Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2016
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission file number: 001-34666
MaxLinear, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware | | 14-1896129 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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5966 La Place Court, Suite 100 Carlsbad, California | | 92008 |
(Address of principal executive offices) | | (Zip Code) |
(760) 692-0711
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ¨ | | Accelerated filer | | þ |
Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of August 3, 2016, the registrant has 57,356,324 shares of Class A common stock, par value $0.0001, and 6,666,777 shares of Class B common stock, par value $0.0001, outstanding.
MAXLINEAR, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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Part I | | |
Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
Part II | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
PART I — FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
MAXLINEAR, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands, except par value amounts) |
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 147,582 |
| | $ | 67,956 |
|
Short-term investments, available-for-sale | 28,899 |
| | 43,300 |
|
Accounts receivable, net | 44,340 |
| | 42,399 |
|
Inventory | 25,604 |
| | 32,443 |
|
Prepaid expenses and other current assets | 4,982 |
| | 3,904 |
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Total current assets | 251,407 |
| | 190,002 |
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Property and equipment, net | 21,134 |
| | 21,858 |
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Long-term investments, available-for-sale | — |
| | 19,242 |
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Intangible assets, net | 60,675 |
| | 51,355 |
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Goodwill | 56,714 |
| | 49,779 |
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Other long-term assets | 1,982 |
| | 2,269 |
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Total assets | $ | 391,912 |
| | $ | 334,505 |
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Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 8,114 |
| | $ | 6,389 |
|
Deferred revenue and deferred profit | 5,798 |
| | 4,066 |
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Accrued price protection liability | 18,270 |
| | 20,026 |
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Accrued expenses and other current liabilities | 13,125 |
| | 15,368 |
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Accrued compensation | 10,313 |
| | 9,983 |
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Total current liabilities | 55,620 |
| | 55,832 |
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Deferred rent | 10,040 |
| | 11,427 |
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Other long-term liabilities | 5,064 |
| | 4,322 |
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| | | |
Commitments and contingencies | — |
| | — |
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Stockholders’ equity: | | | |
Preferred stock, $0.0001 par value; 25,000 shares authorized, no shares issued or outstanding | — |
| | — |
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Common stock, $0.0001 par value; 550,000 shares authorized, no shares issued or outstanding | — |
| | — |
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Class A common stock, $0.0001 par value; 500,000 shares authorized, 57,345 and 55,737 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively | 6 |
| | 5 |
|
Class B common stock, $0.0001 par value; 500,000 shares authorized, 6,665 shares issued and outstanding at June 30, 2016 and December 31, 2015 | 1 |
| | 1 |
|
Additional paid-in capital | 400,093 |
| | 384,961 |
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Accumulated other comprehensive loss | (953 | ) | | (822 | ) |
Accumulated deficit | (77,959 | ) | | (121,221 | ) |
Total stockholders’ equity | 321,188 |
| | 262,924 |
|
Total liabilities and stockholders’ equity | $ | 391,912 |
| | $ | 334,505 |
|
See accompanying notes.
MAXLINEAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net revenue | $ | 101,687 |
| | $ | 70,824 |
| | $ | 204,372 |
| | $ | 106,220 |
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Cost of net revenue | 38,774 |
| | 43,882 |
| | 80,289 |
| | 57,607 |
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Gross profit | 62,913 |
| | 26,942 |
| | 124,083 |
| | 48,613 |
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Operating expenses: | | | | | | | |
Research and development | 24,037 |
| | 23,993 |
| | 47,789 |
| | 39,274 |
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Selling, general and administrative | 16,505 |
| | 23,620 |
| | 30,115 |
| | 34,564 |
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Restructuring charges | — |
| | 11,389 |
| | 2,106 |
| | 11,389 |
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Total operating expenses | 40,542 |
| | 59,002 |
| | 80,010 |
| | 85,227 |
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Income (loss) from operations | 22,371 |
| | (32,060 | ) | | 44,073 |
| | (36,614 | ) |
Interest income | 167 |
| | 51 |
| | 337 |
| | 121 |
|
Other income (expense), net | 124 |
| | (22 | ) | | (74 | ) | | (56 | ) |
Income (loss) before income taxes | 22,662 |
| | (32,031 | ) | | 44,336 |
| | (36,549 | ) |
Provision for income taxes (income tax benefit) | 78 |
| | (1,384 | ) | | 1,071 |
| | (1,180 | ) |
Net income (loss) | $ | 22,584 |
| | $ | (30,647 | ) | | $ | 43,265 |
| | $ | (35,369 | ) |
Net income (loss) per share: | | | | | | | |
Basic | $ | 0.36 |
| | $ | (0.58 | ) | | $ | 0.69 |
| | $ | (0.78 | ) |
Diluted | $ | 0.33 |
| | $ | (0.58 | ) | | $ | 0.64 |
| | $ | (0.78 | ) |
Shares used to compute net income (loss) per share: | | | | | | | |
Basic | 63,470 |
| | 52,586 |
| | 63,056 |
| | 45,367 |
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Diluted | 67,520 |
| | 52,586 |
| | 67,110 |
| | 45,367 |
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See accompanying notes.
MAXLINEAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited; in thousands)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | 22,584 |
| | $ | (30,647 | ) | | $ | 43,265 |
| | $ | (35,369 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Unrealized gain (loss) on investments, net of tax of $0 for the three and six months ended June 30, 2016 and 2015 | 48 |
| | (2 | ) | | 174 |
| | 33 |
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Less: Reclassifications to realized gain on sales and maturities of investments, net of tax of $0 for the three and six months ended June 30, 2016 and 2015 | (50 | ) | | — |
| | (50 | ) | | — |
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Unrealized gain (loss) on investments, net of tax | (2 | ) | | (2 | ) | | 124 |
| | 33 |
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Foreign currency translation adjustments, net of tax benefit of $27 for the three and six months ended June 30, 2016 and 2015 (1) | (363 | ) | | 68 |
| | (255 | ) | | 80 |
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Foreign currency translation adjustments, net of tax | (363 | ) | | 68 |
| | (255 | ) | | 80 |
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Other comprehensive income (loss) | (365 | ) | | 66 |
| | (131 | ) | | 113 |
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Total comprehensive income (loss) | $ | 22,219 |
| | $ | (30,581 | ) | | $ | 43,134 |
| | $ | (35,256 | ) |
(1) Tax amount recognized in Other Long-Term Liabilities of the Consolidated Balance Sheets as part of long-term deferred tax liabilities.
See accompanying notes.
MAXLINEAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
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| | | | | | | |
| Six Months Ended June 30, |
2016 | | 2015 |
Operating Activities | | | |
Net income (loss) | $ | 43,265 |
| | $ | (35,369 | ) |
Adjustments to reconcile net income (loss) to cash provided by operating activities: | | | |
Amortization and depreciation | 9,935 |
| | 13,866 |
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Provision for inventory reserves | 9 |
| | — |
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Amortization of investment premiums, net | 83 |
| | 204 |
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Amortization of inventory step-up | 336 |
| | 13,286 |
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Stock-based compensation | 10,211 |
| | 10,020 |
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Deferred income taxes | 133 |
| | (1,960 | ) |
Loss on disposal of property and equipment | 48 |
| | — |
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Gain on sale of available-for-sale securities | (50 | ) | | — |
|
Change in fair value of contingent consideration | 110 |
| | (132 | ) |
Impairment of lease | — |
| | 5,593 |
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Gain on foreign currency | (46 | ) | | — |
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Excess tax benefits on stock based awards | (5,114 | ) | | — |
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Changes in operating assets and liabilities: | | | |
Accounts receivable | (1,941 | ) | | 6,176 |
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Inventory | 7,409 |
| | (11,650 | ) |
Prepaid and other assets | (805 | ) | | 3,384 |
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Accounts payable, accrued expenses and other current liabilities | 4,967 |
| | 434 |
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Accrued compensation | 3,540 |
| | 1,503 |
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Deferred revenue and deferred profit | 1,732 |
| | 523 |
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Accrued price protection liability | (1,756 | ) | | 2,275 |
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Other long-term liabilities | (767 | ) | | 249 |
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Net cash provided by operating activities | 71,299 |
| | 8,402 |
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Investing Activities | | | |
Purchases of property and equipment | (4,710 | ) | | (1,460 | ) |
Purchases of intangible assets | (390 | ) | | — |
|
Cash used in acquisition, net of cash acquired | (21,000 | ) | | (3,615 | ) |
Purchases of available-for-sale securities | (47,277 | ) | | (19,968 | ) |
Maturities of available-for-sale securities | 81,011 |
| | 53,108 |
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Net cash provided by investing activities | 7,634 |
| | 28,065 |
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Financing Activities | | | |
Repurchases of common stock | (3 | ) | | (101 | ) |
Net proceeds from issuance of common stock | 4,285 |
| | 3,455 |
|
Minimum tax withholding paid on behalf of employees for restricted stock units | (3,593 | ) | | (3,161 | ) |
Equity issuance costs | — |
| | (705 | ) |
Net cash provided by (used in) financing activities | 689 |
| | (512 | ) |
Effect of exchange rate changes on cash and cash equivalents | 4 |
| | 80 |
|
Increase in cash and cash equivalents | 79,626 |
| | 36,035 |
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Cash and cash equivalents at beginning of period | 67,956 |
| | 20,696 |
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Cash and cash equivalents at end of period | $ | 147,582 |
| | $ | 56,731 |
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Supplemental disclosures of cash flow information: | | | |
Cash paid for income taxes | $ | 1,263 |
| | $ | 7 |
|
Supplemental disclosures of non-cash activities: | | | |
Issuance of restricted stock units to Physpeed continuing employees | $ | 578 |
| | $ | — |
|
Issuance of accrued share-based bonus plan | $ | 3,652 |
| | $ | 2,722 |
|
See accompanying notes.
