NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
InterDigital designs and develops advanced technologies that enable and enhance wireless communications and capabilities. Since our founding in 1972, our engineers have designed and developed a wide range of innovations that are used in digital cellular and wireless products and networks, including 2G, 3G, 4G and IEEE 802-related products and networks, as well as video processing, coding and display technology. We are a leading contributor of innovation to the wireless communications industry, as well as a leading holder of patents in the video industry.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING GUIDANCE
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Principles of Consolidation
The accompanying consolidated financial statements include all of our accounts and all entities in which we have a controlling interest and/or are required to be consolidated in accordance with the Generally Accepted Accounting Principles in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.
In determining whether we are the primary beneficiary of a variable interest entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both the power to direct the economically significant activities of the entity and the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. These considerations impact the way we account for our existing collaborative relationships and other arrangements. We continuously assess whether we are the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in us consolidating or deconsolidating our partner(s) to collaborations and other arrangements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. If different assumptions were made or different conditions had existed, our financial results could have been materially different.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Foreign Currency Translation
The functional currency of substantially all of the Company's wholly-owned subsidiaries is the U.S. dollar. Certain subsidiaries have monetary assets and liabilities that are denominated in a currency that is different than the functional currency. The gains and losses resulting from this remeasurement and translation of monetary assets denominated in a currency that is different than the functional currency are reflected in the determination of net income (loss).
Cash, Cash Equivalents, Restricted Cash and Marketable Securities
We classify all highly liquid investment securities with original maturities of three months or less at date of purchase as cash equivalents. Cash that is held for a specific purpose and therefore not available to the Company for immediate or general business use is classified as restricted cash. Our investments are comprised of mutual and exchange traded funds, commercial paper, United States and municipal government obligations and corporate securities. Management determines the appropriate classification of our investments at the time of acquisition and re-evaluates such determination at each balance sheet date.
As of
December 31, 2018
and
2017
, the majority of our marketable securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported net-of-tax as a separate component of shareholders’ equity. Substantially all of our investments are investment grade government and corporate debt securities that have maturities of less than 2 years, and we have both the ability and intent to hold the investments until maturity.
Other-than-Temporary Impairments
We review our investment portfolio during each reporting period to determine whether there are identified events or circumstances that would indicate there is a decline in the fair value that is considered to be other-than-temporary. For non-public investments, if there are no identified events or circumstances that would have a significant adverse effect on the fair value of the investment, then the fair value is not estimated. If an investment is deemed to have experienced an other-than-temporary decline below its cost basis, we reduce the carrying amount of the investment to its quoted or estimated fair value, as applicable, and establish a new cost basis for the investment. We charge the impairment to the "
Other Expense (Net)"
line of our consolidated statements of income.
Intangible Assets
Patents
We capitalize external costs, such as filing fees and associated attorney fees, incurred to obtain issued patents and patent license rights. We expense costs associated with maintaining and defending patents subsequent to their issuance in the period incurred. We amortize capitalized patent costs for internally generated patents on a straight-line basis over
ten
years, which represents the estimated useful lives of the patents. The ten-year estimated useful life for internally generated patents is based on our assessment of such factors as: the integrated nature of the portfolios being licensed, the overall makeup of the portfolio over time, and the length of license agreements for such patents. The estimated useful lives of acquired patents and patent rights, however, have been and will continue to be based on a separate analysis related to each acquisition and may differ from the estimated useful lives of internally generated patents. The average estimated useful life of acquired patents is
9.7
years. We assess the potential impairment to all capitalized net patent costs when events or changes in circumstances indicate that the carrying amount of our patent portfolio may not be recoverable.
Goodwill
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination. We review impairment of goodwill annually on the first day of the fourth quarter. We first assess 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 as a basis for determining whether a quantitative goodwill impairment test is necessary. If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we need not perform the quantitative assessment.
If based on the qualitative assessment we believe it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment test is required to be performed. This assessment requires us to compare the fair value of each reporting unit to its carrying value including allocated goodwill. We determine the fair value of our reporting units generally using a combination of the income and market approaches. The income approach is estimated through the discounted cash flow method based on assumptions about future conditions such as future revenue growth rates, new product and technology introductions, gross margins, operating expenses, discount rates, future economic and market conditions, and other assumptions. The market approach estimates the fair value of our equity by utilizing the market comparable method which is based on revenue multiples from comparable companies in similar lines of business. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, a goodwill impairment charge will be recorded for the difference up to the carrying value of goodwill.
The Company acquired goodwill from our acquisition of the patent licensing business of Technicolor (the "Technicolor Acquisition") in 2018 and from our acquisition of Hillcrest Laboratories, Inc. ("Hillcrest Labs") in 2016. Refer to Note 5, "
Business Combinations
," for more information regarding these transactions.
The carrying value of goodwill as of December 31, 2018 and 2017 was
$22.4 million
and
$16.0 million
, respectively, which was included within "
Other Non-Current Assets
" in the consolidated balance sheets. No impairments were recorded during 2018, 2017 or 2016 as a result of our annual goodwill impairment assessment.
Other Intangible Assets
We capitalize the cost of technology solutions and platforms we acquire or license from third parties when they have a future benefit and the development of these solutions and platforms is substantially complete at the time they are acquired or licensed.
Intangible assets consist of acquired patents, existing technology, and trade names. Refer to the above
Patents
section for more information on acquired patents and existing technology. Our intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 9 to 10 years. We make judgments about the recoverability of purchased finite-lived intangible assets whenever facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we would accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of property and equipment are provided using the straight-line method. The estimated useful lives for computer equipment, computer software, engineering and test equipment and furniture and fixtures are generally
three
to
five
years. Leasehold improvements are amortized over the lesser of their estimated useful lives or their respective lease terms, which are generally
five
to
ten
years. Buildings are being depreciated over
twenty-five
years. Expenditures for major improvements and betterments are capitalized, while minor repairs and maintenance are charged to expense as incurred. Leases meeting certain capital lease criteria are capitalized and the net present value of the related lease payments is recorded as a liability. Amortization of capital leased assets is recorded using the straight-line method over the lesser of the estimated useful lives or the lease terms.
Upon the retirement or disposition of property, plant and equipment, the related cost and accumulated depreciation or amortization are removed, and a gain or loss is recorded.
Internal-Use Software Costs
We capitalize costs associated with software developed for internal use that are incurred during the software development stage. Such costs are limited to expenses incurred after management authorizes and commits to a computer software project, believes that it is more likely than not that the project will be completed, the software will be used to perform the intended function with an estimated service life of
two
years or more, and the completion of conceptual formulation, design and testing of possible software project alternatives (the preliminary design stage). Costs incurred after final acceptance testing has been successfully completed are expensed. Capitalized computer software costs are amortized over their estimated useful life of three years.
All computer software costs capitalized to date relate to the purchase, development and implementation of engineering, accounting and other enterprise software.
Impairment of Long-Lived Assets
We evaluate long-lived assets for impairment when factors indicate that the carrying value of an asset may not be recoverable. When factors indicate that such assets should be evaluated for possible impairment, we review whether we will be able to realize our long-lived assets by analyzing the projected undiscounted cash flows in measuring whether the asset is recoverable. We did not have any long-lived asset impairments in 2018, 2017 or 2016.
Investments in Other Entities
We may make strategic investments in companies that have developed or are developing technologies that are complementary to our business. In conjunction with our adoption of ASU No. 2016-01 "
Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
" discussed further below, we made an accounting policy election for a measurement alternative for our equity investments that do not have readily determinable fair values, specifically related to our strategic investments in other entities. Under the alternative, our strategic investments in other entities without readily determinable fair values are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, if any. On a quarterly basis, we monitor items such as our investment’s financial position and liquidity, performance targets, business plans, and cost trends to assess whether there are any triggering events or indicators present that would be indicative of an impairment, or any other observable price changes as indicated above. We do not adjust our investment balance when the investee reports profit or loss.
Additionally, other investments may be accounted for under the equity method of accounting. Under this method, we initially record our investment in the stock of an investee at cost, and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the determination of net income, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between our cost and underlying equity in net assets of the investee at the date of investment. The investment is also adjusted to reflect our share of changes in the investee’s capital. Dividends received from an investee reduce the carrying amount of the investment. When there are a series of operating losses by the investee or when other factors indicate that a decrease in value of the investment has occurred which is other than temporary, we recognize an impairment equal to the difference between the fair value and the carrying amount of our investment.
The carrying value of our investments in other entities are included within "
Other Non-Current Assets
" on our consolidated balance sheets. During 2018, 2017 and 2016, we made investments in other entities of
$6.7 million
,
$4.6 million
and
$2.0 million
, respectively. The carrying value of our investments in other entities as of December 31, 2018 and 2017 was
$17.4 million
and
$19.2 million
, respectively, the majority of which are accounted for under the measurement alternative for equity investments described above.
Revenue Recognition
Refer to Note 3, "
Revenue Recognition
," for further information regarding our adoption of ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which we refer to as ASC 606, effective January 1, 2018. The discussion that follows below is a description of our revenue recognition practices in effect beginning January 1, 2018 under ASC 606.
