated performance achievement during the performance period and amortize the compensation expense over the three-year service period on a ratable basis. The unrecognized share-based compensation cost of our outstanding PSUs was approximately $18.3 million as of December 26, 2020, which will be recognized over a weighted average period of approximately 1.6 years.

Phantom Stock Units

The 2019 Incentive Plan authorizes the grant of phantom stock units to non-employee directors, officers and employees. We initially granted phantom stock units in October 2019.  Phantom stock units are cash-settled and entitle the recipient to receive a cash payment equal to the value of a single share for each unit based on the average closing share price of our stock over the thirty calendar days prior to the vesting date. Grants of phantom stock units vest over three years, with an annual vesting date of October 31 each year subsequent to the grant date. We recognize compensation expense for phantom stock units on a straight-line basis for each tranche of each award based on the average closing price of our common stock over the thirty calendar days ended prior to each balance sheet date.  The outstanding phantom stock units had a fair value of $81.31 per unit at December 26, 2020 and our accrued liability for such units was $2.8 million.

Phantom stock activity was as follows:

 

 

 

 

 

 

 

 

 

Phantom

 

 

 

 

Stock Units

 

 

 

 

Outstanding

 

 

Balance as of June 2020

 

 

789,113

 

 

Released

 

 

(242,692

)

 

Forfeited

 

 

(100,709

)

 

Balance as of December 2020

 

 

445,712

 

 

The unrecognized share-based compensation cost of our outstanding phantom stock units was approximately $33.5 million as of December 26, 2020, which will be recognized over a weighted average period of approximately 1.9 years.

Employee Stock Purchase Plan

Shares purchased, weighted average purchase price, cash received, and the aggregate intrinsic value for employee stock purchase plan purchases during the six months ended December 26, 2020 were as follows (in millions, except for shares purchased and weighted average price):

 

Shares purchased

 

 

134,601

 

Weighted average purchase price

 

$

48.67

 

Cash received

 

$

6.6

 

Aggregate intrinsic value

 

$

4.6

 

 

13. Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security, or CARES, Act was enacted and signed into law. The CARES Act did not have a material impact on the income tax provision for the six months ended December 26, 2020.

We account for income taxes under the asset and liability method. The provision for income taxes recorded in interim periods is based on our estimate of the annual effective tax rate applied to year-to-date income before provision for income taxes, adjusted for discrete items required to be recognized in the period in which they are incurred.  In each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual tax rate changes, we make a cumulative adjustment in that quarter. Our quarterly tax provision and our quarterly estimate of the annual effective tax rate can be subject to volatility due to several factors, including our ability to accurately forecast annual income before provision for income taxes in each of the tax jurisdictions in which we operate.

23


 

The provision for income taxes of $2.4 million and $12.0 million for the three months ended December 26, 2020 and December 28, 2019, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months ended December 26, 2020 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes, non-deductible officer compensation, the impact of accounting for qualified stock options and global intangible low-taxed income, or GILTI, partially offset by the benefit of income taxed at lower rates, research credits and foreign tax credits. The effective tax rate for the three months ended December 28, 2019, diverged from the combined U.S. federal and state statutory tax rate, primarily because of foreign withholding taxes and GILTI partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates.

The provision for income taxes of $6.0 million and $7.1 million for the six months ended December 26, 2020 and December 28, 2019, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months ended December 26, 2020 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes, non-deductible officer compensation, the impact of accounting for qualified stock options and GILTI partially offset by the benefit of income taxed at lower rates, research credits and foreign tax credits. The effective tax rate for the six months ended December 28, 2019, diverged from the combined U.S. federal and state statutory tax rate, primarily because of withholding taxes and GILTI partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates.

The total liability for gross unrecognized tax benefits related to uncertain tax positions remained unchanged during the six months ended December 26, 2020, at $22.1 million, and was included in other long-term liabilities on our condensed consolidated balance sheets. If recognized, the total gross unrecognized tax benefits would reduce the effective tax rate on income from continuing operations. Accrued interest and penalties related to unrecognized tax benefits as of December 26, 2020 were $1.7 million; this balance decreased by $0.3 million compared to June 27, 2020, largely due to the expiration of the relevant statute of limitations. We classify interest and penalties as components of income tax expense. It is reasonably possible that the amount of the liability for unrecognized tax benefits may change within the next twelve months and an estimate of the range of possible changes includes an increase in our liability of up to $3.2 million.

Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.

Our major tax jurisdictions are the United States, Hong Kong SAR, Japan and the United Kingdom. From fiscal 2014 onward, we remain subject to examination by one or more of these jurisdictions.

 

 

14. Segment, Customers, and Geographic Information

We operate in 1 segment: the development, marketing, and sale of semiconductor products used in electronic devices and products. We generate our revenue from 3 broad product categories: the Internet of Things, or IoT, product market, the personal computing, or PC, product market, and the Mobile product market. We sell our products to original equipment manufacturers, or OEMs, and to contract manufacturers that provide manufacturing services to OEMs.

Net revenue within geographic areas based on our customers’ locations for the periods presented was as follows (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December

 

 

December

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

China

 

$

144.1

 

 

$

138.2

 

 

$

275.3

 

 

$

315.0

 

Taiwan

 

 

94.8

 

 

 

56.4

 

 

 

166.6

 

 

 

121.6

 

Japan

 

 

88.3

 

 

 

149.5

 

 

 

191.4

 

 

 

212.7

 

Other

 

 

22.0

 

 

 

20.5

 

 

 

38.0

 

 

 

37.0

 

South Korea

 

 

6.5

 

 

 

21.6

 

 

 

11.5

 

 

 

38.0

 

United States

 

 

1.9

 

 

 

2.1

 

 

 

3.2

 

 

 

3.9

 

 

 

$

357.6

 

 

$

388.3

 

 

$

686.0

 

 

$

728.2

 

 

24


 

 

Net revenue from our customers for each group of similar products was as follows (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December

 

 

December

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

IoT product applications

 

$

155.1

 

 

$

89.0

 

 

$

269.5

 

 

$

176.8

 

PC product applications

 

 

91.5

 

 

 

81.6

 

 

 

172.0

 

 

 

149.4

 

Mobile product applications

 

 

111.0

 

 

 

217.7

 

 

 

244.5

 

 

 

402.0

 

 

 

$

357.6

 

 

$

388.3

 

 

$

686.0

 

 

$

728.2

 

Net revenue from major customers as a percentage of total net revenue for the periods presented was as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December

 

 

December

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Customer A

 

18%

 

 

21%

 

 

20%

 

 

15%

 

Customer B

 

*

 

 

13%

 

 

11%

 

 

11%

 

Customer C

 

13%

 

 

*

 

 

11%

 

 

*

 

____________________

*Less than 10%

 

We extend credit based on evaluation of a customer’s financial condition, and we generally do not require collateral. Major customer accounts receivable as a percentage of total accounts receivable were as follows:

 

 

 

December

 

 

June

 

 

 

2020

 

 

2020

 

Customer A

 

17%

 

 

21%

 

Customer B

 

13%

 

 

18%

 

 

 

15. Comprehensive Income

Our comprehensive income generally consists of net income. We recognize foreign currency remeasurement adjustments and foreign currency transaction gains and losses in our condensed consolidated statements of income as the U.S. dollar is the functional currency of our foreign entities.