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
1. Organization and Summary of Significant Accounting Policies
Description of Business
MaxLinear, Inc. was incorporated in Delaware in September 2003. MaxLinear, Inc., together with its wholly owned subsidiaries, collectively referred to as MaxLinear, or the Company, is a provider of radio-frequency and mixed-signal integrated circuits for cable and satellite broadband communications and the connected home, and for data center, metro, and long-haul transport network applications and wireless infrastructure. MaxLinear's customers include module makers, original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, who incorporate the Company’s products in a wide range of electronic devices including Pay-TV operator set-top boxes, DOCSIS data and voice gateways, hybrid analog and digital televisions and consumer terrestrial set-top boxes, Direct Broadcast Satellite outdoor units, optical modules for data center, metro, and long-haul transport network applications, and RF transceivers and modem solutions for wireless carrier infrastructure applications. The Company is a fabless semiconductor company focusing its resources on the design, sale and marketing of its products.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of MaxLinear, Inc. and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. All intercompany transactions and investments have been eliminated in consolidation. In the opinion of management, the Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive income (loss) and cash flows.
The consolidated balance sheet as of December 31, 2015 was derived from the Company’s audited consolidated financial statements at that date. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission, or the SEC, on February 17, 2016, as amended by Amendment No. 1 filed with the SEC on April 28, 2016, or the Annual Report. Certain prior period amounts have been reclassified to conform with the current period presentation. Interim results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes to unaudited consolidated financial statements. Actual results could differ from those estimates.
Summary of Significant Accounting Policies
Refer to the Company’s Annual Report for a summary of significant accounting policies. There have been no material changes to our significant accounting policies during the six months ended June 30, 2016, other than the adoption of ASU No. 2016-09, Improvements to Share-Based Compensation during the three months ended June 30, 2016, as discussed under Recent Accounting Pronouncements below.
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning in the first quarter of fiscal year 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of adopting this new accounting standard on its consolidated financial position and results of operations.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires inventory to be subsequently measured using the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in this Update are effective for the Company beginning in the first quarter of fiscal 2017 and should be applied prospectively. The Company is currently evaluating the impact that this guidance will have on the Company's consolidated financial position and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this Update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this Update are effective for the Company for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted. The Company is currently in the process of evaluating the impact of adoption of the amendments in this Update on the Company’s consolidated financial position and results of operations; however, adoption of the amendments in this Update are expected to be material for most entities who have material leases greater than twelve months.
In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the revenue recognition implementation guidance on principal versus agent considerations. The amendments in this Update clarify that when another party is involved in providing goods or services to a customer, an entity that is the principal has obtained control of a good or service before it is transferred to a customer, and provides indicators to assist an entity in determining whether it controls a specified good or service prior to the transfer to the customer. An entity that is the principal recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer, whereas an agent recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. The amendments in this Update are effective for the Company beginning in the first quarter of fiscal year 2018, concurrent with the new revenue recognition standard. The Company is currently evaluating the impact of adopting the new revenue recognition accounting standard, including this Update, on its consolidated financial position and results of operations.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Compensation to simplify certain aspects of accounting for share-based payment transactions associated with income taxes, classification as equity or liabilities, and classification on the statement of cash flows. The amendments in this Update are effective for the Company for fiscal years beginning with fiscal year 2017, including interim periods within those years, with early adoption permitted. Early adoption, if elected, must be completed for all of the amendments in the same period. The new guidance requires, among other things, excess tax benefits and tax deficiencies to be recorded in the income statement in the provision for income taxes when awards vest or are settled. Also, because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital. The Company adopted ASU No. 2016-09 during the quarter ended June 30, 2016. The impact of adoption was to reduce the provision for income taxes and increase net income for the three and six months ended June 30, 2016 by $3.5 million and $5.1 million, respectively, and increase basic net income per share by $0.06 and $0.08 for the three and six months ended June 30, 2016 and increase diluted net income per share by $0.04 and $0.06 for the three and six months ended June 30, 2016 (Note 2). The impact of adoption on the Company's previously reported results for the three months ended March 31, 2016 are as follows:
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
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| | | | | | | | |
| | Three months ended March 31, 2016 |
| | As reported | | As adjusted |
| | (in thousands, except per share amounts) |
Provision for income taxes | | $ | 2,558 |
| | $ | 993 |
|
Net income | | $ | 19,116 |
| | $ | 20,681 |
|
Basic earnings per share | | $ | 0.31 |
| | $ | 0.33 |
|
Diluted earnings per share | | $ | 0.29 |
| | $ | 0.31 |
|
Diluted weighted average shares outstanding | | 65,818 |
| | 66,643 |
|
There was no cumulative effect on retained earnings in the consolidated balance sheet since the Company has a full valuation allowance against U.S. deferred tax assets. The Company elected to continue to estimate forfeitures of share-based awards resulting in no impact to stock-based compensation expense, and is also continuing to classify cash paid by the Company when directly withholding shares for tax withholding purposes in cash flows from financing activities.
2. Net Income (Loss) Per Share
Net income (loss) per share is computed as required by the accounting standard for earnings per share, or EPS. Basic EPS is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period and the weighted-average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock options, restricted stock units and restricted stock awards are considered to be common stock equivalents and are only included in the calculation of diluted EPS when their effect is dilutive.
As a result of the Company's adoption of ASU No. 2016-09 in the second quarter 2016, excess tax benefits and tax deficiencies are no longer recognized in additional paid-in capital. As a result, when computing diluted EPS using the treasury stock method, fewer hypothetical shares can be repurchased resulting in a greater number of incremental shares being issued upon the exercise of share-based payment awards. The impact of adoption of ASU No. 2016-09 on diluted income (loss) per share (Note 1) is to increase net income due to the inclusion of excess tax benefits in the provision for income taxes (income tax benefit) by $3.5 million and $5.1 million for the three and six months ended June 30, 2016, and to increase the number of incremental shares used in computing diluted EPS by 910,000 shares and 868,000 shares for the three and six months ended June 30, 2016, or an increase to diluted net income per share of $0.04 per share and $0.06 per share for the three and six months ended June 30, 2016.
The Company has two classes of stock outstanding, Class A common stock and Class B common stock. The economic rights of the Class A common stock and Class B common stock, including rights in connection with dividends and payments upon a liquidation or merger are identical, and the Class A common stock and Class B common stock will be treated equally, identically and ratably, unless differential treatment is approved by the Class A common stock and Class B common stock, each voting separately as a class. The Company computes basic earnings per share by dividing net income (loss) by the weighted average number of shares of Class A and Class B common stock outstanding during the period. For diluted earnings per share, the Company divides net income (loss) by the sum of the weighted average number of shares of Class A and Class B common stock outstanding and the potential number of shares of dilutive Class A and Class B common stock outstanding during the period.
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands, except per share amounts) |
Numerator: | | | | | | | |
Net income (loss) | $ | 22,584 |
| | $ | (30,647 | ) | | $ | 43,265 |
| | $ | (35,369 | ) |
Denominator: | | | | | | | |
Weighted average common shares outstanding—basic | 63,470 |
| | 52,586 |
| | 63,056 |
| | 45,367 |
|
Dilutive common stock equivalents | 4,050 |
| | — |
| | 4,054 |
| | — |
|
Weighted average common shares outstanding—diluted | 67,520 |
| | 52,586 |
| | 67,110 |
| | 45,367 |
|
Net income (loss) per share: | | | | | | | |
Basic | $ | 0.36 |
| | $ | (0.58 | ) | | $ | 0.69 |
| | $ | (0.78 | ) |
Diluted | $ | 0.33 |
| | $ | (0.58 | ) | | $ | 0.64 |
| | $ | (0.78 | ) |
The Company excluded 1.2 million and 0.7 million common stock equivalents for the three and six months ended June 30, 2016, respectively, and 4.3 million and 5.7 million common stock equivalents for the three and six months ended June 30, 2015, respectively, resulting from outstanding equity awards for the calculation of diluted net income (loss) per share due to their anti-dilutive nature.
3. Business Combination
Acquisition of Certain Assets and Assumption of Certain Liabilities of the Wireless Infrastructure Access Line Business of of Microsemi Storage Solutions, Inc. (formerly known as PMC-Sierra, Inc.)
On April 28, 2016, the Company entered into an asset purchase agreement with Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., or Microsemi, and consummated the transactions contemplated by the asset purchase agreement. The Company paid cash consideration of $21.0 million for the purchase of certain wireless access assets of Microsemi's wireless infrastructure access line business, and assumed certain liabilities. The assets acquired include, among other things, radio frequency and analog/mixed signal patents and other intellectual property, in-production and next-generation RF transceiver designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property, plant, and equipment. The liabilities assumed include, product warranty obligations, accrued vacation and severance obligations for employees of the wireless infrastructure access line business that were hired by the Company upon close of the acquisition. The acquired assets and assumed liabilities, together with the rehired employees, represent a business as defined in ASC 805, Business Combinations. The Company intends to integrate the acquired assets and rehired employees into the Company's existing business. The asset purchase agreement also contains customary representations, warranties and covenants, including non-competition, non-solicitation, and indemnification provisions. In connection with the acquisition, the Company entered into a transition services agreement with Microsemi for the purpose of Microsemi providing interim operations and general and administrative support to the Company.