We derive the vast majority of our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements are often complex and include multiple performance obligations. These agreements can include, without limitation, performance obligations related to the settlement of past patent infringement liabilities, patent and/or know-how licensing royalties on covered products sold by licensees, access to a portfolio of technology as it exists at a point in time, and access to a portfolio of technology at a point in time along with a promises to provide any technology updates to the portfolio during the term.
All of our agreements have been accounted for under ASC 606. This guidance requires the use of a five-step model to achieve the core underlying principle that an entity should recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. These steps include (1) identifying the contract with the customer, (2) identifying the performance obligations, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue as the entity satisfies the performance obligation(s). Additionally, we have elected to utilize certain practical expedients in the application of ASC 606. In evaluating the presence of a significant financing component in our agreements, we utilize the practical expedient to exclude any contracts wherein the gap between payment by our customers and the delivery of our performance obligation is less than one year. We have also elected to utilize the practical expedient related to costs of obtaining a contract where an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. Timing of revenue recognition may differ significantly from the timing of invoicing to customers. Contract assets are included in accounts receivable and represent unbilled amounts expected to be received from customers in future periods, where the revenue recognized to date (or cumulative adjustments to retained earnings in the initial period of adopting ASC 606) exceeds the amount billed, and right to payment is subject to the underlying contractual terms. Contract assets are classified as long-term assets if the payments are expected to be received more than one year from the reporting date. Contract assets due within less than twelve months of the balance sheet date are included within accounts receivable in our consolidated balance sheets. Contract assets due more than twelve months after the balance sheet date are included within other non-current assets.
Patent License Agreements
Upon signing a patent license agreement, we provide the licensee permission to use our patented inventions in specific applications. We account for patent license agreements in accordance with the guidance indicated above. Under our patent license agreements, we typically receive one or a combination of the following forms of payment as consideration for permitting our licensees to use our patented inventions in their applications and products:
Consideration for Past Patent Royalties
Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with a licensee that utilized our patented inventions prior to signing a patent license agreement with us or from the resolution of a disagreement or arbitration with a licensee over the specific terms of an existing license agreement. We may also receive consideration for past patent royalties in connection with the settlement of patent litigation where there was no prior patent license agreement. In each of these cases, we record the consideration as revenue as prescribed by the five-step model.
Fixed-Fee Agreements
Fixed-fee agreements include fixed, non-refundable royalty payments that fulfill the licensee’s obligations to us under a patent license agreement for a specified time period or for the term of the agreement for specified products, under certain patents or patent claims, for sales in certain countries, or a combination thereof - in each case for a specified time period (including for the life of the patents licensed under the agreement).
Dynamic fixed-fee license agreements
contain a single performance obligation that represents ongoing access to a portfolio of technology over the license term, since our promise to transfer to the licensee access to the portfolio as it exists at inception of the license, along with promises to provide any technology updates to the portfolio during the term, are not separately identifiable. Upon entering a new agreement, we allocate the transaction price to the performance obligations delivered at signing (e.g. our existing patent portfolio) and future performance obligations
(e.g. the technology updates). We use a time-based input method of progress to determine the timing of revenue recognition, and as such we recognize the future deliverables on a straight-line basis over the term of the agreement. We utilize the straight-line method as we believe that it best depicts efforts expended to develop and transfer updates to the customer evenly throughout the term of the agreement.
Static fixed-fee license agreements
are fixed-price contracts that generally do not include updates to technology we create after the inception of the license agreement or in which the customer does not stand to substantively benefit from those updates during the term. Generally, our performance obligations are satisfied at contract signing, and as such revenue is recognized at that time.
Variable Agreements
Upon entering a new variable patent license agreement, the licensee typically agrees to pay royalties or license fees on licensed products sold during the term of the agreement. We utilize the sales- or usage- based royalty exception for these agreements and recognize revenues during the contract term when the underlying sale or usage occurs. Our licensees under variable agreements provide us with quarterly royalty reports that summarize their sales of covered products and their related royalty obligations to us. We typically receive these royalty reports subsequent to the period in which our licensees’ underlying sales occurred. As a result, we are required to estimate revenues, subject to the constraint on our ability to estimate such amounts.
Technology Solutions
Technology solutions revenue consists primarily of revenue from royalty payments. We recognize revenue from royalty payments using the same methods described above under our policy for recognizing revenue from patent license agreements. Technology solutions revenues also consist of revenues from software licenses, engineering services and product sales. The nature of these contracts and timing of payments vary.
Patent Sales
Our business strategy of monetizing our intellectual property includes the sale of select patent assets. As patent sales executed under this strategy represent a component of our ongoing major or central operations and activities, we will record the related proceeds as revenue. We will recognize the revenue in accordance with the five-step model, generally upon closing of the patent sale transaction.
Collaborative Arrangements
We record the elements of our collaboration agreements that represent joint operating activities in accordance with ASC 808,
Collaborative Arrangements
(“ASC 808”). Accordingly, the elements of our collaboration agreements that represent activities in which both parties are active participants, and to which both parties are exposed to the significant risks and rewards that are dependent on the commercial success of the activities, are recorded as collaborative arrangements. Generally, the classification of a transaction under a collaborative arrangement is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. For transactions that are deemed to be a collaborative arrangement under ASC 808, costs incurred and revenues generated on sales to third parties will be reported in our consolidated statement of operations on a gross basis if the Company is deemed to be the principal in the transaction, or on a net basis if the Company is instead deemed to be the agent in the transaction, consistent with the guidance in ASC 606-10-55-36,
Revenue From Contracts with Customers - Principal Agent Considerations
.
Deferred Charges
Direct costs of obtaining a contract or fulfilling a contract in a transaction that results in the deferral of revenue may be either expensed as incurred or capitalized, depending on certain criteria. In conjunction with our adoption of ASC 606 effective January 1, 2018, we made a policy election to utilize the practical expedient related to costs of obtaining a contract where an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. If the amortization period is greater than one year, we capitalize direct costs incurred for the acquisition or fulfillment of a contract through the date of signing if they are directly related to a particular revenue arrangement and are expected to be recovered. The costs are amortized on a straight-line basis over the life of the patent license agreement.
For example, from time to time, we use sales agents to assist us in our licensing and/or patent sale activities. In such cases, we may pay a commission. The commission rate varies from agreement to agreement. Commissions are normally paid shortly after our receipt of cash payments associated with the patent license or patent sale agreements. We defer recognition of commission expense and amortize these expenses in proportion to our recognition of the related revenue. Commission expense is included within the "
Patent administration and licensing"
line of our consolidated statements of income and was immaterial for the years presented. There were no new direct contract costs incurred during 2018, 2017 or 2016.
Incremental direct costs incurred related to a debt financing transaction may be capitalized. In connection with our offering of the 2020 Notes, discussed in detail within Note 10, "
Obligations"
, we incurred directly related costs. The initial purchasers' transaction fees and related offering expenses were allocated to the liability and equity components of the debt in proportion to the allocation of proceeds and accounted for as debt issuance costs. The debt issuance costs allocated to the liability component of the debt were capitalized as deferred financing costs and recorded as a direct reduction of the debt. These costs are being amortized to interest expense over the term of the debt using the effective interest method and are included within the "
Other Expense (Net)"
line of our consolidated statements of income. The costs allocated to the equity component of the debt were recorded as a reduction of the equity component of the debt. The balance of unamortized deferred financing costs as of December 31, 2018 and 2017 was
$1.6 million
and
$3.0 million
, respectively. There were no new debt issuance costs incurred in 2018, 2017 or 2016. Deferred financing expense was
$1.4 million
,
$1.4 million
and
$1.7 million
in
2018
,
2017
and
2016
, respectively.
Research and Development
Research and development expenditures are expensed in the period incurred, except certain software development costs that are capitalized between the point in time that technological feasibility of the software is established and when the product is available for general release to customers. We did not have any capitalized software costs related to research and development in any period presented. Research, development and other related costs were approximately
$69.7 million
,
$75.7 million
and
$73.1 million
in
2018
,
2017
and
2016
, respectively.
Compensation Programs
We use a variety of compensation programs to both attract and retain employees, and to more closely align employee compensation with company performance. These programs include, but are not limited to, short-term incentive awards tied to performance goals and cash awards to inventors for filed patent applications and patent issuances, as well as stock option awards, time-based restricted stock unit (“RSU”) awards, performance-based awards and cash awards under our long-term compensation program ("LTCP") and pursuant to the terms and conditions of our Equity Plans (as defined in Note 13, "
Compensation Plans and Programs
"). Our LTCP typically includes annual equity and cash award grants with three- to five-year vesting periods; as a result, in any one year, we are typically accounting for at least three active LTCP cycles.
We account for compensation costs associated with share-based transactions based on the fair value of the instruments issued. The estimated value of stock options includes assumptions around expected life, stock volatility and dividends. The expected life of our stock option awards is based on the simplified method as prescribed by Staff Accounting Bulletin Topic 14. In all periods, our policy has been to set the value of RSUs and restricted stock awards equal to the value of our underlying common stock on the date of measurement. For grants with graded vesting, we amortize the associated unrecognized compensation cost using an accelerated method. For grants that cliff vest, we amortize the associated unrecognized compensation cost on a straight-line basis over their vesting term.
