NOTES TO UNAUDITED
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Investments in entities with less than
20%
ownership or in which the Company does not have the ability to significantly influence the operations of the investee are being accounted for using the cost method and are included in other assets.
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended
December 31, 2013
.
Operating Segment Definitions
Operating segments are based upon Rambus' internal organization structure, the manner in which its operations are managed, the criteria used by its Chief Operating Decision Maker ("CODM") to evaluate segment performance and availability of separate financial information regularly reviewed for resource allocation and performance assessment.
The Company determined its CODM to be the Chief Executive Officer and determined its operating segments to be: (1) Memory and Interface Division ("MID"), which focuses on the design, development and licensing of technology that is related to memory and interfaces; (2) Cryptography Research Inc. ("CRI"), which focuses on the design, development and licensing of technologies for chip and system security and anti-counterfeiting; (3) Lighting and Display Technologies ("LDT"), which focuses on the design, development and licensing of technologies for lighting; and (4) Chief Technology Office ("CTO"), which focuses on the design, development and productization of emerging technologies.
For the
three
months ended
March 31, 2014
and
2013
, only MID, CRI and CTO were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining other operating segments were combined and shown under “Other.”
Reclassifications
Certain prior periods' amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net income (loss) for any of the periods presented.
2. Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The new accounting standards update becomes effective for the Company on January 1, 2015. Early adoption is permitted for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company does not expect that this guidance will have an impact on its financial position, results of operations or cash flows as the Company does not currently have discontinued operations.
In July 2013, the FASB issued ASU No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ("ASU 2013-11"). ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits. ASU 2013-11 requires presenting an unrecognized tax benefit or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carry forward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and
the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This accounting standards update became effective for the Company on January 1, 2014 and was applied prospectively to unrecognized tax benefits that existed at the effective date with retrospective application permitted. Upon adoption of this guidance, the Company reclassified
$4.7 million
from a long-term tax liability to a reduction of a deferred tax asset.
3. Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the earnings by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instrument was exercised and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported.
The following table sets forth the computation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2014
|
|
2013
|
Net income (loss) per share:
|
|
(In thousands, except per share amounts)
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,804
|
|
|
$
|
(10,402
|
)
|
Denominator:
|
|
|
|
|
Weighted-average shares outstanding - basic
|
|
113,590
|
|
|
111,599
|
|
Effect of potential dilutive common shares
|
|
3,039
|
|
|
—
|
|
Weighted-average shares outstanding - diluted
|
|
116,629
|
|
|
111,599
|
|
Basic net income (loss) per share
|
|
$
|
0.07
|
|
|
$
|
(0.09
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.07
|
|
|
$
|
(0.09
|
)
|
For the three months ended
March 31, 2014
and
2013
, options to purchase approximately
6.9 million
and
12.9 million
shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise, taxes and related unrecognized stock-based compensation expense. For the three months ended
March 31, 2013
, an additional
6.4 million
potentially dilutive shares have been excluded from the weighted average dilutive shares because there was a net loss for the period.
4. Intangible Assets and Goodwill
Goodwill
The following tables present goodwill information for each of the reportable segments for the
three
months ended
March 31, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segment:
|
|
December 31,
2013
|
|
Additions to Goodwill
|
|
Impairment Charge of Goodwill
|
|
March 31,
2014
|
|
|
(In thousands)
|
MID
|
|
$
|
19,905
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,905
|
|
CTO
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
CRI
|
|
96,994
|
|
|
—
|
|
|
—
|
|
|
96,994
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
116,899
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
116,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
March 31, 2014
|
Reportable Segment:
|
|
Gross Carrying Amount
|
|
Accumulated Impairment Losses
|
|
Net Carrying Amount
|
|
|
(In thousands)
|
MID
|
|
$
|
19,905
|
|
|
$
|
—
|
|
|
$
|
19,905
|
|
CTO
|
|
8,070
|
|
|
(8,070
|
)
|
|
—
|
|
CRI
|
|
96,994
|
|
|
—
|
|
|
96,994
|
|
Other
|
|
13,700
|
|
|
(13,700
|
)
|
|
—
|
|
Total
|
|
$
|
138,669
|
|
|
$
|
(21,770
|
)
|
|
$
|
116,899
|
|
Intangible Assets
The components of the Company’s intangible assets as of
March 31, 2014
and
December 31, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
Existing technology
|
3 to 10 years
|
|
$
|
185,321
|
|
|
$
|
(86,476
|
)
|
|
$
|
98,845
|
|
Customer contracts and contractual relationships
|
1 to 10 years
|
|
31,093
|
|
|
(20,695
|
)
|
|
10,398
|
|
Non-compete agreements
|
3 years
|
|
300
|
|
|
(283
|
)
|
|
17
|
|
Total intangible assets
|
|
|
$
|
216,714
|
|
|
$
|
(107,454
|
)
|
|
$
|
109,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
Existing technology
|
3 to 10 years
|
|
$
|
186,202
|
|
|
$
|
(80,961
|
)
|
|
$
|
105,241
|
|
Customer contracts and contractual relationships
|
1 to 10 years
|
|
31,093
|
|
|
(19,204
|
)
|
|
11,889
|
|
Non-compete agreements
|
3 years
|
|
300
|
|
|
(258
|
)
|
|
42
|
|
Total intangible assets
|
|
|
$
|
217,595
|
|
|
$
|
(100,423
|
)
|
|
$
|
117,172
|
|
During the three months ended March 31, 2014, the Company did not purchase any intangible assets. During the three months ended
March 31, 2014
, the Company sold portfolios of its intellectual property covering wireless and other technologies for
$2.5 million
and the related gain was recorded as gain from sale of intellectual property in the condensed consolidated statements of operations.
