The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and notes thereto included in Part IV, Item 15(a), the risk factors included in Part I, Item 1A, and the "forward-looking statements" and other risks described herein and elsewhere in this Annual Report. The ADI Merger The completion of the ADI Merger under the ADI Merger Agreement is subject to customary closing conditions, including, among others, the approval of Maxim Integrated's stockholders, and the approval of Analog Devices' shareholders, which were obtained on
October 8, 2020, and the receipt of various regulatory approvals. Subject to the satisfaction or (to the extent permissible) waiver of such conditions, the ADI Merger is expected to close in the summer of 2021. On July 12, 2021, the outside date following which the ADI Merger Agreement may be terminated (subject to certain limitations) was automatically extended from July 12, 2021to October 12, 2021due to pendency of certain required regulatory approvals. For additional information on the ADI Merger Agreement and the ADI Merger, please refer to the Company's Current Report on Form 8-K, filed with the SECon July 13, 2020. The Company cannot guarantee that the ADI Merger will be completed on a timely basis or at all or that, if completed, it will be completed on the terms set forth in the ADI Merger Agreement.
We are a global company with manufacturing facilities in
the United States, the Philippinesand Thailand, and sales offices and design centers throughout the world. We design, develop, manufacture and market linear and mixed-signal integrated circuits, commonly referred to as analog circuits, for a large number of customers in diverse geographical locations. The analog market is fragmented and characterized by diverse applications, a great number of product variations and, with respect to many circuit types, relatively long product life cycles. The major end-markets in which we sell our products are the automotive, communications and data center, consumer, and industrial markets. We are incorporated in the State of Delaware.
Critical accounting policies
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements.
The Securities and Exchange Commission("SEC") has defined the most critical accounting policies as the ones that are most important to the presentation of our financial condition and results of operations, and that require us to make our most difficult and subjective accounting judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include valuation of inventories, accounting for income taxes, and assessment of litigation and contingencies. These policies and the estimates and judgments involved are discussed further below. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or it is less likely that such accounting policies would have a material impact on our reported results of operations for a given period. Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in this Annual Report.
Inventories are stated at the lower of (i) standard cost, which approximates actual cost on a first-in-first-out basis, or (ii) net realizable value. Our standard cost revision policy is to monitor manufacturing variances and revise standard costs on a periodic basis. At each reporting period, we assess our ending inventories for excess quantities and obsolescence based on our projected sales outlook. This assessment includes analysis of projections of future demand. Because of the cyclical nature of the market, inventory levels, obsolescence of technology, and product life cycles, we generally write-down inventories to net realizable value based on this forecasted product demand analysis. Actual demand and market conditions may be lower than those projected by us. This difference could have a material adverse effect on our gross margin should inventory write-downs beyond those initially recorded become necessary. Alternatively, should actual demand and market conditions be more favorable than those estimated by us, gross margin could be favorably impacted as we release these reserves upon the ultimate product shipment. During fiscal years 2021 and 2020, we had net inventory write-downs of
$14.3 millionand $16.5 million, respectively.
Accounting for income taxes
We must make certain estimates and judgments in the calculation of income tax expense, determination of uncertain tax positions, and in the determination of whether deferred tax assets are more likely than not to be realized. The calculation of our 28 --------------------------------------------------------------------------------
Income tax expense and tax liabilities involve dealing with uncertainties in the application of complex tax laws and regulations.