 

 

16. Restructuring Activities

During the first quarter of fiscal 2021, we initiated restructuring activities, which included severance costs for activities intended to gain synergies from our recent acquisitions.  The restructuring costs related to these activities were recorded to the restructuring costs line item within our condensed consolidated statements of comprehensive income, and are expected to be complete by the end of fiscal 2021. The restructuring liability activity for these restructuring activities during fiscal 2021 was as follows (in millions):

 

 

 

Employee Severance

 

 

 

and Benefits

 

Accruals

 

$

4.1

 

Cash payments

 

 

(3.7

)

Balance as of December 2020

 

$

0.4

 

 

25


 

 

During fiscal 2020, we initiated restructuring activities, some of which included severance costs which were for activities intended to further improve efficiencies in our operational activities to align our cost structure consistent with our revenue levels and severance costs related to employees who transitioned with the sale of our assets of our TDDI product line for LCD mobile displays. The restructuring costs related to these activities were recorded to the restructuring costs line item within our condensed consolidated statements of comprehensive income. Some of the activities relating to these restructurings are complete as of June 27, 2020. The remaining activities are expected to be complete by the end of fiscal 2021.  The restructuring liability activity for these restructuring activities during fiscal 2021 was as follows (in millions):

 

 

 

Employee Severance

 

 

 

and Benefits

 

Balance as of June 2020

 

$

6.1

 

Accruals

 

 

2.0

 

Cash payments

 

 

(7.4

)

Balance as of December 2020

 

$

0.7

 

 

26


 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements and Factors That May Affect Results

This Quarterly Report on Form 10-Q for the quarter ended December 26, 2020 (this “Report”) contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, including our expectations regarding the potential impacts on our business of the COVID-19 pandemic, and can be identified by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements may include words such as “expect,” “anticipate,” “intend,” “believe,” “estimate,” “plan,” “target,” “strategy,” “continue,” “may,” “will,” “should,” variations of such words, or other words and terms of similar meaning. All forward-looking statements reflect our best judgment and are based on several factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Such factors include, but are not limited to following: our dependence on our solutions for the mobile product applications market and the PC product applications market for a substantial portion of our revenue; risks related to the volatility of our net revenue from our solutions for mobile product applications; our dependence on one or more large customers; the risk that our business, results of operations and financial condition (including liquidity) and prospects may be materially and adversely affected by heath epidemics, including the COVID-19 pandemic; our exposure to industry downturns and cyclicality in our target markets; the risk that our product solutions for new markets will not be successful; our ability to maintain and build relationships with our customers; our dependence on third parties to maintain satisfactory manufacturing yields and deliverable schedule; and the risks as identified in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections of our Annual Report on Form 10-K for the fiscal year ended June 27, 2020, and other risks as identified from time to time in our SEC reports. Forward-looking statements are based on information available to us on the date hereof, and we do not have, and expressly disclaim, any obligation to publicly release any updates or any changes in our expectations, or any change in events, conditions, or circumstances on which any forward-looking statement is based. Our actual results and the timing of certain events could differ materially from the forward-looking statements. These forward-looking statements do not reflect the potential impact of any mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing.

Statements made in this Report, unless the context otherwise requires, include the use of the terms “us,” “we,” “our,” the “Company” and “Synaptics” to refer to Synaptics Incorporated and its consolidated subsidiaries.

Impact of COVID-19

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, which continues to rapidly spread broadly in the U.S. and globally. In response to the outbreak, governmental authorities implemented numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place orders, and business restrictions and shutdowns, resulting in rapidly changing market and economic conditions. In certain countries in which we operate governments took rapid and effective measures to stem the spread, while in other countries in which we operate governments were slow to react or have missed opportunities to effectively contain the spread. Although some of these restrictions and other containment measures have since been lifted or scaled back, ongoing surges of COVID-19 have resulted in the re-imposition of certain restrictions and containment measures and may lead to other restrictions being re-implemented in the future in response to efforts to reduce the rapid spread of COVID-19.

The health and wellbeing of our workforce is our highest priority.  Many of our employees are able to work from home to minimize the potential risk of spread of COVID-19 in our office environment.  For those employees that are comfortable returning to an office work environment, we implemented various return to work protocols, based on guidance from local and global health organizations, to monitor and assess the health of our employees, including temperature checks and risk assessments, and further require all employees that do work in the office to wear face coverings and social distance while in communal locations in the office.

While the severity and duration of business disruption to our customers and suppliers due to the COVID-19 pandemic remains uncertain, we expect that it will continue to weigh on our business and consolidated results of operations in the near term and may further impact our financial condition (including liquidity) in the future. The full extent of the impact of the COVID-19 pandemic to our business, operations and financial results will depend on numerous evolving factors that we may not be able to anticipate. While we have not incurred significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the full impact COVID-19 will have on our future results due to numerous uncertainties, including the effectiveness of recently approved vaccines against the virus and its mutations, timing and effectiveness of the broad deployment of vaccines to mitigate or stem the spread of the virus, severity of the disease, the duration of the current outbreak, the severity and duration of future surges of the outbreak, further containment actions that may be taken by governmental authorities, the impact to the businesses of our customers and suppliers and other factors.

We will continue to evaluate the nature and scope of the impact to our business, consolidated results of operations, and financial condition, and may take actions altering our business operations and managing our costs and liquidity that we deem necessary or

27


 

appropriate to respond to this fast moving and uncertain global health crisis and the resulting global economic consequences. We are optimistic that the recent changes in the United States to a more science-based, disciplined, and deliberate approach to addressing the virus and the ancillary effects of steps taken to slow the spread may temper the potential mid- to longer-term negative economic impact.

Overview

We are a leading worldwide developer and supplier of custom-designed human interface semiconductor product solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We currently generate revenue from the markets for smartphones, tablets, personal computer, or PC, products, primarily notebook computers, Internet of Things, or IoT, products which include smart devices with voice, speech and video solutions, wireless connectivity and other select electronic devices, including devices in automobiles, with our custom human interface solutions. The solutions we deliver either contain or consist of our touch-, display driver-, fingerprint authentication-based-, voice and speech-, wireless- or video-semiconductor solutions, which include our chip, and, as applicable, customer-specific firmware and software.

