The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
Cavium, Inc., (the “Company”), was incorporated in the state of California on November 21, 2000 and was reincorporated in the state of Delaware effective February 6, 2007. The Company designs, develops and markets semiconductor processors for intelligent and secure networks.
On August 16, 2016, the Company completed the acquisition of QLogic Corporation (“QLogic”). QLogic designs and supplies high performance server and storage networking connectivity products that provide, enhance and manage computer data communication used in enterprise, managed service provider and cloud service provider datacenters. See Note 2 of Notes to Consolidated Financial Statements for further discussion regarding the Company’s acquisition of QLogic.
Basis of Consolidation
The consolidated financial statements include the accounts of Cavium, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Prior to the closing of the acquisition of Xpliant, Inc. (“Xpliant”) in April 2015 as discussed in Note 2 of Notes to Consolidated Financial Statements, the Company accounted for Xpliant as a variable interest entity, or VIE. Under the accounting principles generally accepted in the United States of America, or US GAAP, a VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in its consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.
Revenue Recognition
The Company primarily derives its revenue from sales of semiconductor products to original contract manufacturers, or OEM, or through OEM’s contract manufacturers or distributors. To a lesser extent, the Company also derive revenue from licensing software and related maintenance and support and from professional service arrangements.
The Company recognizes revenue when (i) persuasive evidence of a binding arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is deemed fixed or determinable and free of contingencies and significant uncertainties; and (iv) collectibility is reasonably assured. The Company records a reduction in revenue for provision for estimated sales returns in the same period the related revenues are recorded. These estimates are based on historical patterns of return, analysis of credit memo data and other known factors at the time. The Company also records reductions of revenue for pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recorded. The Company accrues the full potential rebates at the time of sale and does not apply a breakage factor. The reversal of the accrual of unclaimed rebate will be made if the specific rebate programs contractually end and when the Company believes that the unclaimed rebates are no longer subject to payment.
Revenue is recognized upon shipment to distributors with limited rights of returns and price protection if the Company concludes that it can reasonably estimate the credit for returns and price adjustments issuable. The Company records an estimated allowance, at the time of shipment, based on the Company’s historical patterns of returns and pricing credit of sales recognized upon shipment. Credits issued to distributors or other customers have historically not been material. The inventory at these distributors at the end of the period may fluctuate from time to time mainly due to the OEM production ramps and/or new customer demands.
Software arrangements typically include time-based licenses for 12 months with related support. The Company does not sell support separately, therefore, revenue from software arrangements is recognized ratably over the support period. The software arrangement may also include professional services, and these services may be purchased separately. Professional services engagements are billed on either a fixed-fee or time-and-materials basis. For fixed-fee arrangements, professional services revenue is recognized under the proportional performance method, with the associated costs included in cost of revenue. The Company estimates the proportional performance of the arrangements based on an analysis of progress toward completion. The Company periodically evaluates the actual status of each project to ensure that the estimates to complete each contract remain accurate, and a loss is
55
recognized when the total estimated project cost exceeds projec
t revenue. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on progress toward completion of projects in progress. To the extent we are unable to
estimate the proportional performance, revenue is recognized on a completed performance basis. Revenue for time-and-materials engagements is recognized as the effort is incurred.
For sales that include multiple deliverables, the Company allocates revenue based on the relative selling price of the individual components. When more than one element, such as hardware and services, are contained in a single arrangement, the Company allocates revenue between the elements based on each element’s relative selling price, provided that each element meets the criteria for treatment as a separate unit of accounting.
Accounting for Stock-Based Compensation
The Company applies the fair value recognition provisions of stock-based compensation. The Company recognizes the fair value of the awards on a straight-line basis over its vesting periods. The Company estimates the grant date fair value of stock options using the Black-Scholes option valuation model. The Black-Scholes option-pricing model used to determine the fair value of stock options requires various subjective assumptions, including expected volatility, expected term and the risk-free interest rates. The stock price volatility assumption is estimated using the Company’s historical stock price volatility. For options granted beginning 2016, the Company used historical exercise patterns to estimate the expected life. Prior to 2016, the Company used the simplified method as permitted by the guidance on stock-based compensation to estimate the expected life since the Company had no sufficient history of weighted average period from the date of grant to exercise, cancellation, or expiration.
The risk free interest rate is based on the implied yield currently available on United States. Treasury securities with an equivalent remaining term.
The Company recognizes stock-based compensation expense only for the portion of stock options that are expected to vest, based on the Company’s estimated forfeiture rate.
For all restricted stock unit, or RSU, grants other than RSU grants with a market condition, the fair value of the RSU grant is based on the market price of the Company’s common stock on the date of grant. For performance-based RSU grants, the Company evaluates the probability of achieving the milestones for each of the outstanding performance-based RSU grants at each reporting period and updates the related stock-based compensation expense. The fair value of market-based RSUs is determined using the Monte Carlo simulation method which takes into account multiple input variables that determine the probability of satisfying the market conditions stipulated in the award. This method requires the input of assumptions, including the expected volatility of the Company’s common stock, and a risk-free interest rate, similar to assumptions used in determining the fair value of the stock option grants discussed above. The grant date fair value of RSUs, less estimated forfeitures, is recorded based upon the vesting method over the service period.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets, including those related to tax loss carryforwards and credits, and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce deferred tax assets when management cannot conclude that it is more-likely-than-not that the net deferred tax asset will be recovered. The valuation allowance is determined by assessing both positive and negative evidence to determine whether it is more-likely-than-not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis.
The Company recognizes uncertain tax positions when it meets a more-likely-than-not threshold. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
Business Combinations
The Company accounts for business combinations using the purchase method of accounting. The Company determines the recognition of intangible assets based on the following criteria: (i) the intangible asset arises from contractual or other rights; or (ii) the intangible is separable or divisible from the acquired entity and capable of being sold, transferred, licensed, returned or exchanged. In accordance with the guidance provided under business combinations, the Company allocates the purchase price of business combinations to the tangible assets, liabilities and intangible assets acquired, including in-process research and development, or IPR&D, based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The Company’s valuation assumption of acquired assets and assumed liabilities requires significant estimates, especially with respect to intangible assets. The Company estimates the fair value based upon assumptions the Company believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
56
Goodwill and indefinite-lived intangible assets
Goodwill is measured as the excess of the cost of an acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets and liabilities assumed. The Company evaluates goodwill for impairment at its single reporting unit level at least on an annual basis in the fourth quarter of the calendar year or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow. The Company performs a qualitative assessment to determine if any events have occurred or circumstances exist that would indicate that it is more-likely-than-not that a goodwill impairment exists. If any indicators exist based on the qualitative analysis that it is more-likely-than-not that a goodwill impairment exists, the quantitative test is required. Otherwise, no further testing is required.
IPR&D acquired in an asset acquisition is capitalized only if it has an alternative future use. IPR&D recorded as an asset acquired through business combinations is not amortized but instead is tested annually for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired. The Company initially assesses qualitative factors to determine whether it is more likely than not that the fair value of IPR&D is less than its carrying amount, and if so, the Company conducts a quantitative impairment test. The quantitative impairment test consists of a comparison of the fair value of IPR&D to its carrying amount. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to the difference. When an IPR&D project is complete, the related intangible asset becomes subject to amortization and impairment analysis as a long-lived asset.
Long-lived assets
The Company reviews long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets (or asset group) may not be fully recoverable. Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets may not be recoverable, the Company estimates the future cash flows expected to be generated by the assets (or asset group) from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the grouping of long-lived assets and forecasts of future operating results that are used in the discounted cash flow method of valuation.
Inventories
Inventories consist of work-in-process and finished goods. Inventories not related to an acquisition are stated at the lower of cost (determined using the first-in, first-out method), or market value (estimated net realizable value). Inventories from acquisitions are stated at fair value at the date of acquisition. The Company writes down excess and obsolete inventory based on its age and forecasted demand, generally over a 12 month period, which includes estimates taking into consideration the Company’s outlook on uncertain events such as market and economic conditions, technology changes, new product introductions and changes in strategic direction. Actual demand may differ from forecasted demand and such differences may have a material effect on recorded inventory values. Inventory write-downs are not reversed until the related inventories have been sold or scrapped.
Inventories acquired through business combinations are recorded at their acquisition date fair value, which is the estimated selling price less the costs of disposal and a normal profit allowance.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of estimated useful lives or unexpired lease term. Additions and improvements that increase the value or extend the life of an asset are capitalized. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Ordinary repairs and maintenance costs are expensed as incurred.
|
Estimated
Useful Lives
|
|
Software, design tools, computer and other equipment
|
|
1 to 5 years
|
|
Test equipment and mask costs
|
|
1 to 5 years
|
|
Furniture and office equipment
|
|
1 to 5 years
|
|
The Company capitalizes the cost of fabrication masks that are reasonably expected to be used during production manufacturing. Such amounts are included within property and equipment and are depreciated over a period of 12 to 24 months and recorded as a component of cost of revenue. If the Company does not reasonably expect to use the fabrication mask during production manufacturing, the related mask costs are expensed to research and development in the period in which the costs are incurred.
57
The Company l
eases certain design tools under financing arrangements which are included in property and equipment.
The Company also capitalizes acquired internally used software in property and equipment. Subsequent additions, modifications or upgrades to internally us
ed software are capitalized to the extent it provides additional usage or functionality.
Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value. The first two levels of inputs are considered observable and the last unobservable. A description of the three levels of inputs is as follows:
|
•
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
•
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity of 90 days or less at the date of purchase to be cash equivalents. Cash equivalents consist of an investment in a money market fund.
Allowance for Doubtful Accounts
The Company reviews its allowance for doubtful accounts by assessing individual accounts receivable over a specific age and amount. The Company’s allowance for doubtful accounts were not significant as of December 31, 2016 and 2015.
Concentration of Risk
The Company’s products are currently manufactured, assembled and tested by third-party contractors in Asia. There are no long-term agreements with any of these contractors. A significant disruption in the operations of one or more of these contractors would impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable. The Company deposits cash with credit worthy financial institutions. The Company has not experienced any losses on its deposits of cash. Management believes that the financial institutions the Company utilizes are reputable and, accordingly, minimal credit risk exists. The Company’s cash equivalents are invested in a money market fund. The Company follows an established investment policy and set of guidelines to monitor, manage and limit the Company’s exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits the Company’s exposure to any one issuer, as well as the maximum exposure to various asset classes.
A majority of the Company’s accounts receivable are derived from customers headquartered in the United States. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company provides an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable.
Summarized below are individual customers whose accounts receivable balances were 10% or higher of the consolidated gross receivable:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Percentage of gross accounts receivable
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
15%
|
|
|
|
16%
|
|
Customer B
|
|
*
|
|
|
|
20%
|
|
Customer C
|
|
|
12%
|
|
|
*
|
|
Customer D
|
|
|
11%
|
|
|
*
|
|
Customer E
|
|
|
11%
|
|
|
*
|
|
*
|
Represents less than 10% of the gross accounts receivable for the respective period end.
|
58
Summarized below are individual OEM customers whose revenue balances were 10% or higher of the consolidated net revenue:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Percentage of revenue by customer
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer B
|
|
|
12.0%
|
|
|
|
12.5%
|
|
|
|
16.6%
|
|
Customer F
|
|
|
13.1%
|
|
|
|
18.4%
|
|
|
|
15.4%
|
|
Customer G
|
|
*
|
|
|
|
12.0%
|
|
|
|
12.4%
|
|
*
|
Represents less than 10% of the net revenue for the respective year ended
|
Deferred revenue
The Company records deferred revenue for customer billings and advance payments received from customers before the performance obligations have been completed and/or services have been performed for products and/or service related agreements. The Company records deferred revenue, net of deferred costs on shipments to sell-through distributors.