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
The following is a preliminary allocation of purchase price as of the April 28, 2016 closing date based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition (in thousands): |
| | | |
Description | Amount |
| (in thousands) |
Fair value of consideration transferred: | |
Cash | $ | 21,000 |
|
| |
Preliminary purchase price allocation: | |
Inventory | $ | 912 |
|
Property and equipment | 21 |
|
Identifiable intangible assets | 13,600 |
|
Warranty obligations | (12 | ) |
Accrued expenses | (456 | ) |
Identifiable net assets acquired | 14,065 |
|
Goodwill | 6,935 |
|
Total purchase price | $ | 21,000 |
|
The estimated fair value of assets acquired and liabilities assumed performed for the purposes of these unaudited consolidated financial statements was primarily limited to the preliminary identification and valuation of intangible assets and inventory by independent valuation specialists. Estimates of fair value require management to make significant estimates and assumptions that are preliminary and subject to change upon finalization of the valuation analysis. Although final determination may result in different asset and liability fair values, it is not expected that such differences will be material to understanding the impact of the transaction on the financial results of MaxLinear. The goodwill recognized is attributable primarily to the acquired workforce, expected synergies, and other benefits that MaxLinear believes will result from integrating the operations of the wireless infrastructure access line business with the operations of MaxLinear.
The Company has not yet made all of the remaining disclosures required by ASC 805-10-50-2, Business Combinations, as it is currently in the process of completing the purchase accounting for the acquisition. The Company used cash and cash equivalents on hand of $21.0 million to fund the acquisition.
Acquisition and integration-related costs of $0.6 million related to the acquisition of the wireless infrastructure access line business were included in selling, general, and administrative expenses in the Company's statement of operations for the three months ended June 30, 2016.
The following table presents unaudited pro forma combined financial information for each of the periods presented, as if the acquisition had occurred at the beginning of fiscal year 2015:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands) |
Net revenues – proforma combined | $ | 102,530 |
| | $ | 71,630 |
| | $ | 207,648 |
| | $ | 108,067 |
|
Net income (loss) – proforma combined | 22,692 |
| | (34,117 | ) | | 42,696 |
| | (43,862 | ) |
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
The following adjustments were included in the unaudited pro forma combined net income (loss):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands) |
Net income (loss) | $ | 22,584 |
| | $ | (30,647 | ) | | $ | 43,265 |
| | $ | (35,369 | ) |
Add: Results of operations – acquired business | 163 |
| | (2,566 | ) | | 126 |
| | (5,764 | ) |
Less: Proforma adjustments | | | | | | | |
Depreciation of property, plant and equipment | (1 | ) | | (2 | ) | | (3 | ) | | (5 | ) |
Amortization of intangible assets | (203 | ) | | (857 | ) | | (809 | ) | | (1,713 | ) |
Amortization of inventory step-up | — |
| | — |
| | — |
| | (336 | ) |
Acquisition and integration expenses | 569 |
| | — |
| | 569 |
| | (569 | ) |
Tax provision | (420 | ) | | (45 | ) | | (452 | ) | | (106 | ) |
Net income (loss) – proforma combined | $ | 22,692 |
| | $ | (34,117 | ) | | $ | 42,696 |
| | $ | (43,862 | ) |
The pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations of the consolidated business had the merger actually occurred at the beginning of fiscal year 2015 or of the results of future operations of the consolidated business. The unaudited pro forma financial information does not reflect any operating efficiencies and cost saving that may be realized from the integration of the acquisition in the Company's unaudited consolidated statements of operations.
For the three and six months ended June 30, 2016, $0.8 million of revenue and $0.4 million of gross profit, excluding $0.5 million of amortization of acquired intangible assets and the inventory fair-value step-up of the wireless infrastructure access line business since the acquisition date are included in the Company's consolidated statements of operations.
Acquisition of Entropic Communications, Inc.
On April 30, 2015, the Company completed its acquisition of Entropic Communications, Inc., or Entropic, for aggregate consideration of $289.4 million, which was comprised of the equity value of shares of the Company's common stock that were issued in the transaction of $173.8 million, the portion of outstanding equity awards deemed to have been earned as of April 30, 2015 of $4.5 million and cash of $111.1 million.
Refer to Note 4 for disclosures following this acquisition for the three and six months ended June 30, 2016 and 2015.
Acquisition of Physpeed, Co., Ltd.
On October 31, 2014, the Company acquired 100% of the outstanding common shares of Physpeed Co., Ltd., or Physpeed, a privately held developer of high-speed physical layer interconnect products addressing enterprise and telecommunications infrastructure market applications. The Company paid $9.3 million in cash in exchange for all outstanding shares of capital stock and equity of Physpeed. Consideration payable of $1.1 million to the former shareholders of Physpeed was placed into escrow pursuant to the terms of the definitive merger agreement.
The following disclosures regarding this acquisition are for the three and six months ended June 30, 2016 and 2015.
Compensation Arrangements
In connection with the acquisition of Physpeed, the Company agreed to pay additional consideration in future periods. The definitive merger agreement provided for potential consideration of $1.7 million of held back merger proceeds for the former principal shareholders of Physpeed, which will be paid over a two year period contingent upon continued employment. Quarterly payments of $0.2 million began on January 31, 2015 and will end on October 31, 2016. Certain employees of Physpeed will be paid a total of $0.1 million of which $0.07 million was paid in 2015 and $0.05 million is being paid in 2016. These payments are accounted for as transactions separate from the business combination as the payments are contingent upon continued employment and are being recorded as post-combination compensation expense in the Company's financial statements during the service period.
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
Earn-Out
The definitive merger agreement also provides for potential earn-out consideration of up to $0.75 million to the former shareholders of Physpeed for the achievement of certain 2015 and 2016 revenue milestones. The contingent earn-out consideration had an estimated fair value of $0.3 million at the date of acquisition. The 2015 earn-out amount is determined by multiplying $0.375 million by a 2015 revenue percentage that is defined in the definitive merger agreement. The 2016 earn-out amount is determined by multiplying $0.375 million by a 2016 revenue percentage that is defined in the definitive merger agreement. Subsequent changes to the fair value are recorded through earnings. The fair value of the earn-out was $0.3 million and $0.4 million at June 30, 2016 and December 31, 2015, respectively. During the six months ended June 30, 2016, the Company paid $0.2 million for the 2015 earn-out (Note 6).
Restricted Stock Units
The Company agreed to grant restricted stock units, or RSUs, under its equity incentive plan to Physpeed continuing employees if certain 2015 and 2016 revenue targets are met contingent upon continued employment. Qualifying revenues are the net revenues recognized directly attributable to sales of Physpeed products or the Company’s provision of non-recurring engineering services exclusively with respect to the Physpeed products.
The Company recorded compensation expense for the 2015 RSUs over a 14 month service period from October 31, 2014 through December 31, 2015. The Company records compensation expense for the 2016 RSUs over a 26-month service period, which started from October 31, 2014 and runs through December 31, 2016. The Company has recorded an accrual for the stock-based compensation expense for the 2015 and 2016 RSUs of $1.3 million and $1.9 million at June 30, 2016 and December 31, 2015, respectively. The Company issued the 2015 RSUs in February 2016 and no related accrual for the 2015 revenue period was outstanding at June 30, 2016.
4. Restructuring Activity
In connection with the Company's acquisition of Entropic, the Company entered into a restructuring plan to address matters primarily relating to the integration of the Company and Entropic businesses. In connection with this plan, the Company has terminated the employment of 87 Entropic employees since the acquisition closing date. The Company did not incur any associated employee separation charges in the three and six months ended June 30, 2016, as such terminations did not occur during such quarters. The Company recognized non-recurring employee separation charges of approximately $5.8 million in the three and six months ended June 30, 2015 related to these terminations.
Additionally, in connection with the restructuring plan, the Company ceased use of the former Entropic headquarters in 2015. The Company recognized lease charges of $0 and $2.0 million in the three and six months ended June 30, 2016, respectively, and $5.6 million in the three and six months ended June 30, 2015, based on the adjustment to the net present value of the remaining lease obligation on the cease of use date as well as the execution of the final sublease. The Company believes all restructuring charges related to the Entropic acquisition have been incurred as of June 30, 2016.
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
The following table presents the activity related to the plan, which is included in restructuring charges in the Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, 2016 |
| 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands) |
Employee separation expenses | $ | — |
| | $ | 5,796 |
| | $ | — |
| | $ | 5,796 |
|
Lease related charges (1) | — |
| | 5,593 |
| | 1,976 |
| | 5,593 |
|
Other | — |
| | — |
| | 130 |
| | — |
|
| $ | — |
| | $ | 11,389 |
| | $ | 2,106 |
| | $ | 11,389 |
|
____________________________
| |
(1) | In the six months ended June 30, 2016, includes $0.4 million in offsets to restructuring charges related to an Entropic lease that was restructured prior to the completion of the acquisition by MaxLinear. The Company recorded an adjustment to the lease restructuring due to changes in market conditions. In the three months ended June 30, 2016, includes no offsets to restructuring charges related to Entropic leases. |
The following table presents a roll-forward of the Company's restructuring liability as of June 30, 2016, which is included in accrued expenses and other current liabilities in the Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | |
| Employee Separation Expenses | | Lease Related Charges | | Other | | Total |
| (in thousands) |
Liability as of December 31, 2015 | $ | 75 |
| | $ | 1,557 |
| | $ | 1 |
| | $ | 1,633 |
|
Restructuring charges (1) | — |
| | 1,976 |
| | 130 |
| | 2,106 |
|
Cash payments | (9 | ) | | (2,376 | ) | | (73 | ) | | (2,458 | ) |
Non-cash charges | — |
| | 165 |
| | (19 | ) | | 146 |
|
Liability as of June 30, 2016 | $ | 66 |
| | $ | 1,322 |
| | $ | 39 |
| | $ | 1,427 |
|
____________________________
| |
(1) | In the six months ended June 30, 2016, includes $0.4 million in offsets to restructuring charges related to an Entropic lease that was restructured during to the completion of the acquisition by MaxLinear. The Company recorded an adjustment to the lease restructuring due to changes in market conditions. In the three months ended June 30, 2016, includes no offsets to restructuring charges related to Entropic leases. |
5. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill were as follows:
|
| | | |
| Carrying Value |
| (in thousands) |
Balance as of January 1, 2016 | $ | 49,779 |
|
Acquisition of wireless infrastructure access line business | 6,935 |
|
Balance as of June 30, 2016 | $ | 56,714 |
|
Goodwill is not amortized, but is tested for impairment using a two-step method on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit. No goodwill impairment was recognized for three and six months ended June 30, 2016 and 2015.