Many of our customers have manufacturing operations in China, and many of our OEM customers have established design centers in Asia. With our expanding global presence, including offices in China, Hong Kong, India, Japan, Korea, Poland, Switzerland, Taiwan, the United Kingdom, and the United States, we are well positioned to provide local sales, operational, and engineering support services to our existing customers, as well as potential new customers, on a global basis.

Our manufacturing operations are based on a variable cost model in which we outsource all of our production requirements and generally drop ship our products directly to our customers from our contract manufacturers’ facilities, eliminating the need for significant capital expenditures and allowing us to minimize our investment in inventories. This approach requires us to work closely with our contract manufacturers and semiconductor fabricators to ensure adequate production capacity to meet our forecasted volume requirements. We provide our contract manufacturers with six-month rolling forecasts and issue purchase orders based on our anticipated requirements for the next 90 days. However, we generally do not have long-term supply contracts with our contract manufacturers. We use third-party wafer manufacturers to supply wafers and third-party packaging manufacturers to package our proprietary ASICs. In certain cases, we rely on a single source or a limited number of suppliers to provide other key components of our products. Our cost of revenue includes all costs associated with the production of our products, including materials; logistics; amortization of intangibles related to acquired developed technology; backlog; supplier arrangements; manufacturing, assembly, and test costs paid to third-party manufacturers; and related overhead costs associated with our indirect manufacturing operations personnel. Additionally, we charge all warranty costs, losses on inventory purchase obligations, and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value, to cost of revenue.

Our gross margin generally reflects the combination of the added value we bring to our OEM customers’ products by meeting their custom design requirements and the impact of our ongoing cost-improvement programs. These cost-improvement programs include reducing materials and component costs and implementing design and process improvements. Our newly introduced products may have lower margins than our more mature products, which have realized greater benefits associated with our ongoing cost-improvement programs. As a result, new product introductions may initially negatively impact our gross margin.

Our research and development expenses include costs for supplies and materials related to product development, as well as the engineering costs incurred to design ASICs and human interface solutions for OEM customers prior to and after our OEMs’ commitment to incorporate those solutions into their products. In addition, we expense in-process research and development projects acquired as part of a business acquisition, which have not yet reached technological feasibility, and which have no foreseeable alternative future use. We continue to commit to the technological and design innovation required to maintain our position in our existing markets, and to adapt our existing technologies or develop new technologies for new markets.

Selling, general, and administrative expenses include expenses related to sales, marketing, and administrative personnel; internal sales and outside sales representatives’ commissions; market and usability research; outside legal, accounting, and consulting costs; and other marketing and sales activities.

Acquired intangibles amortization, included in operating expenses, consists primarily of amortization of customer relationship and tradenames intangible assets recognized under the purchase method for business combinations.

Restructuring costs primarily reflect severance and facilities consolidation costs related to the restructuring of our operations to reduce operating expenses. These headcount and facilities related costs were in cost of revenue, research and development, and selling, general and administrative expenses.

28


 

Gain on sale of audio technology assets includes the sale of certain intangible assets related to our audio business.  See below under “Divestitures”.

Interest and other expense, net, primarily reflects interest expense on our convertible notes and revolving line of credit as well as the amortization of debt issuance costs and discount on our convertible notes, partially offset by interest income earned on our cash, cash equivalents and short-term investments.

Equity investment loss includes amortization of intangible assets as well as our portion of the net loss reflected under the equity method of accounting in connection with our investment in OXi Technology Ltd.

Acquisitions

DisplayLink

On July 17, 2020, we entered into a definitive agreement to acquire all of the equity interests in DisplayLink Corporation, or DisplayLink, a leader in high-performance video compression technology. The acquisition closed on July 31, 2020. As of December 26, 2020, our preliminary purchase consideration was $442.8 million, subject to certain additional post-closing adjustments. The results of DisplayLink are included in our condensed consolidated financial statements for the period from August 1, 2020 through December 26, 2020.  For further discussion of the DisplayLink acquisition, see Note 6 included in the condensed consolidated financial statements contained elsewhere in this Report.

Broadcom

On July 2, 2020, we entered into definitive agreements with Broadcom to acquire certain assets and assume certain liabilities of, and obtain non-exclusive licenses relating to, Broadcom’s existing Wi-Fi, Bluetooth and GPS/GNSS products and business in the IoT market, or Broadcom Business Acquisition, for an aggregate consideration of $250 million in cash which closed on July 23, 2020.  We also entered into certain transition agreements with Broadcom for a period of three years. The results of the Broadcom Business Acquisition are included in our condensed consolidated financial statements for the period from July 24, 2020 through December 26, 2020.  For further discussion of the Broadcom Business Acquisition, see Note 6 included in the condensed consolidated financial statements contained elsewhere in this Report.

Divestitures

In December 2019, we entered into an asset purchase agreement with a third party to sell the assets of our LCD Touch Controller and Display Driver Integration, or TDDI, product line for LCD mobile displays. We retained our automotive TDDI product line and our discrete touch and discrete display driver product lines supporting LCD and OLED for the mobile market. The assets sold under the asset purchase agreement for cash consideration of $138.7 million and had a carrying value of approximately $33.6 million as of the closing date of the transaction in April 2020.  The gain on sale of this business component was $105.1 million.

In December 2020, we completed the sale of limited audio technology intangible assets, received a fully-paid up perpetual license back from the buyer and, as an element of the transaction licensed other audio technology intangible assets to the buyer under a fully-paid up perpetual license arrangement.  Under the asset purchase agreement and the intellectual property license agreement, we received $35.0 million in cash.  The gain on the sale of the audio technology assets was $34.2 million.

Investment

In December 2020, we invested $5.0 million in Eta Compute in exchange for preferred stock.  This investment provides us with a partnership which enables us to better address expanded industry opportunities for artificial intelligence applications.  The investment is accounted for under the cost method.

Critical Accounting Policies and Estimates

Business Combinations

We have applied significant estimates and judgments in order to determine the fair value of the identified assets acquired, liabilities assumed and goodwill recognized in connection with our business combinations to ensure the value of the assets and liabilities acquired are recognized at fair value as of the acquisition date. In measuring the fair value, we utilize valuation techniques consistent with the market approach, income approach, or cost approach.

29


 

The valuation of the identifiable assets and liabilities includes assumptions made in performing the valuation, such as projected revenue, weighted average cost of capital, discount rates, estimated useful lives, and other relevant assessments. These assessments can be significantly affected by our estimates, judgments, and assumptions.  If actual results are not consistent with our estimates, judgments, or assumptions, or if additional or new information arises in the future that affects our fair value estimates, then adjustments to our initial fair value estimates may have a material impact to our purchase accounting or our results of operations.

Other than the above item, there have been no significant changes in our critical accounting policies and estimates during the six months ended December 26, 2020, compared with our critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended June 27, 2020.