The favorable contracts (included in customer contracts and contractual relationships) are acquired patent licensing agreements where the Company has no performance obligations. Cash received from these acquired favorable contracts reduces the favorable contract intangible asset. For the three months ended
March 31, 2014
and
2013
, the Company received
$0.9 million
and
$1.4 million
related to the favorable contracts, respectively. As of
March 31, 2014
and
December 31, 2013
, the net balance of the favorable contract intangible assets was
$0.1 million
and
$1.0 million
, respectively.
Amortization expense for intangible assets for the
three
months ended
March 31, 2014
and 2013 was
$6.8 million
and
$7.0 million
, respectively. The estimated future amortization expense of intangible assets as of
March 31, 2014
was as follows (amounts in thousands):
|
|
|
|
|
Years Ending December 31:
|
Amount
|
2014 (remaining 9 months)
|
$
|
19,846
|
|
2015
|
25,098
|
|
2016
|
24,335
|
|
2017
|
23,734
|
|
2018
|
10,827
|
|
Thereafter
|
5,420
|
|
|
$
|
109,260
|
|
It is reasonably possible that the businesses could perform significantly below the Company's expectations or a deterioration of market and economic conditions could occur. This would adversely impact the Company's ability to meet its projected results, which could cause the goodwill in any of its reporting units or long-lived assets in any of its asset groups to become impaired. Significant differences between these estimates and actual cash flows could materially affect the Company's future financial results. If the reporting units are not successful in commercializing new business arrangements, if the businesses are unsuccessful in signing new license agreements or renewing their existing license agreements, or if the Company is unsuccessful in managing its costs, the revenue and income for these reporting units could adversely and materially deviate from their historical trends and could cause goodwill or long-lived assets to become impaired. If the Company determines that its goodwill or long-lived assets are impaired, it would be required to record a non-cash charge that could have a material adverse effect on its results of operations and financial position.
5.
Segments and Major Customers
For the
three
months ended
March 31, 2014
and
2013
, MID, CRI and CTO were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segment were shown under “Other.”
The Company evaluates the performance of its segments based on segment operating income (loss), which is defined as revenue minus segment operating expenses. Segment operating expenses are comprised of direct operating expenses.
Segment operating expenses do not include marketing, general and administrative expenses and the allocation of certain expenses managed at the corporate level, such as stock-based compensation, amortization, and certain bonus and acquisition costs. The “Reconciling Items” category includes these unallocated marketing, general and administrative expenses as well as corporate level expenses. The presentation of the
three
months ended
March 31, 2013
segment data has been updated accordingly to conform with the 2014 segment operating income (loss) definition.
The tables below present reported segment operating income (loss) for the
three
months ended
March 31, 2014
and
2013
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2014
|
|
MID
|
|
CRI
|
|
CTO
|
|
Other
|
|
Total
|
|
(In thousands)
|
Revenues
|
$
|
61,156
|
|
|
$
|
12,903
|
|
|
$
|
—
|
|
|
$
|
4,229
|
|
|
$
|
78,288
|
|
Segment operating expenses
|
9,920
|
|
|
7,629
|
|
|
4,271
|
|
|
4,382
|
|
|
26,202
|
|
Segment operating income (loss)
|
$
|
51,236
|
|
|
$
|
5,274
|
|
|
$
|
(4,271
|
)
|
|
$
|
(153
|
)
|
|
$
|
52,086
|
|
Reconciling items
|
|
|
|
|
|
|
|
|
|
|
(28,897
|
)
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
$
|
23,189
|
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
(9,913
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
13,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2013
|
|
MID
|
|
CRI
|
|
CTO
|
|
Other
|
|
Total
|
|
(In thousands)
|
Revenues
|
$
|
59,674
|
|
|
$
|
6,883
|
|
|
$
|
—
|
|
|
$
|
309
|
|
|
$
|
66,866
|
|
Segment operating expenses
|
9,884
|
|
|
4,888
|
|
|
7,171
|
|
|
3,629
|
|
|
25,572
|
|
Segment operating income (loss)
|
$
|
49,790
|
|
|
$
|
1,995
|
|
|
$
|
(7,171
|
)
|
|
$
|
(3,320
|
)
|
|
$
|
41,294
|
|
Reconciling items
|
|
|
|
|
|
|
|
|
|
|
(39,853
|
)
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
$
|
1,441
|
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
(7,332
|
)
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,891
|
)
|
The Company’s CODM does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.
Revenue from the Company’s major customers representing
10%
or more of total revenue for the
three
months ended
March 31, 2014
and
2013
, respectively, was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
Customer
|
|
2014
|
|
2013
|
Customer A (MID and CRI reportable segments)
|
|
19
|
%
|
|
33
|
%
|
Customer B (MID reportable segment)
|
|
15
|
%
|
|
*
|
|
Customer C (MID reportable segment)
|
|
12
|
%
|
|
*
|
|
Customer D (MID reportable segment)
|
|
*
|
|
|
15
|
%
|
Customer E (MID reportable segment)
|
|
*
|
|
|
10
|
%
|
_________________________________________
* Customer accounted for less than 10% of total revenue in the period
Revenue from customers in the geographic regions based on the location of customers' headquarters is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(In thousands)
|
|
2014
|
|
2013
|
South Korea
|
|
$
|
26,853
|
|
|
$
|
22,025
|
|
USA
|
|
28,674
|
|
|
25,569
|
|
Japan
|
|
9,255
|
|
|
14,609
|
|
Europe
|
|
8,563
|
|
|
2,127
|
|
Canada
|
|
1,824
|
|
|
1,786
|
|
Asia-Other
|
|
3,119
|
|
|
750
|
|
Total
|
|
$
|
78,288
|
|
|
$
|
66,866
|
|
6. Marketable Securities
Rambus invests its excess cash and cash equivalents primarily in U.S. government sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within
three
years. As of
March 31, 2014
and
December 31, 2013
, all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than
one year
.