As a result of our adoption of ASU No. 2016-09, "
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
" in first quarter 2017, we now adjust compensation expense recognized to date in the event of canceled awards as they occur. Tax windfalls and shortfalls related to the tax effects of employee share-based compensation are included in our tax provision. On the consolidated statements of cash flows, tax windfalls and shortfalls related to employee share-based compensation awards are included within operating activities and cash paid to tax authorities for shares withheld are included within financing activities. The inclusion of windfalls and shortfalls in the tax provision could increase our earnings volatility between periods.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statement of Income in the period in which the change was enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if management has determined that it is more likely than not that such assets will not be realized.
In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. We are subject to examinations by the U.S. IRS and other taxing jurisdictions on various tax matters, including challenges to various positions we assert in our filings. In the event that the IRS or another taxing jurisdiction levies an assessment in the future, it is possible the assessment could have a material adverse effect on our consolidated financial condition or results of operations.
The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable tax authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. In the event that the IRS or another taxing jurisdiction levies an assessment in the future, it is possible the assessment could have a material adverse effect on our consolidated financial condition or results of operations.
New Accounting Guidance
Accounting Standards Update: Revenue
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "
Revenue from Contracts with Customers (Topic 606)
". Refer to Note 3, "
Revenue Recognition
," for information regarding our adoption of this guidance effective January 1, 2018 and a discussion of the impact to revenue information presented herein, as well as additional required disclosures under the new guidance.
Accounting Standards Update: Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, "
Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
," which amends certain measurement, presentation, and disclosure requirements for financial instruments. The new guidance must be adopted by means of a cumulative-effect adjustment to the
balance sheet in the year of adoption and became effective for the Company starting in first quarter 2018. We adopted this guidance in first quarter 2018, and it did not have a material effect on the Company's consolidated financial statements.
Accounting Standards Update: Leases
In February 2016, the FASB issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements.
The Company adopted this guidance on January 1, 2019 using the modified retrospective transition effective date method. As part of that adoption, we have elected the package of three practical expedients, which includes the following: an entity may elect not to reassess whether expired or existing contracts contain a lease under the revised definition of a lease, an entity may elect not to reassess the lease classification for expired or existing leases, and an entity may elect not to reassess whether previously capitalized initial direct costs would qualify for capitalization. Additionally, the Company has elected not to utilize the hindsight expedient in determining the lease term. Based upon our preliminary review, we expect to record lease liabilities and corresponding right-of-use assets between $11.0 million and $18.0 million in the consolidated balance sheet, for leases with lease terms greater than 12 months. We will finalize the necessary adjustments in conjunction with the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.
Accounting Standards Update: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, "
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
," which allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the "TCJA"). The guidance is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. We early adopted this guidance in first quarter 2018 and reflected a $0.4 million adjustment to retained earnings during the period.
Accounting Standards Update: Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU No. 2018-07, "
Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accountin
g," which is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. The guidance is effective for fiscal years beginning after December 15, 2018, and will therefore be effective for the Company starting in first quarter 2019. We do not expect the adoption to have a material impact on the Company's consolidated financial statements.
Accounting Standards Update: Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, "
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
". The amendments in this ASU add, modify, and eliminate certain disclosure requirements for fair value measurements under Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company early adopted this guidance in fourth quarter 2018 and it did not have a material impact on the Company's consolidated financial statements.
Accounting Standards Update: Cloud Computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15 “
Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
”. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are in the process of determining the effect the adoption will have on our consolidated financial statements.
Accounting Standards Update: Collaborative Arrangements
In November 2018, the FASB issued ASU No. 2018-18, "
Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606
". The amendments in this ASU provide guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted for entities who have previously adopted the new revenue recognition guidance. We are in the process of determining the effect the adoption will have on our consolidated financial statements.
3. REVENUE RECOGNITION
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606") which superseded most prior revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. We adopted the requirements of the new standard as of January 1, 2018 using the modified retrospective transition method applied to those contracts that were not completed as of January 1, 2018. Accordingly, all periods prior to January 1, 2018 are presented in accordance with ASC Topic 605, "Revenue Recognition" (“ASC 605”). See Note 2 "
Summary of Significant Accounting Policies and New Accounting Guidance
" for our revised revenue recognition accounting policy upon adoption of the new guidance.
The adoption of the new guidance affected our recognition of revenue from both our fixed-fee and per-unit license agreements. For accounting purposes under this new guidance, we separate our fixed-fee license agreements into two categories: (i) those agreements that provide rights, over the term of the license, to future technologies that are highly interdependent or highly interrelated to the technologies provided at the inception of the agreement (“Dynamic Fixed-Fee Agreements”) and (ii) those agreements that do not provide for rights to such future technologies (“Static Fixed-Fee Agreements”). Under our previous accounting practices, after the fair value allocation between the past and future components of the agreement, we recognized the future components of revenue from all fixed-fee license agreements on a straight-line basis over the term of the related license agreement. As a result of our adoption of the new guidance, we will continue to recognize revenue from Dynamic Fixed-Fee Agreements on a straight-line basis over the term of the related license agreement, while we expect to recognize most or all of the revenue from Static Fixed-Fee Agreements in the quarter the license agreement is signed. We will not recognize any ongoing revenue from Static Fixed-Fee Agreements already in existence at the time the guidance was adopted. Additionally, in the event a significant financing component is determined to exist in any of our agreements, we will recognize more or less revenue and corresponding interest expense or income, as appropriate.
In addition, under our previous accounting practices, we recognized revenue from our per-unit license agreements in the period in which we received the related royalty report, generally one quarter in arrears from the period in which the underlying sales occurred (i.e. on a "quarter-lag"). We are now required to record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. Because we generally do not receive the per-unit licensee royalty reports for sales during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in our quarterly results for such quarter, we accrue the related revenue based on estimates of our licensees’ underlying sales, subject to certain constraints on our ability to estimate such amounts. As a result of accruing revenue for the quarter based on such estimates, adjustments will be required in the following quarter to true-up revenue to the actual amounts reported by our licensees. In addition, to the extent we receive non-refundable prepayments related to per-unit license agreements that do not provide rights over the term of the license to future technologies that are highly interdependent or highly interrelated to the technologies provided at the inception of the agreement, we will recognize such prepayments as revenue in the period in which all remaining revenue recognition criteria have been met.
Finally, under our previous accounting practices, we established a receivable, and any related deferred tax asset for foreign withholding taxes, for payments expected to be received within twelve months from the balance sheet date, based on the terms of the license agreement. Our reporting of such payments resulted in increases to: accounts receivable and deferred revenue; and deferred tax assets and taxes payable. Under ASC 606, we will only recognize those amounts as they become due.
Timing of revenue recognition may differ significantly from the timing of invoicing to customers. Contract assets are included in accounts receivable and represent unbilled amounts expected to be received from customers in future periods, where the revenue recognized to date (or cumulative adjustments to retained earnings in the initial period of adopting ASC 606) exceeds the amount billed, and right to payment is subject to the underlying contractual terms. Contract assets are classified as long-term assets if the payments are expected to be received more than one year from the reporting date.
See below for a summary of adjustments related to our adoption of ASC 606. Amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Static Fixed-Fee Agreements
|
Static Prepayments
|
Elimination of Quarter-Lag Reporting
|
Significant Financing Component
|
Related Tax Effects and Other Balance Sheet Impact
|
|
Total Adjustments
|
|
January 1, 2018
|
Accounts Receivable
|
$
|
216,293
|
|
|
$
|
6,000
|
|
$
|
—
|
|
$
|
10,948
|
|
$
|
—
|
|
$
|
(171,727
|
)
|
|
$
|
(154,779
|
)
|
|
$
|
61,514
|
|
Deferred Tax Assets
|
84,582
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(52,199
|
)
|
|
(52,199
|
)
|
|
32,383
|
|
Taxes Payable
|
(14,881
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
8,655
|
|
|
8,655
|
|
|
(6,226
|
)
|
Deferred Revenue
|
(616,813
|
)
|
|
99,466
|
|
85,146
|
|
—
|
|
3,235
|
|
171,727
|
|
|
359,574
|
|
|
(257,239
|
)
|
Retained Earnings
|
(1,249,091
|
)
|
|
(105,466
|
)
|
(85,146
|
)
|
(10,948
|
)
|
(3,235
|
)
|
43,544
|
|
|
(161,251
|
)
|
|
(1,410,342
|
)
|
Disaggregated Revenue
The following table presents the disaggregation of our revenue for the year ended December 31, 2018 under ASC 606. Revenues for the years ended December 31, 2018, 2017 and 2016 are presented in accordance with ASC 605. Amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Variable patent royalty revenue
|
$
|
36,384
|
|
|
$
|
47,840
|
|
|
$
|
168,050
|
|
|
Fixed-fee royalty revenue
|
239,347
|
|
|
301,628
|
|
|
177,614
|
|
|
Current patent royalties
a
|
275,731
|
|
|
349,468
|
|
|
345,664
|
|
|
Non-current patent royalties
b
|
26,329
|
|
|
162,890
|
|
|
309,696
|
|
|
Total patent royalties
|
302,060
|
|
|
512,358
|
|
|
655,360
|
|
|
Current technology solutions revenue
a
|
4,594
|
|
|
20,580
|
|
|
10,494
|
|
|
Patent sales
|
750
|
|
|
—
|
|
|
—
|
|
|
Total revenue
|
$
|
307,404
|
|
|
$
|
532,938
|
|
|
$
|
665,854
|
|
|
a. Recurring revenues consist of current patent royalties, inclusive of Dynamic Fixed-Fee Agreement royalties, and current technology solutions
revenue.
|
|
b.
|
Non-current patent royalties for the year ended December 31, 2018 consist of past patent royalties and royalties from static agreements. For the years ended December 31, 2017 and 2016, non-current patent royalties consist of past patent royalties.
|
During the year ended December 31, 2018, we recognized
$101.3 million
of revenue that had been included in deferred revenue as of the beginning of the period. Additionally, upon adoption of ASC 606 on January 1, 2018, we had
$24.7 million
of contract assets. As of December 31, 2018, we had contract assets of
$19.7 million
and
$5.5 million
included within "
Accounts receivable
" and "
Other non-current assets
" in the consolidated balance sheet, respectively.