Results of Operations

Certain of the data used in our condensed consolidated statements of income for the periods indicated, together with comparative absolute and percentage changes in these amounts, were as follows (in millions, except percentages):

 

 

 

Three Months Ended December

 

 

Six Months Ended December

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

IoT product applications

 

$

155.1

 

 

$

89.0

 

 

$

66.1

 

 

 

74.3

%

 

$

269.5

 

 

$

176.8

 

 

$

92.7

 

 

 

52.4

%

PC product applications

 

 

91.5

 

 

 

81.6

 

 

 

9.9

 

 

 

12.1

%

 

 

172.0

 

 

 

149.4

 

 

 

22.6

 

 

 

15.1

%

Mobile product applications

 

 

111.0

 

 

 

217.7

 

 

 

(106.7

)

 

 

(49.0

%)

 

 

244.5

 

 

 

402.0

 

 

 

(157.5

)

 

 

(39.2

%)

Net revenue

 

 

357.6

 

 

 

388.3

 

 

 

(30.7

)

 

 

(7.9

%)

 

 

686.0

 

 

 

728.2

 

 

 

(42.2

)

 

 

(5.8

%)

Gross margin

 

 

150.4

 

 

 

159.3

 

 

 

(8.9

)

 

 

(5.6

%)

 

 

284.9

 

 

 

285.5

 

 

 

(0.6

)

 

 

(0.2

%)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

77.3

 

 

 

77.0

 

 

 

0.3

 

 

 

0.4

%

 

 

158.2

 

 

 

163.0

 

 

 

(4.8

)

 

 

(2.9

%)

Selling, general, and administrative

 

 

39.5

 

 

 

31.5

 

 

 

8.0

 

 

 

25.4

%

 

 

74.8

 

 

 

59.0

 

 

 

15.8

 

 

 

26.8

%

Acquired intangibles amortization

 

 

8.7

 

 

 

3.0

 

 

 

5.7

 

 

 

190.0

%

 

 

15.4

 

 

 

5.9

 

 

 

9.5

 

 

 

161.0

%

Restructuring costs

 

 

0.6

 

 

 

13.3

 

 

 

(12.7

)

 

 

(95.5

%)

 

 

6.2

 

 

 

19.9

 

 

 

(13.7

)

 

 

(68.8

%)

Gain on sale of audio technology assets

 

 

(34.2

)

 

 

 

 

 

(34.2

)

 

 

100.0

%

 

 

(34.2

)

 

 

 

 

 

(34.2

)

 

 

100.0

%

Operating income

 

 

58.5

 

 

 

34.5

 

 

 

24.0

 

 

 

69.6

%

 

 

64.5

 

 

 

37.7

 

 

 

26.8

 

 

 

71.1

%

Interest and other expense, net

 

 

(6.0

)

 

 

(2.3

)

 

 

(3.7

)

 

 

(160.9

%)

 

 

(10.7

)

 

 

(5.9

)

 

 

(4.8

)

 

 

(81.4

%)

Income before provision for income taxes

 

 

52.5

 

 

 

32.2

 

 

 

20.3

 

 

 

63.0

%

 

 

53.8

 

 

 

31.8

 

 

 

22.0

 

 

 

69.2

%

Provision for income taxes

 

 

2.4

 

 

 

12.0

 

 

 

(9.6

)

 

 

(80.0

%)

 

 

6.0

 

 

 

7.1

 

 

 

(1.1

)

 

 

(15.5

%)

Equity investment loss

 

 

(0.5

)

 

 

(0.4

)

 

 

(0.1

)

 

 

(25.0

%)

 

 

(1.0

)

 

 

(0.9

)

 

 

(0.1

)

 

 

(11.1

%)

Net income

 

$

49.6

 

 

$

19.8

 

 

$

29.8

 

 

 

150.5

%

 

$

46.8

 

 

$

23.8

 

 

$

23.0

 

 

 

96.6

%

 

30


 

 

 

Certain of the data used in our condensed consolidated statements of income presented here as a percentage of net revenue for the periods indicated were as follows:

 

 

 

Three Months Ended

 

 

Percentage

Point

 

 

Six Months Ended

 

 

Percentage Point

 

 

 

December

 

 

Increase/

 

 

December

 

 

Increase/

 

 

 

2020

 

 

2019

 

 

(Decrease)

 

 

2020

 

 

2019

 

 

(Decrease)

 

IoT product applications

 

 

43.4

%

 

 

22.9

%

 

 

20.5

%

 

 

39.3

%

 

 

24.3

%

 

 

15.0

%

PC product applications

 

 

25.6

%

 

 

21.0

%

 

 

4.6

%

 

 

25.1

%

 

 

20.5

%

 

 

4.6

%

Mobile product applications

 

 

31.0

%

 

 

56.1

%

 

 

(25.1

%)

 

 

35.6

%

 

 

55.2

%

 

 

(19.6

%)

Net revenue

 

 

100.0

%

 

 

100.0

%

 

 

0.0

%

 

 

100.0

%

 

 

100.0

%

 

 

0.0

%

Gross margin

 

 

42.1

%

 

 

41.0

%

 

 

1.1

%

 

 

41.5

%

 

 

39.2

%

 

 

2.3

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

21.6

%

 

 

19.8

%

 

 

1.8

%

 

 

23.1

%

 

 

22.4

%

 

 

0.7

%

Selling, general, and administrative

 

 

11.0

%

 

 

8.1

%

 

 

2.9

%

 

 

10.9

%

 

 

8.1

%

 

 

2.8

%

Acquired intangibles amortization

 

 

2.4

%

 

 

0.8

%

 

 

1.6

%

 

 

2.2

%

 

 

0.8

%

 

 

1.4

%

Restructuring costs

 

 

0.2

%

 

 

3.4

%

 

 

(3.2

%)

 

 

0.9

%

 

 

2.7

%

 

 

(1.8

%)

Gain on sale of audio technology assets

 

 

(9.6

%)

 

 

0.0

%

 

 

(9.6

%)

 

 

(5.0

%)

 

 

0.0

%

 

 

(5.0

%)

Operating income

 

 

16.4

%

 

 

8.9

%

 

 

7.5

%

 

 

9.4

%

 

 

5.2

%

 

 

4.2

%

Interest and other expense, net

 

 

(1.7

%)

 

 

(0.6

%)

 

 

(1.1

%)

 

 

(1.6

%)

 

 

(0.8

%)

 

 

(0.8

%)

Income before provision for income taxes

 

 

14.7

%

 

 

8.3

%

 

 

6.4

%

 

 

7.8

%

 

 

4.4

%

 

 

3.4

%

Provision for income taxes

 

 

0.7

%

 

 

3.1

%

 

 

(2.4

%)

 

 

0.9

%

 

 

1.0

%

 

 

(0.1

%)

Equity investment loss

 

 

(0.1

%)

 

 

(0.1

%)

 

 

0.0

%

 

 

(0.1

%)

 