Warranty Accrual
The Company’s products are generally subject to a one-year warranty period though certain products carry a warranty for up to three years. The Company records a liability for product warranty obligations in the period the related revenue is recorded based on historical warranty experience.
Research and Development
Research and development costs are expensed as incurred and primarily include personnel costs, prototype expenses, which include the cost of fabrication mask costs not reasonably expected to be used in production manufacturing, and allocated facilities costs as well as depreciation of equipment used in research and development.
Deferred Research and Development Cost
Occasionally, the Company receives funding from third party companies for certain collaboration research and development. The Company records the funding received as deferred research and development costs within accrued expense and other liabilities. The liability for deferred research and development cost will be reduced over time to offset the research and development expenses incurred by the Company related to such funding.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses were $2.8 million, $2.5 million and $1.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Operating Leases
The Company recognizes rent expense on a straight-line basis over the term of the lease. The difference between rent expense and rent paid is recorded as deferred rent in accrued expenses and other current and non-current liabilities on the consolidated balance sheets.
Other Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity other than transactions with stockholders. The Company’s accumulated other comprehensive loss consists of foreign currency translation adjustments.
Foreign Currency Remeasurement
Certain of the Company’s foreign subsidiaries utilize a functional currency other than United States dollars. Assets and liabilities of these subsidiaries are translated to United States dollars at exchange rates in effect at the balance sheet date, and income and expenses are translated at average exchange rates during the period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in currencies other than the functional currency are included in
other, net in the consolidated statements of operations were not material for the years ended December 31, 2016, 2015 and 2014.
59
Recently Adopted Accounting Standards
In January 2017, the
FASB issued an update to the guidance on business combinations to clarify the definition of a business. This new guidance
provides a more robust framework to use in determining when a set of assets and activities is a business.
This new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard should be applied prospectively on or after the effective date. Early adoption of this new standard is allowed for transactions for which the acquisition date occurs before the issuance date or effective
date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company early adopted this new guidance effective on its December 31, 2016 financial reporting. The adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements and related disclosures.
In September 2015, the FASB issued an update to the business combinations standards simplifying the accounting for measurement period adjustments.
The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The update is effective for interim and annual periods beginning after December 15, 2015. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued.
The Company adopted this new guidance effective during its fourth quarter ended December 31, 2016. See Note 2 of Notes to Consolidated Financial Statements for discussion of measurement period adjustments relating to the QLogic acquisition.
In April 2015, the FASB issued an update simplifying the presentation of debt issuance cost. This new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new standard is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued.
The Company adopted this guidance during fiscal 2016 and has presented debt issuance costs as a direct deduction from the related debt liability.
Recently Issued Accounting Standards Not Yet Effective
In January 2017, the FASB issued an update to the guidance to simplify the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The update is effective for goodwill impairment test in fiscal years beginning after December 15, 2019, though early adoption is permitted. The Company is currently assessing the impact of this new guidance.
In November 2016,
the FASB
issued an update to the guidance on statement of cash flows - restricted cash presentation. This new guidance which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. Upon adoption, the Company will present its statement of cash flows in accordance with this updated guidance.
In October 2016,
the FASB,
issued an
update to guidance on income taxes. This new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. The Company is currently evaluating the adoption date and the impact, if any, adoption will have on its financial position and results of operations.
60
In August 2016, the FASB, issued a new guidance on cash flow classification of certain cash receipts and cash payments. Thi
s new guidance will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The eight specific cash flow issues include: (i) debt prepayment or debt extinguishment costs, (ii) settleme
nt of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effecting interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proc
eeds from settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separatel
y identifiable cash flows and application of the predominance principle. This new guidance is effective for fiscal years beginning after December 15, 2017 including interim periods during the annual period and require adoption on a retrospective basis unle
ss it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. Early adoption is permitted.
The Company will present its statement of cash flows in accordance with this guidanc
e subsequent to adoption.
In June 2016 the FASB issued an updated guidance on measurement of credit losses on financial instruments. This updated guidance introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts.
This updated guidance also expands the disclosure requirements to enable users of financial
statements to understand the entity’s assumptions, models and methods for estimating expected credit
losses. This new guidance is effective for fiscal years beginning after December 15, 2020 including interim periods during the annual period. Early adoption is permitted for fiscal years beginning after December 15, 2015 including interim periods during the annual period. The Company is currently evaluating the impact of this updated guidance on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued an update to the guidance on stock-based compensation. Under the new guidance, all excess tax benefits and tax deficiencies will be recognized in the income statement as they occur. This will replace the current guidance, which requires tax benefits that exceed compensation cost (windfalls) to be recognized in equity. It will also eliminate the need to maintain a “windfall pool,” and will remove the requirement to delay recognizing a windfall until it reduces current taxes payable.
The new guidance will also change the cash flow presentation of excess tax benefits, classifying them as operating inflows, consistent with other cash flows related to income taxes. Today, windfalls are classified as financing activities. Also, most companies with stock-based compensation will show additional dilutive effects in earnings per share, or EPS, calculations. This is because there will no longer be excess tax benefits recognized in additional paid in capital. Today those excess tax benefits are included in assumed proceeds from applying the treasury stock method when computing diluted EPS. Under the amended guidance, companies will be able to make an accounting policy election to either (1) continue to estimate forfeitures or (2) account for forfeitures as they occur.
This updated guidance is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. Although the Company is currently evaluating the effect of this new guidance, the Company does not expect to have a material impact on its consolidated financial statements and related disclosures upon adoption of this standard.
In February 2016, the FASB issued updated guidance on leases which requires a lessee to
recognize the assets and lease liabilities on the balance sheet for certain leases classified as operating leases under previous GAAP. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. This updated guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. Although the Company is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures, the Company expects that most of its operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In January 2016, the FASB issued
an updated guidance on
Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in
this updated guidance, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Further, it requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). It also eliminates the requirement for entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this updated guidance are effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. The adoption of this updated guidance is not expected to have a material effect on the Company’s consolidated financial statements and related disclosures.
In July 2015, the FASB issued guidance to simplify the measurement of inventory. The updated standard more closely aligns the measurement of inventory with that of International Financial Reporting Standards and amends the measurement standard from lower of cost or market to lower of cost or net realizable value. The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods during the annual period and requires a prospective approach to adoption. Early adoption is permitted.
The Company does not expect that this guidance will have a material impact on its consolidated financial statements.
61
In May 2014,
the FASB
issued a new guidance on the recognition of revenue from contrac
ts with customers, which includes a single set of rules and criteria for revenue recognition to be used across all industries.
Under the new revenue guidance, revenue will be recognized when an entity satisfies a performance obligation by transferring cont
rol of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service. The amended guidance also requires additional quantitative and qualitative disclosures. In 201
6, the FASB issued several amendments to the standard, these amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue
standard. These amendments have the same effective date as the new revenue standard.
This new guidance, as amended is effective for annual reporting periods beginning after December 15, 2017, including interim periods during the annual period. Early adopt
ion is allowed for annual reporting periods beginning after December 15, 2016. This new guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company
intends to adopt this standard using the modified retrospective method and is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements. Based on a preliminary assessment, the Company does not expect the adop
tion of this new guidance to have a material impact on the Company’s consolidated financial statements. As the Company continues its assessment of the impact of the new guidance on its various arrangements with customers, it may identify additional areas o
f impact as well as revise the results of the preliminary assessment.
2. Business Combinations
QLogic Corporation
On August 16, 2016, pursuant to the terms of an Agreement and Plan of Merger dated June 15, 2016, by and among the Company, Quasar Acquisition Corp. (a wholly owned subsidiary of the Company) and QLogic (the “QLogic merger agreement”), the Company acquired all outstanding shares of common stock of QLogic (the “QLogic shares”) pursuant to an exchange offer for $11.00 per share in cash and 0.098 of a share of the Company’s common stock for each share of QLogic stock (“Transaction Consideration”) followed by a merger. The acquisition was funded with a combination of cash and proceeds from debt financing. See Note 11 of Notes to Consolidated Financial Statements for discussion of the debt financing.
The f
ollowing table summarizes the total acquisition consideration (in thousands, except shares and per share data):
Cash consideration to QLogic common stockholders
|
$
|
936,961
|
|
Common stock (8,364,018 shares of the Company's common stock at $51.55 per share)
|
|
431,165
|
|
Cash consideration for vested "in the money" stock options and fractional shares
|
|
1,934
|
|
Fair value of replacement equity awards attributable to pre-acquisition service
|
|
9,433
|
|
Total acquisition consideration
|
$
|
1,379,493
|
|
Pursuant to the QLogic merger agreement, the Company assumed the unvested equity awards originally granted by QLogic and converted them into the Company’s equivalent awards. The portion of the fair value of partially vested awards associated with prior service of QLogic employees represented a component of the total consideration, as presented above. The Company also made cash payments for vested and in the money stock options and for the fractional shares that resulted from conversion as specified in the QLogic merger agreement.
The Company allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair value of the acquired tangible and identifiable intangible assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3
fair value hierarchy measurements and disclosures.
The purchase price allocation presented below is preliminary, primarily with respect to tax contingency matters. The Company continues to reevaluate the items with any adjustments to its preliminary estimates being recognized as goodwill provided that it is within the measurement period (which will not exceed 12 months from the acquisition date). As additional information becomes available, the Company may further revise its preliminary purchase price allocation during the remainder of the measurement period. Any such revisions or changes to the preliminary purchase price allocation may be material.
