MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s accounts receivable was concentrated with
three
customers at
January 28, 2017
, who represented
14%
,
13%
, and
11%
of gross accounts receivable, respectively, compared with
two
customers at
January 30, 2016
, who represented
13%
and
11%
of gross accounts receivable, respectively.
Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. Net revenue attributable to significant customers whose revenues as a percentage of net revenue was 10% or greater of total net revenues is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Customer:
|
|
|
|
|
|
Western Digital*
|
21
|
%
|
|
19
|
%
|
|
20
|
%
|
Toshiba
|
13
|
%
|
|
**%
|
|
|
**%
|
|
Seagate
|
9
|
%
|
|
14
|
%
|
|
13
|
%
|
Wintech
|
10
|
%
|
|
**%
|
|
|
11
|
%
|
|
|
|
|
|
|
* The percentage of net revenues reported for Western Digital for fiscal year 2017 includes net revenue of HGST and SanDisk that became subsidiaries of Western Digital in late fiscal 2016.
|
** Less than 10% of net revenue
|
The Company continuously monitors the creditworthiness of its distributors and believes these distributors’ sales to diverse end customers and to diverse geographies further serve to mitigate the Company’s exposure to credit risk.
Inventories
Inventory is stated at the lower of cost or market, cost being determined under the first-in, first-out method. The total carrying value of the Company’s inventory is reduced for any difference between cost and estimated market value of inventory that is determined to be excess, obsolete or unsellable inventory based upon assumptions about future demand and market conditions. If actual future demand for the Company’s products is less than currently forecasted, the Company may be required to write inventory down below the current carrying value. Once the carrying value of inventory is reduced, it is maintained until the product to which it relates to is sold or otherwise disposed of. Inventoriable shipping and handling costs are classified as a component of cost of goods sold in the consolidated statements of operations.
Property and Equipment, Net
Property and equipment, net, are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which ranges from
3
to
7 years
for machinery and equipment, and
3
to
4 years
for computer software, and furniture and fixtures. Buildings are depreciated over an estimated useful life of
30 years
and building improvements are depreciated over estimated useful lives of
15 years
. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset.
Goodwill
Goodwill is recorded when the consideration paid for a business acquisition exceeds the fair value of net tangible and intangible assets acquired. Goodwill is measured and tested for impairment annually on the last business day of the fiscal fourth quarter and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company notes multiple qualitative factors indicating potential impairment, then a two-step quantitative impairment test is performed. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. The Company has identified that its business operates as a single operating segment with
two
components (Storage, and Networking & Connectivity), which it has concluded can be aggregated into a single reporting unit for purposes of testing goodwill impairment. As part of a restructuring announced in November 2016 (see “Note 8 - Restructuring and Other Related Charges”), the former Smart Networked Devices and Solutions component was renamed to Networking & Connectivity. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process is only performed if a potential impairment exists, and it involves determining the implied fair value of the reporting unit’s goodwill and comparing it to the carrying value of goodwill. If the carrying value of goodwill were to exceed
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
its implied fair value, then the Company would record an impairment loss for the difference in the fiscal quarter in which the determination is made.
Long-Lived Assets and Intangible Assets
The Company assesses the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. The Company estimates the future cash flows, undiscounted and without interest charges, expected to be generated by the assets from its use or eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Please see “Note 7 — Goodwill and Acquired Intangible Assets, Net” for further details regarding impairment of acquisition-related identified intangible assets.
Acquisition-related identified intangible assets are amortized on a straight-line basis over their estimated economic lives. In-process research and development (“IPR&D”) is not amortized until the completion of the related development.
Foreign Currency Transactions
The functional currency of all of the Company’s non-U.S. operations is the U.S. dollar. Monetary accounts maintained in currencies other than the U.S. dollar are re-measured using the foreign exchange rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are measured and recorded at the exchange rate in effect at the date of the transaction. The effects of foreign currency re-measurement are reported in current operations.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. If the Company grants extended payment terms greater than its standard terms for a customer such that collectability is not assured, the revenue is deferred upon shipment and will be recognized when the payment becomes due provided all other revenue recognition criteria have been satisfied.
Product revenue is generally recognized upon shipment of product to customers, net of accruals for estimated sales returns and rebates. However, some of the Company’s sales are made through distributors under agreements allowing for price protection and limited rights of stock rotation on products unsold by the distributors. Although title passes to the distributor upon shipment, terms and payment by the Company’s distributors is not contingent on resale of the product. Product revenue on sales made through distributors with price protection and stock rotation rights are deferred until the distributors sell the product to end customers. Deferred revenue less the related cost of the inventories is reported as deferred income. The Company does not believe that there is any significant exposure related to impairment of deferred cost of sales, as its historical returns have been minimal and inventory turnover for its distributors generally ranges from
60
to
90 days
. The Company’s sales to direct customers are made primarily pursuant to standard purchase orders for delivery of products.
A portion of the Company’s net revenue is derived from sales through third-party logistics providers, who maintain warehouses in close proximity to the customer’s facilities. Revenue from sales through these third-party logistics providers is not recognized until the product is pulled from stock by the end customer.
The provision for estimated sales returns on product sales is recorded in the same period the related revenues are recorded. These estimates are based on historical returns, analysis of credit memo data and other known factors. Actual returns could differ from these estimates. The Company accounts for rebates by recording reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms agreed to with the customer.
Advertising Expense
Advertising costs are expensed as incurred. The Company recorded
$0.5 million
,
$5.1 million
and
$5.6 million
of advertising costs for fiscal
2017
,
2016
and
2015
, respectively, included in selling and marketing expenses in the consolidated statement of operations.
Share-Based Compensation
Share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. The Company amortizes share-based compensation expense for time-based awards under the straight-line attribution method over the vesting period. Share-based compensation expense for performance-based awards is recognized when it becomes probable that the performance conditions will be met. Once it becomes probable that a performance-based award will vest, the Company recognizes compensation expense equal to the number of shares expected to vest multiplied by the fair value of the award at the grant date, which is amortized using the accelerated method. In the case of performance-based awards based on total shareholder return (“TSR”), share-based compensation expense is amortized over the
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requisite service period. For stock purchase rights under the stock purchase plan, the Company amortizes share-based compensation expense ratably over the
two
-year offering period.
The Company estimates the fair value of time-based stock option and stock purchase awards on the date of grant using the Black Scholes option-pricing model. The fair value of TSR awards is estimated on the date of grant using a Monte Carlo simulation model since the award is indexed to the price of the Company’s common stock as set forth under the terms of the award. The value of the portion of the awards that is ultimately expected to vest is recognized as expense over the requisite service periods. The Black Scholes and Monte Carlo models incorporate various highly subjective assumptions including expected term of awards, expected future stock price volatility, expected dividend yield and risk-free interest rate.
In developing estimates used to calculate assumptions, the Company establishes the expected term for employee stock options, as well as expected forfeiture rates, based on the historical settlement experience and after giving consideration to vesting schedules. Assumptions for stock option exercises and pre-vesting terminations of stock options are stratified by
two
employee groups and
one
employee/non-employee group with sufficiently distinct behavior patterns. Expected volatility was developed based on equally weighted combination of historical stock price volatility and implied volatility derived from traded options on the Company’s stock in the marketplace. The expected dividend yield is calculated by dividing annualized dividend payments by the closing stock price on the grant date of the option.
The fair value of each restricted stock unit is estimated based on the market price of the Company’s common shares on the date of grant less the expected dividend yield.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense for time-based and performance-based awards is recorded net of estimated forfeitures such that expense is recorded only for those share-based awards that are expected to vest. Previously recognized expense is reversed for the portion of awards forfeited prior to vesting as and when forfeitures occurred.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income and unrealized gains and losses, net of tax, on available-for-sale securities, auction rate securities and cash flow hedges. Accumulated other comprehensive income (loss), as presented on the accompanying consolidated balance sheets, consists of net unrealized gains and losses on available-for-sale securities, auction rate securities and cash flow hedges, net of tax.
Accounting for Income Taxes
The Company recognizes income taxes using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated.
Using available evidence and judgment, the Company establishes a valuation allowance for deferred tax assets, when it is determined that it is more likely than not that they will not be realized. Valuation allowances have been provided primarily against the U.S. research and development credits. Valuation allowances have also been provided against certain acquired operating losses and the deferred tax assets of foreign subsidiaries. A change in the assessment of the realization of deferred tax assets may materially impact the Company’s tax provision in the period in which a change of assessment occurs.
The Company is subject to income tax audits by the respective tax authorities in each jurisdiction in which the Company operates. The Company recognizes the effect of income tax positions only if these positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is more than
50%
likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in income tax expense.
Warranty
The Company’s products are generally subject to warranty, which provides for the estimated future costs of repair or replacement upon shipment of the product. The Company’s products carry a standard
90
-day warranty, with certain exceptions in which the warranty period can extend to more than
one year
based on contractual agreements. The warranty accrual is primarily estimated based on historical claims compared to historical revenues and assumes that the Company will have to replace products subject to a claim. From time to time, the Company becomes aware of specific warranty situations, and it records specific accruals to cover these exposures. Warranty expenses were not material in fiscal
2017
,
2016
and
2015
.
Recent Accounting Pronouncements
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounting Pronouncements Recently Adopted
In April 2015, the Financial Accounting Standards Board ("FASB") issued new guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement, which the Company adopted beginning in the first quarter of fiscal 2017. The guidance provides a basis for evaluating whether a cloud computing arrangement includes a software license and whether the license arrangement should be accounted for as an intangible asset. This guidance also strikes from previous authoritative guidance, the use by analogy to the accounting for capital leases, which the Company previously applied in the accounting for certain of its technology license agreements. As such, the Company accounts for new agreements under the new guidance by determining if capitalization as an asset is appropriate or if the arrangement should be treated as a subscription with expense recognized in the period when service is received. Similarly, the Company will re-evaluate the accounting for any renewals to existing license agreements in accordance with the new guidance as they occur.
Accounting Pronouncements Not Yet Effective
In May 2014, the FASB issued a new standard on the recognition of revenue from contracts with customers, which 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 some costs to obtain or fulfill a contract with a customer, and provides for additional disclosures with respect to revenues 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. Early adoption is not permitted. The Company plans to adopt the standard retrospectively with the cumulative effect of initially applying it recognized at the date of initial application under the full retrospective approach.
The Company’s initial assessment has identified a change in revenue recognition timing on our component sales made to distributors. The Company expects to recognize revenue when the Company delivers to the distributor rather than deferring recognition until the distributor sells the components. Other changes may be identified as the Company completes the assessment phase of its revenue project. On the date of initial application, the Company will remove the deferred net revenue on component sales made to distributors through a cumulative adjustment to retained earnings. The Company expects the revenue and corresponding cost of goods sold deferral to be offset by the acceleration of revenue recognition as control of the product transfers to our customer.
To date, the Company has completed the assessment phase of its revenue project and has begun the next phase for the design and development of its systems and processes to enable compliance with the new standards. It expects to complete this phase in its second quarter of fiscal 2018 ending July 29, 2017. Currently, the Company has determined to apply the amendments on a full retrospective basis, although it may decide to change at a later date. The Company will continue to track relevant elements and finalize its evaluation of any changes to its accounting policies and disclosures.
In July 2015, the FASB issued an amendment to its guidance regarding the subsequent measurement of inventory. Currently, inventory is measured at the lower of cost or market. Market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. Under this amended guidance, inventory is to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This amendment applies to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. This standard is effective for annual and interim reporting periods beginning after December 15, 2016. The Company does not expect the adoption of this new accounting standard in the first quarter of fiscal 2018 will have a material effect 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 surrounding lease arrangements. The standard is effective for annual and interim reporting periods beginning after December 15, 2018. The Company is currently evaluating the effect this new guidance will have on its consolidated financial statements.
In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for share-based payment award transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual and interim reporting periods
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
beginning after December 15, 2016. The Company does not expect the adoption of this new accounting standard to have a material effect on its consolidated financial statements since the Company will continue to account for forfeitures based on an estimated forfeiture rate.
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 probable 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 upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The standard is effective for annual and interim reporting periods beginning after December 15, 2019. The Company is currently evaluating the effect this new guidance will have on its consolidated financial statements.
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 annual and interim periods beginning after December 15, 2017. 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 is evaluating the effect this new guidance will have on its consolidated statement of cash flows.
In October 2016, the FASB issued new guidance which 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 annual and interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the effect this new guidance will have on its consolidated financial statements.
In November 2016, the FASB issued new guidance which 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 annual and interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the effect this new guidance will have on its consolidated financial statements.
In January 2017, the FASB issued an accounting standards update which 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 and 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 January 2017, the FASB issued an accounting standards update which simplifies the accounting for goodwill impairment by eliminating Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. Instead, an entity shall perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, but not in an amount to exceed the carrying amount of goodwill allocated to the reporting unit. This guidance will be effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 31, 2017. The Company’s current year step one test outcomes indicated that the adoption of this pronouncement is not expected to have a material effect on the Company’s consolidated financial statements.
Note 2 — Discontinued Operations
In July 2016, the Company hired a new President and Chief Executive Officer who immediately initiated a review of the Company’s businesses in order to assess the market position and potential returns of each business. The outcome of this process was to align the Company’s core competencies to ensure it is investing in areas that are most likely to provide the best long-
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
term returns. The Company identified several businesses that it believes no longer fit with its core competencies and long-term goals to focus on the storage, networking and connectivity markets.
After the business review had been completed, the Company assessed its overall resource requirements in terms of direct costs and indirect costs. In November 2016, the Company announced a plan to restructure its operations to refocus its research and development, increase operational efficiency and improve profitability. The Company expects that the restructuring actions, which include discontinuing investment in specific research and development programs, streamlining engineering processes, and consolidating research and development sites, will eliminate approximately
900
positions worldwide. In addition, the Company plans to divest certain businesses with approximately
$60 million
in operating expenses and
$100 million
in revenue based on a first half of fiscal 2017 annualized run rate.
