The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the "Cautionary Statement" and "Risk Factors" above for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53-week fiscal year that ends on the Saturday closest toDecember 31 . Fiscal 2020 was a 53-week year with the extra week occurring in the first quarter of the year and ended onJanuary 2, 2021 . Fiscal 2019 and 2018 were 52-week years and ended onDecember 28, 2019 andDecember 29, 2018 , respectively. Impact of COVID-19
A new strain of novel coronavirus which causes a severe respiratory disease
("COVID-19") was identified in 2019, and subsequently declared a worldwide
pandemic by the World Health Organization . We implemented a response plan and
continued operations while largely transitioning our global workforce to a
remote work model. The third parties that perform our semiconductor
manufacturing, assembly, packaging and testing have generally remained
operational. The extent of the impact of the COVID-19 pandemic on our
operational and financial performance will depend on future developments,
including the duration, severity and spread of the pandemic, related
restrictions on travel and transportation and other actions that may be taken by
governmental authorities, the impact to the business of our suppliers or
customers, and other items identified under "Risk Factors" above, all of which
are uncertain and cannot be predicted. An extended period of global supply chain
and economic disruption could materially affect our business, results of
operations, access to sources of liquidity and financial condition.
Overview
We are a leading provider of silicon, software and solutions for a smarter, more connected world. Our award-winning technologies are shaping the future of the Internet of Things (IoT), internet infrastructure, industrial automation, consumer and automotive markets. Our world-class engineering team creates products focused on performance, energy savings, connectivity and simplicity. Our primary semiconductor products are mixed-signal integrated circuits (ICs), which are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. As a fabless semiconductor company, we rely on third-party semiconductor fabricators inAsia , and to a lesser extentthe United States andEurope , to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third parties inAsia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located inAsia ), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity.
Our expertise in analog-intensive, high-performance, mixed-signal ICs and
software enables us to develop highly differentiated solutions that address
multiple markets. We group our products into the following categories:
? Internet of Things products, which include wireless connectivity,
microcontroller (MCU) and sensor products; and
Infrastructure and automotive products, which include timing products (clocks
? and oscillators); power products (isolation and Power over Ethernet (PoE)
devices); broadcast products (consumer and automotive radio devices); and
access products (Voice over IP (VoIP) products and embedded modems).
We have combined our previous product groups, Infrastructure, Broadcast and
Access, into the Infrastructure and automotive product group. Prior periods were
retrospectively adjusted.
The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects,
could be adversely affected.
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Because some of our ICs are designed for use in consumer products such as
televisions, set-top boxes and radios, we expect that the demand for our
products will be typically subject to some degree of seasonal demand. However,
rapid changes in our markets and across our product areas make it difficult for
us to accurately estimate the impact of seasonal factors on our business.
Current Period Highlights
Revenues increased$49.1 million in fiscal 2020 compared to fiscal 2019 due to increased revenues from both our IoT products and Infrastructure and automotive products. Gross profit increased$17.2 million during the same period due primarily to increased product sales. Gross margin decreased to 59.5% in fiscal 2020 compared to 60.9% in fiscal 2019 primarily due to variations in product mix. Operating expenses increased$35.6 million in fiscal 2020 compared to fiscal 2019 due primarily to increased personnel-related expenses, new product introduction costs, amortization of intangible assets and occupancy costs. Operating income in fiscal 2020 was$38.3 million compared to$56.7 million in fiscal 2019. We ended fiscal 2020 with$724.7 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities was$135.7 million during fiscal 2020. Accounts receivable were$95.2 million atJanuary 2, 2021 , representing 35 days sales outstanding (DSO). Inventory was$66.7 million atJanuary 2, 2021 , representing 59 days of inventory (DOI). In fiscal 2020, we repurchased 0.2 million shares of our common stock for$16.3 million . Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce new products and solutions with added functionality and further integration. OnApril 28, 2020 , we acquired the Wi-Fi and Bluetooth business ofRedpine Signals for approximately$317 million in cash. We believe the acquisition will accelerate our roadmap for Wi-Fi and Bluetooth silicon and software solutions. In fiscal 2020, we introduced a Z-Wave Long Range (LR) solution enabling one mile connectivity for Z-Wave 700 Series products; highly integrated modules designed to simplify implementation of IEEE 1588 in communications, smart grid, financial trading and industrial applications; new isolated gate drivers that cut latency by 50 percent while significantly increasing transient immunity; new small form-factor, high-performance crystal oscillators (XOs) and voltage-controlled crystal oscillators (VCXOs) for applications that require low jitter and frequency-flexible clock synthesis; a Bluetooth Low Energy system-in-package (SiP) that adds turnkey Bluetooth connectivity to extremely small products; a major upgrade to our Integrated Developer Environment (IDE) with the launch ofSimplicity Studio 5; energy-friendly power management ICs (PMICs) that enhance the energy efficiency of battery-powered applications; a Power over Ethernet (PoE) portfolio that reduces the cost and complexity of adding 90 W PoE to power sourcing equipment (PSE) and powered devices (PD); Secure Vault technology, an award-winning suite of state-of-the-art security with features designed to help connected device manufacturers address escalating IoT security threats and regulatory pressures; secure, proprietary wireless system-on-chip (SoC) devices designed for power- and size-constrained IoT products such as electronic shelf labels; secure, ultra-low-power SoCs optimized forZigbee Green Power applications powered by coin cell batteries or energy-harvesting sources; and a Bluetooth SoC solution delivering a combination of security features, wireless performance, energy efficiency, and software tools and stacks to meet the market demand for high-volume, battery-powered IoT products. We plan to continue to introduce products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expand our total available market opportunity. During fiscal 2020, 2019 and 2018, we had no customer that represented more than 10% of our revenues. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Three of our distributors who sell to our customers, Arrow Electronics, Edom Technology andSekorm , each represented 26%, 22% and 11% of our revenues during fiscal 2020, respectively. Arrow and Edom, each represented 26% and 20% of our revenues during fiscal 2019, and 21% and 17% of our revenues during fiscal 2018, respectively. The percentage of our revenues derived from outside ofthe United States was 90% in fiscal 2020, 87% in fiscal 2019 and 83% in fiscal 2018. All of our revenues to date have been denominated inU.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside ofthe United States . 33 Table of Contents Results of Operations
The following describes the line items set forth in our Consolidated Statements
of Income:
Revenues. Revenues are generated predominately by sales of our products. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products. Cost of Revenues. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs. Our gross margin fluctuates depending on product mix, manufacturing yields, inventory valuation adjustments, average selling prices and other factors. Research and Development. Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets and an allocated portion of our occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications. Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, as well as an allocated portion of our occupancy costs, sales commissions to independent sales representatives, amortization of intangible assets, professional fees, legal fees, and promotional and marketing expenses. Interest Income and Other, Net. Interest income and other, net reflects interest earned on our cash, cash equivalents and investment balances, foreign currency remeasurement adjustments, income or loss on equity method investments, and other non-operating income and expenses. Interest Expense. Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes and credit facility. Interest expense on our convertible senior notes includes contractual interest, amortization of the debt discount and amortization of debt issuance costs.
Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes
includes both domestic and foreign income taxes at the applicable tax rates
adjusted for non-deductible expenses, research and development tax credits and
other permanent differences.
The following table sets forth our Consolidated Statements of Income data as
a percentage of revenues for the periods indicated:
Fiscal Year
2020 2019 2018
Revenues 100.0 % 100.0 % 100.0 %
Cost of revenues 40.5 39.1 39.9
Gross margin 59.5 60.9 60.1
Operating expenses:
Research and development 32.5 30.7 27.5
Selling, general and administrative 22.7 23.4 22.8
Operating expenses
55.2 54.1 50.3
Operating income 4.3 6.8 9.8
Other income (expense):
Interest income and other, net 1.3 1.5 0.8
Interest expense (3.9) (2.4) (2.3)
Income before income taxes 1.7 5.9 8.3
Provision (benefit) for income taxes 0.3 3.6 (1.3)
Net income 1.4 % 2.3 % 9.6 %
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Comparison of Fiscal 2020 to Fiscal 2019
Revenues
Fiscal Year
(in millions) 2020 2019 Change % Change
Internet of Things $ 513.7 $ 488.2 $ 25.5 5.2 %
Infrastructure and automotive 373.0 349.4 23.6 6.8 %
Total $ 886.7 $ 837.6 $ 49.1 5.9 %
The change in revenues in fiscal 2020 was due to:
Increased revenues of
? increased demand for our MCU products and wireless connectivity products and
the addition of revenues from an acquisition.
? Increased revenues of
products, due primarily to increased demand for our power and timing products.
