10-Q 1 q318_10qx10282017.htm FORM 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 000-30877
Marvell Technology Group Ltd.
(Exact name of registrant as specified in its charter)
Bermuda
 
77-0481679
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda
(441) 296-6395
(Address of principal executive offices, Zip Code and registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨ 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨ 
 
 
Emerging growth company
¨ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
The number of common shares of the registrant outstanding as of November 27, 2017 was 491.2 million shares.



TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
 

1


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value per share)
 
 
October 28,
2017
 
January 28,
2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
800,099

 
$
814,092

Short-term investments
931,976

 
854,268

Accounts receivable, net
366,114

 
335,384

Inventories
173,741

 
170,842

Prepaid expenses and other current assets
49,920

 
58,771

Assets held for sale
36,571

 
57,077

Total current assets
2,358,421

 
2,290,434

Property and equipment, net
198,173

 
243,397

Goodwill and acquired intangible assets, net
1,993,668

 
1,996,880

Other non-current assets
131,942

 
117,939

Total assets
$
4,682,204

 
$
4,648,650

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
166,096

 
$
143,484

Accrued liabilities
108,007

 
143,491

Accrued employee compensation
129,035

 
139,647

Deferred income
74,943

 
63,976

Liabilities held for sale

 
5,818

Total current liabilities
478,081

 
496,416

Non-current income taxes payable
56,641

 
60,646

Other non-current liabilities
86,533

 
63,937

Total liabilities
621,255

 
620,999

Commitments and contingencies (Note 9)

 

Shareholders’ equity:
 
 
 
Common shares, $0.002 par value
982

 
1,012

Additional paid-in capital
2,669,775

 
3,016,775

Accumulated other comprehensive income (loss)
(192
)
 
23

Retained earnings
1,390,384

 
1,009,841

Total shareholders’ equity
4,060,949

 
4,027,651

 
 
 
 
Total liabilities and shareholders’ equity
$
4,682,204

 
$
4,648,650

See accompanying notes to unaudited condensed consolidated financial statements

2


MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Net revenue
$
616,302

 
$
623,651

 
$
1,793,761

 
$
1,734,630

Cost of goods sold
238,533

 
266,757

 
705,303

 
777,117

Gross profit
377,769

 
356,894

 
1,088,458

 
957,513

Operating expenses:
 
 
 
 
 
 
 
Research and development
165,477

 
202,416

 
534,444

 
629,767

Selling, general and administrative
59,112

 
60,088

 
169,875

 
192,052

Restructuring related charges
3,284

 
1,164

 
8,455

 
6,326

Total operating expenses
227,873

 
263,668

 
712,774

 
828,145

Operating income from continuing operations
149,896

 
93,226

 
375,684

 
129,368

Interest and other income, net
6,200

 
5,470

 
16,721

 
13,242

Income from continuing operations before income taxes
156,096

 
98,696

 
392,405

 
142,610

Provision for income taxes
6,759

 
15,523

 
8,026

 
4,263

Income from continuing operations, net of tax
149,337

 
83,173

 
384,379

 
138,347

Income (loss) from discontinued operations, net of tax
50,851

 
(10,557
)
 
87,689

 
(37,105
)
Net income
$
200,188

 
$
72,616

 
$
472,068

 
$
101,242

 
 
 
 
 
 
 
 
Net income (loss) per share - Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.30

 
$
0.16

 
$
0.77

 
$
0.27

Discontinued operations
$
0.11

 
$
(0.02
)
 
$
0.17

 
$
(0.07
)
Net income per share - Basic
$
0.41

 
$
0.14

 
$
0.94

 
$
0.20

 
 
 
 
 
 
 
 
Net income (loss) per share - Diluted:
 
 
 
 
 
 
 
       Continuing operations
$
0.30

 
$
0.16

 
$
0.75

 
$
0.27

       Discontinued operations
$
0.10

 
$
(0.02
)
 
$
0.17

 
$
(0.07
)
Net income per share - Diluted
$
0.40

 
$
0.14

 
$
0.92

 
$
0.20

 
 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
494,096

 
511,090

 
499,568

 
510,373

Diluted
504,903

 
522,091

 
510,935

 
516,476

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18

See accompanying notes to unaudited condensed consolidated financial statements

3


MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Net income
$
200,188

 
$
72,616

 
$
472,068

 
$
101,242

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in unrealized gain (loss) on marketable securities
726

 
(2,018
)
 
608

 
2,391

Net change in unrealized loss on cash flow hedges
(1,817
)
 
(444
)
 
(823
)
 
(43
)
Other comprehensive income (loss), net of tax
(1,091
)
 
(2,462
)
 
(215
)
 
2,348

Comprehensive income, net of tax
$
199,097

 
$
70,154

 
$
471,853

 
$
103,590

See accompanying notes to unaudited condensed consolidated financial statements

4


MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
Cash flows from operating activities:
 
 
 
Net income
$
472,068

 
$
101,242

Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
 
 
 
Depreciation and amortization
62,569

 
81,168

Share-based compensation
65,312

 
89,912

Amortization and write-off of acquired intangible assets
3,212

 
8,676

Restructuring related impairment charges
(402
)
 
2,081

Gain from investments in privately-held companies
(2,501
)
 

Amortization of premium/discount on available-for-sale securities
603

 
1,697

Other non-cash expense (income), net
1,331

 
(677
)
Excess tax benefits from share-based compensation

 
(10
)
Deferred income taxes
2,797

 
(2,222
)
Gain on sale of property and equipment
(473
)
 

Gain on sale of discontinued operations
(88,406
)
 

Gain on sale of business
(5,254
)
 

Changes in assets and liabilities:
 
 
 
Accounts receivable
(30,730
)
 
(38,895
)
Inventories
(16,039
)
 
10,944

Prepaid expenses and other assets
13,122

 
(356
)
Accounts payable
20,087

 
10,541

Accrued liabilities and other non-current liabilities
(40,462
)
 
(23,735
)
Carnegie Mellon University accrued litigation settlement

 
(736,000
)
Accrued employee compensation
(10,612
)
 
10,419

Deferred income
5,149

 
7,934

Net cash provided by (used in) operating activities
451,371

 
(477,281
)
Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(672,887
)
 
(343,810
)
Sales of available-for-sale securities
284,151

 
458,744

Maturities of available-for-sale securities
305,702

 
198,293

Return of investment from privately-held companies
6,089

 
274

Purchases of time deposits
(225,000
)
 
(200,000
)
Maturities of time deposits
225,000

 
50,000

Purchases of technology licenses
(5,256
)
 
(8,439
)
Purchases of property and equipment
(25,156
)
 
(37,724
)
Proceeds from sales of property and equipment
1,988

 

Net proceeds from sale of discontinued operations
165,940

 

Net proceeds from sale of business
2,402

 

Net cash provided by investing activities
62,973

 
117,338

Cash flows from financing activities:
 
 
 
Repurchases of common stock
(527,574
)
 
(56,531
)
Proceeds from employee stock plans
137,424

 
11,836

Minimum tax withholding paid on behalf of employees for net share settlement
(25,934
)
 
(16,281
)
Dividend payments to shareholders
(89,556
)
 