As part of the above 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. As of January 28, 2017, the Company believes
two
of these businesses will be sold within the next twelve months. The Company has entered into an agreement with a buyer for
one
of the businesses and is actively seeking a buyer for another business, which it believes is probable and, therefore, the Company expects the sale of these
two
businesses to be completed within the next twelve months. The Company continues its effort to sell a third business. However, at this time, management does not believe the sale will be completed within the next twelve months. As a result, the Company has classified the
two
above-mentioned businesses as discontinued operations, and has reclassified its statement of operations and balance sheets for all periods presented in its consolidated financial statements to report the effect of these discontinued 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):
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
Current assets held for sale:
|
|
|
|
Inventory
|
$
|
8,154
|
|
|
$
|
9,059
|
|
Property and equipment, net
|
2,898
|
|
|
2,762
|
|
Goodwill
|
26,532
|
|
|
26,532
|
|
Acquired intangible assets, net
|
3,799
|
|
|
6,063
|
|
Other
|
1,490
|
|
|
679
|
|
Current assets held for sale for discontinued operations
|
42,873
|
|
|
45,095
|
|
Other assets held for sale
|
|
|
|
Property and equipment, net
|
2,973
|
|
|
—
|
|
Total assets of the disposal group classified as held for sale
|
$
|
45,846
|
|
|
$
|
45,095
|
|
Current liabilities held for sale:
|
|
|
|
Deferred Income
|
$
|
1,670
|
|
|
$
|
1,749
|
|
Total liabilities of the disposal group classified as held for sale
|
$
|
1,670
|
|
|
$
|
1,749
|
|
The following table presents a reconciliation of the major financial lines constituting the results of operations for discontinued operations to the net loss from discontinued operations presented separately in the consolidated statement of operations (in thousands):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
Net Revenue
|
$
|
98,755
|
|
|
$
|
76,612
|
|
|
$
|
69,757
|
|
Operating costs and expenses:
|
|
|
|
|
|
Cost of goods sold
|
60,799
|
|
|
52,219
|
|
|
44,281
|
|
Research and development
|
53,784
|
|
|
59,524
|
|
|
67,263
|
|
Selling and marketing
|
4,750
|
|
|
4,684
|
|
|
4,325
|
|
General and administrative
|
963
|
|
|
769
|
|
|
795
|
|
Amortization of acquired intangible assets
|
325
|
|
|
650
|
|
|
650
|
|
Total operating costs and expenses
|
120,621
|
|
|
117,846
|
|
|
117,314
|
|
Loss from discontinued operations before income taxes
|
(21,866
|
)
|
|
(41,234
|
)
|
|
(47,557
|
)
|
Provision for income taxes
|
977
|
|
|
1,011
|
|
|
884
|
|
Net loss from discontinued operations
|
$
|
(22,843
|
)
|
|
$
|
(42,245
|
)
|
|
$
|
(48,441
|
)
|
The Company has elected not to separately report discontinued operations in its consolidated statement of cash flows since its effect is not material. Non-cash operating amounts reported for discontinued operations include share-based compensation expense of
$9.2 million
,
$7.8 million
and
$6.2 million
in fiscal 2017, 2016 and 2015, respectively. Depreciation, amortization and capital expenditures are not material and there were no other material non-cash investing amounts related to the cash flows from discontinued operations. Due to the Company's transfer pricing arrangements, the Company generates income in most jurisdictions in which it operates, regardless if there is a loss on a consolidated basis. As such, the Company has reflected tax expense of
$1.0 million
,
$1.0 million
, and
$0.9 million
for fiscal years 2017, 2016, and 2015, respectively, attributable to discontinued operations.
Note 3 — Investments
The following tables summarize the Company’s investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Short-term investments:
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
432,603
|
|
|
$
|
281
|
|
|
$
|
(776
|
)
|
|
$
|
432,108
|
|
U.S. government and agency debt
|
185,584
|
|
|
86
|
|
|
(283
|
)
|
|
185,387
|
|
Asset backed securities
|
45,541
|
|
|
33
|
|
|
(47
|
)
|
|
45,527
|
|
Foreign government and agency debt
|
13,425
|
|
|
—
|
|
|
(50
|
)
|
|
13,375
|
|
Municipal debt securities
|
27,916
|
|
|
4
|
|
|
(49
|
)
|
|
27,871
|
|
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
|
|
Total long-term investments
|
4,615
|
|
|
—
|
|
|
—
|
|
|
4,615
|
|
Total investments
|
$
|
859,684
|
|
|
$
|
404
|
|
|
$
|
(1,205
|
)
|
|
$
|
858,883
|
|
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Short-term investments:
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
558,337
|
|
|
$
|
766
|
|
|
$
|
(1,282
|
)
|
|
$
|
557,821
|
|
U.S. government and agency debt
|
317,595
|
|
|
64
|
|
|
(254
|
)
|
|
317,405
|
|
Asset backed securities
|
76,711
|
|
|
81
|
|
|
(56
|
)
|
|
76,736
|
|
Foreign government and agency debt
|
21,370
|
|
|
2
|
|
|
(14
|
)
|
|
21,358
|
|
Municipal debt securities
|
31,211
|
|
|
45
|
|
|
(7
|
)
|
|
31,249
|
|
Total short-term investments
|
1,005,224
|
|
|
958
|
|
|
(1,613
|
)
|
|
1,004,569
|
|
Long-term investments:
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
Auction rate securities
|
11,296
|
|
|
—
|
|
|
—
|
|
|
11,296
|
|
Total long-term investments
|
11,296
|
|
|
—
|
|
|
—
|
|
|
11,296
|
|
Total investments
|
$
|
1,016,520
|
|
|
$
|
958
|
|
|
$
|
(1,613
|
)
|
|
$
|
1,015,865
|
|
As of
January 28, 2017
, the Company’s investment portfolio included auction rate securities with an aggregate par value of
$5 million
. Although these auction rate securities have continued to pay interest and the underlying collateral has not deteriorated, there is currently limited trading volume. The Company uses a discounted cash flow model to estimate the fair value of the auction rate securities based on its estimated timing and amount of future interest and principal payments. The fair value of the auction rate securities as of
January 28, 2017
was
$0.4 million
less than the par value and is included in long-term investments.
The Company made a determination in January 2016 that it did not expect to recover the par value of these auction rate securities and considers any impairment of these securities to be other-than-temporary. There has been no change in circumstances since January 2016 based upon the current time horizon for holding these auction rate securities and the continuation of an illiquid market. Based on the Company's assessment of fair value as of January 28, 2017, the Company determined there was no further impairment of these auction rate securities.
During fiscal 2017, the Company sold auction rate securities with an aggregate par value of
$7.5 million
for total net proceeds of
$6.9 million
. The carrying value of these auction rate securities was
$6.7 million
and resulted in a net gain of
$0.2 million
recorded in interest and other income, net, in the year ended January 28, 2017.
Gross realized gains and gross realized losses on sales of available-for-sale securities are presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Gross realized gains
|
$
|
2,047
|
|
|
$
|
1,654
|
|
|
$
|
1,618
|
|
Gross realized losses
|
(547
|
)
|
|
(1,923
|
)
|
|
(169
|
)
|
Impairment loss
|
—
|
|
|
(1,204
|
)
|
|
—
|
|
Total net realized gains (losses)
|
$
|
1,500
|
|
|
$
|
(1,473
|
)
|
|
$
|
1,449
|
|
The contractual maturities of available-for-sale securities are presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
423,151
|
|
|
$
|
423,058
|
|
|
$
|
304,117
|
|
|
$
|
304,035
|
|
Due between one and five years
|
423,669
|
|
|
422,995
|
|
|
689,847
|
|
|
689,279
|
|
Due over five years
|
12,864
|
|
|
12,830
|
|
|
22,556
|
|
|
22,551
|
|
|
$
|
859,684
|
|
|
$
|
858,883
|
|
|
$
|
1,016,520
|
|
|
$
|
1,015,865
|
|
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
Corporate debt securities
|
$
|
199,382
|
|
|
$
|
(751
|
)
|
|
$
|
16,063
|
|
|
$
|
(25
|
)
|
|
$
|
215,445
|
|
|
$
|
(776
|
)
|
U.S. government and agency debt
|
94,064
|
|
|
(283
|
)
|
|
—
|
|
|
—
|
|
|
94,064
|
|
|
(283
|
)
|
Asset backed securities
|
16,754
|
|
|
(47
|
)
|
|
—
|
|
|
—
|
|
|
16,754
|
|
|
(47
|
)
|
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
|
)
|
Total securities
|
$
|
339,525
|
|
|
$
|
(1,176
|
)
|
|
$
|
18,810
|
|
|
$
|
(29
|
)
|
|
$
|
358,335
|
|
|
$
|
(1,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
Corporate debt securities
|
$
|
283,138
|
|
|
$
|
(1,237
|
)
|
|
$
|
14,383
|
|
|
$
|
(45
|
)
|
|
$
|
297,521
|
|
|
$
|
(1,282
|
)
|
U.S. government and agency debt
|
263,325
|
|
|
(254
|
)
|
|
—
|
|
|
—
|
|
|
263,325
|
|
|
(254
|
)
|
Asset backed securities
|
46,646
|
|
|
(56
|
)
|
|
—
|
|
|
—
|
|
|
46,646
|
|
|
(56
|
)
|
Foreign government and agency debt
|
16,458
|
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
16,458
|
|
|
(14
|
)
|
Municipal debt securities
|
2,943
|
|
|
(5
|
)
|
|
1,571
|
|
|
(2
|
)
|
|
4,514
|
|
|
(7
|
)
|
Total securities
|
$
|
612,510
|
|
|
$
|
(1,566
|
)
|
|
$
|
15,954
|
|
|
$
|
(47
|
)
|
|
$
|
628,464
|
|
|
$
|
(1,613
|
)
|
Note 4 — Supplemental Financial Information (in thousands)
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Cash and cash equivalents:
|
|
|
|
Cash
|
$
|
651,953
|
|
|
$
|
669,312
|
|
Cash equivalents:
|
|
|
|
Time deposits
|
67,000
|
|
|
209,405
|
|
U.S. government and agency debt
|
17,497
|
|
|
184,374
|
|
Money market funds
|
36,122
|
|
|
160,400
|
|
Corporate debt securities
|
31,280
|
|
|
54,689
|
|
Municipal debt securities
|
8,740
|
|
|
—
|
|
Foreign government and agency debt
|
1,500
|
|
|
—
|
|
Cash and cash equivalents
|
$
|
814,092
|
|
|
$
|
1,278,180
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Provision for sales returns and allowances:
|
|
|
|
Sales returns
|
$
|
470
|
|
|
$
|
1,873
|
|
Doubtful accounts
|
914
|
|
|
889
|
|
|
$
|
1,384
|
|
|
$
|
2,762
|
|
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Inventories:
|
|
|
|
Work-in-process
|
$
|
110,083
|
|
|
$
|
125,800
|
|
Finished goods
|
61,886
|
|
|
75,158
|
|
Inventories
|
$
|
171,969
|
|
|
$
|
200,958
|
|
Inventory held by third-party logistics providers is recorded as consigned inventory on the Company’s consolidated balance sheet. The amount of inventory held at third-party logistics providers was
$26.5 million
and
$21.0 million
at January 28, 2017 and January 30, 2016, respectively.
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Property and equipment, net:
|
|
|
|
Machinery and equipment
|
$
|
578,248
|
|
|
$
|
575,954
|
|
Buildings and building improvements
|
194,290
|
|
|
194,247
|
|
Computer software
|
99,186
|
|
|
102,840
|
|
Land
|
53,373
|
|
|
53,373
|
|
Leasehold improvements
|
49,004
|
|
|
50,192
|
|
Furniture and fixtures
|
23,903
|
|
|
27,118
|
|
Construction in progress
|
11,240
|
|
|
1,353
|
|
|
1,009,244
|
|
|
1,005,077
|
|
Less: Accumulated depreciation
|
(765,847
|
)
|
|
(708,299
|
)
|
Property and equipment, net
|
$
|
243,397
|
|
|
$
|
296,778
|
|
The Company recorded depreciation expense of
$82.4 million
,
$73.8 million
and
$78.3 million
for fiscal
2017
,
2016
and
2015
, respectively.