All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
(In thousands)
|
|
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Weighted
Rate of
Return
|
Money market funds
|
|
$
|
317,769
|
|
|
$
|
317,769
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
0.01
|
%
|
Corporate notes, bonds and commercial paper
|
|
58,347
|
|
|
58,355
|
|
|
1
|
|
|
(9
|
)
|
|
0.13
|
%
|
Total cash equivalents and marketable securities
|
|
376,116
|
|
|
376,124
|
|
|
1
|
|
|
(9
|
)
|
|
|
|
Cash
|
|
27,308
|
|
|
27,308
|
|
|
—
|
|
|
—
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
403,424
|
|
|
$
|
403,432
|
|
|
$
|
1
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
(In thousands)
|
|
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Weighted
Rate of
Return
|
Money market funds
|
|
$
|
300,605
|
|
|
$
|
300,605
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
0.01
|
%
|
Corporate notes, bonds and commercial paper
|
|
58,492
|
|
|
58,507
|
|
|
—
|
|
|
(15
|
)
|
|
0.15
|
%
|
Total cash equivalents and marketable securities
|
|
359,097
|
|
|
359,112
|
|
|
—
|
|
|
(15
|
)
|
|
|
|
Cash
|
|
28,565
|
|
|
28,565
|
|
|
—
|
|
|
—
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
387,662
|
|
|
$
|
387,677
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
|
|
Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
March 31,
2014
|
|
December 31,
2013
|
|
(In thousands)
|
Cash equivalents
|
$
|
319,268
|
|
|
$
|
310,131
|
|
Short term marketable securities
|
56,848
|
|
|
48,966
|
|
Total cash equivalents and marketable securities
|
376,116
|
|
|
359,097
|
|
Cash
|
27,308
|
|
|
28,565
|
|
Total cash, cash equivalents and marketable securities
|
$
|
403,424
|
|
|
$
|
387,662
|
|
The Company continues to invest in highly rated quality, highly liquid debt securities. As of
March 31, 2014
, these securities have a remaining maturity of less than one year. The Company holds all of its marketable securities as available-for-sale, marks them to market, and regularly reviews its portfolio to ensure adherence to its investment policy and to monitor individual investments for risk analysis, proper valuation, and unrealized losses that may be other than temporary.
The estimated fair value of cash equivalents and marketable securities classified by the length of time that the securities have been in a continuous unrealized loss position at
March 31, 2014
and
December 31, 2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Gross Unrealized Loss
|
|
March 31,
2014
|
|
December 31,
2013
|
|
March 31,
2014
|
|
December 31,
2013
|
|
(In thousands)
|
Less than one year
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes, bonds and commercial paper
|
$
|
43,151
|
|
|
$
|
53,491
|
|
|
$
|
(9
|
)
|
|
$
|
(15
|
)
|
The gross unrealized loss at
March 31, 2014
and
December 31, 2013
was not material in relation to the Company’s total available-for-sale portfolio. The gross unrealized loss can be primarily attributed to a combination of market conditions as well as the demand for and duration of the corporate notes and bonds. The Company has no intent to sell, there is no requirement to sell and the Company believes that it can recover the amortized cost of these investments. The Company has found no evidence of impairment due to credit losses in its portfolio. Therefore, these unrealized losses were recorded in other comprehensive
income (loss). However, the Company cannot provide any assurance that its portfolio of cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.
See Note 7, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.
7. Fair Value of Financial Instruments
The Company reviews the pricing inputs by obtaining prices from a different source for the same security on a sample of its portfolio. The Company has not adjusted the pricing inputs it has obtained. The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of
March 31, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
Total
|
|
Quoted
Market
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In thousands)
|
Money market funds
|
$
|
317,769
|
|
|
$
|
317,769
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate notes, bonds and commercial paper
|
58,347
|
|
|
—
|
|
|
58,347
|
|
|
—
|
|
Total available-for-sale securities
|
$
|
376,116
|
|
|
$
|
317,769
|
|
|
$
|
58,347
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
Total
|
|
Quoted
Market
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In thousands)
|
Money market funds
|
$
|
300,605
|
|
|
$
|
300,605
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate notes, bonds and commercial paper
|
58,492
|
|
|
—
|
|
|
58,492
|
|
|
—
|
|
Total available-for-sale securities
|
$
|
359,097
|
|
|
$
|
300,605
|
|
|
$
|
58,492
|
|
|
$
|
—
|
|
The following table presents the financial instruments that are measured on a nonrecurring basis as of
March 31, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
|
(in thousands)
|
Carrying Value
|
|
Quoted market prices in active markets (Level 1)
|
|
Significant other observable inputs (Level 2)
|
|
Significant unobservable inputs (Level 3)
|
|
Impairment charges for the three months ended March 31, 2014
|
Investment in non-marketable securities
|
$
|
600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
600
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The Company monitors its investments for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The Company monitors its investments for other-than-temporary losses by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, reductions in carrying values when necessary and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other-than-temporary loss is reported under “Interest and other income (expense), net” in the condensed consolidated statement of operations. For the three months ended
March 31, 2014
and
2013
, the Company did not incur any impairment loss on its investments.