Impact of Adoption of ASC 606
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our current period consolidated income statement and balance sheet is presented below. We believe this additional information is vital during the transition year to allow readers of our financial statements to compare financial results from the preceding financial year given the absence of restatement of the prior period. The adoption of ASC 606 did not affect our reported total amounts of cash flows from operating, investing and financing activities. Amounts contained in the tables below are in thousands, except per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
As Reported ASC 606
|
|
Adjustment
|
|
ASC 605
|
|
As Reported (ASC 605)
|
|
As Reported (ASC 605)
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
Variable patent royalty revenue
|
$
|
36,384
|
|
|
$
|
461
|
|
|
$
|
36,845
|
|
|
$
|
47,840
|
|
|
$
|
168,050
|
|
Fixed-fee royalty revenue
|
239,347
|
|
|
79,341
|
|
|
318,688
|
|
|
301,628
|
|
|
177,614
|
|
Current patent royalties
|
275,731
|
|
|
79,802
|
|
|
355,533
|
|
|
349,468
|
|
|
345,664
|
|
Non-current patent royalties
|
26,329
|
|
|
(10,000
|
)
|
|
16,329
|
|
|
162,890
|
|
|
309,696
|
|
Total patent royalties
|
302,060
|
|
|
69,802
|
|
|
371,862
|
|
|
512,358
|
|
|
655,360
|
|
Patent sales
|
750
|
|
|
—
|
|
|
750
|
|
|
—
|
|
|
—
|
|
Current technology solutions revenue
|
4,594
|
|
|
4,907
|
|
|
9,501
|
|
|
20,580
|
|
|
10,494
|
|
|
$
|
307,404
|
|
|
$
|
74,709
|
|
|
$
|
382,113
|
|
|
$
|
532,938
|
|
|
$
|
665,854
|
|
OPERATING EXPENSES:
|
244,809
|
|
|
—
|
|
|
244,809
|
|
|
231,443
|
|
|
228,548
|
|
Income from operations
|
62,595
|
|
|
74,709
|
|
|
137,304
|
|
|
301,495
|
|
|
437,306
|
|
OTHER EXPENSE (NET)
|
(30,537
|
)
|
|
16,655
|
|
|
(13,882
|
)
|
|
(9,105
|
)
|
|
(15,035
|
)
|
Income before income taxes
|
32,058
|
|
|
91,364
|
|
|
123,422
|
|
|
292,390
|
|
|
422,271
|
|
INCOME TAX BENEFIT (PROVISION)
|
27,417
|
|
|
(6,686
|
)
|
|
20,731
|
|
|
(121,676
|
)
|
|
(116,791
|
)
|
NET INCOME
|
$
|
59,475
|
|
|
$
|
84,678
|
|
|
$
|
144,153
|
|
|
$
|
170,714
|
|
|
$
|
305,480
|
|
Net loss attributable to noncontrolling interest
|
(4,393
|
)
|
|
—
|
|
|
(4,393
|
)
|
|
(3,579
|
)
|
|
(3,521
|
)
|
NET INCOME ATTRIBUTABLE TO INTERDIGITAL, INC.
|
$
|
63,868
|
|
|
$
|
84,678
|
|
|
$
|
148,546
|
|
|
$
|
174,293
|
|
|
$
|
309,001
|
|
NET INCOME PER COMMON SHARE — BASIC
|
$
|
1.85
|
|
|
$
|
2.46
|
|
|
$
|
4.31
|
|
|
$
|
5.04
|
|
|
$
|
8.95
|
|
NET INCOME PER COMMON SHARE — DILUTED
|
$
|
1.81
|
|
|
$
|
2.40
|
|
|
$
|
4.21
|
|
|
$
|
4.87
|
|
|
$
|
8.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
As Reported ASC 606
|
|
Adjustment
|
|
ASC 605
|
|
As Reported (ASC 605)
|
Accounts Receivable, net
|
$
|
35,032
|
|
|
$
|
172,940
|
|
|
$
|
207,972
|
|
|
$
|
216,293
|
|
Deferred Tax Assets
|
77,225
|
|
|
34,256
|
|
|
111,481
|
|
|
84,582
|
|
Other Non-current Assets
|
60,465
|
|
|
(5,500
|
)
|
|
54,965
|
|
|
37,963
|
|
Taxes Payable
|
(1,508
|
)
|
|
(11,075
|
)
|
|
(12,583
|
)
|
|
(14,881
|
)
|
Deferred Revenue
|
(269,306
|
)
|
|
(277,827
|
)
|
|
(547,133
|
)
|
|
(616,813
|
)
|
Retained Earnings
|
(1,426,266
|
)
|
|
87,206
|
|
|
(1,339,060
|
)
|
|
(1,249,091
|
)
|
Contracted Revenue
Based on contracts signed and committed Dynamic Fixed-Fee Agreement payments as of December 31, 2018, we expect to recognize the following amounts of revenue over the term of such contracts (in thousands):
|
|
|
|
|
|
Revenue
|
2019
|
$
|
247,750
|
|
2020
|
246,500
|
|
2021
|
178,583
|
|
2022
|
85,228
|
|
2023
|
—
|
|
Thereafter
|
—
|
|
|
$
|
758,061
|
|
4. GEOGRAPHIC / CUSTOMER CONCENTRATION
We have one reportable segment. During 2018, 2017 and 2016, the majority of our revenue was derived from a limited number of licensees based outside of the United States, primarily in Asia. Substantially all of these revenues were paid in U.S. dollars and were not subject to any substantial foreign exchange transaction risk. The table below lists the countries of the headquarters of our licensees and customers and the total revenue derived from each country or region for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
United States
|
$
|
119,159
|
|
|
$
|
194,184
|
|
|
$
|
199,928
|
|
South Korea
|
112,291
|
|
|
113,059
|
|
|
69,000
|
|
Japan
|
29,525
|
|
|
25,210
|
|
|
27,685
|
|
Taiwan
|
23,326
|
|
|
36,051
|
|
|
185,645
|
|
Finland
|
10,000
|
|
|
—
|
|
|
—
|
|
Sweden
|
6,933
|
|
|
6,935
|
|
|
6,934
|
|
Other Europe
|
4,903
|
|
|
4,413
|
|
|
4,713
|
|
Germany
|
490
|
|
|
1,892
|
|
|
6,463
|
|
Other Asia
|
468
|
|
|
—
|
|
|
—
|
|
China
|
309
|
|
|
77,087
|
|
|
154,767
|
|
Canada
|
—
|
|
|
74,107
|
|
|
10,719
|
|
Total
|
$
|
307,404
|
|
|
$
|
532,938
|
|
|
$
|
665,854
|
|
During
2018
,
2017
and
2016
, the following licensees or customers accounted for
10%
or more of total revenues:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Apple
(a)
|
36
|
%
|
|
21
|
%
|
|
25
|
%
|
Samsung
|
25
|
%
|
|
13
|
%
|
|
10
|
%
|
LG
|
10
|
%
|
|
< 10%
|
|
|
—
|
%
|
Pegatron
|
< 10%
|
|
|
< 10%
|
|
|
20
|
%
|
Blackberry
(b)
|
—
|
%
|
|
13
|
%
|
|
< 10%
|
|
Huawei
(c)
|
—
|
%
|
|
14
|
%
|
|
23
|
%
|
(a) 2016 revenues include
$141.4 million
of non-current patent royalties.
(b) 2017 revenues include
$70.7 million
of non-current patent royalties.
(c) 2017 and 2016 revenues include
$8.4 million
and
$121.5 million
, respectively, of non-current patent royalties.
As of December 31, 2018, 2017 and 2016, we held
$464.6 million
,
$336.1 million
and
$287.2 million
, respectively, of our property, equipment and patents, net of accumulated depreciation and amortization, of which greater than 97% of the total was within the United States in each of the years presented. As of December 31, 2018, we held less than
$0.7 million
of property and equipment, net of accumulated depreciation, collectively, in Canada, Europe and Asia.
Technicolor Acquisition
On July 30, 2018, we completed our acquisition of the patent licensing business of Technicolor, a worldwide technology leader in the media and entertainment sector (the "Technicolor Acquisition"). Refer to Note 20, "
Subsequent Events
," for information regarding our February 2019 announcement of our binding offer to acquire the Research & Innovation ("R&I") unit of Technicolor SA. R&I is a premier research lab that conducts fundamental research into video coding, IoT and smart home, imaging sciences, AR and VR and artificial intelligence and machine learning technologies.