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Other non-current assets:
|
|
|
|
Technology and other licenses
|
$
|
53,254
|
|
|
$
|
48,091
|
|
Deferred tax assets
|
26,608
|
|
|
34,505
|
|
Investments in privately-held companies
|
5,787
|
|
|
5,804
|
|
Prepaid land use rights
|
12,810
|
|
|
13,123
|
|
Deposits
|
3,756
|
|
|
51,512
|
|
Other
|
11,109
|
|
|
10,996
|
|
Other non-current assets
|
$
|
113,324
|
|
|
$
|
164,031
|
|
Amortization of technology and other licenses was
$25.5 million
,
$26.4 million
and
$27.9 million
in fiscal
2017
,
2016
and
2015
, respectively. In connection with its restructuring plan announced in November 2016, the Company recorded the impairment of a
$45.0 million
nonrefundable deposit due to non-utilization of the related contract in fiscal 2017.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Accrued liabilities:
|
|
|
|
Accrued rebates
|
$
|
26,095
|
|
|
$
|
41,320
|
|
Restructuring liability
|
23,150
|
|
|
3,842
|
|
Accrued royalties
|
17,349
|
|
|
16,217
|
|
Technology license obligations
|
21,905
|
|
|
17,985
|
|
Accrued legal expense
|
5,127
|
|
|
9,761
|
|
Other
|
49,865
|
|
|
42,935
|
|
Accrued liabilities
|
$
|
143,491
|
|
|
$
|
132,060
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Deferred income:
|
|
|
|
Net deferred revenue
|
$
|
93,148
|
|
|
$
|
75,541
|
|
Deferred cost of goods sold
|
(25,024
|
)
|
|
(21,568
|
)
|
Deferred income
|
$
|
68,124
|
|
|
$
|
53,973
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Other non-current liabilities:
|
|
|
|
Technology license obligations
|
$
|
14,949
|
|
|
$
|
12,461
|
|
Long-term accrued employee compensation
|
4,075
|
|
|
6,078
|
|
Deferred tax liabilities
|
38,777
|
|
|
1,098
|
|
Other
|
6,136
|
|
|
7,326
|
|
Other non-current liabilities
|
$
|
63,937
|
|
|
$
|
26,963
|
|
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
Loss on
Auction
Rate
Securities
|
|
Unrealized
Gain
(Loss) on
Cash Flow
Hedges
|
|
Total
|
Balance at January 31, 2015
|
$
|
3,768
|
|
|
$
|
(2,274
|
)
|
|
$
|
(1,186
|
)
|
|
$
|
308
|
|
Other comprehensive income (loss) before reclassifications
|
(3,838
|
)
|
|
—
|
|
|
1,111
|
|
|
(2,727
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(586
|
)
|
|
2,274
|
|
|
(64
|
)
|
|
1,624
|
|
Net current-period other comprehensive income (loss), net of tax
|
(4,424
|
)
|
|
2,274
|
|
|
1,047
|
|
|
(1,103
|
)
|
Balance at January 30, 2016
|
(656
|
)
|
|
—
|
|
|
(139
|
)
|
|
(795
|
)
|
Other comprehensive income before reclassifications
|
1,766
|
|
|
—
|
|
|
1,496
|
|
|
3,262
|
|
Amounts reclassified from accumulated other comprehensive income
|
(1,911
|
)
|
|
—
|
|
|
(533
|
)
|
|
(2,444
|
)
|
Net current-period other comprehensive income (loss), net of tax
|
(145
|
)
|
|
—
|
|
|
963
|
|
|
818
|
|
Balance at January 28, 2017
|
$
|
(801
|
)
|
|
$
|
—
|
|
|
$
|
824
|
|
|
$
|
23
|
|
The amounts reclassified from accumulated other comprehensive income (loss) by components are presented in the following table (in thousands):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
Affected Line Item in the Statement of Operations
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Interest and other income, net:
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
Marketable securities
|
$
|
1,911
|
|
|
$
|
586
|
|
|
$
|
1,245
|
|
Auction rate securities
|
—
|
|
|
(2,274
|
)
|
|
(512
|
)
|
Operating costs and expenses:
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
Research and development
|
467
|
|
|
48
|
|
|
(198
|
)
|
Selling and marketing
|
10
|
|
|
(1
|
)
|
|
(8
|
)
|
General and administrative
|
56
|
|
|
17
|
|
|
(12
|
)
|
Total
|
$
|
2,444
|
|
|
$
|
(1,624
|
)
|
|
$
|
515
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Interest and other income, net:
|
|
|
|
|
|
Interest income
|
$
|
13,198
|
|
|
$
|
15,982
|
|
|
$
|
11,370
|
|
Net realized gain (loss) on investments
|
1,500
|
|
|
(1,473
|
)
|
|
1,449
|
|
Currency translation gain
|
1,746
|
|
|
6,655
|
|
|
1,871
|
|
Other income (loss)
|
946
|
|
|
(2,773
|
)
|
|
9,811
|
|
Interest expense
|
(368
|
)
|
|
(706
|
)
|
|
(1,167
|
)
|
|
$
|
17,022
|
|
|
$
|
17,685
|
|
|
$
|
23,334
|
|
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Supplemental cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
363
|
|
|
$
|
703
|
|
|
$
|
1,167
|
|
Cash paid for income taxes, net
|
$
|
17,032
|
|
|
$
|
13,363
|
|
|
$
|
15,727
|
|
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
Purchase of intellectual property under license obligations
|
$
|
27,081
|
|
|
$
|
13,800
|
|
|
$
|
—
|
|
Unsettled trade receivable of available-for-sale securities
|
$
|
7,742
|
|
|
$
|
53,749
|
|
|
$
|
—
|
|
Unsettled trade payable of available-for-sale securities
|
$
|
15,371
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Unpaid purchase of property and equipment at end of year
|
$
|
2,547
|
|
|
$
|
9,069
|
|
|
$
|
7,083
|
|
Unpaid repurchases of our common shares
|
$
|
1,499
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net income (loss) per share
The Company reports both basic net income (loss) per share, which is based on the weighted average number of common shares outstanding during the period, and diluted net income (loss) 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 (loss) per share are presented in the following table (in thousands, except per share amounts):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Numerator:
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
43,994
|
|
|
$
|
(769,155
|
)
|
|
$
|
483,787
|
|
Loss from discontinued operations
|
(22,843
|
)
|
|
(42,245
|
)
|
|
(48,441
|
)
|
Net income (loss)
|
$
|
21,151
|
|
|
$
|
(811,400
|
)
|
|
$
|
435,346
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares — basic
|
509,738
|
|
|
510,945
|
|
|
511,089
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Share-based awards
|
7,775
|
|
|
—
|
|
|
9,671
|
|
Weighted average shares — diluted
|
517,513
|
|
|
510,945
|
|
|
520,760
|
|
Income (loss) from continuing operations per share:
|
|
|
|
|
|
Basic
|
$
|
0.09
|
|
|
$
|
(1.51
|
)
|
|
$
|
0.95
|
|
Diluted
|
$
|
0.09
|
|
|
$
|
(1.51
|
)
|
|
$
|
0.93
|
|
Loss from discontinued operations per share:
|
|
|
|
|
|
Basic
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.10
|
)
|
Diluted
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.09
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
Basic
|
$
|
0.04
|
|
|
$
|
(1.59
|
)
|
|
$
|
0.85
|
|
Diluted
|
$
|
0.04
|
|
|
$
|
(1.59
|
)
|
|
$
|
0.84
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28, 2017
|
|
January 30, 2016
|
|
January 31, 2015
|
Weighted average shares outstanding:
|
|
|
|
|
|
Share-based awards
|
22,642
|
|
|
64,420
|
|
|
35,636
|
|
Anti-dilutive potential shares from share-based awards are excluded from the calculation of diluted earnings per share for all periods reported above because either their exercise price exceeded the average market price during the period or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method. Anti-dilutive potential shares from share-based awards are also excluded from the calculation of diluted earnings per share for the year ended January 30, 2016 due to the net loss reported in fiscal 2016.
Note 5 — 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.
The notional amounts of outstanding forward contracts were as follows (in thousands):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Buy Contracts
|
|
January 28,
2017
|
|
January 30,
2016
|
Israeli shekel
|
$
|
63,523
|
|
|
$
|
19,082
|
|
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.
Other Foreign Currency Forward Contracts.
The Company may enter into foreign currency forward exchange contracts to hedge certain assets and liabilities denominated in various foreign currencies that it does not designate as hedges for accounting purposes. The maturities of these contracts are generally less than 12 months. Gains or losses arising from the remeasurement of these contracts to fair value each period are recorded in interest and other income, net.
The fair value of foreign currency exchange contracts was not significant as of any period presented.
The following table provides information about gains (losses) associated with our derivative financial instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gains (Losses)
in Statement of Operations
|
|
Amount of Gains (Losses) in Statement
of Operations for the Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
Forward contracts:
|
Research and development
|
|
$
|
737
|
|
|
$
|
(390
|
)
|
|
$
|
(1,930
|
)
|
|
Selling and marketing
|
|
15
|
|
|
(5
|
)
|
|
(24
|
)
|
|
General and administrative
|
|
86
|
|
|
(26
|
)
|
|
(157
|
)
|
|
|
|
$
|
838
|
|
|
$
|
(421
|
)
|
|
$
|
(2,111
|
)
|
The portion of gains (losses) excluded from the assessment of hedge effectiveness are included in interest and other income, net, and these amounts were
$(0.3) million
,
$(0.1) million
and
$0.2 million
in fiscal
2017
,
2016
and
2015
, respectively. In addition, realized losses from forward contracts that are not designated as hedging instruments that are included in interest and other income, net, were not material in fiscal
2017
,
2016
and
2015
. The Company also reports hedge ineffectiveness from derivative financial instruments in current earnings, which were not material in fiscal
2017
,
2016
and
2015
.
No
cash flow hedges were terminated as a result of forecasted transactions that did not occur.
Note 6 — 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:
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 and marketable investments in U.S. government and agency debt, which are valued primarily using quoted market prices. The Company’s Level 2 assets include its marketable investments in time deposits, corporate debt securities, foreign government and agency debt, municipal 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 are
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
classified as Level 3 assets because there are currently no active markets for the auction rate securities and consequently the Company is unable to obtain independent valuations from market sources. Therefore, the auction rate securities are valued using a discounted cash flow model. Some of the inputs to the discounted cash flow model are unobservable in the market.
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 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
|
|
Corporate debt securities
|
—
|
|
|
31,280
|
|
|
—
|
|
|
31,280
|
|
Foreign government and agency debt
|
—
|
|
|
1,500
|
|
|
—
|
|
|
1,500
|
|
Municipal debt securities
|
—
|
|
|
8,740
|
|
|
—
|
|
|
8,740
|
|
Short-term investments:
|
|
|
|
|
|
|
|
U.S. government and agency debt
|
185,387
|
|
|
—
|
|
|
—
|
|
|
185,387
|
|
Corporate debt securities
|
—
|
|
|
432,108
|
|
|
—
|
|
|
432,108
|
|
Asset backed securities
|
—
|
|
|
45,527
|
|
|
—
|
|
|
45,527
|
|
Foreign government and agency debt
|
—
|
|
|
13,375
|
|
|
—
|
|
|
13,375
|
|
Municipal debt securities
|
—
|
|
|
27,871
|
|
|
—
|
|
|
27,871
|
|
Time deposits
|
—
|
|
|
150,000
|
|
|
—
|
|
|
150,000
|
|
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
|
|
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at January 30, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Items measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
160,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
160,400
|
|
Time deposits
|
—
|
|
|
209,405
|
|
|
—
|
|
|
209,405
|
|
U.S. government and agency debt
|
184,374
|
|
|
—
|
|
|
—
|
|
|
184,374
|
|
Corporate debt securities
|
—
|
|
|
54,689
|
|
|
—
|
|
|
54,689
|
|
Short-term investments:
|
|
|
|
|
|
|
|
U.S. government and agency debt
|
317,405
|
|
|
—
|
|
|
—
|
|
|
317,405
|
|
Corporate debt securities
|
—
|
|
|
557,821
|
|
|
—
|
|
|
557,821
|
|
Asset backed securities
|
—
|
|
|
76,736
|
|
|
—
|
|
|
76,736
|
|
Foreign government and agency debt
|
—
|
|
|
21,358
|
|
|
—
|
|
|
21,358
|
|
Municipal debt securities
|
—
|
|
|
31,249
|
|
|
—
|
|
|
31,249
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
—
|
|
|
30
|
|
|
—
|
|
|
30
|
|
Long-term investments:
|
|
|
|
|
|
|
|
Auction rate securities
|
—
|
|
|
—
|
|
|
11,296
|
|
|
11,296
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
Severance pay fund
|
—
|
|
|
678
|
|
|
—
|
|
|
678
|
|
Total assets
|
$
|
662,179
|
|
|
$
|
951,966
|
|
|
$
|
11,296
|
|
|
$
|
1,625,441
|
|
Liabilities
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
—
|
|
|
$
|
195
|
|
|
$
|
—
|
|
|
$
|
195
|
|
The following table summarizes the change in fair values for Level 3 assets for the years ended
January 28, 2017
and
January 30, 2016
(in thousands):
|
|
|
|
|
|
Level 3
|
Changes in fair value during the year (pre-tax):
|
|
Balance at January 31, 2015
|
$
|
10,226
|
|
Impairment loss
|
(1,204
|
)
|
Unrealized gain included in accumulated other comprehensive income
|
2,274
|
|
Balance at January 30, 2016
|
11,296
|
|
Sales, redemption and settlement
|
(6,681
|
)
|
Unrealized gain included in accumulated other comprehensive income
|
—
|
|
Balance at January 28, 2017
|
$
|
4,615
|
|
There were no transfers of assets between levels in either fiscal 2017 or 2016.
Note 7 — Goodwill and Acquired Intangible Assets, Net
Goodwill
There was
no
activity for acquisitions or divestitures recorded to goodwill in fiscal
2017
and
2016
due to business combinations.
The Company has identified that its business operates as a
single
operating segment with
two
components that it has concluded can be aggregated into a
single
reporting unit. In connection with the restructuring plan the Company announced in November 2016 (see “Note 8 - Restructuring and Other Related Charges”), its Board of Directors approved a plan to sell certain businesses that are classified and reported in the consolidated statement of operations as discontinued operations. As a result, goodwill was allocated to these businesses based on relative fair value since each represents a portion of the Company’s
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reporting unit (see "Note 2 - Discontinued Operations"). The Company obtained an independent valuation to determine the fair value of these businesses for purposes of allocating the goodwill and to complete an assessment for goodwill impairment of the Company’s continuing operations. Although the Company engaged an independent valuation specialist to provide the fair value calculations, management assumed full responsibility for the valuation results, and the accuracy and completeness of the underlying financial data and corresponding assumptions. The Company’s annual test for goodwill impairment as of the last day of the fourth quarter of fiscal 2017 did
no
t result in any impairment charge.