62
The Company recorded QLogic’s tangible and intangible assets and liabilities based on their estimated fair values as of the acquisition date and allocated the remaining acquisition consideration
to goodwill. The allocation is as follows:
|
Amounts
Previously
Recognized as of
Acquisition Date
(Provisional)
(1)
|
|
|
Measurement
Period
Adjustments
|
|
|
Amounts
Recognized as of
Acquisition Date
(Provisional as
Adjusted)
|
|
|
(amounts in thousands)
|
|
Cash and cash equivalents
|
$
|
365,065
|
|
|
$
|
-
|
|
|
$
|
365,065
|
|
Marketable securities
|
|
375
|
|
|
|
|
|
|
|
375
|
|
Accounts receivable
|
|
65,576
|
|
|
|
|
|
|
|
65,576
|
|
Inventories
|
|
62,500
|
|
|
|
800
|
|
(2)
|
|
63,300
|
|
Prepaid expense and other current assets
|
|
8,274
|
|
|
|
|
|
|
|
8,274
|
|
Property and equipment
|
|
87,314
|
|
|
|
(5,424
|
)
|
(3)
|
|
81,890
|
|
Intangible assets
|
|
716,700
|
|
|
|
5,000
|
|
(4)
|
|
721,700
|
|
Other assets
|
|
1,559
|
|
|
|
|
|
|
|
1,559
|
|
Goodwill
|
|
247,543
|
|
|
|
(77,954
|
)
|
|
|
169,589
|
|
Accounts payable
|
|
(41,776
|
)
|
|
|
|
|
|
|
(41,776
|
)
|
Accrued expense and other current liabilities
|
|
(21,288
|
)
|
|
|
(596
|
)
|
(5)
|
|
(21,884
|
)
|
Deferred revenue
|
|
(603
|
)
|
|
|
|
|
|
|
(603
|
)
|
Deferred tax liability
|
|
(95,766
|
)
|
|
|
78,529
|
|
(5)
|
|
(17,237
|
)
|
Other non-current liabilities
|
|
(15,980
|
)
|
|
|
(355
|
)
|
(5)
|
|
(16,335
|
)
|
Total acquisition consideration
|
$
|
1,379,493
|
|
|
$
|
-
|
|
|
$
|
1,379,493
|
|
(1)
|
As reported in the Company’s September 30, 2016 Quarterly Report on Form 10-Q.
|
(2)
|
The Company obtained new information regarding the valuation of inventories as of the acquisition date which led to an increase in fair value of inventories, and a corresponding decrease in goodwill.
|
(3)
|
The Company obtained new information regarding the valuation of property and equipment as of the acquisition date which led to a net decrease in the fair value of property and equipment, and a corresponding increase in goodwill. This measurement adjustment was mainly related to the acquired real property which was classified as held for sale asset as of September 30, 2016.
|
(4)
|
The Company obtained new information regarding the valuation of intangible assets as of the acquisition date which led to a net increase in the fair value of intangible assets, and a corresponding decrease in goodwill.
|
(5)
|
The changes to the deferred tax liability, accrued expenses and other current and non-current liabilities pertains to tax related purchase price allocation adjustments. The Company obtained additional information related to its deferred income taxes which led to a decrease in the net deferred tax liability, and a corresponding decrease in goodwill. See detailed discussion below.
|
The Company does not believe that the measurement period adjustments to inventory, property and equipment, intangibles accrued expense and other current and non-current liabilities had a material impact on its consolidated statement of operations, balance sheet or cash flow previously reported on Form 10-Q as of and for the quarter ended September 30, 2016.
During the third quarter of 2016 upon closing of the acquisition, the Company recorded a partial release of its net deferred tax assets valuation allowance primarily due to a net deferred tax liability recorded for purchased intangibles and recognized a $82.9 million
tax benefit in the third quarter of 2016. During the fourth quarter of 2016, the Company was able to assess and measure an additional deferred tax asset that existed as of the acquisition date of QLogic. Due to the identification of this additional deferred tax asset, the Company made adjustments during the fourth quarter of 2016 to certain tax balances including the reversal of the partial release of the valuation allowance recorded in the third quarter, resulting in an adjustment to goodwill of $78.5 million.
The valuation of identifiable intangible assets and their estimated useful lives are as follows:
|
Preliminary
Estimated Asset
Fair Value
|
|
|
Weighted
Average
Useful Life
(Years)
|
|
|
(in thousands, except for useful life)
|
|
Existing and core technology
|
$
|
578,400
|
|
|
|
6
|
|
In process research and development ("IPR&D")
|
|
78,900
|
|
|
n/a
|
|
Customer relationships
|
|
51,100
|
|
|
|
10
|
|
Tradename and trademark
|
|
13,300
|
|
|
|
5
|
|
|
$
|
721,700
|
|
|
|
|
|
63
The IPR&D consists of two
projects relating to the development of process technologies to manufacture next generation Fibre Channel and Ethernet products. The projects are estimated to be completed in fiscal years 2017 and 2019 for the related Ethernet and Fibre Channel products,
respectively. The estimated remaining cost to complete the IPR&D projects were $112.2 million as of the acquisition date. The fair value of existing and core technology and IPR&D was determined by performing a discounted cash flow analysis using the multi
period excess earnings approach. This method includes discounting the projected cash flows associated with each technology over its expected life. Projected cash flows attributable to the existing and core technology and IPR&D were discounted to their pres
ent value at a rate commensurate with the perceived risk. The
IPR&D will be accounted for as an indefinite-lived intangible asset until the underlying projects are completed or abandoned. The IPR&D will not be amortized until the completion of the related
products which is determined by when the underlying projects reached technological feasibility. Upon completion, the IPR&D will be amortized over its estimated useful life; useful lives for IPR&D are expected to range between 5 to 6 years.
The valuation of customer relationships was based on the distributor method, taking into account the profit margin a market participant distributor would obtain in selling QLogic products. The useful lives of customer relationships are estimated based upon customer turnover data and management estimates. Other identifiable intangible assets consisted of tradename and trademark, valued using a relief from royalty method. The useful lives of tradename and trademark are expected to correlate to the life of the technology or customer relationships.
The assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:
|
•
|
Historical performance including sales and profitability.
|
|
•
|
Business prospects and industry expectations
|
|
•
|
Estimated economic life of asset
|
|
•
|
Development of new technologies
|
|
•
|
Acquisition of new customers and attrition of existing customers
|
|
•
|
Obsolescence of technology over time
|
Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. Goodwill recorded in the QLogic acquisition is not expected to be deductible for tax purposes. The factors that contributed to the recognized goodwill with the acquisition of QLogic include the Company’s
belief that the acquisition will create a more diverse semiconductor company with expansive offerings which will enable the Company to expand its product offerings and expected synergies from the combined operations of the Company and QLogic.
T
he Company incurred $16.6 million in acquisition related costs which were recorded in selling, general and administrative expense in the consolidated statements of operations in the year ended December 31, 2016.
Unaudited Supplemental Pro Forma Information
The unaudited supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial operations or results of operations that would have been realized if the acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions the Company believe are reasonable under the circumstances.
The following unaudited supplemental pro forma financial information summarizes the results of operations for the periods presented, as if the acquisition was completed on January 1, 2015. The unaudited supplemental pro forma information reports actual operating results, adjusted to include the pro forma effect of certain fair value adjustments for acquired items, such as the amortization of identifiable intangible assets, depreciation of property and equipment and inventories.
It also includes pro forma adjustments for stock-based compensation expense related to replacement equity awards, interest expense on debt and the related tax effects of the acquisition. In accordance with the pro forma acquisition date, the Company recorded in the year ended December 31, 2015 supplemental pro forma financial information the cost of goods sold of $23.3 million from the fair value mark-up in acquired inventory and $40.9 million for the acquisition-related transaction costs incurred by the Company and QLogic. The corresponding adjustments to the supplemental pro forma financial information in the year ended December 31, 2016 were made for the aforementioned pro forma adjustments.
64
QLogic constituted approximately 26% of the consolidated net revenue for the year ended De
cember 31, 2016. Post-acquisition income (loss) on a standalone basis is impracticable to determine as, on the acquisition date, the Company implemented a plan developed prior to the completion of the acquisition and began to immediately integrate QLogic i
nto the Company’s existing operations, engineering groups, sales distribution networks and management structure.
The supplemental pro forma financial information for the periods presented is as follows:
|
Year Ended December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands, except per share data)
|
|
Pro forma net revenue
|
$
|
881,498
|
|
|
|
885,276
|
|
Pro forma net loss
|
|
(131,849
|
)
|
|
|
(167,626
|
)
|
|
|
|
|
|
|
|
|
Pro forma net loss per share, basic
|
$
|
(1.99
|
)
|
|
$
|
(2.62
|
)
|
Pro forma net loss per share, diluted
|
|
(1.99
|
)
|
|
|
(2.62
|
)
|
Xpliant, Inc.
Pursuant to the Agreement and Plan of Merger and Reorganization (the “Xpliant merger agreement”) between the Company and Xpliant, Inc., a final closing occurred on April 29, 2015 as discussed in detail below. Between May 2012 and March 2015, the Company entered into several note purchase agreements and promissory notes with Xpliant to provide cash advances. Xpliant was a Delaware incorporated and privately held company, engaged in the design and development of next generation software defined network switch chips. Prior to the closing of the merger pursuant to the Xpliant merger agreement, the Company concluded that Xpliant was a VIE as the Company was Xpliant’s primary beneficiary due to the Company’s involvement with Xpliant and the Company’s purchase option to acquire Xpliant. As such, the Company has included the accounts of Xpliant in the consolidated financial statements.
The Company had made total cash advances of $85.8 million, consisting of $10.0 million under nine convertible notes which, as amended, matured on August 31, 2014 and $75.8 million under several promissory notes which matured between April 2015 and March 2016. All promissory notes were cancelled as of July 31, 2015.
The convertible notes and promissory notes bore an annual interest rate of 6%.
In addition to the funding received by Xpliant from the Company, between May 2012 and January 2014, certain third party investors (“non-controlling interest”) made cash advances of $13.0 million under several convertible notes which, as amended, matured on August 31, 2014 and $2.9 million under a convertible security. All of the convertible notes bore interest at a rate of 6%, payable at maturity. Two of the convertible notes held by a third party investor with a principal amount of $1.0 million matured and were paid by Xpliant in December 2013. Pursuant to the convertible notes, in the event Xpliant closed a corporate transaction, as defined in the convertible notes, the holders of the convertible notes were entitled to receive two times the outstanding principal plus any unpaid accrued interest. The convertible security had the same features as the convertible notes, with the exception of the requirement for repayment, interest and maturity. For accounting purposes, the Company determined that the convertible security had derivative features and determined that the fair value of the derivative features of the convertible security at the issuance date was approximately the same as the principal amount. All of the convertible notes and the derivative feature of convertible security were classified as Level 3 liability and were all remeasured and presented at fair value in the consolidated financial statements at each reporting period. Pursuant to the option to acquire Xpliant, in June 2014, the Company provided notice to Xpliant of its decision to exercise the purchase option. Therefore, the convertible notes and derivative features of convertible security were valued to two times its principal amount at its maturity date. As such, the Company recorded the change in estimated fair value of notes payable and other of $14.9 million in the consolidated statement of operations in 2014. Pursuant to the Xpliant merger agreement between the Company and Xpliant as discussed in detail below, in October 2014, a portion of the cash advances made by the Company to Xpliant were used to settle all outstanding convertible notes, related accrued interest and convertible security held by non-controlling interest.
Pursuant to the Xpliant merger agreement and in connection with the transaction contemplated by the Xpliant merger agreement, in October 2014, a portion of the cash advances made by the Company to Xpliant were used to settle all outstanding convertible notes, related accrued interest and the convertible security held by non-controlling interest of $30.8 million.
On July 30, 2014, the Company entered into the Xpliant merger agreement, which was amended on October 8, 2014 and March 31, 2015 with Xpliant. Under the terms of the Xpliant merger agreement, as amended, the Company paid approximately $3.6 million in total cash consideration in exchange for all outstanding securities held by Xpliant’s stockholders. Pursuant to the Xpliant merger agreement, as amended, a first closing occurred on March 31, 2015 and the Company paid $2.5 million to Xpliant’s stockholders with respect to approximately 70% of the Xpliant stock outstanding and a second and final closing occurred on April 29, 2015 and the Company paid $1.1 million to Xpliant’s stockholders with respect to the then remaining approximately 30% of the Xpliant stock outstanding. Based on the substance of the transaction, the Company recorded the payments of cash consideration to Xpliant stockholders as a decrease to the Company’s additional paid-in capital within stockholders’ equity.
