MARVELL TECHNOLOGY GROUP LTD.
|
| | | | | | | |
| | October 28,
2017 | | January 28,
2017 |
| Inventories: | | | |
| Work-in-process | $ | 123,351 |
| | $ | 109,362 |
|
| Finished goods | 50,390 |
| | 61,480 |
|
| Total inventories | $ | 173,741 |
| | $ | 170,842 |
|
Inventory held by third-party logistics providers is recorded as consigned inventory on the Company’s unaudited condensed consolidated balance sheet. The amount of inventory held at third-party logistics providers was $12.8 million and $26.5 million at October 28, 2017 and January 28, 2017, respectively.
|
| | | | | | | |
| | October 28,
2017 | | January 28,
2017 |
| Property and equipment, net: | | | |
| Machinery and equipment | $ | 525,825 |
| | $ | 589,280 |
|
| Land, buildings, and leasehold improvements | 245,276 |
| | 296,800 |
|
| Computer software | 98,185 |
| | 99,186 |
|
| Furniture and fixtures | 21,287 |
| | 23,978 |
|
| | 890,573 |
| | 1,009,244 |
|
| Less: Accumulated depreciation and amortization | (692,400 | ) | | (765,847 | ) |
| Total property and equipment, net | $ | 198,173 |
| | $ | 243,397 |
|
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -‑ (Continued)
Current accrued liabilities are comprised of the following at October 28, 2017 and January 28, 2017, respectively:
|
| | | | | | | |
| | October 28,
2017 | | January 28,
2017 |
| Accrued liabilities: | | | |
| Technology license obligations | $ | 21,319 |
| | $ | 21,905 |
|
| Accrued royalties | 15,318 |
| | 17,349 |
|
| Accrued rebates | 10,920 |
| | 26,095 |
|
| Accrued legal related expenses | 13,164 |
| | 7,727 |
|
| Unsettled investment trades | 11,194 |
| | 15,371 |
|
| Restructuring liabilities | 7,826 |
| | 23,150 |
|
| Other | 28,266 |
| | 31,894 |
|
| Total accrued liabilities | $ | 108,007 |
| | $ | 143,491 |
|
Sales Commissions
Unsettled investment trades represent
The Company has elected to apply the accrualpractical expedient to addressexpense commissions when incurred as the timing difference between trade dateamortization period is typically one year or less. These costs are recorded in selling, general and cash settlement date. Other restructuring related accrued liabilitiesadministrative expenses in the unaudited condensed consolidated statements of $0.3operations.
Note 7. Supplemental Financial Information (in thousands)
Consolidated Balance Sheets
| | | | | | | | | | | |
| October 31,
2020 | | February 1,
2020 |
| Inventories: | | | |
| Work-in-process | $ | 181,961 | | | $ | 216,496 | |
| Finished goods | 86,435 | | | 106,484 | |
| Inventories | $ | 268,396 | | | $ | 322,980 | |
| | | | | | | | | | | |
| October 31,
2020 | | February 1,
2020 |
| Property and equipment, net: | | | |
| Machinery and equipment | $ | 677,843 | | | $ | 686,351 | |
| Land, buildings, and leasehold improvements | 288,859 | | | 285,084 | |
| Computer software | 101,955 | | | 100,613 | |
| Furniture and fixtures | 27,152 | | | 24,582 | |
| 1,095,809 | | | 1,096,630 | |
| Less: Accumulated depreciation and amortization | (764,040) | | | (739,538) | |
| Property and equipment, net | $ | 331,769 | | | $ | 357,092 | |
| | | | | | | | | | | |
| October 31,
2020 | | February 1,
2020 |
| Other non-current assets: | | | |
| Technology and other licenses | $ | 218,666 | | | $ | 277,634 | |
| Operating right-of-use assets | 108,659 | | | 110,907 | |
| Prepaid ship and debit * | 88,989 | | | 75,362 | |
| Other | 53,788 | | | 32,947 | |
| Other non-current assets | $ | 470,102 | | | $ | 496,850 | |
* Prepaid ship and debit of $89.0 million and $1.0$75.4 million as of October 28, 201731, 2020 and January 28, 2017,February 1, 2020, respectively, are included in other non-current liabilitiesrelate to certain prepaid distributor arrangements for ship and accounts payable in the accompanying condensed consolidated balance sheets, not presented within current accrued liabilities above due to the nature of the balances.debit claims.
|
| | | | | | | |
| | October 28,
2017 | | January 28,
2017 |
| Deferred income: | | | |
| Deferred revenue | $ | 98,021 |
| | $ | 87,968 |
|
| Deferred cost of goods sold | (23,078 | ) | | (23,992 | ) |
| Deferred income | $ | 74,943 |
| | $ | 63,976 |
|
|
| | | | | | | |
| | October 28,
2017 | | January 28,
2017 |
| Other non-current liabilities: | | | |
| Deferred tax liabilities | $ | 51,129 |
| | $ | 38,777 |
|
| Technology license obligations | 32,948 |
| | 14,949 |
|
| Long-term accrued employee compensation | 931 |
| | 4,075 |
|
| Other | 1,525 |
| | 6,136 |
|
| Other non-current liabilities | $ | 86,533 |
| | $ | 63,937 |
|
Accumulated other comprehensive income (loss)
The changes in accumulated other comprehensive income (loss) by components are presented in the following tables (in thousands):
|
| | | | | | | | | | | |
| | Unrealized Gain (Loss) on Marketable Securities | | Unrealized Gain (Loss) on Cash Flow Hedges | | Total |
| Balance at January 28, 2017 | $ | (801 | ) | | $ | 824 |
| | $ | 23 |
|
| Other comprehensive income (loss) before reclassifications | 653 |
| | 2,341 |
| | 2,994 |
|
| Amounts reclassified from accumulated other comprehensive loss | (45 | ) | | (3,164 | ) | | (3,209 | ) |
| Other comprehensive income (loss) | 608 |
| | (823 | ) | | (215 | ) |
| Balance at October 28, 2017 | $ | (193 | ) | | $ | 1 |
| | $ | (192 | ) |
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -‑ (Continued)
|
| | | | | | | | | | | |
| | Unrealized Gain (Loss) on Marketable Securities | | Unrealized Gain (Loss) on Cash Flow Hedges | | Total |
| Balance at January 30, 2016 | $ | (656 | ) | | $ | (139 | ) | | $ | (795 | ) |
| Other comprehensive income before reclassifications | 2,868 |
| | 479 |
| | 3,347 |
|
| Amounts reclassified from accumulated other comprehensive income | (477 | ) | | (522 | ) | | (999 | ) |
| Other comprehensive income (loss) | 2,391 |
| | (43 | ) | | 2,348 |
|
| Balance at October 29, 2016 | $ | 1,735 |
| | $ | (182 | ) | | $ | 1,553 |
|
| | | | | | | | | | | |
| | October 31,
2020 | | February 1,
2020 |
| Accrued liabilities: | | | |
| Contract liabilities | $ | 132,850 | | | $ | 111,486 | |
| Technology license obligations | 81,182 | | | 71,623 | |
| Deferred non-recurring engineering credits | 47,804 | | | 51,109 | |
| | | |
| | | |
| | | |
| Lease liabilities-current | 32,134 | | | 28,662 | |
| Accrued restructuring | 20,919 | | | 14,302 | |
| Deferred revenue | 19,466 | | | 5,647 | |
| Accrued interest | 19,085 | | | 7,892 | |
| | | |
| Other | 53,546 | | | 55,918 | |
| Accrued liabilities | $ | 406,986 | | | $ | 346,639 | |
Consolidated Statements of Operations | | | | | | | | | | | |
| October 31,
2020 | | February 1,
2020 |
| Other non-current liabilities | | | |
| Lease liabilities-non current | $ | 111,760 | | | $ | 115,778 | |
| | | |
| Technology license obligations | 72,896 | | | 107,893 | |
| Deferred tax liabilities | 37,645 | | | 31,233 | |
| Non-current income tax payable | 26,263 | | | 37,983 | |
| | | |
| Other | 25,706 | | | 12,578 | |
| Other non-current liabilities | $ | 274,270 | | | $ | 305,465 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Interest and other income, net: | | | | | | | |
| Interest income | $ | 4,301 |
| | $ | 3,370 |
| | $ | 11,643 |
| | $ | 10,005 |
|
| Net realized gain (loss) on investments | (2,755 | ) | | 252 |
| | (2,783 | ) | | 677 |
|
| Currency remeasurement gain (loss) | 374 |
| | 944 |
| | (183 | ) | | 1,961 |
|
| Other income (expense) | 4,542 |
| | 986 |
| | 8,437 |
| | 896 |
|
| Interest expense | (262 | ) | | (82 | ) | | (393 | ) | | (297 | ) |
| | $ | 6,200 |
| | $ | 5,470 |
| | $ | 16,721 |
| | $ | 13,242 |
|
Share Repurchase Program
The Company repurchased 31.5 million of its common shareschanges in accumulated other comprehensive income by components for $527.6 million during the nine months ended October 28, 2017. The Company repurchased 4.4 million shares for $56.5 million duringcurrent period are presented in the nine months ended October 29, 2016. The repurchased shares were retired immediately after the repurchases were completed.following table:
As of October 28, 2017, a total of 286.4 million shares have been repurchased to date under the Company’s share repurchase program for a total $3.8 billion in cash and there was $358.0 million remaining available for future share repurchases. | | | | | |
| Unrealized Gain
(Loss) on Cash
Flow Hedges |
| Balance at February 1, 2020 | $ | 0 | |
| Other comprehensive income before reclassifications | 1,214 | |
| Amounts reclassified from accumulated other comprehensive income | (1,214) | |
| Net current-period other comprehensive income, net of tax | 0 | |
| Balance at October 31, 2020 | $ | 0 | |
| | | | | |
| Unrealized Gain
(Loss) on Cash
Flow Hedges |
| Balance at February 2, 2019 | $ | 0 | |
| Other comprehensive income before reclassifications | 0 | |
| Amounts reclassified from accumulated other comprehensive income | 37 | |
| Net current-period other comprehensive income, net of tax | 37 | |
| Balance at November 2, 2019 | $ | 37 | |
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -‑ (Continued)
Note 6. Investments
The following tables summarize the Company’s investments (in thousands):
|
| | | | | | | | | | | | | | | |
| | October 28, 2017 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Short-term investments: | | | | | | | |
| Available-for-sale: | | | | | | | |
| U.S. government and agency debt | $ | 177,184 |
| | $ | 60 |
| | $ | (364 | ) | | $ | 176,880 |
|
| Foreign government and agency debt | 6,846 |
| | — |
| | (15 | ) | | 6,831 |
|
| Municipal debt securities | 2,926 |
| | — |
| | — |
| | 2,926 |
|
| Corporate debt securities | 552,282 |
| | 673 |
| | (528 | ) | | 552,427 |
|
| Asset backed securities | 42,931 |
| | 15 |
| | (34 | ) | | 42,912 |
|
| Held-to-maturity: | | | | | | | |
| Time deposits | 150,000 |
| | — |
| | — |
| | 150,000 |
|
| Total investments | $ | 932,169 |
| | $ | 748 |
| | $ | (941 | ) | | $ | 931,976 |
|
Share Repurchase Program
|
| | | | | | | | | | | | | | | |
| | January 28, 2017 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Short-term investments: | | | | | | | |
| Available-for-sale: | | | | | | | |
| U.S. government and agency debt | $ | 185,584 |
| | $ | 86 |
| | $ | (283 | ) | | $ | 185,387 |
|
| Foreign government and agency debt | 13,425 |
| | — |
| | (50 | ) | | 13,375 |
|
| Municipal debt securities | 27,916 |
| | 4 |
| | (49 | ) | | 27,871 |
|
| Corporate debt securities | 432,603 |
| | 281 |
| | (776 | ) | | 432,108 |
|
| Asset backed securities | 45,541 |
| | 33 |
| | (47 | ) | | 45,527 |
|
| Held-to-maturity: | | | | | | | |
| Time deposits | 150,000 |
| | — |
| | — |
| | 150,000 |
|
| Total short-term investments | 855,069 |
| | 404 |
| | (1,205 | ) | | 854,268 |
|
| Long-term investments: | | | | | | | |
| Available-for-sale: | | | | | | | |
| Auction rate securities | 4,615 |
| | — |
| | — |
| | 4,615 |
|
| Long-term investments | 4,615 |
| | — |
| | — |
| | 4,615 |
|
| Total investments | $ | 859,684 |
| | $ | 404 |
| | $ | (1,205 | ) | | $ | 858,883 |
|
Gross realized gains and gross realized losses on salesOn November 17, 2016, the Company announced that its Board of available-for-sale securities are presentedDirectors authorized a $1.0 billion share repurchase plan. The newly authorized stock repurchase program replaced in its entirety the following tables (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Gross realized gains | $ | 92 |
| | $ | 298 |
| | $ | 177 |
| | $ | 966 |
|
| Gross realized losses | (2,847 | ) | | (46 | ) | | (2,960 | ) | | (289 | ) |
| Total net realized gains (losses) | $ | (2,755 | ) | | $ | 252 |
| | $ | (2,783 | ) | | $ | 677 |
|
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The contractual maturitiesDirectors authorized a $700 million addition to the balance of available-for-sale securities are presented in the following tables (in thousands):
|
| | | | | | | | | | | | | | | |
| | October 28, 2017 | | January 28, 2017 |
| | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| Due in one year or less | $ | 484,064 |
| | $ | 483,982 |
| | $ | 423,151 |
| | $ | 423,058 |
|
| Due between one and five years | 448,105 |
| | 447,994 |
| | 423,669 |
| | 422,995 |
|
| Due over five years | — |
| | — |
| | 12,864 |
| | 12,830 |
|
| | $ | 932,169 |
| | $ | 931,976 |
| | $ | 859,684 |
| | $ | 858,883 |
|
For individual securities that have been in a continuous unrealized loss position, the fair value and gross unrealized loss for these securities aggregated by investment category and length of time in an unrealized position are presented in the following tables (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | October 28, 2017 |
| | Less than 12 months | | 12 months or more | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| U.S. government and agency debt | $ | 95,102 |
| | $ | (273 | ) | | $ | 11,423 |
| | $ | (91 | ) | | $ | 106,525 |
| | $ | (364 | ) |
| Foreign government and agency debt | 2,094 |
| | (3 | ) | | 4,737 |
| | (12 | ) | | 6,831 |
| | (15 | ) |
| Municipal debt securities | 1,266 |
| | — |
| | — |
| | — |
| | 1,266 |
| | — |
|
| Corporate debt securities | 193,182 |
| | (382 | ) | | 24,731 |
| | (146 | ) | | 217,913 |
| | (528 | ) |
| Asset backed securities | 15,111 |
| | (13 | ) | | 2,179 |
| | (21 | ) | | 17,290 |
| | (34 | ) |
| Total securities | $ | 306,755 |
| | $ | (671 | ) | | $ | 43,070 |
| | $ | (270 | ) | | $ | 349,825 |
| | $ | (941 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | January 28, 2017 |
| | Less than 12 months | | 12 months or more | | Total |
| | Fair Value | | Unrealized Loss | | Fair
Value | | Unrealized
Loss | | Fair
Value | | Unrealized
Loss |
| U.S. government and agency debt | $ | 94,064 |
| | $ | (283 | ) | | $ | — |
| | $ | — |
| | $ | 94,064 |
| | $ | (283 | ) |
| Foreign government and agency debt | 11,875 |
| | (48 | ) | | 1,499 |
| | (2 | ) | | 13,374 |
| | (50 | ) |
| Municipal debt securities | 17,450 |
| | (47 | ) | | 1,248 |
| | (2 | ) | | 18,698 |
| | (49 | ) |
| Corporate debt securities | 199,382 |
| | (751 | ) | | 16,063 |
| | (25 | ) | | 215,445 |
| | (776 | ) |
| Asset backed securities | 16,754 |
| | (47 | ) | | — |
| | — |
| | 16,754 |
| | (47 | ) |
| Total securities | $ | 339,525 |
| | $ | (1,176 | ) | | $ | 18,810 |
| | $ | (29 | ) | | $ | 358,335 |
| | $ | (1,205 | ) |
its existing share repurchase program. As of October 28, 2017,31, 2020, there was $564.5 million remaining available for fixed income securities that werefuture share repurchases. The Company intends to effect share repurchases in unrealized loss positions,accordance with the conditions of Rule 10b-18 under the Exchange Act, but may also make repurchases in the open market outside of Rule 10b-18 or in privately negotiated transactions. The share repurchase program will be subject to market conditions and other factors, and does not obligate the Company has determined that (i) it does not haveto repurchase any dollar amount or number of its common shares and the intent to sell these investments, and (ii) it is not more likely than not that it willrepurchase program may be required to sellextended, modified, suspended or discontinued at any time.
The Company repurchased 1.3 million of these investments before recovery of the amortized cost basis. In addition, as of October 28, 2017, the Company anticipates that it will recover the amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognizedits common shares for $25.2 million during the nine months ended October 28, 2017.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7. Derivative Financial Instruments
31, 2020. The Company manages sometemporarily suspended the share repurchase program in late March 2020 as the Company believed it was prudent to strengthen its liquidity to increase its cash balance during the macroeconomic environment affected by COVID-19. The share repurchase program remains temporarily suspended in anticipation of the funding of the Company's acquisition of Inphi. As a result, the Company did 0t repurchase any shares during the three months ended October 31, 2020. The Company repurchased 3.0 million of its foreign currency exchange rate risk throughcommon shares for $64.3 million during the purchase of foreign currency exchange contracts that hedge against the short-term effect of currency fluctuations. The Company’s policy is to enter into foreign currency forward contracts with maturities less than 12 months that mitigate the effect of rate fluctuations on certain local currency denominated operating expenses. All derivative instruments are recorded at fair value in either prepaid expenses and other current assets or accrued liabilities. The Company reports cash flows from derivative instruments in cash flows from operating activities. The Company uses quoted prices to value its derivative instruments. There were no outstanding forward contracts at October 28, 2017. The notional amounts of outstanding forward contracts was $63.5 million at January 28, 2017 and consisted of Israeli shekel buy contracts.
Cash Flow Hedges. The Company designates and documents its foreign currency forward exchange contracts as cash flow hedges for certain operating expenses. The Company evaluates and calculates the effectiveness of each hedge at least quarterly. The effective change is recorded in accumulated other comprehensive income and is subsequently reclassified to operating expense when the hedged expense is recognized. Ineffectiveness is recorded in interest and other income, net.
The following table provides information about gains (losses) associated with the Company’s derivative financial instruments (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | | Amount of Gains (Losses) in Statements of Operations |
| | | | Three Months Ended | | Nine Months Ended |
| | Location of Gains (Losses) in Statements of Operations | | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Derivatives designated as cash flow hedges: | | | | | | | | | |
| Forward contracts: | Research and development | | $ | 1,497 |
| | $ | 242 |
| | $ | 3,223 |
| | $ | 693 |
|
| | Selling, general and administrative | | 329 |
| | 33 |
| | 723 |
| | 96 |
|
| | | | $ | 1,826 |
| | $ | 275 |
| | $ | 3,946 |
| | $ | 789 |
|
The amounts of gains (losses) associated with the Company's derivative financial instruments reclassified from accumulated other comprehensive income (loss) are presented in the following table (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| Affected Line Item in the Statements of Operations: | | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Operating costs and expenses: | | | | | | | | |
| Cash flow hedges: | | | | | | | | |
| Research and development | | $ | 1,490 |
| | $ | 118 |
| | $ | 2,564 |
| | $ | 457 |
|
| Selling, general and administrative | | 328 |
| | 17 |
| | 601 |
| | 65 |
|
| Total | | $ | 1,818 |
| | $ | 135 |
| | $ | 3,165 |
| | $ | 522 |
|
The portion of gains (losses) excluded from the assessment of hedge effectiveness is included in interest and other income, net, and these amounts were not material in the three and nine months ended October 28, 2017 and October 29, 2016.November 2, 2019. The Company did not have hedge ineffectiveness from derivative financial instruments in the threerecords all repurchases, as well as investment purchases and nine months ended October 28, 2017 and October 29, 2016. No cash flow hedges were terminated as a result of forecasted transactions that did not occur.sales, based on their trade date. The repurchased shares are retired immediately after repurchases are completed.
Note 8. Fair Value Measurements
Fair value is an exit price representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Level 1—Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company’s Level 1 assets include institutional money-market funds that are classified as cash equivalents equity securities, and U.S. government and agency debt securities, which are valued primarily using quoted market prices in active markets for identical assets.prices. The Company’s Level 2 assets include its marketable investments in time deposits, foreign government and agency debt, municipal debt securities, corporate debt securities and asset backed securities as the market inputs used to value these instruments consist of market yields, reported trades and broker/dealer quotes, which are corroborated with observable market data.yields. In addition, forward contracts and the severance pay fund areis classified as a Level 2 assetsasset as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Company’s investments in auction rate securities were classified as Level 3 assets because there were no active markets for the auction rate securities and consequently the Company was unable to obtain independent valuations from market sources. Therefore, the auction rate securities were valued using a discounted cash flow model. In the nine months ended October 28, 2017, the auction rate securities were sold.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ‑ (Continued)
The tables below set forth, by level, the Company’s assets and liabilities that are measured at fair value on a recurring basis. The tables do not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at October 28, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Items measured at fair value on a recurring basis: | | | | | | | |
| Assets | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 22,290 |
| | $ | — |
| | $ | — |
| | $ | 22,290 |
|
| Time deposits | — |
| | 36,193 |
| | — |
| | 36,193 |
|
| U.S. government and agency debt | 16,526 |
| | — |
| | — |
| | 16,526 |
|
| Municipal debt securities | — |
| | 7,290 |
| | — |
| | 7,290 |
|
| Corporate debt securities | — |
| | 35,871 |
| | — |
| | 35,871 |
|
| Short-term investments: | | | | | | | |
| Time deposits | — |
| | 150,000 |
| | — |
| | 150,000 |
|
| U.S. government and agency debt | 176,880 |
| | — |
| | — |
| | 176,880 |
|
| Foreign government and agency debt | — |
| | 6,831 |
| | — |
| | 6,831 |
|
| Municipal debt securities | — |
| | 2,926 |
| | — |
| | 2,926 |
|
| Corporate debt securities | — |
| | 552,427 |
| | — |
| | 552,427 |
|
| Asset backed securities | — |
| | 42,912 |
| | — |
| | 42,912 |
|
| Other non-current assets: | | | | | | | |
| Severance pay fund | — |
| | 853 |
| | — |
| | 853 |
|
| Total assets | $ | 215,696 |
| | $ | 835,303 |
| | $ | — |
| | $ | 1,050,999 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at October 31, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Items measured at fair value on a recurring basis: | | | | | | | |
| Assets | | | | | | | |
| Cash equivalents: | | | | | | | |
| | | | | | | |
| Time deposits | $ | 0 | | | $ | 132,456 | | | $ | 0 | | | $ | 132,456 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other non-current assets: | | | | | | | |
| Severance pay fund | 0 | | | 588 | | | 0 | | | 588 | |
| Total assets | $ | 0 | | | $ | 133,044 | | | $ | 0 | | | $ | 133,044 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at February 1, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Items measured at fair value on a recurring basis: | | | | | | | |
| Assets | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 46,355 | | | $ | 0 | | | $ | 0 | | | $ | 46,355 | |
| Time deposits | 0 | | | 88,177 | | | 0 | | | 88,177 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other non-current assets: | | | | | | | |
| Severance pay fund | 0 | | | 693 | | | 0 | | | 693 | |
| Total assets | $ | 46,355 | | | $ | 88,870 | | | $ | 0 | | | $ | 135,225 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Fair Value of Debt
The Company classified the Term Loan, the 2023 Notes and 2028 Notes under Level 2 of the fair value measurement hierarchy. The carrying value of the Term Loan approximates its fair value as the Term Loan is carried at a market observable interest rate that resets periodically. The estimated aggregate fair value of the 2023 Notes and 2028 Notes was $1.1 billion at October 31, 2020 and at February 1, 2020, and were classified as Level 2 as there are quoted prices from less active markets for the notes.
Note 9. Debt
In connection with the acquisition of Cavium, the Company executed debt agreements in June 2018 to obtain a $900.0 million term loan, a $500.0 million revolving credit facility and $1.0 billion of senior unsecured notes.
Term Loan and Revolving Credit Facility
On June 13, 2018, the Company entered into a credit agreement (“Credit Agreement”) with 12 lenders. The Credit Agreement provides for borrowings of: (i) up to $500.0 million in the form of a revolving line of credit ("Revolving Credit Facility") and (ii) $900.0 million in the form of a term loan (“Term Loan”). The proceeds of the Term Loan were used to fund a portion of the cash consideration for the Cavium acquisition, repay Cavium’s debt, and pay transaction expenses in connection with the Cavium acquisition. The proceeds of the Revolving Credit Facility are intended for general corporate purposes of the Company and its subsidiaries, which may include, among other things, the financing of acquisitions, the refinancing of other indebtedness and the payment of transaction expenses related to the foregoing. As of October 31, 2020, there was no outstanding balance related to the Revolving Credit Facility. Following is further detail of the terms of the various debt agreements.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -‑ (Continued)
The Term Loan has a three year term which matures on July 6, 2021 and has a stated floating interest rate which equates to reserve-adjusted LIBOR + 137.5 bps. The effective interest rate for the Term Loan was 3.684% as of October 31, 2020. The Term Loan does not require any scheduled principal payments prior to final maturity but does permit the Company to make early principal payments without premium or penalty. During the three months ended October 31, 2020, the Company repaid $100.0 million of the principal outstanding and wrote off $0.3 million of associated unamortized debt issuance costs. The Revolving Credit Facility has a five year term and has a stated floating interest rate which equates to reserve-adjusted LIBOR + 150.0 bps. As of October 31, 2020, the full amount of the Revolving Credit Facility of $500.0 million was undrawn and will be available for draw down through June 13, 2023. An unused commitment fee is payable quarterly based on unused balances at a rate that is based on the ratings of the Company's senior unsecured long-term indebtedness. This rate was 0.175% at October 31, 2020.
The Company currently carries debt that rely on the LIBOR as the benchmark rate, with the Term Loan maturing on July 6, 2021. LIBOR is expected to be phased out as a benchmark rate by the end of 2021. The Company expects its debt to continue to use LIBOR until the rate is no longer available or a relevant governmental authority makes a public statement that LIBOR will no longer be available after a certain date. To the extent LIBOR ceases to exist, the Company will need to amend its credit agreements that utilize LIBOR as a factor in determining the interest rate. Currently, there is not a firm timeframe for this change. This update currently has no foreseeable impact on the Company's unaudited condensed consolidated financial statements; however, it may have an effect in the future.
The Credit Agreement requires that the Company and its subsidiaries comply, subject to certain exceptions, with covenants relating to customary matters such as creating or permitting certain liens, entering into sale and leaseback transactions, consolidating, merging, liquidating or dissolving, and entering into restrictive agreements. It also prohibits subsidiaries of the Company from incurring additional indebtedness, and requires the Company to comply with a leverage ratio financial covenant as of the end of any fiscal quarter. As of October 31, 2020, the Company was in compliance with all of its debt covenants.
Senior Unsecured Notes
On June 22, 2018, the Company completed a public offering of (i) $500.0 million aggregate principal amount of the Company's 4.200% Senior Notes due 2023 (the “2023 Notes”) and (ii) $500.0 million aggregate principal amount of the Company's 4.875% Senior Notes due 2028 (the “2028 Notes” and, together with the 2023 Notes, the “Senior Notes”).