Acquired Intangible Assets, Net
The carrying amounts of acquired intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
January 30, 2016
|
|
Range of
Useful Lives
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
and
Write-Offs
|
|
Net
Carrying
Amounts
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
and
Write-Offs
|
|
Net
Carrying
Amounts
|
Purchased and core technology
|
4 - 8 years
|
|
$
|
25,798
|
|
|
$
|
(22,227
|
)
|
|
$
|
3,571
|
|
|
$
|
25,798
|
|
|
$
|
(17,950
|
)
|
|
$
|
7,848
|
|
Customer intangibles
|
5 - 7 years
|
|
24,700
|
|
|
(24,700
|
)
|
|
—
|
|
|
24,700
|
|
|
(20,601
|
)
|
|
4,099
|
|
Total acquired intangible assets from continuing operations, net
|
|
|
$
|
50,498
|
|
|
$
|
(46,927
|
)
|
|
$
|
3,571
|
|
|
$
|
50,498
|
|
|
$
|
(38,551
|
)
|
|
$
|
11,947
|
|
Intangible assets, along with the related accumulated amortization, are removed from the table above at the end of the fiscal year they become fully amortized. The Company recorded charges of
$3.4 million
to write off IPR&D in fiscal 2015 upon the Company’s decision to discontinue the related project. These impairment charges are included in amortization and write-off of acquired intangible assets in the consolidated statements of operations.
Based on the identified intangible assets recorded at
January 28, 2017
, the future amortization expense of identified intangibles for the next five fiscal years is as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
2018
|
$
|
3,571
|
|
2019 and thereafter
|
—
|
|
|
$
|
3,571
|
|
Note 8 — Restructuring and Other Related Charges
The following table provides a summary of restructuring and other related charges as presented in the Consolidated Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Cost of goods sold
|
$
|
—
|
|
|
$
|
10,292
|
|
|
$
|
—
|
|
Restructuring and other related charges
|
105,186
|
|
|
53,251
|
|
|
10,438
|
|
Write-off of acquired intangible assets
|
—
|
|
|
—
|
|
|
3,386
|
|
|
$
|
105,186
|
|
|
$
|
63,543
|
|
|
$
|
13,824
|
|
The following table presents details of charges recorded by the Company related to the restructuring actions described below (in thousands):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Severance and related costs
|
$
|
41,035
|
|
|
$
|
43,926
|
|
|
$
|
5,181
|
|
Facilities and related costs
|
6,587
|
|
|
1,407
|
|
|
1,924
|
|
Loss on early contract termination
|
—
|
|
|
1,644
|
|
|
3,230
|
|
Other exit-related costs
|
5,452
|
|
|
534
|
|
|
86
|
|
|
53,074
|
|
|
47,511
|
|
|
10,421
|
|
Release of reserves:
|
|
|
|
|
|
Severance
|
(86
|
)
|
|
—
|
|
|
—
|
|
Other exit-related costs
|
(383
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Impairment and write-off of assets:
|
|
|
|
|
|
Prepaid deposit
|
45,000
|
|
|
—
|
|
|
—
|
|
Inventory
|
—
|
|
|
8,046
|
|
|
—
|
|
Technology licenses
|
629
|
|
|
1,250
|
|
|
—
|
|
Equipment and other
|
6,952
|
|
|
6,736
|
|
|
17
|
|
Acquired intangible asset
|
—
|
|
|
—
|
|
|
3,386
|
|
|
$
|
105,186
|
|
|
$
|
63,543
|
|
|
$
|
13,824
|
|
Fiscal 2017.
The Company recorded
$105.2 million
of restructuring and other related charges in fiscal 2017 as described in the following paragraphs:
In November 2016, the Company announced a plan to restructure its operations to refocus its research and development, increase operational efficiency and improve profitability (see "Note 2 - Discontinued Operations"). The Company expects that the restructuring actions, which include discontinuing investment in specific research and development programs, streamlining engineering processes, and consolidating research and development sites, will eliminate approximately
900
positions worldwide. In addition, the Company plans to divest certain businesses (see “Note 3 - Discontinued Operations”). These actions began immediately following the announcement and are expected to be fully executed by the end of October 2017. As a result of these actions, the Company expects to incur charges of
$90 million
to
$110 million
through fiscal 2017, including cash charges of
$35 million
to
$50 million
. Restructuring and restructuring-related charges include an estimate of severance, asset impairment, lease termination fees and other costs.
The Company recorded restructuring and other related charges of
$98.7 million
in fiscal 2017 related to this restructuring plan announced in November 2016. The charges included
$41.0 million
of severance benefits,
$5.5 million
of other exit-related costs primarily related to contract cancellation penalties,
$1.9 million
of costs related to closing certain facilities,
$45.0 million
to fully impair a nonrefundable deposit due to the non-utilization of the related contract, and
$5.4 million
for the impairment of equipment and technology licenses. The Company is on track to complete activities related to this restructuring plan and expects to incur additional charges in fiscal 2018 since facilities related to the closure of certain operations have yet to be vacated and certain additional actions related to this restructuring plan have yet to occur. Estimated remaining costs are expected to be approximately
$10 million
to
$15 million
, which is in line with the Company's original estimated amount.
In connection with the restructuring of its mobile platform business in September 2015, substantially all of the remaining activities expected to be completed in the first half of fiscal 2017 were completed. As a result, the Company recorded a charge of
$1.9 million
in fiscal 2017, which included
$2.2 million
primarily for the write off of all remaining mobile-related equipment that was previously classified as held for sale that was offset by a net credit of
$0.3 million
, mainly due to the release of a reserve related to the loss on contract termination previously recognized in fiscal 2016. Total cumulative charges recorded through the end of fiscal 2017 related to this restructuring action were
$46.4 million
, which included
$28.1 million
of severance benefits, a
$1.3 million
loss on early contract termination,
$8.8 million
for impairment of technology licenses and certain equipment,
$0.2 million
related to facility closures and an
$8.0 million
write down of inventory. The total cumulative charges were lower than the original estimate of
$100 million
to
$130 million
primarily due to the Company’s decision to retain approximately
140
mobile employees to support the remaining mobile business than it originally anticipated and certain equipment planned for disposal was subsequently determined to have alternative use. The Company also offered retention bonuses to another
128
mobile employees to remain through the ramp down of certain operations. Their benefit packages were recognized ratably over the employees’ remaining service periods through the first half of fiscal 2017.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In addition to the restructuring actions described in the preceding paragraph, the Company recorded charges of
$4.6 million
in the fiscal 2017, primarily for the remaining lease obligation, net of sublease income, upon vacating certain floors in one of its Israel facilities and ongoing operating expenses of vacated facilities related to restructuring actions in previous years.
Fiscal 2016.
The Company recorded
$63.5 million
of restructuring and other related charges in fiscal 2016 as described in the following paragraphs.
In September 2015, the Company announced a significant restructuring of its mobile platform business in order to focus the mobile product line on more profitable opportunities and align its expenses with corporate targets. The Company implemented actions to significantly downsize the mobile platform organization to refocus its technology to other emerging opportunities. As a result of these actions, the Company recorded restructuring and other related charges of
$44.4 million
in fiscal 2016 related to this restructuring. The charge primarily included severance benefits for
825
employees who were notified of their termination, a loss on early contract termination, the impairment of technology licenses and certain equipment, and the write down of inventory. Substantially all of the affected employees departed by the end of fiscal 2016.
In May 2015, the Company decided to further reduce its research and development operations in Israel and close certain other design centers, primarily located in Europe and the U.S. in connection with its ongoing effort to streamline its business. As a result, the Company recorded a total
$16.3 million
charge in fiscal 2016 comprised of
$15.1 million
for severance related to the termination of
358
employees who were notified of their termination and
$1.2 million
for a lease obligation related to a facility that the Company vacated in July 2015. Substantially all of the activities associated with these actions were completed and all affected employees departed before the end of fiscal 2016.
In March 2015, the Company exercised the early buyout option under an existing operating lease for corporate equipment that it planned to sell as part of a cost reduction action. The Company actively sought a buyer and classified the equipment as held for sale within prepaid and current assets on the consolidated balance sheet. It also ceased depreciation on the asset and recorded impairment charges of
$1.4 million
through the second quarter ended August 1, 2015. In October 2015, the Company sold the corporate equipment for net proceeds of
$9.3 million
, which approximated the carrying value and resulted in
no
gain or loss recognized upon the sale of the asset.
In addition to the restructuring actions described in the preceding paragraphs, the Company recorded
$1.4 million
of additional charges primarily associated with ongoing operating expenses of vacated facilities related to restructuring actions in previous fiscal years and maintenance costs for the corporate equipment sold in October 2015.
Fiscal 2015.
The Company decided to streamline its operations, primarily in Israel, to align with its overall strategic plan, and to discontinue the development of a product it originally acquired in a business combination. As a result, the Company recorded
$13.8 million
of restructuring and other related charges in fiscal 2015. Facilities and related costs primarily included a charge for a portion of the lease obligation related to vacating the floors the Company no longer planned to occupy in one of its Israel facilities. The write-off of an acquired intangible asset in fiscal 2015 was due to the Company’s decision to discontinue the related project. These actions were substantially completed by the end of fiscal 2015. In addition, the Company decided to exercise an early buy out option to acquire an asset under an existing operating lease agreement, and recorded a
$3.2 million
loss from the termination of the agreement in fiscal 2015.
The following table sets forth a reconciliation of the beginning and ending restructuring liability balances by each major type of costs associated with the restructuring charges (in thousands):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2016 Restructuring
|
|
Mobile & Other Prior Restructuring
|
|
|
|
Severance and related costs
|
|
Facilities and related costs
|
|
Other exit-related costs
|
|
Severance and related costs
|
|
Facilities and related costs
|
|
Other exit-related costs
|
|
Total
|
Balance at January 31, 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,339
|
|
|
$
|
3,230
|
|
|
$
|
4,569
|
|
Cost reduction charges
|
—
|
|
|
—
|
|
|
—
|
|
|
43,926
|
|
|
1,407
|
|
|
2,178
|
|
|
47,511
|
|
Cash payments
|
—
|
|
|
—
|
|
|
—
|
|
|
(42,741
|
)
|
|
(1,567
|
)
|
|
(3,764
|
)
|
|
(48,072
|
)
|
Exchange rate adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(30
|
)
|
|
(106
|
)
|
|
—
|
|
|
(136
|
)
|
Balance at January 30, 2016
|
—
|
|
|
—
|
|
|
—
|
|
|
1,155
|
|
|
1,043
|
|
|
1,644
|
|
|
3,842
|
|
Cost reduction charges
|
41,020
|
|
|
1,872
|
|
|
5,452
|
|
|
15
|
|
|
4,715
|
|
|
—
|
|
|
53,074
|
|
Cash payments
|
(24,065
|
)
|
|
(110
|
)
|
|
(829
|
)
|
|
(1,082
|
)
|
|
(5,112
|
)
|
|
(1,261
|
)
|
|
(32,459
|
)
|
Release of reserves
|
—
|
|
|
—
|
|
|
—
|
|
|
(86
|
)
|
|
—
|
|
|
(383
|
)
|
|
(469
|
)
|
Exchange rate adjustment
|
45
|
|
|
1
|
|
|
2
|
|
|
(2
|
)
|
|
65
|
|
|
—
|
|
|
111
|
|
Balance at January 28, 2017
|
17,000
|
|
|
1,763
|
|
|
4,625
|
|
|
—
|
|
|
711
|
|
|
—
|
|
|
24,099
|
|
Less: non-current portion
|
—
|
|
|
(949
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(949
|
)
|
Current portion
|
$
|
17,000
|
|
|
$
|
814
|
|
|
$
|
4,625
|
|
|
$
|
—
|
|
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
23,150
|
|
During fiscal 2017, the Company paid severance and related benefit costs to approximately
500
employees who departed in fiscal 2017 as part of the restructuring actions described above. The remaining 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 after the end of fiscal 2017 and is expected to be paid within the first half of fiscal 2018. The balance at January 28, 2017 for facility and related costs includes remaining payments under lease obligations related to vacated space that are expected to be paid through fiscal 2019. Other exit-related costs are expected to be paid in the first quarter of fiscal 2018.
Note 9 — Income Taxes
The U.S. and non-U.S. components of income (loss) before income taxes of continuing operations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
U.S. operations
|
$
|
30,889
|
|
|
$
|
32,433
|
|
|
$
|
30,607
|
|
Non-U.S. operations
|
86,127
|
|
|
(790,253
|
)
|
|
449,103
|
|
|
$
|
117,016
|
|
|
$
|
(757,820
|
)
|
|
$
|
479,710
|
|
The provision (benefit) for income taxes consists of the following (in thousands):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Current income tax provision (benefit):
|
|
|
|
|
|
Federal
|
$
|
8,289
|
|
|
$
|
10,482
|
|
|
$
|
8,826
|
|
State
|
180
|
|
|
83
|
|
|
(161
|
)
|
Foreign
|
19,916
|
|
|
(5,326
|
)
|
|
171
|
|
Total current income tax provision (benefit)
|
28,385
|
|
|
5,239
|
|
|
8,836
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
Federal
|
(5,062
|
)
|
|
(4,355
|
)
|
|
(1,775
|
)
|
State
|
(12
|
)
|
|
580
|
|
|
16
|
|
Foreign
|
49,711
|
|
|
9,871
|
|
|
(11,154
|
)
|
Total deferred income tax provision (benefit)
|
44,637
|
|
|
6,096
|
|
|
(12,913
|
)
|
Total provision (benefit) for income taxes
|
$
|
73,022
|
|
|
$
|
11,335
|
|
|
$
|
(4,077
|
)
|
Deferred tax assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Deferred tax assets:
|
|
|
|
Federal and California research and other tax credits
|
$
|
450,503
|
|
|
$
|
414,662
|
|
Reserves and accruals
|
35,887
|
|
|
35,200
|
|
Share-based compensation
|
3,733
|
|
|
4,476
|
|
Net operating losses
|
5,361
|
|
|
11,055
|
|
Gross deferred tax assets
|
495,484
|
|
|
465,393
|
|
Valuation allowance
|
(456,541
|
)
|
|
(424,914
|
)
|
Total deferred tax assets
|
38,943
|
|
|
40,479
|
|
Total deferred tax liabilities
|
(51,112
|
)
|
|
(7,073
|
)
|
Net deferred tax assets (liabilities)
|
$
|
(12,169
|
)
|
|
$
|
33,406
|
|
As presented in the consolidated balance sheets as of January 28, 2017 and January 30, 2016, and in the table above, unrecognized tax benefits have been offset by deferred tax assets for certain net operating losses that are available to be used in the amount of
$7.5 million
and
$6.3 million
, respectively.