Additionally, the Company cannot provide any assurance that its non-marketable equity security will not be further impacted by adverse changes in the general market conditions or deterioration in business prospects of the investee, which may require the Company in the future to record additional impairment charges which could adversely impact its financial results.
For the
three
months ended
March 31, 2014
and
2013
, there were no transfers of financial instruments between different categories of fair value.
The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of
March 31, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
As of December 31, 2013
|
(In thousands)
|
|
Face
Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Face
Value
|
|
Carrying
Value
|
|
Fair Value
|
5% Convertible Senior Notes due 2014 (the "2014 Notes")
|
|
$
|
172,500
|
|
|
$
|
168,658
|
|
|
$
|
173,846
|
|
|
$
|
172,500
|
|
|
$
|
164,047
|
|
|
$
|
175,821
|
|
1.125% Convertible Senior Notes due 2018 (the "2018 Notes")
|
|
$
|
138,000
|
|
|
$
|
110,962
|
|
|
$
|
155,824
|
|
|
$
|
138,000
|
|
|
$
|
109,629
|
|
|
$
|
142,427
|
|
The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes which is a level two measurement. As discussed in Note 8, "Convertible Notes," as of
March 31, 2014
, the 2014 Notes and 2018 Notes are carried at their face value of
$172.5 million
and
$138.0 million
, respectively, less any unamortized debt discount. The carrying value of other financial instruments, including accounts receivable, accounts payable and other accrued liabilities, approximates fair value due to their short maturities.
8. Convertible Notes
The Company’s convertible notes are shown in the following table:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
As of March 31, 2014
|
|
As of December 31, 2013
|
5% Convertible Senior Notes due 2014
|
|
$
|
172,500
|
|
|
$
|
172,500
|
|
1.125% Convertible Senior Notes due 2018
|
|
138,000
|
|
|
138,000
|
|
Total principal amount of convertible notes
|
|
$
|
310,500
|
|
|
$
|
310,500
|
|
|
|
|
|
|
Unamortized discount - 2014 Notes
|
|
$
|
(3,842
|
)
|
|
$
|
(8,453
|
)
|
Unamortized discount - 2018 Notes
|
|
(27,038
|
)
|
|
(28,371
|
)
|
Total unamortized discount
|
|
$
|
(30,880
|
)
|
|
$
|
(36,824
|
)
|
|
|
|
|
|
Total convertible notes
|
|
$
|
279,620
|
|
|
$
|
273,676
|
|
Less current portion
|
|
168,658
|
|
|
164,047
|
|
Total long-term convertible notes
|
|
$
|
110,962
|
|
|
$
|
109,629
|
|
The 2014 Notes are classified as a short-term liability as they will be due on June 15, 2014.
Interest expense related to the notes for the
three
months ended
March 31, 2014
and
2013
was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2014
|
|
2013
|
|
(In thousands)
|
2014 Notes coupon interest at a rate of 5%
|
$
|
2,156
|
|
|
$
|
2,157
|
|
2014 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 11.7%
|
4,769
|
|
|
4,089
|
|
2018 Notes coupon interest at a rate of 1.125%
|
388
|
|
|
—
|
|
2018 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 5.5%
|
1,473
|
|
|
—
|
|
Total interest expense on convertible notes
|
$
|
8,786
|
|
|
$
|
6,246
|
|
9. Commitments and Contingencies
As of
March 31, 2014
, the Company’s material contractual obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Remainder
of 2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
Thereafter
|
Contractual obligations (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Imputed financing obligation (2)
|
$
|
38,808
|
|
|
$
|
4,422
|
|
|
$
|
6,010
|
|
|
$
|
6,156
|
|
|
$
|
6,302
|
|
|
$
|
6,447
|
|
|
$
|
9,471
|
|
Leases and other contractual obligations
|
7,118
|
|
|
2,399
|
|
|
2,118
|
|
|
1,243
|
|
|
1,018
|
|
|
340
|
|
|
—
|
|
Software licenses (3)
|
5,684
|
|
|
2,446
|
|
|
2,865
|
|
|
373
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition retention bonuses (4)
|
16,749
|
|
|
16,679
|
|
|
70
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Convertible notes
|
310,500
|
|
|
172,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
138,000
|
|
|
—
|
|
Interest payments related to convertible notes
|
11,300
|
|
|
5,089
|
|
|
1,553
|
|
|
1,553
|
|
|
1,553
|
|
|
1,552
|
|
|
—
|
|
Total
|
$
|
390,159
|
|
|
$
|
203,535
|
|
|
$
|
12,616
|
|
|
$
|
9,325
|
|
|
$
|
8,873
|
|
|
$
|
146,339
|
|
|
$
|
9,471
|
|
_________________________________________
|
|
(1)
|
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately
$20.0 million
including
$18.0 million
recorded as a reduction of long-term deferred tax assets and
$2.0 million
in long-term income taxes payable as of
March 31, 2014
. As noted below in Note 13, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
|
|
|
(2)
|
With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the contractual obligations table and the amount reflected on the condensed consolidated balance sheets are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. Additionally, the amount includes the amended Ohio lease and the amended Sunnyvale lease.
|
|
|
(3)
|
The Company has commitments with various software vendors for non-cancellable license agreements generally having terms longer than
one
year. The above table summarizes those contractual obligations as of
March 31, 2014
which are also presented on the Company’s condensed consolidated balance sheet under current and other long-term liabilities.
|
|
|
(4)
|
In connection with acquisitions, the Company is obligated to pay retention bonuses to certain employees and contractors, subject to certain eligibility and acceleration provisions including the condition of employment. The remaining
$16.7 million
of CRI retention bonuses payable on June 3, 2014 can be paid in cash or stock at the Company’s election.
|
Building lease expense was approximately
$0.6 million
and
$0.9 million
for the three months ended
March 31, 2014
and 2013, respectively. Deferred rent of
$1.3 million
and
$1.4 million
as of
March 31, 2014
and
December 31, 2013
, respectively, were included primarily in other long-term liabilities.