The increase in revenues in fiscal 2020 was also due to an adjustment of$11.9 million resulting from a change in the assumptions used to estimate variable consideration. Unit volumes of our products increased by 13.8% and average selling prices decreased by 6.7% compared to fiscal 2019. The average selling prices of our products may fluctuate significantly from period to period due to changes in product mix and other factors. In general, as our products become more mature, we expect to experience decreases in average selling prices. We anticipate that newly announced, higher priced, next generation products and product derivatives will offset some of these decreases. Gross Profit Fiscal Year (in millions) 2020 2019 Change Gross profit$ 527.5 $ 510.3 $ 17.2 Gross margin 59.5 % 60.9 % (1.4) % Gross profit increased in fiscal 2020 due primarily to increased product sales. The change in gross profit in fiscal 2020 was due to an increase in gross profit of$11.7 million for our Infrastructure and automotive products and$5.5 million for our Internet of Things products. Gross margin decreased in fiscal 2020 primarily due to lower gross margins on our IoT products. Gross margin declines resulted primarily from lower average selling prices on such products in fiscal 2020. We may experience declines in the average selling prices of certain of our products. This creates downward pressure on gross margin and may be offset to the extent we are able to introduce higher margin new products and gain market share with our products; reduce costs of existing products through improved design; achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or reduce logistics costs. Research and Development Fiscal Year (in millions) 2020 2019 Change % Change Research and development$ 287.9 $ 257.2 $ 30.7 12.0 % Percent of revenue 32.5 % 30.7 % The increase in research and development expense in fiscal 2020 was primarily due to increases of$18.5 million for personnel-related expenses, including costs associated with increased headcount and an acquisition,$5.5 million for new product introduction costs,$3.7 million for the amortization of intangible assets and$1.0 million for occupancy costs. We expect that research and development expense will increase in absolute dollars in the first quarter of 2021 compared to the fourth quarter of 2020. 35
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Selling, General and Administrative
Fiscal Year
(in millions) 2020 2019 Change %
Change
Selling, general and administrative
2.5 % Percent of revenue 22.7 % 23.4 %
The increase in selling, general and administrative expense in fiscal 2020 was primarily due to an increase of$4.4 million for personnel-related expenses, including costs associated with increased headcount. We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in the first quarter of 2021 compared to the fourth quarter of 2020.
Interest Income and Other, Net
Interest income and other, net in fiscal 2020 was
fiscal 2020 was primarily due to lower interest rates on the underlying
instruments, offset by a net gain of
equity investment.
Interest Expense
Interest expense in fiscal 2020 was$34.1 million compared to$20.2 million in fiscal 2019. The increase in interest expense in fiscal 2020 was primarily due to a net increase of$8.0 million in interest resulting from an increase in the aggregate balance of notes outstanding and a loss of$4.1 million recorded on the early extinguishment of a portion of the 2022 Notes.
Provision (Benefit) for Income Taxes
Fiscal Year
(in millions) 2020 2019 Change
Provision (benefit) for income taxes
Effective tax rate
18.1 % 61.2 % The decrease in the effective tax rate for fiscal 2020 as compared to fiscal 2019 was primarily due to the impact in fiscal 2019 of a change in our position related to the treatment of stock-based compensation within our intercompany cost-sharing arrangement offset by the increased impact of fiscal 2020 permanent tax differences. The incremental, discrete income tax expense recognized in fiscal 2019 for the cost-sharing change was$27.2 million . The effective tax rates for each of the periods presented differ from theU.S. federal statutory tax rates of 21% due to the amount of income earned in foreign jurisdictions where the tax rate may be higher or lower than the federal statutory tax rate, and other permanent items including research and development tax credits, the tax effects of stock-based compensation and global intangible low-tax income ("GILTI").
Comparison of Fiscal 2019 to Fiscal 2018
A discussion of changes in our results of operations from fiscal 2018 to fiscal 2019 has been omitted from this Form 10-K, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K filed with theSecurities and Exchange Commission onJanuary 29, 2020 . 36 Table of Contents Business Outlook The following represents our business outlook for the first quarter of fiscal 2021. Income Statement Item Estimate Revenues$237 million to$247 million Gross margin 58.1% Operating expenses$126 million Effective tax rate 0.0% Diluted earnings per share$0.05 to$0.15
Liquidity and Capital Resources
Our principal sources of liquidity as ofJanuary 2, 2021 consisted of$724.7 million in cash, cash equivalents and short-term investments, of which approximately$572.8 million was held by ourU.S. entities. The remaining balance was held by our foreign subsidiaries. Our cash equivalents and short-term investments consisted of government debt securities, which include agency bonds, municipal bonds, variable-rate demand notes,U.S. Treasury bills andU.S. government securities; corporate debt securities, which include asset-backed securities, corporate bonds, certificates of deposit and commercial paper; and money market funds. Our long-term investments consisted of auction-rate securities.