The Technicolor Acquisition included the acquisition by InterDigital of approximately 18,000 patents and applications, across a broad range of technologies, including approximately 3,000 worldwide video coding patents and applications. The acquisition of Technicolor’s portfolio greatly expands InterDigital’s technology footprint in the mobile industry, and opens new markets in consumer home electronics, display technology and video. The portfolio will also be supplemented by jointly funded R&D collaboration, which will bring together the efforts of hundreds of engineers in InterDigital Labs and Technicolor R&I. Members of Technicolor’s licensing, legal and other support teams in offices in Rennes and Paris, France; Princeton, New Jersey, USA; and other locations joined InterDigital’s team of more than 300 R&D and other staff in locations around the world. In addition, we have assumed Technicolor’s rights and obligations under a joint licensing program with Sony Corporation (“Sony”) relating to digital televisions and standalone computer display monitors (the “Madison Arrangement”), including Technicolor's role as sole licensing agent for the Madison Arrangement. As part of this transaction, we also granted back to Technicolor a perpetual license for patents acquired in the transaction. With respect to patents generated through the jointly funded R&D efforts, we will own the patents, and Technicolor will receive a license back to the patents resulting from the targeted research conducted by its R&I team.
The Technicolor Acquisition meets the definition of a business combination and, as such, was accounted for using the acquisition method of accounting. Under the terms of the agreement, in third quarter 2018, we paid Technicolor
$158.9 million
in cash, inclusive of
$15.9 million
of cash acquired, yielding net cash consideration of
$143.0 million
. We funded this payment with cash on hand. Technicolor will receive 42.5% of all of InterDigital's future cash receipts (net of estimated operating expenses) from InterDigital’s new licensing efforts in the consumer electronics field; there will be no revenue sharing associated with InterDigital’s mobile industry licensing efforts. We account for the portion of the future cash receipts owed to Technicolor relating to patents existing as of the date of the acquisition as a contingent consideration liability, which was valued at
$18.6 million
as of the acquisition date. See below for further discussion of the contingent consideration liability. Additionally, as of the acquisition date, we estimated we will receive payments totaling
$20.2 million
relating to the transaction from Technicolor, of which
$8.5 million
was included within "
Prepaid and other current asset
s" and the remaining balance was included within "
Other non-current asset
s" in the consolidated balance sheet. We account for our assumption of Technicolor’s rights and obligations under the Madison Arrangement as a collaborative arrangement.
We allocated the fair value of consideration transferred to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. We recorded the excess of the fair value of consideration transferred over the net values of these assets and liabilities as goodwill. We estimated the fair value of the intangible assets in this transaction through a combination of a discounted cash flow analysis (the income approach) and an analysis of comparable market transactions (the market approach). For the income approach, we based the inputs and assumptions used to develop these estimates on a market participant perspective and included estimates of projected revenues, discount rates, economic lives and income tax rates, among others, and all of these estimates require significant management judgment. For the market approach, we applied judgment to identify the most comparable market transactions to this transaction. Refer to Note 7 for discussion regarding the valuation methodologies used for the contingent consideration liability.
The following table summarizes the fair value of consideration transferred and our allocation of that consideration based on the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
|
|
|
|
|
|
As of
July 30, 2018
|
|
Cash
|
$
|
158,898
|
|
|
Contingent consideration liability
|
|
18,616
|
|
|
|
$
|
177,514
|
|
`
|
Less: Transaction-related receivable
|
|
(20,200
|
)
|
|
Net fair value of consideration transferred
|
$
|
157,314
|
|
|
|
|
|
|
Allocation:
|
|
|
Estimated useful life (Years)
|
Net tangible assets and liabilities:
|
|
|
|
Restricted cash
|
$
|
15,913
|
|
|
Other current assets
|
|
5,600
|
|
|
Other non-current assets
|
|
3,116
|
|
|
Current liabilities
|
|
(6,219
|
)
|
|
Long-term debt
|
|
(17,717
|
)
|
|
Other long-term liabilities
|
|
(3,767
|
)
|
|
Total net tangible assets and liabilities
|
$
|
(3,074
|
)
|
|
|
|
|
|
Identified intangible assets:
|
|
|
|
Patents
|
$
|
154,000
|
|
9 - 10
|
Goodwill
(1)
|
|
6,388
|
|
|
Total identified intangible assets
|
$
|
160,388
|
|
|
|
|
|
|
Total fair value of consideration transferred
|
$
|
157,314
|
|
|
(1) Goodwill consists of expected synergies resulting from the combination of our and Technicolor’s patent licensing businesses in the increasingly complementary areas of mobile and video technology. We expect that the majority of the goodwill resulting from the Technicolor Acquisition will be deductible for income tax purposes.
The following table shows the change in the carrying amount of our goodwill balance from December 31, 2017 to December 31, 2018, all of which is allocated to our one reportable segment (in thousands):
|
|
|
|
|
|
Goodwill balance as of December 31, 2017
|
|
$
|
16,033
|
|
Technicolor Acquisition
|
|
|
6,388
|
|
Goodwill balance as of December 31, 2018
|
|
$
|
22,421
|
|
Since the date of closing, the Technicolor Acquisition resulted in
$4.5 million
of revenue and
$12.5 million
of pre-tax losses, excluding one-time transaction-related costs, that were included in our consolidated statement of income for the year ended December 31, 2018. One-time transaction-related costs for the year ended December 31, 2018 were
$17.8 million
, the majority of which were recorded within “Selling, general and administrative” expenses in the Company's consolidated statement of income.
The amount of revenue and earnings that would have been included in the Company’s consolidated statements of income for the years ended December 31, 2018 and 2017 had the acquisition date been January 1, 2017 are reflected in the table below. These amounts have been calculated after applying the Company's accounting policies and adjusting the results to reflect additional interest expense as well as amortization that would have been charged assuming the fair value adjustments to amortizable intangible assets had been recorded as of January 1, 2017. In addition, pro forma adjustments have been made to reflect the impact of the transaction-related costs discussed above. These unaudited pro forma combined results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated, or that may result in the future. The amounts in the table are unaudited (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
December 31,
|
|
2018
|
2017
|
|
(Unaudited)
|
Actual revenue
|
$
|
307,404
|
|
$
|
532,938
|
|
Supplemental pro forma revenue
|
$
|
314,096
|
|
$
|
541,921
|
|
Actual earnings
|
$
|
63,868
|
|
$
|
174,293
|
|
Supplemental pro forma earnings
|
$
|
51,591
|
|
$
|
105,604
|
|
Actual diluted earnings per share
|
$
|
1.81
|
|
$
|
4.87
|
|
Supplemental pro forma diluted earnings per share
|
$
|
1.46
|
|
$
|
2.95
|
|
Contingent Consideration
As discussed above, in conjunction with the Technicolor Acquisition, Technicolor will receive 42.5% of all of InterDigital's future cash receipts (net of estimated operating expenses) from InterDigital's new licensing efforts in the consumer electronics field; there will be no revenue sharing associated with InterDigital’s mobile industry licensing efforts. The portion of the future cash receipts relating to patents existing as of the date of the acquisition will be accounted for as a contingent consideration liability in accordance with ASC 805-30-25,
Business Combinations - Contingent Consideration.
The revenue sharing arrangement continues through December 31, 2038, and there are no minimum or maximum payments under the arrangement.
The estimated acquisition date fair value of the contingent consideration liability of
$18.6 million
was determined utilizing a Monte Carlo simulation model. This initial fair value measurement was based on the perspective of a market participant and includes significant unobservable inputs that are classified as Level 3 inputs within the fair value hierarchy and are discussed further within Note 7. The contingent consideration is subject to re-measurement each reporting period until it has been fully paid, and any adjustments to the fair value of the contingent consideration are reflected in operating expenses within the consolidated statements of income.
Madison Arrangement
As discussed above, in conjunction with the Technicolor Acquisition, effective July 30, 2018, we have assumed Technicolor’s rights and obligations under the Madison Arrangement, which commenced in 2015. The Madison Arrangement falls under the scope of ASC 808,
Collaborative Arrangements
(“ASC 808”). Refer to Note 2 for our significant accounting policy regarding collaborative arrangements.
Under the Madison Arrangement, Technicolor and Sony combined portions of their respective digital TV (“DTV”) and computer display monitor (“CDM”) patent portfolios and created a combined licensing opportunity to DTV and CDM manufacturers. Per an Agency and Management Services Agreement (“AMSA”) entered into upon the creation of the Madison Arrangement, Technicolor was initially appointed as sole licensing agent of the arrangement, and InterDigital has now assumed that role. As licensing agent, we are responsible for making decisions regarding the prosecution and maintenance of the combined patent portfolio and the licensing and enforcement of the combined patent portfolio in the field of use of DTVs and CDMs on an exclusive basis during the term of the AMSA in exchange for an agent fee.
We were deemed to be the principal in this collaborative arrangement under ASC 808, and, as such, in accordance with ASC 606-10-55-36
Revenue From Contracts with Customers - Principal Agent Considerations
, we record revenues generated on sales to third parties and costs incurred on a gross basis in the consolidated statements of income. Therefore, we recognize all royalties from customers as revenue and payments to Sony for its royalty share as operating expenses within the consolidated statements of income. Cost reimbursements for expenses incurred resulting from fulfilling the duties of the licensing agent are recorded as contra expenses. Amounts attributable to transactions arising from the Madison Arrangement between participants were not material during the year ended December 31, 2018.