 

(0.1

%)

 

 

0.0

%

Net income

 

 

13.9

%

 

 

5.1

%

 

 

8.8

%

 

 

6.8

%

 

 

3.3

%

 

 

3.5

%

 

Net Revenue

Net revenue was $357.6 million for the three months ended December 26, 2020, compared with $388.3 million for the three months ended December 28, 2019, a decrease of $30.7 million, or 7.9%. Of this net revenue, $155.1 million, or 43.4%, was from IoT product applications, and $91.5 million, or 25.6%, was from PC product applications, and $111.0 million, or 31.0%, was from Mobile product applications. The decrease in net revenue for the three months ended December 26, 2020 was primarily attributable to a decrease in net revenue from Mobile product applications, partially offset by an increase in net revenue from IoT product applications and PC product applications. Net revenue from Mobile product applications decreased as a result of a decline in units sold (which decreased 36%) as well as lower average selling prices due to product sales mix (which declined 20%) for Mobile product applications. The decline in unit sales in Mobile product applications was primarily due to the divestiture of our TDDI business in the fourth quarter of fiscal 2020. Net revenue from IoT product applications, which includes products from both acquisitions that closed in July 2020, increased as a result of higher average selling prices for IoT product applications due to our product sales mix (which increased 48%) and an increase in units sold (which increased 18%). Net revenue from PC product applications increased due to a growth in units sold (which increased 12%) for PC product applications.

Net revenue was $686.0 million for the six months ended December 26, 2020, compared with $728.2 million for the six months ended December 28, 2019, a decrease of $42.2 million, or 5.8%. Of this net revenue, $269.5 million, or 39.3%, was from IoT product applications, and $172.0 million, or 25.1%, was from PC product applications, and $244.5 million, or 35.6%, was from Mobile product applications. The decrease in net revenue for the three months ended December 26, 2020 was attributable to a decrease in net revenue from Mobile product applications, partially offset by an increase in net revenue from IoT product applications and PC product applications. Net revenue from Mobile product applications decreased as a result of a decline in units sold (which decreased 30%) as well as lower average selling prices (a decline of 13%) for Mobile product applications. The decline in unit sales in Mobile product applications was primarily due to the divestiture of our TDDI business in the fourth quarter of fiscal 2020. Net revenue from IoT product applications, which includes products from both acquisitions that closed in July 2020, increased as a result of higher average selling prices for IoT product applications due to our product sales mix (which increased 36%) and an increase in units sold (which increased 12%). Net revenue from PC product applications increased due to a growth in units sold (which increased 10%) for PC product applications as well as slightly higher average selling prices.

Gross Margin

Gross margin as a percentage of net revenue was 42.1%, or $150.4 million, for the three months ended December 26, 2020, compared with 41.0%, or $159.3 million, for the three months ended December 28, 2019. The 110 basis point increase in gross margin for the three months ended December 26, 2020, was primarily due to a favorable product mix and product cost reductions, partially

31


 

offset by a $20.5 million increase in amortization for amortizable intangibles primarily related to the acquisition of DisplayLink and the Broadcom Business Acquisition and $11.9 million of inventory fair value adjustments associated with the DisplayLink acquisition.

Gross margin as a percentage of net revenue was 41.5%, or $284.9 million, for the six months ended December 26, 2020, compared with 39.2%, or $285.5 million, for the six months ended December 28, 2019.  The 230 basis point increase in gross margin for the six months ended December 28, 2019, was primarily due to a favorable product mix and product cost reductions, partially offset by a $27.7 million increase in amortization for amortizable intangibles primarily related to the acquisition of DisplayLink and the Broadcom Business Acquisition and $21.7 million of inventory fair value adjustments associated with the DisplayLink acquisition

We continuously introduce new product solutions, that may have life cycles of less than one year.  Further, because we sell our technology solutions in designs that are generally unique or specific to an OEM customer’s application, gross margin varies on a product-by-product basis, making our cumulative gross margin a blend of our product specific designs.  As a fabless manufacturer, our gross margin percentage is generally not materially impacted by our shipment volume.  We charge losses on inventory purchase obligations and write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value (including warranty costs) to cost of revenue.

Operating Expenses

Research and Development Expenses. Research and development expenses remained flat at $77.3 million for the three months ended December 26, 2020, compared with $77.0 million for the three months ended December 28, 2019. A majority of expenses have declined from the three months ended December 28, 2019 to the three months ended December 26, 2020, as a result of a reduction in average headcount. However, the declines in other expenses have been offset by acquisition related product development services.

Research and development expenses decreased $4.8 million to $158.2 million for the six months ended December 26, 2020, compared with the six months ended December 28, 2019. The decrease in research and development expenses reflected a net $3.6 million decrease in personnel-related costs, which was due to a reduction in average headcount for the six months ended December 26, 2020 as compared to the six months ended December 28, 2019, as a result of restructuring activities to reduce operating costs, partially offset by increased headcount as a result of recent acquisitions; a $3.7 million decrease due to acquired in-process research and development recorded in the first quarter of fiscal 2020; a $2.0 million decrease in travel related costs; a $1.6 million decrease in software license and maintenance costs; and a $1.3 million decrease in facilities and infrastructure costs; partially offset by an increase of $3.5 million in project related costs and a $3.0 million increase in intellectual property amortization.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $8.0 million to $39.5 million for the three months ended December 26, 2020, compared with the three months ended December 28, 2019. The increase in selling, general, and administrative expenses primarily reflected a $6.5 million increase in stock based compensation costs which were incurred in connection with grants of awards primarily to new employees in fiscal 2020 and the first half of fiscal 2021, as well as a $1.4 million increase in legal and accounting fees related to recent acquisitions.  

Selling, general, and administrative expenses increased $15.8 million to $74.8 million for the six months ended December 26, 2020, compared with the six months ended December 28, 2019. The increase in selling, general, and administrative expenses primarily reflected a $13.2 million increase in stock based compensation costs which were incurred in connection with grants of awards primarily to new employees in fiscal 2020 and the first half of fiscal 2021, as well as a $1.1 million increase in foreign exchange losses.  

Acquired Intangibles Amortization. Acquired intangibles amortization reflects the amortization of intangibles acquired through acquisitions. For further discussion of acquired intangibles amortization, see Note 7 Acquired Intangibles and Goodwill included in the condensed consolidated financial statements contained elsewhere in this Report.

Restructuring Costs.  Restructuring costs of $6.2 million in the six months ended December 26, 2020 reflect severance costs for restructuring of our operations to reduce ongoing operating costs. Restructuring activities commenced in each of fiscal 2020 and the first half of fiscal 2021 and are all expected to be complete by the end of fiscal 2021. See Note 16 Restructuring Activities included in the condensed consolidated financial statements contained elsewhere in this Report.