(91,835
)
Payments on technology license obligations
(22,697
)
 
(13,848
)
Excess tax benefits from share-based compensation

 
10

Net cash used in financing activities
(528,337
)
 
(166,649
)
Net decrease in cash and cash equivalents
(13,993
)
 
(526,592
)
Cash and cash equivalents at beginning of period
814,092

 
1,278,180

Cash and cash equivalents at end of period
$
800,099

 
$
751,588

See accompanying notes to unaudited condensed consolidated financial statements

5

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Note 1. Basis of Presentation

The unaudited condensed consolidated financial statements of Marvell Technology Group Ltd., a Bermuda exempted company, and its wholly owned subsidiaries (the “Company”), as of and for the three and nine months ended October 28, 2017, have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted as permitted by the SEC. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company's fiscal year 2017 audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2017. In the opinion of management, the financial statements include all adjustments, including normal recurring adjustments and other adjustments that are considered necessary for fair presentation of the Company’s financial position and results of operations. All inter-company accounts and transactions have been eliminated. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for the entire year. The Company's financial results for prior periods presented herein have been recast to reflect certain businesses that were classified as discontinued operations during the fourth quarter of fiscal year 2017 and second quarter of fiscal year 2018. See Note 3. Discontinued Operations for additional information. Certain prior year amounts have been reclassified to conform to current year presentation. These amounts were not material to any of the periods presented.

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. Accordingly, every fifth or sixth fiscal year will have a 53-week period. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal 2017 had a 52-week year. Fiscal 2018 is a 53-week year.

During the first fiscal quarter of 2018, the Company recorded certain out-of-period adjustments of $4.7 million related to revenue-related accruals and $3.2 million related to other expenses. The net effect of these out-of-period adjustments resulted in a $7.9 million increase in income from continuing operations for the nine months ended October 28, 2017, an increase in basic earnings per share from continuing operations of $0.02 per share, and an increase in diluted earnings per share from continuing operations of $0.01 per share, as well as contributing to the increase in revenue and gross margin for the nine months ended October 28, 2017

Subsequent to quarter end, on November 20, 2017, the Company and Cavium, Inc. ("Cavium") announced a definitive agreement, unanimously approved by the boards of directors of both companies, under which the Company will acquire all outstanding shares of Cavium common stock in exchange for consideration of $40.00 per share in cash and 2.1757 Marvell common shares for each Cavium share. The exchange ratio was based on a purchase price of $80 per share, using the Company's undisturbed price prior to November 3, when media reports of the transaction first surfaced. This represents a transaction value of approximately $6 billion. Cavium shareholders are expected to own approximately 25% of the combined company on a pro forma basis. The agreement provides the Company and Cavium with certain specific termination rights in certain circumstances, including a termination fee that may be payable by either the Company or Cavium upon termination of the transaction as more fully described in the agreement.

The Company intends to fund the cash consideration with a combination of cash on hand from the combined companies and $1.75 billion in debt financing. The Company has obtained commitments consisting of an $850 million bridge loan commitment and a $900 million committed term loan from Goldman Sachs Bank USA and Bank of America Merrill Lynch, in each case, subject to customary terms and conditions. The transaction is not subject to any financing condition.

The transaction is expected to close in mid-calendar 2018, subject to regulatory approval as well as other customary closing conditions, including the adoption by Cavium shareholders of the merger agreement and the approval by the Company's shareholders of the issuance of the Company's common shares in the transaction.



6

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 2. Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Effective

In May 2014, the FASB issued a new accounting standard on the recognition of revenue from contracts with customers that will supersede nearly all existing revenue recognition guidance under GAAP. The new standard will require an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses, in particular, contracts with more than one performance obligation, as well as the accounting for certain costs to obtain or fulfill a contract with a customer, and provides for additional disclosures with respect to revenue and cash flows arising from contracts with customers. Public entities are required to apply the amendments on either a full or modified retrospective basis for annual periods beginning after December 15, 2017 and for interim periods within those annual periods. This update will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company plans to adopt the standard on a modified retrospective basis, with the cumulative effect recognized in retained earnings at the date of adoption.

To date, the Company has completed the assessment phase and has substantially completed the design phase of its revenue project and is currently in process of developing, implementing and testing its internal systems, processes and controls. The Company has identified systems and process changes necessary to enable compliance with the new standard. The Company will continue to complete the remaining development, implementation and testing steps necessary to adopt the new standard at the beginning of its fiscal year 2019, and will finalize changes necessary to its accounting policies and disclosures.

The Company’s assessment to date has identified a change in revenue recognition timing on its component sales made to distributors. The Company expects to recognize revenue when the Company transfers control to the distributor rather than deferring recognition until the distributor sells the components. On the date of initial adoption, the Company will remove the deferred income on component sales made to distributors and record estimates of the accruals for variable consideration through a cumulative adjustment to retained earnings. As of October 28, 2017, the deferred income on component sales to distributors, which is included in deferred income in the accompanying condensed consolidated balance sheets, is $72.3 million. In addition, the Company will establish appropriate accrual adjustments estimated based on historical experience for the variable consideration aspect of sales to distributors, including estimates for price protection, rebates, and stock rotation programs. The Company currently estimates that the accruals for variable consideration which will be required on the initial date of adoption will be in excess of $40.0 million. Other changes may be identified as the Company continues its design, testing and implementation process.

In January 2016, the FASB issued an accounting standard update that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In February 2016, the FASB issued a new standard on the accounting for leases, which requires a lessee to record a right-of-use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve months. The standard also expands the required quantitative and qualitative disclosures for lease arrangements. The standard is effective for the Company beginning in the first quarter of fiscal year 2020. The Company is currently evaluating the effect this new guidance will have on its consolidated financial statements.

In June 2016, the FASB issued a new standard requiring financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard eliminates the threshold for initial recognition in current GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The standard is effective for the Company beginning in the first quarter of fiscal year 2021. The Company does not expect the adoption of this guidance will have a material effect on its consolidated financial statements.


7

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In August 2016, the FASB issued an accounting standards update to add or clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The amendments in the update provide guidance on eight specific cash flow issues and is effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted, including adoption in an interim period. The amendments to the guidance should be applied using a retrospective transition method for each period presented and, if it is impracticable to apply all of the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company does not expect the adoption of this guidance to have a material effect on the Company's consolidated financial statements.

In October 2016, the FASB issued new guidance that simplifies the accounting for the income tax effects of intra-entity transfers and will require companies to recognize the income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs. Previous guidance required companies to defer the income tax effects of intra-entity transfers of assets until the asset had been sold to an outside party or otherwise recognized. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In November 2016, the FASB issued new guidance that requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. As a result, companies will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In January 2017, the FASB issued an accounting standards update that revises the definition of a business. The amendments provide a more robust framework for determining when a set of assets and activities is a business. The update is intended to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted for certain transactions, as specifically described in the guidance. The Company is evaluating the effect this new guidance will have on its consolidated financial statements.