Long-term debt
An affiliate of CPPIB Credit Investments Inc. ("CPPIB Credit"), a wholly owned subsidiary of Canada Pension Plan Investment Board, is a third-party investor in the Madison Arrangement. CPPIB Credit has made certain payments to Technicolor and Sony and has agreed to contribute cash to fund certain capital reserve obligations under the arrangement in exchange for a percentage of future revenues, specifically through September 11, 2030 in regard to the Technicolor patents.
Upon our assumption of Technicolor’s rights and obligations under the Madison Arrangement, our relationship with CPPIB Credit meets the criteria in ASC 470-10-25 -
Sales of Future Revenues or Various Other Measures of Income
(“ASC
470”), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business segment, trademark, patent, or contractual right for a defined period. Under this guidance, we recognized the fair value of our contingent obligation to CPPIB Credit, as of the acquisition date, as long-term debt in our consolidated balance sheet. This initial fair value measurement is based on the perspective of a market participant and includes significant unobservable inputs which are classified as Level 3 inputs within the fair value hierarchy. The fair value of the long-term debt as of December 31, 2018 is disclosed within Note 7. Our repayment obligations are contingent upon future royalty revenues generated from the Madison Arrangement and there are no minimum or maximum payments under the arrangement.
Under ASC 470, amounts recorded as debt shall be amortized under the interest method. At each reporting period, we will review the discounted expected future cash flows over the life of the obligation. The Company made an accounting policy election to utilize the catch-up method when there is a change in the estimated future cash flows, whereby we will adjust the carrying amount of the debt to the present value of the revised estimated future cash flows, discounted at the original effective interest rate, with a corresponding adjustment recognized as interest expense within “
Other Expense (Net)
” in the consolidated statements of income. The effective interest rate as of the acquisition date was approximately 14.5%. This rate represents the discount rate that equates the estimated future cash flows with the fair value of the debt as of the acquisition date, and is used to compute the amount of interest to be recognized each period based on the estimated life of the future revenue streams. During the year ended December 31, 2018, we recognized $0.7 million of interest expense related to this debt which was included within “
Other Expense (Net)
” in the consolidated statements of income. Any future payments made to CPPIB Credit, or additional proceeds received from CPPIB Credit, will decrease or increase the long-term debt balance accordingly.
Restricted cash
Under the Madison Arrangement, the parties reserve cash in bank accounts to fund our activities to manage the portfolios. These accounts are custodial accounts for which the funds are restricted for this purpose. As of December 31, 2018, the Company had
$13.7 million
of restricted cash included within the consolidated balance sheet attributable to the Madison Arrangement. Refer to Note 6 for a reconciliation of cash, cash equivalents and restricted cash within the consolidated balance sheets.
Commitments
To receive consent from both Sony and CPPIB Credit to assume the rights and responsibilities of Technicolor under the Madison Arrangement, we committed to contributing cash to fund shortfalls in the Madison Arrangement, up to a maximum of
$25.0 million
, through 2020. A shortfall funding is only required in the scenario in which the restricted cash is not sufficient to fund current obligations. In the event that we fund a shortfall, any surplus cash resulting from subsequent royalty receipts would be used to repay our shortfall funding plus 25% interest in advance of distributions of royalties to either Sony or CPPIB Credit, assuming they have not participated in the funding of the shortfall. As of December 31, 2018, we have not contributed any shortfall funding.
Hillcrest Labs
On December 20, 2016, we acquired Hillcrest Laboratories, Inc. ("Hillcrest Labs"), a pioneer in sensor processing technology, for approximately
$48.0 million
in cash, net of
$0.4 million
cash acquired. The business combination transaction was accounted for using the acquisition method of accounting. We estimated the fair value of the intangible assets in this transaction through a combination of a discounted cash flow analysis (the income approach) and an analysis of comparable market transactions (the market approach). For the income approach, the inputs and assumptions used to develop these estimates were based on a market participant perspective and included estimates of projected revenues, discount rates, economic lives and income tax rates, among others. For the market approach, we applied judgment to identify the most comparable market transactions to this transaction. The purchase price allocation is now final.
Purchase price allocation
The following table summarizes the purchase price allocation made to the net tangible and intangible assets acquired and liabilities assumed as of the acquisition date, with the excess amount recorded as goodwill, which was representative of the expected synergies from the integration of Hillcrest Labs and its strategic fit within our organization (in thousands):
|
|
|
|
|
|
|
|
Amount
|
|
Estimated Useful Life (Years)
|
Net tangible assets and liabilities:
|
|
|
|
Deferred tax assets and liabilities
|
$
|
2,221
|
|
|
|
Net working capital
|
(8,754
|
)
|
|
|
|
$
|
(6,533
|
)
|
|
|
Identified intangible assets:
|
|
|
|
Patents/existing technology
|
$
|
36,200
|
|
|
9 - 10
|
Trade name
|
600
|
|
|
9
|
Customer relationships
|
1,700
|
|
|
10
|
Goodwill
|
16,033
|
|
|
N/A
|
|
$
|
54,533
|
|
|
|
|
|
|
|
Total purchase price
|
$
|
48,000
|
|
|
|
The amounts of revenue and earnings that would have been included in the Company’s consolidated statement of income for the year ended December 31, 2016 had the acquisition date been January 1, 2015 are as reflected in the table below. These amounts have been calculated after applying the Company's accounting policies and adjusting the results to reflect additional amortization that would have been charged assuming the fair value adjustments to amortizable intangible assets had been recorded as of January 1, 2015. In addition, pro forma adjustments have been made to reflect the impact of
$7.7 million
of transaction related costs. These unaudited pro forma combined results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated, or that may result in the future. The amounts in the table are unaudited (in thousands, except per share data).
|
|
|
|
|
|
For the Year Ended
|
|
December 31,
|
|
2016
|
|
(Unaudited)
|
Actual revenue
|
$
|
665,854
|
|
Supplemental pro forma revenue
|
$
|
672,695
|
|
Actual earnings
|
$
|
309,001
|
|
Supplemental pro forma earnings
|
$
|
305,237
|
|
Actual diluted earnings per share
|
$
|
8.78
|
|
Supplemental pro forma diluted earnings per share
|
$
|
8.67
|
|
6. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND MARKETABLE SECURITIES
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash as of
December 31, 2018
and
2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Money market and demand accounts
|
$
|
488,733
|
|
|
$
|
417,348
|
|
Commercial paper
|
—
|
|
|
15,666
|
|
|
$
|
488,733
|
|
|
$
|
433,014
|
|
The following table provides a reconciliation of total cash, cash equivalents and restricted cash as of December 31, 2018 and 2017 within the consolidated balance sheets. The Company had no restricted cash prior to the Technicolor Acquisition which was completed in July 2018 and is discussed further within Note 5, "
Business Combinations
."
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
$
|
475,056
|
|
|
$
|
433,014
|
|
Restricted cash included within prepaid and other current assets
|
|
13,677
|
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
$
|
488,733
|
|
|
$
|
433,014
|
|
Marketable Securities
As of
December 31, 2018
and
2017
, the majority of our marketable securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported net-of-tax as a separate component of shareholders’ equity. Substantially all of our investments are investment-grade government and corporate debt securities that have maturities of less than 2 years, and we have both the ability and intent to hold the investments until maturity. During 2016, we recorded other-than-temporary impairments of approximately
$0.2 million
, with no other-than-temporary impairments recorded during 2018 or 2017. The gross realized gains and losses on sales of marketable securities were not significant during the years ended December 31, 2018, 2017 and 2016.
Marketable securities as of
December 31, 2018
and
2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
14,548
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,548
|
|
U.S. government securities
|
291,157
|
|
|
—
|
|
|
(1,581
|
)
|
|
289,576
|
|
Corporate bonds, asset backed and other securities
|
167,579
|
|
|
5
|
|
|
(984
|
)
|
|
166,600
|
|
Total available-for-sale securities
|
$
|
473,284
|
|
|
$
|
5
|
|
|
$
|
(2,565
|
)
|
|
$
|
470,724
|
|
Reported in:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
$
|
—
|
|
Short-term investments
|
|
|
|
|
|
|
470,724
|
|
Total marketable securities
|
|
|
|
|
|
|
$
|
470,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
66,132
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66,132
|
|
U.S. government securities
|
513,645
|
|
|
—
|
|
|
(2,613
|
)
|
|
511,032
|
|
Corporate bonds, asset backed and other securities
|
164,075
|
|
|
35
|
|
|
(627
|
)
|
|
163,483
|
|
Total available-for-sale securities
|
$
|
743,852
|
|
|
$
|
35
|
|
|
$
|
(3,240
|
)
|
|
$
|
740,647
|
|
Reported in:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
$
|
15,666
|
|
Short-term investments
|
|
|
|
|
|
|
724,981
|
|
Total marketable securities
|
|
|
|
|
|
|
$
|
740,647
|
|
As of
December 31, 2018
and
2017
,
$390.9 million
and
$345.0 million
, respectively, of our short-term investments had contractual maturities within one year. The remaining portions of our short-term investments had contractual maturities within one to two years.
7. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable. We primarily place our cash equivalents and short-term investments in highly rated financial instruments and in United States government instruments.