Gain on sale of audio technology assets.  Gain on sale of audio technology assets includes the sale of certain intangible assets related to our audio business. See Note 6 Acquisitions, Divestiture and Investment included in the condensed consolidated financial statements contained elsewhere in this Report.

Interest and Other Expense, Net. Interest and other expense, net primarily includes the amortization of debt discount and issuance costs, as well as interest on our debt, partially offset by interest income earned on our cash, cash equivalents and short-term investments. Interest and other expense, net increased $3.7 million to $6.0 million for the three months ended December 26, 2020, as compared to $2.3 million for the three months ended December 28, 2019.  The increase in interest and other expense, net is primarily

32


 

due to a decrease in interest income as a result of lower cash balances and interest rates and higher interest expense on our debt due to borrowings under our revolving line of credit. Interest and other expense, net increased $4.8 million to $10.7 million for the six months ended December 26, 2020, as compared to $5.9 million for the six months ended December 28, 2019. The increase in interest and other expense, net is primarily due to a decrease in interest income as a result of lower cash balances and interest rates and higher interest expense on our debt due to borrowings under our revolving line of credit.

Provision for Income Taxes On March 27, 2020, the Coronavirus Aid, Relief and Economic Security, or CARES, Act was enacted and signed into law. The CARES Act did not have a material impact on the income tax provision for the three and six months ended December 26, 2020.

We account for income taxes under the asset and liability method. The provision for income taxes recorded in interim periods is based on our estimate of the annual effective tax rate applied to year-to-date income before provision for income taxes, adjusted for discrete items required to be recognized in the period in which they are incurred.  In each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual tax rate changes, we make a cumulative adjustment in that quarter. Our quarterly tax provision and our quarterly estimate of the annual effective tax rate can be subject to volatility due to several factors, including our ability to accurately forecast annual income before provision for income taxes in each of the tax jurisdictions in which we operate.

The provision for income taxes of $2.4 million and $12.0 million for the three months ended December 26, 2020 and December 28, 2019, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months ended December 26, 2020 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes, non-deductible officer compensation, the impact of accounting for qualified stock options and GILTI, partially offset by the benefit of income taxed at lower rates, research credits and foreign tax credits. The effective tax rate for the three months ended December 28, 2019, diverged from the combined U.S. federal and state statutory tax rate, primarily because of foreign withholding taxes and GILTI partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates.

The provision for income taxes of $6.0 million and $7.1 million for the six months ended December 26, 2020 and December 28, 2019, respectively, represented estimated federal, foreign, and state income taxes. The effective tax rate for the three months ended December 26, 2020 diverged from the combined U.S. federal and state statutory tax rate primarily because of foreign withholding taxes, non-deductible officer compensation, the impact of accounting for qualified stock options and GILTI, partially offset by the benefit of income taxed at lower rates, research credits and foreign tax credits. The effective tax rate for the six months ended December 28, 2019, diverged from the combined U.S. federal and state statutory tax rate, primarily because of foreign withholding taxes and GILTI partially offset by the benefit of research credits, foreign tax credits and income taxed at lower tax rates.

Liquidity and Capital Resources

Our cash and cash equivalents were $309.9 million as of December 26, 2020, compared with $763.4 million as of June 27, 2020, representing a decrease of $453.5 million. The decrease primarily reflected $623.0 million used for the acquisition of businesses, net of cash and cash equivalents acquired, $25.8 million used for payroll taxes for restricted stock units, market stock units and performance stock units, and $12.2 million used for purchases of property and equipment, partially offset by $88.0 million of proceeds from maturities of investments, $77.9 million of net cash provided by operating activities, $34.2 million of proceeds from sale of audio technology assets and $11.2 of proceeds from issuance of shares. At this time, we consider earnings of our foreign subsidiaries indefinitely invested overseas and have made no provision for income or withholding taxes, other than the one-time transition tax incurred as part of the Tax Cuts and Jobs Act, that may result from a future repatriation of those earnings. As of December 26, 2020, $198.4 million of cash, cash equivalents and short-term investments was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we would be required to accrue and pay foreign withholding taxes to repatriate certain of these funds.

Cash Flows from Operating Activities. Operating activities during the six months ended December 26, 2020 generated $77.9 million compared with $120.0 million net cash generated during the six months ended December 28, 2019. For the six months ended December 26, 2020, the primary operating activities were adjustments for non-cash charges of $75.2 million and a net change in operating assets and liabilities of $44.1 million. The net change in operating assets and liabilities was primarily attributable to a $46.9 million increase in accounts receivable, net, a $24.6 million decrease in accrued compensation, $15.3 million decrease in income taxes payable and a $11.9 million decrease in other accrued liabilities, partially offset by a $62.0 million decrease in inventories. From June 27, 2020 to December 26, 2020, our days sales outstanding remained flat at 63 days. Our annual inventory turns increased from six to nine over the same time period.

Cash Flows from Investing Activities. Cash used in investing activities during the six months ended December 26, 2020 primarily consisted of $623.0 million used for the acquisition of businesses and $12.2 million for purchases of property and equipment, partially offset by $88.0 million in proceeds from maturities of investments and $34.2 million of proceeds from sale of audio technology assets.  

33


 

Cash Flows from Financing Activities. Net cash used in financing activities for the six months ended December 26, 2020 was $14.6 million compared with $12.2 million for the six months ended December 28, 2019. Net cash used in financing activities for the six months ended December 26, 2020 consisted of $25.8 million used for payroll taxes on RSUs, MSUs and PSUs, partially offset by $11.2 of proceeds from issuance of shares.

Common Stock Repurchase Program. As of December 26, 2020, our board has cumulatively authorized $1.4 billion for our common stock repurchase program, which will expire in July 2021. The program authorizes us to purchase our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors. The number of shares purchased and the timing of purchases are based on the level of our cash balances, general business and market conditions, and other factors. Common stock purchased under this program is held as treasury stock. From April 2005 through December 26, 2020, we purchased 31,749,195 shares of our common stock in the open market for an aggregate cost of $1.2 billion. During the three months ended December 26, 2020, we did not repurchase any shares of our common stock. As of December 26, 2020, the remaining available authorization under our common stock repurchase program was $177.4 million.

Convertible Debt

On June 20, 2017, we entered into a purchase agreement, or the Purchase Agreement, with Wells Fargo Securities, LLC, as representative of the initial purchasers named therein, collectively, the Initial Purchasers, pursuant to which we agreed to issue and sell, and the Initial Purchasers agreed to purchase, $500 million aggregate principal amount of our 0.50% convertible senior notes due 2022, or the Notes, in a private placement transaction. Pursuant to the Purchase Agreement, we also granted the Initial Purchasers a 30-day option to purchase up to an additional $25 million aggregate principal amount of Notes, which was exercised in full on June 21, 2017. The net proceeds, after deducting the Initial Purchasers’ discounts, were $514.5 million, which included proceeds from the Initial Purchasers’ exercise of their option to purchase additional Notes. We received the net proceeds on June 26, 2017, which we used to repurchase shares of our common stock, retire our outstanding bank debt, and provide additional cash resources to fund the acquisition of Conexant Systems, LLC and the assets of Marvell Technology Group, Ltd.’s multimedia solutions business.