The 2023 Notes mature on June 22, 2023 and the 2028 Notes mature on June 22, 2028. The stated and effective interest rates for the 2023 Notes are 4.200% and 4.423%, respectively. The stated and effective interest rates for the 2028 Notes are 4.875% and 5.012%, respectively. The Company may redeem the Senior Notes, in whole or in part, at any time prior to their maturity at the redemption prices set forth in Senior Notes. In addition, upon the occurrence of a change of control repurchase event (which involves the occurrence of both a change of control and a ratings event involving the Senior Notes being rated below investment grade), the Company will be required to make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest to, but excluding, the repurchase date. The indenture governing the Senior Notes also contains certain limited covenants restricting the Company’s ability to incur certain liens, enter into certain sale and leaseback transactions and merge or consolidate with any other entity or convey, transfer or lease all or substantially all of the Company’s properties or assets to another person, which, in each case, are subject to certain qualifications and exceptions.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ‑ (Continued)
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at January 28, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Items measured at fair value on a recurring basis: | | | | | | | |
| Assets | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 36,122 |
| | $ | — |
| | $ | — |
| | $ | 36,122 |
|
| Time deposits | — |
| | 67,000 |
| | — |
| | 67,000 |
|
| U.S. government and agency debt | 17,497 |
| | — |
| | — |
| | 17,497 |
|
| Foreign government and agency debt | — |
| | 1,500 |
| | — |
| | 1,500 |
|
| Municipal debt securities | — |
| | 8,740 |
| | — |
| | 8,740 |
|
| Corporate debt securities | — |
| | 31,280 |
| | — |
| | 31,280 |
|
| Short-term investments: | | | | | | | |
| Time deposits | — |
| | 150,000 |
| | — |
| | 150,000 |
|
| U.S. government and agency debt | 185,387 |
| | — |
| | — |
| | 185,387 |
|
| Foreign government and agency debt | — |
| | 13,375 |
| | — |
| | 13,375 |
|
| Municipal debt securities | — |
| | 27,871 |
| | — |
| | 27,871 |
|
| Corporate debt securities | — |
| | 432,108 |
| | — |
| | 432,108 |
|
| Asset backed securities | — |
| | 45,527 |
| | — |
| | 45,527 |
|
| Prepaid expenses and other current assets: | | | | | | | |
| Foreign currency forward contracts | — |
| | 735 |
| | — |
| | 735 |
|
| Long-term investments: | | | | | | | |
| Auction rate securities | — |
| | — |
| | 4,615 |
| | 4,615 |
|
| Other non-current assets: | | | | | | | |
| Severance pay fund | — |
| | 736 |
| | — |
| | 736 |
|
| Total assets | $ | 239,006 |
| | $ | 778,872 |
| | $ | 4,615 |
| | $ | 1,022,493 |
|
| Liabilities | | | | | | | |
| Accrued liabilities: | | | | | | | |
| Foreign currency forward contracts | $ | — |
| | $ | 58 |
| | $ | — |
| | $ | 58 |
|
The following table summarizes the change in fair value for Level 3 assetsCompany's outstanding debt at October 31, 2020 and February 1, 2020 (in thousands):
| | | | | | | | | | | | | | |
| | October 31,
2020 | | February 1,
2020 |
| Face Value Outstanding: | | | | |
| Term Loan | | $ | 350,000 | | | $ | 450,000 | |
| | | | |
| 2023 Notes | | 500,000 | | | 500,000 | |
| 2028 Notes | | 500,000 | | | 500,000 | |
| Total borrowings | | $ | 1,350,000 | | | $ | 1,450,000 | |
| Less: Unamortized debt discount and issuance cost | | (8,195) | | | (10,976) | |
| Net carrying amount of debt | | $ | 1,341,805 | | | $ | 1,439,024 | |
| Less: Current portion (1) | | 349,004 | | | 0 | |
| Non-current portion | | $ | 992,801 | | | $ | 1,439,024 | |
(1) As of October 31, 2020, the current portion of outstanding debt includes the Term Loan, which is due within twelve months. The Company intends to repay the amount with operating cash flow.
During the three and nine months ended October 31, 2020, the Company recognized $14.1 million and $43.6 million of interest expense in its unaudited condensed consolidated statements of operations related to interest, amortization of debt issuance costs and accretion of discount associated with the outstanding Term Loan and Senior Notes, respectively.
During the three and nine months ended November 2, 2019, the Company recognized $20.6 million and $59.8 million of interest expense in its unaudited condensed consolidated statements of operations related to interest, amortization of debt issuance costs and accretion of discount associated with the outstanding Term Loan and Senior Notes, respectively.
As of October 31, 2020, the aggregate future contractual maturities of the Company's outstanding debt, at face value, were as follows (in thousands):
| | | | | | | | |
| Fiscal Year | | Amount |
| Remainder of 2021 | | $ | 0 | |
| 2022 | | 350,000 | |
| 2023 | | 0 | |
| 2024 | | 500,000 | |
| 2025 | | 0 | |
| Thereafter | | 500,000 | |
| Total | | $ | 1,350,000 | |
|
| | | |
| | Nine Months Ended |
| | October 28,
2017 |
| Beginning balance at January 28, 2017 | $ | 4,615 |
|
| Sales and redemptions | (4,550 | ) |
| Realized gain (loss) | (65 | ) |
| Ending balance at October 28, 2017 | $ | — |
|
Note 9.10. Commitments and Contingencies
Purchase Commitments
Under the Company’s manufacturing relationships with its foundry partners, cancellation of outstanding purchase orders is allowed but requires payment of all costs and expenses incurred through the date of cancellation. As of October 28, 2017,31, 2020, these foundries had incurred approximately $130.2$237.8 million of manufacturing costs and expenses relating to the Company’s outstanding purchase orders.
Contingencies and Legal Proceedings
The Company currently is, and may from time to time become, a party to claims, lawsuits, governmental inquiries, inspections or investigations and other legal proceedings (collectively, “Legal Matters”) arising in the course of its business. Such Legal Matters, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -‑ (Continued)
Intellectual Property Indemnification
The Company has agreed to indemnify certain customers for claims made against the Company’s products where such claims allege infringement of third-party intellectual property rights, including, but not limited to, patents, registered trademarks and/or copyrights. Under the aforementioned indemnification clauses, the Company may be obligated to defend the customer and pay for the damages awarded against the customer under an infringement claim, as well as the customer's attorneys’ fees and costs. The Company’s indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. Generally, there are limits on and exceptions to the Company’s potential liability for indemnification. Although historically the Company has not made significant payments under these indemnification obligations, the Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. The maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.
Contingencies and Legal Proceedings
The Company and certain of its subsidiaries are currently parties to various legal proceedings, including those noted in this section. The legal proceedings and claims described below could result in substantial costs and could divert the attention and resources of the Company’s management. The Company is also engaged in other legal proceedings and claims not described below, which arise in the ordinary course of its business. The Company is currently unable to predict the final outcome of these lawsuitsits pending Legal Matters and therefore cannot determine the likelihood of loss or estimate a range of possible loss, except with respect to amounts where it has determined a loss is both probable and estimable and where it has made an accrual. Litigation is subjectThe Company evaluates, at least on a quarterly basis, developments in its Legal Matters that could affect the amount of any accrual, as well as any developments that would result in a loss contingency to become both probable and reasonably estimable. The ultimate outcome of any Legal Matter involves judgments, estimates and inherent uncertainties and unfavorable rulings could occur.uncertainties. An unfavorable rulingoutcome in litigation,a Legal Matter, particularly in a patent litigation,dispute, could require the Company to pay damages one-time license fees or ongoing royalty payments, and could prevent the Company from manufacturing or selling some of its products or limit or restrict the type of work that employees involved in such litigation may perform forcertain jurisdictions. While the Company anycannot predict with certainty the results of the Legal Matters in which could adversely affectit is currently involved, the Company does not expect that the ultimate costs to resolve these Legal Matters will individually or in the aggregate have a material adverse effect on its financial results in future periods. Therecondition, however, there can be no assurance that these mattersthe current or any future Legal Matters will be resolved in a manner that is not adverse to the Company’s business, financial condition, results of operations or cash flows.
Luna Litigation and Consolidated Cases. On September 11, 2015, Daniel Luna filed an action asserting putative class action claims on behalf of the Company’s shareholders in the United States District Court for the Southern District of New York (“S.D. of New York”). This action was consolidated with two additional, nearly identical complaints subsequently filed by Philip Limbacher and Jim Farno. The complaints asserted violations of federal securities laws based on allegations that the Company and certain of its officers and directors (Sehat Sutardja, Michael Rashkin and Sukhi Nagesh) made, caused to be made, or failed to correct false and/or misleading statements in the Company’s press releases and public filings. The complaints request damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
On November 18, 2015, the S.D. of New York granted the Company’s motion to transfer the consolidated cases to the N.D. of California. On December 21, 2015, the N.D. of California granted the Company’s motion to deem the consolidated cases related to the Saratoga litigation, discussed below. On February 8, 2016, the N.D. of California granted an unopposed motion to appoint Plumbers and Pipefitters National Pension Fund as Lead Plaintiff. On March 19, 2016, Lead Plaintiff filed a consolidated amended complaint. On April 29, 2016, Marvell and each of the individual defendants each filed motions to dismiss. The hearing on the motions to dismiss took place on July 29, 2016 and the court took the matter under submission. On October 12, 2016, the Court granted Defendants’ motions to dismiss with leave to amend and granted lead plaintiff 30 days to file an amended complaint. The parties agreed that the plaintiffs would file and serve an amended complaint by November 28, 2016. Plaintiffs filed and served the amended complaint on November 28, 2016. The Initial Case Management Conference took place on January 12, 2017. Marvell and co-defendants filed separate Motions to Dismiss on January 17, 2017. A hearing on the Motion to Dismiss took place on May 4, 2017 and, on May 17, 2017, the Court granted the Motion to Dismiss as to Rashkin and Nagesh and denied the Motion to Dismiss as to Sutardja and Marvell. On August 2, 2017, Lead Plaintiff filed a motion for class certification. On October 27, 2017, after a hearing on October 26, 2017, the Court certified a class of persons or entities that acquired Marvell stock during the period from February 19, 2015 to December 7, 2015. The Court has set a deadline of December 29, 2017 for the conclusion of fact discovery and a March 5, 2018 trial date.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Indemnities, Commitments and Guarantees
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities may include intellectual property indemnities to the Company’s customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties’ technology based upon the Company’s products, indemnities for general commercial obligations, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of Bermuda. In addition, the Company has contractual commitments to various customers, thatwhich could require the Company to incur costs to repair an epidemic defect with respect to its products outside of the normal warranty period if such defect were to occur. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. In general, the Company does not record any liability for these indemnities, commitments and guarantees in the accompanying unaudited condensed consolidated balance sheets as the amounts cannot be reasonably estimated and are not considered probable. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and estimable.
Intellectual Property Indemnification
In addition to the loss is both estimableabove indemnities, the Company has agreed to indemnify certain customers for claims made against the Company’s products where such claims allege infringement of third-party intellectual property rights, including, but not limited to, patents, registered trademarks, and/or copyrights. Under the aforementioned indemnification clauses, the Company may be obligated to defend the customer and probable.pay for the damages awarded against the customer as well as the attorneys’ fees and costs under an infringement claim. The Company’s indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. Generally, there are limits on and exceptions to the Company’s potential liability for indemnification. Historically the Company has not made significant payments under these indemnification obligations and the Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. The maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.
Note 10.11. Income Tax
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.
The Company’s quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in accurately predicting our pre-tax income (or loss)or loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in tax laws, the applicability of special tax regimes, changes in how the Company doeswe do business, and tax law developments. acquisitions, as well as the integration of such acquisitions.
The Company’s estimated effective tax rate for the year differs from the U.S. statutory rate of 21% primarily due to the benefit of a substantial portion of its earnings being taxed at rates lower than the U.S. statutory rate.
The Company's negative effective tax rate is the result of anticipated annual income tax expense forattributed to certain jurisdictions which have pretax income. The Company's effective tax rate was adversely affected by pre-tax losses in certain non-U.S. tax jurisdictions that are benefited at tax rates that are lower than 21%. These losses significantly reduce the three months ended October 28, 2017 included currentCompany's pre-tax income without a corresponding reduction in its tax expense, and can therefore increase its effective tax rate in periods with pre-tax income, or cause a negative effective tax rate in periods where there is an income tax expense of $5.9 million, a net increase in unrecognized tax benefits of $0.5 million, and an expense of $0.3 million related to other discrete items recorded in the quarter. The net increase in unrecognized tax benefits arose from penalties and interest of $0.5 million accrued on the outstanding unrecognized tax benefit balance. The income tax expense for the nine months ended October 28, 2017 included current income tax expense of $13.9 million and expense of $1.5 million related to other discrete items, offset by a tax benefit of $7.4 million from a net reduction in unrecognized tax benefits. The net reduction in unrecognized tax benefits arose from the release of $9.8 million due to expiration of the statute of limitations in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $1.8 million accrued on the outstanding unrecognized tax benefit balance and the accrual of $0.6 million for changes in prior year tax positions.
The income tax expense for the three months ended October 29, 2016 included current income tax expense of $11.9 million, an expense of $0.6 million related to settlements of prior year tax in foreign jurisdictions, a net increase in unrecognized tax benefits of $2.8 million, and an expense of $0.2 million related to other discrete items recorded in the quarter. The net increase in unrecognized tax benefits arose from the accrual of penalties and interest of $0.5 million on the outstanding unrecognized tax benefit balance, plus the accrual of additional $2.3 million for changes in prior year positions. The income tax expense for the nine months ended October 29, 2016 included current income tax expense of $15.3 million, an expense of $0.6 million related to settlements of prior year tax in foreign jurisdictions, and an expense of $0.6 million related to other discrete items recorded in the quarter, offset by a tax benefit of $9.7 million from a net reduction in unrecognized tax benefits and a deferred tax benefit of $2.5 million for the portion of a payment to the Company’s former Chief Executive Officer that became deductible after his departure from the Company in April 2016. The net reduction in unrecognized tax benefits arose from the release of $14.3 million due to expiration of the statute of limitations in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $2.0 million accrued on the outstanding unrecognized tax benefit balance, and the accrual of an additional $2.6 million for changes in prior year tax positions.
pre-tax loss.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -‑ (Continued)
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted into US federal law on March 27, 2020.The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company evaluated the provisions of the CARES Act and does not anticipate any material impact on its financial statements. The tax effects of other related foreign government assistance enacted into law this period are also not material to the Company this period.
The income tax benefit of $1.6 million for the three months ended October 31, 2020 includes a current tax benefit of $1.9 million primarily as a result of losses incurred on a year to date basis.
The income tax benefit of $5.5 million for the nine months ended October 31, 2020 includes a tax benefit from a net reduction in unrecognized tax benefits of $15.0 million and a tax benefit attributable to the Company's asset impairment of $10.8 million, offset by $17.4 million of current tax expense.
It is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to foreign currencies within the next 12 months. Excluding these factors, it is reasonably possible that uncertain tax positions may decrease by as much as $7.7$5.3 million from the lapse of statutes of limitation in various jurisdictions during the next twelve12 months. Government tax authorities from several non-U.S. jurisdictions are also examining the Company’s tax returns. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to its tax audits and that any settlement will not have a material effect on its results or financial position at this time.
The Company operates under tax incentives in certain countries that may be extended and/or renewed if certain additional requirements are satisfied. The tax incentives are conditional upon meeting certain employment and investment thresholds. The impactThere were 0 cash tax benefits as a result of these tax incentives decreasedon foreign taxes for the three and nine months ended October 31, 2020, but foreign taxes were decreased by $0.1$1.0 million and $1.6$2.7 million for the three and nine months ended October 28, 2017, respectively, and $2.4 million and $4.6 million for the three and nine months ended October 29, 2016,November 2, 2019, respectively. The benefit of the tax incentives on net income per share was less than $0.01 per share for the three and nine months ended October 28, 2017, compared to a benefit of $0.01 per share for the three and nine months ended October 29, 2016.November 2, 2019.
The Company’s principal source of liquidity as of October 28, 201731, 2020 consisted of approximately $1.7 billion$832.0 million of cash and cash equivalents, and short-term investments, of which approximately $1.1 billion$694.1 million was held by foreign subsidiaries (outside Bermuda). Approximately $620 million of this amount held by foreign subsidiaries is related to undistributed earnings, which have been indefinitely reinvested outside of Bermuda. These fundsThe Company has not recognized a deferred tax liability on $280.9 million of these assets as those amounts are primarily held in China, Israel and the United States.deemed to be indefinitely reinvested. The Company plans to use such amounts to fund various activities outside of Bermuda, including working capital requirements, capital expenditures for expansion, funding of future acquisitions or other financing activities. If such funds were needed by
On October 29, 2020, the Company entered into a merger agreement with Inphi Corporation. As a result of this transaction, upon closing, the parent company will be domiciled in Bermuda or if the amounts were otherwise no longer considered indefinitely reinvested,United States and not Bermuda. Therefore, for periods after closing, the Company would incur acombined group will be subject to taxation in the United States, which may adversely impact future effective tax expenserates and tax liabilities.
MARVELL TECHNOLOGY GROUP LTD. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ‑ (Continued)
Note 11.12. Net IncomeLoss Per Share
The Company reports both basic net incomeloss per share, which is based on the weighted averageweighted-average number of common shares outstanding during the period, and diluted net incomeloss per share, which is based on the weighted averageweighted-average number of common shares outstanding and potentially dilutive shares outstanding during the period.
The computations of basic and diluted net incomeloss per share are presented in the following table (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | |
| | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 | | | | |
| Numerator: | | | | | | | | | | | |
| Net loss | $ | (22,908) | | | $ | (82,501) | | | $ | (293,834) | | | $ | (188,282) | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Denominator: | | | | | | | | | | | |
| Weighted-average shares — basic | 670,487 | | | 668,178 | | | 667,186 | | | 667,184 | | | | | |
| Effect of dilutive securities: | | | | | | | | | | | |
| Share-based awards | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Weighted-average shares — diluted | 670,487 | | | 668,178 | | | 667,186 | | | 667,184 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net loss per share: | | | | | | | | | | | |
| Basic | $ | (0.03) | | | $ | (0.12) | | | $ | (0.44) | | | $ | (0.28) | | | | | |
| Diluted | $ | (0.03) | | | $ | (0.12) | | | $ | (0.44) | | | $ | (0.28) | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Numerator: | | | | | | | |
| Income from continuing operations | $ | 149,337 |
| | $ | 83,173 |
| | $ | 384,379 |
| | $ | 138,347 |
|
| Income (loss) from discontinued operations | 50,851 |
| | (10,557 | ) | | 87,689 |
| | (37,105 | ) |
| Net income | $ | 200,188 |
| | $ | 72,616 |
| | $ | 472,068 |
| | $ | 101,242 |
|
| Denominator: | | | | | | | |
| Weighted average shares — basic | 494,096 |
| | 511,090 |
| | 499,568 |
| | 510,373 |
|
| Effect of dilutive securities: | | | | | | | |
| Share-based awards | 10,807 |
| | 11,001 |
| | 11,367 |
| | 6,103 |
|
| Weighted average shares — diluted | 504,903 |
| | 522,091 |
| | 510,935 |
| | 516,476 |
|
| Income from continuing operations per share: | | | | | | | |
| Basic | $ | 0.30 |
| | $ | 0.16 |
| | $ | 0.77 |
| | $ | 0.27 |
|
| Diluted | $ | 0.30 |
| | $ | 0.16 |
| | $ | 0.75 |
| | $ | 0.27 |
|
| Income (loss) from discontinued operations per share: | | | | | | | |
| Basic | $ | 0.11 |
| | $ | (0.02 | ) | | $ | 0.17 |
| | $ | (0.07 | ) |
| Diluted | $ | 0.10 |
| | $ | (0.02 | ) | | $ | 0.17 |
| | $ | (0.07 | ) |
| Net income per share: | | | | | | | |
| Basic | $ | 0.41 |
| | $ | 0.14 |
| | $ | 0.94 |
| | $ | 0.20 |
|
| Diluted | $ | 0.40 |
| | $ | 0.14 |
| | $ | 0.92 |
| | $ | 0.20 |
|
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Potential dilutive securities include dilutive common shares from share-based awards attributable to the assumed exercise of stock options, restricted stock units and employee stock purchase plan shares using the treasury stock method. Under the treasury stock method, potential common shares outstanding are not included in the computation of diluted net income per share if their effect is anti-dilutive.
Anti-dilutive potential shares are presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 |
| Weighted-average shares outstanding: | | | | | | | |
| Share-based awards | 12,456 | | | 13,000 | | | 10,401 | | | 13,380 | |
|
| | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 28,
2017 | | October 29,
2016 | | October 28,
2017 | | October 29,
2016 |
| Weighted average shares outstanding: | | | | | | | |
| Share-based awards | 876 |
| | 20,211 |
| | 3,122 |
| | 37,309 |
|
Anti-dilutive potential shares from share-based awards are excluded from the calculation of diluted earnings per share for all periods reported above because either their exercise price exceeded the average market price during the period or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method. Anti-dilutive potential shares from share based awards are excluded from the calculation of diluted earnings per share for the three and nine months ended October 31, 2020 and November 2, 2019 due to the net losses reported in those periods.
Item 2.Management’s Discussion and Analysis of Financial Condition and Resultsof Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “seeks,” “estimates,” "forecasts," "targets," “may,” “can,” “will,” “would” and similar expressions identify such forward-looking statements.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially from those predicted include, but are not limited to:
• the impact of the COVID-19 pandemic or other future pandemics, on the global economy and on our dependence uponcustomers, suppliers, employees and business;
•our ability to complete our planned merger with Inphi Corporation. on a timely basis, or at all;
•our ability to realize anticipated synergies in connection with the storage, networkingInphi merger;
• our ability to define, design and connectivity markets, which are highly cyclicaldevelop products for the infrastructure and intensely competitive;5G market and to market and sell those products to infrastructure customers;
• the outcomeimpact of pendinginternational conflict, trade relations between the U.S. and other countries, and continued economic volatility in either domestic or future litigationforeign markets;
• the impact and legalcosts associated with changes in international financial and regulatory proceedings;conditions such as the addition of new trade restrictions, tariffs or embargos;
• extension of lead time due to supply chain disruption, component shortage that impacts the production of our dependence on a small number ofproducts and constrained availability from other electronic suppliers impacting our customers' ability to ship their products, which in turn may adversely impact our sales to those customers;
severe financial hardship or bankruptcy of one or more of our major customers;
• our ability and the ability of our customers to successfully compete in the markets in which we serve;
our reliance on independent foundries and subcontractors for the manufacture, assembly and testing of our products;
• our ability and our customers’ ability to develop new and enhanced products and the adoption of those products in the market;
decreases in our gross margin and results of operations in the future due to a number of factors;
our ability to estimate customer demand and future sales accurately;
• our ability to scale our operations in response to changes in demand for existing or new products and services;
• our reliance on independent foundries and subcontractors for the impactmanufacture, assembly and testing of international conflict and continued economic volatility in either domestic or foreign markets;our products;
the effects of transitioning to smaller geometry process technologies;
• the risks associated with manufacturing and selling a majority of our products and our customers’ products outside of the United States;
risks associated• the effects of transitioning to smaller geometry process technologies;
• our ability to execute on changes in strategy and realize the expected benefits from restructuring activities;
• our ability to implement our plans, forecasts and other expectations with acquisitionrespect to our acquisitions and consolidation activityto fully realize the anticipated synergies and cost savings in the semiconductor industry;time frame anticipated;
• our ability to limit costs related to defective products;
• our ability to recruit and retain experienced executive management as well as highly-skilled personnel;
• our ability to mitigate risks related to our information technology systems;
• our ability to protect our intellectual property, particularly outside of the U.S.;
• our ability to estimate customer demand and future sales accurately;
• our reliance on third-party distributors and manufacturers' representatives to sell our products;
• the impact of any change in our application of the United States federal income tax laws in jurisdictions where we operate and the loss of any beneficial tax treatment that we currently enjoy;
the effects of any potential acquisitions or investments;
our ability to protect our intellectual property;
the impact and costs associated with changes in international financial and regulatory conditions; and
• our maintenance of an effective system of internal controls.controls;
• our dependence upon the storage market, which is highly cyclical and intensely competitive;
• our dependence on a small number of customers;
• severe financial hardship or bankruptcy of one or more of our major customers;
• the effects of any potential future acquisitions, strategic investments, divestitures, mergers or joint ventures;
• risks associated with acquisition and consolidation activity in the semiconductor industry;
• decreases in our gross margin and results of operations in the future due to a number of factors;
• the impact of natural disasters and other catastrophic events; and
• the outcome of pending or future litigation and legal proceedings.
Additional factors which could cause actual results to differ materially include those set forth in the following discussion, as well as the risks discussed in Part II, Item 1A, “Risk Factors,” and other sections of this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date hereof. Unless required by law, we undertake no obligation to update any forward-looking statements.
Overview
We are a leading supplier of infrastructure semiconductor solutions, spanning the data center core to network edge. We are a fabless semiconductor providersupplier of high-performance application-specific standard products. Ourand semi-custom products with core strength of expertise is the development ofstrengths in developing and scaling complex System-on-a-Chip (“SoC”) devices, leveraging our technology portfolio of intellectual property in the areas ofarchitectures integrating analog, mixed-signal and digital signal processing functionality. Leveraging leading intellectual property and embeddeddeep system-level expertise as well as highly innovative security firmware, our solutions are empowering the data economy and standalone integrated circuits. We also develop integrated hardware platforms along with software that incorporates digital computing technologies designedenabling communications across 5G, cloud, automotive, industrial and configured to provide an optimized computing solution. Our broad product portfolio includes devices for storage, networking and connectivity.artificial intelligence applications.
In the third quarter of fiscal 2018, we saw2021, our net revenue decreaseincreased year over year by 1%13% from $623.7$662.5 million net revenue in the third quarter of fiscal 20172020 compared with $616.3$750.1 million in the third quarter of fiscal 2018.2021. The decreaseincrease was primarily due to a 4% decrease in our storage product sales and 22% decrease in our other product sales, offset in part by a 19% increase inincreased sales of our connectivity products.networking products by 35%, partially offset by decreased sales of our storage products by 4% and our other products by 35%. Our net revenue for the nine months ended October 28, 201731, 2020 increased by $59.1$189.6 million compared to net revenue for the nine months ended October 29, 2016.November 2, 2019. This increase was primarily due to increased sales of our networking products by 24% with sales benefiting from acquisitions and the demand increase for our networking products, partially offset by the divestiture of the Wi-Fi Connectivity business in fiscal 2020 and decreased sales of our storage products by 10% and connectivityother products by 10%. This2% and 28%, respectively.
In response to growth was offset byin demand from customers for our products, our operations team is continuing to ramp production with our global supply chain partners. However, we have begun to experience a decline in other products.
As discussed in Note 1, duringnumber of industry-wide supply constraints affecting the first fiscal quartertype of 2018,high complexity products we recorded certain out-of-period adjustments of $4.7 million relatedprovide for data infrastructure. These supply challenges are currently limiting our ability to revenue-related accruals and $3.2 million related to other expenses. The net effect of these out-of-period adjustments resulted in a $7.9 million increase in income from continuing operations from the nine months ended October 28, 2017, an increase in basic earnings per share from continuing operations of $0.02 per share, and an increase in diluted earnings per share from continuing operations of $0.01 per share, as well as contributing tofully satisfy the increase in demand for some of our networking products.
We continue to monitor the impact of COVID-19 on our business. While many of our offices around the world remain open to enable critical on-site business functions in accordance with local government guidelines, the majority of our employees continue to work from home. Recently, some of our customers have reported adverse impacts on demand for their products due to COVID-19. We have seen a reduction in demand for products from customers in the enterprise networking, and enterprise server and storage end markets. We expect COVID-19 to continue to impact our business and for a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, see Part II, Item 1A, “Risk Factors,” including but not limited to the risk detailed under the caption “We face risks related to COVID-19 pandemic which could significantly disrupt our manufacturing, research and development, operations, sales and financial results.”
We expect that the U.S. government's export restrictions on certain Chinese customers will continue to impact our revenue in fiscal year 2021. Moreover, concerns that U.S. companies may not be reliable suppliers as a result of these and gross marginother actions has caused, and may in the future cause, some of our customers in China to amass large inventories of our products well in advance of need or cause some of our customers to replace our products in favor of products from other suppliers. Customers in China may also choose to develop indigenous solutions, as replacements for nine months endedproducts that are subject to U.S. export controls. In addition, there may be indirect impacts to our business that we can not easily quantify such as the fact that some of our other customers' products which use our solutions may also be impacted by export restrictions.
Pending Business Combination. On October 28, 2017.
On November 20, 2017,29, 2020, we alongentered into a merger agreement (the “Merger Agreement”) with Cavium, Inc.Inphi Corporation (“Inphi”), announced a definitive agreement, unanimously approved by the boards of directors of both companies, under whichwhereby we will acquire all outstanding sharesInphi with cash and stock consideration. Under the terms of Cavium common stock in exchange for consideration of $40.00the agreement, we will pay Inphi's stockholders $66 per share in cash and 2.1757 Marvell2.323 common shares for each Cavium share. The exchange ratio was based on aInphi share, which represents purchase price of $80 per share, using our undisturbed price prior to November 3, when media reports of the transaction first surfaced. This represents a transaction valueconsideration of approximately $6$10 billion. Cavium shareholders are expected to own approximately 25%The merger consideration will be financed by new debt financing and issuance of the combined company on a pro forma basis.