65
Prior to the closing of the merger pursuant to the Xpliant merger agreement and the settlement of the outstanding convertible notes and convertible security to non-controlling interest, the net loss o
f Xpliant was allocated to the Company and to the non-controlling interest based on the outstanding cash advances provided to Xpliant at each reporting period.
3. Net Loss Per Common Share
Basic net income (loss) per share is computed using the weighted-average common shares outstanding. Diluted net income per share is computed using the weighted-average common shares outstanding and any dilutive potential common shares. Diluted net loss per common share is computed using the weighted-average common shares outstanding and excludes all dilutive potential common shares when the Company is in a net loss position their inclusion would be anti-dilutive. The Company’s dilutive securities primarily include stock options and restricted stock units.
The following outstanding options and restricted stock units were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect:
|
Year Ended December 31,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
(in thousands)
|
|
Options to purchase common stock
|
|
1,194
|
|
|
|
2,028
|
|
|
|
2,626
|
|
Restricted stock units
|
|
4,119
|
|
|
|
2,194
|
|
|
|
2,465
|
|
4. Fair Value Measurements
At December 31, 2016 and 2015, the Company’s cash equivalents comprised of an investment in a money market fund. In accordance with the guidance for fair value measurements and disclosures, the Company determined the fair value hierarchy of its money market fund as Level 1, which approximated $61.4 million and $102.2 million as of December 31, 2016 and 2015, respectively. The carrying amount of the Company’s accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair value due to their short term maturities.
There are no other financial assets and liabilities, except those disclosed in Notes 2, 7, 11 and 13 of Notes to Consolidated Financial Statements that require Level 2 or Level 3 fair value hierarchy measurements and disclosures.
5. Balance Sheet Components
Inventories
|
As of December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands)
|
|
Work-in-process
|
$
|
61,363
|
|
|
$
|
33,701
|
|
Finished goods
|
|
58,329
|
|
|
|
13,308
|
|
|
$
|
119,692
|
|
|
$
|
47,009
|
|
Property and equipment, net
|
As of December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands)
|
|
Test equipment and mask costs
|
$
|
138,633
|
|
|
$
|
71,021
|
|
Software, design tools, computer and other equipment
|
|
87,648
|
|
|
|
62,331
|
|
Furniture, office equipment and leasehold improvements
|
|
12,927
|
|
|
|
5,755
|
|
Construction in progress
|
|
4,767
|
|
|
|
-
|
|
|
|
243,975
|
|
|
|
139,107
|
|
Less: accumulated depreciation and amortization
|
|
(93,113
|
)
|
|
|
(74,430
|
)
|
|
$
|
150,862
|
|
|
$
|
64,677
|
|
Depreciation and amortization expense was $46.7 million, $32.9 million and $19.5 million for years ended December 31, 2016, 2015 and 2014, respectively. Certain fully depreciated property and equipment have been eliminated from both the gross and accumulated amount as they were disposed of as the Company no longer utilized them.
66
The C
ompany leases certain design tools under financing arrangements which are included in property and equipment, which total cost, net of accumulated amortization amounted to $46.3 million and $25.3 million at December 31, 2016 and 2015, respectively. Amortiz
ation expense related to assets recorded under capital lease and certain financing arrangements was $16.8 million, $14.7 million and $9.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Sale of held for sale assets
In September 2016, the Company began to actively market the real property located in Aliso Viejo, California that was acquired in the QLogic acquisition. The Company classified this real property as held for sale assets on its consolidated balance sheet as of September 30, 2016. On December 16, 2016, the Company completed the sale of this real property for a total net cash consideration of $32.4 million. Concurrently, the Company leased back the property on a month-to-month basis until the expected occupancy of the new leased property located in Irvine, California. See related discussions on the new lease agreement for the Irvine, California property in Note 13 of Notes to Consolidated Financial Statements. The first six months of the leaseback were rent free; thereafter, the rents will be lower than the market rates. For accounting purposes, these rents were deemed to have been netted against the sale proceeds and represent a prepaid rent. Accordingly, the Company recorded $1.8 million representing the off-market rental rate adjustment as prepaid rent on the consolidated balance sheets and such amount will be recognized as rent expense over the expected lease-back term. The Company adjusted fair value of the acquired property and equipment disclosed in the purchase price allocation in Note 2 of Notes to Financial Statements based upon the business combination guidance on measurement period and accordingly did not recognize a gain or loss upon the sale of the real property.
Other Asset Acquisition
In November 2016, the Company entered into an asset purchase agreement with a third party company. Pursuant to the asset purchase agreement, the Company acquired property and equipment of $9.2 million and IPR&D of $2.0 million. The IPR&D was recorded at its relative fair using the multi-period excess earnings valuation approach and was written off immediately as the asset had no alternative future use.
Accrued expenses and other current liabilities
|
As of December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands)
|
|
Accrued compensation and related benefits
|
$
|
18,197
|
|
|
$
|
4,485
|
|
Deferred research and development costs
|
|
25,370
|
|
|
|
-
|
|
Income tax payable
|
|
4,098
|
|
|
|
541
|
|
Restructuring related payables (Note 7)
|
|
3,653
|
|
|
|
-
|
|
Professional fees
|
|
2,233
|
|
|
|
1,018
|
|
Accrued rebates
|
|
3,228
|
|
|
|
-
|
|
Manufacturing rights payable (Note 13)
|
|
2,500
|
|
|
|
1,875
|
|
Accrued interest
|
|
1,427
|
|
|
|
-
|
|
Other
|
|
4,261
|
|
|
|
1,524
|
|
|
$
|
64,967
|
|
|
$
|
9,443
|
|
Accrued Rebates
In 2016, the Company started its rebate programs with certain customers. In addition, the Company assumed and continued the existing QLogic rebate programs following the closing of the QLogic acquisition. The Company assumed
an outstanding rebate accrual of $2.1 million from the acquisition of QLogic. For the year ended December 31, 2016, the Company recorded estimated rebates amounting to $2.9 million and made rebate settlements of $1.8 million. As of December 31, 2016, total accrued rebates included within accrued expenses and other current liabilities was $3.2 million.
67
Warranty Accrual
The following table presents a rollforward of the warranty liability, which is included within accrued expenses and other current liabilities:
|
Year Ended December 31,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
(in thousands)
|
|
Beginning balance
|
$
|
336
|
|
|
$
|
227
|
|
|
$
|
167
|
|
Assumed warranty liability from the acquisition of QLogic
|
|
753
|
|
|
|
-
|
|
|
|
-
|
|
Accruals and adjustments
|
|
534
|
|
|
|
459
|
|
|
|
679
|
|
Settlements
|
|
(702
|
)
|
|
|
(350
|
)
|
|
|
(619
|
)
|
Ending balance
|
$
|
921
|
|
|
$
|
336
|
|
|
$
|
227
|
|
Deferred revenue
|
As of December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands)
|
|
Services/support and maintenance
|
$
|
7,773
|
|
|
$
|
5,531
|
|
Software license/subscription
|
|
625
|
|
|
|
785
|
|
Distributor deferred margin
|
|
14
|
|
|
|
-
|
|
|
$
|
8,412
|
|
|
$
|
6,316
|
|
Other non-current liabilities
|
As of December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands)
|
|
Income tax payable (Note 9)
|
$
|
12,071
|
|
|
$
|
915
|
|
Accrued rent
|
|
2,163
|
|
|
|
1,493
|
|
Customer deposits
|
|
1,103
|
|
|
|
109
|
|
Restructuring related payables (Note 7)
|
|
663
|
|
|
|
-
|
|
Other
|
|
2,386
|
|
|
|
445
|
|
|
$
|
18,386
|
|
|
$
|
2,962
|
|
6. Goodwill and Intangible Assets, Net
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The carrying value of goodwill as of December 31, 2016 and 2015 was $241.1 million and $71.5 million, respectively. The change in the carrying value of goodwill from December 31, 2015 to December 31, 2016 was due to the goodwill additions from the acquisition of QLogic. See Note 2 of Notes to Consolidated Financial Statements for discussions related to the acquisition of QLogic.
The Company reviews goodwill for impairment annually at the beginning of its fourth calendar quarter or whenever events or changes in circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. The Company manages and operates as one reporting unit. The Company performed a qualitative assessment of the goodwill at the Company level as a whole and concluded that it was more-likely-than-not that goodwill is not impaired as of December 31, 2016 and 2015. In assessing the qualitative factors, the Company considered among others these key factors: (i) changes in the industry and competitive environment; (ii) market capitalization; (iii) stock price; and (iv) overall financial performance.
68
Intangible assets, net
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Weighted
average
remaining
amortization
period (years)
|
|
|
|
(in thousands)
|
|
|
|
|
|
Existing and core technology - product
|
|
$
|
620,110
|
|
|
$
|
(78,017
|
)
|
|
$
|
542,093
|
|
|
|
5.63
|
|
Technology licenses
|
|
|
130,676
|
|
|
|
(48,225
|
)
|
|
|
82,451
|
|
|
|
4.68
|
|
Customer contracts and relationships
|
|
|
53,315
|
|
|
|
(4,161
|
)
|
|
|
49,154
|
|
|
|
9.62
|
|
Trade name
|
|
|
15,596
|
|
|
|
(3,309
|
)
|
|
|
12,287
|
|
|
|
4.63
|
|
Total amortizable intangible assets
|
|
$
|
819,697
|
|
|
$
|
(133,712
|
)
|
|
$
|
685,985
|
|
|
|
5.18
|
|
IPR&D
|
|
|
78,900
|
|
|
|
-
|
|
|
|
78,900
|
|
|
|
|
|
Total intangible assets
|
|
$
|
898,597
|
|
|
$
|
(133,712
|
)
|
|
$
|
764,885
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Weighted
average
remaining
amortization
period (years)
|
|
|
|
(in thousands)
|
|
|
|
|
|
Existing and core technology - product
|
|
$
|
41,711
|
|
|
$
|
(41,115
|
)
|
|
$
|
596
|
|
|
|
0.99
|
|
Technology licenses
|
|
|
70,521
|
|
|
|
(35,625
|
)
|
|
|
34,896
|
|
|
|
6.10
|
|
Customer contracts and relationships
|
|
|
2,215
|
|
|
|
(2,215
|
)
|
|
|
-
|
|
|
-
|
|
Trade name
|
|
|
2,296
|
|
|
|
(2,296
|
)
|
|
|
-
|
|
|
-
|
|
Total amortizable intangible assets
|
|
$
|
116,743
|
|
|
$
|
(81,251
|
)
|
|
$
|
35,492
|
|
|
|
6.01
|
|
Amortization expense was $52.6 million, $9.6 million and $14.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Certain fully amortized intangible assets have been eliminated from both the gross and accumulated amortization amounts.