ASC No. 740-10, Income Taxes ("ASC 740-10"), prescribes a recognition threshold and measurement framework for financial statement reporting and disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740-10, a tax position is recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the recognition threshold is then measured to determine the largest amount of the benefit that has a greater than 50% likelihood of being realized upon settlement. Although we believe that our computation of tax benefits to be recognized and realized are reasonable, no assurance can be given that the final outcome will not be different from what was reflected in our income tax provisions and accruals. Such differences could have a material impact on our net income and operating results in the period in which such determination is made. See Note 17: "Income Taxes" in the Notes to Consolidated Financial Statements included in Part IV, Item 15(a) of this Annual Report for further information related to ASC 740-10. We evaluate our deferred tax asset balance and record a valuation allowance to reduce the net deferred tax assets to the amount that is more likely than not to be realized. In the event it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would be recorded. This adjustment would increase income in the period such determination was made. Likewise, should it be determined that all or part of the net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination is made. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. Realization of our deferred tax asset is dependent primarily upon future taxable income in the
U.S.and certain foreign jurisdictions. Our judgments regarding future profitability may change due to future market conditions, changes in U.S.or international tax laws and other factors. These changes, if any, may require material adjustments to the net deferred tax asset and an accompanying reduction or increase in net income in the period in which such determinations are made.
Litigation and contingencies
From time to time, we receive notices that our products or manufacturing processes may be infringing the patent or other intellectual property rights of others, notices of stockholder litigation or other lawsuits or claims against us. We periodically assess each matter in order to determine if a contingent liability in accordance with ASC No. 450, Contingencies ("ASC 450"), should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. We expense legal fees associated with consultations and defense of lawsuits as incurred. Based on the information obtained, combined with management's judgment regarding all of the facts and circumstances of each matter, we determine whether a contingent loss is probable and whether the amount of such loss can be estimated. Should a loss be probable and estimable, we record a contingent loss. In determining the amount of a contingent loss, we take into consideration advice received from experts in the specific matter, the current status of legal proceedings, settlement negotiations which may be ongoing, prior case history and other factors. Should the judgments and estimates made by management be incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations. Alternatively, if the judgments and estimates made by management are incorrect and a particular contingent loss does not occur, the contingent loss recorded would be reversed, thereby favorably impacting our results of operations. Impact of COVID-19 on Our Business The ongoing COVID-19 pandemic has impacted and will continue to impact the Company's operations, employees, customers, and suppliers, due to shelter-in-place orders, mandated quarantines, reduced facility operations, and travel bans and restrictions. While the operating results for the first quarter of fiscal year 2022 and thereafter may be impacted by COVID-19, the extent and form of such impact to our business is uncertain and cannot be estimated with any degree of certainty.
Employee Healthand Safety During the second half of fiscal year 2020 and the full fiscal year 2021, the Company's facilities and offices were either operating at reduced capacity or temporarily closed for non-essential operations. In an effort to protect the health and safety of our employees, we implemented safety measures such as work-from-home practices, travel restrictions, extensive cleaning protocols, and social distancing when engaging in essential activities. 29 -------------------------------------------------------------------------------- Focus on Customers We continue to work with our sales, supplier, and customer design and engineering teams to meet current demand. Teams meet remotely, through telephonic or video conferences and by leveraging available technology, to continue the design and engineering process that would normally take place at physical customer locations. Manufacturing and Operations We will continue to actively monitor this evolving situation and implement changes to protect employee health. In addition to our actions, we will continue to implement government-placed orders in all our locations. While COVID-19 related disruptions have impacted our manufacturing operations, we continue to leverage our manufacturing flexibility to reduce the negative effects of such disruptions. For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, see Part I, Item 1A - Risk Factors of this Annual Report. Results of Operations The following table sets forth certain Consolidated Statements of Income data expressed as a percentage of net revenues for the periods indicated: For the Year Ended June 26, June 27, June 29, 2021 2020 2019 Net revenues 100.0 % 100.0 % 100.0 % Cost of goods sold 33.1 % 34.6 % 35.2 % Gross margin 66.9 % 65.4 % 64.8 % Operating expenses: Research and development 17.3 % 20.1 % 18.8 % Selling, general and administrative 12.2 %