At the end of fiscal 2017, the Company recorded a valuation allowance of
$456.5 million
which is an increase of
$31.6 million
from fiscal 2016. The Company provided a full valuation allowance against its federal and various state research credits which it earns in excess of its current year tax liabilities, as well as a portion against its net operating loss carryforwards in the U.S. federal and California jurisdictions. Based on the objectively verifiable positive and negative evidence, the Company determined that it is more likely than not that these research credits and net operating losses will not be realized in the future. The Company also provided a valuation allowance against the deferred tax assets of a portion of its operations in Israel, which has cumulative losses in recent years and is not projecting sufficient future taxable income to realize the benefit of its deferred tax assets.
As of January 28, 2017, the Company had net operating loss carryforwards available to offset future taxable income of approximately
$82.7 million
,
$1.4 million
and
$6.3 million
for foreign, U.S. federal and state of California purposes, respectively. The federal carryforwards will expire in various fiscal years between
2022
and
2028
, and the California carryforwards will expire at various fiscal years between
2018
and
2033
, if not utilized before these years. The majority of the Company’s non-U.S. losses carry forward indefinitely. For U.S. federal income tax return purposes, the Company had research tax credit carryforwards of approximately
$268.5 million
that expire through fiscal
2037
. As of January 28, 2017, the Company had unused California research and tax credit carryforwards of approximately
$279.4 million
, which can be carried forward
indefinitely
. Included in the U.S. federal and California carryforward amounts are
$63.0 million
and
$60.0 million
, respectively, that are attributable to excess tax benefits from stock options. Upon realization, the benefit associated with these credits will increase additional paid-in capital. The Company also has research and investment tax credit carryforwards of approximately
$24.3 million
in other U.S. states that expire through fiscal
2032
due to the statutes of limitation.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company consists of a Bermuda parent holding company with various foreign and U.S. subsidiaries. The applicable statutory rate in Bermuda is
zero
for the Company for fiscal 2017, 2016, and 2015. For purposes of the reconciliation between the provision (benefit) for income taxes at the statutory rate and the effective tax rate, a notional U.S.
35%
rate is applied as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Provision at U.S. notional statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Difference in U.S. and non-U.S. tax rates
|
(23.7
|
)
|
|
(37.1
|
)
|
|
(35.1
|
)
|
Benefits from utilization of general business credits
|
(35.8
|
)
|
|
5.2
|
|
|
(10.8
|
)
|
Change in valuation allowance
|
30.6
|
|
|
(4.3
|
)
|
|
9.5
|
|
Withholding taxes
|
42.8
|
|
|
—
|
|
|
—
|
|
Tax effects of global restructuring
|
14.3
|
|
|
—
|
|
|
—
|
|
Other
|
(0.8
|
)
|
|
(0.3
|
)
|
|
0.5
|
|
Effective tax rate
|
62.4
|
%
|
|
(1.5
|
)%
|
|
(0.9
|
)%
|
The following table reflects changes in the unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Unrecognized tax benefits as of the beginning of the period
|
$
|
29,139
|
|
|
$
|
45,197
|
|
|
$
|
51,682
|
|
Increases related to prior year tax positions
|
2,080
|
|
|
304
|
|
|
976
|
|
Decreases related to prior year tax positions
|
—
|
|
|
(4,334
|
)
|
|
(386
|
)
|
Increases related to current year tax positions
|
2,363
|
|
|
4,237
|
|
|
5,356
|
|
Settlements
|
—
|
|
|
(704
|
)
|
|
—
|
|
Lapse in the statute of limitations
|
(6,576
|
)
|
|
(9,739
|
)
|
|
(10,691
|
)
|
Foreign exchange gain
|
(3,213
|
)
|
|
(5,822
|
)
|
|
(1,740
|
)
|
Gross amounts of unrecognized tax benefits as of the end of the period
|
$
|
23,793
|
|
|
$
|
29,139
|
|
|
$
|
45,197
|
|
Included in the balances as of January 28, 2017 is
$23.4 million
of unrecognized tax benefit that would affect the effective income tax rate if recognized. Also,
$7.5 million
and
$6.3 million
of the gross unrecognized tax benefits presented in the table above are offset against deferred tax assets in the consolidated balance sheets as of January 28, 2017 and January 30, 2016, respectively.
The amounts in the table above do not include the related interest and penalties. The amount of interest and penalties accrued was approximately
$21.6 million
as of January 28, 2017,
$26.4 million
as of January 30, 2016, and
$27.7 million
as of January 31, 2015. The Company’s policy is to recognize these interest and penalties as a component of income tax expense. The consolidated statements of operations for fiscal 2017, 2016, and 2015 included
$2.7 million
,
$4.6 million
, and
$3.8 million
, respectively, of interest and penalties related to the unrecognized tax benefits.
The Company is subject to income tax audits by the respective tax authorities in all of the jurisdictions in which it operates. The examination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. As of January 28, 2017, the material jurisdictions that are subject to examination include China, Israel, Singapore, Switzerland and the United States for the Company’s fiscal years 2006 through 2016. As of January 28, 2017, several of the Company’s non-U.S. entities are under examination for fiscal years encompassing 2006 through 2016. The Company is also under examination by the State of California for fiscal year
2013
and
2014
.
For fiscal 2018, the Company will continue to review its tax positions and provide for or reverse unrecognized tax benefits as issues arise. During the next 12 months, 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
$9.5 million
from the lapse of the statutes of limitation in various jurisdictions during the next 12 months.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Singapore Economic Development Board (“EDB”) initially granted a
10
-year Pioneer Status in July 1999 to the Company’s Singapore subsidiary. In October 2004, the Company’s subsidiary in Singapore was granted a second incentive known as the Develop and Expansion Incentive (“DEI”), and in June 2006, the EDB agreed to extend the Pioneer status for
15 years
to June 2014. The Company re-negotiated with the Singapore government and in fiscal 2015, they extended the DEI tax credits to the Company until June 2019. In order to retain these tax benefits in Singapore, the Company must meet certain operating conditions relating to, among other things, maintenance of a regional headquarters function, and research and development activities in Singapore. In fiscal 2017, 2016 and 2015 tax savings associated with these tax holidays were approximately
$0.9 million
,
$5.3 million
and
$0.1 million
, respectively, which if paid would impact the Company’s earnings per share by
$0.01
per share in fiscal 2016, and less than
$0.01
per share in fiscal 2017 and 2015.
Under the Israeli Encouragement law of “approved or benefited enterprise,”
two
branches of Marvell Israel (M.I.S.L) Ltd., the GTL branch and the cellular branch (formerly Marvell DSPC), are entitled to approved and benefited tax programs that include reduced tax rates and exemption of certain income, subject to various operating and other conditions. Income from the approved or benefited enterprises, with the exception of capital gains, is eligible up to fiscal 2027. There was no such benefit in fiscal 2017, 2016 and 2015.
During fiscal 2007, each of the Swiss Federal Department of Economy and the Vaud Cantonal Tax Administration granted the Company’s subsidiary in Switzerland a
10
year tax holiday on revenues from research and design wafer supply trading activities, which commenced in February 2007 and expired at the end of fiscal 2016. The fiscal 2016, and 2015 tax savings associated with this tax holiday was approximately
$3.7 million
and
$4.5 million
, respectively, which provided earnings per share of
$0.01
per share in fiscal 2016 and 2015.
No
tax savings was recognized in fiscal 2017 due to expiration of the tax holiday.
As a result of restructuring actions taken in the fourth quarter of fiscal 2017, the Company recognized tax expense of
$66.9 million
,
$50.1 million
of this amount was attributable to foreign withholding taxes on undistributed earnings of certain subsidiaries that are no longer considered to be indefinitely reinvested.
$16.8 million
is attributable to foreign taxes associated with such restructuring actions.
The Company’s principal source of liquidity as of January 28, 2017 consisted of approximately
$1.7 billion
of cash, cash equivalents and short-term investments, of which approximately
$970 million
was held by foreign subsidiaries (outside Bermuda). Approximately
$620 million
of this amount held by foreign subsidiaries is related to undistributed earnings which have been indefinitely reinvested outside of Bermuda. These funds are primarily held in China, Israel and the United States. We have 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, we would incur a tax expense of approximately
$190 million
.
Note 10 — Commitments and Contingencies
Warranty Obligations
The Company’s products carry a standard
90
-day warranty with certain exceptions in which the warranty period can extend to more than
one year
based on contractual agreements. The Company’s warranty expense has not been significant in the periods presented.
Lease Commitments
The Company leases some of its facilities, equipment and computer aided design software under non-cancelable operating leases. Rent expense, net of sublease income for fiscal
2017
,
2016
, and
2015
was approximately
$23.7 million
,
$23.8 million
and
$26.1 million
, respectively. The Company also purchases certain intellectual property under technology license obligations. Future minimum lease payments, net of estimated sublease income, and payments under technology license obligations as of
January 28, 2017
, are presented in the following tables (in thousands):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
Fiscal Year
|
Minimum
Operating
Leases
Payments
|
2018
|
$
|
37,167
|
|
2019
|
27,004
|
|
2020
|
16,708
|
|
2021
|
3,767
|
|
2022
|
610
|
|
Thereafter
|
2,147
|
|
Total future minimum lease payments
|
$
|
87,403
|
|
|
|
|
|
|
Fiscal Year
|
Technology
License
Obligations
|
2018
|
$
|
23,180
|
|
2019
|
7,025
|
|
2020 and thereafter
|
7,025
|
|
Total future minimum lease payments
|
$
|
37,230
|
|
Less: amount representing interest
|
(170
|
)
|
Present value of future minimum payments
|
37,060
|
|
Less: current portion
|
(22,111
|
)
|
Non-current portion
|
$
|
14,949
|
|
Technology license obligations include the liabilities under agreements for technology licenses between the Company and various vendors.
Purchase Commitments
Under the Company’s manufacturing relationships with its foundry partners, cancellation of all outstanding purchase orders is allowed but requires payment of all costs and expenses incurred through the date of cancellation. As of
January 28, 2017
, these foundries had incurred approximately
$208.8 million
of manufacturing costs and expenses relating to the Company’s outstanding purchase orders.
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 as well as the attorneys’ fees and costs under an infringement claim. The Company’s indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. Generally, there are limits on and exceptions to the Company’s potential liability for indemnification. 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
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 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
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Carnegie Mellon University Litigation.
On
March 6, 2009
, CMU filed a complaint in the U.S. District Court for the Western District of Pennsylvania (“W.D. of Pennsylvania”). CMU has asserted U.S. Patent Nos. 6,201,839 and 6,438,180 (collectively, the “CMU patents in suit”), which relate to read-channel integrated circuit devices and the hard disk drive (“HDD”) incorporating such devices. A jury trial began on November 26, 2012. On December 26, 2012, a jury delivered a verdict that found the CMU patents in suit were literally and willfully infringed and valid, and awarded past damages in the amount of
$1.17 billion
. Based on post-trial motions and decisions, the W.D. of Pennsylvania calculated the damages including enhancement to total approximately
$1.54 billion
, and held that, under its decision, CMU is entitled to post judgment interest and an ongoing royalty. On May 7, 2014, the W.D. of Pennsylvania entered final judgment, from which the Company filed a notice of appeal on May 14, 2014. On August 4, 2015, the Federal Circuit in a three-judge panel issued an opinion affirming in part, reversing in part, and vacating and remanding in part. On February 16, 2016, the Company and CMU entered into a Settlement Agreement and Patent License pursuant to which the Company has agreed to pay an aggregate of
$750 million
, without any ongoing royalty payments, to CMU and the parties have agreed to mutually acceptable release, license and covenant not to sue provisions. Please see “Note 15 — Carnegie Mellon University Settlement” for additional information on the effect of the settlement in the Company’s consolidated financial statements for fiscal 2017. In connection with the settlement, the primary supersedeas bond that the Company entered into in connection with this litigation was reduced to
$439 million
and the secondary bond, which is secured, was adjusted to
$311 million
. All of the Company’s obligations under both bonds were discharged pursuant to an order releasing supersedeas bonds on April 21, 2016. On October 18, 2016, the case was dismissed with prejudice.
Innovatio Litigation.
On March 16, 2015, Innovatio IP Ventures, LLC filed suit against MSI in the U.S. District Court for the Northern District of Illinois, alleging infringement of U.S. Patent Nos. 6,697,415; 5,844,893; 5,740,366; 7,916,747; 6,665,536; 7,013,138; 7,107,052; 5,546,397; 7,710,907; 7,710,935; 6,714,559; 7,457,646; and 6,374,311, purportedly related to certain wireless technology. The complaint sought unspecified damages. On October 11, 2016, the case was dismissed with prejudice.
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 shall 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 further Case Management Conference and a hearing on defendants' Motions to Dismiss are both set for May 4, 2017. Trial is set for March 5, 2018.
Saratoga Litigation.
