NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Skyworks Solutions, Inc., together with its consolidated subsidiaries (“Skyworks” or the “Company”), is empowering the wireless networking revolution. The Company’s highly innovative analog semiconductors are connecting people, places, and things, spanning a number of new and previously unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets.
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures, normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted pursuant to those rules and regulations. However, in management’s opinion, the financial information reflects all adjustments, including those of a normal recurring nature, necessary to present fairly the results of operations, financial position, and cash flows of the Company for the periods presented. The results of operations, financial position, and cash flows for the Company during the interim periods are not necessarily indicative of those expected for the full year. This information should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2017, filed with the SEC on November 13, 2017, as amended by Amendment No. 1 to such Annual Report on Form 10-K, filed with the SEC on January 26, 2018 (the “2017 10-K”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, expenses, comprehensive income and accumulated other comprehensive loss that are reported in these unaudited consolidated financial statements and accompanying disclosures. The Company evaluates its estimates on an ongoing basis using historical experience and other factors, including the current economic environment. Significant judgment is required in determining the reserves for and fair value of items such as overall fair value assessments of assets and liabilities, particularly those classified as Level 2 or Level 3 in the fair value hierarchy, marketable securities, inventory, intangible assets associated with business combinations, share-based compensation, loss contingencies, and income taxes. In addition, significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows for any necessary impairment testing. Actual results could differ significantly from these estimates.
The Company’s fiscal year ends on the Friday closest to September 30. Fiscal year 2018 consists of
52
weeks and ends on
September 28, 2018
. Fiscal year 2017 consisted of
52
weeks and ended on
September 29, 2017
. The
third
quarters and nine months ended for fiscal years 2018 and 2017 each consisted of
13
weeks and 39 weeks, respectively, and ended on
June 29, 2018
, and
June 30, 2017
, respectively.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted ASU 2016-09 at the beginning of the first quarter of fiscal year 2018. As a result of adoption, the Company recognized a discrete income tax benefit of
$23.6 million
to the income tax provision for excess tax benefits generated by the settlement of share-based awards for the nine months ended
June 29, 2018
. The adoption also resulted in an increase in cash flow from operations and a decrease of cash flow from financing of
$23.6 million
for the nine months ended
June 29, 2018
. Prior periods have not been adjusted. The Company has elected to account for forfeitures as they occur and will no longer estimate future forfeitures. The change in accounting for forfeitures was applied using a modified retrospective transition method and resulted in a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal year 2018 in the amount of
$1.9 million
. Forfeitures in the future will now be recorded as a benefit in the period they are realized.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The Company early adopted ASU 2017-04 during the second quarter
of fiscal year 2018 and applied it prospectively, as permitted by the standard. The adoption of this standard did not impact the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company will adopt this guidance during the first quarter of fiscal year 2019 and currently expects to apply the modified retrospective approach, with the cumulative effect of applying the new guidance recognized as an adjustment to the opening retained earnings balance. The Company has established a cross-functional team to assess the potential impact of the new revenue standard. The assessment process consists of reviewing the Company's current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to its revenue contracts and identifying appropriate changes to the business processes, systems and controls to support revenue recognition and disclosure requirements under the new standard. The Company is continuing to evaluate the potential impact of the new revenue standard on its business processes, systems, controls and consolidated financial statements. Based on its preliminary assessments, the Company does not expect the new guidance to have a material impact on the nature, amount, and timing of its revenue recognition. As the Company continues to assess the impact of the new guidance on its revenue contracts with its customers and finalizes its evaluation of any changes to its accounting policies, internal controls and footnote disclosures, the Company may identify additional areas of impact and may revise the results of its preliminary assessment.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This ASU requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for fiscal years beginning after December 15, 2018, with early adoption permitted. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented. The Company is currently evaluating the effect that ASU 2016-02 will have on the consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), (“ASU 2016-15”). This ASU provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. The effective date for the standard is for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that ASU 2016-15 will have on the consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-entity Transfers of an Asset Other than Inventory (“ASU 2016-16”). This ASU provides guidance that changes the accounting for income tax effects of intra-entity transfers of assets other than inventory. Under the new guidance, the selling (transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset. The effective date for the standard is for fiscal years beginning after December, 15, 2017, on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the effect ASU 2016-16 will have on the consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting (“ASU 2017-09”). This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company is currently evaluating the effect ASU 2017-09 will have on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 320) (“ASU 2016-13”), which requires a financial asset (or a group of financial assets) measured on the basis of amortized cost to be presented at the net amount expected to be collected. This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This ASU requires that credit losses of debt securities designated as available-for-sale be recorded through an allowance for credit losses. The ASU also limits the credit loss to the amount by which fair value is below amortized cost. This ASU will be effective for the Company in the first quarter of 2021, with early adoption permitted. This ASU requires modified retrospective adoption, with prospective adoption for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the effect ASU 2016-13 will have on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 320) (“ASU 2016-01”), which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for the Company in the first quarter of fiscal year 2019 and requires modified retrospective adoption, with prospective adoption for amendments related to equity securities without readily determinable fair values. The Company is evaluating the effect ASU 2016-01 will have on the consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments (“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than the Company's adoption date of Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company is currently evaluating the effect ASU 2018-07 will have on the consolidated financial statements.