Intangible asset amortization 0.1 %
Impairment of long-lived assets - % - % -% Severance and restructuring expenses 0.5 %
Other operating expenses (income), net 0.9 % - % -% Total operating expenses 30.9 %
Operating income 35.9 %
Interest and other income (expense), net (0.6) %
Income before taxes 35.3 %
Provision (benefit) for income taxes 3.9 % 1.1 % (3.2) % Net income 31.4 % 29.9 % 35.8 %
The following table presents the pre-tax stock-based compensation included in the items of the consolidated statements of earnings presented above as a percentage of net income for the periods indicated:
For the Year Ended June 26, June 27, June 29, 2021 2020 2019 Cost of goods sold 0.5 % 0.6 % 0.4 % Research and development 1.7 % 2.0 % 1.8 % Selling, general and administrative 1.8 % 1.8 % 1.5 % 4.0 % 4.4 % 3.7 % A review of our fiscal year 2021 performance compared to fiscal year 2020 performance appears below. A review of our fiscal year 2020 performance compared to fiscal year 2019 performance is set forth in Part II, Item 7 of the Form 10-K for the fiscal year ended
June 27, 2020under the caption "Results of Operations". 30 --------------------------------------------------------------------------------
We reported net revenues of
$2.6 billionand $2.2 billionin fiscal years 2021 and 2020, respectively. Our net revenues in fiscal year 2021 increased by 20% compared to our net revenues in fiscal year 2020. Revenue from consumer products was up 21% due to higher demand in cell phone and handheld computer products. Revenue from industrial products was up 22% due to higher demand in control and automation, automatic test equipment, and medical products. Revenue from automotive products was up 38% due to higher demand in auto infotainment, safety and security, and powertrain products. The Company has updated the year ended June 27, 2020market revenue to conform to the current period presentation of Major End-Market estimates, due to a change in product classification. Approximately 90% and 89% of our net revenues in fiscal years 2021 and 2020, respectively, were derived from shipments to customers located outside the United States, primarily in Asiaand Europe. Less than 1% of our sales are denominated in currencies other than U.S.dollars. The impact of changes in foreign exchange rates on net revenues and our results of operations for fiscal years 2021 and 2020 were immaterial.
Our gross margin as a percentage of net revenue was 66.9% in fiscal year 2021 compared to 65.4% in fiscal year 2020. Gross margins as a percentage of net revenue in fiscal year 2021 compared to fiscal year 2020 was higher primarily due to higher revenues, increased factory utilization and lower inventory reserves.
Research and development
Research and development expenses were
$454.3 millionand $440.2 millionfor fiscal years 2021 and 2020, respectively, which represented 17.3% and 20.1% of net revenues, respectively. The $14.1 millionincrease in research and development expenses was primarily due to higher salaries and other personnel related costs, partially offset by lower travel expenses. The level of research and development expenditures as a percentage of net revenues will vary from period to period depending, in part, on the level of net revenues and on our success in recruiting the technical personnel needed for our new product introductions and process development. We view research and development expenditures as critical to maintaining a high level of new product introductions, which in turn are critical to our plans for future growth.
Selling, general and administrative expenses
Selling, general and administrative expenses were
$320.7 millionand $296.7 millionin fiscal years 2021 and 2020, respectively, which represented 12.2% and 13.5% of net revenues, respectively. The $24.0 millionincrease in selling, general and administrative expenses was primarily due to higher salaries and other personnel costs, including stock-based compensation for accelerated vesting of certain restricted stock awards and restricted stock units. The level of selling, general and administrative expenditures as a percentage of net revenues will vary from period to period, depending on the level of net revenues and our success in recruiting sales and administrative personnel needed to support our operations. Severance and restructuring Severance and restructuring expenses were $13.4 millionand $5.4 millionin fiscal years 2021 and 2020, respectively, which represented 0.5% and 0.2% of net revenues for each respective period. The $8.0 millionincrease was due to increased restructuring activities which, as a result of the pending ADI Merger, now include change in control related benefits.