Our accounts receivable are derived principally from patent license and technology solutions agreements. As of
December 31, 2018
and 2017,
five
and
three
licensees comprised
76%
and
96%
, respectively, of our accounts receivable balance. We perform ongoing credit evaluations of our licensees, who generally include large, multinational, wireless telecommunications equipment manufacturers. We believe that the book values of our financial instruments approximate their fair values.
Fair Value Measurements
We use various valuation techniques and assumptions when measuring the fair value of our assets and liabilities. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. This guidance established a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:
Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates.
Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. We use quoted market prices for similar assets to estimate the fair value of our Level 2 investments.
Recurring Fair Value Measurements
Our financial assets are included within short-term investments on our consolidated balance sheets, unless otherwise indicated. Our financial assets and liabilities that are accounted for at fair value on a recurring basis are presented in the tables below as of
December 31, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market and demand accounts (a)
|
$
|
488,733
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
488,733
|
|
Commercial paper (b)
|
—
|
|
|
14,548
|
|
|
—
|
|
|
14,548
|
|
U.S. government securities
|
—
|
|
|
289,576
|
|
|
—
|
|
|
289,576
|
|
Corporate bonds, asset backed and other securities
|
—
|
|
|
166,600
|
|
|
—
|
|
|
166,600
|
|
|
$
|
488,733
|
|
|
$
|
470,724
|
|
|
$
|
—
|
|
|
$
|
959,457
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration resulting from the Technicolor Acquisition
|
—
|
|
|
—
|
|
|
19,800
|
|
|
19,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,800
|
|
|
$
|
19,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market and demand accounts (a)
|
$
|
417,348
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
417,348
|
|
Commercial paper (b)
|
—
|
|
|
66,132
|
|
|
—
|
|
|
66,132
|
|
U.S. government securities
|
—
|
|
|
511,032
|
|
|
—
|
|
|
511,032
|
|
Corporate bonds and asset backed securities
|
—
|
|
|
163,483
|
|
|
—
|
|
|
163,483
|
|
|
$
|
417,348
|
|
|
$
|
740,647
|
|
|
$
|
—
|
|
|
$
|
1,157,995
|
|
_______________
|
|
(a)
|
Included within cash and cash equivalents.
|
|
|
(b)
|
Includes
zero
and
$15.7 million
of commercial paper that is included within cash and cash equivalents as of December 31, 2018 and 2017, respectively.
|
Level 3 Fair Value Measurements
Contingent Consideration
As discussed further in Note 5, we completed the Technicolor Acquisition during third quarter 2018. In conjunction with the Technicolor Acquisition, we recognized a contingent consideration liability which is measured at fair value on a recurring basis using significant unobservable inputs classified as Level 3 measurements within the fair value hierarchy. We utilized a Monte Carlo simulation model to determine the estimated fair value of the contingent consideration liability. A Monte Carlo simulation uses random numbers together with volatility assumptions to generate individual paths, or trials, for variables of interest governed by a Geometric Brownian Motion in a risk-neutral framework. Level 3 significant unobservable inputs include the following (in thousands):
|
|
|
|
Significant Unobservable Input
|
Ranges
|
Weighted Average
|
Risk-adjusted discount rate for revenue
|
13.5% - 14.2%
|
13.9%
|
Credit risk discount rate
|
6.2% - 8.0%
|
7.1%
|
Revenue volatility
|
35.0%
|
35.0%
|
Projected years of earn out
|
2019 - 2030
|
N/A
|
Significant increases or decreases in any of those inputs in isolation could result in a significantly lower or higher fair value measurement. Adjustments to the fair value of contingent consideration are reflected in operating expenses within our consolidated statements of income.
The following table provides a reconciliation of the beginning and ending balances of our Level 3 fair value measurements from December 31, 2017 to December 31, 2018, which includes the contingent consideration liability resulting from the Technicolor Acquisition discussed further above and within Note 5. As of December 31, 2018, the Level 3 contingent consideration liability is included within "
Other long-term liabilities
" in the consolidated balance sheet.
|
|
|
|
|
Level 3 Fair Value Measurements
|
|
|
|
|
Contingent Consideration Liability
|
Balance as of December 31, 2017
|
$
|
—
|
|
Technicolor Acquisition - July 30, 2018
|
|
18,616
|
|
Reduction for payments
|
|
—
|
|
Changes in fair value recognized in the consolidated statements of income
|
|
1,184
|
|
Balance as of December 31, 2018
|
$
|
19,800
|
|
Fair Value of Long-Term Debt
2020 Senior Convertible Notes
The principal amount, carrying value and related estimated fair value of the Company's senior convertible debt reported in the consolidated balance sheets as of
December 31, 2018
and
December 31, 2017
was as follows (in thousands). The aggregate fair value of the principal amount of the senior convertible long-term debt is a Level 2 fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Principal
Amount
|
|
Carrying
Value
|
|
Fair
Value
|
|
Principal
Amount
|
|
Carrying
Value
|
|
Fair
Value
|
Senior Convertible Long-Term Debt
|
$
|
316,000
|
|
|
$
|
298,951
|
|
|
$
|
331,595
|
|
|
$
|
316,000
|
|
|
$
|
285,126
|
|
|
$
|
377,029
|
|
Technicolor Acquisition Long-term Debt
As more fully disclosed in Note 5, we recognized long-term debt in conjunction with the Technicolor Acquisition, which closed in third quarter 2018. The carrying value and related estimated fair value of the Technicolor Acquisition long-term debt reported in the consolidated balance sheet as of
December 31, 2018
was as follows (in thousands). The aggregate fair value of the Technicolor Acquisition long-term debt is a Level 3 fair value measurement.
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Carrying
Value
|
|
Fair
Value
|
Technicolor Acquisition Long-Term Debt
|
$
|
18,428
|
|
|
$
|
19,100
|
|
Non-Recurring Fair Value Measurements
Investments in Other Entities
As discussed in Note 2, in conjunction with the adoption of ASU 2016-01 in the first quarter of 2018, we made an accounting policy election to utilize a measurement alternative for equity investments that do not have readily determinable fair values, which applies to our strategic investments in other entities. Under the alternative, our strategic investments in other entities that do not have readily determinable fair values are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any adjustments to the carrying value of those investments are considered non-recurring fair value measurements. During the year ended December 31, 2018, we recognized an aggregate
$8.4 million
loss resulting from the sale of our entire ownership interest in one of our strategic investments and the impairment of a separate strategic investment. Certain of our investments in other entities may be seeking additional financing in the next twelve months. We will continue to review and monitor our investments in other entities for any indications of a change in fair value or impairment.
Patents
In fourth quarter 2018, we signed a patent licensing agreement with Sony. A portion of the future consideration for the agreement was in the form of patents that will be contributed to Convida Wireless. We have yet to record these patents on our balance sheet as of December 31, 2018 as they have not yet been transferred. However, we have determined the estimated fair value of the patents for determining the transaction price for revenue recognition purposes, which was estimated to be
$22.5 million
utilizing the cost approach and will be amortized over the patents' estimated useful lives once transferred. Additionally,
as previously disclosed, during 2017 and 2016, we entered in patent license agreements with LG and Huawei, respectively, for which a portion of the consideration was patents. The estimated fair value of the LG patents was
$19.7 million
, and the estimated fair value of the Huawei patents was
$20.7 million
. which are being amortized over their estimated useful lives. We estimated the fair value of the patents in the LG and Huawei transactions through a combination of a discounted cash flow analysis (the income approach) and an analysis of comparable market transactions (the market approach).
We estimated the fair value of the patents in these transactions through a combination of a discounted cash flow analysis (the income approach), an analysis of comparable market transactions (the market approach), and/or by quantifying the amount of money required to replace the future service capability of the assets (the cost approach). For the income approach, the inputs and assumptions used to develop these estimates were based on a market participant perspective and included estimates of projected royalties, discount rates, economic lives and income tax rates, among others. For the market approach, judgment was applied as to which market transactions were most comparable to the transaction. For the cost approach, we utilized the historical cost of assets of similar technologies to determine the estimated replacement cost, including research, development, testing and patent application fees.
8. PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Computer equipment and software
|
$
|
20,876
|
|
|
$
|
20,003
|
|
Engineering and test equipment
|
4,168
|
|
|
4,034
|
|
Building and improvements
|
3,711
|
|
|
3,624
|
|
Leasehold improvements
|
11,364
|
|
|
9,711
|
|
Furniture and fixtures
|
1,549
|
|
|
1,279
|
|
Property and equipment, gross
|
41,668
|
|
|
38,651
|
|
Less: accumulated depreciation
|
(31,617
|
)
|
|
(27,978
|
)
|
Property and equipment, net
|
$
|
10,051
|
|
|
$
|
10,673
|
|
Depreciation expense was
$3.7 million
,
$3.9 million
and
$4.1 million
in
2018
,
2017
and
2016
, respectively. Depreciation expense included depreciation of computer software costs of
$0.3 million
,
$0.5 million
and
$1.0 million
in
2018
,
2017
and
2016
, respectively. Accumulated depreciation related to computer software costs was
$9.2 million
and
$8.8 million
as of
December 31, 2018
and
2017
, respectively. The net book value of our computer software was
$0.3 million
and
$0.5 million
as of
December 31, 2018
and
2017
, respectively.