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
Acquired Intangibles
Finite-lived Intangible Assets
The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and technology licenses purchased, which continue to be amortized:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2016 | | December 31, 2015 |
| Weighted Average Useful Life (in Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | (in thousands) |
Licensed technology | 3 | | $ | 3,311 |
| | $ | (2,876 | ) | | $ | 435 |
| | $ | 2,921 |
| | $ | (2,725 | ) | | $ | 196 |
|
Developed technology | 7 | | 55,600 |
| | (8,214 | ) | | 47,386 |
| | 47,000 |
| | (4,652 | ) | | 42,348 |
|
Trademarks and trade names | 7 | | 1,700 |
| | (283 | ) | | 1,417 |
| | 1,700 |
| | (162 | ) | | 1,538 |
|
Customer relationships | 5 | | 7,800 |
| | (1,290 | ) | | 6,510 |
| | 4,700 |
| | (627 | ) | | 4,073 |
|
Covenants non-compete | 3 | | 100 |
| | (6 | ) | | 94 |
| | — |
| | — |
| | — |
|
Backlog | 1 | | 24,700 |
| | (24,367 | ) | | 333 |
| | 24,200 |
| | (24,200 | ) | | — |
|
| | | $ | 93,211 |
| | $ | (37,036 | ) | | $ | 56,175 |
| | $ | 80,521 |
| | $ | (32,366 | ) | | $ | 48,155 |
|
Amortization expense related to intangible assets was $2.6 million and $4.7 million in the three and six months ended June 30, 2016, respectively, and $9.2 million and $9.4 million in the three and six months ended June 30, 2015, respectively.
The following table sets forth the activity during the six months ended June 30, 2016 related to finite-lived intangible assets resulting from the acquisition of the wireless access line business, other additions and amortization of acquired finite-lived intangible assets:
|
| | | |
| Carrying Amount |
| (in thousands) |
Balance as of December 31, 2015 | $ | 48,155 |
|
Acquisition of wireless infrastructure access line business | 12,300 |
|
Other additions | 390 |
|
Amortization | (4,670 | ) |
Balance as of June 30, 2016 | $ | 56,175 |
|
The following table presents future amortization of the Company’s finite-lived intangible assets at June 30, 2016:
|
| | | |
| Amortization |
| (in thousands) |
2016 (six months) | $ | 5,597 |
|
2017 | 10,485 |
|
2018 | 10,468 |
|
2019 | 9,159 |
|
2020 | 8,499 |
|
2021 | 8,122 |
|
Thereafter | 3,845 |
|
Total | $ | 56,175 |
|
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
Indefinite-lived Intangible Assets
The following table sets forth the activity of the Company’s indefinite-lived intangible assets, which consists of in-process research and development technology:
|
| | | |
| Gross Carrying Amount |
| (in thousands) |
Balance as of December 31, 2015 | $ | 3,200 |
|
Acquisition of wireless infrastructure access line business | 1,300 |
|
Balance as of June 30, 2016 | $ | 4,500 |
|
The Company regularly reviews the carrying amount of its long-lived assets, as well as the useful lives, to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset. Should impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset over the asset’s fair value. No impairment losses related to long-lived assets were recognized for the three and six months ended June 30, 2016 and 2015.
6. Financial Instruments
The composition of financial instruments is as follows:
|
| | | | | | | | | | | | | | | |
| June 30, 2016 |
Amortized Cost | | Gross Unrealized | | Fair Value |
Gains | | Losses | |
| (in thousands) |
Assets | | | | | | | |
Money market funds | $ | 10,311 |
| | $ | — |
| | $ | — |
| | $ | 10,311 |
|
Government debt securities | 2,000 |
| | — |
| | — |
| | 2,000 |
|
Corporate debt securities | 26,889 |
| | 10 |
| | — |
| | 26,899 |
|
| 39,200 |
| | 10 |
| | — |
| | 39,210 |
|
Less amounts included in cash and cash equivalents | (10,311 | ) | | — |
| | — |
| | (10,311 | ) |
| $ | 28,889 |
| | $ | 10 |
| | $ | — |
| | $ | 28,899 |
|
|
| | | |
| Fair Value at June 30, 2016 |
| (in thousands) |
Liabilities | |
Contingent Consideration | $ | 265 |
|
Total | $ | 265 |
|
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
Amortized Cost | | Gross Unrealized | | Fair Value |
Gains | | Losses | |
| (in thousands) |
Assets | | | | | | | |
Money market funds | $ | 17,144 |
| | $ | — |
| | $ | — |
| | $ | 17,144 |
|
Government debt securities | 17,303 |
| | — |
| | (30 | ) | | 17,273 |
|
Corporate debt securities | 45,353 |
| | — |
| | (84 | ) | | 45,269 |
|
| 79,800 |
| | — |
| | (114 | ) | | 79,686 |
|
Less amounts included in cash and cash equivalents | (17,144 | ) | | — |
| | — |
| | (17,144 | ) |
| $ | 62,656 |
| | $ | — |
| | $ | (114 | ) | | $ | 62,542 |
|
|
| | | |
| Fair Value at December 31, 2015 |
| (in thousands) |
Liabilities | |
Contingent Consideration | $ | 395 |
|
Total | $ | 395 |
|
At June 30, 2016, the Company held 5 government and corporate debt securities with an aggregate fair value of $7.7 million that were in an unrealized loss position for less than 12 months. No securities have been in unrealized loss positions for greater than 12 months. Gross unrealized losses were immaterial at June 30, 2016, and represented temporary impairments on government agency and corporate debt securities related to multiple issuers, and were primarily caused by fluctuations in U.S. interest rates. The Company evaluates securities for other-than-temporary impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer; including changes in the financial condition of the security’s underlying collateral; any downgrades of the security by a rating agency; nonpayment of scheduled interest, or the reduction or elimination of dividends; as well as our intent and ability to hold the security in order to allow for an anticipated recovery in fair value.
All of the Company’s long-term available-for-sale securities were due between 1 and 2 years as of June 30, 2016.
The fair values of the Company’s financial instruments are the amounts that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants and are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The levels are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
The Company classifies its financial instruments within Level 1 or Level 2 of the fair value hierarchy on the basis of valuations using quoted market prices or alternate pricing sources and models utilizing market observable inputs, respectively. The Company’s money market funds were valued based on quoted prices for the specific securities in an active market and were therefore classified as Level 1. The government and corporate debt securities have been valued on the basis of valuations provided by third-party pricing services, as derived from such services’ pricing models. The pricing services may use a consensus price which is a weighted average price based on multiple sources or mathematical calculations to determine the valuation for a security, and have been classified as Level 2. The Company reviews Level 2 inputs and fair value for reasonableness and the values may be further validated by comparison to independent pricing sources. In addition, the Company reviews third-party pricing provider models, key inputs and assumptions and understands the pricing processes at its third-party providers in determining the overall reasonableness of the fair value of its Level 2 financial instruments. As of June 30, 2016, the Company has not made any adjustments to the prices obtained from its third party pricing providers. The contingent liability is classified as Level 3 as of June 30, 2016 and December 31, 2015 and is valued using an internal rate of return model. The assumptions used in preparing the internal rate of return model include estimates for future revenues related to Physpeed products and services and a discount factor of 0.45 at June 30, 2016 and 0.41 at December 31, 2015. The assumptions used in preparing the internal rate of return model include estimates for outcome if milestone goals are achieved, the probability of achieving each outcome and discount rates. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in estimated future revenues would be accompanied by a directionally similar change in fair value.
The following table presents a summary of the Company’s financial instruments that are measured on a recurring basis:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at June 30, 2016 |
| Balance at June 30, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) |
Assets | | | | | | | |
Money market funds | $ | 10,311 |
| | $ | 10,311 |
| | $ | — |
| | $ | — |
|
Government debt securities | 2,000 |
| | — |
| | 2,000 |
| | — |
|
Corporate debt securities | 26,899 |
| | — |
| | 26,899 |
| | — |
|
| $ | 39,210 |
| | $ | 10,311 |
| | $ | 28,899 |
| | $ | — |
|
Liabilities | | | | | | | |
Contingent consideration | $ | 265 |
| | $ | — |
| | $ | — |
| | $ | 265 |
|
| $ | 265 |
| | $ | — |
| | $ | — |
| | $ | 265 |
|
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2015 |
| Balance at December 31, 2015 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in thousands) |
Assets | | | | | | | |
Money market funds | $ | 17,144 |
| | $ | 17,144 |
| | $ | — |
| | $ | — |
|
Government debt securities | 17,273 |
| | — |
| | 17,273 |
| | — |
|
Corporate debt securities | 45,269 |
| | — |
| | 45,269 |
| | — |
|
| $ | 79,686 |
| | $ | 17,144 |
| | $ | 62,542 |
| | $ | — |
|
Liabilities | | | | | | | |
Contingent consideration | $ | 395 |
| | $ | — |
| | $ | — |
| | $ | 395 |
|
| $ | 395 |
| | $ | — |
| | $ | — |
| | $ | 395 |
|
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
The following summarizes the activity in Level 3 financial instruments:
|
| | | | | | | |
| Six Months Ended June 30, 2016 |
| 2016 | | 2015 |
| (in thousands) |
Contingent Consideration (1) | | | |
Beginning balance | $ | 395 |
| | $ | 265 |
|
Physpeed earn-out payment | (240 | ) | | — |
|
Loss (gain) recognized in earnings (2) | 110 |
| | (132 | ) |
Ending balance | $ | 265 |
| | $ | 133 |
|
Net (loss) gain for the period included in earnings attributable to contingent consideration held at the end of the period | $ | (110 | ) | | $ | 132 |
|
____________________________
| |
(1) | In connection with the acquisition of Physpeed, the Company recorded contingent consideration based upon the expected achievement of 2015 and 2016 revenue milestones. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expense in the unaudited consolidated statements of operations. |
| |
(2) | Changes to the estimated fair value of contingent consideration for the six months ended June 30, 2016 were primarily due to updates to present value discount factors. Changes to the estimated fair value of contingent consideration for the six months ended June 30, 2015 were primarily due to revisions to the Company's expectations of earn-out achievement. |
There were no transfers between Level 1, Level 2 or Level 3 financial instruments in six months ended June 30, 2016.