In May 2017, the FASB issued an accounting standards update that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Unless the changes in terms or conditions meet all three criteria outlined in the guidance, modification accounting should be applied. The three criteria relate to changes in the terms and conditions that affect the fair value, vesting conditions, or classification of a share-based payment award. The amendment is effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In August 2017, the FASB issued an accounting standards update that simplifies the application and administration of hedge accounting. The guidance amends the presentation and disclosure requirements and changes how companies assess effectiveness. The guidance is intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The guidance will be applied to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. The Company is evaluating the effect this new guidance will have on its consolidated financial statements.
Note 3. Discontinued Operations

In November 2016, the Company announced a plan to restructure its operations to refocus its research and development, increase operational efficiency and improve profitability. As part of those actions, the Company began an active program to locate buyers for several businesses. The Company concluded that the divestitures of these businesses represented a strategic shift that has a major effect on the Company’s operations and financial results. These businesses were deemed not to align with the Company’s core business. The Company classified these businesses as discontinued operations for all periods presented in its consolidated financial statements.


8

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In February 2017, the Company entered into an agreement to sell the assets of one of these businesses, the Broadband operations. The transaction closed on April 4, 2017. Based on the terms of the agreement, the Company received sale consideration of $23.0 million in cash proceeds. The divestiture resulted in a pre-tax gain on sale of $8.2 million, which is included in income from discontinued operations in the consolidated statements of operations.

In May 2017, the Company sold the assets of a second business, the LTE thin-modem operations. The transaction closed on May 18, 2017.  Based on the terms of the agreement, the Company received sale consideration of $52.9 million. The divestiture resulted in a pre-tax gain on sale of $34.0 million, which is included in income from discontinued operations in the consolidated statements of operations.

In June 2017, the Company entered into an agreement to sell the assets of a third business, the Multimedia operations. The transaction closed on September 8, 2017. Based on the terms of the agreement, the Company received sale consideration of $93.7 million in cash proceeds. The divestiture resulted in a pre-tax gain on sale of $46.2 million which is included in income from discontinued operations in the consolidated statements of operations.

The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations to the total assets and liabilities of the disposal group classified as held for sale that are presented separately in the consolidated balance sheets (in thousands):

 
October 28,
2017
 
January 28,
2017
Assets held for sale:
 
 
 
       Inventory
$

 
$
9,281

       Property and equipment, net

 
5,270

       Goodwill

 
36,636

       Acquired intangible assets, net

 
3,799

       Other

 
1,490

Assets held for sale for discontinued operations

 
56,476

Other assets held for sale
36,571

 
601

Total assets of the disposal group classified as held for sale
$
36,571

 
$
57,077

 
 
 
 
Liabilities held for sale:
 
 
 
       Deferred income
$

 
$
5,818


Other assets held for sale as of October 28, 2017 consist of buildings and land.


9

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table presents a reconciliation of the major financial lines constituting the results of operations for discontinued operations to the net income (loss) from discontinued operations presented separately in the consolidated statements of operations (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Net revenue
$
22,117

 
$
30,771

 
$
94,137

 
$
87,018

Operating costs and expenses:
 
 
 
 
 
 
 
       Cost of goods sold
10,521

 
19,306

 
47,499

 
55,766

       Research and development
2,360

 
20,047

 
34,530

 
62,045

       Selling, general and administrative
4,284

 
1,691

 
6,925

 
5,240

Operating costs and expenses
17,165

 
41,044

 
88,954

 
123,051

Income (loss) from discontinued operations before income taxes
4,952

 
(10,273
)
 
5,183

 
(36,033
)
Gain from sale of discontinued operations
46,219

 

 
88,406

 

Provision for income taxes
320

 
284

 
5,900

 
1,072

Income (loss) from discontinued operations, net of tax
$
50,851

 
$
(10,557
)
 
$
87,689

 
$
(37,105
)

Non-cash operating amounts reported for discontinued operations include share-based compensation credit of $1.8 million for the three months ended October 28, 2017 and share-based compensation expense of $1.6 million for the nine months ended October 28, 2017 and share-based compensation expense of $3.0 million and $10.2 million for the three and nine months ended October 29, 2016, respectively. The net credit recognized in the quarter ended October 28, 2017 is due to the effect of forfeitures. Depreciation, amortization and capital expenditures are not material. The proceeds from sale of the Multimedia business of $93.7 million, proceeds from sale of the LTE thin-modem business of $49.2 million and proceeds from sale of the Broadband business of $23.0 million are classified in investing activities for the nine months ended October 28, 2017, and the gain on sale of such business is presented in operating activities in the consolidated statements of cash flows. Due to the Company's transfer pricing arrangements, the Company generates income in most jurisdictions in which it operates, regardless of a loss that may exist on a consolidated basis. In addition, the Company recognized a tax expense of $0.5 million on the sale of its Multimedia business for the three and nine months ended October 28, 2017 and a tax expense of $4.5 million on the sale of its LTE thin-modem business for the nine month period ended October 28, 2017. As such, the Company has reflected a tax expense of $0.3 million and $5.9 million for the three and nine months ended October 28, 2017 and $0.3 million and $1.1 million for the three and nine months ended October 29, 2016, respectively, attributable to discontinued operations.


10

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 4. Restructuring Related Charges
In November 2016, the Company announced a restructuring plan intended to refocus its research and development, increase operational efficiency and improve profitability. As a continuation of such plan, the Company recorded restructuring related charges of $3.3 million and $8.5 million in the three and nine months ended October 28, 2017. The following table presents details of charges recorded by the Company related to the restructuring actions described below (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Restructuring related charges:
 
 
 
 
 
 
 
     Severance and related costs
$
1,547

 
$

 
$
7,383

 
$
15

     Facilities and related costs
1,109

 
108

 
1,551

 
4,585

     Other exit-related costs
922

 

 
1,342

 

 
3,578

 
108

 
10,276

 
4,600

Release of reserves:
 
 
 
 
 
 
 
Severance
(26
)
 

 
(937
)
 
(86
)
       Facilities and related costs
(75
)
 

 
(145
)
 

Other exit-related
(237
)
 

 
(337
)
 
(269
)
 
(338
)
 

 
(1,419
)
 
(355
)
Impairment and write-off of assets:
 
 
 
 
 
 
 
Technology license

 

 
174

 

Equipment and other
44

 
1,056

 
(576
)
 
2,081

 
44

 
1,056

 
(402
)
 
2,081

 
 
 
 
 
 
 
 
Restructuring related charges
$
3,284

 
$
1,164

 
$
8,455

 
$
6,326

The Company is on track to complete activities related to the restructuring plan as previously announced.
The following table sets forth a reconciliation of the beginning and ending restructuring liability balances by each major type of cost associated with the restructuring charges (in thousands):
 
 
November 2016 & Other Prior Restructuring
 
 
 
Severance
and Related
Costs
 
Facilities
and Related
Costs
 
Other
Exit-Related
Costs
 
Total
Balance at January 28, 2017
$
17,000

 
$
2,474

 
$
4,625

 
$
24,099

Restructuring charges - continuing operations
7,383

 
1,551

 
1,342

 
10,276

Release of reserves - continuing operations
(937
)
 
(145
)
 
(337
)
 