Other net operating expenses (income)
Other operating expenses (income), net were
$22.6 millionand $0.9 millionin fiscal years 2021 and 2020, respectively, which represented 0.9% and less than 0.1% of net revenues for each respective period. The $21.7 millionincrease was primarily due to expenses such as legal and professional services related to the pending ADI Merger and an increase in fair value of contingent consideration related to a prior acquisition. We expect to incur additional merger-related expenses as we approach the expected transaction close date. 31 --------------------------------------------------------------------------------
Interest and other income (expenses), net
Interest and other income (expense), net were
$(16.0) millionand $(8.3) millionin fiscal years 2021 and 2020, respectively, which represented (0.6)% and (0.4)% of net revenues, respectively. Interest income in fiscal year 2021 compared to fiscal year 2020 decreased by $25.4 milliondue to lower investment yields from cash equivalents and decrease in short-term investments portfolio. Other income in fiscal year 2021 compared to fiscal year 2020 increased by $17.7 millionprimarily due to fair value adjustments in privately-held companies and receipt of previously impaired notes receivable.
Provision (benefit) for income taxes
Our annual income tax expense was
$102.5 millionand $23.4 millionfor fiscal years 2021 and 2020, respectively. The effective tax rate was 11.0% and 3.5% for fiscal years 2021 and 2020, respectively. In fiscal year 2020, we reversed $40.5 millionof uncertain tax position reserves and $10.7 millionof related interest reserves, net of federal and state benefits, primarily due to the fiscal fourth quarter settlement of an audit of our fiscal year 2012 through fiscal year 2014 federal corporate income tax returns. The reversal of uncertain tax position reserves for intercompany transfer pricing issues increased accumulated unremitted foreign earnings, which resulted in an additional Internal Revenue Code Section 965 transition tax ("Transition Tax") charge of $6.5 millionin the fiscal fourth quarter. Our federal statutory tax rate is 21%. Our fiscal year 2021 effective tax rate was lower than the statutory tax rate primarily due to earnings of foreign subsidiaries, generated by our international operations managed in Ireland, that were taxed at lower rates and a $13.2 millionreversal of uncertain tax position and related interest reserves. These impacts were partially offset by tax generated by Global Intangible Low-Taxed Income ("GILTI") provisions. Our fiscal year 2020 effective tax rate was lower than the statutory tax rate primarily due to the $51.2 millionreversal of uncertain tax position and related interest reserves, and earnings of foreign subsidiaries, generated by our international operations managed in Ireland, that were taxed at lower rates. These impacts were partially offset by tax generated by GILTI provisions and a $6.5 millionTransition Tax charge. We have various entities domiciled within and outside the United States. The following is a breakout of our U.S.and foreign income (loss) before income taxes: For the Year Ended June 26, June 27, June 29, 2021 2020 2019 (in thousands) Domestic pre-tax income $ 69,061 $ 72,854 $ 103,016Foreign pre-tax income 860,675 605,242 651,405 Total $ 929,736 $ 678,096 $ 754,421A relative increase in earnings in lower tax jurisdictions, such as Ireland, may lower our consolidated effective tax rate, while a relative increase in earnings in higher tax jurisdictions, such as the United States, may increase our consolidated effective tax rate. However, after fiscal year 2018 the consolidated effective tax rate impact of earnings changes in various tax jurisdictions is not as significant due to the reduction of the federal statutory tax rate from 35% to 21% and GILTI provisions, which effectively subject income earned by our foreign subsidiaries to current U.S.tax at a rate of 10.5%, less foreign tax credits.
Recently published accounting position papers
Refer to our analysis of recently published accounting pronouncements, as included in Part IV, Item 15. Attachments and Tables to Financial Statements, Note 2: “Summary of Significant Accounting Policies”.
Financial situation, liquidity and capital resources
32 -------------------------------------------------------------------------------- Cash flows were as follows: For the Year Ended June 26, June 27, June 29, 2021 2020 2019 (in thousands) Net cash provided by operating activities
$ 924,260 $ 800,855 $ 875,840Net cash provided by (used in) investing activities (30,511) (32,049) 856,911
Net cash provided by (used in) financing activities (187,765)
(940,720) (1,518,893) Net increase (decrease) in cash, cash equivalents and restricted cash
$ 705,984 $ (171,914) $ 213,858Operating Activities
Cash flow from operating activities corresponds to net income adjusted for certain non-cash items and changes in certain assets and liabilities.