7. Balance Sheet Details
Cash and cash equivalents and investments consist of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| (in thousands) |
Cash and cash equivalents | $ | 147,582 |
| | $ | 67,956 |
|
Short-term investments | 28,899 |
| | 43,300 |
|
Long-term investments | — |
| | 19,242 |
|
| $ | 176,481 |
| | $ | 130,498 |
|
Inventory consists of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| (in thousands) |
Work-in-process | $ | 14,276 |
| | $ | 15,713 |
|
Finished goods | 11,281 |
| | 16,730 |
|
In-transit | 47 |
| | — |
|
| $ | 25,604 |
| | $ | 32,443 |
|
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
Property and equipment consist of the following:
|
| | | | | | | | | |
| Useful Life (in Years) | | June 30, 2016 | | December 31, 2015 |
| | | (in thousands) |
Furniture and fixtures | 5 | | $ | 2,612 |
| | $ | 2,458 |
|
Machinery and equipment | 3 -5 | | 25,047 |
| | 23,679 |
|
Masks and production equipment | 2 | | 8,154 |
| | 8,062 |
|
Software | 3 | | 3,036 |
| | 3,017 |
|
Leasehold improvements | 4 -5 | | 11,268 |
| | 9,573 |
|
Construction in progress | N/A | | 700 |
| | 62 |
|
| | | 50,817 |
| | 46,851 |
|
Less accumulated depreciation and amortization | | | (29,683 | ) | | (24,993 | ) |
| | | $ | 21,134 |
| | $ | 21,858 |
|
Deferred revenue and deferred profit consist of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| (in thousands) |
Deferred revenue—rebates | $ | 224 |
| | $ | 118 |
|
Deferred revenue—distributor transactions | 8,523 |
| | 5,695 |
|
Deferred cost of net revenue—distributor transactions | (2,949 | ) | | (1,747 | ) |
| $ | 5,798 |
| | $ | 4,066 |
|
Accrued price protection liability consists of the following activity:
|
| | | | | | | |
| Six Months Ended June 30, |
| 2016 | | 2015 |
| (in thousands) |
Beginning balance | $ | 20,026 |
| | $ | 10,018 |
|
Additional liability from acquisition | — |
| | 3,486 |
|
Charged as a reduction of revenue | 22,759 |
| | 14,781 |
|
Reversal of unclaimed rebates | (1,302 | ) | | (63 | ) |
Payments | (23,213 | ) | | (12,443 | ) |
Ending balance | $ | 18,270 |
| | $ | 15,779 |
|
Accrued expenses and other current liabilities consist of the following:
|
| | | | | | | |
| June 30, 2016 | | December 31, 2015 |
| (in thousands) |
Accrued technology license payments | $ | 3,000 |
| | $ | 3,000 |
|
Accrued professional fees | 1,372 |
| | 1,196 |
|
Accrued restructuring | 1,427 |
| | 1,633 |
|
Accrued litigation costs | — |
| | 534 |
|
Accrued royalty | 1,170 |
| | 2,042 |
|
Accrued leases - other | 1,243 |
| | — |
|
Other | 4,913 |
| | 6,963 |
|
| $ | 13,125 |
| | $ | 15,368 |
|
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
8. Stock-Based Compensation and Employee Benefit Plans
Refer to the Company’s Annual Report for a summary of the stock-based compensation and equity plans. There have been no material changes to such plans during the six months ended June 30, 2016.
Stock-Based Compensation
The Company uses the Black-Scholes valuation model to calculate the fair value of stock options and employee stock purchase rights granted to employees. The Company calculates the fair value of RSUs, and restricted stock awards, or RSAs, based on the fair market value of our Class A common stock on the grant date. The weighted-average grant date fair value per share of the RSUs and RSAs granted in the six months ended June 30, 2016 was $18.15. The weighted-average grant date fair value per share of the RSUs and RSAs granted in the six months ended June 30, 2015 was $9.98. No stock options were granted during the six months ended June 30, 2016 and 2015.
The Company recognized stock-based compensation in the consolidated statements of operations, based on the department to which the related employee reports, as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (in thousands) | | (in thousands) |
Cost of net revenue | $ | 51 |
| | $ | 61 |
| | $ | 94 |
| | $ | 96 |
|
Research and development | 3,305 |
| | 3,053 |
| | 6,584 |
| | 5,393 |
|
Selling, general and administrative | 1,746 |
| | 1,680 |
| | 3,533 |
| | 3,024 |
|
| $ | 5,102 |
| | $ | 4,794 |
| | $ | 10,211 |
| | $ | 8,513 |
|
The total unrecognized compensation cost related to unvested stock options as of June 30, 2016 was $1.1 million, and the weighted average period over which these equity awards are expected to vest is 1.44 years. The total unrecognized compensation cost related to unvested RSUs and RSAs as of June 30, 2016 was $45.3 million, and the weighted average period over which these equity awards are expected to vest is 2.92 years.
In connection with the acquisition of Entropic, the Company assumed stock options and RSUs originally granted by Entropic. Stock-based compensation expense related to assumed Entropic stock options and RSUs included $0.2 million in the three and six months ended June 30, 2016, and $2.4 million in the three and six months ended June 30, 2015.
Employee Incentive Bonus
In connection with the Company's bonus programs, in May 2016, we issued 0.2 million freely-tradable shares of our Class A common stock in settlement of bonus awards to employees, including executives, for the July 1, 2015 to December 31, 2015 performance period. In August 2015, we issued 0.3 million shares of our Class A common stock in settlement of bonus awards for the January 1, 2015 to June 30, 2015 performance period under our bonus plan. In May 2015, we issued 0.2 million freely-tradable shares of our Class A common stock in settlement of bonus awards for the fiscal 2014 performance period under our bonus plan.
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
Restricted Stock Units and Restricted Stock Awards
A summary of the Company’s restricted stock unit and restricted stock award activity is as follows:
|
| | | | | | |
| Number of Shares (in thousands) | | Weighted-Average Grant-Date Fair Value per Share |
Outstanding at December 31, 2015 | 3,642 |
| | $ | 9.19 |
|
Granted | 2,081 |
| | 18.15 |
|
Vested | (1,300 | ) | | 10.32 |
|
Canceled | (234 | ) | | 10.87 |
|
Outstanding at June 30, 2016 | 4,189 |
| | 13.20 |
|
The intrinsic value of restricted stock units and restricted stock awards vested was $15.7 million and $23.1 million in the three and six months ended June 30, 2016, respectively, and $12.3 million and $15.2 million in the three and six months ended June 30, 2015, respectively. The intrinsic value of restricted stock units and restricted stock awards outstanding at June 30, 2016 was $75.3 million.
Stock Options
A summary of the Company’s stock options activity is as follows:
|
| | | | | | | | | | | | |
| Number of Shares (in thousands) | | Weighted-Average Exercise Price | | Weighted-Average Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at December 31, 2015 | 3,572 |
| | $ | 6.83 |
| | | | |
Granted(1) | — |
| | — |
| | | | |
Exercised | (408 | ) | | 5.18 |
| | | | |
Canceled | (38 | ) | | 24.32 |
| | | | |
Outstanding at June 30, 2016 | 3,126 |
| | $ | 6.83 |
| | 3.19 | | $ | 35,481 |
|
Vested and expected to vest at June 30, 2016 | 3,115 |
| | $ | 6.83 |
| | 3.19 | | $ | 35,367 |
|
Exercisable at June 30, 2016 | 2,808 |
| | $ | 6.67 |
| | 3.05 | | $ | 32,376 |
|
____________________________
(1) No options were granted during the six months ended June 30, 2016.
The intrinsic value of stock options exercised was $3.2 million and $5.2 million in the three and six months ended June 30, 2016, respectively, and $1.1 million and $1.3 million in the three and six months ended June 30, 2015, respectively.
Employee Stock Purchase Rights
The fair values of employee stock purchase rights were estimated using the Black-Scholes option pricing model at their respective grant date using the following assumptions:
|
| | |
| Six Months Ended June 30, 2016 |
Weighted-average grant date fair value per share | $5.02 - $7.44 |
|
Risk-free interest rate | 0.33 - 0.38% |
|
Dividend yield | — | % |
Expected life (in years) | 0.50 |
|
Volatility | 59.14 - 83.71% |
|
|
| | |
| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The expected life is the duration of the offering period for each grant date, which occurs on a semi-annual basis. In addition, the estimated volatility incorporates the historical volatility of the Company's daily share closing price.