On October 16, 2015, Saratoga Advantage Trust Technology & Communications Portfolio (“Saratoga”) filed an action asserting shareholder derivative claims ostensibly on behalf of the Company in the Superior Court of the State of California, County of Santa Clara. The complaint names
eight
current or former officers and/or directors (Sehat Sutardja, Weili Dai, Juergen Gromer, Arturo Krueger, John Kassakian, Randhir Thakur, Michael Rashkin, and Sukhi Nagesh) as defendants and asserts various California state law causes of action based on allegations that the Company and the named officers and directors made, caused to be made, or failed to correct false and/or misleading statements in the Company’s press releases and public filings, leading to the filing of securities class actions that allegedly damaged the Company. The Company was named as a nominal defendant. The complaint requested damages and restitution in unspecified amounts, equitable and/or
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
injunctive relief, costs and fees of bringing the action, and other unspecified relief. On September 15, 2016, the case was dismissed with prejudice.
Surety Bonds
On May 14, 2014, the Company filed a Notice of Appeal to appeal the final judgment issued by the W.D of Pennsylvania in the CMU litigation. In order to stay the execution of the final judgment pending its appeal, the Company filed a supersedeas bond for
$1.54 billion
with the W.D. of Pennsylvania in the event the Company did not fully satisfy a final judgment as affirmed after the completion of all appellate proceedings. The bond was issued by a consortium of sureties authorized by the U.S. Treasury. In support of the bond, the Company entered into separate indemnity agreements with each of the sureties to indemnify the sureties from all costs and payments made under the bond. The indemnity agreements did not require collateral to be posted at the time of the issuance of the bond. However, the indemnity agreements provided that each of the sureties had the right to demand to be placed in funds or call for collateral under pre-defined events.
On November 14, 2014, the Company filed a second surety bond for
$216 million
and filed a commitment letter from the sureties to issue up to an additional
$95 million
in bonding under certain conditions. The second bond and commitment were secured by the Company’s campus located in Santa Clara, California with a carrying value of
$126.7 million
at
January 28, 2017
.
In connection with the settlement that was reached with CMU, the primary supersedeas bond that the Company entered into was reduced to
$439 million
and the secondary bond was adjusted to
$311 million
and both were discharged pursuant to an order releasing supersedeas bonds on April 21, 2016. For additional information, see CMU litigation under “Contingencies” above.
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, which 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 future payment is probable.
Note 11 — Benefit Plans
The Company sponsors a 401(k) savings and investment plan that allows eligible U.S. employees to participate by making pre-tax contributions to the 401(k) plan ranging from
1%
to
50%
of eligible earnings subject to a required annual limit. The Company matches
100%
of the first
4%
of the employee’s contribution and
50%
of the next
2%
, up to a
$3,000
maximum contribution. The Company made matching contributions to employees of
$4.5 million
in fiscal
2017
,
$4.9 million
in fiscal
2016
and
$5.1 million
in fiscal
2015
. As of
January 28, 2017
, the 401(k) plan offers a variety of investment alternatives, representing different asset classes. Employees may not invest in the Company’s common shares through the 401(k) plan.
The Company also has voluntary defined contribution plans in various non-U.S. locations. In connection with these plans, the Company made contributions on behalf of employees totaling
$11.8 million
,
$14.5 million
and
$18.5 million
during fiscal
2017
,
2016
and
2015
, respectively. The Company also maintains a limited number of defined benefit plans for certain non-U.S. locations. Total costs under these plans were
$0.1 million
,
$1.5 million
and
$0.1 million
in fiscal 2017, 2016 and 2015, respectively.
Note 12 — Shareholders’ Equity
Common and Preferred Stock
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of
January 28, 2017
, the Company is authorized to issue
992.0 million
shares of
$0.002
par value common stock and
8 million
shares of
$0.002
par value preferred stock. As of
January 28, 2017
and
January 30, 2016
,
no
shares of preferred stock were outstanding.
1995 Stock Option Plan
In April 1995, the Company adopted the 1995 Stock Option Plan (the “Option Plan”). The Option Plan, as amended from time to time, had
383.4 million
common shares reserved for issuance thereunder as of
January 28, 2017
. Options granted under the Option Plan generally have a term of
10 years
and generally must be issued at prices equal to the fair market value of the stock on the date of grant. Incentive stock options granted to shareholders who own greater than
10%
of the outstanding stock at the time of the grant may not have a term exceeding
five years
and these options must be issued at prices of at least
110%
of the fair market value of the stock on the date of grant. The Company can also grant stock awards, which may be subject to vesting. Further, the Company can grant restricted stock unit (“RSU”) awards. RSU awards are denominated in shares of stock, but may be settled in cash or shares upon vesting, as determined by the Company at the time of grant. Awards under the Option Plan generally vest over
2
to
5 years
.
As of
January 28, 2017
, approximately
98.6 million
shares remained available for future issuance under the Option Plan.
Fiscal 2017.
In August 2016, the Company granted performance-based equity awards to each of its executive officers who then joined the Company. The Company also granted performance-based equity awards to an additional
four
executive officers who later joined the Company in September, November and December of 2016. These equity awards include RSU’s which vest based on the achievement of certain financial goals (“Financial Performance RSU”). The Financial Performance RSUs will be earned on the achievement of certain financial operating metrics to be measured as of the end of fiscal 2018 and will vest on the third anniversary of the respective vesting commencement dates. Shares granted under these Financial Performance RSUs (based on
100%
expected achievement) are reported in the table presented below as “Performance-Based.” The executive officers were also granted equity awards which shall vest based on total shareholder return (each a “Total Shareholder Return Award”). The Total Shareholder Return Awards will vest on the
third anniversary
of the respective vesting commencement dates based on the achievement of performance objectives relating to relative total shareholder return of the Company’s common shares as compared to that of comparable companies of the Philadelphia Semiconductor Sector Index over a performance period defined in the award. These Total Shareholder Return Awards are reported in the table presented below as “Market-Based.”
Fiscal 2016.
In April 2015, the Company granted performance-based equity awards to each of its executive officers, which were based on their achievement of certain performance goals for a performance period beginning in fiscal 2016. These equity awards included RSUs which would vest based on the achievement of certain financial goals (each a “Financial Performance RSU”), and performance awards for which a portion would vest based on the achievement of individual strategic objectives (each a “Strategic Objective Award”) and a portion would vest based on total shareholder return (each a “Total Shareholder Return Award”). These awards are reported as “Performance-Based,” except for the Total Shareholder Return Award which is reported as “Market-Based.” The Financial Performance RSUs would be earned based on the achievement of revenue and modified non-GAAP operating income that have been established at “threshold,” “target” and “maximum” levels that would vest on the first anniversary of the vest commencement date. The Strategic Objective Awards would also vest on the first anniversary of the commencement date at the target level based on the achievement of individual strategic goals and, with respect to a portion of each Strategic Objective Award, the further achievement of either the revenue or modified non-GAAP operating income objective established for the Financial Performance RSU. The Total Shareholder Return Awards would vest on the second anniversary of the commencement date based on the Company’s stock price performance in comparison to the Philadelphia Semiconductor Sector Index.
Fiscal 2015
. In April 2014, the Company granted performance-based equity awards to each of its executive officers which were based on their achievement of certain performance goals in fiscal 2015 and 2016. These equity awards included RSUs which would vest based on financial performance criteria (“Financial Performance RSU”) and restricted stock units which vest based on both financial performance criteria and individual strategic goals (“Strategic Performance Award”). The Financial Performance RSUs would be earned based on the achievement of revenue and modified non-GAAP operating income that have been established at “threshold,” “target” and “maximum” levels. Each Financial Performance RSU would vest
50%
on the first anniversary of the commencement date based on achievement of fiscal 2015 financial performance criteria and
50%
on the second anniversary of the vesting commencement date based on the achievement of fiscal 2016 financial performance criteria. The Strategic Performance Awards would vest based on achievement at the threshold level of either the revenue or modified non-GAAP operating income objective established for the Financial Performance RSU, in addition to the achievement of additional individual strategic goals. Each Strategic Performance Award would vest
50%
on the first anniversary of the
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
commencement date based on achievement of fiscal 2015 individual strategic goals and
50%
on second anniversary date based on the achievement of the fiscal 2016 individual strategic goals.
In June 2014, the Company granted performance-based RSU (“PSUs”) to certain members of senior management. Pursuant to the PSUs, each eligible employee was entitled to vest in a certain number of shares based on such employee’s achievement of individual financial and strategic performance goals for fiscal 2015, including, for example, net revenue and operating expense targets, and other individual strategic milestones. The actual number of shares that would vest for each eligible employee was based on the achievement of such performance goals determined at the end of fiscal 2015 and would vest over
two years
, with
50%
vesting on
April 1, 2015
and
50%
vesting on
April 1, 2016
.
Outside Director Equity Compensation Policy
In September 2016, the Company’s Board of Directors approved the termination of the 2007 Directors’ Stock Incentive Plan, (“2007 Director Plan”) that was initially adopted in October 2007 and it approved a new Outside Director Equity Compensation Policy, which governs the granting of equity awards to non-employee directors under the Option Plan. At the annual general meeting of shareholders held in June 2015, the shareholders approved an amendment to the Option Plan to enable a full range of awards to be granted to non-employee directors. Under the newly adopted Outside Director Compensation Policy, each outside director upon election or appointment at an annual meeting of shareholders will be granted an RSU award under the 1995 Stock Option Plan for a number of shares with an aggregate fair market value equal to
$220,000
on the grant date. In no event shall an outside director be awarded an annual RSU award for more than
20,000
shares. The RSU award vests
100%
on the earlier of the date of the next annual general meeting of shareholders or the
one
-year anniversary of the date of grant.
2000 Employee Stock Purchase Plan
Under the 2000 Employee Stock Purchase Plan, as amended and restated on October 31, 2011 (the “ESPP”), participants purchase the Company’s stock using payroll deductions, which may not exceed
15%
of their total cash compensation. Pursuant to the terms of the current ESPP, the “look-back” period for the stock purchase price is
24 months
. Offering and purchase periods begin on December 8 and June 8 of each year. Participants enrolled in a
24
-month offering period will continue in that offering period until the earlier of the end of the offering period or the reset of the offering period. A reset occurs if the fair market value of the Company’s common shares on any purchase date is less than it was on the first day of the offering period. Participants in a
24
-month offering period will be granted the right to purchase common shares at a price per share that is
85%
of the lesser of the fair market value of the shares at (i) the participant’s entry date into the
two
-year offering period or (ii) the end of each
six
-month purchase period within the offering period.
Under the ESPP, a total of
2.3 million
shares were issued in fiscal
2017
at a weighted-average price of
$7.33
per share, a total of
5.9 million
shares were issued in fiscal
2016
at a weighted-average price of
$10.00
per share and a total of
9.7 million
shares were issued in fiscal
2015
at a weighted-average price of
$7.67
per share. As of
January 28, 2017
, there was
$16.2 million
of unamortized compensation cost related to the ESPP.
As of
January 28, 2017
, approximately
29.5 million
shares remained available for future issuance under the ESPP.
Option Plan and Stock Award Activity
Stock option activity under the Company’s stock option and stock incentive plans is included in the following table (in thousands, except for per share amounts):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Options
|
|
Market-Based Options
|
|
Total
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
Balance at February 1, 2014
|
49,156
|
|
|
$
|
13.40
|
|
|
2,623
|
|
|
$
|
15.43
|
|
|
51,779
|
|
|
$
|
13.51
|
|
Granted
|
6,365
|
|
|
$
|
15.33
|
|
|
—
|
|
|
—
|
|
|
6,365
|
|
|
$
|
15.33
|
|
Exercised
|
(3,732
|
)
|
|
$
|
10.19
|
|
|
—
|
|
|
—
|
|
|
(3,732
|
)
|
|
$
|
10.19
|
|
Canceled/Forfeited
|
(4,649
|
)
|
|
$
|
14.66
|
|
|
(391
|
)
|
|
$
|
15.43
|
|
|
(5,040
|
)
|
|
$
|
14.72
|
|
Balance at January 31, 2015
|
47,140
|
|
|
$
|
13.79
|
|
|
2,232
|
|
|
$
|
15.43
|
|
|
49,372
|
|
|
$
|
13.88
|
|
Granted
|
6,170
|
|
|
$
|
14.13
|
|
|
—
|
|
|
—
|
|
|
6,170
|
|
|
$
|
14.13
|
|
Exercised
|
(2,225
|
)
|
|
$
|
9.79
|
|
|
—
|
|
|
—
|
|
|
(2,225
|
)
|
|
$
|
9.79
|
|
Canceled/Forfeited
|
(10,211
|
)
|
|
$
|
15.68
|
|
|
(76
|
)
|
|
$
|
15.43
|
|
|
(10,287
|
)
|
|
$
|
15.68
|
|
Balance at January 30, 2016
|
40,874
|
|
|
$
|
13.59
|
|
|
2,156
|
|
|
$
|
15.43
|
|
|
43,030
|
|
|
$
|
13.68
|
|
Granted
|
2,104
|
|
|
$
|
9.99
|
|
|
—
|
|
|
—
|
|
|
2,104
|
|
|
$
|
9.99
|
|
Exercised
|
(5,558
|
)
|
|
$
|
10.35
|
|
|
—
|
|
|
—
|
|
|
(5,558
|
)
|
|
$
|
10.35
|
|
Canceled/Forfeited
|
(12,324
|
)
|
|
$
|
16.44
|
|
|
(2,156
|
)
|
|
$
|
15.43
|
|
|
(14,480
|
)
|
|
$
|
16.29
|
|
Balance at January 28, 2017
|
25,096
|
|
|
$
|
12.61
|
|
|
—
|
|
|
|
|
25,096
|
|
|
$
|
12.61
|
|
Vested or expected to vest at January 28, 2017
|
24,253
|
|
|
$
|
12.57
|
|
|
|
|
|
|
|
|
|
For time-based stock options vested and expected to vest at
January 28, 2017
, the aggregate intrinsic value was
$68.0 million
. For time-based stock options exercisable at
January 28, 2017
, the aggregate intrinsic value was
$45.7 million
. The aggregate intrinsic value of stock options exercised during fiscal
2017
,
2016
and
2015
was
$19.8 million
,
$9.7 million
and
$19.3 million
, respectively. The market-based stock options automatically expired in April 2016 since the market price conditions were not met within the required
five years
from date of grant. The Company’s closing stock price of
$15.09
as reported on the NASDAQ Global Select Market as of January 27, 2017 was used to calculate the aggregate intrinsic value for all in-the-money options.