We intend to fund the cash consideration with a combination of cash on hand from the combined companies and $1.75 billion in debt financing. We have obtained commitments consisting of an $850 million bridge loan commitment and a $900 million committed term loan from Goldman Sachs Bank USA and Bank of America Merrill Lynch, in each case subject to customary terms and conditions. The transaction is not subject to any financing condition.
our common shares. The transaction is expected to close in mid-calendar 2018, subject to regulatorythe second half of calendar 2021, pending approval by Inphi's and our shareholders, as well as regulatory approval and satisfaction of other customary closing conditions, including the adoption by Cavium shareholdersconditions. As a result of the merger agreement andtransaction, the approval by our shareholdersparent company will be domiciled in the United States upon closing of the issuance of Marvell common sharestransaction.
Inphi is a global leader in high-speed data movement enabled by optical interconnects. Their product portfolio includes laser drivers, trans-impedance amplifiers, PAM (Pulse Amplitude Modulation) and Coherent DSPs (Digital Signal Processors) and data center interconnects. We and Inphi both have growing positions in carrier and datacenter, and Inphi’s high-speed electro-optics platform is highly complementary to our storage, networking, compute, and security portfolio. Inphi’s electro-optics portfolio combined with our copper Ethernet PHY franchise is expected to create an industry-leading high-speed data interconnect platform serving the transaction.enterprise, carrier, data center, and automotive end markets.
Restructuring. We continuously evaluate our existing operations to increase operational efficiency, decrease costs and increase profitability. In November 2016,2019, as part of the integration of the acquired Avera business, we announcedinitiated a restructuring plan intended to refocusfurther achieve the aforementioned goals.
During the second quarter ended August 1, 2020, we made changes to the scope of our research and development, increase operational efficiency and improve profitability.server processor product line in response to changes in the associated market. We transitioned our product offering from standard server processors to the broad server market to focus only on customized server processors for a few targeted customers. This change in strategy required the Company to assess whether the carrying value of the associated assets would be recoverable. As a continuationresult of such plan,the assessment, we recordeddetermined the carrying amount of certain impacted assets are not recoverable, which have resulted in recognition of $119.0 million of restructuring related charges of $3.3 million and $8.5 millionassociated with the server processor product line during the second quarter ended August 1, 2020. See “Note 5 - Restructuring” in the three and nine months ended October 28, 2017, respectively. In addition, duringNotes to the first nine months of fiscal 2018, we received cash proceeds of $165.9 million and recognized a gain on sale of $88.4 million from the sales of our Multimedia, LTE thin-modem, and Broadband businesses. These businesses are classified as discontinued operationsUnaudited Condensed Consolidated Financial Statements for all periods presented in our accompanying consolidated financial statements.further information.
Unless noted otherwise, our discussion under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, refers to our continuing operations.
Capital Return Program. Our financial position is strong and we We remain committed to delivering shareholder value through our share repurchase and dividend programs. On October 16, 2018, we announced that our Board of Directors authorized a $700 million addition to the balance of our existing share repurchase program. Under the program authorized by our Board of Directors, we may repurchase shares in the open-market or through privately negotiated transactions. The extent to which we repurchase our shares and the timing of such repurchases will depend upon market conditions and other corporate considerations, as determined by our management team. The share repurchase program was temporarily suspended in late March 2020 to preserve cash during the COVID-19 pandemic and remains temporarily suspended in anticipation of the funding of our acquisition of Inphi. As a result, we did not repurchase any shares during the three months ended October 31, 2020. We will continue to evaluate business conditions to decide when we can restart the share repurchase program. As of October 31, 2020, there was $564.5 million remaining available for future share repurchases of the authorization.
For the nine months ended October 28, 2017,31, 2020, we repurchased 31.51.3 million shares of our common stock for $527.6$25.2 million. As of October 28, 2017,31, 2020, a total of 286.4308.1 million shares have been repurchased to date under the Company’sour share repurchase programprograms for a total $3.8$4.3 billion in cash and there was $358 million remaining available for future share repurchases.cash. We returned $617.1$145.3 million to stockholders in the nine months ended October 28, 2017,31, 2020, including our repurchases of common stock and $89.6$120.1 million of cash dividends.
Cash and Short Term Investments.Cash Equivalents. Our total cash and cash equivalents and short-term investments were $1.7 billion$832.0 million at October 28, 2017,31, 2020, which was slightly$184.4 higher than our balance at our fiscal year ended January 28, 2017.February 1, 2020 of $647.6 million.
Sales and Customer Composition. Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. During the third quarter of fiscal 2021, there was no net revenue attributable to a customer, other than one distributor, whose revenues as a percentage of net revenue was 10% or greater of total net revenues. Net revenue attributable to significant customers whose revenue as a percentage of net revenue was 10% or greater of total net revenue is presented in the following table:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | |
| | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 | | October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 | |
| End Customer: | | | | | | | | End Customer: | | | | | | | | |
| Western Digital* | 17.2 | % | | 22.4 | % | | 20.2 | % | | 20.5 | % | |
| Toshiba | 13.6 | % | | 13.7 | % | | 14.0 | % | | 13.2 | % | |
| Seagate | 12.3 | % | | 10.5 | % | | 10.9 | % | | 9.8 | % | |
| Cisco Systems | | Cisco Systems | * | | * | | * | | 10 | % | |
| | Distributor: | | | | | | | | Distributor: | | |
| Wintech | 11.3 | % | | ** |
| | 10.9 | % | | 9.6 | % | Wintech | 12 | % | | 13 | % | | 12 | % | | 12 | % | |
|
| | | | |
| * | The percentage of net revenue reported for Western Digital in the three and nine months ended October 28, 2017 and October 29, 2016 includes net revenue of HGST and Sandisk which became subsidiaries of Western Digital in late fiscal 2016. |
** | Less than 10% of net revenue |
We continuously monitor the creditworthiness of our major customers and distributors and believe the distributors’their sales to diverse end customers and geographies further serve to mitigate our exposure to credit risk.
Most of our sales are made to customers located outside of the United States, primarily in Asia, and allmajority of our products are manufactured outside the United States. Sales shipped to customers with operations in Asia represented approximately 94%81% and 80% of our net revenue in the three and nine months ended October 28, 2017, respectively31, 2020, and approximately 94%83% and 82% of net revenue in both the three and nine months ended October 29, 2016,November 2, 2019, respectively. Because many manufacturers and manufacturing subcontractors of our customers are located in Asia, we expect that most of our net revenue will continue to be represented by sales to our customers in that region. For risks related to our global operations, see Part II, Item 1A, “Risk Factors,” including but not limited to the risk detailed under the caption "“We face additional risks due to the extent of our global operations since a majority of our products, and those of our customers, are manufactured and sold outside of the United States. The occurrence of any or a combination of the additional risks described below would significantly and negatively impact our business and results of operations."”
Historically, a relatively large portion of our sales have been made on the basis of purchase orders rather than long-term agreements. Customers can generally cancel or defer purchase orders on short notice without incurring a significant penalty. In addition, the development process for our products is long, which may cause us to experience a delay between the time we incur expenses and the time revenue is generated from these expenditures. We anticipate that the rate of new orders may vary significantly from quarter to quarter. For risks related to our sales cycles,cycle, see Part II, Item 1A, “Risk Factors,” including but not limited to the risk detailed under the caption "“We are subject to order and shipment uncertainties. If we are unable to accurately predict customer demand, we may hold excess or obsolete inventory, which would reduce our gross margin. Conversely, we may have insufficient inventory, which would resultsresult in lost revenue opportunities and potential loss of market share as well as damaged customer relationships."”
Critical Accounting Policies and Estimates
There have been no material changes during the three months ended October 31, 2020 to our critical accounting policies and estimates from the information provided in the “Critical Accounting Policies and Estimates” section of our Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.February 1, 2020.
In the current macroeconomic environment affected by COVID-19, our estimates could require increased judgment and carry a higher degree of variability and volatility. We continue to monitor and assess our estimates in light of developments, and as events continue to evolve and additional information becomes available, our estimates may change materially in future periods.
Results of Operations
The following table sets forth information derived from our unaudited condensed consolidated statementsUnaudited Condensed Consolidated Statements of operationsOperations expressed as a percentage of net revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | |
| October 31,
2020 | | November 2,
2019 | | October 31,
2020 | | November 2,
2019 | | | | |
| Net revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | | | |
| Cost of goods sold | 49.2 | | | 48.7 | | | 50.8 | | | 46.9 | | | | | |
| Gross profit | 50.8 | | | 51.3 | | | 49.2 | | | 53.1 | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Research and development | 34.1 | | | 40.4 | | | 37.4 | | | 40.4 | | | | | |
| Selling, general and administrative | 15.4 | | | 18.0 | | | 16.1 | | | 17.3 | | | | | |
| Restructuring related charges | 2.6 | | | 2.2 | | | 7.4 | | | 1.9 | | | | | |
| Total operating expenses | 52.1 | | | 60.6 | | | 60.9 | | | 59.6 | | | | | |
| Operating loss | (1.3) | | | (9.3) | | | (11.7) | | | (6.5) | | | | | |
| Interest income | 0.1 | | | 0.2 | | | 0.1 | | | 0.2 | | | | | |
| Interest expense | (2.1) | | | (3.2) | | | (2.2) | | | (3.2) | | | | | |
| Other income (loss), net | — | | | 0.1 | | | 0.2 | | | (0.1) | | | | | |
| Loss before income taxes | (3.3) | | | (12.2) | | | (13.6) | | | (9.6) | | | | | |
| Provision for income taxes | (0.2) | | | 0.2 | | | (0.3) | | | (0.1) | | | | | |
| Net loss | (3.1) | % | | (12.4) | % | | (13.3) | % | | (9.5) | % | | | | |
|
| | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 28, 2017 | | October 29, 2016 | | October 28, 2017 | | October 29, 2016 |
| Net revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of goods sold | 38.7 |
| | 42.8 |
| | 39.3 |
| | 44.8 |
|
| Gross profit | 61.3 |
| | 57.2 |
| | 60.7 |
| | 55.2 |
|
| Operating expenses: | | | | | | | |
| Research and development | 26.8 |
| | 32.5 |
| | 29.8 |
| | 36.3 |
|
| Selling, general and administrative | 9.6 |
| | 9.6 |
| | 9.5 |
| | 11.1 |
|
| Restructuring related charges | 0.5 |
| | 0.2 |
| | 0.5 |
| | 0.3 |
|
| Total operating expenses | 36.9 |
| | 42.3 |
| | 39.8 |
| | 47.7 |
|
| Operating income from continuing operations | 24.4 |
| | 14.9 |
| | 20.9 |
| | 7.5 |
|
| Interest and other income, net | 1.0 |
| | 0.9 |
| | 0.9 |
| | 0.7 |
|
| Income from continuing operations before income taxes | 25.4 |
| | 15.8 |
| | 21.8 |
| | 8.2 |
|
| Provision (benefit) for income taxes | 1.1 |
| | 2.5 |
| | 0.4 |
| | 0.2 |
|
| Income from continuing operations, net of tax | 24.3 | % | | 13.3 | % | | 21.4 | % | | 8.0 | % |
Three and nine months ended October 28, 201731, 2020 and October 29, 2016November 2, 2019
Net Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | | | | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change | | | | | | |
| | | | | | | | | | | | | | | | | |
| | (in thousands, except percentage) | | | | | | |
| Net revenue | $ | 750,143 | | | $ | 662,470 | | | 13.2% | | $ | 2,171,081 | | | $ | 1,981,490 | | | 9.6% | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | October 28, 2017 | | October 29, 2016 | | % Change | | October 28, 2017 | | October 29, 2016 | | % Change |
| | (in thousands, except percentage) |
| Net revenue | $ | 616,302 |
| | $ | 623,651 |
| | (1.2 | )% | | $ | 1,793,761 |
| | $ | 1,734,630 |
| | 3.4 | % |
Our net revenue for the three months ended October 28, 2017 decreased31, 2020 increased by $7.3$87.7 million compared to net revenue for the three months ended October 29, 2016.November 2, 2019. This decrease was primarily due to increased sales of our networking products by 35%, partially offset by decreased sales of our storage products by 4% due to lower sales of HDD products, partially offset by increased sales of SSD products. The decrease was also partially due to decreased sales ofand our other products by 22%. This decrease was offset by increased sales of our connectivity products, which were up 19%35% compared to the three months ended October 29, 2016.November 2, 2019. The increased sales of our networking products were primarily due to acquisitions and an increase in demand for our ethernet, embedded processor and automotive networking products, partially offset by the divestiture of the Wi-Fi Connectivity business in fiscal 2020. The decrease in sales of our storage products were primarily due to a decrease in demand for our fibre channel adapters and HDD storage controllers partially offset by an increase in demand for our SSD storage controllers. The decrease in sales of our other products is because we have stopped investing in these products and we expect that sales for these products will continue to decline over time.
Our net revenue for the nine months ended October 28, 201731, 2020 increased by $59.1$189.6 million compared to net revenue for the nine months ended October 29, 2016.November 2, 2019. This increase was primarily due to higherincreased sales of our networking products by 24%, partially offset by the decreased sales of our storage products and our other products by 10% driven2% and 28%, respectively. The increased sales of our networking products were primarily due to acquisitions and the increase in demand for our ethernet, automotive and embedded processor networking products, partially offset by strong growththe divestiture of the Wi-Fi connectivity business in fiscal 2020.The decrease in sales of SSDour other products is because we have stopped investing in these products and higherwe expect that sales for these products will continue to decline over time. The decrease in sales of our connectivitystorage products by 10%. This growth was primarily due to a decrease in demand for our HDD storage controllers and our fibre channel adapters partially offset by a declinean increase in other products by 26%. Net revenuedemand for the nine months ended October 28, 2017 included a one-time benefit of $4.7 million from a reduction in revenue-related accruals described in Note 1 of our unaudited condensed consolidated financial statements.SSD storage controllers.
In the three months ended October 28, 2017,31, 2020, unit shipments were 3% higher40% lower and average selling prices decreased 4%increased 39% compared to the three months ended October 29, 2016.November 2, 2019. In the nine months ended October 28, 2017,31, 2020, unit shipments were 2% higher39% lower and average selling prices increased 2%36% compared to the nine months ended October 29, 2016.November 2, 2019. This was primarily driven by the acquisition of Avera ASIC business characterized by higher average selling prices and divestiture of the Wi-Fi Connectivity business, represented by higher unit shipments.
Cost of Goods Sold and Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | | | | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change | | | | | | |
| | | | | | | | | | | | | | | | | |
| | (in thousands, except percentage) |
| Cost of goods sold | $ | 369,083 | | | $ | 322,403 | | | 14.5% | | $ | 1,103,863 | | | $ | 929,293 | | | 18.8% | | | | | | |
| % of net revenue | 49.2 | % | | 48.7 | % | | | | 50.8 | % | | 46.9 | % | | | | | | | | |
| Gross profit | $ | 381,060 | | | $ | 340,067 | | | 12.1% | | $ | 1,067,218 | | | $ | 1,052,197 | | | 1.4% | | | | | | |
| % of net revenue | 50.8 | % | | 51.3 | % | | | | 49.2 | % | | 53.1 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | October 28, 2017 | | October 29, 2016 | | %
Change | | October 28, 2017 | | October 29, 2016 | | % Change |
| | (in thousands, except percentage) |
| Cost of goods sold | $ | 238,533 |
| | $ | 266,757 |
| | (10.6 | )% | | $ | 705,303 |
| | $ | 777,117 |
| | (9.2 | )% |
| % of net revenue | 38.7 | % | | 42.8 | % | | | | 39.3 | % | | 44.8 | % | | |
| Gross profit | $ | 377,769 |
| | $ | 356,894 |
| | 5.8 | % | | $ | 1,088,458 |
| | $ | 957,513 |
| | 13.7 | % |
| % of net revenue | 61.3 | % | | 57.2 | % | | | | 60.7 | % | | 55.2 | % | | |
The costCost of goods sold as a percentage of net revenue increased for the three months ended October 31, 2020 compared to the three months ended November 2, 2019. Cost of goods sold as a percentage of net revenue was higher for the nine months ended October 31, 2020 compared to the nine months ended November 2, 2019, which primarily resulted from increased costs from amortization of acquired intangible assets, the amortization of inventory fair value adjustment associated with the Aquantia and Avera acquisitions as well as the inventory impairment associated with the change in strategy of our server processor product line. As a result, gross margin for the nine months ended October 31, 2020 decreased 3.9 percentage points compared to the nine months ended November 2, 2019.
Research and Development
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | | | | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change | | | | | | |
| | | | | | | | | | | | | | | | | |
| | (in thousands, except percentage) |
| Research and development | $ | 255,637 | | | $ | 267,781 | | | (4.5)% | | $ | 812,360 | | | $ | 801,002 | | | 1.4% | | | | | | |
| % of net revenue | 34.1 | % | | 40.4 | % | | | | 37.4 | % | | 40.4 | % | | | | | | | | |
Research and development expense decreased by $12.1 million in the three months ended October 31, 2020 compared to the three months ended November 2, 2019. The decrease was primarily due to increased non-recurring engineering credits of $26.3 million recognized in the current period, partially offset by higher employee personnel-related costs of $5.2 million, higher engineering design costs of $4.5 million and higher depreciation and amortization expense of $3.4 million.
Research and development expense increased by $11.4 million in the nine months ended October 31, 2020 compared to the nine months ended November 2, 2019. The increase was primarily due to additional costs from our acquisition of Aquantia and Avera, including $32.1 million of higher employee personnel-related costs, $12.7 million of higher depreciation and amortization expense and $10.9 million of higher engineering design costs, partially offset by increased non-recurring engineering credits of $45.4 million recognized in the current period.
Selling, general and administrative
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change |
| | | | | | | | | | | |
| | (in thousands, except percentage) |
| Selling, general and administrative | $ | 115,501 | | | $ | 118,993 | | | (2.9)% | | $ | 350,322 | | | $ | 342,988 | | | 2.1% |
| % of net revenue | 15.4 | % | | 18.0 | % | | | | 16.1 | % | | 17.3 | % | | |
Selling, general and administrative expense decreased by $3.5 million in the three months ended October 31, 2020 compared to the three months ended November 2, 2019. The decrease was reflective of one-time non-recurring Aquantia and Avera merger transaction costs incurred in the prior year when the deals were closing, and decreasing integration costs this year, contributing to an overall decrease of $12.6 million year over year. In addition, lower fortravel expenses of $2.0 million were incurred in the current year due to the COVID-19 pandemic. These collective expense decreases were partially offset by $2.6 million higher facility expense this year, $2.5 million higher employee compensation-related costs and $5.7 million higher intangible amortization expense recognized this year associated with new acquired intangible assets from the Company's prior year acquisitions of Aquantia and Avera.
Selling, general and administrative expense increased by $7.3 million in the nine months ended October 31, 2020 compared to the nine months ended November 2, 2019. The increase was primarily due to additional costs associated with our acquisitions of Aquantia and Avera, including $18.8 million of higher intangible amortization expense and $5.3 million higher employee compensation-related costs, partially offset by lower merger transaction and integration costs of $10.3 million related to the Aquantia and Avera acquisitions and lower travel expenses of $5.7 million due to the COVID-19 pandemic.
Restructuring Related Charges
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | | | | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change | | | | | | |
| | | | | | | | | | | | | | | | | |
| | (in thousands, except percentage) |
| Restructuring related charges | $ | 19,312 | | | $ | 14,802 | | | 30.5% | | $ | 161,189 | | | $ | 37,070 | | | 334.8% | | | | | | |
| % of net revenue | 2.6 | % | | 2.2 | % | | | | 7.4 | % | | 1.9 | % | | | | | | | | |
We recognized $19.3 million and $161.2 million of total restructuring related charges in the three and nine months ended October 28, 2017 due31, 2020. During the second quarter ended August 1, 2020, we made changes to improved margins primarily asthe scope of our server processor product line in response to changes in the associated market. We transitioned our product offering from standard server processors for the broad server market to focus only on customized server processors for a few targeted customers. This change in strategy required us to assess whether the carrying value of the associated assets would be recoverable. As a result of a shiftthe assessment, we determined the carrying amount of certain impacted assets were not recoverable, which resulted in recognition of $119.0 million of restructuring related charges associated with the server processor product line during the second quarter ended August 1, 2020. See “Note 5 - Restructuring” in the mix of our product sales away from lower margin other products ,Notes to the introduction of higher margin new products, combined with lower manufacturing costs, lower inventory reserves, period cost reductions,Unaudited Condensed Consolidated Financial Statements for further information.
Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | | | | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change | | | | | | |
| | | | | | | | | | | | | | | | | |
| | (in thousands, except percentage) |
| Interest income | $ | 608 | | | $ | 1,092 | | | (44.3)% | | $ | 2,243 | | | $ | 3,437 | | | (34.7)% | | | | | | |
| % of net revenue | 0.1 | % | | 0.2 | % | | | | 0.1 | % | | 0.2 | % | | | | | | | | |
Interest income decreased by $0.5 million and yield improvement. As a result, gross margin for$1.2 million, respectively, in the three and nine months ended October 28, 2017 increased 4.1 percentage points and 5.5 percentage points, respectively,31, 2020 compared to the three and nine months ended October 29, 2016. Our cost of goods sold as a percentage of net revenue may fluctuate in future periodsNovember 2, 2019 due to among other things: changes in the mix of products sold; the timing of production ramps of new products; increased pricing pressures fromlower interest rates on our customers and competitors; charges for obsolete or potentially excess inventory; changes in the costs charged by our foundry, assembly and test subcontractors; product warranty costs; changes in commodity prices such as gold; and the margin profiles of our new product introductions.invested cash.
Research and Development
Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | | | | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change | | | | | | |
| | | | | | | | | | | | | | | | | |
| | (in thousands, except percentage) |
| Interest expense | $ | (16,066) | | | $ | (21,241) | | | (24.4)% | | $ | (48,531) | | | $ | (62,975) | | | (22.9)% | | | | | | |
| % of net revenue | (2.1) | % | | (3.2) | % | | | | (2.2) | % | | (3.2) | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | October 28, 2017 | | October 29, 2016 | | % Change | | October 28, 2017 | | October 29, 2016 | | % Change |
| | (in thousands, except percentage) |
| Research and development | $ | 165,477 |
| | $ | 202,416 |
| | (18.2 | )% | | $ | 534,444 |
| | $ | 629,767 |
| | (15.1 | )% |
| % of net revenue | 26.8 | % | | 32.5 | % | | | | 29.8 | % | | 36.3 | % | | |
Research and development expenses decreased by $36.9 million in the three months ended October 28, 2017 compared to the three months ended October 29, 2016. The decrease was primarily attributable to $28.4 million of lower personnel-related costs and a $4.2 million reduction in depreciation and amortization expense. These reductions are primarily attributable to the results of the restructuring actions announced in November 2016.
Research and development expenses decreased by $95.3 million in the nine months ended October 28, 2017 compared to the nine months ended October 29, 2016. The decrease was primarily attributable to $79.5 million of lower personnel-related costs and $11.6 million reduction in depreciation and amortization expense. These reductions are primarily attributable to the results of the restructuring actions announced in November 2016.
Selling, general and administrative
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | October 28, 2017 | | October 29, 2016 | | % Change | | October 28, 2017 | | October 29, 2016 | | % Change |
| | (in thousands, except percentage) |
| Selling, general and administrative | $ | 59,112 |
| | $ | 60,088 |
| | (1.6 | )% | | $ | 169,875 |
| | $ | 192,052 |
| | (11.5 | )% |
| % of net revenue | 9.6 | % | | 9.6 | % | | | | 9.5 | % | | 11.1 | % | | |
Selling, general and administrativeInterest expense decreased by $1.0 million in the three months ended October 28, 2017 compared to the three months ended October 29, 2016. The decrease was primarily due to a decrease of $3.9 million in personnel-related costs. The decrease was partially offset by an increase in marketing expenses of $1.6 million, increase in employee activities expenses of $0.8$5.2 million and an increase in legal expenses of $0.6 million.
Selling, general and administrative expense decreased by $22.2 million in the nine months ended October 28, 2017 compared to the nine months ended October 29, 2016. The decrease was primarily due to a decrease in legal expenses of $14.2 million and a decrease of $11.5 million related to audit and tax fees.
Restructuring Related Charges
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | October 28, 2017 | | October 29, 2016 | | % Change | | October 28, 2017 | | October 29, 2016 | | % Change |
| | (in thousands, except percentage) |
| Restructuring related charges | $ | 3,284 |
| | $ | 1,164 |
| | 182.1 | % | | $ | 8,455 |
| | $ | 6,326 |
| | 33.7 | % |
| % of net revenue | 0.5 | % | | 0.2 | % | | | | 0.5 | % | | 0.3 | % | | |
We recorded total restructuring charges and other related charges of $3.3 million and $8.5$14.4 million in the three and nine months ended October 28, 2017, respectively. The charges primarily arose from activities related to the restructuring plan we announced in November 2016 to refocus our research and development, increase operational efficiency and improve profitability. The charges for the nine months ended October 28, 2017 included $10.3 million of severance and other exit-related costs offset by $1.4 million release of reserve. See "Note 4 – Restructuring Related Charges" for further information.
Interest and Other Income, Net
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | October 28, 2017 | | October 29, 2016 | | % Change | | October 28, 2017 | | October 29, 2016 | | % Change |
| | (in thousands, except percentage) |
| Interest and other income, net | $ | 6,200 |
| | $ | 5,470 |
| | 13.3 | % | | $ | 16,721 |
| | $ | 13,242 |
| | 26.3 | % |
| % of net revenue | 1.0 | % | | 0.9 | % | | | | 0.9 | % | | 0.7 | % | | |
Interest and other income, net, increased by $0.7 million and $3.5 million in the three and nine months ended October 28, 2017, respectively,31, 2020 compared to the three and nine months ended October 29, 2016.November 2, 2019. The increasedecrease was primarily due to lower outstanding term loan balances as well as lower borrowing rates.
Other Income (Loss), Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | | | | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change | | | | | | |
| | | | | | | | | | | | | | | | | |
| | (in thousands, except percentage) |
| Other income (loss), net | $ | 299 | | | $ | 689 | | | (56.6)% | | $ | 3,613 | | | $ | (1,624) | | | (322.5)% | | | | | | |
| % of net revenue | — | % | | 0.1 | % | | | | 0.2 | % | | (0.1) | % | | | | | | | | |
Other income (loss), net, changed by $0.4 million in the three months ended October 28, 2017 is31, 2020 compared to the three months ended November 2, 2019. The higher income in the three months ended November 2, 2019 was primarily due to a $0.9foreign currency rate fluctuations.
Other income (loss), net, changed by $5.2 million increase in interest income. The increase in the nine months ended October 28, 201731, 2020 compared to the nine months ended November 2, 2019. The change is primarily due to a $5.3 million gain from sale of a businessincome in fiscal 2021 related to restructuringthe divestiture activity,of the Wi-Fi connectivity business compared to loss in fiscal 2020 due to Wi-Fi divestiture-related costs and $1.8 million gain from saleforeign currency rate fluctuations.
Provision (benefit) for Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | | | | | |
| October 31,
2020 | | November 2,
2019 | | %
Change | | October 31,
2020 | | November 2,
2019 | | %
Change | | | | | | |
| | | | | | | | | | | | | | | | | |
| | (in thousands, except percentage) |
| Provision (benefit) for income taxes | $ | (1,641) | | | $ | 1,532 | | | (207.1)% | | $ | (5,494) | | | $ | (1,743) | | | 215.2% | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | October 28, 2017 | | October 29, 2016 | | % Change | | October 28, 2017 | | October 29, 2016 | | % Change |
| | (in thousands, except percentage) |
| Provision (benefit) for income taxes | $ | 6,759 |
| | $ | 15,523 |
| | (56.5 | )% | | $ | 8,026 |
| | $ | 4,263 |
| | 88.3 | % |
Our income tax expensebenefit for the three months ended October 28, 201731, 2020 was $6.8$1.6 million compared to a tax expense of $15.5$1.5 million for the three months ended October 29, 2016.November 2, 2019. Our income tax expensebenefit for the three months ended October 28, 201731, 2020 differs from the same period in the prior year primarily due to lowera reduction of earnings of our non-U.S. subsidiaries that are subject to tax expense on continuing operations of $5.9 million in the current periodU.S. versus tax expense on continuing operations of $11.9 million in the prior period, combined with additional accruals of $2.6 million for changesa decrease in prior year tax positions recorded in the prior period and $0.6 million for settlements of prior year tax in foreign jurisdictions recorded innon-US income taxes versus the prior period. The effective tax rate for the three months ended October 28, 201731, 2020 and October 29, 2016November 2, 2019 differs from the U.S. statutory federalFederal rate of 35%21% primarily due to the rate differential on foreign earnings that are taxed at a substantially lower tax rate.earnings.