9. Income Taxes
In order to determine the quarterly provision for income taxes, the Company used an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. The provision for income taxes primarily relates to projected current federal and state income taxes and income taxes in certain foreign jurisdictions. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The Company utilizes the asset and liability method of accounting for income taxes. The Company records deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence quarterly, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon the Company's review of all positive and negative evidence, including its three year U.S. cumulative pre-tax book loss and taxable loss, the Company concluded that a full valuation allowance should continue to be recorded against its U.S. net deferred tax assets at June 30, 2016. Additionally, the Company completed the acquisition of Entropic in the second quarter 2015. As a result of the acquisition, there was a valuation allowance release that resulted in a tax benefit of $1.8 million due to the purchase accounting adjustment for the net deferred tax liability. Furthermore, the Company does not incur expense or benefit in certain tax free jurisdictions in which it operates.
The Company recorded a provision for income taxes of $0.1 million and $1.1 million in the three and six months ended June 30, 2016, respectively, and a benefit from income taxes of $1.4 million and $1.2 million in the three and six months ended June 30, 2015, respectively. The provision for income taxes in the three and six months ended June 30, 2016 primarily relates to federal alternative minimum tax due to the Company’s limitation on use of net operating losses, credit carryforwards, state income taxes, and income taxes in certain foreign jurisdictions. During the quarter ended June 30, 2016, the Company adopted ASU No. 2016-09, Improvements to Share-Based Compensation, which resulted in a reduction in the provision for income taxes of $3.5 million and $5.1 million in the consolidated statements of operations for the three and six months ended June 30, 2016 related to the inclusion of net excess tax benefits in the provision for income taxes (Note 1). The income tax benefit in the three and six months ended June 30, 2015 primarily relates to income taxes in certain foreign jurisdictions.
During the six months ended June 30, 2016, the Company’s unrecognized tax benefits increased by $2.0 million. The Company expects decreases to its unrecognized tax benefits of $0.2 million within twelve months, due to the lapse of statutes of limitations. Accrued interest and penalties associated with uncertain tax positions as of June 30, 2016 were $0.2 million and $0.02 million, respectively.
The Company is not currently under examination in any jurisdictions.
10. Concentration of Credit Risk and Significant Customers
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions. At times, such deposits may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company markets its products and services to manufacturers of wired and wireless communications equipment throughout the world. The Company makes periodic evaluations of the credit worthiness of its customers and does not require collateral for credit sales.
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
Customers greater than 10% of net revenues for each of the periods presented are as follows:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Percentage of total net revenue | | | | | | | |
Arris(1) | 29 | % | | 30 | % | | 26 | % | | 29 | % |
Technicolor(2) | 10 | % | | * |
| | 14 | % | | * |
|
WNC Corporation | * |
| | * |
| | 11 | % | | * |
|
Cisco(2) | N/A |
| | 16 | % | | N/A |
| | 15 | % |
* Represents less than 10% of the net revenue for the respective period.
(1) In January 2016, Arris completed its acquisition of Pace. The revenue percentage attributed to Arris includes sales made to Pace in the three and six months ended June 30, 2016.
(2) In November 2015, Technicolor completed its purchase of Cisco’s connected devices business. Prior to Technicolor's purchase of Cisco, Cisco was a significant customer in the three and six months ended June 30, 2015.
Products shipped to international destinations representing greater than 10% of net revenue for each of the periods presented are as follows:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Percentage of total net revenue | | | | | | | |
China | 84 | % | | 75 | % | | 84 | % | | 73 | % |
The determination of which country a particular sale is allocated to is based on the destination of the product shipment.
Balances greater than 10% of accounts receivable are as follows:
|
| | | | | |
| June 30, | | December 31, |
| 2016 | | 2015 |
Percentage of gross accounts receivable | | | |
WNC Corporation | 12 | % | | 16 | % |
Pegatron Corporation | 23 | % | | 17 | % |
Sernet Technologies Corporation
| 12 | % | | 14 | % |
MTI Jupiter Technologies | * |
| | 13 | % |
* Represents less than 10% of the gross accounts receivable for the respective period end.
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
11. Commitments and Contingencies
Lease Commitments and Other Contractual Obligations
The Company leases facilities and certain equipment under operating lease arrangements expiring at various years through fiscal 2022. As of June 30, 2016, future minimum payments under non-cancelable operating leases, other obligations, and inventory purchase obligations are as follows:
|
| | | | | | | | | | | | | | | |
| Operating Leases | | Other Obligations | | Inventory Purchase Obligations | | Total |
| (in thousands) |
2016 (six months) | $ | 3,793 |
| | $ | 3,638 |
| | $ | 14,880 |
| | $ | 22,311 |
|
2017 | 6,896 |
| | 4,813 |
| | — |
| | 11,709 |
|
2018 | 6,144 |
| | 891 |
| | — |
| | 7,035 |
|
2019 | 5,829 |
| | — |
| | — |
| | 5,829 |
|
2020 | 6,177 |
| | — |
| | — |
| | 6,177 |
|
Thereafter | 7,666 |
| | — |
| | — |
| | 7,666 |
|
Total minimum payments | $ | 36,505 |
| | $ | 9,342 |
| | $ | 14,880 |
| | $ | 60,727 |
|
On May 6, 2015, the Company amended a lease arrangement with The Campus Carlsbad, LLC, so that the current Carlsbad office space of approximately 45,000 square feet expanded to include an additional 24,000 square feet of space. The original lease, which had a term of three years and seven months with an original expiration date of November 30, 2019, was extended to an expiration date of June 30, 2022. In 2015, the Company completed tenant improvement activities and expanded into this office space. The Company was provided a tenant improvement allowance of approximately $1,543,000 for tenant improvement costs and related fees and expenses.
On November 11, 2015, the Company entered into a real property lease with The Northwestern Mutual Life Insurance Company, a Wisconsin corporation, with respect to the lease of approximately 50,235 square feet of office and laboratory space located at 50 Parker in Irvine, California. The Company relocated its current operations in Irvine, California to the new facility in May 2016.
The lease has an initial term of six years and two months, commencing on the later of (i) April 1, 2016 or (i) the date upon which certain building and tenant improvements have been substantially completed and possession of the substantially completed premises has been tendered by the landlord to the Company. The base monthly rent under the lease is approximately $68,000 per month during the first year of the initial lease term, increasing to approximately $86,000 per month during the last year of the initial lease term. The lease contains an option to extend the lease term for a single, five-year period. If the lease term is extended for the optional five-year period, the monthly base rent will be adjusted based on the fair market rental value. In addition to base rent, the Company has agreed to pay for a proportional share of the common area operating expenses and real property taxes. The lease includes customary provisions providing for late fees for unpaid rent, landlord access to the property, insurance obligations and events of default. In addition, this agreement includes tenant improvement incentives of $2.7 million.
CrestaTech Litigation
On January 21, 2014, CrestaTech Technology Corporation, or CrestaTech, filed a complaint for patent infringement against us in the United States District Court of Delaware, or the District Court Litigation. In its complaint, CrestaTech alleges that we infringe U.S. Patent Nos. 7,075,585, or the ’585 Patent, and 7,265,792. In addition to asking for compensatory damages, CrestaTech alleges willful infringement and seeks a permanent injunction. CrestaTech also names Sharp Corporation, Sharp Electronics Corp. and VIZIO, Inc. as defendants based upon their alleged use of our television tuners.
On January 28, 2014, CrestaTech filed a complaint with the U.S. International Trade Commission, or ITC, again naming, among others, MaxLinear, Sharp, Sharp Electronics, and VIZIO, or the ITC Investigation. On May 16, 2014, the ITC granted CrestaTech’s motion to file an amended complaint adding six OEM Respondents, namely, SIO International, Inc., Hon Hai Precision Industry Co., Ltd., Wistron Corp., Wistron Infocomm Technology (America) Corp., Top Victory Investments Ltd. and TPV International (USA), Inc. MaxLinear, Sharp and VIZIO, which are collectively referred to with MaxLinear, Sharp and VIZIO as the Company Respondents. CrestaTech’s ITC complaint alleged a violation of 19 U.S.C. § 1337 through the
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
importation into the United States, the sale for importation, or the sale within the United States after importation of the Company’s accused products that CrestaTech alleged infringe the same two patents asserted in the Delaware action. Through its ITC complaint, CrestaTech sought an exclusion order preventing entry into the United States of certain of the Company's television tuners and televisions containing such tuners from Sharp, Sharp Electronics, and VIZIO. CrestaTech also sought a cease and desist order prohibiting the Company Respondents from engaging in the importation into, sale for importation into, the sale after importation of, or otherwise transferring within the United States certain of the Company's television tuners or televisions containing such tuners.
On March 10, 2014, the court stayed the District Court Litigation pending resolution of the ITC Investigation.
On December 15, 2014, the ITC held a trial in the ITC Investigation. On February 27, 2015, the Administrative Law Judge issued a written Initial Determination, or ID, ruling that the Company Respondents do not violate Section 1337 in connection with CrestaTech’s asserted patents because CrestaTech failed to satisfy the economic prong of the domestic industry requirement pursuant to Section 1337(a)(2). In addition, the ID stated that certain of the Company's television tuners and televisions incorporating those tuners manufactured and sold by certain customers infringe three claims of the ‘585 Patent, and these three claims were not determined to be invalid. On April 30, 2015, the ITC issued a notice indicating that it intended to review portions of the ID finding no violation of Section 1337, including the ID’s findings of infringement with respect to, and validity of, the ‘585 Patent, and the ID’s finding that CrestaTech failed to establish the existence of a domestic industry within the meaning of Section 1337.
The ITC has subsequently issued its opinion, which terminated its investigation. The opinion affirmed the findings of the administrative law judge that no violation of Section 1337 had occurred because CrestaTech had failed to establish the economic prong of the domestic industry requirement. The ITC also affirmed the administrative law judge's finding of infringement with respect to the three claims of the '585 Patent that were not held to be invalid.