(1,419
)
Restructuring charges - discontinued operations
7,015

 
9

 
3,560

 
10,584

Net cash payments
(29,040
)
 
(2,998
)
 
(5,152
)
 
(37,190
)
Other

 

 
1,792

 
1,792

Balance at October 28, 2017
$
1,421

 
$
891

 
$
5,830

 
$
8,142



11

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The remaining accrued severance represents termination benefits determined to have been established under a substantive ongoing benefit arrangement for which payment was considered probable due to the timing of notification to certain additional employee groups, and is expected to be paid in the fourth quarter of fiscal 2018 through first quarter of fiscal 2019. Severance charges of $0.9 million and $7.0 million in the three and nine months ended October 28, 2017, respectively, relate to discontinued operations and have been included in income (loss) from discontinued operations, net of tax, in the Company's condensed consolidated statements of operations. Other exit-related costs of $3.6 million in both the three and nine months ended October 28, 2017, respectively, relate to discontinued operations and have been included in income (loss) from discontinued operations, net of tax, in the Company's condensed consolidated statements of operations. The accrued balance at October 28, 2017 for facilities and related costs includes remaining payments under lease obligations related to vacated space that are expected to be paid through fiscal 2020. Other exit-related costs are expected to be paid in the fourth quarter of fiscal 2018 through first quarter of fiscal 2019.

Note 5. Supplemental Financial Information (in thousands)
Consolidated Balance Sheets
 
 
October 28,
2017
 
January 28,
2017
Inventories:
 
 
 
Work-in-process
$
123,351

 
$
109,362

Finished goods
50,390

 
61,480

Total inventories
$
173,741

 
$
170,842


Inventory held by third-party logistics providers is recorded as consigned inventory on the Company’s unaudited condensed consolidated balance sheet. The amount of inventory held at third-party logistics providers was $12.8 million and $26.5 million at October 28, 2017 and January 28, 2017, respectively.

 
October 28,
2017
 
January 28,
2017
Property and equipment, net:
 
 
 
Machinery and equipment
$
525,825

 
$
589,280

Land, buildings, and leasehold improvements
245,276

 
296,800

Computer software
98,185

 
99,186

Furniture and fixtures
21,287

 
23,978

 
890,573

 
1,009,244

Less: Accumulated depreciation and amortization
(692,400
)
 
(765,847
)
Total property and equipment, net
$
198,173

 
$
243,397






12

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Current accrued liabilities are comprised of the following at October 28, 2017 and January 28, 2017, respectively:

 
October 28,
2017
 
January 28,
2017
Accrued liabilities:
 
 
 
Technology license obligations
$
21,319

 
$
21,905

Accrued royalties
15,318

 
17,349

Accrued rebates
10,920

 
26,095

Accrued legal related expenses
13,164

 
7,727

Unsettled investment trades
11,194

 
15,371

Restructuring liabilities
7,826

 
23,150

Other
28,266

 
31,894

Total accrued liabilities
$
108,007

 
$
143,491


Unsettled investment trades represent the accrual to address the timing difference between trade date and cash settlement date. Other restructuring related accrued liabilities of $0.3 million and $1.0 million as of October 28, 2017 and January 28, 2017, respectively, are included in other non-current liabilities and accounts payable in the accompanying condensed consolidated balance sheets, not presented within current accrued liabilities above due to the nature of the balances.

 
October 28,
2017
 
January 28,
2017
Deferred income:
 
 
 
Deferred revenue
$
98,021

 
$
87,968

Deferred cost of goods sold
(23,078
)
 
(23,992
)
Deferred income
$
74,943

 
$
63,976

 
 
October 28,
2017
 
January 28,
2017
Other non-current liabilities:
 
 
 
Deferred tax liabilities
$
51,129

 
$
38,777

Technology license obligations
32,948

 
14,949

Long-term accrued employee compensation
931

 
4,075

Other
1,525

 
6,136

Other non-current liabilities
$
86,533

 
$
63,937

Accumulated other comprehensive income (loss)
The changes in accumulated other comprehensive income (loss) by components are presented in the following tables (in thousands):
 
Unrealized Gain
(Loss) on
Marketable
Securities
 
Unrealized Gain
(Loss) on Cash
Flow Hedges
 
Total
Balance at January 28, 2017
$
(801
)
 
$
824

 
$
23

Other comprehensive income (loss) before reclassifications
653

 
2,341

 
2,994

Amounts reclassified from accumulated other comprehensive loss
(45
)
 
(3,164
)
 
(3,209
)
Other comprehensive income (loss)
608

 
(823
)
 
(215
)
Balance at October 28, 2017
$
(193
)
 
$
1

 
$
(192
)

13

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
Unrealized Gain
(Loss) on
Marketable
Securities
 
Unrealized Gain
(Loss) on Cash
Flow Hedges
 
Total
Balance at January 30, 2016
$
(656
)
 
$
(139
)
 
$
(795
)
Other comprehensive income before reclassifications
2,868

 
479

 
3,347

Amounts reclassified from accumulated other comprehensive income
(477
)
 
(522
)
 
(999
)
Other comprehensive income (loss)
2,391

 
(43
)
 
2,348

Balance at October 29, 2016
$
1,735

 
$
(182
)
 
$
1,553




Consolidated Statements of Operations

 
Three Months Ended
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Interest and other income, net:
 
 
 
 
 
 
 
Interest income
$
4,301

 
$
3,370

 
$
11,643

 
$
10,005

Net realized gain (loss) on investments
(2,755
)
 
252

 
(2,783
)
 
677

Currency remeasurement gain (loss)
374

 
944

 
(183
)
 
1,961

Other income (expense)
4,542

 
986

 
8,437

 
896

Interest expense
(262
)
 
(82
)
 
(393
)
 
(297
)
 
$
6,200

 
$
5,470

 
$
16,721

 
$
13,242

Share Repurchase Program
The Company repurchased 31.5 million of its common shares for $527.6 million during the nine months ended October 28, 2017. The Company repurchased 4.4 million shares for $56.5 million during the nine months ended October 29, 2016. The repurchased shares were retired immediately after the repurchases were completed.
As of October 28, 2017, a total of 286.4 million shares have been repurchased to date under the Company’s share repurchase program for a total $3.8 billion in cash and there was $358.0 million remaining available for future share repurchases.