Our income tax expensebenefit for the nine months ended October 28, 201731, 2020 was $8.0$5.5 million compared to a tax expensebenefit of $4.3$1.7 million for the nine months ended October 29, 2016.November 2, 2019. Our income tax provisionbenefit for the nine months ended October 28, 201731, 2020 differs from the same period in the prior year primarily due to the magnitudea reduction of the unrecognizedearnings of our non-U.S. subsidiaries that are subject to tax benefit released in the current period of $9.8 millionU.S. versus the prior period, of $14.3 million,combined with a decrease in addition to the recognition of a discrete tax benefit in the amount of $2.5 million recognized for the portion of a payment to the Company’s former Chief Executive Officer that became deductible after his departure from the Company in April 2016, offset by additional accruals of $2.6 million for changes in prior year tax positions recorded in the prior period and $0.6 million for settlements of prior year tax in foreign jurisdictions recorded innon-US income taxes versus the prior period. The effective tax rate for the nine months ended October 28, 201731, 2020 and October 29, 2016November 2, 2019 differs from the U.S. statutory federalFederal rate of 35%21% primarily due to the rate differential on foreign earnings, that are taxed at a substantially lowerthe expiration of the statutes of limitations on unrecognized tax rate.benefits in various foreign jurisdictions, and discrete tax benefits on the asset impairment for the period ended October 31, 2020.
Our provision for incomesincome taxes may be affected by changes in the geographic mix of earnings with different applicable tax rates, changes in the realizability of deferred tax assets and liabilities, accruals related to contingent tax liabilities and period-to-period changes in such accruals, the results of income tax audits, the expiration of statutes of limitations on the assessment for income taxes, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities and changes in tax laws. For discussionIt is also possible that significant negative evidence may become available to reach a conclusion that a valuation allowance will be needed, and as such, we may recognize a valuation allowance in the next 12 months.
We also continuously evaluate realignment of our legal structure in response to guidelines and requirements in various international tax related risks,jurisdictions where we conduct business. Additionally, please see Part II, Item 1A, “Risk Factors,” including the risk detailedinformation in “Item 1A: Risk Factors” under the caption "“Changes in existing taxation benefits, rules or practices may adversely affect our financial results.results.”
Liquidity and Capital Resources
Our principal source of liquidity as of October 28, 201731, 2020 consisted of approximately $1.7 billion$832.0 million of cash and cash equivalents, and short-term investments, of which approximately $1.1 billion$694.1 million was held by foreign subsidiaries (outside Bermuda). Approximately $620 million of this amount held by foreign subsidiaries is related to undistributed earnings that have been indefinitely reinvested outside of Bermuda. These funds are primarily held in China, Israel and the United States. We have plansplan to use such amounts to fund various activities outside of Bermuda, including working capital requirements, capital expenditures for expansion, funding of future acquisitions or other financing activities. If such funds were needed by
In June 2018, we executed debt agreements to obtain a $900 million term loan and $1.0 billion of senior unsecured notes in order to fund the parent companyCavium acquisition. In addition, we executed a debt agreement in Bermuda or ifJune 2018 to obtain a $500 million Revolving Credit Facility. During the amounts were otherwise no longer considered indefinitely reinvested,quarter ended October 31, 2020, the Company repaid $100 million of the principal outstanding and as of October 31, 2020, the term loan had an outstanding balance of $350 million, which we would incurintend to repay with operating cash flow. See “Note 9 - Debt” for additional information.
In October 2020, in order to fund the Inphi acquisition, we obtained commitments consisting of a tax expense$2.5 billion bridge loan commitment, a $750 million 3-year term loan facility commitment and a $750 million 5-year term loan facility commitment from JP Morgan Chase Bank, N.A., in each case subject to customary terms and conditions. See “Note 1 - Basis of approximately $190 million.Presentation” for additional information.
We believe that our existing cash, cash equivalents, and short-term investments, together with cash generated from operations, and funds from our Revolving Credit Facility will be sufficient to cover our working capital needs, capital expenditures, investment requirements and any declared dividends, repurchase of our common stock and commitments for at least the next twelve months. Our capital requirements will depend on many factors, including our rate of sales growth, market acceptance of our products, costs of securing access to adequate manufacturing capacity, the timing and extent of research and development projects and increases in operating expenses, all of which are all subject to uncertainty. In addition, we are named as defendants in several litigation actions and an unfavorable outcome in any current litigation matter could have a material adverse effect on our liquidity, cash flows and results of operations. For a discussion of litigation related risks, see Part II, Item 1A, "Risk Factors," including the risk detailed under the caption "We have been named as a party to several legal proceedings and may be named in additional ones in the future, including litigation involving our patents and other intellectual property, which could subject us to liability, require us to indemnify our customers, require us to obtain or renew licenses, require us to stop selling our products or force us to redesign our products."
To the extent that our existing cash and cash equivalents, and short-term investments andtogether with cash generated by operations, and funds available under our Revolving Credit Facility are insufficient to fund our future activities, we may need to raise additional funds through public or private debt or equity financing. We may also acquire additional businesses, purchase assets or enter into other strategic arrangements in the future, which could also require us to seek debt or equity financing. Additional equity financing or convertible debt financing may be dilutive to our current shareholders. If we elect to raise additional funds, we may not be able to obtain such funds on a timely basis or on acceptable terms, if at all. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to our common shares.
Future payment of a regular quarterly cash dividend on our common shares and our planned repurchases of common stock will be subject to, among other things, the best interests of the Companyus and our shareholders, our results of operations, cash balances and future cash requirements, financial condition, developments in ongoing litigation, statutory requirements under Bermuda law, market conditions and other factors that our board of directors may deem relevant. Our dividend payments and repurchases of common stock may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares at all or in any particular amounts. Our share repurchase program was temporarily suspended in late March 2020 to preserve cash during the COVID-19 pandemic and remains temporarily suspended in anticipation of the funding of our acquisition of Inphi. We will continue to evaluate business conditions to decide when we can restart the share repurchase program.
Cash Flows from Operating Activities
Net cash flow provided by operating activities for the nine months ended October 28, 201731, 2020 was $451.4$659.0 million. We had a net incomeloss of $472.1$293.8 million adjusted for the following non-cash items: depreciation and amortization of $62.6acquired intangible assets of $333.9 million, share-based compensation expense of $65.3$182.1 million, depreciation and amortization of $149.9 million, restructuring related non cash charges of $123.6 million, amortization of inventory fair value adjustment associated with the Aquantia and Avera acquisition of $17.3 million and $88.4$23.1 million of gainnet loss from sale of our Broadband, Multimedia and LTE thin-modem businesses.other non-cash items. Cash outflowinflow from working capital of $59.5$123.0 million for the nine months ended October 28, 201731, 2020 was primarily driven by increasesan increase in accrued employee compensation, an increase in accounts receivablepayable, an increase in accrued liabilities and other non-current liabilities, as well as a decrease in inventories. The increase in accrued employee compensation is due to increase in our bonus accrual and increase in employee contributions to the employee stock purchase plan. The increase in accounts payable is mainly due to timing of payments. The increase in accrued liabilities and other non current liabilities is due to an increase in ship and debit reserve. The decrease in inventory is due to improved supply chain management
Net cash flow provided by operating activities for the nine months ended November 2, 2019 was $304.5 million. We had a net loss of $188.3 million adjusted for the following non-cash items: amortization of acquired intangible assets of $253.5 million, share-based compensation expense of $189.0 million, depreciation and amortization of $112.7 million, restructuring related non cash charges of $16.2 million, amortization of inventory fair value adjustment associated with the Aquantia acquisition of $3.3 million and $14.8 million net loss from other non-cash items. Cash outflow from working capital of $96.8 million for the nine months ended November 2, 2019 was primarily driven by a decrease in accrued liabilities. This outflow wasliabilities and other non-current liabilities, as well as an increase in inventory, partially offset by an increase in accounts payable and a decrease in prepaid expenses and other current assets. The increase in accounts receivable was driven primarily by the increase in revenue. The increase in inventory is associated with the build up of inventory related to our networking and storage products in preparation for next quarter's demand.payable. The decrease in accrued liabilities and other non-current liabilities was driven bydue to a reduction of accruals for restructuring expensesdecrease in accrued rebates, ship and rebates.debit reserve and income tax payable, as well as a decrease due to severance payments. The increase in inventory was primarily due to slower inventory turns and inventory acquired from Aquantia. The increase in accounts payable was mainly due to additional amounts owed for assembly and test services.timing of payments.
Net cash flow used in operations for the nine months ended October 29, 2016 was $477.3 million. We had $101.2 million of net income, adjusted for $180.6 million of non-cash items, which was primarily driven by depreciation and amortization of $81.2 million, share-based compensation expense of $89.9 million, and the amortization and write-off of acquired intangible assets of $8.7 million. The cash outflow from working capital of $759.1 million for the nine months ended October 29, 2016 was primarily driven by the decrease in the CMU accrued litigation settlement that was fully paid in the nine months ended October 29, 2016.
Cash Flows from Investing Activities
Net cash flow provided by investing activities was $63.0 million for the nine months ended October 28, 2017 compared to net cash generated from investing activities of $117.3 million for the nine months ended October 29, 2016.
For the nine months ended October 28, 2017,31, 2020, net cash provided byused in investing activities of $63.0$96.5 million was primarily driven by purchases of available-for-sale securitiesproperty and equipment of $672.9$88.2 million, and purchases of technology licenses of $8.5 million.
For the nine months ended November 2, 2019, net cash used in investing activities of $525.4 million was primarily driven by net cash paid to acquire Aquantia of $477.6 million, purchases of property and equipment of $62.9 million and purchases of technology licenses of $1.9 million, partially offset by sales and maturities of available-for-sale securities of $589.9 million and net proceeds of $165.9 million from the sale of our Broadband, Multimedia and LTE thin-modem businesses.available for sale securities acquired from Aquantia of $18.8 million.
Cash Flows from Financing Activities
For the nine months ended October 29, 2016, net cash generated from investing activities of $117.3 million was primarily driven by sales and maturities of available-for-sale securities of $657.0 million. This increase was partially offset by payments of $343.8 million for the purchase of available-for-sale securities and $200.0 million for the purchase of time deposits.
Cash Flows from Financing Activities
For the nine months ended October 28, 2017,31, 2020, net cash used in financing activities of $528.3$378.1 million was primarily attributable to $527.6 million for repurchases of our common stock, $89.6$120.1 million for payment of our quarterly dividends, and $25.9$100.0 million minimumrepayment of debt principal, $82.6 million tax withholding payments on behalf of employees for net share settlements.settlements, $76.8 million payments for technology license obligations, $25.2 million for repurchases of our common stock and $22.3 million payment of debt financing cost. These outflows were partially offset by $50.5 million proceeds of $137.4 million from employee stock plans.
For the nine months ended October 29, 2016,November 2, 2019, net cash used in financing activities of $166.6$76.9 million was primarily attributable to payments$119.5 million for payment of our quarterly dividends, of $91.8$80.9 million repurchases of our common stock of $56.5 million and $16.3 million minimum tax withholding payments on behalf of employees for net share settlements.settlements, $64.3 million for repurchases of our common stock, $57.2 million payments for technology license obligations and $50.0 million repayment of debt principal. These outflows were partially offset by $350.0 million proceeds from issuance of debt and $103.1 million proceeds from employee stock plans.
Contractual Obligations and Commitments
We presented our contractual obligations at January 28, 2017February 1, 2020 in our Annual Report on Form 10-K for the fiscal year then ended. There have been no material changes outside the ordinary course of business in those obligations during the ninethree months ended October 28, 2017.31, 2020.
Indemnification Obligations
See “Note 910 – Commitments and Contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. OurWith our outstanding debt, we are exposed to various forms of market risk, including the potential losses arising from adverse changes in interest rates on our outstanding Term Loan and Revolving Credit Facility. See “Note 9 - Debt” for further information. A hypothetical increase or decrease in the interest rate by 1 percentage point would result in an increase or decrease in annual interest expense by approximately $2.4 million.
We currently carry debt that relies on the LIBOR as the benchmark rate, with the Term Loan maturing on July 6, 2021. LIBOR is expected to be phased out as a benchmark rate by the end of 2021. We expect our debt to continue to use LIBOR until the rate is no longer available or a relevant governmental authority makes a public statement that LIBOR will no longer be available after a certain date. To the extent LIBOR ceases to exist, we may need to renegotiate our credit agreements that utilize LIBOR as a factor in determining the interest rate. Currently, there is not a firm timeframe for this change. This update currently has no foreseeable impact on our unaudited condensed consolidated financial statements; however, it may have an effect in the future.
We maintain an investment policy that requires minimum credit ratings, diversification of credit risk and limits the long-term interest rate risk relates primarily to our fixed income short-term investment portfolio as we did not have any outstanding debt asby requiring effective maturities of October 28, 2017.generally less than five years. We generally invest our excess cash primarily in highly liquid and highly rated debt instruments of the U.S. government and its agencies, municipalities, corporations,money market mutual funds, corporate debt securities and such other investmentsmunicipal debt securities that are classified as asset backed securitiesavailable-for-sale and time deposits. These investments are recorded on our condensed consolidated balance sheets at fair market value with their related unrealized gain or loss reflected as a component of accumulated other comprehensive income (loss) in the unaudited condensed consolidated statementsstatement of shareholders’ equity.
Based on investment positions as Investments in both fixed rate and floating rate interest earning securities carry a degree of October 28, 2017,interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a hypothetical 100 basis point increaserise in interest rates, across all maturities would result in a $6.6 million decline in the fair market valuewhile floating rate securities may produce less income than predicted if interest rates fall. There were no such investments on hand at October 31, 2020, aside from cash and cash equivalents.
Foreign Currency Exchange Risk. All of our sales and the majority of our expenses are denominated in U.S. dollars. Since we operate in many countries, we pay certain payroll and other operatinga percentage of our international operational expenses are denominated in localforeign currencies and these expenses may be higherexchange volatility could positively or lowernegatively impact those operating costs. Increases in the value of the U.S. dollar terms. Our operationsrelative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in Israel represent a large portion of our total foreign currency exposure and we may enter into hedging transactions that are typically less than 12 months in duration to help mitigate somethe value of the volatilityU.S. dollar relative to these forecasted cash flows.other currencies could result in our suppliers raising their prices to continue doing business with us. Additionally, we may hold certain assets and liabilities, including potential tax liabilities, in local currency on our consolidated balance sheet. These tax liabilities would be settled in local currency. Therefore, foreign exchange gains and losses from remeasuring the tax liabilities are recorded to interest and other income, net. We do not believe that foreign exchange volatility has a material impact on our current business or results of operations. However, fluctuations in currency exchange rates could have a greater effect on our business or results of operations in the future to the extent our expenses increasingly become denominated in foreign currencies.
We may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange balance sheetexposures for a variety of reasons, including, but not limited to, accounting considerations and cash flow exposures due to immateriality, offsetting exposures, certainty of the timing of the assets or liabilities realized as cash flows, prohibitive economic cost of hedging a particular currency, and limited availability of appropriate hedging instruments. There is also a risk that our customers may be negatively impacted in their ability to purchase our products priced in U.S. dollars when there has been significant volatility in foreign currency exchange rates. We do not enter into derivative financial instruments for trading or speculative purposes.exposures.
To provide an assessment of the foreign currency exchange risk associated with our foreign currency exposures within operating expense, we performed a sensitivity analysis to determine the impact that an adverse change in exchange rates would have on our financial statements. If the U.S. dollar weakened by 10%, our operating expense could increase by approximately 4%2%. We expect our hedges of foreign currency exposures to be highly effective and offset a significant portion of the short-term impact of changes in exchange rates on the hedged portion of our exposures.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of October 28, 2017.. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of October 31, 2020, our disclosure controls and procedures were not effective as of October 28, 2017 due to material weaknesses described below.effective.
Notwithstanding the material weaknesses
Changes in our internal controls over financial reporting as of October 28, 2017, management has concluded that the condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.Internal Control Over Financial Reporting
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company continues to work toward remediating certain material weaknessesThere have been no changes in our internal control over financial reporting during the three months ended October 31, 2020 that were initially identified and disclosed in our fiscal 2016 consolidated financial statements. Remediation of the following material weaknesses is in process but has not yet been completed:
(i) Sufficiency of Accounting and Finance Department Resources - The Company had insufficient finance and accounting department resources with appropriate knowledge, expertise and training commensurate with the Company’s corporate structure and financial reporting requirementshave materially affected, or are reasonably likely to effectively assess risk, design, operate and oversee internal controls over financial reporting. This lack of appropriate resources resulted in inconsistent expectations around the preparation, review and maintenance of documentation critical to the design and consistent execution of internal controls as well as a lack of segregation of duties in certain controls. Further, the lack of appropriate resources resulted in controls that relied upon information that did not have sufficiently precise controls around accuracy and completeness of that information and was therefore not reliable. These factors contributed to deficiencies in the Company’s financial reporting process due to a lack of precision in the review controls over certain information and assumptions impacting various financial reporting areas including those items that are nonrecurring in nature and therefore bear a greater degree of complexity given their infrequency. Additionally, they contributed to deficiencies in the Company’s ability to identify, assess and monitor the appropriate accounting treatment of certain contractual arrangements.
(ii) Revenue Recognition - The Company’s internal controls to identify, accumulate and assess the accounting impact of certain concessions or side agreements on whether the Company’s revenue recognition criteria had been met were in certain instances not fully followed or were not effective. The Company’s controls were not effective to ensure (a) consistent standards in the level of documentation of agreements required to support accurate recording of revenue transactions, and (b) that such documentation is retained, complete, and independently reviewed to ensure certain terms impacting revenue recognition were accurately reflected in the Company’s books and records.
Remediation of Material Weakness in Internal Control over Financial Reporting
Our management has worked, and continues to work, to strengthenmaterially affect, our internal control over financial reporting. As a result of the COVID-19 pandemic, we have modified our workplace practices globally, resulting in most of our employees working remotely. We are committedcontinually monitoring and assessing the COVID-19 situation on our internal controls to ensuring that such controls are designedminimize the impact on their design and operating effectively.effectiveness. We have undertaken remedial efforts, under the oversight of the Audit Committee, to address the material weaknesses inbelieve that our internal control over financial reporting which includes the following activities:
Strengthened our finance and accounting department resources with hiring of key personnel and department leaders with the appropriate knowledge, expertise and training commensurate with the Company’s corporate structure and financial reporting requirements;
Implemented changes in the design of certain controls as more fully described below;
Provided training to ensure those responsible for executing on internal controls regarding the required documentation requirements to evidence that the control functioned as designed;
Provided training to ensure changes in process, systems and policies regarding customer rebates and customer agreements were communicated to and understood by the appropriate individuals involved in the processes;
Made certain changes in the Internal Audit organization, including (i) hiring a Senior Director of Internal Audit to oversee the Internal Audit department and (ii) adding and onboarding headcount in order to better monitor and assess the effectiveness of internal controls over financial reporting.
We plan to complete remediation of the two remaining material weaknesses by the end of fiscal 2018 (i.e., February 3, 2018). However, such material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of timereporting are being executed effectively and management has concluded, through testing, that these controls are operating effectively.
Changes to Internal Control over Financial Reporting
During the quarter ended October 28, 2017, management completed the implementation of the following changes in internal control as part of its remediation efforts in addressing the two previously identified material weaknesses described above and implemented the following internal controls:
Sufficiency of Accounting and Finance Personnel:
Reorganized the responsibilities of new and existing finance and accounting personnel to appropriately match control owners to processes that effectively assess risk, design, operate and oversee internal controls over financial reporting;
Enhanced the level of precision of our review controls over information and assumptions impacting various financial reporting areas, including the accuracy and completeness of financial information and those items that are complex and/or nonrecurring in nature;
Made changes to certain controls to ensure segregation of duties was properly maintained.
Revenue Recognition:
Implemented a policy governing customer rebates and claims; revised the processes, systems and controls surrounding customer rebates based on this policy;
Implemented a formal, documented control process to meet with our Sales Vice Presidents during the quarter-end financial close process to review and discuss outstanding rebates and other revenue related topics which might impact revenue recognition;
Implemented changes in our Enterprise Resource Planning system to further restrict access to customer data that impacts revenue recognition;
Implemented controls to monitor and detect changes to customer data that may impact revenue recognition;
Developed and implemented enhanced controls to manage our customer agreements and related amendments to ensure terms and conditions impacting revenue were being appropriately applied and used to determine revenue recognition;
Reorganized the responsibilities within the Revenue Accounting Group to appropriately match the control owners to processes to enable more thorough oversight over transactions through the revenue cycle;
The above changes were implemented during the quarter ended October 28, 2017. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of internal control over financial reporting. The Audit Committee continues to monitor the progress of the remediation efforts set forth above. Except as noted in the preceding paragraphs, no other change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended October 28, 2017, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.be effective.
Inherent Limitations
Limitation on Effectiveness of Controls
Our management, including our principal executive officer and our principal financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
The information under the caption “Contingencies” as set forth in “Note 910 – Commitments and Contingencies” of our Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1, is incorporated herein by reference. For additional discussion of certain risks associated with legal proceedings, see Part II, Item 1A, “Risk Factors,” immediately below.
Item 1A.Risk Factors
Investing in our common shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this report before you decide to purchase our common shares. Many of these risks and uncertainties are beyond our control, including business cycles and seasonal trends of the computing, infrastructure, semiconductor and related industries and end markets. If any of the possible adverse events described below actually occurs, we may be unable to conduct our business as currently planned and our financial condition and operating results could be harmed. In addition, the trading price of our common shares could decline due to the occurrence of any of these risks, and you could lose all or part of your investment.
We have marked withSUMMARY OF FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
The following summarizes the principal factors that make an asterisk (*) those risks described below that reflect substantive changes frominvestment in the risks described under “Part II, Item 1.A. Risk Factors” includedCompany speculative or risky. This summary should be read in our Quarterly Report on Form 10-Q for the quarter ended July 28, 2017 as filedconjunction with the SEC on August 31, 2017.
Factors That May Affect Future Results
*Ourremainder of this “Risk Factors” section and should not be relied upon as an exhaustive summary of the material risks facing our business. The occurrence of any of these risks could harm our business, financial condition, and results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may varymake from quartertime to quarter, which may causetime. You should consider all of the pricerisk factors described in our public filings when evaluating our business.
•risks related to the impact of the COVID-19 pandemic or other future pandemics, on the global economy and on our customers, suppliers, employees and business;
•risks related to our ability to complete our planned merger with Inphi Corporation on a timely basis, or at all, and limitations and restrictions contained in the Merger Agreement;
•risks related to our ability to realize anticipated synergies in connection with the Inphi merger and other strategic transactions;
•risks related to changes in general economic conditions, such as the impact of Brexit on the economy in the E.U., political conditions, such as the recent tariffs and trade restrictions with China and other foreign nations, and specific conditions in the end markets we address, including the continuing volatility in the technology sector and semiconductor industry;
•risks related to the ability of our common sharescustomers, particularly in jurisdictions such as China that may be subject to decline.trade restrictions (including the need to obtain export licenses) to develop their own solutions or acquire fully developed solutions from third-parties;
•risks related to the extension of lead time due to supply chain disruptions, component shortages that impact the production of our products, and constrained availability from other electronic suppliers impacting our customers' ability to ship their products, which in turn may adversely impact our sales to those customers;
•risks related to cancellations, rescheduling or deferrals of significant customer orders or shipments, as well as the ability of our customers to manage inventory;
•risks related to the effects of any future acquisitions, divestitures or significant investments;
•risks related to the highly competitive nature of the end markets we serve, particularly within the semiconductor and infrastructure industries;
•risks related to our dependence on a few customers for a significant portion of our revenue;
•risks related to our ability to execute on changes in strategy and realize the expected benefits from restructuring activities;
•risks related to our ability to maintain a competitive cost structure for our manufacturing and assembly and test processes and our reliance on third parties to produce our products;
•risks related to our ability to realize anticipated synergies in connection with our acquisitions and our loss of synergies in connection with our divestitures;
•risks related to any current and future litigation and regulatory investigations that could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully maintain and grow our business;
•risks related to gain or loss of a design win or key customer;
•risks related to seasonality or volatility related to sales into the infrastructure market;
•risks related to failures to qualify our products or our suppliers’ manufacturing lines;
•risks related to our ability to develop and introduce new and enhanced products in a timely and effective manner, as well as our ability to anticipate and adapt to changes in technology;
•risks related to failures to protect our intellectual property, particularly outside the U.S.;
•risks related to the potential impact of a significant natural disaster, including earthquakes, fires, floods and tsunamis, particularly in certain regions in which we operate or own buildings, such as Santa Clara, California, and where our third party suppliers operate, such as Taiwan and elsewhere in the Pacific Rim;
•risks related to our ability to attract, retain and motivate a highly skilled workforce, especially managerial, engineering, sales and marketing personnel;
•risks related to our debt obligations;
•risks related to severe financial hardship or bankruptcy of one or more of our major customers; and
•risks related tofailures of our customers to agree to pay for NRE (non-recurring engineering) costs or failure to pay enough to cover the costs we incur in connection with NREs.
Our quarterly results of operations have fluctuated in the past and could do so in the future. Because our results of operations are difficult to predict, you should not rely on quarterly comparisons of our results of operations as an indication of our future performance.
Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and those identified throughout this “Risk Factors” section:
changes in general economic and political conditions and specific conditions in the end markets we address, including the continuing volatility in the technology sector and semiconductor industry;
the effects of any acquisitions, divestitures or significant investments, including our recently announced merger with Cavium, Inc.;
the highly competitive nature of the end markets we serve, particularly within the semiconductor industry;
our dependence on a few customers for a significant portion of our revenue;
severe financial hardship or bankruptcy of one or more of our major customers;
our ability to maintain a competitive cost structure for our manufacturing and assembly and test processes and our reliance on third parties to produce our products;
any current and future litigation that could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully maintain and grow our business;
cancellations, rescheduling or deferrals of significant customer orders or shipments, as well as the ability of our customers to manage inventory;
gain or loss of a design win or key customer;
seasonality in sales of consumer devices in which our products are incorporated;
failure to qualify our products or our suppliers’ manufacturing lines;
our ability to develop and introduce new and enhanced products in a timely and effective manner, as well as our ability to anticipate and adapt to changes in technology;
failure to protect our intellectual property;
impact of a significant natural disaster, including earthquakes, floods and tsunamis, particularly in certain regions in which we operate or own buildings, such as Santa Clara, California, and where our third party suppliers operate, such as Taiwan and elsewhere in the Pacific Rim; and
our ability to attract, retain and motivate a highly skilled workforce, especially managerial, engineering, sales and marketing personnel.
Due to fluctuations in our quarterly results of operations and other factors, the price at which our common shares will trade is likely to continue to be highly volatile. From January 31, 2016 through October 28, 2017, our common shares traded as low as $8.32 and as high as $18.88 per share. Accordingly, you may not be able to resell your common shares at or above the price you paid. In future periods, our stock price could decline if, amongst other factors, our revenue or operating results are below our estimates or the estimates or expectations of securities analysts and investors. Our stock is traded on the Nasdaq stock exchange under the ticker symbol “MRVL”. As a result of stock price volatility, we may be subject to securities class action litigation. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully maintain and grow our business.
*WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE CORONAVIRUS (COVID-19) PANDEMIC
We face risks related to the COVID-19 pandemic which could significantly disrupt and adversely impact our manufacturing, research and development, operations, sales and financial results.
Our business has been, and will continue to be, adversely impacted by the effects of the COVID-19 pandemic. In addition to global macroeconomic effects, the COVID-19 pandemic and related adverse public health measures have caused disruption to our global operations and sales. Our third-party manufacturers, suppliers, third-party distributors, sub-contractors and customers have been, and are expected to continue to be, disrupted by worker absenteeism, quarantines and restrictions on their employees’ ability to work; office and factory closures; disruptions to ports and other shipping infrastructure; border closures; and other travel or health-related restrictions. Depending on the magnitude of such effects on our manufacturing, assembling, and testing activities or the operations of our suppliers, third-party distributors, or sub-contractors, our supply chain, manufacturing and product shipments will be delayed, which could adversely affect our business, operations and customer relationships.
In addition to operational and customer impacts, the COVID-19 pandemic has had, and is expected to continue to have, a significant impact on the economies and financial markets of many countries including an economic downturn, which has affected and may in the future affect demand for our products and impact our operating results in both the near and long term. There can be no assurance that any decreases in sales resulting from the COVID-19 pandemic will be offset by increased sales in subsequent periods.