Indemnification
The Company enters into standard license agreements in the ordinary course of business. Although the Company does not indemnify most of its customers, there are times when an indemnification is a necessary means of doing business. Indemnification covers customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement or any other claim by any third party arising as result of the applicable agreement with the Company. The Company generally attempts to limit the maximum amount of indemnification that the Company could be required to make under these agreements, to the amount of fees received by the Company.
10. Equity Incentive Plans and Stock-Based Compensation
As of
March 31, 2014
,
700,058
shares of the
21,400,000
shares approved under the 2006 Equity Incentive Plan (the “2006 Plan”) remain available for grant which included an increase of
6,500,000
shares approved by stockholders on April 26, 2012. The 2006 Plan is now the Company’s only plan for providing stock-based incentive awards to eligible employees, executive officers, non-employee directors and consultants; however, the 1997 Stock Option Plan (the “1997 Plan”) will continue to govern awards previously granted under that plan.
A summary of shares available for grant under the Company’s plans is as follows:
|
|
|
|
|
Shares Available
for Grant
|
Shares available as of December 31, 2013
|
2,527,428
|
|
Stock options granted
|
(1,797,462
|
)
|
Stock options forfeited
|
269,083
|
|
Stock options expired under former plans
|
(9,900
|
)
|
Nonvested equity stock and stock units granted (1)
|
(308,712
|
)
|
Nonvested equity stock and stock units forfeited (1)
|
19,621
|
|
Total available for grant as of March 31, 2014
|
700,058
|
|
_________________________________________
|
|
(1)
|
For purposes of determining the number of shares available for grant under the 2006 Plan against the maximum number of shares authorized, each share of restricted stock granted reduces the number of shares available for grant by
1.5
shares and each share of restricted stock forfeited increases shares available for grant by
1.5
shares.
|
General Stock Option Information
The following table summarizes stock option activity under the 1997 Plan and 2006 Plan for the
three
months ended
March 31, 2014
and information regarding stock options outstanding, exercisable, and vested and expected to vest as of
March 31, 2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
(In thousands, except per share amounts)
|
Outstanding as of December 31, 2013
|
11,377,146
|
|
|
$
|
11.32
|
|
|
|
|
|
|
Options granted
|
1,797,462
|
|
|
$
|
8.78
|
|
|
|
|
|
|
Options exercised
|
(206,843
|
)
|
|
$
|
6.73
|
|
|
|
|
|
|
Options forfeited
|
(269,083
|
)
|
|
$
|
15.20
|
|
|
|
|
|
|
Outstanding as of March 31, 2014
|
12,698,682
|
|
|
$
|
10.95
|
|
|
6.13
|
|
$
|
36,153
|
|
Vested or expected to vest at March 31, 2014
|
11,752,766
|
|
|
$
|
11.25
|
|
|
5.91
|
|
$
|
32,643
|
|
Options exercisable at March 31, 2014
|
6,303,547
|
|
|
$
|
14.94
|
|
|
3.74
|
|
$
|
10,850
|
|
No stock options that contain a market condition were granted during the
three
months ended
March 31, 2014
. The fair values of the options granted with a market condition were calculated using a binomial valuation model, which estimates the potential outcome of reaching the market condition based on simulated future stock prices. As of both
March 31, 2014
and
December 31, 2013
, there were
1,315,000
stock options outstanding that require the Company to achieve minimum market conditions in order for the options to become exercisable.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at
March 31, 2014
, based on the
$10.75
closing stock price of Rambus’ common stock on March 31, 2014 on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of
March 31, 2014
was
8,833,026
and
2,656,578
, respectively.
Employee Stock Purchase Plan
No purchases were made under the 2006 Employee Stock Purchase Plan (“ESPP”) during the
three
months ended
March 31, 2014
and
2013
, respectively. As of
March 31, 2014
,
19,232
shares under the ESPP remain available for issuance. On September 27, 2013, the Company filed a Registration Statement on Form S-8, registering
1,500,000
additional shares under the ESPP in connection with the commencement of the next subscription period under the ESPP. On April 24, 2014, the Company held its 2014 Annual Meeting of Stockholders where an amendment to the ESPP to increase the number of shares of common stock reserved for issuance under the ESPP by
1,500,000
shares was approved.
Stock-Based Compensation
For the
three
months ended
March 31, 2014
and
2013
, the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. In addition, the Company sponsors an ESPP, whereby eligible employees are entitled to purchase common stock semi-annually, by means of limited payroll deductions, at a
15%
discount from the fair market value of the common stock as of specific dates.
Stock Options
During the
three
months ended
March 31, 2014
and 2013, the Company granted
1,797,462
and
1,619,437
stock options, respectively, with an estimated total grant-date fair value of
$7.0 million
and $
3.8 million
, respectively. During the
three
months ended
March 31, 2014
and 2013, the Company recorded stock-based compensation expense related to stock options of
$2.2 million
and
$3.1 million
, respectively.