On November 30, 2015, CrestaTech filed an appeal of the ITC decision with the United States Court of Appeals for the Federal Circuit, or the Federal Circuit. On March 7, 2016, CrestaTech voluntarily dismissed its appeal resulting in final resolution of the ITC Investigation in our favor.
In addition, the Company has filed four petitions for inter partes review, or IPR, by the US Patent Office, two for each of the CrestaTech patents asserted against the Company. The Patent Trial and Appeal Board, or the PTAB, did not institute two of these IPRs as being redundant to IPRs filed by another party that are already underway for the same CrestaTech patent. The remaining two petitions were instituted or instituted-in-part and, together with the IPRs filed by third parties, there are currently six IPR proceedings filed involving the two CrestaTech patents asserted against the Company. In October 2015, the PTAB issued final decisions in two of the six IPR proceedings (one for each of the two asserted patents), holding that all of the reviewed claims are unpatentable. Included in these decisions was one of the three claims of the ‘585 Patent mentioned above in connection with the ITC’s final decision. CrestaTech appealed the PTAB’s decisions at the Federal Circuit. The parties recently completed briefing in this appeal and the case is set to proceed to oral argument. The remaining two claims of the ‘585 Patent are included in at least one of the four IPR proceedings instituted and currently pending before the PTAB. Oral argument was held in these four proceedings on June 1, 2016 and June 2, 2016. Final Written Decisions from the PTAB are expected in the upcoming weeks.
On March 18, 2016, CrestaTech filed a petition for Chapter 7 bankruptcy in the Northern District of California. As a result of this proceeding, all rights in the CrestaTech asserted patents, including the right to control the pending litigation, were assigned to CF Crespe LLC ("CF Crespe"). CF Crespe is now the named party in the pending IPRs, the Federal Circuit appeal and District Court Litigation. CF Crespe has not sought to lift the stay in the District Court Litigation given the resolution of the ITC investigation.
The Company cannot predict the outcome of any appeal by CrestaTech, the District Court Litigation, or the IPRs. Any adverse determination in the District Court Litigation could have a material adverse effect on the Company's business and operating results.
Trango Systems, Inc. Litigation
On August 2, 2016, Trango Systems, Inc., or Trango, filed a complaint in the Superior Court of California, County of San Diego, Central Division (Case No. 37-2016-00026197-CU-BC-CTL) against Broadcom Corporation and the Company alleging fraud, negligent misrepresentation, breach of contract, intentional interference with economic relations, negligent interference with economic relations, intentional interference with prospective economic relations, negligent interference with prospective economic relations, unlawful and unfair business acts and practices, and aiding and abetting. The case relates to a
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| MAXLINEAR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited; in thousands, except per share amounts and percentage data) | |
chipset the Company acquired in connection with the Company's recent acquisition of certain assets from Broadcom Corporation (Note 12). The case was only recently filed and is in the preliminary stages. The plaintiff seeks general and special damages, pre-judgment interest, expenses and costs, statutory penalties, attorney’s fees, punitive damages, and injunctive relief.
Other Matters
In addition, from time to time, we are subject to threats of litigation or actual litigation in the ordinary course of business, some of which may be material. Other than the CrestaTech and Trango litigation described above, management believes that there are no other currently pending litigation matters that, if determined adversely by the Company, would have a material effect on the Company's business or that would not be covered by the Company's existing liability insurance.
12. Subsequent Events
Acquisition of Certain Assets and Assumption of Certain Liabilities of the Wireless Infrastructure Backhaul Business of Broadcom Corporation
On July 1, 2016, the Company completed its previously announced acquisition of certain assets and assumption of certain liabilities of the wireless infrastructure backhaul business of Broadcom Corporation (which recently merged with Avago Technologies Limited), or Broadcom, for aggregate cash consideration of $80.0 million. The assets acquired include, among other things, certain patents and other intellectual property, certain designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property and equipment. The liabilities assumed include, among other things, product warranty obligations and accrued severance obligations for employees of the wireless infrastructure access line business that were hired by the Company upon close of the acquisition. The assets and liabilities to be acquired, together with the rehired employees, represent a business as defined in ASC 805, Business Combinations.
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this report.
Overview
We are a provider of radio frequency, or RF, and mixed-signal integrated circuits for cable and satellite broadband communications and the connected home, and for data center, metro, and long-haul fiber networks and wireless infrastructure. Our high performance RF receiver products capture and process digital and analog broadband signals to be decoded for various applications. These products include both RF receivers and RF receiver systems-on-chip (SoCs), which incorporate our highly integrated radio system architecture and the functionality necessary to receive and demodulate broadband signals, and physical medium devices that provide a constant current source, current-to-voltage regulation, and data alignment and retiming functionality in optical interconnect applications. Through our acquisition of Entropic Communications, Inc., or Entropic, in April of 2015, we provide semiconductor solutions for the connected home, ranging from MoCA® (Multimedia over Coax Alliance) solutions that transform how traditional HDTV broadcast and Internet Protocol- (IP) based streaming video content is seamlessly, reliably, and securely delivered, processed, and distributed into and throughout the home. Through our acquisition of the Microsemi wireless infrastructure access line business in April of 2016, we provide integrated circuits for wireless infrastructure markets, including wideband RF transceivers and synthesizers for 3G, 4G, and future 5G cellular base station and remote radio head (RRH) unit platforms. Through our recently closed acquisition of the Broadcom wireless infrastructure backhaul business in July of 2016, we also provide modem and RF transceiver solutions into cellular infrastructure backhaul applications.
Our net revenue has grown from approximately $0.6 million in fiscal 2006 to $300.4 million in fiscal 2015. In the six months ended June 30, 2016, revenues were $204.4 million. In fiscal 2015 and in the six months ended June 30, 2016, our net revenue was derived primarily from sales of RF receivers and RF receiver systems-on-chip and MoCA connectivity solutions into broadband operator voice and data modems and gateways and global analog and digital RF receiver products for analog and digital Pay-TV applications. These analog and digital television applications include Direct Broadcast Satellite outdoor unit (DBS ODU) solutions, which consist of our translation switch (BTS) and channel stacking switch (CSS) products. These products simplify the installation required to support simultaneous reception of multiple channels from multiple satellites over a single cable. Our ability to achieve revenue growth in the future will depend, among other factors, on our ability to further penetrate existing markets; our ability to expand our target addressable markets by developing new and innovative products; and our ability to obtain design wins with device manufacturers, in particular manufacturers of set-top boxes, data modems, and gateways for the broadband service provider and Pay-TV industries, manufacturers selling into the Cable infrastructure market, and manufacturers of optical module and telecommunications infrastructure equipment.
Products shipped to Asia accounted for 93% and 94% in the three and six months ended June 30, 2016, respectively, and 90% and 90% of net revenue in the three and six months ended June 30, 2015. Although a large percentage of our products are shipped to Asia, we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold outside Asia. For example, we believe revenue generated from sales of our digital terrestrial set-top box products in the three and six months ended June 30, 2016 and 2015 related principally to sales to Asian set-top box manufacturers delivering products into Europe, Middle East, and Africa, or EMEA markets. Similarly, revenue generated from sales of our cable modem products in the three and six months ended June 30, 2016 and 2015 related principally to sales to Asian ODMs and contract manufacturers delivering products into European and North American markets. To date, most of our sales have been denominated in United States dollars. There is a growing portion of our business, related specifically to our high-speed optical interconnect products, that are shipped to, and are ultimately consumed in Asian markets, with the majority of these products being deployed by end customers in China.
A significant portion of our net revenue has historically been generated by a limited number of customers. In the three months ended June 30, 2016, one of our customers, Arris Group, Inc., or Arris, accounted for 29% of our net revenue, and our ten largest customers collectively accounted for 77% of our net revenue. In the six months ended June 30, 2016, one of our customers, Arris, accounted for 26% of our net revenue, and our ten largest customers collectively accounted for 75% of our net revenue. In the three months ended June 30, 2015, one of our customers, Arris, accounted for 30% of our net revenue, and our ten largest customers collectively accounted for 81% of our net revenue. In the six months ended June 30, 2015, one of our customers, Arris, accounted for 29% of our net revenue, and our ten largest customers collectively accounted for 75% of our net revenue. For certain customers, we sell multiple products into disparate end user applications such as cable modems, satellite set-top boxes and broadband gateways.
Our business depends on winning competitive bid selection processes, known as design wins, to develop semiconductors for use in our customers’ products. These selection processes are typically lengthy, and as a result, our sales cycles will vary based on the specific market served, whether the design win is with an existing or a new customer and whether our product being designed in our customer’s device is a first generation or subsequent generation product. Our customers’ products can be complex and, if our engagement results in a design win, can require significant time to define, design and result in volume production. Because the sales cycle for our products is long, we can incur significant design and development expenditures in circumstances where we do not ultimately recognize any revenue. We do not have any long-term purchase commitments with any of our customers, all of whom purchase our products on a purchase order basis. Once one of our products is incorporated into a customer’s design, however, we believe that our product is likely to remain a component of the customer’s product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative chip. Product life cycles in our target markets will vary by application. For example, in the hybrid television market, a design-in can have a product life cycle of 9 to 18 months. In the terrestrial retail digital set-top box market, a design-in can have a product life cycle of 18 to 24 months. In the cable operator modem and gateway sectors, a design-in can have a product life cycle of 24 to 48 months. In the satellite operator gateway and DBS ODU sectors, a design-in can have a product life cycle of 24 months to 60 months and beyond.