Operating Activities
Net cash provided by operating activities was$135.7 million during fiscal 2020, compared to net cash provided of$166.5 million during fiscal 2019. Operating cash flows during fiscal 2020 reflect our net income of$12.5 million , adjustments of$141.6 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash outflow of$18.4 million due to changes in our operating assets and liabilities. Net cash provided by operating activities was$166.5 million during fiscal 2019, compared to net cash provided of$173.5 million during fiscal 2018. Operating cash flows during fiscal 2019 reflect our net income of$19.3 million , adjustments of$147.8 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash outflow of$0.6 million due to changes in our operating assets and liabilities. Accounts receivable increased to$95.2 million atJanuary 2, 2021 from$75.6 million atDecember 28, 2019 . The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings. Our average DSO was 35 days atJanuary 2, 2021 and 31 days atDecember 28, 2019 . Inventory decreased to$66.7 million atJanuary 2, 2021 from$73.1 million atDecember 28, 2019 . Our inventory level is primarily impacted by our need to make purchase commitments to support forecasted demand and variations between forecasted and actual demand. Our DOI was 59 days atJanuary 2, 2021 and 76 days atDecember 28, 2019 . The decline in DOI was primarily due to lower inventory levels atJanuary 2, 2021 resulting from supplier capacity constraints and higher demand for our products.
Investing Activities
Net cash used in investing activities was$361.0 million during fiscal 2020, compared to net cash used of$106.8 million during fiscal 2019. The increase in cash outflows was principally due to a payment of$316.8 million for the acquisition of the Wi-Fi and Bluetooth business ofRedpine Signals , offset by a decrease in cash outflows of$57.4 million from net purchases and sales of marketable securities in fiscal 2020. Net cash used in investing activities was$106.8 million during fiscal 2019, compared to net cash used of$197.0 million during fiscal 2018. The decrease in cash outflows was principally due to a decrease of$237.2 million in net payments for the acquisition of businesses, offset by an increase in cash outflows of$157.8 million in net purchases and sales of marketable securities in fiscal 2019. 37 Table of Contents Financing Activities
Net cash provided by financing activities was$200.9 million during fiscal 2020, compared to cash used of$29.6 million during fiscal 2019. The increase in cash inflows was principally due to$845.0 million in proceeds from the issuance of debt and a decrease of$10.4 million for repurchases of our common stock, offset by$623.6 million in payments on debt in fiscal 2020. Net cash used in financing activities was$29.6 million during fiscal 2019, compared to cash used of$48.8 million during fiscal 2018. The decrease in cash outflows was principally due to a decrease of$12.6 million for repurchases of our common stock during fiscal 2019. As ofJanuary 2, 2021 , our debt included$535 million principal amount convertible senior notes (the "2025 Notes") and$140.6 million principal amount convertible senior notes (the "2022 Notes") and we had an undrawn$400 million revolving credit facility. We have an option to increase the size of the borrowing capacity of the revolving credit facility by up to the greater of an aggregate of$250 million and 100% of EBITDA, plus an amount that would not cause a secured leverage ratio to exceed 3.25 to 1.00, subject to certain conditions. OnMarch 27, 2020 , we borrowed$310 million under the revolving credit facility. OnJune 1, 2020 , we used$310.0 million of the 2025 Notes proceeds to repay the revolving credit facility in full. We used the remainder of the proceeds, along with cash on hand, to repurchase approximately$236.8 million aggregate principal amount of its outstanding 2022 Notes. We had increased our borrowings as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. OnJanuary 6, 2021 , we issued a notice of redemption for the remaining 2022 Notes. The redemption will occur onMarch 22, 2021 , unless earlier converted. See Note 10, Debt, to the Consolidated Financial Statements for additional information. Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities. We believe our existing cash, cash equivalents, investments and credit under our Credit Facility are sufficient to meet our capital requirements through at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.
Contractual Obligations
The following table summarizes our contractual obligations as ofJanuary 2, 2021 (in thousands): Payments due by period Total 2021 2022 2023 2024 2025 Thereafter Longterm debt obligations (1)$ 675,567 $ 140,567 $ - $ - $ -$ 535,000 $ - Interest on longterm debt obligations (2)$ 19,532 $ 5,399 $ 4,332 $ 4,332 $ 3,928 $ 1,541 $ - Operating lease obligations (3)$ 34,901 $ 6,787 $ 6,174 $ 5,367 $ 4,874 $ 3,278 $ 8,421 Purchase obligations (4)$ 148,595 $ 148,595 $ - $
- $ - $ - $ - Other longterm obligations (5)$ 39,667 $ -$ 14,888 $ 10,406 $ 6,346 $ 8,027 $ -
Long-term debt obligations represent the principal portion of the 2022 Notes
(1) and 2025 Notes. The remaining principal balance of the 2022 Notes will be
redeemed in 2021, and, therefore, has been reclassified to short-term debt.