Supplemental Cash Flow Information
At
June 29, 2018
, the Company had
$13.9 million
accrued to other long-term liabilities for capital equipment, and
$28.0 million
accrued to accounts payable for capital equipment. These amounts accrued for capital equipment purchases have been excluded from the consolidated statements of cash flows for the nine months ended
June 29, 2018
, and are expected to be paid in subsequent periods. Certain prior period amounts in the condensed consolidated statements of cash flows have been reclassified to conform to current period presentation. The description “Proceeds from employee stock purchase plan” has been reclassified from net cash provided by operating activities to net cash used in financing activities.
2. MARKETABLE SECURITIES
The Company's portfolio of available for sale marketable securities consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Noncurrent
|
Available for sale:
|
June 29,
2018
|
|
September 29,
2017
|
|
June 29,
2018
|
|
September 29,
2017
|
U.S. Treasury and government securities
|
80.5
|
|
|
—
|
|
|
4.3
|
|
|
—
|
|
Corporate bonds and notes
|
121.4
|
|
|
—
|
|
|
30.4
|
|
|
—
|
|
Municipal bonds
|
163.0
|
|
|
—
|
|
|
64.1
|
|
|
—
|
|
Other government securities
|
19.5
|
|
|
—
|
|
|
7.5
|
|
|
—
|
|
Total
|
384.4
|
|
|
—
|
|
|
106.3
|
|
|
—
|
|
The contractual maturities of noncurrent available for sale marketable securities were due within
two years or less
.
The Company recorded unrealized gains and losses on sales of available-for-sale marketable securities as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29, 2018
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
U.S. Treasury and government securities
|
84.8
|
|
|
—
|
|
|
—
|
|
|
84.8
|
|
Corporate bonds and notes
|
151.9
|
|
|
—
|
|
|
(0.1
|
)
|
|
151.8
|
|
Municipal bonds
|
227.2
|
|
|
—
|
|
|
(0.1
|
)
|
|
227.1
|
|
Other government securities
|
27.0
|
|
|
—
|
|
|
—
|
|
|
27.0
|
|
Total
|
490.9
|
|
|
—
|
|
|
(0.2
|
)
|
|
490.7
|
|
The Company concluded that the unrealized losses were temporary at June 29, 2018. Further, for debt securities with unrealized losses, the Company did not have the intent to sell, nor was it more likely than not that the Company would be required to sell, such securities before recovery or maturity.
3. FAIR VALUE
The Company groups its financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
|
•
|
Level 1 - Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
|
|
|
•
|
Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company.
|
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at fair value on a recurring basis such as its financial instruments. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the
three and nine months ended
June 29, 2018
.
Contingent consideration related to business combinations is recorded as a Level 3 liability because management uses significant judgments and unobservable inputs to determine the fair value. The Company reassesses the fair value of its contingent consideration liabilities on a quarterly basis and records any fair value adjustments to earnings in the period that they are determined.