14

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 6. Investments
The following tables summarize the Company’s investments (in thousands):
 
October 28, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. government and agency debt
$
177,184

 
$
60

 
$
(364
)
 
$
176,880

Foreign government and agency debt
6,846

 

 
(15
)
 
6,831

Municipal debt securities
2,926

 

 

 
2,926

Corporate debt securities
552,282

 
673

 
(528
)
 
552,427

Asset backed securities
42,931

 
15

 
(34
)
 
42,912

Held-to-maturity:
 
 
 
 
 
 
 
Time deposits
150,000

 

 

 
150,000

Total investments
$
932,169

 
$
748

 
$
(941
)
 
$
931,976


 
 
January 28, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. government and agency debt
$
185,584

 
$
86

 
$
(283
)
 
$
185,387

Foreign government and agency debt
13,425

 

 
(50
)
 
13,375

Municipal debt securities
27,916

 
4

 
(49
)
 
27,871

Corporate debt securities
432,603

 
281

 
(776
)
 
432,108

Asset backed securities
45,541

 
33

 
(47
)
 
45,527

Held-to-maturity:
 
 
 
 
 
 
 
Time deposits
150,000

 

 

 
150,000

Total short-term investments
855,069

 
404

 
(1,205
)
 
854,268

Long-term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Auction rate securities
4,615

 

 

 
4,615

Long-term investments
4,615

 

 

 
4,615

Total investments
$
859,684

 
$
404

 
$
(1,205
)
 
$
858,883


Gross realized gains and gross realized losses on sales of available-for-sale securities are presented in the following tables (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Gross realized gains
$
92

 
$
298

 
$
177

 
$
966

Gross realized losses
(2,847
)
 
(46
)
 
(2,960
)
 
(289
)
Total net realized gains (losses)
$
(2,755
)
 
$
252

 
$
(2,783
)
 
$
677


15

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The contractual maturities of available-for-sale securities are presented in the following tables (in thousands):
 
 
October 28, 2017
 
January 28, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
484,064

 
$
483,982

 
$
423,151

 
$
423,058

Due between one and five years
448,105

 
447,994

 
423,669

 
422,995

Due over five years

 

 
12,864

 
12,830

 
$
932,169

 
$
931,976

 
$
859,684

 
$
858,883

For individual securities that have been in a continuous unrealized loss position, the fair value and gross unrealized loss for these securities aggregated by investment category and length of time in an unrealized position are presented in the following tables (in thousands):
 
 
October 28, 2017
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government and agency debt
$
95,102

 
$
(273
)
 
$
11,423

 
$
(91
)
 
$
106,525

 
$
(364
)
Foreign government and agency debt
2,094

 
(3
)
 
4,737

 
(12
)
 
6,831

 
(15
)
Municipal debt securities
1,266

 

 

 

 
1,266

 

Corporate debt securities
193,182

 
(382
)
 
24,731

 
(146
)
 
217,913

 
(528
)
Asset backed securities
15,111

 
(13
)
 
2,179

 
(21
)
 
17,290

 
(34
)
Total securities
$
306,755

 
$
(671
)
 
$
43,070

 
$
(270
)
 
$
349,825

 
$
(941
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 28, 2017
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government and agency debt
$
94,064

 
$
(283
)
 
$

 
$

 
$
94,064

 
$
(283
)
Foreign government and agency debt
11,875

 
(48
)
 
1,499

 
(2
)
 
13,374

 
(50
)
Municipal debt securities
17,450

 
(47
)
 
1,248

 
(2
)
 
18,698

 
(49
)
Corporate debt securities
199,382

 
(751
)
 
16,063

 
(25
)
 
215,445

 
(776
)
Asset backed securities
16,754

 
(47
)
 

 

 
16,754

 
(47
)
Total securities
$
339,525

 
$
(1,176
)
 
$
18,810

 
$
(29
)
 
$
358,335

 
$
(1,205
)


As of October 28, 2017, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the amortized cost basis. In addition, as of October 28, 2017, the Company anticipates that it will recover the amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the nine months ended October 28, 2017.


16

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 7. Derivative Financial Instruments
The Company manages some of its foreign currency exchange rate risk through the purchase of foreign currency exchange contracts that hedge against the short-term effect of currency fluctuations. The Company’s policy is to enter into foreign currency forward contracts with maturities less than 12 months that mitigate the effect of rate fluctuations on certain local currency denominated operating expenses. All derivative instruments are recorded at fair value in either prepaid expenses and other current assets or accrued liabilities. The Company reports cash flows from derivative instruments in cash flows from operating activities. The Company uses quoted prices to value its derivative instruments. There were no outstanding forward contracts at October 28, 2017. The notional amounts of outstanding forward contracts was $63.5 million at January 28, 2017 and consisted of Israeli shekel buy contracts.

Cash Flow Hedges. The Company designates and documents its foreign currency forward exchange contracts as cash flow hedges for certain operating expenses. The Company evaluates and calculates the effectiveness of each hedge at least quarterly. The effective change is recorded in accumulated other comprehensive income and is subsequently reclassified to operating expense when the hedged expense is recognized. Ineffectiveness is recorded in interest and other income, net.
The following table provides information about gains (losses) associated with the Company’s derivative financial instruments (in thousands):
 
 
 
 
Amount of Gains (Losses) in Statements of Operations
 
 
 
Three Months Ended
 
Nine Months Ended
 
Location of Gains (Losses)
in Statements of Operations
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
Forward contracts:
Research and development
 
$
1,497

 
$
242

 
$
3,223

 
$
693

 
Selling, general and administrative
 
329

 
33

 
723

 
96

 
 
 
$
1,826

 
$
275

 
$
3,946

 
$
789


The amounts of gains (losses) associated with the Company's derivative financial instruments reclassified from accumulated other comprehensive income (loss) are presented in the following table (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
Affected Line Item in the Statements of Operations:
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Operating costs and expenses:
 
 
 
 
 
 
 
 
     Cash flow hedges:
 
 
 
 
 
 
 
 
     Research and development
 
$
1,490

 
$
118

 
$
2,564

 
$
457

     Selling, general and administrative
 
328

 
17

 
601

 
65

Total
 
$
1,818

 
$
135

 
$
3,165

 
$
522


The portion of gains (losses) excluded from the assessment of hedge effectiveness is included in interest and other income, net, and these amounts were not material in the three and nine months ended October 28, 2017 and October 29, 2016. The Company did not have hedge ineffectiveness from derivative financial instruments in the three and nine months ended October 28, 2017 and October 29, 2016. No cash flow hedges were terminated as a result of forecasted transactions that did not occur.
Note 8. Fair Value Measurements
Fair value is an exit price representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

17

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Level 1—Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company’s Level 1 assets include institutional money-market funds that are classified as cash equivalents, equity securities, and U.S. government and agency debt securities, which are valued primarily using quoted market prices in active markets for identical assets. The Company’s Level 2 assets include its marketable investments in time deposits, foreign government and agency debt, municipal debt securities, corporate debt securities and asset backed securities as the market inputs used to value these instruments consist of market yields, reported trades and broker/dealer quotes, which are corroborated with observable market data. In addition, forward contracts and the severance pay fund are classified as Level 2 assets as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Company’s investments in auction rate securities were classified as Level 3 assets because there were no active markets for the auction rate securities and consequently the Company was unable to obtain independent valuations from market sources. Therefore, the auction rate securities were valued using a discounted cash flow model. In the nine months ended October 28, 2017, the auction rate securities were sold.
 