The Notes bear interest at a rate of 0.50% per year. Interest has accrued since June 26, 2017 and is payable semi-annually in arrears, on June 15 and December 15 of each year, beginning on December 15, 2017. The Notes are senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any our liabilities that are not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.

The Notes mature on June 15, 2022, or the Maturity Date, unless earlier repurchased, redeemed or converted.

Holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at their option at any time prior to the close of business on the business day immediately preceding March 15, 2022 under certain defined circumstances, including (1) if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter or (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day.

On or after March 15, 2022 until the close of business on the business day immediately preceding the Maturity Date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amounts, at the option of the holder. Upon conversion, we will pay or deliver, at our election, shares of common stock, cash, or a combination of cash and shares of common stock.

The conversion rate for the Notes is initially 13.6947 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $73.02 per share of common stock). The conversion rate is subject to adjustment in certain circumstances.

Upon the occurrence of a fundamental change (as defined in the Notes indenture), holders of the Notes may require us to repurchase for cash all or a portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest up to, but excluding, the fundamental change repurchase date.

Commencing June 20, 2020, we may redeem for cash all or any portion of the Notes, at our option, if the last reported sale price of our common stock, as determined by us, has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal

34


 

to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest up to, but excluding, the redemption date. Our policy is to settle the principal amount of our Notes with cash upon conversion or redemption.

Bank Credit Facility. We have a $200.0 million revolving credit facility, pursuant to that certain Amended and Restated Credit Agreement, dated September 27, 2017, or the Credit Agreement, which includes a $20 million sublimit for letters of credit and a $20 million sublimit for swingline loans. Under the terms of the Credit Agreement, we may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments in an aggregate principal amount of up to $100 million to the extent existing or new lenders agree to provide such increased or additional commitments, as applicable. Proceeds under the revolving credit facility are available for working capital and general corporate purposes.

In February 2020, we entered into the First Amendment to the Amended and Restated Credit Agreement, or the Amendment, with the lenders that are party thereto, or the Lenders, and Wells Fargo Bank, National Association, as administrative agent for the Lenders. Pursuant to the Amendment, the Credit Agreement was amended to, among other things, (i) modify the definition of Consolidated EBITDA (as defined in the Credit Agreement) to increase the maximum limit on the add back of certain restructuring and integration cost and expenses to 30% from 15% of Consolidated EBITDA, (ii) modify the negative covenant for Consolidated Total Leverage Ratio (as defined in the Credit Agreement) at the end of any fiscal quarter to 4.75:1.00 from 3.50:1.00, and for any four quarter period following a Material Acquisition (as defined in the Credit Agreement) to 5:00:1.00 from 3.75:1.00, (iii) modify the circumstances under which the maturity date of the Credit Agreement would be accelerated in advance of the maturity date of the Notes to eliminate the acceleration of the maturity date of the Credit Agreement if we meet certain specified leverage and liquidity covenants, (iv) add a minimum liquidity covenant for each two-week period beginning on the date that is 120 days prior to the maturity date of the Company’s existing convertible senior notes, (v) add certain technical amendments to address LIBOR transition matters, and (vi) include or revise certain definitions and certain customary representation, warranties and acknowledgments. As of December 26, 2020, there was $100.0 million balance outstanding under the revolving credit facility. The weighted average annualized interest rate on these borrowings for the three months ended December 26, 2020 was 2.73%.

The revolving credit facility is required to be repaid in full on the earlier of (i) September 27, 2022, and (ii) the date 91 days prior to the Maturity Date of the Notes if the Notes have not been refinanced in full by such date, subject to certain exceptions based on specific covenant calculations. Debt issuance costs of $2.3 million relating to the revolving credit facility will be amortized over 60 months

Our obligations under the Credit Agreement are guaranteed by the material domestic subsidiaries of our Company, subject to certain exceptions (such material subsidiaries, together with our Company, collectively, the Credit Parties). The obligations of the Credit Parties under the Credit Agreement and the other loan documents delivered in connection therewith are secured by a first priority security interest in substantially all of the existing and future personal property of the Credit Parties, including, without limitation, 65% of the voting capital stock of certain of the Credit Parties’ direct foreign subsidiaries, subject to certain exceptions.

The revolving credit facility bears interest at our election of a Base Rate plus an Applicable Margin or LIBOR plus an Applicable Margin. Swingline loans bear interest at a Base Rate plus an Applicable Margin. The Base Rate is a floating rate that is the greater of the Prime Rate, the Federal Funds Rate plus 50 basis points, or LIBOR plus 100 basis points. The Applicable Margin is based on a sliding scale which ranges from 0.25 to 100 basis points for Base Rate loans and 100 basis points to 175 basis points for LIBOR loans. We are required to pay a commitment fee on any unused commitments under the Credit Agreement which is determined on a leverage-based sliding scale ranging from 0.175% to 0.25% per annum. Interest and fees are payable on a quarterly basis. The LIBOR index is expected to be discontinued at the end of 2021. Under our credit facility, when the LIBOR index is discontinued, we will switch to a comparable or successor rate as selected by the Administrative Agent and the Company, which may include the Secured Overnight Financing Rate, or SOFR.

Under the Credit Agreement, there are various restrictive covenants, including three financial covenants which limit the consolidated total leverage ratio, or leverage ratio, the consolidated interest coverage ratio, or interest coverage ratio, a restriction which places a limit on the amount of capital expenditures that may be made in any fiscal year, a restriction that permits up to $50 million per fiscal quarter of accounts receivable financings, and sets the Specified Leverage Ratio. The leverage ratio is the ratio of debt as of the measurement date to earnings before interest, taxes, depreciation and amortization, or EBITDA, for the four consecutive quarters ending with the quarter of measurement. The current leverage ratio shall not exceed 4.75 to 1.00 provided that for the four fiscal quarters ending after the date of a material acquisition, such maximum leverage ratio shall be adjusted to 5.0 to 1.00, and thereafter 4.75 to 1.0. The interest coverage ratio is EBITDA to interest expense for the four consecutive quarters ending with the quarter of measurement. The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the Credit Agreement. The Specified Leverage Ratio is the ratio used in determining, among other things, whether we are permitted to make dividends and/or prepay certain indebtedness, at a fixed ratio of 2.25 to 1.00.

35


 

$100 Million Shelf Registration. We have registered an aggregate of $100.0 million of common stock and preferred stock for issuance in connection with acquisitions, which shares will generally be freely tradeable after their issuance under the Securities Act unless held by an affiliate of the Company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144 of the Securities Act.