Assets and liabilities recorded at fair value on a recurring basis consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 29, 2018
|
|
As of September 29, 2017
|
|
|
|
Fair Value Measurements
|
|
|
|
Fair Value Measurements
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents*
|
$
|
563.7
|
|
|
$
|
373.8
|
|
|
$
|
189.9
|
|
|
$
|
—
|
|
|
$
|
592.6
|
|
|
$
|
592.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Treasury and government securities
|
84.8
|
|
|
15.0
|
|
|
69.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate bonds and notes
|
151.8
|
|
|
—
|
|
|
151.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal bonds
|
227.1
|
|
|
—
|
|
|
227.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other government securities
|
27.0
|
|
|
—
|
|
|
27.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,054.4
|
|
|
$
|
388.8
|
|
|
$
|
665.6
|
|
|
$
|
—
|
|
|
$
|
592.6
|
|
|
$
|
592.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
4.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.1
|
|
|
$
|
11.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11.9
|
|
Total
|
$
|
4.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.1
|
|
|
$
|
11.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11.9
|
|
* Cash equivalents included in level 2 consist of corporate bonds and notes, foreign government bonds, commercial paper, and agency securities purchased with less than ninety days until maturity.
The following table summarizes changes to the fair value of the Level 3 liabilities (in millions):
|
|
|
|
|
|
Contingent consideration
|
Balance as of September 29, 2017
|
$
|
11.9
|
|
Decreases to contingent consideration included in earnings
|
(7.8
|
)
|
Balance as of June 29, 2018
|
$
|
4.1
|
|
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets and liabilities, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations, are measured at fair value using income approach valuation methodologies at the date of acquisition and are subsequently re-measured if there are indicators of impairment. There were no indicators of impairment identified during the
three and nine months ended
June 29, 2018
.
4. INVENTORY
Inventory consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 29,
2018
|
|
September 29,
2017
|
Raw materials
|
$
|
19.6
|
|
|
$
|
24.6
|
|
Work-in-process
|
305.2
|
|
|
330.6
|
|
Finished goods
|
167.9
|
|
|
123.0
|
|
Finished goods held on consignment by customers
|
10.1
|
|
|
15.3
|
|
Total inventory
|
$
|
502.8
|
|
|
$
|
493.5
|
|
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 29,
2018
|
|
September 29,
2017
|
Land and improvements
|
$
|
11.6
|
|
|
$
|
11.6
|
|
Buildings and improvements
|
219.7
|
|
|
137.8
|
|
Furniture and fixtures
|
31.9
|
|
|
29.5
|
|
Machinery and equipment
|
1,897.2
|
|
|
1,715.3
|
|
Construction in progress
|
223.2
|
|
|
164.8
|
|
Total property, plant and equipment, gross
|
2,383.6
|
|
|
2,059.0
|
|
Accumulated depreciation
|
(1,349.0
|
)
|
|
(1,176.7
|
)
|
Total property, plant and equipment, net
|
$
|
1,034.6
|
|
|
$
|
882.3
|
|
6. GOODWILL AND INTANGIBLE ASSETS
There were no changes to the carrying amount of goodwill during the
three and nine months ended
June 29, 2018
.
The Company tests its goodwill for impairment annually as of the first day of its fourth fiscal quarter and in interim periods if certain events occur indicating the carrying value of goodwill may be impaired. There were no indicators of impairment noted during the
three and nine months ended
June 29, 2018
.