We have experienced and expect to continue to experience disruptions to our business operations resulting from work from home, quarantines, self-isolations, or other movement and restrictions on the ability of our employees to perform their jobs, innovate, work together in teams and collaborate and such disruptions could impact our ability to develop and design our products in a timely manner or meet required milestones or customer commitments. See the Risk Factor entitled “If weare unable to develop and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our results of operations and competitive position will be harmed.” These disruptions may also impact our ability to win in time sensitive competitive bidding selectionprocesses. See the Risk Factor entitled “We rely on our customers to design our products into their systems, and the nature of the design process requires usto incur expenses prior to customer commitments to use our products or recognizing revenues associated with those expenses which may adversely affect our financial results.” In addition, work from home, quarantines, self-isolations, home schooling, continuing macroeconomic related uncertainty or caring for family members may result in heavy psychological, emotional or financial burdens for some of our employees, which may impact their productivity and morale and may lead to higher employee absences and higher attrition rates. See the Risk Factor entitled “We depend on highly skilled personnel to support our business operations. If we are unable to retain and motivate our current personnel or attract additional qualified personnel, our ability to develop and successfully market our products could be harmed.”
Our share repurchase program was temporarily suspended in late March 2020 to preserve cash during the COVID-19 pandemic and remains temporarily suspended in anticipation of the funding of our acquisition of Inphi. See the Risk Factor entitled “There can be no assurance that we will continue to declare cash dividends or effect share repurchases in any particular amount or at all, and statutory requirements under Bermuda Law may require us to defer payment of declared dividends or suspend share repurchases.”
We may become subject to claims or lawsuits by employees, customers, suppliers or other parties regarding actions we take in our operations in response to the COVID-19 pandemic.
Due to uncertainty regarding the severity and duration of the COVID-19 pandemic and related public health measures and macroeconomic impacts, at this time we are unable to predict the full impact of the COVID-19 pandemic on our business, financial condition, operating results and cash flows. In addition, the impacts of the COVID-19 pandemic will be exacerbated the longer the pandemic continues.
The impact of the COVID-19 pandemic can also exacerbate other risks discussed below in this Item 1A "Risk Factors" section.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR PROPOSED MERGER WITH INPHI
Our proposed acquisition of Cavium, Inc. (“Cavium”)Inphi involves a number of risks, including, among others, the risk that we fail to complete the acquisition in a timely manner or at all, regulatory risks, risks associated with our use of a significant portion of our cash and our taking on significant indebtedness, other financial risks, integration risks, and riskrisks associated with the reactions of customers, suppliers and employees.
On October 29, 2020, Marvell entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), by and among Marvell, Maui HoldCo, Inc., a Delaware corporation and a wholly owned subsidiary of Marvell (“HoldCo”), Maui Acquisition Company Ltd, a Bermuda exempted company and a wholly owned subsidiary of HoldCo (“Bermuda Merger Sub”), Indigo Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of HoldCo (“Delaware Merger Sub”), and Inphi Corporation, a Delaware corporation (“Inphi”). Pursuant to the Merger Agreement: (i) Bermuda Merger Sub will be merged with and into Marvell (the “Bermuda Merger”), with Marvell continuing as a wholly owned subsidiary of HoldCo; and (ii) Delaware Merger Sub will be merged with and into Inphi (the “Delaware Merger” and, together with the Bermuda Merger, the “Mergers”), with Inphi continuing as a wholly owned subsidiary of HoldCo. As a result of the transaction, the parent company will be domiciled in the United States upon closing of the transaction.
Our and Cavium’sInphi’s obligations to consummate the proposed transactionMergers are subject to the satisfaction or waiver of certain conditions, including, among others: (i) the approval of Cavium'sby Marvell’s shareholders of the merger agreement;Merger Agreement and the Bermuda Merger; (ii) adoption by Inphi’s stockholders of the approval of our shareholders to allow us to issue shares of common stock in connection with the merger agreement;Merger Agreement; and (iii) the receipt of certain regulatory clearance under applicable U.S. and foreign regulations; (iv) the absence of any law or order prohibiting the proposed transaction; (v) there being no event that would have a material adverse effect on Cavium; and (vi) the accuracy of the representations and warranties of Cavium, subject to certain exceptions, and Cavium’s material compliance with its covenants, in the definitive agreement. We cannot provide assurance that the conditions to the completion of the proposed transaction will be satisfied in a timely manner or at all, and if the proposed transaction is not completed, we would not realize any of the expected benefits.approvals.
The regulatory approvals required in connection with the proposed transaction may not be obtained or may contain materially burdensome conditions. If any conditions or changes to the structure of the proposed transactionMergers are required to obtain these regulatory approvals, they may have the effect of jeopardizing or delaying completion of the proposed transactionMergers or reducing ourthe anticipated benefits.benefits of the transaction to HoldCo. If we agree to any material conditions in order to obtain any approvals required to complete the proposed transaction, ourMergers, HoldCo’s business and results of operations may be adversely affected.
In addition, the use of a significant portion of our cash and the incurrence of substantial indebtedness in connection with the financing of the proposed transactionMergers will reduce ourHoldCo’s liquidity, and may limit ourHoldCo’s flexibility in responding to other business opportunities and increase our vulnerability to adverse economic and industry conditions.
If the proposed transaction isMergers are not completed by June 30, 2021 (or March 1, 2022, if extended by either party in accordance with the terms of the Merger Agreement) under certain circumstances, including in the event receipt of certain required regulatory approvals has not been obtained, either Marvell or Inphi may choose to terminate the Merger Agreement. Marvell or Inphi may also elect to terminate the Merger Agreement in certain other circumstances, or they may mutually decide to terminate the Merger Agreement at any time prior to the effective time of the Delaware Merger, before or after obtaining shareholder approval, as applicable.
If the proposed Mergers are not completed, our stock price could fall to the extent that our current price reflects an assumption that we will complete it. Furthermore, if the proposed transaction isMergers are not completed and the purchase agreementMerger Agreement is terminated, we would not realize any of the expected benefits of the proposed transaction,Mergers, and we may suffer other consequences that could adversely affect our business, results of operations and stock price, including, among others:
•we could be required to pay a termination fee of up to $180$460 million;
•we will have incurred and may continue to incur costs relating to the proposed transaction,Mergers, many of which are payable by us whether or not the proposed transaction isMergers are completed;
•matters related to the proposed transactionMergers (including integration planning) require substantial commitments of time and resources by our management team and numerous others throughout outour organization, which could otherotherwise have been devoted to other opportunities;
•we may be subject to legal proceedings related to the proposed transactionMergers or the failure to complete the proposed transaction;Mergers;
•the failure to complete the proposed transactionMergers may result in negative publicity and a negative perception of us in the investment community; and
•any disruptions to our business resulting from the announcement and pendency of the proposed transaction,Mergers, including any adverse changes in our relationships with our customers, supplied,suppliers, partners or employees, may continue to intensify in the event the proposed transaction isMergers are not consummated.
The benefits we expect HoldCo to realize from the proposed transactionMergers will depend, in part, on ourHoldCo’s ability to integrate the businesses successfully and efficiently. See also the Risk Factor entitled “Any potential future acquisitions, strategic investments, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business."
Furthermore, uncertainties about the proposed transactionMergers may cause our and/or Cavium’sInphi’s current and prospective employees to experience uncertainty about their futures. These uncertainties may impair our and/or Cavium’sInphi’s ability to retain, recruit or motivate key management, engineering, technical and other personnel. Similarly, our and/or Cavium’sInphi’s existing or prospective customers, licensees, suppliers and/or partners may delay, defer or cease purchasing products or services from or providing products or services to us or Cavium;Inphi; delay or defer other decisions concerning us or Cavium;Inphi; or otherwise seek to change the terms on which they do business with us or Cavium.Inphi. Any of the above could harm us and/or Cavium,Inphi, and thus decrease the benefits we expect HoldCo to receive from the proposed transaction.Mergers.
The proposed transactionMergers may also result in significant charges or other liabilities, including taxes, that could adversely affect ourHoldCo’s results of operations, such as cash expenses and non-cash accounting charges incurred in connection with ourthe acquisition and/or integration of the business and operations of Cavium.Marvell and Inphi. The amount and timing of these possible charges are not yet known. Further, ourHoldCo’s failure to identify or accurately assess the magnitude of certain liabilities we areHoldCo is assuming in the proposed transaction could result in unexpected litigation or regulatory exposure, unfavorable accounting charges, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on ourHoldCo’s business, results of operations, financial condition or cash flows.
Until the completion of the Mergers or the termination of the Merger Agreement in accordance with its terms, Marvell and Inphi are each prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to Marvell or Inphi and their respective shareholders.
Until the proposed Mergers are completed or the Merger Agreement is terminated, the Merger Agreementrestricts Marvell and Inphi from taking specified actions without the consent of the other party, and requires Marvell and Inphi to conduct their respective business and operations in the ordinary course in all material respects and substantially in accordance with past practices. These restrictions may prevent Marvell and Inphi from making appropriate changes to their respective businesses or pursuing attractive business opportunities that may arise prior to the completion of the proposed Mergers.
The Merger Agreement limits each of Marvell’s and Inphi’s ability to pursue alternative transactions, and in certain instances requires payment of a termination fee, which could deter a third party from proposing an alternative transaction.
The Merger Agreement contains provisions that, subject to certain exceptions, limit each of Marvell’s and Inphi’s ability to solicit, initiate, encourage or facilitate, or enter into discussions or negotiations with respect to, any inquiries regarding or the making of any proposal or offer that constitutes or could reasonably be expected to lead to an alternative transaction. In addition, under certain specified circumstances, Inphi is required to pay a termination fee of $300 million if the Merger Agreement is terminated and, under certain specified circumstances, Marvell is required to pay a termination fee of $400 (or in some cases $460) million if the Merger Agreement is terminated. It is possible that these or other provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Marvell or Inphi from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower per share price to acquire Marvell or Inphi than it might otherwise have proposed to pay.
Any delay in completing the Mergers may significantly reduce the benefits expected to be obtained from the Mergers.
In addition to the required regulatory clearances and approvals, the Mergers are subject to a number of other conditions that are beyond the control of Marvell and Inphi. The failure to satisfy these and other conditions may prevent, delay or otherwise materially and adversely affect completion of the Mergers. Marvell and Inphi cannot predict whether and when these other conditions will be satisfied. Further, the requirements for obtaining the required regulatory clearances and approvals could delay the completion of the Mergers for a significant period of time or prevent it from occurring. Any delay in completing the Mergers may significantly reduce the synergies projected to result from the Mergers and other benefits that Marvell and Inphi expect to achieve if they complete the Mergers within the expected timeframe and integrate their respective businesses.
There can be no assurance that Marvell will be able to secure the funds necessary to pay the cash portion of the Merger consideration and refinance certain existing indebtedness on acceptable terms, in a timely manner or at all.
HoldCo intends to fund the cash portion of the Merger consideration to be paid to holders of Inphi common stock with new debt. To this end, Marvell and HoldCo have entered into two debt commitment letters containing commitments for a $1.5 billion senior unsecured term loan facility and a $2.5 billion senior 364-day bridge term loan facility. However, neither Marvell nor HoldCo has entered into definitive agreements for the debt financing (or other financing arrangements in lieu thereof), and the obligation of the lenders to provide the debt financing under the debt commitment letter is subject to a number of customary conditions. There can be no assurance that Marvell or HoldCo will be able to obtain the debt financing pursuant to the debt commitment letters.
In the event that the debt financing contemplated by the debt commitment letters is not available, other financing may not be available on acceptable terms, in a timely manner or at all. If Marvell or HoldCo is unable to obtain debt financing, the proposed Mergers may be delayed or not be completed.
Litigation filed against Marvell and Inphi could prevent or delay the completion of the Mergers or result in the payment of damages following completion of the Mergers.
Marvell, Inphi and members of their respective boards of directors may in the future be parties, among others, to various claims and litigation related to the Merger Agreement and the Merger, including putative shareholder class actions. Among other remedies, the plaintiffs in such matters may seek to enjoin the Mergers. The results of complex legal proceedings are difficult to predict, and could delay or prevent the Mergers from being completed in a timely manner. Moreover, litigation could be time consuming and expensive, could divert the attention of Marvell’s and Inphi’s management away from their regular businesses, and, if adversely resolved against either Marvell or Inphi, could have a material adverse effect on Marvell’s or Inphi’s respective financial condition or the condition of the combined company.
Failure to successfully integrate the businesses of Marvell and Inphi in the expected time frame may adversely affect HoldCo’s future results.
Marvell and Inphi entered into the Merger Agreement with the expectation that the Mergers will result in various benefits, including certain cost savings and operational efficiencies or synergies. To realize these anticipated benefits, the businesses of Marvell and Inphi must be successfully integrated. Historically, Marvell and Inphi have been independent companies, and they will continue to be operated as such until the completion of the Mergers. The integration may be complex and time consuming and may require substantial resources and effort. The management of HoldCo may face significant challenges in consolidating the operations of Marvell and Inphi, integrating the technologies, procedures, and policies, as well as addressing the different corporate cultures of the two companies and retaining key personnel. If the companies are not successfully integrated, the anticipated benefits of the mergers may not be realized fully or at all or may take longer to realize than expected.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR STRATEGIC TRANSACTIONS
Recent, current and potential future acquisitions, strategic investments, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business.
Our long-term strategy has included in the past, as discussed below, and may continue to include in the future identifying and acquiring, investing in or merging with suitable candidates on acceptable terms, or divesting of certain business lines or activities. In particular, over time, we may acquire, make investments in, or merge with providers of product offerings that complement our business or may terminate such activities.
For example:
•On September 19, 2019, we completed the acquisition of Aquantia Corp. (“Aquantia”);
•On November 5, 2019, we completed the acquisition of Avera Semiconductor, the Application Specific Integrated Circuit (ASIC) business of GlobalFoundries (“Avera”);
•On December 6, 2019, we sold NXP USA, Inc. certain assets related to our Wi-Fi Connectivity business; and
•On October 29, 2020, we entered into the Merger Agreement with Inphi.
Mergers, acquisitions and divestitures include a number of risks and present financial, managerial and operational challenges. Any acquired business, technology, service or product could significantly underperform relative to our expectations and may not achieve the benefits we expect on a timely basis or at all. Given that our resources are limited, our decision to pursue a transaction has opportunity costs; accordingly, if we pursue a particular transaction, we may need to forgo the prospect of entering into other transactions that could help us achieve our strategic objectives.
When we decide to sell assets or a business, we may have difficulty selling on acceptable terms in a timely manner or at all. These circumstances could delay the achievement of our strategic objectives or cause us to incur additional expense, or we may sell a business at a price or on terms that are less favorable than we had anticipated, resulting in a loss on the transaction.
If we do enter into agreements with respect to acquisitions, divestitures, or other transactions, these transactions, or parts of these transactions, may fail to be completed due to factors such as: failure to obtain regulatory or other approvals; disputes or litigation; or difficulties obtaining financing for the transaction.
If we fail to complete a transaction, we may nonetheless have incurred significant expenses in connection with such transaction. Failure to complete a pending transaction may result in negative publicity and a negative perception of us in the investment community.
For all these reasons, our pursuit of an acquisition, investment, divestiture, merger or joint venture could cause our actual results to differ materially from those anticipated.
Recent or potential future acquisitions involve a number of risks, including, among others, those associated with our use of a significant portion of our cash and other financial risks and integration risks.
We used a significant portion of our cash and incurred substantial indebtedness in connection with the financing of our acquisition of Cavium, which was completed in fiscal year 2019. In fiscal year 2020, we used cash and indebtedness to finance our acquisition of Aquantia and indebtedness to finance our acquisition of Avera. As of December 11, 2019, we repaid the entire amount of the indebtedness related to the Aquantia and Avera acquisitions. In addition, Marvell and HoldCo intend to fund the cash portion of the Merger consideration and other fees and expenses required to be paid in connection with the Mergers with new debt. Our use of cash to fund our current and future acquisitions has reduced our liquidity and may (i) limit our flexibility in responding to other business opportunities and (ii) increase our vulnerability to adverse economic and industry conditions.
WE OPERATE GLOBALLY AND ARE SUBJECT TO SIGNIFICANT RISKS IN MANY JURISDICTIONS
Adverse changes in the political and economic policies of the U.S. government in connection with trade with China have reduced the demand for our products and damaged our business.
Regulatory activity, such as enforcement of U.S. export control and sanctions laws, and the imposition of tariffs and export regulations, have in the past and may continue to materially limit our ability to make sales to our significant customers in China, which has in the past and may continue to harm our results of operations, reputation and financial condition. For example, the recent U.S. government export restrictions on a number of Chinese customers, such as Huawei Technologies Co. Ltd., and others have dampened demand for our products, adding to the already challenging macroeconomic environment. An increasing number of Marvell products require licenses for export to Huawei and other companies on the Entity List; there can be no assurances that such licenses will be approved by the U.S. Government. Moreover, concerns that U.S. companies may not be reliable suppliers as a result of these and other actions has caused, and may in the future cause, some of our customers in China to amass large inventories of our products well in advance of need or caused some of our customers to replace our products in favor of products from other suppliers. As a result, the Chinese government has adopted a new law with respect to unreliable suppliers. Being designated as an unreliable supplier would have an adverse impact on our business and operations. In addition, there may be indirect impacts to our business that we cannot easily quantify such as the fact that some of our other customers' products which use our solutions, such as hard disk drives, may also be impacted by export restrictions. Customers in China may also choose to develop indigenous solutions, as replacements for products that are subject to U.S. export controls. If export restrictions related to Chinese customers are sustained for a long period of time, or if other export restrictions were to be imposed as a result of current trade tensions such as restrictions on trade with other countries, it could have an adverse impact on our revenues and results of operations. Recently, the U.S. has announced prohibitions on certain “transactions” including without limitation “any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service” involving TikTok and WeChat. We are continuing to evaluate the impact of these prohibitions on our business, but these actions, in addition to the executive order last year on securing the information and communications technology and services supply chain, may have direct and indirect adverse impacts on our revenues and results of operations in China and elsewhere.
We typically sell products to customers in China pursuant to purchase orders rather than long term purchase commitments. Customers in China can generally cancel or defer purchase orders on short notice without incurring a penalty and, therefore, they may be more likely to do so while the tariffs and trade restrictions are in effect. See also, risk Factor entitled “We are subject to order and shipment uncertainties. If we are unable to accurately predictcustomer demand, we may hold excess or obsolete inventory, which would reduce our gross margin. Conversely, we may have insufficient inventory, which would result in lost revenue opportunities and potential loss of market share as well as damaged customer relationships.” In addition, customers in China that may be subject to trade restrictions or tariffs, may develop their own products or solutions instead of purchasing from us or they may acquire products or solutions from our competitors or other third-party sources that are not subject to the U.S. tariffs and trade restrictions.
Changes to U.S. or foreign tax, trade policy, tariff and import/export regulations may have a material adverse effect on our business, financial condition and results of operations.
Changes in U.S. or foreign international tax, social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business have in the past and could in the future adversely affect our business. The U.S. presidential administration has instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. The new tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods. The U.S. presidential administration has indicated a focus on policy reforms that discourage corporations from outsourcing manufacturing and production activities to foreign jurisdictions, including through tariffs or penalties on goods manufactured outside the U.S., which may require us to change the way we conduct business. Political changes and trends such as populism, protectionism, economic nationalism and sentiment toward multinational companies and resulting changes to trade, tax or other laws and policies may be disruptive to our businesses. These changes in U.S. and foreign laws and policies have the potential to adversely impact the U.S. economy or certain sectors thereof, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations. See also, “Adverse changes in the political and economic policies of the U.S.government in connection with trade with China have reduced the demand for our products and damaged our business” and "Changes in existing taxation benefits, rules or practices may adversely affect our financial results.”
We face additional risks due to the extent of our global operations since a majority of our products, and those of our customers, are manufactured and sold outside of the United States. The occurrence of any or a combination of the additional risks described below would significantly and negatively impact our business and results of operations.
A substantial portion of our business is conducted outside of the United States and, as a result, we are subject to foreign business, political and economic risks. Most of our products are manufactured outside of the United States. Our current qualified integrated circuit foundries are located in the same region within Taiwan, and our primary assembly and test subcontractors are located in the Pacific Rim region. In addition, many of our customers are located outside of the United States, primarily in Asia, which further exposes us to foreign risks. Sales shipped to customers with operations in Asia represented approximately 81% and 83% of our net revenue in the three months ended October 31, 2020 and November 2, 2019, respectively.
We also have substantial operations outside of the United States. These operations are directly influenced by the political and economic conditions of the region in which they are located and, with respect to Israel, possible military hostilities periodically affecting the region that could affect our operations there. We anticipate that our manufacturing, assembly, testing and sales outside of the United States will continue to account for a substantial portion of our operations and revenue in future periods.
Accordingly, we are subject to risks associated with international operations, including:
•the rise or spread of global pandemics or actual or threatened public health emergencies such as the COVID-19 pandemic on our operations, employees, customers and suppliers;
•political, social and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions;
•volatile global economic conditions, including downturns in which some competitors may become more aggressive in their pricing practices, which would adversely impact our gross margin;
•compliance with domestic and foreign export and import regulations, including pending changes thereto, and difficulties in obtaining and complying with domestic and foreign export, import and other governmental approvals, permits and licenses;
•local laws and practices that favor local companies, including business practices in which we are prohibited from engaging by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations;
•difficulties in staffing and managing foreign operations;
•natural disasters, including earthquakes, fires, tsunamis and floods;
•trade restrictions, higher tariffs, worsening trade relationship between the United States and China, or changes in cross border taxation, particularly in light of the tariffs imposed by the Trump administration;
•transportation delays;
•difficulties of managing distributors;
•less effective protection of intellectual property than is afforded to us in the United States or other developed countries;
•inadequate local infrastructure; and
•exposure to local banking, currency control and other financial-related risks.
As a result of having global operations, the sudden disruption of the supply chain and/or disruption of the manufacture of our customer’s products caused by events outside of our control could impact our results of operations by impairing our ability to timely and efficiently deliver our products.
Moreover, the international nature of our business subjects us to risk associated with the fluctuation of the U.S. dollar versus foreign currencies. Decreases in the value of the U.S. dollar versus currencies in jurisdictions where we have large fixed costs, or where our third-party manufacturers have significant costs, will increase the cost of such operations which could harm our results of operations.
CHANGES IN PRODUCT DEMAND CAN ADVERSELY AFFECT OUR FINANCIAL RESULTS
Unfavorable or uncertain conditions in the 5G infrastructure market may cause fluctuations in our rate of revenue growth or financial results.
Markets for 5G infrastructure may not develop in the manner or in the time periods we anticipate. If domestic and global economic conditions worsen, particularly in light of the impacts of the COVID-19 pandemic and potential global recession resulting therefrom, overall spending on 5G infrastructure may be reduced, which would adversely impact demand for our products in these markets. In addition, unfavorable developments with evolving laws and regulations worldwide related to 5G or 5G suppliers may limit global adoption, impede our strategy, and negatively impact our long- term expectations in this area. Even if the 5G infrastructure market develops in the manner or in the time periods we anticipate, if we do not have timely,
competitively priced, market-accepted products available to meet our customers’ planned roll-out of 5G wireless communication systems, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected. See also, “Our sales are concentrated in a few large customers. If we lose or experience a significant reduction in sales to any of these key customers, if any of these key customers experience a significant decline in market share, or if any of these customers experience significant financial difficulties, our revenue may decrease substantially and our results of operations and financial condition may be harmed.” for additional risks related to export restrictions that may impact a customer in the 5G infrastructure market.
Our sales are concentrated in a few large customers. If we lose or experience a significant reduction in sales to any of these key customers, if any of these key customers experience a significant decline in market share, or if any of these customers experience significant financial difficulties, our revenue may decrease substantially and our results of operations and financial condition may be harmed.
We receive a significant amount of our revenue from a limited number of customers. NetFor example, during the third quarter of fiscal 2021, there was one distributor, whose revenue as a percentage of our net revenue was 10% or greater of total net revenues. In addition, net revenue from our two largest customers, including this distributor, represented 31% and 36%16% of our net revenue for the three months ended October 28, 2017 and October 29, 2016, respectively.31, 2020. Sales to our largest customers have fluctuated significantly from period to period and year to year and will likely continue to fluctuate in the future, primarily due to the timing and number of design wins with each customer, the continued diversification of our customer base as we expand into new markets, and natural disasters or other issues that may divert a customer’s operations. The loss of any of our large customers or a significant reduction in sales we make to them would likely harm our financial condition and results of operations. To the extent one or more of our large customers experience significant financial difficulty, bankruptcy or insolvency, this could have a material adverse effect on our sales and our ability to collect on receivables, which could harm our financial condition and results of operations. For example, Toshiba Corporation has announced significant financial difficulties not directly related
If we are unable to their semiconductor business but which may have an adverse effect on its overall financial condition or resultincrease the number of large customers in a divestiture of the semiconductor portion of its business that purchaseskey markets, then our products.
Our operating results in the foreseeable future will continue to depend on sales to a relatively small number of customers, as well as the ability of these customers to sell products that incorporate our products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past, or alter their purchasing patterns in some other way, particularly because:
•a significant portion of our sales are made on a purchase order basis, which allows our customers to cancel, change or delay product purchase commitments with relatively short notice to us;
•customers may purchase integrated circuitssimilar products from our competitors;
•customers may discontinue sales or lose market share in the markets for which they purchase our products;
•customers, particularly in jurisdictions such as China that may be subject to trade restrictions or tariffs, may develop their own solutions or acquire fully developed solutions from third-parties;
•customers may be subject to severe business disruptions, including, but not limited to, those driven by financial instability;instability, actual or threatened pandemics, such as the COVID-19 pandemic, or public health emergencies or other global or regional macroeconomic developments; or
•customers may consolidate (for example, Western Digital acquired SanDisk in 2017, and Toshiba Corporation has announced an intent to sellsold control of a portion of its semiconductor business)business in 2018), which could lead to changing demand for our products, replacement of our products by the merged entity with those of our competitors and cancellation of orders.
We are subject to order and shipment uncertainties. If we are unable to accurately predict customer demand, we may hold excess or obsolete inventory, which would reduce our gross margin. Conversely, we may have insufficient inventory, which would result in lost revenue opportunities and potential loss of market share as well as damaged customer relationships.
We typically sell products pursuant to purchase orders rather than long-term purchase commitments. Customers can generally cancel or defer purchase orders on short notice without incurring a significant penalty. Due to their inability to predict demand or other reasons, some of our customers may accumulate excess inventories and, as a consequence, defer purchase of our products. We cannot accurately predict what or how many products our customers will need in the future. Anticipating demand is difficult because our customers face unpredictable demand for their own products and are increasingly focused more on cash preservation and tighter inventory management. In addition, if regulatory activity, such as enforcementan increasing number of U.S. export controlour chips are being incorporated into consumer products, we anticipate greater fluctuations in demand for our products, which makes it more difficult to forecast customer demand.
We place orders with our suppliers based on forecasts of customer demand and, sanctions laws, werein some instances, may establish buffer inventories to materially limitaccommodate anticipated demand. Our forecasts are based on multiple assumptions, each of which may introduce error into our estimates. For example, our ability to accurately forecast customer demand may be impaired by the delays inherent in our customer’s product development processes, which may include extensive qualification and testing of components included in their products, including ours. In many cases, they design their products to use components from multiple suppliers. This creates the risk that our customers may decide to cancel or change product plans for products incorporating our integrated circuits prior to completion, which makes salesit even more difficult to forecast customer demand.
Our products are incorporated into complex devices and systems, which may create supply chain cross-dependencies. Due to cross dependencies, any supply chain disruptions could negatively impact the demand for our products in the short term. We have a limited ability to predict the timing of a supply chain correction. In addition, the market share of our customers could be adversely impacted on a long-term basis due to any of our significant customers, itcontinued supply chain disruption, which could harmnegatively affect our results of operations, reputation and financial condition.operations.
*Any potential future acquisitions, strategic investments, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business.
Our long-term strategy may include identifying and acquiring, investing in or merging with suitable candidates on acceptable terms, or divesting of certain business lines or activities. In particular, over time, we may acquire, make investments in, or merge with providers of product offerings that complement our business or may terminate such activities. Mergers, acquisitions and divestitures include a number of risks and present financial, managerial and operational challenges, including but not limited to:
diversion of management attention from running our existing business;
increased expenses, including, but not limited to, legal, administrative and compensation expenses related to newly hired or terminated employees;
key personnel of an acquired company may decide not to work for us;
increased costs to integrate or, in the case of a divestiture, separate the technology, personnel, customer base and business practices of the acquired or divested business or assets;
assuming the legal obligations of the acquired company, including potential exposure to material liabilities not discovered in the due diligence process;
potential adverse effects on reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions;
potential damage to customer relationships or loss of synergies in the case of divestitures; and
unavailability of acquisition financing on reasonable terms or at all.