Outstanding options and exercisable options information by range of exercise prices as of January 28, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
Exercisable Options
|
Range of
Exercise Prices
|
|
Number of
Shares
(in Thousands)
|
|
Weighted
Average
Remaining
Contractual Term
(in Years)
|
|
Weighted
Average
Exercise Price
|
|
Number of
Shares
(in Thousands)
|
|
Weighted
Average
Exercise Price
|
$
|
5.70
|
|
|
$
|
10.47
|
|
|
3,842
|
|
|
4.84
|
|
$
|
8.11
|
|
|
2,214
|
|
|
$
|
6.94
|
|
$
|
10.76
|
|
|
$
|
10.76
|
|
|
7,004
|
|
|
6.16
|
|
$
|
10.76
|
|
|
4,344
|
|
|
$
|
10.76
|
|
$
|
10.80
|
|
|
$
|
14.35
|
|
|
6,047
|
|
|
5.79
|
|
$
|
13.13
|
|
|
2,630
|
|
|
$
|
11.72
|
|
$
|
14.45
|
|
|
$
|
15.87
|
|
|
5,540
|
|
|
5.82
|
|
$
|
15.40
|
|
|
2,385
|
|
|
$
|
15.24
|
|
$
|
15.91
|
|
|
$
|
21.62
|
|
|
2,663
|
|
|
1.19
|
|
$
|
16.95
|
|
|
2,599
|
|
|
$
|
16.96
|
|
Total
|
|
|
|
25,096
|
|
|
5.27
|
|
$
|
12.61
|
|
|
14,172
|
|
|
$
|
12.23
|
|
As of
January 28, 2017
, the unamortized compensation expense for time-based stock options was
$15.5 million
. The unamortized compensation expense for time-based options will be amortized on a straight-line basis and is expected to be recognized over a weighted-average period of
1.4
years.
Activity related to the non-vested portion of the restricted stock units is included in the following table (in thousands, except for share prices):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based
|
|
Performance-Based
|
|
Market-Based
|
|
Total
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Balance at February 1, 2014
|
11,254
|
|
|
$
|
14.14
|
|
|
100
|
|
|
|
$
|
10.52
|
|
|
|
|
|
|
11,354
|
|
|
$
|
14.11
|
|
Granted
|
5,534
|
|
|
$
|
15.20
|
|
|
1,277
|
|
*
|
|
$
|
14.98
|
|
|
|
|
|
|
6,811
|
|
|
$
|
15.16
|
|
Vested
|
(5,938
|
)
|
|
$
|
13.96
|
|
|
(3
|
)
|
|
|
$
|
10.52
|
|
|
|
|
|
|
(5,941
|
)
|
|
$
|
13.96
|
|
Canceled/Forfeited
|
(1,102
|
)
|
|
$
|
14.32
|
|
|
(120
|
)
|
|
|
$
|
11.23
|
|
|
|
|
|
|
(1,222
|
)
|
|
$
|
14.02
|
|
Balance at January 31, 2015
|
9,748
|
|
|
$
|
14.84
|
|
|
1,254
|
|
|
|
$
|
14.99
|
|
|
|
|
|
|
11,002
|
|
|
$
|
14.85
|
|
Granted
|
5,689
|
|
|
$
|
12.88
|
|
|
669
|
|
*
|
|
$
|
14.08
|
|
|
407
|
|
|
$
|
12.24
|
|
|
6,765
|
|
|
$
|
12.96
|
|
Vested
|
(5,139
|
)
|
|
$
|
15.06
|
|
|
(658
|
)
|
|
|
$
|
15.15
|
|
|
—
|
|
|
$
|
—
|
|
|
(5,797
|
)
|
|
$
|
15.07
|
|
Canceled/Forfeited
|
(1,955
|
)
|
|
$
|
13.99
|
|
|
(288
|
)
|
|
|
$
|
14.39
|
|
|
(54
|
)
|
|
$
|
12.24
|
|
|
(2,297
|
)
|
|
$
|
14.00
|
|
Balance at January 30, 2016
|
8,343
|
|
|
$
|
13.57
|
|
|
977
|
|
|
|
$
|
14.43
|
|
|
353
|
|
|
$
|
12.24
|
|
|
9,673
|
|
|
$
|
13.61
|
|
Granted
|
9,139
|
|
|
$
|
9.83
|
|
|
366
|
|
*
|
|
$
|
13.91
|
|
|
612
|
|
*
|
$
|
11.94
|
|
|
10,117
|
|
|
$
|
10.11
|
|
Vested
|
(5,490
|
)
|
|
$
|
13.95
|
|
|
(155
|
)
|
|
|
$
|
14.15
|
|
|
—
|
|
|
—
|
|
|
(5,645
|
)
|
|
$
|
13.95
|
|
Canceled/Forfeited
|
(2,067
|
)
|
|
$
|
10.69
|
|
|
(875
|
)
|
|
|
$
|
14.45
|
|
|
(406
|
)
|
|
$
|
12.39
|
|
|
(3,348
|
)
|
|
$
|
11.88
|
|
Balance at January 28, 2017
|
9,925
|
|
|
$
|
10.52
|
|
|
313
|
|
|
|
$
|
13.91
|
|
|
559
|
|
|
$
|
11.80
|
|
|
10,797
|
|
|
$
|
10.69
|
|
|
|
*
|
Amounts represent the target number of restricted stock units at grant date. For awards granted to our executive officers, up to
200%
of the target restricted stock units may vest if the maximum level for performance goals is achieved.
|
In connection with the performance-based equity awards granted in fiscal 2016 to each of the Company’s executive officers, a total of
33,616
shares vested on April 1, 2016 based on achieving certain individual strategic goals as evaluated by the Executive Compensation Committee of the Company’s Board of Directors. No shares vested for the achievement of financial performance goals since the financial performance criteria were below the threshold level. The amount of canceled shares reported in the table above includes the unvested shares that were not earned.
In connection with the performance-based equity awards granted in fiscal 2015 to each of the Company’s executive officers, a total of
478,001
shares vested on April 1, 2015 in connection with the first performance period completed at the end of fiscal 2015. Of this amount, an additional
107,954
shares are included as granted in the table above for fiscal 2015 since each executive officer achieved greater than their target shares for one of the financial performance goals. The amount of canceled shares reported in the table above includes the portion of unvested shares that were not earned since performance objectives for each executive officer’s other financial and strategic performance goals were not fully achieved. No shares will be issued in connection with the second performance period since the financial and strategic performance goals for fiscal 2016 were not achieved.
In connection with the PSUs granted in fiscal 2015 to certain members of senior management, final evaluation for each individual’s achievement of their performance was measured in the first quarter of fiscal 2016. As a result, a total of
360,723
shares vested on April 1, 2015 and are included in the above table. There was no material adjustment to share-based compensation expense related to these performance-based restricted stock units in fiscal 2016. The amount of canceled shares reported in the table above includes the portion of unvested shares that were not earned since certain performance achievements were not fully achieved.
The aggregate intrinsic value of restricted stock units expected to vest as of
January 28, 2017
was
$152.4 million
. The number of restricted stock units that are expected to vest is
10.1 million
shares.
As of
January 28, 2017
, unamortized compensation expense related to restricted stock units was
$64.2 million
. The unamortized compensation expense for restricted stock units will be amortized on a straight-line basis and is expected to be recognized over a weighted-average period of
1.4
years.
Share-Based Compensation
The following table presents details of share-based compensation expenses by functional line item (in thousands):
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Continuing operations:
|
|
|
|
|
|
Cost of goods sold
|
$
|
8,334
|
|
|
$
|
7,787
|
|
|
$
|
7,972
|
|
Research and development
|
78,136
|
|
|
92,054
|
|
|
89,131
|
|
Selling and marketing
|
10,243
|
|
|
10,242
|
|
|
10,623
|
|
General and administrative
|
8,047
|
|
|
15,878
|
|
|
23,292
|
|
Share-based compensation - continuing operations
|
$
|
104,760
|
|
|
$
|
125,961
|
|
|
$
|
131,018
|
|
Discontinued operations:
|
|
|
|
|
|
Cost of goods sold
|
187
|
|
|
129
|
|
|
—
|
|
Research and development
|
8,306
|
|
|
6,738
|
|
|
5,301
|
|
Selling and marketing
|
649
|
|
|
864
|
|
|
846
|
|
General and administrative
|
68
|
|
|
87
|
|
|
81
|
|
Share-based compensation - discontinued operations
|
9,210
|
|
|
7,818
|
|
|
6,228
|
|
Total share-based compensation
|
$
|
113,970
|
|
|
$
|
133,779
|
|
|
$
|
137,246
|
|
Share-based compensation capitalized in inventory was
$0.9 million
at January 28, 2017 and
$1.5 million
at both January 30, 2016 and January 31, 2015.
Upon the termination of certain members of our executive management in April 2016, it was determined that the vesting in certain of their unvested stock awards was no longer probable. As a result, the Company recorded a reversal of the previously recognized related share-based compensation expense in fiscal 2017.
Valuation Assumptions
The expected volatility for awards granted during fiscal
2017
,
2016
and
2015
was based on an equally weighted combination of historical stock price volatility and implied volatility derived from traded options on the Company’s stock in the marketplace. The Company believes that the combination of historical volatility and implied volatility provides a better estimate of future stock price volatility.
The expected dividend yield is calculated by dividing the current annualized dividend by the closing stock price on the date of grant of the option.
The following weighted average assumptions were used for each respective period to calculate the fair value of each time-based stock option award on the date of grant using the Black-Scholes option pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Time-based Stock Options:
|
|
|
|
|
|
Weighted average fair value
|
$
|
2.92
|
|
|
$
|
3.93
|
|
|
$
|
4.35
|
|
Expected volatility
|
40
|
%
|
|
34
|
%
|
|
35
|
%
|
Expected term (in years)
|
5.2
|
|
|
5.4
|
|
|
5.0
|
|
Risk-free interest rate
|
1.3
|
%
|
|
1.6
|
%
|
|
1.6
|
%
|
Expected dividend yield
|
2.5
|
%
|
|
1.8
|
%
|
|
1.6
|
%
|
There have been
no
market-based stock option grants since fiscal 2012, when the Company issued
3.1 million
stock options with a market-based condition for a group of senior employees. The market price conditions were not met within the
five years
from date of grant and these stock options automatically expired in April 2016.
The following weighted-average assumptions were used for each respective period to calculate the fair value of common shares to be issued under the ESPP on the date of grant using the Black-Scholes option pricing model:
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Employee Stock Purchase Plan:
|
|
|
|
|
|
Estimated fair value
|
$
|
3.83
|
|
|
$
|
3.24
|
|
|
$
|
4.10
|
|
Expected volatility
|
39
|
%
|
|
41
|
%
|
|
30
|
%
|
Expected term (in years)
|
1.2
|
|
|
1.3
|
|
|
1.3
|
|
Risk-free interest rate
|
0.7
|
%
|
|
0.6
|
%
|
|
0.3
|
%
|
Expected dividend yield
|
1.9
|
%
|
|
2.4
|
%
|
|
1.6
|
%
|
The following weighted-average assumptions were used for each respective period to calculate the fair value of common shares to be issued under Total Shareholder Return performance awards on the date of grant using the Monte Carlo pricing model:
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
January 30,
2016
|
Total Shareholder Return Awards:
|
|
|
Expected term (in years)
|
2.9
|
|
2.0
|
|
Expected volatility
|
36
|
%
|
27
|
%
|
Average correlation coefficient of peer companies
|
0.5
|
|
0.4
|
|
Risk-free interest rate
|
0.9
|
%
|
0.5
|
%
|
Expected dividend yield
|
2.1
|
%
|
1.7
|
%
|
The correlation coefficients are calculated based upon the price data used to calculate the historical volatilities and is used to model the way in which each entity tends to move in relation to its peers.
Share Repurchase Program
On November 17, 2016, the Company announced that its Board of Directors authorized a
$1.0 billion
share repurchase plan. The current stock repurchase program replaced in its entirety the prior
$3.25 billion
stock repurchase program, which had approximately
$115.0 million
of repurchase authority remaining as of November 27, 2016. The Company intends to effect share repurchases in accordance with the conditions of Rule 10b-18 under the Exchange Act but may also make repurchases in the open market outside of Rule 10b-18 or in privately negotiated transactions. The share repurchase program will be subject to market conditions and other factors, and does not obligate the Company to repurchase any dollar amount or number of its common shares and the repurchase program may be extended, modified, suspended or discontinued at any time.
The Company repurchased
13.3 million
of its common shares for
$183.1 million
,
19.7 million
of its common shares for
$260.9 million
and
5.1 million
of its common shares for
$65.0 million
in cash during fiscal
2017
,
2016
and
2015
, respectively. All of the repurchased shares were retired immediately after the repurchases were completed. The Company records all repurchases, as well as investment purchases and sales, based on their trade date. From August 2010 when the Company’s Board of Directors initially authorized a share repurchase program through
January 28, 2017
, a total of
254.9 million
shares have been repurchased to date under the Company’s share repurchase program for a total
$3.3 billion
in cash and there was
$884.0 million
remaining available for future share repurchases.