Intangible assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
Weighted
Average
Amortization
Period (Years)
|
June 29, 2018
|
|
September 29, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
5
|
$
|
78.5
|
|
|
$
|
(66.9
|
)
|
|
$
|
11.6
|
|
|
$
|
78.5
|
|
|
$
|
(63.4
|
)
|
|
$
|
15.1
|
|
Developed technology and other
|
5
|
152.9
|
|
|
(119.0
|
)
|
|
33.9
|
|
|
150.2
|
|
|
(110.9
|
)
|
|
39.3
|
|
Trademarks
|
3
|
1.6
|
|
|
(0.7
|
)
|
|
0.9
|
|
|
1.6
|
|
|
(0.3
|
)
|
|
1.3
|
|
Internally developed software
|
3
|
18.0
|
|
|
(4.5
|
)
|
|
13.5
|
|
|
12.1
|
|
|
—
|
|
|
12.1
|
|
Total intangible assets
|
|
$
|
251.0
|
|
|
$
|
(191.1
|
)
|
|
$
|
59.9
|
|
|
$
|
242.4
|
|
|
$
|
(174.6
|
)
|
|
$
|
67.8
|
|
Annual amortization expense for the next five fiscal years related to intangible assets is expected to be as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining 2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
Amortization expense
|
$
|
5.3
|
|
|
$
|
20.2
|
|
|
$
|
17.5
|
|
|
$
|
8.7
|
|
|
$
|
0.5
|
|
|
$
|
7.7
|
|
7. INCOME TAXES
The provision for income taxes consists of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 29,
2018
|
|
June 30,
2017
|
|
June 29,
2018
|
|
June 30,
2017
|
United States income taxes
|
$
|
16.0
|
|
|
$
|
53.1
|
|
|
$
|
328.7
|
|
|
$
|
161.2
|
|
Foreign income taxes
|
8.3
|
|
|
7.5
|
|
|
27.1
|
|
|
19.2
|
|
Provision for income taxes
|
$
|
24.3
|
|
|
$
|
60.6
|
|
|
$
|
355.8
|
|
|
$
|
180.4
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
7.8
|
%
|
|
19.7
|
%
|
|
36.0
|
%
|
|
19.8
|
%
|
The difference between the Company’s effective tax rate and the
24.6%
United States federal statutory rate for the
three months ended
June 29, 2018
, resulted primarily from a decrease to tax expense of
$12.0 million
related to the release of tax reserves due to the lapse of the statute of limitations, an adjustment to the mandatory deemed repatriation tax on foreign earnings, foreign earnings taxed at rates lower than the federal statutory rate, the domestic production activities deduction, research and experimentation tax credits earned, and a benefit of
$1.1 million
related to windfall stock deductions, partially offset by an increase in tax expense related to a change in the reserve for uncertain tax positions.
The difference between the Company’s effective tax rate and the
24.6%
United States federal statutory rate for the
nine months ended
June 29, 2018
, resulted primarily from a one-time charge of
$238.0 million
related to the mandatory deemed repatriation tax on foreign earnings, a one-time charge of
$18.5 million
related to the revaluation of the deferred tax assets and liabilities related to tax reform, and an increase in tax expense related to a change in the reserve for uncertain tax positions, partially offset by foreign earnings taxed at rates lower than the federal statutory rate, the domestic production activities deduction, research and experimentation tax credits earned, a decrease to tax expense of
$12.0 million
related to the release of tax reserves due to the lapse of the statute of limitations, and a benefit of
$23.6 million
related to windfall stock deductions.
On December 22, 2017, the President of the United States signed into law new tax legislation, which includes, among other things, a reduction of the United States corporate tax rate from 35% to
21%
, a mandatory deemed repatriation tax on foreign earnings, repeal of the corporate alternative minimum tax and the domestic production activities deduction, and expensing of certain capital investments. The new law makes fundamental changes to the taxation of multinational entities, including a shift from worldwide taxation with deferral to a hybrid territorial system, featuring a participation exemption regime, a minimum tax on low-taxed foreign earnings, and new measures to deter base erosion and promote export from the United States. The Company expects this tax reform to have significant continued impact on its provision for income taxes and is in the process of evaluating the impact.
Staff Accounting Bulletin 118 (“SAB 118”), provides a measurement period during which companies may analyze the impacts of newly enacted legislation when the company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the new legislation, not to exceed one year. In accordance with SAB 118, the Company has estimated the impact of the new legislation as it pertains to various items, including a one-time charge of
$238.0 million
related to the mandatory deemed repatriation tax on foreign earnings and a one-time charge of
$18.5 million
related to the revaluation of its deferred tax assets and liabilities, using the new federal statutory tax rate of
21%
. The Company believes these amounts are reasonable estimates; however these amounts are provisional and are subject to change. Additional time is needed to gather the information necessary to finalize the computations of the impact of the new tax legislation. The changes included in the new tax legislation are broad and complex. The final transition impacts of the new tax legislation may differ from the above estimates, possibly materially, due to, among other things, changes in interpretations of the new tax legislation, any legislative action to address questions that arise because of the new tax legislation, any changes in accounting standards for income taxes or related interpretations in response to the new tax legislation, or any updates or changes to estimates the Company has utilized to calculate the transition impacts. SAB 118 allows for a measurement period of up to one year after the enactment date of the new tax legislation to finalize the recording of the related tax impacts. Accordingly, the Company revised its estimate of the mandatory deemed repatriation tax on foreign earnings by decreasing the one-time charge from
$257.8 million
for the
three months ended
December 29, 2017, to
$238.0 million
for the
nine months ended
June 29, 2018, primarily due to a change in the interpretation of the definition of cash within the computation. The $
19.8 million
measurement period adjustment reduced the effective tax rate by
2.0%
for the nine months ended June 29, 2018. The Company will continue to refine this estimate as new information becomes available and continues to anticipate finalizing and recording any adjustments by September 28, 2018.