Any acquired business, technology, service or product could significantly under-perform relative to our expectations and may not achieve the benefits we expect from possible acquisitions. Given that our resources are limited, our decision to pursue a transaction has opportunity costs; accordingly, if we pursue a particular transaction, we may need to forgo the prospect of entering into other transactions that could help us achieve our strategic objectives.
When we decide to sell assets or a business, we may have difficulty selling on acceptable terms in a timely manner. These circumstances could delay the achievement of our strategic objectives or cause us to incur additional expense, or we may sell a business at a price or on terms that are less favorable than we had anticipated, resulting in a loss on the transaction.
If we do enter into agreements with respect to acquisitions, divestitures,overestimate customer demand, our excess or other transactions, weobsolete inventory may fail to complete themincrease significantly, which would reduce our gross margin and adversely affect our financial results. The risk of obsolescence and/or excess inventory is heightened for devices designed for consumer electronics due to factors such as:the rapidly changing market for these types of products. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would miss revenue opportunities and potentially lose market share and damage our customer relationships. In addition, any future significant cancellations or deferrals of product orders or the return of previously sold products could materially and adversely affect our profit margins, increase product obsolescence and restrict our ability to fund our operations.
failure to obtain regulatory or other approvals;
IP disputes or other litigation; or
difficulties obtaining financing for the transaction.
For all these reasons, our pursuit of an acquisition, investment, divestiture, merger or joint venture could cause our actual results to differ materially from those anticipated.
We operate in intensely competitive markets, and ourmarkets. Our failure to compete effectively would harm our results of operations.
The semiconductor industry, and specifically the storage, networking and connectivityinfrastructure markets, areis extremely competitive. We currently compete with a number of large domestic and international companies in the business of designing integrated circuits and related applications, some of which have greater financial, technical and management resources than us. Our efforts to introduce new products into markets with entrenched competitors will expose us to additional competitive pressures. For example, we are facing, and expect we will continue to face, significant competition in the infrastructure, networking market.and SSD storage markets. Additionally, customer expectations and requirements have been evolving rapidly. For example, customers now expect us to provide turnkey solutions and commit to future roadmaps that have technical risks.
Some of our competitors may be better situated to meet changing customer needs and secure design wins. Increasing competition in the markets in which we operate may negatively impact our revenue and gross margins. For example, competitors with greater financial resources may be able to offer lower prices than us, or they may offer additional products, services or other incentives that we may not be able to match.
We also may experience discriminatory or anti-competitive practices by our competitors that could impede our growth, cause us to incur additional expense or otherwise negatively affect our business. In addition, some of these competitors may use their market power to dissuade our customers from purchasing from us. For example, certain U.S. and E.U. regulators are currently investigating whether a competitor may have abused its dominant market position to harm competition by forcing customers to deal with it exclusively, bundling its various semiconductors with other products, or by distorting the market by using illegal rebates.
In addition, many of our competitors operate and maintain their own fabrication facilities and have longer operating histories, greater name recognition, larger customer bases, and greater sales, marketing and distribution resources than we do. Furthermore, our current and potential competitors in the data communication and wireless markets have established or may establish financial and strategic relationships among themselves or with existing or potential customers or other third parties to increase the ability of their products to address the needs of customers. Accordingly, new competitors or alliances among these competitors may acquire significant market share, which would harm our business. While we continue to pursue similar strategic relationships, and currently have significant financial and technical resources, we cannot assure you that we will be able to continue to compete successfully against existing or new competitors, which would harm our results of operations. As the technology inflections happen, our competitors may get ahead of us and negatively impact our market share.
In addition, the semiconductor industry has experienced increased consolidation over the past several years. For example, Avago Technologies Limited (now Broadcom Limited (“Broadcom”))Microchip Technology acquired Broadcom Corporation in February 2016 and LSI CorporationMicrosemi in May 2014; Intel2018 and ON Semiconductor purchased Quantenna Communications, Inc. in June 2019, NVIDIA Corporation acquired Altera Corporation in December 2015;Mellanox Technologies on April 27, 2020 and NXPInfineon acquired Cypress Semiconductors acquired Freescale Semiconductor, Ltd. in December 2015.on April 16, 2020. In addition, Broadcom recentlyJuly 2020, Analog Devices Inc. announced a bidits intent to merge with Maxim Integrated Products Inc. In September 2020, NVIDIA announced its intent to acquire Qualcomm.Arm Limited. We license technology from Arm Limited and would be adversely impacted if the pricing for, or availability of, the relevant technology is changed in an adverse manner as a result of this transaction. In October 2020, AMD announced its intent to acquire Xilinx, Inc. Consolidation among our competitors has led, and in the future could lead, to a changing competitive landscape, capabilities and market share, which could put us at a competitive disadvantage and harm our results of operations.
A significant portion of our business is dependent onrevenue comes from the HDDstorage industry, which is highly cyclical, experiences rapid technological change, is subject to industry consolidation, and is facing increased competition from alternative technologies.technologies and is highly cyclical.
The HDD industry is intensely competitive and technology inflections are happening rapidly. This industry has historically been cyclical, with periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction. These cycles may affect us because some of our largestWe depend on a few customers participate in this industry.
HDD manufacturers tend to order more components than they may need during growth periods, and sharply reduce orders for components during periods of contraction. Rapid technological changes in the HDD industry often result in shifts in market share among the industry’s participants. If the HDD manufacturers using our products do not retain or increase their market share, our sales may decrease.
In addition, the HDD industry has experienced significant consolidation. Consolidation among our customers could lead to changing demand for our products, replacementSSD controllers and as such, the loss of our products by the merged entity with those of our competitors and cancellation of orders, each of which couldany SSD controller customer or a significant reduction in sales we make to them may harm our financial condition and results of operations. If we are unableSSD customers have, and may in the future develop their own controllers, which could pose a challenge to leverage our technologymarket share in the SSD space and customer relationships, we may not capitalize onadversely affect our revenues in the increased opportunities for our products within the combined company.storage business.
Furthermore, future changes in the nature of information storage products and personal computing devices could reduce demand for traditional HDDs. For example, products using alternative technologies, such as SSD and other storage technologies are a source of competition to manufacturers of HDDs. Although we offer SSD controllers, leveraging our technology in hard drives, we cannot ensure that our overall business will not be adversely affected if demand for traditional HDDs decreases. Additionally, we depend on a few
Manufacturers tend to order more components than they may need during growth periods, and sharply reduce orders for components during periods of contraction. Rapid technological changes in the industry often result in shifts in market share among the industry’s participants. If the HDD and SSD manufacturers using our products do not retain or increase their market share, our sales may decrease.
In addition, the storage industry has experienced significant consolidation. Consolidation among our customers will lead to changing demand for our SSD controllersproducts, replacement of our products by the merged entity with those of our competitors and as such, the losscancellation of any SSD controller customer or a significant reduction in sales we make to them mayorders, each of which could harm our financial condition and results of operations. Unlike in the HDD industry, SSD customers may develop their own controllers, which could pose a challenge to our market share in the SSD space.
If we are unable to developleverage our technology and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our results of operations and competitive position will be harmed.
Our future success will depend on our ability to develop and introduce new products and enhancements to our existing products in a timely and cost-effective manner. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of integration and smaller process geometries. In addition, the development of new silicon devices is highly complex, and due to supply chain cross-dependencies and other issues,customer relationships, we may experience delays in completingnot capitalize on the development, productionincreased opportunities for our products within the combined company.
This industry has historically been cyclical, with periods of increased demand and introductionrapid growth followed by periods of oversupply and subsequent contraction. These cycles may affect us because some of our new products. See also, “We may be unable to protect our intellectual property, which would negatively affect our ability to compete.”largest customers participate in this industry.
Our ability to adapt to changes and to anticipate future standards, andAs a result, the rateaverage selling price of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. We may also have to incur substantial unanticipated costs to comply with these new standards. Our success will also depend on the abilityeach of our customers to develop new products usually declines as individual products mature and enhance existing products forcompetitors enter the markets they serve and to introduce and promote those products successfully and in a timely manner. Even if we and our customers introduce new and enhanced products to the market, those products may not achieve market acceptance.market.
Our gross margin and results of operations may be adversely affected in the future by a number of factors, including decreases in average selling prices of products over time and shifts in our product mix.mix as well as the price increase of certain components and testing and assembly.
The products we develop and sell are primarily used for high-volume applications. As a result, the prices of those products have historically decreased rapidly. In addition, our more recently introduced products tend to have higher associated costs because of initial overall development and production expenses. Therefore, over time, we may not be able to maintain or improve our gross margins. Our financial results could suffer if we are unable to offset any reductions in our average selling prices by other cost reductions through efficiencies, introduction of higher margin products and other means.
To attract new customers or retain existing customers, we may offer certain price concessions to certain customers, which could cause our average selling prices and gross margins to decline. In the past, we have reduced the average selling prices of our products in anticipation of future competitive pricing pressures, new product introductions by us or by our competitors and other factors. We expect that we will continue to have to reduce prices of existing products in the future. Moreover, because of the wide price differences across the markets we serve, the mix and types of performance capabilities of our products sold may affect the average selling prices of our products and have a substantial impact on our revenue and gross margin. We may enter new markets in which a significant amount of competition exists, and this may require us to sell our products with lower gross margins than we earn in our established businesses. If we are successful in growing revenue in these markets, our overall gross margin may decline. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover the fixed costs and investments associated with a particular product, and as a result may harm our financial results.
Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities and our costs may even increase, which could also reduce our gross margins. Our gross margin could also be impacted by increased cost (including those caused by tariffs), loss of cost savings or dilution of savings due to changes in charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand or if the financial health of either contract manufacturers or suppliers deteriorates as well as excess inventory and inventory holding and obsolescence charges. In addition, we are subject to risks from fluctuating market prices of certain components, which are incorporated into our products or used by our suppliers to manufacture our products. Supplies of these components may from time to time become restricted, or general market factors and conditions may affect pricing of such commodities. Any increase in the price of components used in our products will adversely affect our gross margins.
Entry into new markets, such as markets with different business models, as a result of our acquisitions may reduce our gross margin and operating margin. For example, the Avera business uses an ASIC model to offer end-to-end solutions for IP, design team, Fab & packaging to deliver a tested, yielded product to customers. This business model tends to have a lower gross margin. In addition, the costs related to this type of business model typically include significant NRE (non-recurring engineering) costs that customers pay based on the completion of milestones. Our operating margin may decline if our customers do not agree to pay for NREs or if they do not pay enough to cover the costs we incur in connection with NREs. In addition, our operating margin may decline if we are unable to sell products in sufficient volumes to cover the development costs that we have incurred.
WE ARE VULNERABLE TO PRODUCT DEVELOPMENT AND MANUFACTURING-RELATED RISKS
We may experience increased actual and opportunity costs as a result of our transition to smaller geometry process technologies.
In order to remain competitive, we have transitioned, and expect to continue to transition, our semiconductor products to increasingly smaller line width geometries. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies. We also evaluate the costs of migrating to smaller geometry process technologies including both actual costs such as increased mask costs and wafer costs and increased costs related to EDA tools and the opportunity costs related to the technologies we choose to forego. These transitions are imperative for us to be competitive with the rest of the industry and to target some of our product development in high growth areas to these advanced nodes, which has resulted in significant initial design and development costs.
We have been, and may continue to be, dependent on our relationships with our foundry subcontractors to transition to smaller geometry processes successfully. We cannot ensure that the foundries we use will be able to effectively manage any future transitions. If we or any of our foundry subcontractors experience significant delays in a future transition or fail to efficiently implement a transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations.
As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, if at all. Moreover, even if we are able to achieve higher levels of design integration, such integration may have a short-term adverse impact on our results of operations, as we may reduce our revenue by integrating the functionality of multiple chips into a single chip.
We rely on our customers to design our products into their systems, and the nature of the design process requires us to incur expenses prior to customer commitments to use our products or recognizing revenues associated with those expenses which may adversely affect our financial results.
One of our primary focuses is on winning competitive bid selection processes, known as “design wins,” to develop products for use in our customers’ products. We devote significant time and resources in working with our customers’ system designers to understand their future needs and to provide products that we believe will meet those needs and these bid selection processes can be lengthy. If a customer’s system designer initially chooses a competitor’s product, it becomes significantly more difficult for us to sell our products for use in that system because changing suppliers can involve significant cost, time, effort and risk for our customers. Thus, our failure to win a competitive bid can result in our foregoing revenues from a given customer’s product line for the life of that product. In addition, design opportunities may be infrequent or may be delayed. Our ability to compete in the future will depend, in large part, on our ability to design products to ensure compliance with our customers’ and potential customers’ specifications. We expect to invest significant time and resources and to incur significant expenses to design our products to ensure compliance with relevant specifications.
We often incur significant expenditures in the development of a new product without any assurance that our customers’ system designers will select our product for use in their applications. We often are required to anticipate which product designs will generate demand in advance of our customers expressly indicating a need for that particular design. Even if our customers’ system designers select our products, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred.
The reasons for this delay generally include the following elements of our product sales and development cycle timeline and related influences:
•our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their designs,
•it can take from six months to three years from the time our products are selected to commence commercial shipments; and
•our customers may experience changed market conditions or product development issues. The resources devoted to product development and sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory if we have produced product in anticipation of expected demand. We may spend resources on the development of products that our customers may not adopt. If we incur significant expenses and investments in inventory in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.
Additionally, even if system designers use our products in their systems, we cannot assure you that these systems will be commercially successful or that we will receive significant revenue from the sales of our products for those systems. As a result, we may be unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions.
Additionally, failure of our customers to agree to pay for NRE (non-recurring engineering) costs or failure to pay enough to cover the costs we incur in connection with NREs may harm our financial results. See also, “Research and Development” under Results of Operations.
If we are unable to develop and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our results of operations and competitive position will be harmed.
Our future success will depend on our ability to develop and introduce new products and enhancements to our existing products that address customer requirements, in a timely and cost-effective manner and are competitive as to a variety of factors. For example, for our products addressing the 5G market, we must successfully identify customer requirements and design, develop and produce products on time that compete effectively as to price, functionality and performance. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions, and increasing demand for higher levels of integration and smaller process geometries. In addition, the development of new silicon devices is highly complex and, due to supply chain cross-dependencies and other issues, we may experience delays in completing the development, production and introduction of our new products. See also, “We may be unable to protect our intellectual property, which would negatively affect our abilityto compete.”
Our ability to adapt to changes and to anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. We may also have to incur substantial unanticipated costs to comply with these new standards. Our success will also depend on the ability of our customers to develop new products and enhance existing products for the markets they serve and to introduce and promote those products successfully and in a timely manner. Even if we and our customers introduce new and enhanced products to the market, those products may not achieve market acceptance.
We rely on independent foundries and subcontractors for the manufacture, assembly and testing of our integrated circuit products, and the failure of any of these third-party vendors to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our sales and limit our ability to grow our business.
We do not have our own manufacturing or assembly facilities and have very limited in-house testing facilities. Therefore, we currently rely on several third-party foundries to produce our integrated circuit products. We also currently rely on several third-party assembly and test subcontractors to assemble, package and test our products. This exposes us to a variety of risks, including the following:
Regional Concentration
Substantially all of our products are manufactured by third-party foundries located in Taiwan, and other sources are located in China, Germany, South Korea, Singapore and Singapore.the United States. In addition, substantially all of our third-party assembly and testing facilities are located in China, Malaysia, Singapore and Taiwan. Because of the geographic concentration of these third-party foundries, as well as our assembly and test subcontractors, we are exposed to the risk that their operations may be disrupted by regional disasters including, for example, earthquakes (particularly in Taiwan and elsewhere in the Pacific Rim close to fault lines), tsunamis or typhoons, or by pandemics or other actual or threatened public health emergencies such as the COVID-19 pandemic, or by political, social or economic instability. In the case of such an event, our revenue, cost of goods sold and results of operations
would be negatively impacted. In addition, there are limited numbers of alternative foundries and identifying and implementing alternative manufacturing facilities would be time consuming. As a result, if we needed to implement alternate manufacturing facilities, we could experience significant expenses and delays in product shipments, which could harm our results of operations.
No Guarantee of Capacity or Supply
The ability of each foundry to provide us with semiconductor devices is limited by its available capacity and existing obligations. When demand is strong, availability of foundry capacity may be constrained or not available, and with limited exceptions, our vendors are not obligated to perform services or supply products to us for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular purchase order. We place our orders on the basis of our customers’ purchase orders or our forecast of customer demand, and the foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. It is possible that foundry customers that are larger and better financed than we are or that have long-term agreements with our main foundries may induce our foundries to reallocate capacity to those customers. Our foundries and outsourced assembly and test suppliersmay reallocate capacity to their customers offering them a better margin or rate of return than provided by the Company. This reallocation could impair our ability to secure the supply of components that we need. In particular, as we and others in our industry transition to smaller geometries, our manufacturing partners may be supply constrained or may charge premiums for these advanced technologies, which may harm our business or results of operations. See also, “We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels ofdesign integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.” Moreover, if any of our third-party foundry suppliers, outsourced assembly and test suppliers, or other suppliers are unable to secure the necessary raw materials from their suppliers, lose benefits under material agreements, experience power outages, lack sufficient capacity to manufacture our products, encounter financial difficulties or suffer any other disruption or reduction in efficiency, we may encounter supply delays or disruptions, which could harm our business or results of operations.
For example, in response to growth in demand from customers for our products, our operations team is continuing to ramp production with our global supply chain partners. However, we have begun to experience a number of industry-wide supply constraints affecting the type of high complexity products we provide for data infrastructure. These supply challenges are currently limiting our ability to fully satisfy the increase in demand for some of our networking products.
While we attempt to create multiple sources for our products, most of our products are not manufactured at more than one foundry at any given time, and our products typically are designed to be manufactured in a specific process at only one of these foundries. Accordingly, if one of our foundries is unable to provide us with components as needed, it would be difficult for us to transition the manufacture of our products to other foundries, and we could experience significant delays in securing sufficient supplies of those components. This could result in a material decline in our revenue, net income and cash flow.
In order to secure sufficient foundry capacity when demand is high and to mitigate the risks described in the foregoing paragraph, we may enter into various arrangements with our foundries, outsourced assembly and test suppliers, or other suppliers that could be costly and harm our results of operations, such as nonrefundable deposits with or loans to foundriessuch parties in exchange for capacity commitments, or contracts that commit us to purchase specified quantities of integrated circuits over extended periods. We may not be able to make any such arrangement in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, and not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to use all of that capacity or incur penalties. These penalties may be expensive and could harm our financial results.
Uncertain Yields and Quality
The fabrication of integrated circuits is a complex and technically demanding process. Our technology is transitioning from planar to FINFET transistors. This transition may result in longer qualification cycles and lower yields. Our foundries have from time to time experienced manufacturing defects and lower manufacturing yields, which are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance. In addition, we may face lower manufacturing yields and reduced quality in the process of ramping up and diversifying our manufacturing partners. Poor yields from our foundries, or defects, integration issues or other performance problems with our products could cause us significant customer relations and business reputation problems, harm our financial performance and result in financial or other damages to our customers. Our customers could also seek damages in connection with product liability claims, which would likely be time consuming and costly to defend. In addition, defects could result in significant costs. See also, “Costs related to defective products could have amaterial adverse effect on us.”
To the extent that we rely on outside suppliers to manufacture or assemble and test our products, we may have a reduced ability to directly control product delivery schedules and quality assurance, which could result in product shortages or quality assurance problems that could delay shipments or increase costs.
Commodity Prices
We are also subject to risk from fluctuating market prices of certain commodity raw materials, including gold and copper, which are incorporated into our end products or used by our suppliers to manufacture our end products. Supplies for such commodities may from time to time become restricted, or general market factors and conditions may affect pricing of such commodities.
We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.
In order to remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products and to redesign some products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.
We are dependent on our relationships with our foundry subcontractors to transition to smaller geometry processes successfully. We cannot ensure that the foundries we use will be able to effectively manage the transition or that we will be able to maintain our existing foundry relationships or develop new ones. If we or any of our foundry subcontractors experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations.
As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, if at all. Moreover, even if we are able to achieve higher levels of design integration, such integration may have a short-term adverse impact on our results of operations, as we may reduce our revenue by integrating the functionality of multiple chips into a single chip.
Matters relating to or arising from our Audit Committee investigation, including regulatory proceedings, litigation matters and potential additional expenses, may adversely affect our business and results of operations.
As previously disclosed in our public filings, the Audit Committee of our Board of Directors completed an investigation that generally included a review of certain revenue recognized in the first and second quarters of fiscal 2016 and the fourth quarter of fiscal 2015, including transactions that would have, in the normal course of events and but for action by certain Marvell employees, been completed and recognized in a subsequent quarter (referred to internally as “pull-ins”), the accrual of a litigation reserve in the second quarter of fiscal 2016, and the stated belief by Marvell’s former Chairman and Chief Executive Officer of ownership of certain patent rights related to the Final-Level Cache invention and his later assignment of associated patent rights to Marvell. In addition, we are also the subject of investigations by the Securities and Exchange Commission and the U.S. Attorney related to these matters. We are fully cooperating with the SEC and the U.S. Attorney with respect to those investigations.
To date, we have incurred significant expenses related to legal, accounting, and other professional services in connection with the investigations and related matters, and may continue to incur significant additional expenses with regard to these matters and related remediation efforts. The expenses incurred, and expected to be incurred, on the investigations, the impact of our delay in fiscal 2016 and the beginning of fiscal 2017 in meeting our periodic reports on the confidence of investors, employees and customers, and the diversion of the attention of the management team that has occurred, and is expected to continue, has adversely affected, and could continue to adversely affect, our business, financial condition and results of operations or cash flows.
As a result of the matters reported above, we are exposed to greater risks associated with litigation, regulatory proceedings and government enforcement actions. In addition, securities class actions or other lawsuits have been filed against us, our directors and officers. One such action is likely to result in us incurring significant legal expenses during the remainder of fiscal 2018. Any future such investigations or additional lawsuits may adversely affect our business, financial condition, results of operations and cash flows.
Our indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financial condition, results of operations and cash flows.
Under Bermuda law, our articles of association and bye-laws and certain indemnification agreements to which we are a party, we have an obligation to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors and officers with respect to current and future investigations and litigation, including the matters discussed in Part II-Item 1, “Legal Proceedings” of this Quarterly Report on Form 10-Q. In connection with some of these pending matters, we are required to, or we have otherwise agreed to, advance, and have advanced, legal fees and related expenses to certain of our current and former directors and officers and expect to continue to do so while these matters are pending. Certain of these obligations may not be “covered matters” under our directors’ and officers’ liability insurance, or there may be insufficient coverage available. Further, in the event the directors and officers are ultimately determined not to be entitled to indemnification, we may not be able to recover the amounts we previously advanced to them.
In addition, we have incurred significant expenses in connection with the Audit Committee’s independent investigation, the pending government investigations, and shareholder litigation, including a shareholder lawsuit that will likely subject us to significant legal expenses during fiscal 2018. We cannot provide any assurances that pending claims, or claims yet to arise, including the cost of fees, penalties or other expenses, will not exceed the limits of our insurance policies, that such claims are covered by the terms of our insurance policies or that our insurance carrier will be able to cover our claims. Additionally, to the extent there is coverage of these claims, the insurers also may seek to deny or limit coverage in some or all of these matters. Furthermore, the insurers could become insolvent and unable to fulfill their obligation to defend, pay or reimburse us for insured claims. Accordingly, we cannot be sure that claims will not arise that are in excess of the limits of our insurance or that are not covered by the terms of our insurance policy. Due to these coverage limitations, we may incur significant unreimbursed costs to satisfy our indemnification obligations, which may have a material adverse effect on our financial condition, results of operations or cash flows.
Costs related to defective products could have a material adverse effect on us.
From time to time, we have experienced hardware and software defects and bugs associated with the introduction of our highly complex products. Despite our testing procedures, we cannot ensure that errors will not be found in new products or releases after commencement of commercial shipments in the future. Such errors could result in:
•loss of or delay in market acceptance of our products;
•material recall and replacement costs;
•delay in revenue recognition or loss of revenue;
•writing down the inventory of defective products;
•the diversion of the attention of our engineering personnel from product development efforts;
•our having to defend against litigation related to defective products or related property damage or personal injury; and
•damage to our reputation in the industry that could adversely affect our relationships with our customers.
In addition, the process of identifying a recalled product in devices that have been widely distributed may be lengthy and require significant resources. We may have difficulty identifying the end customers of the defective products in the field, which may cause us to incur significant replacement costs, contract damage claims from our customers and further reputational harm. Any of these problems could materially and adversely affect our results of operations.
*Despite our best efforts, security vulnerabilities may exist with respect to our products. Mitigation techniques designed to address such security vulnerabilities, including software and firmware updates or other preventative measures, may not operate as intended or effectively resolve such vulnerabilities. Software and firmware updates and/or other mitigation efforts may result in performance issues, system instability, data loss or corruption, unpredictable system behavior, or the theft of data by third parties, any of which could significantly harm our business and reputation.
We rely on third-party distributors and manufacturers’ representatives and the failure of these distributors and manufacturers’ representatives to perform as expected could reduce our future sales.
From time to time, we enter into relationships with distributors and manufacturers’ representatives to sell our products, and we are unable to predict the extent to which these partners will be successful in marketing and selling our products. Moreover, many of our distributors and manufacturers’ representatives also market and sell competing products, and may terminate their relationships with us at any time. Our future performance will also depend, in part, on our ability to attract additional distributors or manufacturers’ representatives that will be able to market and support our products effectively, especially in markets in which we have experiencednot previously distributed our products. If we cannot retain or attract quality distributors or manufacturers’ representatives, our sales and results of operations will be harmed.
CHANGES IN OUR EFFECTIVE TAX RATE MAY REDUCE OUR NET INCOME
Changes in existing taxation benefits, rules or practices may adversely affect our financial results.
Changes in existing taxation benefits, rules or practices may also have a significant transition ateffect on our reported results. Both the executive management levelU.S. Congress and the G-20 (Group of Twenty Finance Ministers and Central Bank Governors) may consider legislation affecting the taxation of foreign corporations and such legislation if enacted might adversely affect our future tax liabilities and have a material impact on our results of operations.
In addition, in prior years, we have entered into agreements in certain foreign jurisdictions that if certain criteria are met, the foreign jurisdiction will provide a more favorable tax rate than their current statutory rate. For example, we have obtained an undertaking from the Minister of Finance of Bermuda that in the last 18 months. Ifevent Bermuda enacts legislation imposing tax computed on profits, income, or capital asset, gain or appreciation, then the imposition of any such taxes will not apply to us until March 31, 2035. Additionally, our new executive teamSingapore subsidiary qualifies for the Development and Expansion Incentive until June 2024. Furthermore, under the Israeli Encouragement law of “approved or benefited enterprise,” our subsidiary in Israel, Marvell Israel (M.I.S.L) Ltd., is unableentitled to, engage and align mid-managementhas certain existing programs that qualify as, approved and benefited tax programs that include reduced tax rates and exemption of certain income through fiscal 2027. Moreover, receipt of past and future benefits under tax agreements may depend on our ability to fulfill commitments regarding employment of personnel or attract and retainperformance of specified activities in the key talent needed for us to timely achieveapplicable jurisdiction. Changes in our business objectives,plans, including divestitures, could result in termination of an agreement or loss of benefits thereunder. If any of our business andtax agreements in any of these foreign jurisdictions were terminated, our results of operations could be harmed.
FollowingThe Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Sharing Project, and issued in 2015, and is expected to continue to issue, guidelines and proposals that may change various aspects of the departureexisting framework under which our tax obligations are determined in some of the countries in which we do business. We can provide no assurance that changes in tax laws and additional investigations as a result of this project would not have an adverse tax impact on our international operations. In addition, the European Union (“EU”) has initiated its own measures along similar lines. In December 2017, the EU identified certain jurisdictions (including Bermuda and Cayman Islands) which it considered had a tax system that facilitated offshore structuring by attracting profits without commensurate economic activity. To avoid EU “blacklisting”, both Bermuda and Cayman Islands introduced new legislation in December 2018, which came into force on January 1, 2019. These new laws require Bermuda and Cayman companies carrying on one or more “relevant activity” (including: banking, insurance, fund management, financing, leasing, headquarters, shipping, distribution and service center, intellectual property or holding company) to maintain a substantial economic presence in Bermuda to comply with the economic substance requirements. It is still not clear how the Bermuda and Cayman Islands authorities will interpret and enforce these new rules. To the extent that we are required to maintain more of a presence in Bermuda or the Cayman Islands, such requirements will increase our costs either directly in those locations or indirectly as a result of increased costs related to moving our operations to other jurisdictions.