As of
March 31, 2014
, there was
$19.4 million
of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of
2.5
years. The total fair value of shares vested as of
March 31, 2014
was
$63.4 million
.
The total intrinsic value of options exercised was
$0.6 million
for the
three
months ended
March 31, 2014
. There were no options exercised during the three months ended March 31, 2013. Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.
During the three months ended March 31, 2014, net proceeds from employee stock option exercises totaled approximately
$1.4 million
.
Employee Stock Purchase Plan
For the
three
months ended
March 31, 2014
, the Company recorded an immaterial amount of compensation expense related to the ESPP. For the
three
months ended
March 31, 2013
, the Company recorded compensation expense related to the ESPP of
$0.5 million
. As of
March 31, 2014
, there was an immaterial amount of total unrecognized compensation cost related to stock-based compensation arrangements granted under the ESPP. That cost is expected to be recognized over
one
month.
There were no tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the
three
months ended
March 31, 2014
and
2013
calculated in accordance with accounting for share-based payments.
Valuation Assumptions
The fair value of stock awards is estimated as of the grant date using the Black-Scholes-Merton (“BSM”) option-pricing model assuming a dividend yield of
0%
and the additional weighted-average assumptions as listed in the table below.
The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted that contain only service conditions in the periods presented.
|
|
|
|
|
|
|
|
|
|
Stock Option Plans
|
|
Three Months Ended
|
|
March 31,
|
|
2014
|
|
2013
|
Stock Option Plans
|
|
|
|
|
|
Expected stock price volatility
|
44
|
%
|
|
47
|
%
|
Risk free interest rate
|
2.1
|
%
|
|
0.9
|
%
|
Expected term (in years)
|
6.1
|
|
|
5.4
|
|
Weighted-average fair value of stock options granted to employees
|
$
|
3.92
|
|
|
$
|
2.33
|
|
No shares were issued under the Employee Stock Purchase Plan during the three months ended March 31, 2014 and 2013.
Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the
three
months ended
March 31, 2014
, the Company granted nonvested equity stock units totaling
205,808
shares under the 2006 Plan. During the
three
months ended
March 31, 2013
, the Company granted nonvested equity stock units totaling
276,496
under the 2006 Plan. These awards have a service condition, generally a service period of
four years
, except in the case of grants to directors, for which the service period is
one year
. For the
three
months ended
March 31, 2014
, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately
$1.8 million
. For the
three
months ended
March 31, 2013
, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately
$1.5 million
. In prior years, the Company granted nonvested equity stock units to its employees with vesting subject to the achievement of certain performance conditions. During the
three
months ended
March 31, 2014
, the Company did not record any stock-based compensation expense related to these performance stock units as they have been forfeited. During the
three
months ended
March 31, 2013
, the achievement of certain performance conditions for certain performance equity stock units was considered probable, and as a result, the Company recognized an immaterial amount of stock-based compensation expense related to these performance stock units for this period.
For the
three
months ended
March 31, 2014
, the Company recorded stock-based compensation expense of approximately
$0.7 million
related to all outstanding unvested equity stock grants. For the three months ended
March 31, 2013
, the Company recorded stock-based compensation expense of approximately
$1.3 million
related to all outstanding unvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately
$4.3 million
at
March 31, 2014
. This amount is expected to be recognized over a weighted average period of
2.6 years
.
The following table reflects the activity related to nonvested equity stock and stock units for the
three
months ended
March 31, 2014
:
|
|
|
|
|
|
|
|
|
Nonvested Equity Stock and Stock Units
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Nonvested at December 31, 2013
|
|
629,649
|
|
|
$
|
8.56
|
|
Granted
|
|
205,808
|
|
|
$
|
8.79
|
|
Vested
|
|
(117,828
|
)
|
|
$
|
9.56
|
|
Forfeited
|
|
(13,078
|
)
|
|
$
|
6.67
|
|
Nonvested at March 31, 2014
|
|
704,551
|
|
|
$
|
8.49
|
|
11.
Stockholders’ Equity
Share Repurchase Program
During the
three
months ended
March 31, 2014
, the Company did not repurchase any shares of its common stock under its share repurchase program. As of
March 31, 2014
, the Company had repurchased a cumulative total of approximately
26.3 million
shares of its common stock with an aggregate price of approximately
$428.9 million
since the commencement of the program in 2001. As of
March 31, 2014
, there remained an outstanding authorization to repurchase approximately
5.2 million
shares of the Company’s outstanding common stock.
The Company records stock repurchases as a reduction to stockholders’ equity. The Company records a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the price of the shares repurchased exceeds the average original proceeds per share received from the issuance of common stock.
12. Restructuring Charges
The 2013 Plan
During 2013, the Company initiated a restructuring program related primarily to its LDT group as a result of the change in its business strategy to reduce its focus on the lower margin bulb products. Additionally, the Company curtailed its immersive media platform spending (the “2013 Plan”). In connection with this restructuring program, the Company estimated that it would incur aggregate costs of approximately
$3.0 million
to
$4.0 million
. During the
three
months ended
March 31, 2014
, the Company incurred an immaterial amount of restructuring charges related primarily to the reduction in workforce, which was related to the CTO reportable segment. The Company expects to substantially complete its restructuring activities related to this plan by the end of 2014.