In addition to the introduction of a modified territorial tax system, the Tax Reform Act includes two new sets of provisions aimed at preventing or decreasing U.S. tax base erosion—the global intangible low-taxed income (“GILTI”) provisions and the base erosion and anti-abuse tax (“BEAT”) provisions. The GILTI provisions impose taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company expects to make an accounting policy election to account for GILTI as a component of tax expense in the period in which the Company is subject to the rules and therefore will not provide any deferred tax impacts of GILTI in its consolidated financial statements for the quarter ended June 29, 2018. The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. These BEAT provisions are not effective for the Company until fiscal year 2019. The Company does not presently expect that it will be subject to the minimum tax imposed by the BEAT provisions. Other significant provisions of the Tax Reform Act that are not yet effective and for which it has not completed its analysis, but which may impact the Company's income taxes in future years, include the inclusion of performance-based compensation in determining the excessive compensation limitation and the benefit related to foreign derived intangible income.
The reduction of the corporate tax rate to
21%
is effective within fiscal year 2018. Therefore, the Company is subject to a blended fiscal year 2018 tax rate of approximately
24.6%
, which is computed by using the number of days of the fiscal year during which the Company is subject to the old tax rate of 35% and the number of days the Company is subject to the newly enacted tax rate of
21%
.
Accrued taxes of
$18.3 million
and
$20.3 million
have been included in other current liabilities within the consolidated balance sheets as of
June 29, 2018
, and
June 30, 2017
, respectively. The
$238.0 million
deemed repatriation tax is payable over the next eight years,
$19.0 million
per year for each of the next five years, followed by payments of
$35.8 million
,
$47.7 million
, and
$59.5 million
in years six through eight, respectively. The Company has accrued
$219.0 million
of the deemed repatriation tax in long-term liabilities within the consolidated balance sheet as of June 29, 2018.
The difference between the Company’s effective tax rate and the
35%
United States federal statutory rate for the
three and nine months ended
June 30, 2017
, resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate, the domestic production activities deduction, research and experimentation tax credits earned, and benefits from the settlement of a Canadian audit of the fiscal years 2010 and 2011 income tax returns, partially offset by an increase in the Company’s tax expense related to a change in the Company’s reserve for uncertain tax positions.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, various lawsuits, claims and proceedings have been, and may in the future be, instituted or asserted against the Company, including those pertaining to patent infringement, intellectual property, environmental hazards, product liability and warranty, safety and health, employment and contractual matters.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company’s business and have demanded and may in the future demand that the Company license their technology. The outcome of any such litigation cannot be predicted with certainty and some such lawsuits, claims or proceedings may be disposed of unfavorably to the Company. Generally speaking, intellectual property disputes often have a risk of injunctive relief, which, if imposed against the Company, could materially and adversely affect the Company’s financial condition, or results of operations. From time to time the Company may also be involved in legal proceedings in the ordinary course of business.
The Company monitors the status of legal proceedings and other contingencies on an ongoing basis to ensure loss contingencies are recognized and/or disclosed in its financial statements and footnotes. The Company does not believe there are any pending legal proceedings that are reasonably possible to result in a material loss. The Company is engaged in various legal actions in the normal course of business and, while there can be no assurances, the Company believes the outcome of all pending litigation involving the Company will not have, individually or in the aggregate, a material adverse effect on its business.
Guarantees and Indemnifications
The Company has made no significant contractual guarantees for the benefit of third parties. However, the Company generally indemnifies its customers from third-party intellectual property infringement litigation claims related to its products and, on occasion, also provides other indemnities related to product sales. In connection with certain facility leases, the Company has indemnified its lessors for certain claims arising from the facility or the lease.