In addition, in a prior period, the Company transferred certain intellectual property to a related entity in Singapore. The impact to the Company was determined based on our determination of the fair value of this property, which required management to make significant estimates and to apply complex tax regulations in multiple jurisdictions. In a future period, local tax authorities may challenge the fair value determinations made by the Company, which could adversely impact our expected tax benefits from this transaction.
On October 29, 2020, the Company entered into a definitive agreement (the “Merger Agreement”) with Inphi Corporation (“Inphi”), Maui HoldCo, Inc., Maui Acquisition Company Ltd., a Bermuda exempted company and a wholly owned subsidiary of HoldCo (“Bermuda Merger Sub”), and Indigo Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of HoldCo (“Delaware Merger Sub”), pursuant to which, subject to the terms and conditions of the Merger Agreement, the Company will acquire Inphi with cash and stock consideration. Pursuant to the Merger Agreement: (i) Bermuda Merger Sub will be merged with and into Marvell (the “Bermuda Merger”), with Marvell continuing as a wholly owned subsidiary of HoldCo; and (ii) Delaware Merger Sub will be merged with and into Inphi (the “Delaware Merger” and, together with the Bermuda Merger, the “Mergers”), with Inphi continuing as a wholly owned subsidiary of HoldCo. As a result of this transaction, upon closing, the parent company will be domiciled in the US and not Bermuda. As a result, the combined group will be subject to taxation in the US, which currently has federal tax rate of 21%. This may cause our overall effective tax rate to increase significantly versus our current corporate effective tax rate as a Bermuda-domiciled company, which could materially impact our financial results, including our earnings and cash flow, for periods after the completion of the proposed Mergers.
Our profitability and effective tax rate could be impacted by unexpected changes to our statutory income tax rates or income tax liabilities. Such changes might include changes in tax law or regulations, changes to our geographic mix of earnings, changes in the valuation of deferred tax assets and liabilities, changes in our supply chain and changes due to audit assessments. In particular, the tax benefits associated with our transfer of intellectual property to Singapore are sensitive to future profitability and taxable income in Singapore, audit assessments, and changes in applicable tax law. Our current corporate effective tax rate fluctuates significantly from period to period, and is based upon the application of currently applicable income tax laws, regulations and treaties, as well as current judicial and administrative interpretations of these income tax laws, regulations and treaties, in various jurisdictions.
WE ARE SUBJECT TO RISKS RELATED TO OUR ASSETS
We are exposed to potential impairment charges on certain assets.
We had approximately $5.3 billion of goodwill and $2.4 billion of acquired intangible assets on our unaudited condensed consolidated balance sheet as of October 31, 2020. Under generally accepted accounting principles in the United States, we are required to review our intangible assets including goodwill for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. We perform an assessment of goodwill for impairment annually on the last business day of our co-foundersfiscal fourth quarter and whenever events or changes in April 2016 andcircumstances indicate the reconstitutioncarrying amount of board of directors shortly thereafter in connection with our agreement with Starboard Value LLC,goodwill may not be recoverable. When testing goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the company’s executive management team subsequently went through a complete transition, including the hiringfair value of a new President and CEO, Chief Financial Officer, Chief Accounting Officer and Controller, Chief Operations Officer, Chief Technology Officer, Chief Administration and Legal Officer, Executive Vice Presidentreporting unit is less than its carrying value or we may determine to proceed directly to the quantitative impairment test.
Factors we consider important in the qualitative assessment which could trigger a goodwill impairment review include: significant underperformance relative to historical or projected future operating results; significant changes in the manner of Worldwide Sales and Marketing andour use of the appointment of new leadersacquired assets or the strategy for our corporate development organizationoverall business; significant negative industry or economic trends; a significant decline in our stock price for a sustained period; and a significant change in our storage, and networking and connectivity groups. Atmarket capitalization relative to our net book value.
We assess the timeimpairment of intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Circumstances which could trigger a review include, but are not limited to the following: significant decreases in the market price of the filingasset; significant adverse changes in the business climate or legal factors; accumulation of this Quarterly Report on Form 10-Q, our Presidentcosts significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and Chief Executive Officer has been employed bycurrent expectation that the company just over sixteen months. Whileasset will more likely than not be sold or disposed of significantly before the individual membersend of its estimated useful life.
For example, during the second quarter ended August 1, 2020, we made changes to the scope of our executive management team eachserver processor product line in response to changes in the associated market. We are transitioning our product offering from standard server processors to the broad server market to focus only on customized server processors for a few targeted customers. This change in strategy required the Company to assess whether the carrying value of the associated assets would be recoverable. As a result of the assessment, we determined the carrying amount of certain impacted assets are not recoverable, which have significant industry-related experience, they previously had not worked togetherresulted in recognition during the quarter of $119.0 million of restructuring related charges associated with the server processor product line. See “Note 5 - Restructuring” in the Notes to the Unaudited Condensed Consolidated Financial Statements for further information.
We have determined that our business operates as a groupsingle operating segment with two primary components (Storage and it will take timeNetworking), which we have concluded can be aggregated into a single reporting unit for thempurposes of testing goodwill impairment. The fair value of the reporting unit is determined by taking our market capitalization as determined through quoted market prices and as adjusted for a control premium and other relevant factors. If our fair value declines to become an integrated management team. Delaysbelow our carrying value, we could incur significant goodwill impairment charges, which could negatively impact our financial results. If in the integrationfuture a change in our organizational structure results in more than one reporting unit, we will be required to allocate our goodwill and perform an assessment of goodwill for impairment in each reporting unit. As a result, we could have an impairment of goodwill in one or more of such future reporting units.
In addition, from time to time, we have made investments in private companies. If the companies that we invest in are unable to execute their plans and succeed in their respective markets, we may not benefit from such investments, and we could potentially lose the amounts we invest. We evaluate our management teaminvestment portfolio on a regular basis to determine if impairments have occurred. If the operations of any businesses that we have acquired declines significantly, we could affect our ability to implement our business strategy, whichincur significant intangible asset impairment charges. Impairment charges could have a material adverse effectimpact on our business and results of operations.
If any of the members of our current management team were to leave our company unexpectedly, we could face substantial difficulty in hiring qualified successors. The marketplace for senior executive management candidates is very competitive and limited, particularly in the Silicon Valley where our U.S. operations are based. Our growth may be adversely impacted if we are unable to attract, retain and motivate such key employees. Turnover of senior management can adversely impact our stock price, our results of operations and our client relationships, and has made recruiting for future management positions more difficult. Competition for senior leadership may increase our compensation expenses, which may negatively affect our profitability.in any period.
*We depend on highly skilled engineering and sales and marketing personnel to support our business operations. If we are unable to retain and motivate our current personnel or attract additional qualified personnel, our ability to develop and successfully market our products could be harmed.
We believe our future success will dependare subject to the risks of owning real property.
Our buildings in large part upon our abilitySanta Clara, California and Shanghai, China subject us to attractthe risks of owning real property, which include, but are not limited to:
•the possibility of environmental contamination and retain highly skilled managerial, engineering, sales and marketing personnel. The competition for qualified technical personnelthe costs associated with significant experienceremediating any environmental problems;
•adverse changes in the design, development, manufacturing, marketing and salesvalue of integrated circuits is intense, boththese properties due to interest rate changes, changes in the Silicon Valley where our U.S. operations are based and in global marketsneighborhood in which we operate. Our inabilitythe property is located, or other factors;
•the possible need for structural improvements in order to attract qualified personnel, including hardwarecomply with zoning, seismic and software engineers and sales and marketing personnel, could delay other legal or regulatory requirements;
•the development and introduction of, and harm our ability to sell, our products. Changes to United States immigration policies that restrict our ability to attract and retain technical personnel may negatively affect our research and development efforts.
We typically do not enter into employment agreements with any of our key technical personnel and the loss of such personnel could harm our business, as their knowledgepotential disruption of our business and industry would be extremely difficult to replace. The impact on employee morale experienced in connectionoperations arising from or connected with our recent restructuring efforts, which eliminated approximately 900 jobs worldwide, could make it more difficult for us to add to our workforce when neededa relocation due to speculation regarding our future restructuring activities. In addition, our recently announced merger with Cavium, Inc. may cause our current and prospective employeesmoving to experience uncertainty about their futures that may impair our abilityor renovating the facility;
•increased cash commitments for improvements to retain, recruitthe buildings or motivate key management, engineering, technical and other personnel.the property, or both;
*We rely upon the performance of our information technology systems to process, transmit, store and protect electronic information. The failure of or security breaches of any of our critical information technology systems may result in serious harm to our reputation, business, results of operations and/or financial condition.
We depend heavily on our technology infrastructure and maintain and rely upon certain critical information systems•increased operating expenses for the effective operationbuildings or the property, or both;
•possible disputes with third parties related to the buildings or the property, or both;
•failure to achieve expected cost savings due to extended non-occupancy of our business. We routinely collecta vacated property intended to be leased; and store sensitive data
•the risk of financial loss in our information systems, including intellectual property and other proprietary information about our business and thatexcess of our customers, suppliers and business partners. These information technology systems are subjectamounts covered by insurance, or uninsured risks, such as the loss caused by damage to damage or interruption fromthe buildings as a numberresult of potential sources, including, but not limited to, natural disasters, viruses, destructive or inadequate code, malware, power failures, cyber-attacks, internal malfeasance earthquakes, floods and/or other events. We have implemented processes for systems under our control intended to mitigate risks; however, we can provide no guarantee that those risk mitigation measures will be effective. Given the frequencynatural disasters.
Table of cyber-attacks and resulting breaches reported by other businesses and governments, it is likely we will experience one or more breaches of some extent in the future. We may incur significant costs in order to implement, maintain and/or update security systems we feel are necessary to protect our information systems, or we may miscalculate the level of investment necessary to protect our systems adequately. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. To the extent that any system failure, accident or security breach results in material disruptions or interruptions to our operations or the theft, loss or disclosure of, or damage to our data or confidential information, including our intellectual property, our reputation, business, results of operations and/or financial condition could be materially adversely affected.Contents
WE ARE SUBJECT TO IP RISKS AND RISKS ASSOCIATED WITH LITIGATION AND REGULATORY PROCEEDINGS
We may be unable to protect our intellectual property, which would negatively affect our ability to compete.
We believe one of our key competitive advantages results from the collection of proprietary technologies we have developed and acquired since our inception, and the protection of our intellectual property rights is, and will continue to be, important to the success of our business. If we fail to protect these intellectual property rights, competitors could sell products based on technology that we have developed, which could harm our competitive position and decrease our revenue.
We rely on a combination of patents, copyrights, trademarks, trade secret laws,secrets, contractual provisions, confidentiality agreements, licenses and other methods, to protect our proprietary technologies. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. Notwithstanding these agreements, we have experienced disputes with employees regarding ownership of intellectual property in the past. For instance, we have had a dispute with Dr. Sehat Sutardja, our former Chief Executive Officer and a former member of our board of directors, related to his stated belief of ownership of certain patent rights related to the Final-Level Cache invention and his later assignment of associated patent rights to Marvell. Our Audit Committee investigated this claim and concluded that the FLC invention was owned by the Company. To the extent that any third party has a claim to ownership of any relevant technologies used in our products, we may not be able to recognize the full revenue stream from such relevant technologies.
We have been issued a significant number of U.S. and foreign patents and have a significant number of pending U.S. and foreign patent applications. However, a patent may not be issued as a result of any applications or, if issued, claims allowed may not be sufficiently broad to protect our technology. In addition, it is possible that existing or future patents may be challenged, invalidated or circumvented. We may also be required to license some of our patents to others including competitors as a result of our participation in and contribution to development of industry standards. Despite our efforts, unauthorized parties may attempt to copy or otherwise obtain and use our products or proprietary technology. Monitoring unauthorized use of our technology is difficult, and the steps that we have taken may not prevent unauthorized use of our technology, particularly in jurisdictions where the laws may not protect our proprietary rights as fully as in the United States or other developed countries. If our patents do not adequately protect our technology, our competitors may be able to offer products similar to ours, which would adversely impact our business and results of operations. We have implemented security systems with the intent of maintaining the physical security of our facilities and protecting our confidential information including our intellectual property. Despite our efforts, we may be subject to breach of these security systems and controls which may result in unauthorized access to our facilities and labs and/or unauthorized use or theft of the confidential information and intellectual property we are trying to protect. If we fail to protect these intellectual property rights, competitors could sell products based on technology that we have developed, which could harm our competitive position and decrease our revenue.
Certain of our software, as well as that of our customers, may be derived from so-called “open source” software that is generally made available to the public by its authors and/or other third parties. Open source software is made available under licenses that impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works under a particular type of license, rather than the forms of license we customarily use to protect our intellectual property. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event that the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work if the license is terminated which could adversely impact our business and results of operations.
We are subject to order and shipment uncertainties. If we are unable to accurately predict customer demand, we may hold excess or obsolete inventory, which would reduce our gross margin. Conversely, we may have insufficient inventory, which would result in lost revenue opportunities and potential loss
We typically sell products pursuant to purchase orders rather than long-term purchase commitments. Customers can generally cancel or defer purchase orders on short notice without incurring a significant penalty. Due to their inability to predict demand or other reasons, some of our customers may accumulate excess inventories and, as a consequence, defer purchase of our products. We cannot accurately predict what or how many products our customers will need in the future. Anticipating demand is difficult because our customers face unpredictable demand for their own products and are increasingly focused more on cash preservation and tighter inventory management. In addition, as an increasing number of our chips are being incorporated into consumer products, we anticipate greater fluctuations in demand for our products, which makes it more difficult to forecast customer demand.
We place orders with our suppliers based on forecasts of customer demand and, in some instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are based on multiple assumptions, each of which may introduce error into our estimates. For example, our ability to accurately forecast customer demand may be impaired by the delays inherent in our customer’s product development processes, which may include extensive qualification and testing of components included in their products, including ours. In many cases, they design their products to use components from multiple suppliers. This creates the risk that our customers may decide to cancel or change product plans for products incorporating our integrated circuits prior to completion, which makes it even more difficult to forecast customer demand.
Our products are incorporated into complex devices and systems, which may create supply chain cross-dependencies. For example, in fiscal 2012, many areas of Thailand sustained massive damage from flooding, which disrupted the global supply chain for HDDs. Due to cross dependencies, any supply chain disruptions could negatively impact the demand for our products in the short term. We have a limited ability to predict the timing of a supply chain correction. In addition, the market share of our customers could be adversely impacted on a long-term basis due to any continued supply chain disruption, which could negatively affect our results of operations.
If we overestimate customer demand, our excess or obsolete inventory may increase significantly, which would reduce our gross margin and adversely affect our financial results. The risk of obsolescence and/or excess inventory is heightened for devices designed for consumer electronics due to the rapidly changing market for these types of products. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would miss revenue opportunities and potentially lose market share and damage our customer relationships. In addition, any future significant cancellations or deferrals of product orders or the return of previously sold products could materially and adversely affect our profit margins, increase product obsolescence and restrict our ability to fund our operations.
We rely on third-party distributors and manufacturers’ representatives and the failure of these distributors and manufacturers’ representatives to perform as expected could reduce our future sales.
From time to time, we enter into relationships with distributors and manufacturers’ representatives to sell our products, and we are unable to predict the extent to which these partners will be successful in marketing and selling our products. Moreover, many of our distributors and manufacturers’ representatives also market and sell competing products, and may terminate their relationships with us at any time. Our future performance will also depend, in part, on our ability to attract additional distributors or manufacturers’ representatives that will be able to market and support our products effectively, especially in markets in which we have not previously distributed our products. If we cannot retain or attract quality distributors or manufacturers’ representatives, our sales and results of operations will be harmed.
We face additional risks due to the extent of our global operations since a majority of our products, and those of our customers, are manufactured and sold outside of the United States. The occurrence of any or a combination of the additional risks described below would significantly and negatively impact our business and results of operations.
A substantial portion of our business is conducted outside of the United States and, as a result, we are subject to foreign business, political and economic risks. All of our products are manufactured outside of the United States. Our current qualified integrated circuit foundries are located in the same region within Taiwan, and our primary assembly and test subcontractors are located in the Pacific Rim region. In addition, many of our customers are located outside of the United States, primarily in Asia, which further exposes us to foreign risks. Sales shipped to customers with operations in Asia represented approximately 94% of our net revenue in the nine months ended October 28, 2017, 94% of our net revenue in fiscal 2017 and 96% of net revenue in fiscal 2016.
We also have substantial operations outside of the United States. These operations are directly influenced by the political and economic conditions of the region in which they are located and, with respect to Israel, possible military hostilities periodically affecting the region that could affect our operations there. We anticipate that our manufacturing, assembly, testing and sales outside of the United States will continue to account for a substantial portion of our operations and revenue in future periods.
Accordingly, we are subject to risks associated with international operations, including:
political, social and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions;
volatile global economic conditions, including downturns in which some competitors may become more aggressive in their pricing practices, which would adversely impact our gross margin;
compliance with domestic and foreign export and import regulations, including pending changes thereto, and difficulties in obtaining and complying with domestic and foreign export, import and other governmental approvals, permits and licenses;
local laws and practices that favor local companies, including business practices in which we are prohibited from engaging by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations;
difficulties in staffing and managing foreign operations;
natural disasters, including earthquakes, tsunamis and floods;
trade restrictions, higher tariffs, or changes in cross border taxation, particularly in light of the prospect of changes in U.S. international trade policies following the recent U.S. presidential election;
transportation delays;
difficulties of managing distributors;
less effective protection of intellectual property than is afforded to us in the United States or other developed countries;
inadequate local infrastructure; and
exposure to local banking, currency control and other financial-related risks.
As a result of having global operations, the sudden disruption of the supply chain and/or disruption of the manufacture of our customer’s products caused by events outside of our control could impact our results of operations by impairing our ability to timely and efficiently deliver our products. For example, during fiscal 2012, the earthquake and tsunami that affected Japan disrupted the global supply chain for certain components important to our products, and the flooding in Thailand affected the supply chain and manufacturing of the products for a number of our customers.
Moreover, the international nature of our business subjects us to risk associated with the fluctuation of the U.S. dollar versus foreign currencies. Decreases in the value of the U.S. dollar versus currencies in jurisdictions where we have large fixed costs, or where our third-party manufacturers have significant costs, will increase the cost of such operations which could harm our results of operations.
We must comply with a variety of existing and future laws and regulations that could impose substantial costs on us and may adversely affect our business.
We are subject to various state, federal and international laws and regulations governing the environment,worldwide, which may differ among jurisdictions, affecting our operations in areas including, restricting the presence of certain substances in electronic productsbut not limited to: intellectual property ownership and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. In addition, we are also subject to various industry requirements restricting the presence of certain substances in electronic products. Although our management systems are designed to maintain compliance, we cannot assure you that we have been or will be at all times in complete compliance with such laws and regulations. If we violate or fail to comply with any of them, a range of consequences could result, including fines, import/export restrictions, sales limitations, criminal and civil liabilities or other sanctions.
We and our customers are also subject to variousinfringement; tax; import and export lawsrequirements; anti-corruption; foreign exchange controls and regulations. Governmentcash repatriation restrictions; conflict minerals; data privacy requirements; competition; advertising; employment; product regulations; environment, health and safety requirements; and consumer laws. For example, government export regulations apply to the encryption or other features contained in some of our products. If we fail to continue to receive licenses or otherwise comply with these regulations, we may be unable to manufacture the affected products at foreign foundries or ship these products to certain customers, or we may incur penalties or fines.
We In addition, we are also subject to various industry requirements restricting the “conflict mineral rules” promulgated by the SEC, which impose disclosure requirements on us regarding the usepresence of conflict minerals mined from the Democratic Republic of Congo and adjoining countriescertain substances in electronic products. Although our products and the procedures our manufacturer’s usemanagement systems are designed to prevent the sourcing of such conflict minerals. The ongoing implementation of these requirements could affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. As a result, there may only be a limited pool of suppliers who provide conflict-free metals, andmaintain compliance, we cannot assure you that we have been or will be able to obtain productsat all times in sufficient quantities or at competitive prices, which could adversely affectcompliance with such laws and regulations. Our compliance programs rely in part on compliance by our suppliers, vendors and distributors. To the extent such third parties don't comply with these obligations our business, operations and product margins. Additionally, ifreputation may be adversely impacted. If we are unableviolate or fail to sufficiently source conflict-free metals, we may face difficulties in satisfying customers who may require thatcomply with any of the products they purchase from us are conflict-free, which may harm ourabove requirements, a range of consequences could result, including fines, import/export restrictions, sales limitations, criminal and operating results.
civil liabilities or other sanctions. The costs of complying with these laws (including the costs of any investigations, auditing and monitoring) with these laws could adversely affect our current or future business. In addition, future
Our product or manufacturing standards could also be impacted by new or revised environmental rules and regulations may become more stringent or costly and our compliance costs and potential liabilities could increase, which may harm our current or future business.
Changes in existing taxation benefits, rules or practices may adversely affect our financial results.
Changes in existing taxation benefits, rules or practices may also haveother social initiatives. For example, a significant effectportion of our revenues come from international sales. Environmental legislation, such as the EU Directive on Restriction of Hazardous Substances (RoHS), the EU Waste Electrical and Electronic Equipment Directive (WEEE Directive) and China’s regulation on Management Methods for Controlling Pollution Caused by Electronic Information Products, may increase our reported results. For example, bothcost of doing business internationally and impact our revenues from the U.S. CongressEU, China and other countries with similar environmental legislation as we endeavor to comply with and implement these requirements.
In connection with some of our acquisitions, we have been subject to regulatory conditions imposed by the G-20 (GroupCommittee on Foreign Investment in the United States (CFIUS) where we have agreed to implement certain cyber security, physical security and training measures and supply agreements to protect national security. A portion of Twenty Finance Ministers and Central Bank Governors) may consider legislation affecting the taxation ofbusiness we acquired in the Avera acquisition requires facility security clearances under the National Industrial Security Program. The National Industrial Security Program requires that a corporation maintaining a facility security clearance be effectively insulated from foreign corporations and such legislation if enacted might adversely affect our future tax liabilities and have a material impact on our results of operations. Furthermore,ownership, control or influence (“FOCI”). Because we are organized in prior years,Bermuda, we have entered into agreements in certain foreign jurisdictions that if certain criteria are met, the foreign jurisdiction will provide a more favorable tax rate than their current statutory rate. For example, we have obtained an undertaking from the Minister of Finance of Bermuda that in the event Bermuda enacts legislation imposing tax computed on profits, income, or capital asset, gain or appreciation, then the imposition of any such taxes will not apply to us until March 31, 2035. Additionally, our Singapore subsidiary qualified for Pioneer status until it expired in June 2014. However, we re-negotiated with the Singapore governmentU.S. Department of Defense with respect to FOCI mitigation arrangements that relate to our operation of the portion of the Avera business involving facility clearances. These measures and in fiscal 2015, they extendedarrangements may materially and adversely affect our operating results due to the Development and Expansion Incentive until June 2019. Furthermore,increased cost of compliance with these measures. If we fail to comply with our obligations under the Israeli Encouragement law of “approved or benefited enterprise,” two branches of our subsidiary in Israel, Marvell Israel (M.I.S.L) Ltd., are entitled to, and have certain existing programs that qualify as, approved and benefited tax programs that include reduced tax rates and exemption of certain income through fiscal 2027. Moreover, receipt of past and future benefits under taxthese agreements, may depend on our ability to fulfill commitments regarding employmentoperate our business may be adversely affected. As a result of personnel or performance of specified activitiesthe proposed transaction with Inphi, our parent company will be domiciled in the applicable jurisdiction. ChangesUnited States upon closing of the transaction. As a result, we plan to request to be released from some of the above obligations. We can offer no assurance that such a request will be granted in a timely manner or at all.
Primarily as a result of our business plans, including divestitures,acquisition of Avera, we are now a party to certain contracts with the U.S. government. Our contracts with government entities are subject to various procurement regulations and other requirements relating to their formation, administration and performance. We may be subject to audits and investigations relating to our government contracts, and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of an agreementcontracts, refunding or losssuspending of benefits thereunder. Ifpayments, forfeiture of profits, payment of fines, and suspension or debarment from future government business. In addition, such contracts may provide for termination by the government at any of our tax agreements in anytime, without cause. Any of these foreign jurisdictions were terminated,risks related to contracting with governmental entities could adversely impact our results of operations would be harmed.
The Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Sharing Project, and issued in 2015, and is expected to continue to issue, guidelines and proposals that may change various aspects of the existing framework under which our tax obligations are determined in some of the countries in which we do business. The European Commission has also conducted investigations in multiple countries focusing on whether local country tax rulings or tax legislation provides preferential tax treatment that violates European Union state aid rules and concluded that certain countries, including Ireland and Belgium, have provided illegal state aid in certain cases. We can provide no assurance that changes in tax laws and additional investigations would not have an adverse tax impact on our international operations.
In addition, the current U.S. administration and key members of Congress have made public statements indicating that tax reform is a priority. Certain changes to U.S. tax laws, including reduction of the U.S. corporate tax rate, expansion of the U.S. tax base by eliminating certain deductions, implementation of a territorial tax system, and addition of a border adjustment mechanism, could have material consequences on the amount of tax we pay in the U.S. and thereby on our financial position and results of operations.
During fiscal 2016 and continuing into the third quarter of fiscal 2018, we identified material weaknesses in our internal controls over financial reporting. If we are unable to develop, implement and maintain effective internal controls in future periods, our consolidated financial statements could contain material misstatements which would cause us to issue a restatement thereof. A restatement of our consolidated financial statements could cause our investors to lose confidence in our reported financial information and lead to a decline in our stock price.
The Sarbanes-Oxley Act of 2002 and SEC rules require that management report on the effectiveness of our internal control over financial reporting and our disclosure controls and procedures. Among other things, management must conduct an assessment of internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Based on management’s assessment, we concluded that our internal controls over financial reporting were not effective as of October 28, 2017. The specific material weaknesses are described in Item 4 of this Quarterly Report on Form 10-Q.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected. As with any material weakness, if our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements. Any material misstatements could result in a restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.
Even when we have remediated our material weaknesses, any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of its inherent limitations, internal control over financial reporting will not necessarily prevent all error and all fraud. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. In addition, we may modify the designsales and operating effectivenessresults.
We have been named as a party to several legal proceedings and may be named in additional ones in the future, including litigation involving our patents and other intellectual property, which could subject us to liability, require us to indemnify our customers, require us to obtain or renew licenses, require us to stop selling our products or force us to redesign our products.
We are currently, and have been in the past, named as a party to several lawsuits, government inquiries or investigations and other legal proceedings (referred to as “litigation”), and we may be named in additional ones in the future. Please see “Note 910 - Commitments and Contingencies” of our Notes to the Unaudited Condensed Consolidated Financial Statements set forth in Part I, Item I1 of this Quarterly Report on Form 10-Q for a more detailed description of material litigation matters in which we aremay be currently engaged. In particular, litigation involving patents and other intellectual property is widespread in the high-technology industry and is particularly prevalent in the semiconductor industry, where a number of companies and other entities aggressively bring numerous infringement claims to assert their patent portfolios. The amount of damages alleged in intellectual property infringement claims can often be very significant. See also, “We may be unable to protect our intellectual property, which would negatively affect our ability to compete.”
From time to time, our subsidiaries and customers receive, and may continue to receive in the future, standards-based or other types of infringement claims, as well as claims against us and our subsidiaries’ proprietary technologies. Our subsidiaries and customers could face claims of infringement for certain patent licenses that have not been renewed. These claims could result in litigation and/or claims for indemnification, which, in turn, could subject us to significant liability for damages, attorneys’ fees and costs. Any potential intellectual property litigation also could force us to do one or more of the following:
•stop selling, offering for sale, making, having made or exporting products or using technology that contains the allegedly infringing intellectual property;
•limit or restrict the type of work that employees involved in such litigation may perform for us;
•pay substantial damages and/or license fees and/or royalties to the party claiming infringement or other license violations that could adversely impact our liquidity or operating results;
•attempt to obtain or renew licenses to the relevant intellectual property, which licenses may not be available on reasonable terms or at all; and
•attempt to redesign those products that contain the allegedly infringing intellectual property.
Under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses for current and former directors and officers. See also, “Our indemnification obligations and limitations of our director and officer liability insurance may have a materialadverse effect on our financial condition, results of operations and cash flows.”Additionally, from time to time, we have agreed to indemnify selectcustomers for claims alleging infringement of third-party intellectual property rights, including, but not limited to, patents, registered trademarks and/or copyrights. If we are required to make a significant payment under any of our indemnification obligations, our results of operations may be harmed.
Several securities class action lawsuits were filed against us following our September 11, 2015 announcement of an independent audit committee investigation of certain accounting and internal control matters in the second quarter of fiscal 2016 and our subsequent delinquency in filing our periodic financial reports.