The following table summarizes the 2013 Plan restructuring activities during the
three
months ended
March 31, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Severance
and Related Benefits
|
|
Facilities
|
|
Total
|
|
|
(In thousands)
|
Balance at December 31, 2013
|
|
$
|
1,732
|
|
|
$
|
133
|
|
|
$
|
1,865
|
|
Charges
|
|
39
|
|
|
—
|
|
|
39
|
|
Payments
|
|
(1,613
|
)
|
|
(133
|
)
|
|
(1,746
|
)
|
Balance at March 31, 2014
|
|
$
|
158
|
|
|
$
|
—
|
|
|
$
|
158
|
|
13. Income Taxes
The Company recorded a provision for income taxes of
$5.5 million
and
$4.5 million
for the three months ended
March 31, 2014
and
2013
, respectively. The provision for income taxes for the
three
months ended
March 31, 2014
and
2013
is primarily comprised of withholding taxes, state taxes and other foreign taxes based upon income earned during the period.
During the
three
months ended
March 31, 2014
and
2013
, the Company paid withholding taxes of
$5.1 million
and
$3.8 million
, respectively.
As of March 31, 2014, the Company’s condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately
$188.7 million
, which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses and certain liabilities, partially reduced by deferred tax liabilities associated with the convertible debt instruments. As of
March 31, 2014
, a full valuation allowance has been recorded against the U.S. deferred tax assets. The Company’s deferred tax assets decrease during the three months ended March 31, 2014 is primarily due to the utilization of U.S. tax attribute carryforward.
Management periodically evaluates the realizability of the Company's 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 as the Company is in a cumulative loss position over the previous three years, which is considered significant negative evidence. A sustained period of profitability in the Company's operations is required before the Company would change its judgment regarding the need for a full valuation allowance against its net deferred tax assets. Although the weight of negative evidence related to cumulative losses has decreased as the Company has settled outstanding litigation, the Company believes that this objectively measured negative evidence outweighs the subjectively determined positive evidence of future profitability and, as such, the Company has not changed its judgment regarding the need for a full valuation allowance on its deferred tax assets in the United States as of March 31, 2014. However, continued improvement in the Company's operating results, conditioned on its MID, LDT or CRI reporting units successfully commercializing new business arrangements, signing new or renewing existing license agreements and managing costs, could lead to reversal of almost all of the Company's valuation allowance as early as the remainder of 2014. Until such time, consumption of tax attributes to offset profits will reduce the overall level of deferred tax assets subject to valuation allowance. Should the Company determine that it would be able to
realize its remaining deferred tax assets in the foreseeable future, an adjustment to its remaining deferred tax assets would cause a material increase to income in the period such determination is made.
The Company maintains liabilities for uncertain tax positions within its long-term income taxes payable accounts and as a reduction to existing deferred tax assets to the extent tax attributes are available to offset such liabilities. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.
As of
March 31, 2014
, the Company had approximately
$20.0 million
of unrecognized tax benefits, including
$18.0 million
recorded as a reduction of long-term deferred tax assets and
$2.0 million
in long-term income taxes payable. If recognized, approximately
$2.0 million
would be recorded as an income tax benefit. No benefit would be recorded for the remaining unrecognized tax benefits as the recognition would require a corresponding increase in the valuation allowance. As of
December 31, 2013
, the Company had
$18.8 million
of unrecognized tax benefits, including
$12.6 million
recorded as a reduction of long-term deferred tax assets and
$6.2 million
recorded in long-term income taxes payable.
Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. At
March 31, 2014
and
December 31, 2013
, an immaterial amount of interest and penalties is included in long-term income taxes payable.
Rambus files income tax returns for the U.S., California, India and various other state and foreign jurisdictions. The U.S. federal returns are subject to examination from 2012 and forward. The California returns are subject to examination from 2009 and forward. In addition, any research and development credit carryforward or net operating loss carryforward generated in prior years and utilized in these or future years may also be subject to examination. The India returns are subject to examination from fiscal year ending March 2006 and forward. The Company is currently under examination by California for the 2010 and 2011 tax years and by India for fiscal years ending March 2006, 2009 and 2010. Management regularly assesses the likelihood of outcomes resulting from income tax examinations to determine the adequacy of their provision for income taxes and believes their provision for unrecognized tax benefits is adequate. In January 2014, an Internal Revenue Service examination covering the 2010 through 2011 tax years was completed with no audit adjustments.
Additionally, the Company's future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.
14. Litigation and Asserted Claims
SDRAM, DDR, DDR2, DDR3, gDDR2, GDDR3, GDDR4 Litigation (“DDR2”)
U.S District Court in the Northern District of California
On January 25, 2005, Rambus filed a patent infringement suit in the U.S. District Court for the Northern District of California against SK hynix, Infineon, Nanya, and Inotera. On January 13, 2006, Rambus also filed suit against Micron in the same court for patent infringement. Infineon and Inotera were subsequently dismissed from this litigation as was Samsung, which previously had been added as a defendant. Rambus alleged that certain of its patents were infringed by certain of the defendants' DDR2 and other advanced memory products. On June 11, 2013, Rambus and SK hynix announced that they had entered into a settlement of all outstanding disputes between the parties and on December 9, 2013, Rambus and Micron announced that they had entered into a settlement of all outstanding disputes between the parties, which is described in Note 15, "Agreements with SK hynix and Micron. On March 23, 2014, Rambus and Nanya announced that they had entered into a settlement of all outstanding disputes between the parties. As a result of such settlements, all DDR2 litigation has been dismissed.