The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the state of Delaware. The duration of the indemnities varies, and in many cases is indefinite. The indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales and in many cases are subject to geographic and other restrictions. In certain instances, the Company’s indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets and does not expect that such obligations will have a material adverse impact on its financial condition or results of operations.
9. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
On
January 31, 2018
, the Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to repurchase up to
$1.0 billion
of its common stock from time to time prior to
January 31, 2020
, on the open market or in privately negotiated transactions, as permitted by securities laws and other legal requirements.
During the three months ended
June 29, 2018
, the Company paid
$240.3 million
(including commissions) in connection with the repurchase of
2.5 million
shares of its common stock (paying an average price of
$97.43
per share). During the nine months ended
June 29, 2018
, the Company paid
$524.5 million
(including commissions) in connection with the repurchase of
5.1 million
shares of its common stock (paying an average price of
$102.06
per share). As of
June 29, 2018
,
$647.9 million
remained available under the existing stock repurchase authorization.
Dividends
On
July 19, 2018
, the Company announced that the Board of Directors had declared a cash dividend on its common stock of
$0.38
per share, payable on
August 28, 2018
, to the Company’s stockholders of record as of the close of business on
August 7, 2018
.
During the
three and nine months ended
June 29, 2018
, dividends charged to retained earnings were as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Total Amount
|
First quarter
|
$
|
0.32
|
|
|
$
|
58.8
|
|
Second quarter
|
0.32
|
|
|
58.5
|
|
Third quarter
|
0.32
|
|
|
57.8
|
|
Total
|
$
|
0.96
|
|
|
$
|
175.1
|
|
Share-based Compensation
The following table summarizes the share-based compensation expense by line item in the Statements of Operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 29,
2018
|
|
June 30,
2017
|
|
June 29,
2018
|
|
June 30,
2017
|
Cost of goods sold
|
$
|
3.3
|
|
|
$
|
2.9
|
|
|
$
|
11.6
|
|
|
$
|
10.1
|
|
Research and development
|
6.5
|
|
|
9.1
|
|
|
32.2
|
|
|
25.9
|
|
Selling, general and administrative
|
9.7
|
|
|
8.6
|
|
|
42.5
|
|
|
28.3
|
|
Total share-based compensation
|
$
|
19.5
|
|
|
$
|
20.6
|
|
|
$
|
86.3
|
|
|
$
|
64.3
|
|
On November 15, 2017, the Company agreed to potentially issue not more than
1%
of its common stock to an unaffiliated third party as a contingent consideration for its role under a multi-year collaboration agreement, upon the achievement of certain product sales milestones. The shares have been valued utilizing a probability weighted series of Black-Scholes pricing models and could be issued after mid-2020. The shares will be marked to estimated fair value each reporting period through earnings. The amount recorded in the statement of operations within selling, general and administrative expense for the three and
nine months ended
June 29, 2018
, is not material.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 29,
2018
|
|
June 30,
2017
|
|
June 29,
2018
|
|
June 30,
2017
|
Net income
|
$
|
286.5
|
|
|
$
|
246.2
|
|
|
$
|
632.9
|
|
|
$
|
728.9
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
181.2
|
|
|
184.2
|
|
|
182.3
|
|
|
184.6
|
|
Dilutive effect of equity based awards
|
1.6
|
|
|
2.4
|
|
|
1.9
|
|
|
2.4
|
|
Weighted average shares outstanding – diluted
|
182.8
|
|
|
186.6
|
|
|
184.2
|
|
|
187.0
|
|
|
|
|
|
|
|
|
|
Net income per share – basic
|
$
|
1.58
|
|
|
$
|
1.34
|
|
|
$
|
3.47
|
|
|
$
|
3.95
|
|
Net income per share – diluted
|
$
|
1.57
|
|
|
$
|
1.32
|
|
|
$
|
3.44
|
|
|
$
|
3.90
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
|
0.8
|
|
Basic earnings per share are calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding during the period. The calculation of diluted earnings per share includes the dilutive effect of equity based awards that were outstanding during the
three and nine months ended
June 29, 2018
, and
June 30, 2017
, using the treasury stock method. Certain of the Company’s outstanding share-based awards, noted in the table above, were excluded because they were anti-dilutive, but they could become dilutive in the future.