The following table presents the estimated future amortization expense of amortizable intangible assets as of December 31, 2016 (in thousands):
2017
|
|
|
|
$
|
125,146
|
|
2018
|
|
|
|
|
123,521
|
|
2019
|
|
|
|
|
121,030
|
|
2020
|
|
|
|
|
116,983
|
|
2021
|
|
|
|
|
109,635
|
|
2022 and thereafter
|
|
|
|
|
89,670
|
|
|
|
|
|
$
|
685,985
|
|
69
7. Restructuring Accrual
In connection with a workforce reduction during the year ended December 31, 2014, the Company incurred and paid $1.4 million severance and other benefits. There was no restructuring activity during the year ended December 31, 2015. The following table summarizes the activity and the outstanding balances of the restructuring liability as of and for the year ended December 31, 2016:
|
|
As of December 31, 2016
|
|
|
|
Severance and
other benefits
|
|
|
Excess Facility
Related Cost
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance at beginning of the year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Assumed restructuring liability from the acquisition of QLogic
|
|
|
-
|
|
|
|
4,215
|
|
|
|
4,215
|
|
Additions
|
|
|
12,018
|
|
|
|
-
|
|
|
|
12,018
|
|
Cash payments
|
|
|
(10,857
|
)
|
|
|
(1,060
|
)
|
|
|
(11,917
|
)
|
Balance at end of the year
|
|
$
|
1,161
|
|
|
$
|
3,155
|
|
|
$
|
4,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of the restructuring related liabilities
|
|
$
|
1,161
|
|
|
$
|
2,492
|
|
|
$
|
3,653
|
|
Long-term portion of restructuring related liabilities
|
|
$
|
-
|
|
|
$
|
663
|
|
|
$
|
663
|
|
Following the acquisition of QLogic, the Company assumed outstanding liabilities from the restructuring initiatives undertaken by QLogic prior to the acquisition. This restructuring initiative was designed to enhance product focus and streamline the business operations. The assumed restructuring liability was related to the excess facility which was calculated based on the discounted future lease payments. This non-recurring fair value measurement was classified as Level 3 fair value hierarchy measurements and disclosures. The outstanding excess facility related restructuring liability is expected to be settled over the term of the related agreement through April 2018.
In addition, the Company recorded employee severance expense of $12.0 million within sales, general and administrative on the consolidated statement of operations for the year ended December 31, 2016 related to actions following the acquisition of QLogic and integration of QLogic with the Company. The amount has been substantially paid as of December 31, 2016 and the remaining unpaid balance is expected to be settled in 2017.
8. Stockholders’ Equity
Common and Preferred Stock
As of December 31, 2016 and 2015, the Company is authorized to issue 200,000,000 shares of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock. The Company is authorized to issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption and liquidation preferences.
2001 Stock Incentive Plan
The Company’s 2001 Stock Incentive Plan (the “2001 Plan”) expired as of December 31, 2011, thus as of December 31, 2016 there were no outstanding shares reserved for issuance. Options granted under the 2001 Plan were either incentive stock options or non-statutory stock options as determined by the Company’s board of directors. Options granted under the 2001 Plan vested at the rate specified by the plan administrator, typically with 1/8th of the shares vesting six months after the date of grant and 1/48th of the shares vesting monthly thereafter over the next three and one half years to four and one half years. The term of option expire ten years from the date of grant.
2007 Equity Incentive Plan
Upon completion of its IPO in May 2007, the Company adopted the 2007 Equity Incentive Plan, the (“2007 Plan”), which initially reserved 5,000,000 shares of the Company’s common stock. The 2007 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, and other forms of equity compensation (collectively, “stock awards”), and performance cash awards, all of which may be granted to employees (including officers), directors, and consultants or affiliates. Awards granted under the 2007 Plan vest at the rate specified by the plan administrator, for stock options, typically with 1/8th of the shares vesting six months after the date of grant and 1/48th of the shares vesting monthly thereafter over the next three and one half years and for restricted stock unit awards typically with quarterly vesting over four years. The term of awards expires seven to ten years from the date of grant. As of December 31, 2016, there were 8,863,022 shares reserved for issuance under the 2007 Plan.
70
2016 Equity Incentive Plan
On June 15, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 EIP”), which initially reserved for issuance 3,600,000 shares of the Company’s common stock.
The 2016 EIP is intended as the successor to and continuation of the Company’s 2007 Plan and following the adoption of the 2016 EIP, no more awards will be granted from the 2007 Plan. The 2016 EIP provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards, which may be granted to employees, directors and consultants. Following the effective date, no additional awards may be granted under the 2007 Plan. All outstanding awards granted un
der the 2007 EIP will remain subject to the terms of such plan, provided however, that the following shares of common stock subject to any outstanding stock award granted under the 2007 Plan (collectively, the “2007 Plan Returning Shares”) will immediately be added to the share reserve as and when such shares become 2007 Plan Returning Shares and become available for issuance pursuant to awards granted under the 2016 EIP:
(i) any shares subject to such stock award that are not issued because such stock award or any portion thereof expires or otherwise terminates without all of the shares covered by such stock award having been issued; (ii) any shares subject to such stock award that are not issued because such stock award or any portion thereof is settled in cash; and (iii) any shares issued pursuant to such stock award that are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition required for the vesting of such shares
.
As of December 31, 2016, there were 3,418,573 shares reserved for issuance under the 2016 EIP.
QLogic 2005 Plan
Following the closing of the acquisition of QLogic, the Company assumed and will continue the
QLogic 2005 Performance Incentive Plan (the “QLogic 2005 Plan”). Following the closing of the acquisition of QLogic, the total shares available for future grant under the QLogic 2005 Plan was 3,612,039 shares of the Company’s common stock.
The QLogic 2005 Plan provides for the issuance of restricted stock unit awards, incentive and non-qualified stock options, and other stock-based incentive awards. Restricted stock unit awards, or RSUs, granted pursuant to the QLogic 2005 Plan to employees subject to a service condition generally vest over four years from the date of grant. Stock options granted pursuant to the QLogic 2005 Plan to employees have ten year terms and generally vest over four years from the date of grant.
Shares issued in respect of any full value award granted under this plan shall be counted against the shares available for future grant as 1.75 shares for every one share issued in connection with such award. Full value award means any award under the QLogic 2005 Plan that is not a stock option grant or a stock appreciation right grant. As of December 31, 2016, there were 1,998,131 shares reserved for issuance under the QLogic 2005 Plan.
Stock Options
Detail related to stock option activity is as follows:
|
|
Number of Options
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
Balance as of December 31, 2013
|
|
|
3,552,216
|
|
|
$
|
17.79
|
|
Options granted
|
|
|
165,000
|
|
|
|
38.78
|
|
Options exercised
|
|
|
(1,082,914
|
)
|
|
|
14.05
|
|
Options cancelled and forfeited
|
|
|
(8,042
|
)
|
|
|
28.46
|
|
Balance as of December 31, 2014
|
|
|
2,626,260
|
|
|
|
20.62
|
|
Options granted
|
|
|
87,178
|
|
|
|
64.70
|
|
Options exercised
|
|
|
(685,439
|
)
|
|
|
14.02
|
|
Options cancelled and forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2015
|
|
|
2,027,999
|
|
|
|
24.75
|
|
Options granted
|
|
|
175,776
|
|
|
|
48.88
|
|
Assumed from the acquisition
|
|
|
1,045
|
|
|
|
34.63
|
|
Options exercised
|
|
|
(1,010,670
|
)
|
|
|
11.31
|
|
Options cancelled and forfeited
|
|
|
(161
|
)
|
|
|
32.40
|
|
Balance as of December 31, 2016
|
|
|
1,193,989
|
|
|
|
39.68
|
|
The aggregate intrinsic value for options exercised during the years ended December 31, 2016, 2015 and 2014, was $41.5 million, $37.4 million and $36.2 million, respectively, representing the difference between the closing price of the Company’s common stock at the date of exercise and the exercise price paid.
71
The following table summarizes information about stock options outstanding as of December 31, 2016:
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
Exercise Prices
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
$8.52 - $33.44
|
|
|
149,523
|
|
|
|
1.31
|
|
|
$
|
25.53
|
|
|
|
149,523
|
|
|
$
|
25.53
|
|
|
|
|
|
$35.73 - $36.54
|
|
|
180,529
|
|
|
|
2.16
|
|
|
|
35.73
|
|
|
|
180,373
|
|
|
|
35.73
|
|
|
|
|
|
$37.22 - $37.55
|
|
|
205,688
|
|
|
|
1.19
|
|
|
|
37.22
|
|
|
|
205,688
|
|
|
|
37.22
|
|
|
|
|
|
$37.63 - $37.63
|
|
|
204,293
|
|
|
|
3.22
|
|
|
|
37.63
|
|
|
|
190,893
|
|
|
|
37.63
|
|
|
|
|
|
$37.83 - $42.01
|
|
|
178,953
|
|
|
|
3.54
|
|
|
|
38.71
|
|
|
|
136,075
|
|
|
|
38.98
|
|
|
|
|
|
$43.62 - $76.38
|
|
|
275,003
|
|
|
|
5.75
|
|
|
|
53.98
|
|
|
|
58,617
|
|
|
|
63.11
|
|
|
|
|
|
$8.52 - $76.38
|
|
|
1,193,989
|
|
|
|
3.10
|
|
|
$
|
39.68
|
|
|
|
921,169
|
|
|
$
|
37.02
|
|
|
$
|
27,368,172
|
|
Exercisable
|
|
|
921,169
|
|
|
|
2.39
|
|
|
$
|
37.02
|
|
|
|
|
|
|
|
|
|
|
$
|
23,593,675
|
|
Vested and expected to vest
|
|
|
1,172,678
|
|
|
|
3.05
|
|
|
$
|
39.50
|
|
|
|
|
|
|
|
|
|
|
$
|
27,101,509
|
|
The aggregate intrinsic value for options outstanding at December 31, 2016, represents the difference between the weighted average exercise price and the closing price of the Company’s common stock at December 31, 2016, as reported on The NASDAQ Global Market, for all in the money options outstanding.
The estimated weighted-average grant date fair value of options granted for years ended December 31, 2016, 2015 and 2014 was $18.65 per share, $23.79 per share, and $14.63 per share, respectively. The fair value of each option grant for the years ended December 31, 2016, 2015 and 2014 were estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions below.
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Risk-free interest rate
|
|
|
1.11%
|
|
|
1.34% to 1.41%
|
|
|
1.26% to 1.47%
|
|
Expected life
|
|
4.96 years
|
|
|
3.77 to 4.58 years
|
|
|
3.77 to 4.53 years
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Volatility
|
|
|
42.51%
|
|
|
40.96% to 43.03%
|
|
|
43.8% to 45.1%
|
|
As of December 31, 2016, there was $3.9 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under the 2007 Plan, the Company’s 2001 Stock Incentive Plan and the QLogic 2005 Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.50 years.
72
Restricted Stock Units
A summary of the activity of RSU for the related periods are presented below:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant Date Fair
Value Per Share
|
|
Balance as of December 31, 2013
|
|
|
1,776,170
|
|
|
$
|
35.64
|
|
Granted
|
|
|
1,970,094
|
|
|
|
41.32
|
|
Issued and released
|
|
|
(1,154,123
|
)
|
|
|
37.55
|
|
Cancelled and forfeited
|
|
|
(127,394
|
)
|
|
|
37.05
|
|
Balance as of December 31, 2014
|
|
|
2,464,747
|
|
|
|
39.21
|
|
Granted
|
|
|
955,592
|
|
|
|
61.82
|
|
Issued and released
|
|
|
(1,115,525
|
)
|
|
|
40.94
|
|
Cancelled and forfeited
|
|
|
(110,746
|
)
|
|
|
45.82
|
|
Balance as of December 31, 2015
|
|
|
2,194,068
|
|
|
|
47.85
|
|
Granted
|
|
|
2,482,048
|
|
|
|
53.22
|
|
Assumed from the acquisition
|
|
|
1,301,199
|
|
|
|
51.55
|
|
Vested
|
|
|
(1,583,775
|
)
|
|
|
47.60
|
|
Cancelled and forfeited
|
|
|
(274,221
|
)
|
|
|
53.37
|
|
Balance as of December 31, 2016
|
|
|
4,119,319
|
|
|
|
51.98
|
|
For the year ended December 31, 2016, the Company issued 1,547,694 shares of common stock in connection with the vesting of RSUs. The difference between the number of RSUs vested and the shares of common stock issued for the year ended December 31, 2016 is the result of RSUs withheld in satisfaction of minimum tax withholding obligations associated with the vesting.