Potential Future Litigation
In addition to the litigation described above, companies continue to adopt Rambus technologies into various products. Rambus has notified many of these companies of their use of Rambus technology and continues to evaluate how to proceed on these matters. In the ordinary course of business, Rambus may also be involved in other various legal proceedings and claims related to commercial, corporate and securities, labor and employment, wage and hour, and other types of claims. There can be no assurance that any future litigation will be successful or resolved favorably to the Company. The outcome of any litigation, as well as any delay in its resolution,
is inherently uncertain and could adversely affect Rambus' ability to license its intellectual property in the future.
The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies.
15. Agreements with SK hynix and Micron
SK hynix
On June 11, 2013, Rambus, SK hynix and certain related entities of SK hynix entered into a settlement agreement, pursuant to which the parties have agreed to release all claims against each other with respect to all outstanding litigation between them. Pursuant to the settlement agreement, Rambus and SK hynix entered into a semiconductor patent license agreement on June 11, 2013, under which SK hynix licenses from Rambus non-exclusive rights to certain Rambus patents and has agreed to pay Rambus cash amounts over the next
five years
. Under the license agreement, Rambus has granted to SK hynix (i) a paid-up perpetual patent license for certain identified SK hynix DRAM products and (ii) a
five
-year term patent license to all other DRAM and other semiconductor products.
The agreements with SK hynix are considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered several factors in determining the accounting fair value of the elements of the SK hynix agreements which included a third party valuation using an income approach (collectively the “SK hynix Fair Value”). The inputs and assumptions used in this accounting valuation were from a market participant perspective and included projected customer revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and discretion, and is based upon a number of factors, including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions may have a substantial impact on the SK hynix Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction.
During the first quarter of 2014, the Company received cash consideration of
$12.0 million
from SK hynix. The amount was allocated between royalty revenue (
$11.8 million
) and gain from settlement (
$0.2 million
) based on the elements’ SK hynix Fair Value.
The remaining
$204.0 million
is expected to be paid in successive quarterly payments of
$12.0 million
, concluding in the second quarter of 2018.
The cumulative cash receipts through March 31, 2014 and the remaining future cash receipts from the agreements with SK hynix are expected to be recognized as follows assuming no adjustments to the payments under the terms of the agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Received
to-date as of March 31,
|
|
Estimated to Be Received in
|
|
Total Estimated
Cash Receipts
|
|
2014
|
|
Remainder
of 2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue
|
$
|
35.4
|
|
|
$
|
35.5
|
|
|
$
|
47.3
|
|
|
$
|
47.9
|
|
|
$
|
48.0
|
|
|
$
|
24.0
|
|
|
$
|
238.1
|
|
Gain from settlement
|
0.6
|
|
|
0.5
|
|
|
0.7
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
Total
|
$
|
36.0
|
|
|
$
|
36.0
|
|
|
$
|
48.0
|
|
|
$
|
48.0
|
|
|
$
|
48.0
|
|
|
$
|
24.0
|
|
|
$
|
240.0
|
|
Micron
On December 9, 2013, Rambus, Micron and certain related entities of Micron entered into a settlement agreement, pursuant to which the parties have agreed that they will release all claims against each other with respect to all outstanding litigation between them and certain other potential claims. Pursuant to the settlement agreement, Rambus and Micron entered into a semiconductor patent license agreement on December 9, 2013. Under the license agreement, Rambus has granted to Micron and its subsidiaries and certain affiliated entities (i) a paid-up perpetual patent license for
certain identified Micron DRAM products and (ii) a
seven
-year term patent license to other memory and semiconductor products.
The agreements with Micron are considered a multiple element arrangement for accounting purposes. For a multiple element arrangement under the applicable accounting rules, the Company is required to identify specific elements of the arrangement and then determine when those elements should be recognized. The Company identified three elements in the arrangement: antitrust litigation settlement, settlement of past infringement, and license agreement. The Company considered several factors in determining the accounting fair value of the elements of the Micron agreements which included a third party valuation using an income approach (collectively the “Micron Fair Value”). The inputs and assumptions used in this accounting valuation were from a market participant perspective and included projected customer revenue, royalty rates, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and discretion, and is based upon a number of factors, including the selection of industry comparables, market growth rates and other relevant factors. Changes in any number of these assumptions may have a substantial impact on the Micron Fair Value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction.
During the first quarter of 2014, the Company received cash consideration of
$10.0 million
from Micron. The amount was allocated between royalty revenue (
$9.7 million
) and gain from settlement (
$0.3 million
) based on the elements’ Micron Fair Value.
The remaining
$264.5 million
is expected to be paid in successive quarterly payments of
$10.0 million
, concluding in the fourth quarter of 2020.
The cumulative cash receipts through March 31, 2014 and the remaining future cash receipts from the agreements with Micron are expected to be recognized as follows assuming no adjustments to the payments under the terms of the agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Received
to-date as of March 31,
|
|
Estimated to Be Received in
|
|
Total Estimated
Cash Receipts
|
|
2014
|
|
Remainder of 2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019 and thereafter
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue
|
$
|
15.0
|
|
|
$
|
29.0
|
|
|
$
|
38.7
|
|
|
$
|
39.5
|
|
|
$
|
40.0
|
|
|
$
|
40.0
|
|
|
$
|
74.5
|
|
|
$
|
276.7
|
|
Gain from settlement
|
0.5
|
|
|
1.0
|
|
|
1.3
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.3
|
|
Total
|
$
|
15.5
|
|
|
$
|
30.0
|
|
|
$
|
40.0
|
|
|
$
|
40.0
|
|
|
$
|
40.0
|
|
|
$
|
40.0
|
|
|
$
|
74.5
|
|
|
$
|
280.0
|
|