The tables below set forth, by level, the Company’s assets and liabilities that are measured at fair value on a recurring basis. The tables do not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):
 
Fair Value Measurements at October 28, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Items measured at fair value on a recurring basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
22,290

 
$

 
$

 
$
22,290

Time deposits

 
36,193

 

 
36,193

U.S. government and agency debt
16,526

 

 

 
16,526

Municipal debt securities

 
7,290

 

 
7,290

Corporate debt securities

 
35,871

 

 
35,871

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
150,000

 

 
150,000

U.S. government and agency debt
176,880

 

 

 
176,880

Foreign government and agency debt

 
6,831

 

 
6,831

Municipal debt securities

 
2,926

 

 
2,926

Corporate debt securities

 
552,427

 

 
552,427

Asset backed securities

 
42,912

 

 
42,912

Other non-current assets:
 
 
 
 
 
 
 
Severance pay fund

 
853

 

 
853

Total assets
$
215,696

 
$
835,303

 
$

 
$
1,050,999

 




18

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
Fair Value Measurements at January 28, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Items measured at fair value on a recurring basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
36,122

 
$

 
$

 
$
36,122

Time deposits

 
67,000

 

 
67,000

U.S. government and agency debt
17,497

 

 

 
17,497

Foreign government and agency debt

 
1,500

 

 
1,500

Municipal debt securities

 
8,740

 

 
8,740

Corporate debt securities

 
31,280

 

 
31,280

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
150,000

 

 
150,000

U.S. government and agency debt
185,387

 

 

 
185,387

Foreign government and agency debt

 
13,375

 

 
13,375

Municipal debt securities

 
27,871

 

 
27,871

Corporate debt securities

 
432,108

 

 
432,108

Asset backed securities

 
45,527

 

 
45,527

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts

 
735

 

 
735

Long-term investments:
 
 
 
 
 
 
 
Auction rate securities

 

 
4,615

 
4,615

Other non-current assets:
 
 
 
 
 
 
 
Severance pay fund

 
736

 

 
736

Total assets
$
239,006

 
$
778,872

 
$
4,615

 
$
1,022,493

Liabilities
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$
58

 
$

 
$
58

 
The following table summarizes the change in fair value for Level 3 assets (in thousands):
 
 
Nine Months Ended
 
October 28,
2017
Beginning balance at January 28, 2017
$
4,615

Sales and redemptions
(4,550
)
Realized gain (loss)
(65
)
Ending balance at October 28, 2017
$

Note 9. Commitments and Contingencies
Purchase Commitments
Under the Company’s manufacturing relationships with its foundry partners, cancellation of outstanding purchase orders is allowed but requires payment of all costs and expenses incurred through the date of cancellation. As of October 28, 2017, these foundries had incurred approximately $130.2 million of manufacturing costs and expenses relating to the Company’s outstanding purchase orders.


19

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intellectual Property Indemnification
The Company has agreed to indemnify certain customers for claims made against the Company’s products where such claims allege infringement of third-party intellectual property rights, including, but not limited to, patents, registered trademarks and/or copyrights. Under the aforementioned indemnification clauses, the Company may be obligated to defend the customer and pay for the damages awarded against the customer under an infringement claim, as well as the customer's attorneys’ fees and costs. The Company’s indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. Generally, there are limits on and exceptions to the Company’s potential liability for indemnification. Although historically the Company has not made significant payments under these indemnification obligations, the Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. The maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.
Contingencies and Legal Proceedings
The Company and certain of its subsidiaries are currently parties to various legal proceedings, including those noted in this section. The legal proceedings and claims described below could result in substantial costs and could divert the attention and resources of the Company’s management. The Company is also engaged in other legal proceedings and claims not described below, which arise in the ordinary course of its business. The Company is currently unable to predict the final outcome of these lawsuits and therefore cannot determine the likelihood of loss or estimate a range of possible loss, except with respect to amounts where it has determined a loss is both probable and estimable and where it has made an accrual. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling in litigation, particularly patent litigation, could require the Company to pay damages, one-time license fees or ongoing royalty payments, and could prevent the Company from manufacturing or selling some of its products or limit or restrict the type of work that employees involved in such litigation may perform for the Company, any of which could adversely affect financial results in future periods. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company’s business, financial condition, results of operations or cash flows.
Luna Litigation and Consolidated Cases. On September 11, 2015, Daniel Luna filed an action asserting putative class action claims on behalf of the Company’s shareholders in the United States District Court for the Southern District of New York (“S.D. of New York”). This action was consolidated with two additional, nearly identical complaints subsequently filed by Philip Limbacher and Jim Farno. The complaints asserted violations of federal securities laws based on allegations that the Company and certain of its officers and directors (Sehat Sutardja, Michael Rashkin and Sukhi Nagesh) made, caused to be made, or failed to correct false and/or misleading statements in the Company’s press releases and public filings. The complaints request damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
 
On November 18, 2015, the S.D. of New York granted the Company’s motion to transfer the consolidated cases to the N.D. of California. On December 21, 2015, the N.D. of California granted the Company’s motion to deem the consolidated cases related to the Saratoga litigation, discussed below. On February 8, 2016, the N.D. of California granted an unopposed motion to appoint Plumbers and Pipefitters National Pension Fund as Lead Plaintiff. On March 19, 2016, Lead Plaintiff filed a consolidated amended complaint. On April 29, 2016, Marvell and each of the individual defendants each filed motions to dismiss. The hearing on the motions to dismiss took place on July 29, 2016 and the court took the matter under submission. On October 12, 2016, the Court granted Defendants’ motions to dismiss with leave to amend and granted lead plaintiff 30 days to file an amended complaint. The parties agreed that the plaintiffs would file and serve an amended complaint by November 28, 2016. Plaintiffs filed and served the amended complaint on November 28, 2016. The Initial Case Management Conference took place on January 12, 2017. Marvell and co-defendants filed separate Motions to Dismiss on January 17, 2017. A hearing on the Motion to Dismiss took place on May 4, 2017 and, on May 17, 2017, the Court granted the Motion to Dismiss as to Rashkin and Nagesh and denied the Motion to Dismiss as to Sutardja and Marvell. On August 2, 2017, Lead Plaintiff filed a motion for class certification. On October 27, 2017, after a hearing on October 26, 2017, the Court certified a class of persons or entities that acquired Marvell stock during the period from February 19, 2015 to December 7, 2015. The Court has set a deadline of December 29, 2017 for the conclusion of fact discovery and a March 5, 2018 trial date.

20

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Indemnities, Commitments and Guarantees
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities may include intellectual property indemnities to the Company’s customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties’ technology based upon the Company’s products, indemnities for general commercial obligations, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of Bermuda. In addition, the Company has contractual commitments to various customers that could require the Company to incur costs to repair an epidemic defect with respect to its products outside of the normal warranty period if such defect were to occur. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. In general, the Company does not record any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets as the amounts cannot be reasonably estimated and are not considered probable. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when the loss is both estimable and probable.

Note 10. Income Tax

The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.
The Company’s quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income (or loss) and the mix of jurisdictions to which they relate, changes in how the Company does business, and tax law developments. The Company’s estimated effective tax rate for the year differs from the U.S. statutory rate primarily due to the benefit of a substantial portion of its earnings being taxed at rates lower than the U.S. statutory rate.
The income tax expense for the three months ended October 28, 2017 included current income tax expense of $5.9 million, a net increase in unrecognized tax benefits of $0.5 million, and an expense of $0.3 million related to other discrete items recorded in the quarter. The net increase in unrecognized tax benefits arose from penalties and interest of $0.5 million accrued on the outstanding unrecognized tax benefit balance. The income tax expense for the nine months ended October 28, 2017 included current income tax expense of $13.9 million and expense of $1.5 million related to other discrete items, offset by a tax benefit of $7.4 million from a net reduction in unrecognized tax benefits. The net reduction in unrecognized tax benefits arose from the release of $9.8 million due to expiration of the statute of limitations in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $1.8 million accrued on the outstanding unrecognized tax benefit balance and the accrual of $0.6 million for changes in prior year tax positions.