Cash provided by operating activities was
$924.3 millionin fiscal year 2021, an increase of $123.4 millioncompared with fiscal year 2020. This increase was primarily caused by an increase in net income of $172.6 millionand changes in working capital. Changes in working capital were driven by increases in other assets and other liabilities, partially offset by decreases in accounts receivable and price adjustment and other revenue reserves.
Cash flow from investing activities consists primarily of capital expenditures, purchases and maturities net of investments and acquisitions.
Cash used in investing activities was
$30.5 millionin fiscal year 2021, a decrease of $1.5 millioncompared with fiscal year 2020. The change was due to a $70.4 milliondecrease in maturities of available-for-sale securities. The Company also paid $69.3 million, net of cash acquired, for an acquisition during fiscal year 2020. Financing Activities Financing cash flows consist primarily of new borrowings, repurchases of common stock, issuance and repayment of notes payables, payment of dividends to stockholders, proceeds from stock option exercises and employee stock purchase plan and withholding tax payments associated with net share settlements of equity awards. Net cash used in financing activities was $187.8 millionin fiscal year 2021, a decrease of $753.0 millioncompared with fiscal year 2020. Cash used in financing activities was lower due to a decrease in repurchases of common stock of $431.6 millionand dividend payments of $389.0 million, offset by an increase in net issuance of restricted stock units and awards of $26.0 millionand proceeds from the Employee Stock Purchase Plan ("ESPP") of $23.8 million.
Liquidity and capital resources
Our primary source of liquidity is our cash flow from operating activities resulting from net income and working capital management.
October 30, 2018, we were authorized to repurchase up to $1.5 billionof the Company's common stock. During the fiscal years ended June 26, 2021and June 27, 2020, we repurchased an aggregate of $9.2 millionand $440.8 million, respectively, of the Company's common stock. Pursuant to the terms of the ADI Merger Agreement, the Company suspended its repurchase program on July 13, 2020, the date we announced our planned merger with ADI.
We paid cash dividends of
We anticipate that the available funds and cash generated from operations will be sufficient to meet cash and working capital requirements, including the anticipated level of capital expenditures and debt repayments for at least the next twelve months. 33 --------------------------------------------------------------------------------
The following table summarizes our main contractual obligations at
Payment due by period Less than 1 More than 5 Total year 1-3 years 4-5 years years (in thousands) Outstanding debt obligations (1)
Purchase obligations related to stocks (2)
299,552 47,055 87,850 72,980 91,667 Transition tax (3) 237,160 26,927 77,416 132,817 -
Interest payments related to debt securities (4) 132 312
34,125 47,156 34,500 16,531 Operating lease obligations (5) 56,900 12,444 18,707 13,533 12,216 Contingent liability 10,000 10,000 - - - Total
$ 1,735,924 $ 130,551 $ 731,129 $ 253,830 $ 620,414(1) Outstanding debt represents amounts due for our long-term notes. (2) We order materials and supplies in advance or with minimum purchase quantities. We are obligated to pay for the materials and supplies when received. (3) Internal Revenue Code Section 965 transition tax on accumulated unremitted earnings of foreign subsidiaries at December 31, 2017, paid in eight interest-free installments beginning in September 2018. (4) Interest payments calculated based on contractual payment requirements under the debt agreements. (5) We lease facilities under non-cancelable operating lease agreements that expire at various dates through fiscal year 2031. Purchase orders for the purchase of the majority of our raw materials and other goods and services are not included above. Our purchase orders generally allow for cancellation without significant penalties. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected short-term requirements. As of June 26, 2021, our gross unrecognized income tax benefits were $171.7 millionwhich excludes $29.5 millionof accrued interest. We are unable to make a reasonably reliable estimate of the timing of payments of these amounts, if any, in individual years due to uncertainties in the timing or outcomes of either actual or anticipated tax audits. As a result, these amounts are not included in the table above.
Off-balance sheet provisions
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