Subsequent to the year ended January 28, 2017 through March 15, 2017, the Company repurchased an additional
2.7 million
of its common shares for
$43.7 million
at an average price per share of
$15.91
.
Dividends
On March 16, 2017, the Company announced that its board of directors declared a cash dividend of
$0.06
per share payable on April 20, 2017 to shareholders of record as of April 4, 2017.
Note 13 — Segment and Geographic Information
The Company operates in
one
reportable segment — the design, development and sale of integrated circuits. The chief executive officer was identified as the chief operating decision maker (“CODM”) for the years ended
January 28, 2017
,
January 30, 2016
and
January 31, 2015
. The Company’s CODM is ultimately responsible and actively involved in the allocation of resources and the assessment of the Company’s performance. The fact that the Company operates in only
one
reportable segment is based on the following:
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
•
|
The Company uses a highly-integrated approach in developing its products in that discrete technologies developed by the Company are frequently integrated across many of its products. Substantially all of the Company’s integrated circuits are manufactured under similar manufacturing processes.
|
|
|
•
|
The Company’s organizational structure is based along functional lines. Each of the functional department heads reports directly to the CODM. Shared resources in the Company also report directly to the CODM or to a direct report of the CODM.
|
|
|
•
|
The assessments of performance across the Company, including assessment of the Company’s incentive compensation plan, are based largely on operational performance and consolidated financial performance.
|
|
|
•
|
The decisions on allocation of resources and other operational decisions are made by the CODM based on his direct involvement with the Company’s operations and product development.
|
The following tables present net revenue and long-lived asset information based on geographic region. Net revenue is based on the destination of the shipments and long-lived assets are based on the physical location of the assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
January 28,
2017
|
|
January 30,
2016
|
|
January 31,
2015
|
Net Revenue:
|
|
|
|
|
|
United States
|
$
|
51,416
|
|
|
$
|
60,119
|
|
|
$
|
61,470
|
|
China
|
1,239,931
|
|
|
1,509,244
|
|
|
2,171,299
|
|
Thailand
|
113,778
|
|
|
189,299
|
|
|
294,706
|
|
Malaysia
|
286,267
|
|
|
302,953
|
|
|
377,903
|
|
Philippines
|
283,345
|
|
|
211,602
|
|
|
254,381
|
|
Others
|
342,937
|
|
|
375,999
|
|
|
477,447
|
|
|
$
|
2,317,674
|
|
|
$
|
2,649,216
|
|
|
$
|
3,637,206
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
2017
|
|
January 30,
2016
|
Property and equipment, net:
|
|
|
|
China
|
$
|
16,484
|
|
|
$
|
22,294
|
|
Israel
|
12,133
|
|
|
15,069
|
|
Singapore
|
54,054
|
|
|
68,212
|
|
United States
|
147,552
|
|
|
173,158
|
|
Others
|
13,174
|
|
|
18,045
|
|
|
$
|
243,397
|
|
|
$
|
296,778
|
|
Note 14 — Related Party Transactions
The Company, through one of its subsidiaries, is a party to technology license agreements with each of VeriSilicon Holdings Co., Ltd. ("VeriSilicon") and Vivante Corporation (“Vivante”). Pursuant to its agreements with VeriSilicon, which has been amended from time to time, and a services agreement with VeriSilicon, the Company paid
$1.5 million
,
$1.8 million
and
$3.7 million
to VeriSilicon during fiscal 2017, 2016 and 2015, respectively. As of January 28, 2017, the Company had
$0.1 million
of liability to VeriSilicon. Pursuant to its agreements with Vivante, which has been amended from time to time, and a services agreement with Vivante, the Company paid
$3.5 million
,
$4.0 million
and
$9.1 million
to Vivante during fiscal 2017, 2016 and 2015, respectively. As of January 28, 2017, the Company had
no
liability to Vivante. VeriSilicon acquired Vivante in late 2016. Dr. Sehat Sutardja and Ms. Weili Dai, the Company’s former Chairman and Chief Executive Officer and President and a director of the Company, respectively, and currently greater than
10%
shareholder of the Company, are husband and wife. Ms. Dai’s brothers (and Dr. Sutardja’s brothers-in-law) Wayne Dai and Weijin Dai are executive officers and board members of VeriSilicon. Dr. Sutardja and Ms. Dai are shareholders (directly and indirectly) in VeriSilicon.
In February 2015, the Executive Compensation Committee (“Committee”) of the Company’s Board of Directors approved a cash payment of approximately
$15.4 million
to Dr. Sehat Sutardja. The U.S. Court of Federal Claims ruled against Dr. Sutardja in his legal challenge with the Internal Revenue Service and the California Franchise Tax Board related to the tax
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
treatment of several stock options granted in fiscal 2004. After discussing and evaluating the alternatives to a continuing legal challenge of the court’s determination, the likelihood of success of further appeal by Dr. Sutardja and the potential negative impact on the Company of a continuation of the case regardless of the outcome, the Committee determined to provide Dr. Sutardja with relief from the financial effects of the penalty taxes. Accordingly, the Committee approved the cash payment to Dr. Sutardja equal to the amount of his penalty taxes owed under the Tax Codes, plus accrued interest owed with respect to such liabilities, all grossed-up for income taxes that will be owed by Dr. Sutardja on receipt of such cash payment. The Company recorded the payment in general and administrative expense in fiscal 2016. A payment of
$8.4 million
was made to Dr. Sutardja in fiscal 2016 representing reimbursement for the U.S. federal tax portion. As of
January 28, 2017
, the Company had a remaining
$7.0 million
liability to Dr. Sutardja with respect to the California tax portion.
Note 15 — Carnegie Mellon University Settlement
In February 2016, the Company and CMU settled their patent infringement lawsuit pursuant to a court-ordered mediation and entered into a Settlement Agreement and Patent License (the “Agreement”). The parties agreed to mutual release of claims, license and covenant not to sue provisions for which the Company paid an aggregate of
$750 million
to CMU in fiscal 2017. See CMU litigation under “Note 10 - Commitments and Contingencies” for further information about the lawsuit.
The Agreement was accounted for as a multiple-element arrangement and accordingly, a valuation was completed to determine the estimated fair value of each identifiable element. As a result, the Company allocated
$654.7 million
to the mutual release of claims and covenant not to sue provisions;
$81.3 million
to the licensing of intellectual property in fiscal 2016; and the remaining
$14.0 million
representing the future use of the license through April 2018.
The
$654.7 million
for the mutual release of claims and covenant not to sue was recorded in fiscal 2016 as a settlement charge in operating expenses since there is no future benefit. The
$81.3 million
license fee was recorded in fiscal 2016 as a charge in cost of goods sold for past use of the license. The
$14.0 million
representing the future use of the license, is to be recognized in cost of goods sold over the remaining term of the license from February 2016 through April 2018. Accordingly, the Company recorded
$6.2 million
to cost of goods sold in fiscal 2017.
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 16 — Changes in the Company's Organization
In April 2016, the employment of Dr. Sehat Sutardja as Chief Executive Officer and Ms. Weili Dai as President was terminated by the Company’s Board of Directors. The Board of Directors then formed an Interim Office of the Chief Executive and appointed Maya Strelar-Migotti, Executive Vice President of the Smart Networked Devices and Solutions Business Group, and Dr. Pantelis Alexopoulos, Executive Vice President of the Storage Business Group, as Interim Co-Chief Executive Officers.
In April 2016, the Company announced that it entered into an agreement with Starboard Value LP (“Starboard”), regarding the composition of its Board of Directors. Under the terms of the agreement, the Company elected Peter A. Feld, Richard S. Hill, Oleg Khaykin, Michael Strachan and Robert Switz to serve on its board. The agreement specifies that the Board would recommend and the Company would support and solicit proxies only for the election at the 2016 annual general meeting of Messrs. Feld, Hill, Khaykin, Strachan and Switz, the
four
independent directors serving on the Board immediately prior to the execution of the agreement, Dr. Juergen Gromer, Dr. John G. Kassakian, Arturo Krueger and Dr. Randhir Thakur, and Matthew J. Murphy, who joined the Company in July 2016 after the Board of Directors appointed him to serve as the Company’s President and Chief Executive Officer in June 2016.
Upon the commencement of Mr. Murphy’s employment, the Board subsequently appointed Richard S. Hill, the Chairman of the Board, as the Company’s Interim Principal Executive Officer, to serve in that capacity until the Company filed its Quarterly Report on Form 10-Q for the second quarter of fiscal 2017 (“Q217 Form 10-Q”). Mr. Murphy assumed the role of the Company’s principal executive officer immediately following the filing of the Q217 Form 10-Q.
In August 2016, the Company announced the appointment of Jean Hu as Chief Financial Officer effective August 22, 2016. David P. Eichler, the Company’s Interim Chief Financial Officer and principal financial officer, ceased serving as the Company’s principal financial officer upon Ms. Hu’s appointment as Chief Financial Officer. In September 2016, the Company announced the departure of Dr. Zining Wu as the Company’s Chief Technical Officer. In October 2016, the Company announced the appointment of David Caron as Chief Accounting Officer and Controller.
At the Company’s Annual General Meeting of Shareholders held on November 8, 2016 (the “Annual Meeting”), shareholders whose shares were present either in person or by proxy voted upon the election of directors to the Board of Directors. The shareholders elected the following directors to serve until the next annual general meeting of shareholders: Peter Feld; Richard Hill; Oleg Khaykin; Matthew Murphy; Michael Strachan; Robert Switz; and Randhir Thakur. Immediately following the Annual Meeting, the terms of directors Dr. Sehat Sutardja, Weili Dai, Dr. Juergen Groemer, Dr. John Kassakian and Arturo Krueger expired. On November 15, 2016, the Board of Directors appointed Dr. Thakur to serve on the Audit Committee of the Board of Directors, effective immediately
.
In December 2016, the Board of Directors appointed Tudor Brown as a member of the Board of Directors and the Executive Compensation Committee. In January 2017, Ms. Strelar-Migotti left the Company.
SUPPLEMENTARY DATA
(Unaudited)
The following table presents the unaudited consolidated statements of operations data for each of the eight quarters in the period ended January 28, 2017. In connection with the Company’s announcement in November 2016 to restructure its operations to refocus its research and development, increase operational efficiency and improve profitability, it also plans to divest certain businesses and it began an active program to locate buyers for several businesses. As of January 28, 2017,
two
of these businesses were classified as discontinued operations. As required, the Company retrospectively recast its consolidated statements of operations and balance sheets for all period presented to reflect these business as discontinued operations.
In management’s opinion, this information has been presented on the same basis as the audited consolidated financial statements included in a separate section of this Annual Report on Form 10-K, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to fairly state the unaudited quarterly results when read in conjunction with the audited consolidated financial statements and related notes. The operating results for any period should not be considered indicative of results to be expected in any future period. The Company expects the quarterly operating results to fluctuate in future periods due to a variety of reasons, including those discussed in Part I, Item 1A, “Risk Factors.”
MARVELL TECHNOLOGY GROUP LTD.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter (2)
|
|
(In thousands, except per share amounts)
|
Net revenue
|
$
|
519,383
|
|
|
$
|
600,799
|
|
|
$
|
626,092
|
|
|
$
|
571,400
|
|
Gross profit
(1)
|
$
|
275,029
|
|
|
$
|
327,822
|
|
|
$
|
357,779
|
|
|
$
|
327,517
|
|
Income (loss) from continuing operations
|
$
|
(13,271
|
)
|
|
$
|
56,688
|
|
|
$
|
77,454
|
|
|
$
|
(76,877
|
)
|
Loss from discontinued operations
|
$
|
(9,408
|
)
|
|
$
|
(5,383
|
)
|
|
$
|
(4,838
|
)
|
|
$
|
(3,214
|
)
|
Net income (loss)
|
$
|
(22,679
|
)
|
|
$
|
51,305
|
|
|
$
|
72,616
|
|
|
$
|
(80,091
|
)
|
Income (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.03
|
)
|
|
$
|
0.11
|
|
|
$
|
0.15
|
|
|
$
|
(0.15
|
)
|
Diluted
|
$
|
(0.03
|
)
|
|
$
|
0.11
|
|
|
$
|
0.15
|
|
|
$
|
(0.15
|
)
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.04
|
)
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
(0.16
|
)
|
Diluted
|
$
|
(0.04
|
)
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
First
Quarter (3)
|
|
Second
Quarter (4)
|
|
Third
Quarter (5)
|
|
Fourth
Quarter
|
|
(In thousands, except per share amounts)
|
Net revenue
|
$
|
709,563
|
|
|
$
|
687,923
|
|
|
$
|
649,217
|
|
|
$
|
602,513
|
|
Gross profit
(1)
|
$
|
368,427
|
|
|
$
|
241,920
|
|
|
$
|
286,127
|
|
|
$
|
310,225
|
|
Income (loss) from continuing operations
|
$
|
27,112
|
|
|
$
|
(761,484
|
)
|
|
$
|
(51,956
|
)
|
|
$
|
17,173
|
|
Loss from discontinued operations
|
$
|
(13,022
|
)
|
|
$
|
(10,456
|
)
|
|
$
|
(5,794
|
)
|
|
$
|
(12,973
|
)
|
Net income
|
$
|
14,090
|
|
|
$
|
(771,940
|
)
|
|
$
|
(57,750
|
)
|
|
$
|
4,200
|
|
Income (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.06
|
|
|
$
|
(1.47
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
0.03
|
|
Diluted
|
$
|
0.06
|
|
|
$
|
(1.47
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
0.03
|
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
Diluted
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.03
|
|
|
$
|
(1.49
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.01
|
|
Diluted
|
$
|
0.03
|
|
|
$
|
(1.49
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.01
|
|