The income tax expense for the three months ended October 29, 2016 included current income tax expense of $11.9 million, an expense of $0.6 million related to settlements of prior year tax in foreign jurisdictions, a net increase in unrecognized tax benefits of $2.8 million, and an expense of $0.2 million related to other discrete items recorded in the quarter. The net increase in unrecognized tax benefits arose from the accrual of penalties and interest of $0.5 million on the outstanding unrecognized tax benefit balance, plus the accrual of additional $2.3 million for changes in prior year positions. The income tax expense for the nine months ended October 29, 2016 included current income tax expense of $15.3 million, an expense of $0.6 million related to settlements of prior year tax in foreign jurisdictions, and an expense of $0.6 million related to other discrete items recorded in the quarter, offset by a tax benefit of $9.7 million from a net reduction in unrecognized tax benefits and a deferred tax benefit of $2.5 million for the portion of a payment to the Company’s former Chief Executive Officer that became deductible after his departure from the Company in April 2016. The net reduction in unrecognized tax benefits arose from the release of $14.3 million due to expiration of the statute of limitations in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $2.0 million accrued on the outstanding unrecognized tax benefit balance, and the accrual of an additional $2.6 million for changes in prior year tax positions.


21

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

It is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to foreign currencies within the next 12 months. Excluding these factors, uncertain tax positions may decrease by as much as $7.7 million from the lapse of statutes of limitation in various jurisdictions during the next twelve months. Government tax authorities from several non-U.S. jurisdictions are also examining the Company’s tax returns. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to its tax audits and that any settlement will not have a material effect on its results at this time.

The Company operates under tax incentives in certain countries that may be extended if certain additional requirements are satisfied. The tax incentives are conditional upon meeting certain employment and investment thresholds. The impact of these tax incentives decreased foreign taxes by $0.1 million and $1.6 million for the three and nine months ended October 28, 2017, respectively, and $2.4 million and $4.6 million for the three and nine months ended October 29, 2016, respectively. The benefit of the tax incentives on net income per share was less than $0.01 per share for the three and nine months ended October 28, 2017, compared to a benefit of $0.01 per share for the three and nine months ended October 29, 2016.

The Company’s principal source of liquidity as of October 28, 2017 consisted of approximately $1.7 billion of cash, cash equivalents and short-term investments, of which approximately $1.1 billion was held by foreign subsidiaries (outside Bermuda). Approximately $620 million of this amount held by foreign subsidiaries is related to undistributed earnings, which have been indefinitely reinvested outside of Bermuda. These funds are primarily held in China, Israel and the United States. The Company plans to use such amounts to fund various activities outside of Bermuda including working capital requirements, capital expenditures for expansion, funding of future acquisitions, or other financing activities. If such funds were needed by the parent company in Bermuda or if the amounts were otherwise no longer considered indefinitely reinvested, the Company would incur a tax expense of approximately $190 million.
Note 11. Net Income Per Share
The Company reports both basic net income per share, which is based on the weighted average number of common shares outstanding during the period, and diluted net income per share, which is based on the weighted average number of common shares outstanding and potentially dilutive shares outstanding during the period. The computations of basic and diluted net income per share are presented in the following table (in thousands, except per share amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
149,337

 
$
83,173

 
$
384,379

 
$
138,347

Income (loss) from discontinued operations
50,851

 
(10,557
)
 
87,689

 
(37,105
)
Net income
$
200,188

 
$
72,616

 
$
472,068

 
$
101,242

Denominator:
 
 
 
 
 
 
 
Weighted average shares — basic
494,096

 
511,090

 
499,568

 
510,373

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based awards
10,807

 
11,001

 
11,367

 
6,103

Weighted average shares — diluted
504,903

 
522,091

 
510,935

 
516,476

Income from continuing operations per share:
 
 
 
 
 
 
 
       Basic
$
0.30

 
$
0.16

 
$
0.77

 
$
0.27

       Diluted
$
0.30

 
$
0.16

 
$
0.75

 
$
0.27

Income (loss) from discontinued operations per share:
 
 
 
 
 
 
 
       Basic
$
0.11

 
$
(0.02
)
 
$
0.17

 
$
(0.07
)
       Diluted
$
0.10

 
$
(0.02
)
 
$
0.17

 
$
(0.07
)
Net income per share:
 
 
 
 
 
 
 
       Basic
$
0.41

 
$
0.14

 
$
0.94

 
$
0.20

       Diluted
$
0.40

 
$
0.14

 
$
0.92

 
$
0.20


22

MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Potential dilutive securities include dilutive common shares from share-based awards attributable to the assumed exercise of stock options, restricted stock units and employee stock purchase plan shares using the treasury stock method. Under the treasury stock method, potential common shares outstanding are not included in the computation of diluted net income per share if their effect is anti-dilutive.
 
Anti-dilutive potential shares are presented in the following table (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
2016
Weighted average shares outstanding:
 
 
 
 
 
 
 
Share-based awards
876

 
20,211

 
3,122

 
37,309


Anti-dilutive potential shares from share-based awards are excluded from the calculation of diluted earnings per share for all periods reported above because either their exercise price exceeded the average market price during the period or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “seeks,” “estimates,” “may,” “can,” “will,” “would” and similar expressions identify such forward-looking statements.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially from those predicted, include, but are not limited to:

our dependence upon the storage, networking and connectivity markets, which are highly cyclical and intensely competitive;
the outcome of pending or future litigation and legal and regulatory proceedings;
our dependence on a small number of customers;
severe financial hardship or bankruptcy of one or more of our major customers;
our ability and the ability of our customers to successfully compete in the markets in which we serve;
our reliance on independent foundries and subcontractors for the manufacture, assembly and testing of our products;
our ability and our customers’ ability to develop new and enhanced products and the adoption of those products in the market;
decreases in our gross margin and results of operations in the future due to a number of factors;
our ability to estimate customer demand and future sales accurately;
our ability to scale our operations in response to changes in demand for existing or new products and services;
the impact of international conflict and continued economic volatility in either domestic or foreign markets;
the effects of transitioning to smaller geometry process technologies;
the risks associated with manufacturing and selling a majority of our products and our customers’ products outside of the United States;
risks associated with acquisition and consolidation activity in the semiconductor industry;
the impact of any change in the income tax laws in jurisdictions where we operate and the loss of any beneficial tax treatment that we currently enjoy;
the effects of any potential acquisitions or investments;

23


our ability to protect our intellectual property;
the impact and costs associated with changes in international financial and regulatory conditions; and
our maintenance of an effective system of internal controls.