On April 30, 2015, we completed our acquisition of Entropic. Pursuant to the terms of the merger agreement or merger agreements dated as of February 3, 2015, by and among MaxLinear, Entropic, and two wholly-owned subsidiaries of MaxLinear, all of the Entropic outstanding shares were converted into the right to receive consideration consisting of cash and shares of our Class A common stock. We paid an aggregate of $111.1 million in cash and issued an aggregate of 20.4 million shares of our Class A common stock to the stockholders of Entropic. In addition, we assumed all outstanding Entropic stock options and unvested restricted stock units that were held by continuing service providers (as defined in the merger agreement). We used Entropic’s cash and cash equivalents to fund a significant portion of the cash portion of the merger consideration and, to a lesser extent, our own cash and cash equivalents.
Recent Developments
On April 28, 2016, we entered into an asset purchase agreement with Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., or Microsemi, and consummated the transactions contemplated by the asset purchase agreement. We paid cash consideration of $21.0 million for the purchase of certain wireless access assets of Microsemi's wireless infrastructure access line business, and assumed certain specified liabilities. The assets acquired include, among other things, radio frequency and analog/mixed signal patents and other intellectual property, in-production and next-generation RF transceiver designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property, plant, and equipment. The liabilities assumed include, among other things, product warranty obligations and accrued vacation and severance obligations for employees of the wireless infrastructure access line business that were rehired by the Company.
On May 9, 2016, we entered into a material definitive agreement to purchase certain assets and assume certain liabilities of the wireless infrastructure backhaul business of Broadcom Corporation, or Broadcom. On July 1, 2016, we consummated the transactions contemplated by the purchase agreement and paid aggregate cash consideration of $80.0 million and hired certain employees of the wireless infrastructure backhaul business. The assets acquired include, among other things, certain patents and other intellectual property, certain designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property, plant, and equipment. The liabilities assumed include, among other things, product warranty obligations and accrued severance obligations for rehired employees of the wireless infrastructure access line business. For more information, please refer to Note 12 of our consolidated financial statements.
The acquired assets and liabilities, together with the rehired employees for each of these acquisitions, represent a business as defined in ASC 805, Business Combinations. We are integrating the acquired assets and rehired employees into our existing business.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, allowance for doubtful accounts, inventory valuation, goodwill and other intangible assets valuation, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.
We believe that accounting policies we have identified as critical involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
For a summary of our critical accounting policies and estimates, refer to Management's Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2015, which we filed with the Securities and Exchange Commission, or SEC, on February 17, 2016, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on April 28, 2016, or our Annual Report. There have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2016, other than our adoption of ASU No. 2016-09, Improvements to Share-Based Compensation during the three months ended June 30, 2016, as discussed under Recent Accounting Pronouncements below.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for us beginning in the first quarter of fiscal year 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the impact of adopting this new accounting standard on our consolidated financial position and results of operations.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires inventory to be subsequently measured using the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in this Update are effective for us beginning in the first quarter of fiscal 2017 and should be applied prospectively. We are currently evaluating the impact that this guidance will have on our consolidated financial position and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this Update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this Update are effective for us for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted. We are currently in the process of evaluating the impact of adoption of the amendments in this Update on our consolidated financial position and results of operations; however, adoption of the amendments in this Update are expected to be material for most entities who have a material lease greater than twelve months.
In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the revenue recognition implementation guidance on principal versus agent considerations. The amendments in this Update clarify that when another party is involved in providing goods or services to a customer, an entity that is the principal has obtained control of a good or service before it is transferred to a customer, and provides indicators to assist an entity in determining whether it controls a specified good or service prior to the transfer to the customer. An entity that is the principal recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer, whereas an agent recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. The amendments in this Update are effective for us beginning in the first quarter of fiscal year 2018, concurrent with the new revenue recognition standard. We are currently evaluating the impact of adopting the new revenue recognition accounting standard, including this Update, on its consolidated financial position and results of operations.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Share-Based Compensation to simplify certain aspects of accounting for share-based payment transactions associated with income taxes, classification as equity or liabilities, and classification on the statement of cash flows. The amendments in this Update are effective for the Company for fiscal years beginning with fiscal year 2017, including interim periods within those years, with early adoption permitted. Early adoption, if elected, must be completed for all of the amendments in the same period. The new guidance requires, among other things, excess tax benefits and tax deficiencies to be recorded in the income statement in the provision for income taxes when awards vest or are settled. Also, because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share is amended to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital. We adopted ASU No. 2016-09 during the quarter ended June 30, 2016. The impact of adoption was to reduce the provision for income taxes and increase net income for the three and six months ended June 30, 2016 by $3.5 million and $5.1 million, respectively, and increase net income per share by $0.06 and $0.08 for the three and six months ended June 30, 2016 and increase diluted net income per share by $0.04 and $0.06 for the three and six months ended June 30, 2016. The impact of adoption on the Company's previously reported results for the three months ended March 31, 2016 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, 2016 |
| | As reported | | As adjusted |
| | (in thousands, except per share amounts) |
Provision for income taxes | | $ | 2,558 |
| | $ | 993 |
|
Net income | | $ | 19,116 |
| | $ | 20,681 |
|
Basic earnings per share | | $ | 0.31 |
| | $ | 0.33 |
|
Diluted earnings per share | | $ | 0.29 |
| | $ | 0.31 |
|
Diluted weighted average shares outstanding | | 65,818 |
| | 66,643 |
|
There was no cumulative effect on retained earnings in the consolidated balance sheet since we have a full valuation allowance against U.S. deferred tax assets. We elected to continue to estimate forfeitures of share-based awards resulting in no impact to stock-based compensation expense, and we are also continuing to classify cash paid by us when directly withholding
shares for tax withholding purposes in cash flows from financing activities.
Results of Operations
The following describes the line items set forth in our unaudited consolidated statements of operations.
Net Revenue. Net revenue is generated from sales of integrated radio frequency analog and mixed signal semiconductor solutions for broadband communication applications. A significant but declining portion of our end customers purchases products indirectly from us through distributors. Although we actually sell the products to, and are paid by, the distributors, we refer to these end customers as our customers.
Cost of Net Revenue. Cost of net revenue includes the cost of finished silicon wafers processed by third-party foundries; costs associated with our outsourced packaging and assembly, test and shipping; costs of personnel, including stock-based compensation, and equipment associated with manufacturing support, logistics and quality assurance; amortization of certain production mask costs; cost of production load boards and sockets; and an allocated portion of our occupancy costs.
Research and Development. Research and development expense includes personnel-related expenses, including stock-based compensation, new product engineering mask costs, prototype integrated circuit packaging and test costs, computer-aided design software license costs, intellectual property license costs, reference design development costs, development testing and evaluation costs, depreciation expense and allocated 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. All research and development costs are expensed as incurred.
Selling, General and Administrative. Selling, general and administrative expense includes personnel-related expenses, including stock-based compensation, distributor and other third-party sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs.
Restructuring Charges. Restructuring charges consist of employee severance and stock-based compensation expenses, and lease and leasehold impairment charges related to our restructuring plan entered into as a result of our acquisition of Entropic, and an adjustment related to restructuring plan implemented by Entropic prior to our acquisition.
Interest Income. Interest income consists of interest earned on our cash, cash equivalents and investment balances.
Other Income (Expense). Other income (expense) generally consists of income (expense) generated from non-operating transactions.
Provision for Income Taxes. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expenses for tax and financial statement purposes and the realizability of assets in future years.
The following table sets forth our unaudited consolidated statement of operations data as a percentage of net revenue for the periods indicated:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net revenue | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Cost of net revenue | 38 |
| | 62 |
| | 39 |
| | 54 |
|
Gross profit | 62 |
| | 38 |
| | 61 |
| | 46 |
|
Operating expenses: | | | | | | | |
Research and development | 24 |
| | 34 |
| | 23 |
| | 37 |
|
Selling, general and administrative | 16 |
| | 33 |
| | 15 |
| | 33 |
|
Restructuring charges | — |
| | 16 |
| | 1 |
| | 11 |
|
Total operating expenses | 40 |
| | 83 |
| | 39 |
| | 81 |
|
Income (loss) from operations | 22 |
| | (45 | ) | | 22 |
| | (35 | ) |
Interest income | — |
| | — |
| | — |
| | — |
|
Other income (expense), net | — |
| | — |
| | — |
| | — |
|
Income (loss) before income taxes | 22 |
| | (45 | ) | | 22 |
| | (35 | ) |
Provision for income taxes (income tax benefit) | — |
| | (2 | ) | | 1 |
| | (1 | ) |
Net income (loss) | 22 | % | | (43 | )% | | 21 | % | | (34 | )% |
Net Revenue
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| 2016 | | 2015 | | $ Change | | % Change | | 2016 | | 2015 | | $ Change | | % Change |
| (dollars in thousands) | | | | (dollars in thousands) | | |
Operator | $ | 77,597 |
| | $ | 53,165 |
| | $ | 24,432 |
| | 46 | % | | $ | 153,738 |
| | $ | 82,033 |
| | $ | 71,705 |
| | 87 | % |
% of net revenue | 76 | % | | 75 | % | | | | | | 75 | % | | 77 | % | | | | |
Infrastructure and other | 15,943 |
| | 5,155 |
| | 10,788 |
| | 209 | % | | 25,831 |
| | 11,683 |
| | 14,148 |
| | 121 | % |
% of net revenue | 16 | % | | 7 | % | | | | | | 13 | % | | 11 | % | | | | |
Legacy video SoC | 8,147 |
| | 12,504 |
| | (4,357 | ) | | (35 | )% | | 24,803 |
| | 12,504 |
| | 12,299 |
| | 98 | % |
% of net revenue | 8 | % | | 18 | % | | | | | | 12 | % | | 12 | % | | | | |
Total net revenue | $ | 101,687 |
| | $ | 70,824 |
| | $ | 30,863 |
| | 44 | % | | $ | 204,372 |
| | $ | 106,220 |
| | |