The total intrinsic value of the RSUs outstanding as of December 31, 2016 was $256.9 million, representing the closing price of the Company’s stock on December 31, 2016, multiplied by the number of non-vested RSUs expected to vest as of December 31, 2016.
In February 2015, the Company granted one-year and two-year performance-based RSUs with grant date fair values of $2.1 million and $0.7 million, respectively. In February 2016, the Company granted one-year performance-based RSUs with a grant date fair value of $2.9 million. The Company recorded the related stock-based compensation expense based on its evaluation of the probability of achieving the milestones of all of the outstanding performance-based RSUs as of December 31, 2016 and 2015. At each reporting period, the Company evaluates the probability of achieving the milestone of each of the outstanding performance-based RSUs and updates the recognition of related stock-based compensation expense.
The Company also granted four-year vesting market-based RSUs in February 2015 with a grant date fair value of $1.5 million. In February 2016, the Company granted three-year vesting market-based RSUs with a grant date fair value of $3.3 million. These market-based RSUs will vest if: (i) during the performance period, the Company’s total stockholder return over a period of 30 consecutive trading days is equal to or greater than that of the price per share with respect to the February 2015 grant and industry index with respect to the February 2016 grant, set by the compensation committee of the board of directors; and (ii) the recipient remains in continuous service with the Company through such vesting period. The fair value of the market-based RSU was determined by management using the Monte Carlo simulation method which takes into account multiple input variables that determine the probability of satisfying the market conditions stipulated in the award. This method requires the input of assumptions, including the expected volatility of the Company’s common stock, and a risk-free interest rate, similar to assumptions used in determining the fair value of the stock option grants discussed above. The Company recorded the related stock-based compensation expense for the years ended December 31, 2016 and 2015 related to these grants.
As of December 31, 2016, there was $164.8 million of unrecognized compensation costs, net of estimated forfeitures, related to RSUs granted under the 2007 Plan,
2016 EIP and the QLogic 2005 Plan
. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.57 years.
73
Stock-Based Compensation
The following table presents the detail of stock-based compensation expense amounts included in the consolidated statements of operations for each of the periods presented:
|
Year Ended December 31,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
(in thousands)
|
|
Cost of revenue
|
$
|
1,389
|
|
|
$
|
765
|
|
|
$
|
954
|
|
Research and development
|
|
41,701
|
|
|
|
29,085
|
|
|
|
32,328
|
|
Sales, general and administrative
|
|
42,240
|
|
|
|
18,447
|
|
|
|
19,177
|
|
|
$
|
85,330
|
|
|
$
|
48,297
|
|
|
$
|
52,459
|
|
The total stock-based compensation cost capitalized as part of inventory as of December 31, 2016 and 2015 was not material.
9. Income Taxes
The following table presents the provision for income taxes and the effective tax rates:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Loss before income taxes
|
|
$
|
(146,212
|
)
|
|
$
|
(15,378
|
)
|
|
$
|
(24,182
|
)
|
Provision for income taxes
|
|
|
997
|
|
|
|
1,682
|
|
|
|
1,633
|
|
Effective tax rate
|
|
|
(0.7
|
)%
|
|
|
(10.9
|
)%
|
|
|
(6.8
|
)%
|
The provision for income taxes for the year ended December 31, 2016 was primarily related to tax on earnings in foreign jurisdictions and the deferred tax liability related to the indefinite lived intangible assets. The provision for income taxes for the years ended December 31, 2015 and 2014 was primarily related to earnings in foreign jurisdictions.
As discussed in Note 2 of Notes to Consolidated Financial Statements, during the third quarter of 2016 upon closing of the acquisition, the Company recorded a partial release of its net deferred tax assets valuation allowance primarily due to a net deferred tax liability recorded for purchased intangibles and recognized a $82.9 million
tax benefit in the third quarter of 2016. During the fourth quarter of 2016, the Company was able to assess and measure an additional deferred tax asset that existed as of the acquisition date of QLogic. Due to the identification of this additional deferred tax asset, the Company made adjustments during the fourth quarter of 2016 to certain tax balances including the reversal of the partial release of the valuation allowance recorded in the third quarter of 2016.
The domestic and foreign components of income (loss) before income tax expense were as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Domestic
|
|
$
|
(147,752
|
)
|
|
$
|
(37,109
|
)
|
|
$
|
(42,318
|
)
|
Foreign
|
|
|
1,540
|
|
|
|
21,731
|
|
|
|
18,136
|
|
|
|
$
|
(146,212
|
)
|
|
$
|
(15,378
|
)
|
|
$
|
(24,182
|
)
|
74
The p
rovision for income taxes consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Current tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
51
|
|
|
$
|
(15
|
)
|
|
$
|
19
|
|
Foreign
|
|
|
3,084
|
|
|
|
1,034
|
|
|
|
1,230
|
|
|
|
|
3,135
|
|
|
|
1,019
|
|
|
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
775
|
|
|
|
564
|
|
|
|
627
|
|
Foreign
|
|
|
(2,913
|
)
|
|
|
99
|
|
|
|
(243
|
)
|
|
|
|
(2,138
|
)
|
|
|
663
|
|
|
|
384
|
|
Provision for income taxes
|
|
$
|
997
|
|
|
$
|
1,682
|
|
|
$
|
1,633
|
|
The Company’s effective tax rate differs from the United States federal statutory rate as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income tax at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Stock compensation costs
|
|
|
(2.9
|
)
|
|
|
(13.1
|
)
|
|
|
5.6
|
|
Other
|
|
|
(1.8
|
)
|
|
|
(0.1
|
)
|
|
|
0.6
|
|
Convertible securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(4.2
|
)
|
State taxes, net of federal benefit
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
Foreign income inclusion in the United States
|
|
|
6.8
|
|
|
|
(4.9
|
)
|
|
|
(0.5
|
)
|
Research and development credits
|
|
|
4.1
|
|
|
|
42.6
|
|
|
|
24.2
|
|
Foreign tax rate differential
|
|
|
(32.1
|
)
|
|
|
41.5
|
|
|
|
19.6
|
|
Change in valuation allowance
|
|
|
(9.7
|
)
|
|
|
(111.8
|
)
|
|
|
(86.7
|
)
|
Total
|
|
|
(0.7
|
)%
|
|
|
(10.9
|
)%
|
|
|
(6.8
|
)%
|
On July 27, 2015, the United States Tax Court in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015) issued an opinion with respect to Altera’s litigation with the Internal Revenue Service, concerning the treatment of stock-based compensation expense in an inter-company cost sharing arrangement. In ruling in favor of Altera, the Tax Court invalidated the portion of the Treasury regulations requiring the inclusion of stock-based compensation expense in such inter-company cost-sharing arrangements. Accordingly, the Company adjusted its inter-company arrangement to reflect the recent ruling. There was no material impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2016 considering the full valuation allowance on the Company’s federal and state net deferred tax assets. QLogic had a similar global structure prior to the acquisition and the Company is currently evaluating various alternatives to integrate the two groups of entities. The Company’s QLogic subsidiary has not amended its inter-company arrangement to exclude stock-based compensation
as of December 31, 2016.
75
The tax effects of the temporary differences that give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
As of December 31,
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
Tax credits
|
|
|
|
$
|
77,569
|
|
|
$
|
47,113
|
|
Net operating loss carryforwards
|
|
|
|
|
257,286
|
|
|
|
40,325
|
|
Capitalized research and development
|
|
|
|
|
15,077
|
|
|
|
18,093
|
|
Intangible assets
|
|
|
|
|
-
|
|
|
|
6,374
|
|
Depreciation and amortization
|
|
|
|
|
389
|
|
|
|
1,970
|
|
Stock compensation
|
|
|
|
|
14,372
|
|
|
|
10,813
|
|
Other
|
|
|
|
|
9,887
|
|
|
|
2,845
|
|
Gross deferred tax assets
|
|
|
|
|
374,580
|
|
|
|
127,533
|
|
Less: valuation allowance
|
|
|
|
|
(315,915
|
)
|
|
|
(127,328
|
)
|
Net deferred tax assets
|
|
|
|
|
58,665
|
|
|
|
205
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
(55,788
|
)
|
|
|
(3,400
|
)
|
Unremitted foreign earnings
|
|
|
|
|
(21,171
|
)
|
|
|
-
|
|
Net deferred tax liabilities
|
|
|
|
$
|
(18,294
|
)
|
|
$
|
(3,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Reported As
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, non-current
|
|
|
|
$
|
480
|
|
|
$
|
222
|
|
Deferred tax liabilities, non-current
|
|
|
|
|
(18,774
|
)
|
|
|
(3,417
|
)
|
Net deferred tax liabilities
|
|
|
|
$
|
(18,294
|
)
|
|
$
|
(3,195
|
)
|
As of December 31, 2016, the Company had total net operating loss carryforwards for federal and states of California and Massachusetts income tax purposes of $1,408.0 million and
$496.1 million, respectively. If not utilized, these federal and state net operating loss carryforwards will expire beginning in 2020 and 2017, respectively. The federal and states of California and Massachusetts net operating loss carryforwards include excess windfall deductions of $260.7 million and $143.0 million,
respectively.
The Company is tracking the portion of its deferred tax assets attributable to stock option benefits in a separate memo account pursuant to the accounting guidance for stock-based compensation. Therefore, these amounts are no longer included in the Company’s gross or net deferred tax assets. Pursuant to the guidance for stock-based compensation, the stock option benefits of approximately $101.7 million will be recorded within stockholders’ equity when it reduces cash taxes payable. The Company uses the “with and without” approach in determining when excess tax benefits have been realized, and the Company considers the direct effects of stock option deductions to calculate excess tax
benefits.
As of December 31, 2016, the Company also had federal and state research and development tax credit carryforwards of approximately $59.3 million and $75.9 million, respectively. The federal and state tax credit carryforwards will expire commencing 2020 and 2017, respectively, except for the California research tax credits which carry forward indefinitely. The Company also has various foreign and alternative minimum tax credits of approximately $1.1 million
.
The Company’s net deferred tax assets relate predominantly to its United States tax jurisdiction. A full valuation allowance against the Company federal and state net deferred tax assets has been in place since 2012. The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. The Company weighed both positive and negative evidence and determined that there is a continued need for a valuation allowance on its federal and state deferred tax assets as of December 31, 2015 and 2016.
The Company reviews whether the utilization of its net operating losses and research credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Utilization of these carryforwards is restricted and results in some amount expiring prior to benefiting the Company. The deferred tax assets shown above have been adjusted to reflect these expiring carryforwards.