Interest on our long-term debt obligations primarily represents contractual
(2) interest on the 2022 Notes and 2025 Notes. Interest excludes non-cash
amortization of the debt discount and debt issuance costs.
(3) Operating lease obligations include amounts for leased facilities.
Purchase obligations include contractual arrangements in the form of purchase
(4) orders with suppliers where there is a fixed non-cancelable payment schedule
or minimum payments due with a reduced delivery schedule.
(5) Other long-term obligations primarily represent non-current income taxes and
software license obligations.
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We are unable to make a reasonably reliable estimate as to when or if cash settlement with taxing authorities will occur for our unrecognized tax benefits. Therefore, our liability of$3.0 million for unrecognized tax benefits is not included in the table above. See Note 17, Income Taxes, to the Consolidated Financial Statements for additional information.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
The preparation of financial statements and accompanying notes in conformity withU.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts reported. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in the financial statements. We believe the following critical accounting policies affect our more complex judgments and estimates. Inventory valuation - We assess the recoverability of inventories through the application of a set of methods, assumptions and estimates. In determining net realizable value, we write down inventory that may be slow moving or have some form of obsolescence, including inventory that has aged more than 12 months. We also adjust the valuation of inventory when its manufacturing cost exceeds the estimated selling price less costs of completion, disposal and transportation. We assess the potential for any unusual customer returns based on known quality or business issues and write-off inventory losses for scrap or non-saleable material. Inventory not otherwise identified to be written down is compared to an assessment of our 12-month forecasted demand. The result of this methodology is compared against the product life cycle and competitive situations in the marketplace to determine the appropriateness of the resulting inventory levels. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those that we project. In the event that actual demand is lower or market conditions are worse than originally projected, additional inventory write-downs may be required. Impairment of goodwill and other long-lived assets - We review long-lived assets which are held and used, including fixed assets and purchased intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. We assess goodwill for impairment by comparing the fair value of a reporting unit to its carrying amount. In determining fair value, several valuation methodologies are allowed, although quoted market prices are the best evidence of fair value. If the fair value of the reporting unit is less than its carrying amount, we recognize an impairment loss equal to that excess amount. 39
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Acquired intangible assets - When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as acquired technology and customer relationships. Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate. We amortize intangible assets with finite lives over their expected useful lives. Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations. Revenue recognition - We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. In order to achieve this core principle, we apply a five-step process. As part of this process, we analyze the performance obligations in a customer contract and estimate the consideration we expect to receive. The evaluation of performance obligations requires that we identify the promised goods and services in the contract. For contracts that contain more than one promised good and service, we then must determine whether the promises are capable of being distinct and if they are separately identifiable from other promises in the contract. Additionally, for our sales to distributors, we must estimate the impact that price adjustments and rights of return will have on consideration. We make these estimates based on available information, including recent sales activity and pricing data. If our evaluation of performance obligations is incorrect, we may recognize revenue sooner or later than is appropriate. If our estimates of consideration are inaccurate, we may recognize too much or too little revenue in a period. We may adjust assumptions used to estimate consideration periodically based on analysis of prior estimates. See Note 14, Revenues, to the Consolidated Financial Statements for additional information. Stock-based compensation - We recognize the fair-value of stock-based compensation transactions in the Consolidated Statements of Income. The fair value of our full-value stock awards (with the exception of market-based performance awards) equals the fair market value of our stock on the date of grant. The fair value of our market-based performance awards is estimated at the date of grant using a Monte-Carlo simulation. The fair value of our stock option and employee stock purchase plan grants is estimated at the date of grant using the Black-Scholes option pricing model. In addition, we are required to estimate the expected forfeiture rate of our stock grants and only recognize the expense for those shares expected to vest. If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost. See Note 15, Stock-Based Compensation, to the Consolidated Financial Statements for additional information. Income taxes - We are required to calculate income taxes in each of the jurisdictions in which we operate. This process involves calculating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheet. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to estimate the amount of expected future taxable income. Judgment is inherent in this process and differences between the estimated and actual taxable income could result in a material impact on our Consolidated Financial Statements. We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material effect on our income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes
have
been made for all periods.
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Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in Note 2, Significant Accounting Policies, to the Consolidated Financial Statements. Such information is incorporated by reference herein.
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