Additional factors which could cause actual results to differ materially include those set forth in the following discussion, as well as the risks discussed in Part II, Item 1A, “Risk Factors,” and other sections of this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date hereof. Unless required by law, we undertake no obligation to update any forward-looking statements.

Overview

We are a fabless semiconductor provider of high-performance, application-specific standard products. Our core strength of expertise is the development of complex System-on-a-Chip (“SoC”) devices, leveraging our technology portfolio of intellectual property in the areas of analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. We also develop integrated hardware platforms along with software that incorporates digital computing technologies designed and configured to provide an optimized computing solution. Our broad product portfolio includes devices for storage, networking and connectivity.

In the third quarter of fiscal 2018, we saw net revenue decrease year over year by 1% from $623.7 million net revenue in the third quarter fiscal 2017 compared with $616.3 million in the third quarter of fiscal 2018. The decrease was primarily due to a 4% decrease in our storage product sales and 22% decrease in our other product sales, offset in part by a 19% increase in sales of our connectivity products. Our net revenue for the nine months ended October 28, 2017 increased by $59.1 million compared to net revenue for the nine months ended October 29, 2016. This increase was primarily due to increased sales of our storage products by 10% and connectivity products by 10%. This growth was offset by a decline in other products.

As discussed in Note 1, during the first fiscal quarter of 2018, we recorded certain out-of-period adjustments of $4.7 million related to revenue-related accruals and $3.2 million related to other expenses. The net effect of these out-of-period adjustments resulted in a $7.9 million increase in income from continuing operations from the nine months ended October 28, 2017, an increase in basic earnings per share from continuing operations of $0.02 per share, and an increase in diluted earnings per share from continuing operations of $0.01 per share, as well as contributing to the increase in revenue and gross margin for nine months ended October 28, 2017

On November 20, 2017,  we, along with Cavium, Inc., announced a definitive agreement, unanimously approved by the boards of directors of both companies, under which we will acquire all outstanding shares of Cavium common stock in exchange for consideration of $40.00 per share in cash and 2.1757 Marvell common shares for each Cavium share. The exchange ratio was based on a purchase price of $80 per share, using our undisturbed price prior to November 3, when media reports of the transaction first surfaced. This represents a transaction value of approximately $6 billion. Cavium shareholders are expected to own approximately 25% of the combined company on a pro forma basis.

We intend to fund the cash consideration with a combination of cash on hand from the combined companies and $1.75 billion in debt financing. We have obtained commitments consisting of an $850 million bridge loan commitment and a $900 million committed term loan from Goldman Sachs Bank USA and Bank of America Merrill Lynch, in each case subject to customary terms and conditions. The transaction is not subject to any financing condition.

The transaction is expected to close in mid-calendar 2018, subject to regulatory approval as well as other customary closing conditions, including the adoption by Cavium shareholders of the merger agreement and the approval by our shareholders of the issuance of Marvell common shares in the transaction.

Restructuring. In November 2016, we announced a restructuring plan intended to refocus our research and development, increase operational efficiency and improve profitability. As a continuation of such plan, we recorded restructuring related charges of $3.3 million and $8.5 million in the three and nine months ended October 28, 2017, respectively. In addition, during the first nine months of fiscal 2018, we received cash proceeds of $165.9 million and recognized a gain on sale of $88.4 million from the sales of our Multimedia, LTE thin-modem, and Broadband businesses. These businesses are classified as discontinued operations for all periods presented in our accompanying consolidated financial statements.

Unless noted otherwise, our discussion under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, refers to our continuing operations.

24



Capital Return Program. Our financial position is strong and we remain committed to delivering shareholder value through our share repurchase and dividend programs. For the nine months ended October 28, 2017, we repurchased 31.5 million shares of our common stock for $527.6 million. As of October 28, 2017, a total of 286.4 million shares have been repurchased to date under the Company’s share repurchase program for a total $3.8 billion in cash and there was $358 million remaining available for future share repurchases. We returned $617.1 million to stockholders in the nine months ended October 28, 2017, including our repurchases of common stock and $89.6 million of cash dividends.

Cash and Short Term Investments. Our total cash, cash equivalents and short-term investments were $1.7 billion at October 28, 2017, which was slightly higher than our balance at our fiscal year ended January 28, 2017.

Sales and Customer Composition. Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. Net revenue attributable to significant customers whose revenue as a percentage of net revenue was 10% or greater of total net revenue is presented in the following table:
 
 
Three Months Ended
 
Nine Months Ended
 
October 28, 2017
 
October 29, 2016
 
October 28, 2017
 
October 29, 2016
End Customer:
 
 
 
 
 
 
 
Western Digital*
17.2
%
 
22.4
%
 
20.2
%
 
20.5
%
Toshiba
13.6
%
 
13.7
%
 
14.0
%
 
13.2
%
Seagate
12.3
%
 
10.5
%
 
10.9
%
 
9.8
%
Distributor:
 
 
 
 
 
 
 
Wintech
11.3
%
 
**

 
10.9
%
 
9.6
%
 

*
The percentage of net revenue reported for Western Digital in the three and nine months ended October 28, 2017 and October 29, 2016 includes net revenue of HGST and Sandisk which became subsidiaries of Western Digital in late fiscal 2016.
**
Less than 10% of net revenue
We continuously monitor the creditworthiness of our major customers and distributors and believe the distributors’ sales to diverse end customers and geographies further serve to mitigate our exposure to credit risk.
Most of our sales are made to customers located outside of the United States, primarily in Asia, and all of our products are manufactured outside the United States. Sales shipped to customers with operations in Asia represented approximately 94% of our net revenue in the three and nine months ended October 28, 2017, respectively and approximately 94% of net revenue in both the three and nine months ended October 29, 2016, respectively. Because many manufacturers and manufacturing subcontractors of our customers are located in Asia, we expect that most of our net revenue will continue to be represented by sales to our customers in that region. For risks related to our global operations, see Part II, Item 1A, “Risk Factors,” including but not limited to the risk detailed under the caption "We face additional risks due to the extent of our global operations since a majority of our products, and those of our customers, are manufactured and sold outside of the United States. The occurrence of any or a combination of the additional risks described below would significantly and negatively impact our business and results of operations."
Historically, a relatively large portion of our sales have been made on the basis of purchase orders rather than long-term agreements. Customers can generally cancel or defer purchase orders on short notice without incurring a significant penalty. In addition, the development process for our products is long, which may cause us to experience a delay between the time we incur expenses and the time revenue is generated from these expenditures. We anticipate that the rate of new orders may vary significantly from quarter to quarter. For risks related to our sales cycles, see Part II, Item 1A, “Risk Factors,” including but not limited to the risk detailed under the caption "We are subject to order and shipment uncertainties. If we are unable to accurately predict customer demand, we may hold excess or obsolete inventory, which would reduce our gross margin. Conversely, we may have insufficient inventory, which would results in lost revenue opportunities and potential loss of market share as well as damaged customer relationships."

25


Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017.
Results of Operations
The following table sets forth information derived from our unaudited condensed consolidated statements of operations expressed as a percentage of net revenue:
 
 
Three Months Ended
 
Nine Months Ended
 
October 28, 2017