76
During 2016, the Company repatriated $50.0 million from it
s offshore operations. The Company recorded no tax expense related to this cash repatriation due to the utilization of net operating losses. Additionally, in connection with a review of the Company’s cash position and anticipated cash needs for investment
in the Company’s core business, including principal prepayments to the Company’s outstanding Term Loan Facility, the Company determined that the current earnings from certain QLogic foreign entities will no longer be indefinitely reinvested, and the Compan
y has provided a deferred tax liability for anticipated United States federal income taxes. For all remaining Cavium foreign entities, the Company will continue to indefinitely reinvest foreign earnings. The undistributed earnings
of the Company’s foreign
subsidiaries was
approximately $359.7 million and $38.3 million as of December 31, 2016 and 2015, respectively. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes (subj
ect to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. As of December 31, 2016 and 2015, the computation of potential United States income tax of a future distribution is impracticable.
The following table summarizes the activity related to the unrecognized tax benefits:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Balance at beginning of the year
|
|
$
|
19,709
|
|
|
$
|
16,270
|
|
|
$
|
14,625
|
|
Gross increases related to current year's tax positions
|
|
|
5,640
|
|
|
|
3,138
|
|
|
|
1,446
|
|
Gross increase resulting from the acquisition of QLogic
|
|
|
179,366
|
|
|
|
-
|
|
|
|
-
|
|
Gross increases (decreased) related to prior year's tax positions
|
|
|
(383
|
)
|
|
|
398
|
|
|
|
199
|
|
Releases related to prior year's tax positions
|
|
|
(1,917
|
)
|
|
|
(97
|
)
|
|
|
-
|
|
Balance at the end of the year
|
|
$
|
202,415
|
|
|
$
|
19,709
|
|
|
$
|
16,270
|
|
The gross increase resulting from the acquisition of QLogic was primarily related to the unrecognized tax benefits against the additional tax assets identified in the measurement period but existed as of the acquisition date. Also included in the unrecognized tax benefits at December 31, 2016
is $12.1 million that, if recognized, would reduce the Company’s annual effective tax rate after considering the valuation allowance. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company has accrued $2.8 million potential penalties and interest during the year ended December 31, 2016.
The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.
Beginning in 2011, the Company is operating under tax incentives in Singapore, which are effective through February 2020. The tax incentives are conditional upon the Company meeting certain employment, revenue, and investment thresholds. The Company realized benefits from the reduced tax rate for the periods presented as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Provision for Singapore entity at statutory tax rate of 17%
|
|
$
|
973
|
|
|
$
|
811
|
|
|
$
|
719
|
|
Provision for Singapore entity in the consolidated statement of operations
|
|
|
363
|
|
|
|
310
|
|
|
|
303
|
|
Benefit from preferential tax rate differential
|
|
$
|
610
|
|
|
$
|
501
|
|
|
$
|
416
|
|
Impact of tax benefits per basic and diluted share
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
The Company’s major tax jurisdictions are the United States federal government, the states of California and Massachusetts, China, India, Ireland, Israel, Japan, Singapore and the United Kingdom. The Company files income tax returns in the United States federal jurisdiction, the states of California and Massachusetts, various other states, and foreign jurisdictions in which it has a subsidiary or branch operations. The United States federal corporation income tax returns beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service, or IRS. The California corporation income tax returns beginning with the 2000 tax year remain subject to examination by the California Franchise Tax Board. As of December 31, 2016, QLogic’s 2014 tax year is under audit by the IRS. There are no on-going foreign tax audits other than in various India tax jurisdictions which are under income tax audits for certain tax years between 2008 and 2015. The Company does not expect any material tax adjustments from either of these audits.
77
10. Retirement Plan
The Company has established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code for substantially all United States employees. This plan covers substantially all United States employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company matches 50% of the employees’ annual contribution up to two thousand dollars per employee. The Company contributions to the plan may be made at the discretion of the Company’s board of directors. For the years ended December 31, 2016, 2015 and 2014, the Company’s defined contribution expense was $1.5 million, $1.1 million and $1.0 million, respectively.
In connection with local foreign laws, the Company is required to have a tenured-based defined benefit plan for its employees in certain non-US locations. The Company’s tenured-based payout liability is calculated based on the salary of each employee multiplied by the years of such employee’s employment, and is reflected on the Company’s consolidated balance sheets in other non-current liabilities on an accrual basis.
The total expense and total obligation for these plans were not material to the consolidated financial statements
.
11. Debt
On August 16, 2016, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A. (“JPMCB”), as administrative agent and collateral agent, the other agents party thereto and the lenders referred to therein (collectively, the “Lenders”). The Lenders provided (i) a $700.0 million six year term B loan facility (the “Initial Term B Loan Facility”) and (ii) a $50.0 million interim term loan facility (the “Interim Term Loan Facility”, (i) and (ii) together, the “Term Facility”) to finance the acquisition of QLogic and pay fees and expenses of such acquisition.
The outstanding debt under the Term Facility are collateralized by a lien on substantially all of the Company’s assets.
The interest rates applicable to loans outstanding under the Credit Agreement with respect to the Initial Term B Loan Facility are, at the Company's option, equal to either a base rate plus a margin of 2.00% per annum or LIBOR plus a margin of 3.00% per annum. In no event shall the LIBOR for any interest period be less than 0.75% with respect to the Initial Term B Facility. The Initial Term B Loan Facility will mature on August 16, 2022 and requires quarterly principal payments commencing on December 31, 2016 equal to 0.25% of the aggregate original principal amount, with the balance payable at maturity (in each case subject to adjustment for prepayments). The interest rates applicable to loans outstanding under the Credit Agreement with respect to the Interim Term Loan Facility are, at the Company's option, equal to either a base rate plus a margin of 1.00% per annum or LIBOR plus a margin of 2.00% per annum. In October 2016, the Company paid the outstanding Interim Term Loan Facility.
As of December 31, 2016, the carrying value of the Term Facility approximates the fair value. The Company classified this under Level 2 fair value measurement hierarchy as the borrowings are not actively traded and have variable interest structure based upon market rates currently available to the Company for debt with similar terms and maturities. The following table summarizes the outstanding borrowings from the Term Facility as of December 31, 2016:
|
Principal
Outstanding
|
|
|
Unamortized
Deferre
d
Financing Costs
|
|
|
Principal
Outstanding,
net of
Unamortized
Deferred
Financing
Costs
|
|
|
Current
Portion of
Long-Term
Debt
|
|
|
Long-
Term Debt
|
|
|
(in thousands)
|
|
Initial Term B Loan Facility
|
$
|
698,250
|
|
|
$
|
18,971
|
|
|
$
|
679,279
|
|
|
$
|
3,865
|
|
|
$
|
675,414
|
|
In January 2017, the Company made payments totaling $86.0 million towards the outstanding principal balance of the Initial Term B Loan.
The deferred financing costs associated with the Term Facility were recorded as a reduction to principal outstanding in the consolidated balance sheets and is being amortized over the term of the Term Facility.
For the year ended December 31, 2016, the Company recognized contractual interest expense and amortization of deferred financing costs of $10.2 million and $1.6 million, respectively.
78
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants that, among other things, restrict the
ability of the Company and its subsidiaries to create or incur certain liens, incur or guarantee additional indebtedness, merge or consolidate with other companies, payment of dividends, transfer or sell assets and make restricted payments. These covenants
are subject to a number of limitations and exceptions set forth in the Credit Agreement.
The Company is in compliance with these covenants as of December 31, 2016.
12. Segment and Geographic Information
Operating segments are based on components of the Company that engage in business activity that earn revenue and incur expenses and (a) whose operating results are regularly reviewed by the Company’s chief operating decision maker, or CODM, to make decisions about resource allocation and performance and (b) for which discrete financial information is available. The Company manages and operates as one reportable segment. The closing of the acquisition of QLogic did not change the Company’s reportable segment as management views and operates the combined companies as one reportable segment. T
he Company implemented a plan developed prior to the completion of the QLogic acquisition and began to immediately integrate QLogic into the Company’s existing operations, engineering groups, sales distribution networks and management structure.
The Company’s net revenue consists primarily of the sale of semiconductor products and the Company also derives revenue from licensing software. The revenue from these sources is classified by the Company as product revenue. The Company also generates revenue from professional service arrangements which is categorized as service revenue. The total service revenue is less than 10% of the Company’s total net revenue for the years ended December 31, 2016, 2015 and 2014. The Company categorizes its net revenue in two different markets, (i) the enterprise, datacenter, and service provider markets; and (ii) broadband and consumer markets.
The net revenue by markets for the periods indicated was as follows:
|
Year Ended December 31,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
(in thousands)
|
|
Enterprise, datacenter, and service provider markets
|
$
|
568,812
|
|
|
$
|
377,809
|
|
|
$
|
341,056
|
|
Broadband and consumer markets
|
|
34,502
|
|
|
|
34,935
|
|
|
|
31,922
|
|
|
$
|
603,314
|
|
|
$
|
412,744
|
|
|
$
|
372,978
|
|
Revenues by geographic area are presented based upon the ship-to location of the original equipment manufacturers, the contract manufacturers or the distributors who purchased the Company’s products. For sales to the distributors, their geographic location may be different from the geographic locations of the ultimate end customers.
Net revenues by geographic area are as follows:
|
Year Ended December 31,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
(in thousands)
|
|
United States
|
$
|
196,727
|
|
|
$
|
128,431
|
|
|
$
|
111,997
|
|
China
|
|
139,957
|
|
|
|
100,980
|
|
|
|
93,045
|
|
Korea
|
|
54,367
|
|
|
|
28,578
|
|
|
|
28,665
|
|
Taiwan
|
|
39,839
|
|
|
|
34,533
|
|
|
|
29,229
|
|
Mexico
|
|
28,563
|
|
|
|
34,452
|
|
|
|
27,184
|
|
Finland
|
|
38,768
|
|
|
|
38,283
|
|
|
|
44,976
|
|
Singapore
|
|
20,982
|
|
|
|
3,767
|
|
|
|
2,421
|
|
Malaysia
|
|
16,482
|
|
|
|
11,728
|
|
|
|
9,059
|
|
Other countries
|
|
67,629
|
|
|
|
31,992
|
|
|
|
26,402
|
|
Total
|
$
|
603,314
|
|
|
$
|
412,744
|
|
|
$
|
372,978
|
|
The following table sets forth tangible long lived assets, which consist of property and equipment, net by geographic regions:
|
As of December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands)
|
|
United States
|
$
|
115,328
|
|
|
$
|
52,547
|
|
All other countries
|
|
35,534
|
|
|
|
12,130
|
|
Total
|
$
|
150,862
|
|
|
$
|
64,677
|
|
79
13. Commitments and Contingencies
The Company is not currently a party to any legal proceedings, the outcome of which, if determined adversely to the Company, would have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
The Company leases its facilities under non-cancelable operating leases, which contain renewal options and escalation clauses, and expire on various dates ending in October 2025. Rent expense incurred under operating leases was $11.3 million, $8.0 million and $6.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
On November 18, 2016, the Company entered into a lease agreement to lease approximately 105,600 square feet in a building located in Irvine, California. The lease term is 8 years and is expected to commence in October 2017. This leased facility is for the relocation of QLogic employees from real property previously owned located in Aliso Viejo, California. As discussed in Note 5 of Notes to Consolidated Financial Statements, the Company completed the sale of the previously owned real property located in Aliso Viejo, California, which the Company leased back on a month-to-month basis.