The ultimate outcome of litigation could have a material adverse effect on our business and the trading price for our securities. Litigation may be time consuming, expensive, and disruptive to normal business operations, and the outcome of litigation is difficult to predict. Litigation, regardless of the outcome, may result in significant expenditures, diversion of our management’s time and attention from the operation of our business and damage to our reputation or relationship with third parties, which could materially and adversely affect our business, financial condition, results of operations, cash flows and stock price.
WE ARE SUBJECT TO RISKS RELATED TO OUR DEBT OBLIGATIONS
Our indebtedness could adversely affect our financial condition and our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.
On July 6, 2018, in connection with our acquisition of Cavium, we incurred substantial indebtedness pursuant to a Credit Agreement. The Credit Agreement provides for a $900.0 million Term Loan. The Term Loan will mature on July 6, 2021. As of October 31, 2020, the outstanding principal balance of the Term Loan amounted to $350 million. See “Note 9 - Debt” for discussion of the debt financing in the Notes to Consolidated Financial Statements set forth in Part II, Item 8 of the Annual Report on Form 10-K.
In addition to the loans under the credit agreements, on June 22, 2018, we completed a public offering of (i) $500.0 million aggregate principal amount of the Company’s 4.200% Senior Notes due 2023 (the “2023 Notes”) and (ii) $500.0 million aggregate principal amount of the Company’s 4.875% Senior Notes due 2028 (the “2028 Notes” and, together with the 2023 Notes, the “Senior Notes”). We are exposedobligated to potential impairment chargespay interest on certain assets.the Senior Notes on June 22 and December 22 of each year, beginning on December 22, 2018. The 2023 Notes will mature on June 22, 2023 and the 2028 Notes will mature on June 22, 2028.
In addition, we intend to pay the cash portion of the consideration for the Mergers and other fees and expenses required to be paid in connection with the Mergers from cash on hand and borrowings.We had approximately $2.0have obtained financing commitments for (i) a $2.5 billion of goodwill on our consolidated balance sheetsenior 364-day bridge term loan facility (the “Bridge Facility”) pursuant to a commitment letter (the “Bridge Commitment Letter”) dated as of October 28, 2017. Under generally accepted accounting principles29, 2020, with JPMorgan Chase Bank, N.A. (“JPMorgan”), and (ii) a $1.5 billion senior unsecured term loan facility comprised of a $750.0 million 3-year term loan tranche (the “3 Year Term Loan”) and a $750.0 million 5-year term loan tranche (the “5-Year Term Loan,” and collectively with the 3-Year Term Loan, the “Term Loan Facility”) pursuant to a facilities commitment letter (the “Facilities Commitment Letter” and, together with the Bridge Commitment Letter, the “Debt Commitment Letters”) dated as of October 29, 2020, with JPMorgan.Pursuant to the Debt Commitment Letters, subject to the terms and conditions set forth therein, JPMorgan has committed to provide the full amount of the Bridge Facility and the Term Loan Facility. The funding of the Bridge Facility provided for in the Bridge Commitment Letter and the funding of the Term Loan Facility provided for in the Facilities Commitment Letter, in each case, is contingent upon the satisfaction of customary conditions, including (i) execution and delivery of definitive documentation with respect to the Bridge Facility and Term Loan Facility in accordance with the terms set forth in the applicable Commitment Letters and (ii) consummation of the Mergers in accordance with the Merger Agreement. The actual documentation governing the Bridge Facility and the Term Loan Facility has not been finalized, and accordingly, the actual terms may differ from the description of such terms in the applicable Debt Commitment Letters. Availability under the Bridge Facility will be reduced by the net cash proceeds from customary mandatory commitment reduction and prepayment events from issuances of equity, the incurrence of certain other debt or the sale of available assets, in each case subject to limited exceptions. We expect to replace some or all of the Bridge Facility prior to the closing of the Mergers with permanent financing comprised of senior unsecured notes. There can be no assurance that the permanent financing will be completed.
Our indebtedness could have important consequences to us including:
•increasing our vulnerability to adverse general economic and industry conditions;
•requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business strategy, acquisitions and other general corporate purposes;
•limiting our flexibility in planning for, or reacting to, changes in the economy and the semiconductor industry;
•placing us at a competitive disadvantage compared to our competitors with less indebtedness;
•exposing us to interest rate risk to the extent of our variable rate indebtedness; and
•making it more difficult to borrow additional funds in the future to fund growth, acquisitions, working capital, capital expenditures and other purposes.
Although the credit agreements contain restrictions on our ability to incur additional indebtedness and the indenture under which the Senior Notes were issued contains restrictions on creating liens and entering into certain sale-leaseback transactions, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness, liens or sale-leaseback transactions incurred in compliance with these restrictions could be substantial.
The credit agreements and the Senior Notes contain customary events of default upon the occurrence of which, after any applicable grace period, the lenders would have the ability to immediately declare the loans due and payable in whole or in part. In such event, we may not have sufficient available cash to repay such debt at the time it becomes due, or be able to refinance such debt on acceptable terms or at all. Any of the foregoing could materially and adversely affect our financial condition and results of operations.
We may not be able to access cash or to incur additional indebtedness if the COVID-19 pandemic causes the closure of banks for an extended period of time or if there is a sudden increase in requests for indebtedness at one time by many potential borrowers which could overwhelm the banking industry.
Adverse changes to our debt ratings could negatively affect our ability to raise additional capital.
We receive debt ratings from the major credit rating agencies in the United States,States. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities. Liquidity, asset quality, cost structure, reserve mix and commodity pricing levels could also be considered by the rating agencies. The applicable margins with respect to the Term Loan will vary based on the applicable public ratings assigned to the collateralized, long-term indebtedness for borrowed money by Moody's Investors Service, Inc., Standard & Poor's Financial Services LLC, Fitch’s and any successor to each such rating agency business. A ratings downgrade could adversely impact our ability to access debt markets in the future and increase the cost of current or future debt and may adversely affect our share price.
The Credit Agreements and the indenture under which the Senior Notes were issued impose restrictions on our business.
The credit agreements and the indenture for the Senior Notes each contains a number of covenants imposing restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions, among other things, restrict our ability and our subsidiaries’ ability to create or incur certain liens, incur or guarantee additional indebtedness, merge or consolidate with other companies, pay dividends, transfer or sell assets and make restricted payments. These restrictions are subject to a number of limitations and exceptions set forth in the credit agreements and the indenture for the Senior Notes. Our ability to meet the liquidity covenant or the leverage ratio set forth in the credit agreements may be affected by events beyond our control.
The foregoing restrictions could limit our ability to plan for, or react to, changes in market conditions or our capital needs. We do not know whether we will be granted waivers under, or amendments to, our credit agreements or to the Senior Notes if for any reason we are requiredunable to reviewmeet these requirements, or whether we will be able to refinance our intangible assets including goodwill for impairment whenever eventsindebtedness on terms acceptable to us, or changes in circumstances indicate thatat all.
We may be unable to generate the carrying value of these assetscash flow to service our debt obligations.
We may not be recoverable. We perform an assessment of goodwill for impairment annuallyable to generate sufficient cash flow to enable us to service our indebtedness, including the Senior Notes, or to make anticipated capital expenditures. Our ability to pay our expenses and satisfy our debt obligations, refinance our debt obligations and fund planned capital expenditures will depend on the last business day of our fiscal fourth quarter and whenever events or changes in circumstances indicate the carrying amount of goodwill may notfuture performance, which will be recoverable.
We have identified that our business operates as a single operating segment with two components (Storage, and Networking and Connectivity), which we have concluded can be aggregated into a single reporting unit for purposes of testing goodwill impairment. As part of our restructuring announced in November 2016, our former Smart Networked Devices and Solutions component was renamed Networking and Connectivity. The fair value of the reporting unit is determinedaffected by taking our market capitalization as determined through quoted market prices and as adjusted for a control premiumgeneral economic, financial competitive, legislative, regulatory and other relevant factors.factors beyond our control. If our fair value declineswe are unable to below our carrying value, we could incur significant goodwill impairment charges, which could negatively impact our financial results. Ifgenerate sufficient cash flow from operations or to borrow sufficient funds in the future to service our debt, we may be required to sell assets, reduce capital expenditures, refinance all or a changeportion of our existing debt (including the Senior Notes) or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or borrow more money on terms acceptable to us, if at all. If we cannot make scheduled payments on our debt, we will be in default and holders of our organizational structure results in more than one reporting unit,debt could declare all outstanding principal and interest to be due and payable, and we could be forced into bankruptcy or liquidation. In addition, a material default on our indebtedness could suspend our eligibility to register securities using certain registration statement forms under SEC guidelines that permit incorporation by reference of substantial information regarding us, potentially hindering our ability to raise capital through the issuance of our securities and increasing our costs of registration.
We may, under certain circumstances, be required to repurchase the Senior Notes at the option of the holder.
We will be required to allocaterepurchase the Senior Notes at the option of each holder upon the occurrence of a change of control repurchase event as defined in the indenture for the Senior Notes. However, we may not have sufficient funds to repurchase the notes in cash at the time of any change of control repurchase event. Our failure to repurchase the Senior Notes upon a change of control repurchase event would be an event of default under the indenture for the Senior Notes and could cause a cross-default or acceleration under certain future agreements governing our goodwill and perform an assessmentother indebtedness. The repayment obligations under the Senior Notes may have the effect of goodwill for impairment in each reporting unit. Asdiscouraging, delaying or preventing a result,takeover of our company. If we were required to pay the Senior Notes prior to their scheduled maturity, it could have an impairmenta significant negative impact on our cash and liquidity and could impact our ability to invest financial resources in other strategic initiatives.
WE ARE SUBJECT TO CYBERSECURITY RISKS
Cybersecurity risks could adversely affect our business and disrupt our operations.
We depend heavily on our technology infrastructure and maintain and rely upon certain critical information systems for the effective operation of our business. We routinely collect and store sensitive data in our information systems, including intellectual property and other proprietary information about our business and that of our customers, suppliers and business partners. These information technology systems are subject to damage or interruption from a number of potential sources, including, but not limited to, natural disasters, destructive or inadequate code, malware, power failures, cyber-attacks, internal malfeasance or other events. Cyber-attacks on us may include viruses and worms, phishing attacks, and denial-of-service attacks. In addition, we may be the target of email scams that attempt to acquire personal information or company assets.
We have implemented processes for systems under our control intended to mitigate risks; however, we can provide no guarantee that those risk mitigation measures will be effective. While we have historically been successful in defending against cyber-attacks and breaches, given the frequency of cyber-attacks and resulting breaches reported by other businesses and governments, it is likely we will experience one or more breaches of some extent in the future. We have incurred and may in the future incur significant costs in order to implement, maintain and/or update security systems we feel are necessary to protect our information systems, or we may miscalculate the level of investment necessary to protect our systems adequately. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures.
The Company’s business also requires it to share confidential information with suppliers and other third parties. Although the Company takes steps to secure confidential information that is provided to third parties, such measures may not always be effective and data breaches, losses or other unauthorized access to or releases of confidential information may occur and could materially adversely affect the Company’s reputation, financial condition and operating results and could result in liability or penalties under data privacy laws.
To the extent that any system failure, accident or security breach results in material disruptions or interruptions to our operations or the theft, loss or disclosure of, or damage to our data or confidential information, including our intellectual property, our reputation, business, results of operations and/or financial condition could be materially adversely affected.
GENERAL RISK FACTORS
We depend on highly skilled personnel to support our business operations. If we are unable to retain and motivate our current personnel or attract additional qualified personnel, our ability to develop and successfully market our products could be harmed.
We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. The competition for qualified technical personnel with significant experience in the design, development, manufacturing, marketing and sales of integrated circuits is intense, both in the Silicon Valley where our U.S. operations are based and in global markets in which we operate. Our inability to attract and retain qualified personnel, including hardware and software engineers and sales and marketing personnel, could delay the development and introduction of, and harm our ability to sell, our products. Our ability to attract and retain qualified personnel also depends on how well we maintain a strong workplace culture that is attractive to employees. Changes to United States immigration policies that restrict our ability to attract and retain technical personnel may negatively affect our research and development efforts.
We typically do not enter into employment agreements with any of our key technical personnel and the loss of such personnel could harm our business, as their knowledge of our business and industry would be extremely difficult to replace. The impact on employee morale experienced in connection with our recent restructuring efforts and in connection with our recent acquisitions and divestiture, could make it more difficult for us to add to our workforce when needed due to speculation regarding our future reporting units.restructuring activities. In addition, as a result of our acquisitions and divestiture, our current and prospective employees may experience uncertainty about their futures that may impair our ability to retain, recruit or motivate key management, engineering, technical and other personnel.
There can be no assurance that we will continue to declare cash dividends or effect share repurchases in any particular amount or at all, and statutory requirements under Bermuda Law may require us to defer payment of declared dividends or suspend share repurchases.
In May 2012, we declared our first quarterly cash dividend and in October 2018, we announced that our board of directors had authorized a $700 million addition to our previously existing $1 billion share repurchase program. An aggregate of $1.1 billion of shares have been repurchased under that program as of October 31, 2020. Future payment of a regular quarterly cash dividend on our common shares and future share repurchases will be subject to, among other things: the best interests of our company and our shareholders; our results of operations, cash balances and future cash requirements; financial condition; developments in ongoing litigation; statutory requirements under Bermuda law; market conditions; and other factors that our Board of Directors may deem relevant. Our dividend payments or share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares in any particular amounts or at all. A reduction in, a delay of, or elimination of our dividend payments or share repurchases could have a negative effect on our share price. Our share repurchase program was temporarily suspended in late March 2020 to preserve cash during the COVID-19 pandemic and remains temporarily suspended in anticipation of the funding of our acquisition of Inphi. Although share repurchases were temporarily suspended during this time, as of October 31, 2020, there was $564.5 million remaining available for future share repurchases of the authorization.
Our indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financial condition, results of operations and cash flows.
Under Bermuda law, our articles of association and bye-laws and certain indemnification agreements to which we are a party, we have made investmentsan obligation to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors and officers with respect to past, current and future investigations and litigation. For example, we incurred significant indemnification expenses in private companies. Ifconnection with the companies thatAudit Committee's independent investigation completed in March 2016 and related shareholder litigation and government investigations. In connection with some of these matters, we investwere required to, or we otherwise agreed to, advance, and have advanced, legal fees and related expenses to certain of our current and former directors and officers. Further, in the event the directors and officers are unableultimately determined not to execute their plans and succeed in their respective markets,be entitled to indemnification, we may not benefit from such investments, and we could potentially lose thebe able to recover any amounts we invest. previously advanced to them.
We evaluatecannot provide any assurances that future indemnification claims, including the cost of fees, penalties or other expenses, will not exceed the limits of our investment portfolio on a regular basisinsurance policies, that such claims are covered by the terms of our insurance policies or that our insurance carrier will be able to determine if impairments have occurred. Ifcover our claims. Additionally, to the operationsextent there is coverage of any businessesthese claims, the insurers also may seek to deny or limit coverage in some or all of these matters.
Furthermore, the insurers could become insolvent and unable to fulfill their obligation to defend, pay or reimburse us for insured claims. Accordingly, we cannot be sure that claims will not arise that are in excess of the limits of our insurance or that are not covered by the terms of our insurance policy. Due to these coverage limitations, we have acquired declines significantly, we couldmay incur significant intangible asset impairment charges. Impairment charges couldunreimbursed costs to satisfy our indemnification obligations, which may have a material impactadverse effect on our financial condition, results of operations inor cash flows.
As we carry only limited insurance coverage, any period.incurred liability resulting from uncovered claims could adversely affect our financial condition and results of operations.
Our insurance policies may not be adequate to fully offset losses from covered incidents, and we do not have coverage for certain losses. For example, there is very limited coverage available with respect to the services provided by our third-party foundries and assembly and test subcontractors. In the event of a natural disaster (such as an earthquake or tsunami), political or military turmoil, widespread public health emergencies including pandemics, including the COVID-19 pandemic, or other significant disruptions to their operations, insurance may not adequately protect us from this exposure. We believe our existing insurance coverage is consistent with common practice, economic considerations and availability considerations. If our insurance coverage is insufficient to protect us against unforeseen catastrophic losses, any uncovered losses could adversely affect our financial condition and results of operations.
If we were classified as a passive foreign investment company, there would be adverse tax consequences to U.S. holders of our ordinary shares.
If we were classified as a “passive foreign investment company” or “PFIC” under section 1297 of the Internal Revenue Code, of 1986, as amended (the “Code”), for any taxable year during which a U.S. holder holds ordinary shares, such U.S. holder generally would be taxed at ordinary income tax rates on any gain realized on the sale or exchange of the ordinary shares and on any “excess distributions” (including constructive distributions) received on the ordinary shares. Such U.S. holder could also be subject to a special interest charge with respect to any such gain or excess distribution.
We would be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of our gross income is passive income or (ii) on average, the percentage of our assets that produce passive income or are held for the production of passive income is at least 50% (determined on an average gross value basis). We were not classified as a PFIC for fiscal year 20172020 or in any prior taxable year. Whether we will, in fact, be classified as a PFIC for any subsequent taxable year depends on our assets and income over the course of the relevant taxable year and, as a result, cannot be predicted with certainty. In particular, because the total value of our assets for purposes of the asset test will be calculated based upon the market price of our ordinary shares, a significant and sustained decline in the market price of our ordinary shares and corresponding market capitalization relative to our passive assets could result in our being classified as a PFIC. There can be no assurance that we will not be classified as a PFIC in the future or the Internal Revenue Service will not challenge our determination concerning PFIC status for any prior period.
As we carry only limited insurance coverage, any incurred liability resulting from uncovered claims could adversely affect our financial condition and results of operations.
Our insurance policies may not be adequate to fully offset losses from covered incidents, and we do not have coverage for certain losses. For example, there is very limited coverage available with respect to the services provided by our third-party foundries and assembly and test subcontractors. In the event of a natural disaster (such as an earthquake or tsunami), political or military turmoil, widespread health issues or other significant disruptions to their operations, insurance may not adequately protect us from this exposure. We believe our existing insurance coverage is consistent with common practice, economic considerations and availability considerations. If our insurance coverage is insufficient to protect us against unforeseen catastrophic losses, any uncovered losses could adversely affect our financial condition and results of operations.
We are subject to the risks of owning real property.
Our buildings in Santa Clara, California; Singapore; Etoy, Switzerland; and Shanghai, China subject us to the risks of owning real property, which include, but are not limited to:
the possibility of environmental contamination and the costs associated with remediating any environmental problems;
adverse changes in the value of these properties due to interest rate changes, changes in the neighborhood in which the property is located, or other factors;
the possible need for structural improvements in order to comply with zoning, seismic and other legal or regulatory requirements;
the potential disruption of our business and operations arising from or connected with a relocation due to moving to or renovating the facility;
increased cash commitments for improvements to the buildings or the property, or both;
increased operating expenses for the buildings or the property, or both;
possible disputes with tenants or other third parties related to the buildings or the property, or both;
failure to achieve expected cost savings due to extended non-occupancy of a vacated property intended to be leased; and
the risk of financial loss in excess of amounts covered by insurance, or uninsured risks, such as the loss caused by damage to the buildings as a result of earthquakes, floods and/or other natural disasters.
*There can be no assurance that we will continue to declare cash dividends or effect share repurchases in any particular amount or at all, and statutory requirements under Bermuda Law may require us to defer payment of declared dividends or suspend share repurchases.
In May 2012, we announced the declaration of our first quarterly cash dividend. In November 2016, we announced that our board of directors had authorized a $1 billion share repurchase program, of which $642 million of shares have already been repurchased. Future payment of a regular quarterly cash dividend on our common shares and future share repurchases will be subject to, among other things: the best interests of our company and our shareholders; our results of operations, cash balances and future cash requirements; financial condition; developments in ongoing litigation; statutory requirements under Bermuda law; market conditions; and other factors that the board of directors may deem relevant. Our dividend payments or share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares in any particular amounts or at all. A reduction in, a delay of, or elimination of our dividend payments or share repurchases could have a negative effect on our share price.
We are incorporated in Bermuda, and, as a result, it may not be possible for our shareholders to enforce civil liability provisions of the securities laws of the United States. In addition, our Bye-Laws contain a waiver of claims or rights of action by our shareholders against our officers and directors, which will severely limit our shareholders’ right to assert a claim against our officers and directors under Bermuda law.
We are organized under the laws of Bermuda. As a result, it may not be possible for our shareholders to affect service of process within the United States upon us, or to enforce against us in U.S. courts judgments based on the civil liability provisions of the securities laws of the United States. There is significant doubt as to whether the courts of Bermuda would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liability provisions of the securities laws of the United States or any state, or hear actions brought in Bermuda against us or those persons based on those laws. The United States and Bermuda do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not be automatically enforceable in Bermuda.
Our Bye-Laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers and directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties with or for us, other than with respect to any matter involving any fraud or dishonesty on the part of the officer or director or to any matter arising under U.S. federal securities laws. This waiver will limit the rights of our shareholders to assert claims against our officers and directors unless the act complained of involves fraud or dishonesty or arises as a result of a breach of U.S. federal securities laws. Therefore, so long as acts of business judgment do not involve fraud or dishonesty or arise as a result of a breach of U.S. federal securities laws, they will not be subject to shareholder claims under Bermuda law. For example, shareholders will not have claims against officers and directors for a breach of trust, unless the breach rises to the level of fraud or dishonesty, or arises as a result of a breach of U.S. federal securities laws.
Our Bye-Laws contain provisions that could delay or prevent a change in corporate control, even if the change in corporate control would benefit our shareholders.
Our Bye-Laws contain change in corporate control provisions, which include authorizing the issuance of preferred shares without shareholder approval. This provision could make it more difficult for a third party to acquire us, even if doing so would benefit our shareholders.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the three months ended October 28, 2017.31, 2020.
Issuer Purchases of Equity Securities
The following table presents details of our
Our share repurchasesrepurchase program was temporarily suspended in late March 2020 to preserve cash during the COVID-19 pandemic. As a result, the Company did not repurchase any shares during the three months ended October 28, 2017 (in thousands, except per31, 2020. Although share data):repurchases are temporarily suspended, we have $564.5 million of repurchase authority remaining under our current share repurchase program.
|
| | | | | | | | | | | | | |
| Period (1) | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
| July 30 – August 26, 2017 | — |
| | $ | — |
| | — |
| | $ | 497,973 |
|
| August 27 – September 23, 2017 | 4,061,100 |
| | $ | 17.83 |
| | 4,061,100 |
| | $ | 425,576 |
|
| September 24– October 28, 2017 | 3,754,700 |
| | $ | 18.01 |
| | 3,754,700 |
| | $ | 357,956 |
|
| Total | 7,815,800 |
| | $ | 17.91 |
| | 7,815,800 |
| | $ | 357,956 |
|
Item 5. Other Information
| |
(1) | The monthly periods presented above for the three months ended October 28, 2017, are based on our fiscal accounting periods which follow a quarterly 4-4-5 week fiscal accounting period. |
| |
(2) | On November 17, 2016, the Company announced that its Board of Directors authorized a $1 billion share repurchase plan. The newly authorized stock repurchase program replaces in its entirety the prior $3.25 billion stock repurchase program, which had approximately $115 million of repurchase authority remaining as of November 17, 2016. We intend to effect share repurchases in accordance with the conditions of Rule 10b-18 under the Exchange Act, but may also make repurchases in the open market outside of Rule 10b-18 or in privately negotiated transactions. The share repurchase program will be subject to market conditions and other factors and does not obligate us to repurchase any dollar amount or number of our common shares and the repurchase program may be extended, modified, suspended or discontinued at any time. |
Change of Address.
Effective as of October 31, 2020, the Company's principal executive offices moved to Victoria Place, 5th Floor 31 Victoria Street, Hamilton HM 10, Bermuda. This change in address is not related to the proposed changes in our structure related to the closing of the transaction with Inphi.
Compensatory Arrangements of Certain Officers.
As part of the offer letter that Marvell Technology Group Ltd. (the “Company”) entered into in connection with the recruitment of Mr. Matthew J. Murphy as President and Chief Executive Officer in 2016, the Company entered into a Severance Agreement with Mr. Murphy that provided for certain severance benefits should he be terminated in the future. Following the Company’s annual review of executive severance agreements, on December 1, 2020, the parties extended the agreement’s duration and made certain other changes. The terms of the amended Severance Agreement are summarized below.
If Mr. Murphy’s employment is terminated by the Company for other than “Cause” or if he resigns for “Good Reason” (both as defined in the Severance Agreement), provided he executes and does not revoke a release of claims in a form provided by the Company, he will receive: (a) a lump sum separation payment equal to the sum of two times his then annual base salary, (b) 100% of his target incentive bonus, (c) reimbursement for 12 months of medical insurance premiums, and (d) acceleration of certain equity grants as described below. For each Equity Award (as defined in the Severance Agreement) subject only to time-based vesting, the vesting will be accelerated as if Mr. Murphy had remained employed through the date 18 months following the termination of employment date, and (b) for each Equity Award subject to performance-based vesting to the extent that the performance measurement has been completed and shares based on that performance will vest thereafter solely based on time, the vesting will be accelerated as if Mr. Murphy had remained employed through the date 18 months following the termination of employment date. There shall be no acceleration with respect to that portion of any Equity Awards based on performance where the performance measurement has not been achieved.
The amended Severance Agreement shall terminate upon the later of (i) January 1, 2023 or (ii) if Mr. Murphy is terminated involuntarily by the Company without Cause prior to January 1, 2023, the date that all of the obligations of the parties hereto with respect to this agreement have been satisfied.
The foregoing description of the amended Severance Agreement is qualified in its entirety by reference to the full text of the agreement filed as Exhibit 10.6 incorporated herein by reference.
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Item 6.Exhibits | | | | | | | | |
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| Exhibit No. | | Item | | Form | | File Number | | Incorporated by
Reference from
Exhibit Number | | Filed with SEC |
| 2.1 | | Agreement and Plan of Merger and Reorganization, dated as of October 29, 2020, by and among Marvell Technology Group Ltd., Inphi Corporation, Maui HoldCo, Inc., Maui Acquisition Company Ltd and Indigo Acquisition Corp. | | 8-K | | 000-30877 | | 2.1 | | October 30, 2020 |
| 10.1# | | | | | | | | | | Filed herewith |
| 10.2# | | | | | | | | | | Filed herewith |
| 10.3# | | | | | | | | | | Filed herewith |
| 10.4 | | Commitment Letter, dated as of October 29, 2020, by and among Marvell Technology Group Ltd., Maui HoldCo, Inc., and JPMorgan Chase Bank, N.A. | | 8-K | | 000-30877 | | 10.1 | | October 30, 2020 |
| 10.5 | | Facilities Commitment Letter, dated as of October 29, 2020, by and among Marvell Technology Group Ltd., Maui HoldCo, Inc. and JPMorgan Chase Bank, N.A. | | 8-K | | 000-30877 | | 10.2 | | October 30, 2020 |
| 10.6 | | | | | | | | | | Filed herewith |
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| 31.1 | | | | | | | | | | Filed herewith |
| 31.2 | | | | | | | | | | Filed herewith |
| 32.1* | | | | | | | | | | Filed herewith |
| 32.2* | | | | | | | | | | Filed herewith |
| 101.INS | | Inline XBRL Instance Document | | | | | | | | Filed herewith |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | Filed herewith |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | Filed herewith |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Document | | | | | | | | Filed herewith |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | Filed herewith |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | Filed herewith |
| 104 | | The cover page for this Form 10-Q, formatted in Inline XBRL (included in Exhibit 101) | | | | | | | | Filed herewith |
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| Exhibit No. | | Item | | Form | | File Number | | Incorporated by Reference from Exhibit Number | | Filed with SEC |
| 3.1 | | Memorandum of Association of Marvell Technology Group Ltd. | | S-1 | | 333-33086 | | 3.1 | | 3/23/2000 |
| | | | 8-K | | 000-30877 | | 3.1 | | 11/10/2016 |
| | | | 8-K | | 000-30877 | | 3.1 | | 7/6/2006 |
| | | | | | | | | | Filed herewith |
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| 101.INS | | XBRL Instance Document | | | | | | | | Filed herewith |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | Filed herewith |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | Filed herewith |
| 101.DEF | | XBRL Taxonomy Extension Definition Document | | | | | | | | Filed herewith |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | Filed herewith |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | Filed herewith |
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| # | Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. |
| * | The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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# | Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. |
* | The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| MARVELL TECHNOLOGY GROUP LTD. |
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| Date: December 4, 2020 | By: | /s/ JEAN HU |
| | Jean Hu |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
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| MARVELL TECHNOLOGY GROUP LTD. |
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Date: December 4, 2017 | By: | /s/ JEAN HU |
| | Jean Hu |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