Liquidity and Capital Resources. Although consequences of the COVID-19 pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future, we believe our existing cash and cash equivalents, anticipated cash flows from operating activities, and available credit under our revolving credit facility will be sufficient to meet our working capital and other cash requirements, including the DisplayLink acquisition, the Broadcom Business Acquisition, and our debt service obligations, for at least the next 12 months. On April 2, 2020, the Company borrowed $100 million under the Credit Agreement in order to increase its cash position and preserve financial flexibility out of an abundance of caution as a result of the ongoing uncertainty and volatility in the global markets driven by the COVID-19 pandemic. Our future capital requirements will depend on many factors, including our revenue, the effectiveness of recently approved vaccines including the deployment of those vaccines to help reduce the length, duration and severity of the COVID-19 pandemic, the timing and extent of spending to support product development efforts, costs associated with restructuring activities net of projected savings from those activities, costs related to protecting our intellectual property, the expansion of sales and marketing activities, timing of introduction of new products and enhancements to existing products, costs to ensure access to adequate manufacturing, costs of maintaining sufficient space for our workforce, the continuing market acceptance of our product solutions, our common stock repurchase program, and the amount and timing of our investments in, or acquisitions of, other technologies or companies. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to fund our future long-term working capital needs, take advantage of business opportunities or to respond to competitive pressures could be limited or severely constrained.

Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not currently anticipate the need to remit undistributed earnings of our foreign subsidiaries to meet our working capital and other cash requirements, but if we did remit such earnings, we may be required to accrue and pay certain state and foreign taxes to repatriate these funds, which would adversely impact our financial position and results of operations.

Contractual Obligations and Commercial Commitments

Our material contractual obligations and commercial commitments as of December 26, 2020 were as follows (in millions):

 

 

 

Remaining

in Fiscal

Year 2021

 

 

Fiscal

Year 2022

 

 

Fiscal

Year 2023

 

 

Fiscal

Year 2024

 

 

Fiscal

Year 2025

 

 

Thereafter

 

 

Total

 

Long-term debt (1)

 

$

2.6

 

 

$

627.7

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

630.3

 

Leases

 

 

6.0

 

 

 

10.2

 

 

 

6.3

 

 

 

4.8

 

 

 

3.9

 

 

 

13.2

 

 

 

44.4

 

Purchase obligations and

   other commitments (2)

 

 

34.6

 

 

 

8.1

 

 

 

8.8

 

 

 

1.4

 

 

 

 

 

 

 

 

 

52.9

 

Transition tax payable (3)

 

 

 

 

 

0.9

 

 

 

1.8

 

 

 

2.4

 

 

 

3.0

 

 

 

 

 

 

8.1

 

Total

 

$

43.2

 

 

$

646.9

 

 

$

16.9

 

 

$

8.6

 

 

$

6.9

 

 

$

13.2

 

 

$

735.7

 

 

(1)

Represents the principal and interest payable through the maturity date of the underlying contractual obligation.

(2)

Purchase obligations and other commitments include payments due for inventory purchase obligations with contract manufacturers, long-term software tool licenses, and other licenses.

(3)

Represents the remaining balance of the one-time transition tax liability associated with our deemed repatriation of accumulated foreign earnings as a result of the enactment of the Tax Cuts and Jobs Act into law on December 22, 2017.

The amounts in the table above exclude unrecognized tax benefits of $22.1 million. As of December 26, 2020, we were unable to make a reasonably reliable estimate of when cash settlement with a taxing authority may occur in connection with our gross unrecognized tax benefit.

36


 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 26, 2020, our market risk related to interest rates on our cash and cash equivalents, and foreign currency exchange risks has not changed materially from the risks disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 27, 2020.

 

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to reasonably ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Due to the COVID-19 pandemic, a significant portion of our employees are working from home while under governmental restrictions. Established business continuity plans were initiated in order to mitigate the impact to our control environment, operating procedures, data and internal controls. The design of our processes and controls allow for remote execution with accessibility to secure data.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes in Internal Control over Financial Reporting

We assessed, with the participation of our CEO and CFO, any change in our internal control over financial reporting as of the end of the fiscal quarter covered by this Report.

Our assessment excluded DisplayLink which was acquired on July 31, 2020. DisplayLink had net revenues of approximately $45.0 million and total tangible assets of approximately $59.0 million, which are included in our condensed consolidated financial statements as of and for the six months ended December 26, 2020. We are currently assessing the control environment of this acquired business. DisplayLink sales constitute approximately 6.6% of our sales for the six-month period covered by this Report, their tangible assets constitute approximately 6.8% of our tangible assets as of the end of such period and their total liabilities constitute approximately 6.3% of our total liabilities.

Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company. During the integration period, management is developing additional controls to ensure the financial information provided by DisplayLink is complete and accurate in all material respects.

Except as noted above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period ended December 26, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

37


 

PART II—OTHER INFORMATION

 

 

We are party to various litigation matters and claims arising from time to time in the ordinary course of business. While the results of such matters cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows.  

 

 

ITEM 1A. RISK FACTORS

We refer you to the Company’s risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended June 27, 2020 for material risks that may affect our business. There have been no material changes from the risk factors previously disclosed.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Our Board of Directors has cumulatively authorized $1.4 billion for our common stock repurchase program, which expires at the end of July 2021. As of December 26, 2020, the remaining amount authorized for the repurchase of our common stock was $177.4 million. During the three-month period ended December 26, 2020, we did not repurchase any shares under our common stock repurchase program.

 

 

 

38


 

 

ITEM 6. EXHIBITS

 

 

 

 

31.1

 

Certification of Chief Executive Officer

 

 

 

31.2

 

Certification of Chief Financial Officer

 

 

 

32.1**

 

Section 1350 Certification of Chief Executive Officer

 

 

32.2**

 

Section 1350 Certification of Chief Financial Officer

 

 

101.INS Inline

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

101.SCH Inline

 

XBRL Taxonomy Extension Schema Document

 

 

101.CAL Inline

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF Inline

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB Inline

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE Inline

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

**

This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

 

39


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

SYNAPTICS INCORPORATED

 

 

 

 

Date:  February 4, 2021

 

 

 

By:

 

/s/ Michael E. Hurlston

 

 

 

 

Name:

 

Michael E. Hurlston

 

 

 

 

Title:

 

President and Chief Executive Officer

 

 

 

 

 

Date:  February 4, 2021

 

 

 

By:

 

/s/ Dean Butler

 

 

 

 

Name:

 

Dean Butler

 

 

 

 

Title:

 

Senior Vice President and Chief Financial Officer

 

Date:  February 4, 2021

 

 

 

By:

 

/s/ Kermit Nolan

 

 

 

 

Name:

 

Kermit Nolan

 

 

 

 

Title:

 

Corporate Vice President and Chief Accounting Officer

 

40