The Company also has non-cancellable software and maintenance commitments which are generally billed on a quarterly basis. These commitments are included in the operating leases.
The Company acquired certain assets under capital lease and technology license obligations. The capital lease and technology license obligations include future cash payments payable primarily for license agreements with various outside vendors. For license agreements which qualify under capital lease and where installment payments extend beyond one year, the present value of the future installment payments are capitalized and included as part of intangible assets or property and equipment which is amortized over the estimated useful lives of the related licenses. In July 2016, the Company signed design kit license agreements with a third party vendor for an aggregate consideration of $9.0 million, payable in four equal installments. The first installment was due on the effective date of the agreement and the remaining installment payments are due in the succeeding quarters following the effective date. The aggregate total consideration was recorded as intangible assets which will be amortized over the term of the license and the related liability was recorded under capital lease and technology license obligations. In July and September 2016, the Company signed design tools purchase agreements with a third party vendor for an aggregate total consideration of $15.6 million, payable in equal quarterly installments up to May 2019. The present value of the aggregate total consideration was recorded as design tools under property and equipment which will be amortized over the term of the license and the related liability was recorded under capital lease and technology license obligations.
On September 27, 2016, the Company signed a new purchase agreement with a third party vendor for $31.5 million, payable in quarterly installments up to August 2019, in exchange for a three-year license to certain design tools effective October 1, 2016. This new purchase agreement replaced the purchase agreement entered into by the Company in October 2014 with the same third party company for $28.5 million in exchange for a three-year license to certain design tools. The present value of the aggregate total consideration was recorded as design tools under property and equipment which will be amortized over the term of the license and the related liability was recorded under capital lease and technology license obligations. As a result of the cancellation of the October 2014 purchase agreement in October 2016, the Company wrote-off the related design tools within property and equipment and the unpaid installment obligations under capital lease and technology license obligations.
80
Minimum commitments under non-cancelable operating and capital lease agreements as of December 31, 2016 are as follows:
|
|
Capital lease
and
technology
license
obligations
|
|
|
Operating
leases
|
|
|
Total
|
|
|
|
(in thousands)
|
|
2017
|
|
$
|
26,919
|
|
|
$
|
15,887
|
|
|
$
|
42,806
|
|
2018
|
|
|
18,124
|
|
|
|
15,487
|
|
|
|
33,611
|
|
2019
|
|
|
10,643
|
|
|
|
14,569
|
|
|
|
25,212
|
|
2020
|
|
|
-
|
|
|
|
14,153
|
|
|
|
14,153
|
|
2021
|
|
|
-
|
|
|
|
13,110
|
|
|
|
13,110
|
|
2022 thereafter
|
|
|
-
|
|
|
|
20,011
|
|
|
|
20,011
|
|
|
|
$
|
55,686
|
|
|
$
|
93,217
|
|
|
$
|
148,903
|
|
Less: Interest component (3.75% annual rate)
|
|
|
2,273
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payment
|
|
|
53,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of the obligations
|
|
$
|
25,535
|
|
|
|
|
|
|
|
|
|
Long-term portion of obligations
|
|
$
|
27,878
|
|
|
|
|
|
|
|
|
|
On January 31, 2017, the Company entered into a lease agreement to lease approximately 116,000 sq. ft. in a building located adjacent to the Company’s corporate headquarter in San Jose, California. The lease term is through July 2027 and the Company expects to occupy the building beginning October 2017.
QLogic Manufacturing Rights Buy-outs
The Company exercised non-cancellable options to purchase the manufacturing rights from a QLogic application specific integrated circuit, or ASIC, vendor effective at the closing of the acquisition of QLogic for certain QLogic ASIC products and on November 1, 2016 for certain other QLogic ASIC products. In consideration for the exercise of the manufacturing rights, the Company paid an aggregate of $55.0 million in September 2016. In addition, the Company paid a one-time royalty buy-out fee of $10.0 million for certain QLogic ASIC products.
On September 29, 2016, the Company entered into an ownership transfer and manufacturing rights agreement with another QLogic third party ASIC vendor to acquire manufacturing rights and relieve the Company from future royalty obligations related to certain ASIC products. In consideration for this, the Company agreed to pay a total of $10.0 million. Subject to the terms of the agreement, the Company paid $7.5 million on the effective date of the agreement and the remaining $2.5 million was placed in escrow in November 2016, to be released on the earlier of (i) receipt of the validation notice that the related ASIC product has been put into production by the Company and (ii) transfer of specified assets to a third party vendor approved by the Company. The amount placed in escrow was classified within prepaid expense and other current assets on the consolidated balance sheets as of December 31, 2016.
The Company determined that the total consideration amounting to $75.0 million as discussed above, pertained to the use of technologies and the cost associated with cancelling the exclusive rights to manufacture the related products. The Company estimated the components of the total consideration attributable to the use of technologies and the cost to cancel the exclusive manufacturing rights using market-based fair value estimation.
The fair value estimation was determined based on inputs that are unobservable and significant to the overall fair value measurement. It was also based on estimates and assumptions made by management. As such this was
classified as Level 3 fair value hierarchy measurements and disclosures. Based on the analysis, the Company attributed $42.8 million of the total consideration to the use of the related technologies in future periods and recorded this amount as an intangible asset in the consolidated balance sheets as of December 31, 2016 and the remaining balance of $32.2 million was attributed to the cost of cancelling the exclusive rights to manufacture the related products and was recorded as cost of revenue in the consolidated statements of operations in the year ended December 31, 2016.
81
Xpliant Manufacturing Rights Buy-out
On March 30, 2015, Xpliant exercised its option to purchase the manufacturing rights to accelerate the takeover of manufacturing, and to relieve Xpliant from any further obligation to purchase product quantities from an Xpliant ASIC vendor. In consideration for this, Xpliant agreed to pay a $7.5 million manufacturing rights licensing fee and a per-unit royalty fee for certain ASIC products sold to certain customers for a limited time. The manufacturing rights licensing fee was payable in four equal quarterly payments, with the first installment payment due on April 29, 2015 and each of the subsequent three installment payments were due on the first day of the following calendar quarter. Considering the terms of the purchase of the manufacturing rights and the stage of development of the related ASIC products covered by the manufacturing rights, the Company recorded the full amount of the manufacturing rights licensing fee within research and development expense on the consolidated statement of operations in the first quarter of 2015 and the related liability was recorded within other accrued expenses and other current liabilities on the consolidated balance sheets. In 2015, the Company settled three installments due. The final installment payment was made in the first quarter of 2016.
82
Selected Quarterly Consolidated Financial Data (Unaudited)
The following table summarizes certain unaudited quarterly financial information in each of the quarters in 2016 and 2015. The quarterly data have been prepared on the same basis as the audited consolidated financial statements. This should be read together with the consolidated financial statements and related notes included elsewhere in this Annual Report.
|
Quarter Ended
|
|
|
December 31, 2016
|
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
Fiscal 2016
|
(in thousands, except per share data)
|
|
Revenue
|
$
|
226,151
|
|
|
$
|
168,123
|
|
|
$
|
107,158
|
|
|
$
|
101,882
|
|
Gross Profit
|
|
98,225
|
|
|
|
47,414
|
|
|
|
71,659
|
|
|
|
68,016
|
|
Loss from operations
|
|
(29,146
|
)
|
|
|
(94,242
|
)
|
|
|
(6,801
|
)
|
|
|
(3,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
$
|
(37,061
|
)
|
|
$
|
(98,456
|
)
|
|
$
|
(7,137
|
)
|
|
$
|
(3,558
|
)
|
Provision for (benefit from) income taxes
|
|
84,539
|
|
|
|
(84,090
|
)
|
|
|
273
|
|
|
|
275
|
|
Net loss
|
$
|
(121,600
|
)
|
|
$
|
(14,366
|
)
|
|
$
|
(7,410
|
)
|
|
$
|
(3,833
|
)
|
Net loss per common share, basic
|
$
|
(1.82
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.07
|
)
|
Net loss per common share, diluted
|
$
|
(1.82
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
December 31, 2015
|
|
|
September 30, 2015
|
|
|
June 30, 2015
|
|
|
March 31, 2015
|
|
Fiscal 2015
|
(in thousands, except per share data)
|
|
Revenue
|
$
|
100,942
|
|
|
$
|
105,063
|
|
|
$
|
104,961
|
|
|
$
|
101,778
|
|
Gross Profit
|
|
66,850
|
|
|
|
68,860
|
|
|
|
67,288
|
|
|
|
65,979
|
|
Income (loss) from operations
|
|
(311
|
)
|
|
|
4,971
|
|
|
|
(5,273
|
)
|
|
|
(13,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
$
|
(676
|
)
|
|
$
|
4,582
|
|
|
$
|
(5,694
|
)
|
|
$
|
(13,590
|
)
|
Provision for income taxes
|
|
354
|
|
|
|
366
|
|
|
|
661
|
|
|
|
301
|
|
Net income (loss)
|
$
|
(1,030
|
)
|
|
$
|
4,216
|
|
|
$
|
(6,355
|
)
|
|
$
|
(13,891
|
)
|
Net income (loss) per common share, basic
|
$
|
(0.02
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.25
|
)
|
Net income (loss) per common share, diluted
|
$
|
(0.02
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.25
|
)
|
(1)
|
Cost of revenue for the quarter ended December 31, 2016 includes charges of $12.6 million for the purchase accounting effect on inventory and amortization of acquired intangible assets of $27.1 million.
|
(2)
|
Cost of revenue for the quarter ended September 30, 2016 included charges of $37.1 million related to the QLogic manufacturing rights buy-out, purchase accounting effect on inventory of $7.3 million and amortization of acquired intangible assets of $12.7 million.
|
(3)
|
Sales, general and administrative expense for the quarter ended September 30, 2016 included stock-based compensation expense related to QLogic employees with change in control provisions of $15.6 million, acquisition and integration costs of $13.4 million and restructuring, severance and other employment charges of $12.0 million related to the QLogic acquisition.
|
(4)
|
Benefit from income taxes for the quarter ended September 30, 2016 included a tax benefit from the partial release of the valuation allowance on net deferred tax assets of $82.9 million
.
As a result of the QLogic acquisition, a net deferred tax liability was recorded due to the book-tax basis difference mainly related to purchased intangibles. This net deferred tax liability provided an additional source of income to support the realizability of the Company’s pre-existing deferred tax assets which resulted in the partial release of its valuation allowance.
|
(5)
|
Provision for income taxes for the quarter ended December 31, 2016 included tax expense due to the reversal of the partial release of the valuation allowance on net deferred tax assets recorded in the quarter ended September 30, 2016 as discussed above. During the fourth quarter of 2016, the Company was able to assess and measure an additional deferred tax asset that existed as of the acquisition date of QLogic. Due to the identification of this additional deferred tax asset, the Company made adjustments to certain tax balances including the reversal of the partial release of the valuation allowance recorded in the third quarter of 2016.
|
(6)
|
Research and development expense for the quarter ended March 31, 2015 included a charge of $7.5 million related to the Xpliant manufacturing rights buy-out.
|
83