During second quarter 2015, we sold our facility in King of Prussia, Pennsylvania, to a third party and entered into a limited leaseback arrangement for a period not to exceed one year, for net consideration of
$4.5 million
. The
$3.4 million
gain related to the sale was recorded within "
Other Expense (Net)
" in our consolidated statements of operations, and the assets sold were removed from Property and Equipment, at the completion of the lease term in second quarter 2016.
9. PATENTS AND OTHER INTANGIBLE ASSETS
Patents
As of December 31, 2018 and 2017, patents consisted of the following (in thousands, except for useful life data):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Weighted average estimated useful life (years)
|
10.0
|
|
|
10.0
|
|
Gross patents
|
$
|
851,846
|
|
|
$
|
660,886
|
|
Accumulated amortization
|
(397,279
|
)
|
|
(335,478
|
)
|
Patents, net
|
$
|
454,567
|
|
|
$
|
325,408
|
|
Amortization expense related to capitalized patent costs was
$61.8 million
,
$52.9 million
and
$48.6 million
in
2018
,
2017
and
2016
, respectively. These amounts are recorded within the "
Patent administration and licensing"
line of our Consolidated Statements of Income.
The estimated aggregate amortization expense for the next five years related to our patents balance as of
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
2019
|
$
|
70,797
|
|
2020
|
65,994
|
|
2021
|
61,379
|
|
2022
|
57,084
|
|
2023
|
51,152
|
|
Other Intangible Assets
As of December 31, 2018 and 2017, intangible assets excluding patents are included in "
Other Non-Current Assets
" on the Consolidated Balance Sheets and consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Average Life
(Years)
|
|
Gross Assets
|
|
Accumulated Amortization
|
|
Net
|
|
Gross Assets
|
|
Accumulated Amortization
|
|
Net
|
Trade Names
|
9
|
|
$
|
600
|
|
|
$
|
(133
|
)
|
|
$
|
467
|
|
|
$
|
600
|
|
|
$
|
(67
|
)
|
|
$
|
533
|
|
Customer Relationships
|
10
|
|
1,700
|
|
|
(340
|
)
|
|
1,360
|
|
|
1,700
|
|
|
(170
|
)
|
|
1,530
|
|
|
|
|
$
|
2,300
|
|
|
$
|
(473
|
)
|
|
$
|
1,827
|
|
|
$
|
2,300
|
|
|
$
|
(237
|
)
|
|
$
|
2,063
|
|
As of December 31, 2018, the estimated future amortization expense of these intangible assets is as follows (in thousands):
|
|
|
|
|
2019
|
$
|
237
|
|
2020
|
237
|
|
2021
|
237
|
|
2022
|
237
|
|
2023
|
237
|
|
Thereafter
|
642
|
|
|
$
|
1,827
|
|
Refer to Note 5, "
Business Combinations,
" and Note 7, "
Concentration of Credit Risk and Fair Value of Financial Assets and Financial Liabilities
," for information regarding the long-term debt recognized during 2018 resulting from the Technicolor Acquisition.
Long-term debt obligations, excluding the long-term debt resulting from the Technicolor Acquisition, are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
1.50% Senior Convertible Notes due 2020
|
$
|
316,000
|
|
|
$
|
316,000
|
|
Less:
|
|
|
|
Unamortized interest discount
|
(15,428
|
)
|
|
(27,863
|
)
|
Deferred financing costs
|
(1,621
|
)
|
|
(3,011
|
)
|
Total net carrying amount of 2020 Notes
|
298,951
|
|
|
285,126
|
|
Less: Current portion of long-term debt
|
—
|
|
|
—
|
|
Long-term net carrying amount of 2020 Notes
|
$
|
298,951
|
|
|
$
|
285,126
|
|
There were no capital leases as of
December 31, 2018
or
December 31, 2017
.
Maturities of principal of the long-term debt obligations of the Company as of
December 31, 2018
, excluding the long-term debt resulting from the Technicolor Acquisition, are as follows (in thousands):
|
|
|
|
|
2019
|
$
|
—
|
|
2020
|
316,000
|
|
2021
|
—
|
|
2022
|
—
|
|
2023
|
—
|
|
Thereafter
|
—
|
|
|
$
|
316,000
|
|
2016 Senior Convertible Notes, and Related Note Hedge and Warrant Transactions
In April 2011, we issued
$230.0 million
in aggregate principal amount of
2.50%
Senior Convertible Notes due 2016 (the “2016 Notes”), which matured and were repaid in full on March 15, 2016.
In connection with the offering of the 2016 Notes, on March 29 and March 30, 2011, we entered into convertible note hedge transactions that covered, subject to customary anti-dilution adjustments, approximately
3.5 million
and approximately
0.5 million
shares of our common stock, respectively, at an initial strike price that corresponded to the initial conversion price of the 2016 Notes and were exercisable upon conversion of the 2016 Notes. In addition, on the same dates, we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately
3.5 million
shares and approximately
0.5 million
shares, respectively, of common stock. The warrants had a final strike price of
$62.95
per share, as adjusted in August 2016. The warrants became exercisable and expired in daily tranches from June 15, 2016 through August 10, 2016. The market price of our common stock did not exceed the strike price of the warrants on any warrant expiration date in second quarter 2016; during third quarter 2016, we issued
23,667
shares of common stock pursuant to these warrants.
Accounting Treatment of the 2016 Notes and Related Convertible Note Hedge and Warrant Transactions
The offering of the 2016 Notes on March 29, 2011 was for
$200.0 million
and included an overallotment option that allowed the initial purchaser to purchase up to an additional
$30.0 million
aggregate principal amount of 2016 Notes. The initial purchaser exercised its overallotment option on March 30, 2011, bringing the total amount of 2016 Notes issued on April 4, 2011 to
$230.0 million
.
In connection with the offering of the 2016 Notes, as discussed above, the Company entered into convertible note hedge transactions with respect to its common stock. The
$42.7 million
cost of the convertible note hedge transactions was partially offset by the proceeds from the sale of the warrants described above, resulting in a net cost of
$10.9 million
.
Existing accounting guidance provides that the March 29, 2011 convertible note hedge and warrant contracts be treated as derivative instruments for the period during which the initial purchaser's overallotment option was outstanding. Once the overallotment option was exercised on March 30, 2011, the March 29, 2011 convertible note hedge and warrant contracts were reclassified to equity, as the settlement terms of the Company's note hedge and warrant contracts both provide for net share settlement. There was no material net change in the value of these convertible note hedges and warrants during the one day they were classified as derivatives and the equity components of these instruments will not be adjusted for subsequent changes in fair value.
Under current accounting guidance, the Company bifurcated the proceeds from the offering of the 2016 Notes between the liability and equity components of the debt. On the date of issuance, the liability and equity components were calculated to be approximately
$187.0 million
and
$43.0 million
, respectively. The initial
$187.0 million
liability component was determined based on the fair value of similar debt instruments excluding the conversion feature. The initial
$43.0 million
(
$28.0 million
net of tax) equity component represents the difference between the fair value of the initial $187.0 million in debt and the
$230.0 million
of gross proceeds. The related initial debt discount of
$43.0 million
was being amortized using the effective interest method over the life of the 2016 Notes. An effective interest rate of
7%
was used to calculate the debt discount on the 2016 Notes.
In connection with the above-noted transactions, the Company incurred
$8.0 million
of directly related costs. The initial purchaser's transaction fees and related offering expenses were allocated to the liability and equity components of the debt in proportion to the allocation of proceeds and accounted for as debt issuance costs. We allocated
$6.5 million
of debt issuance costs to the liability component of the debt, which were capitalized as deferred financing costs. These costs were amortized to interest expense over the term of the debt using the effective interest method. The remaining
$1.5 million
of costs allocated to the equity component of the debt were recorded as a reduction of the equity component of the debt.
2020 Senior Convertible Notes, and Related Note Hedge and Warrant Transactions
On March 11, 2015, we issued
$316.0 million
in aggregate principal amount of
1.50%
Senior Convertible Notes due 2020 (the “2020 Notes”). The 2020 Notes bear interest at a rate of
1.50%
per year, payable in cash on March 1 and September 1 of each year, commencing September 1, 2015, and mature on March 1, 2020, unless earlier converted or repurchased.
The 2020 Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election, at a current conversion rate of
14.0506
shares of common stock per
$1,000
principal amount of 2020 Notes (which is equivalent to a conversion price of approximately
$71.17
per share as of December 31, 2018), as adjusted pursuant to the terms of the indenture for the 2020 Notes (the "Indenture"). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances, including in connection with conversions made following certain fundamental changes and under other circumstances set forth in the Indenture. It is our current intent and policy to settle all conversions through combination settlement of cash and shares of common stock, with a specified dollar amount of
$1,000
per
$1,000
principal amount of the 2020 Notes and any remaining amounts in shares.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding December 1, 2019, the 2020 Notes will be convertible only under certain circumstances as set forth in the indenture to the 2020 Notes, including on any date during any calendar quarter (and only during such calendar quarter) if the closing sale price of our common stock was more than 130% of the applicable conversion price (approximately
$92.52
based on the current conversion price) on each applicable trading day for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter.
Commencing on December 1, 2019, the 2020 Notes will be convertible in multiples of
$1,000
principal amount, at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the 2020 Notes.
The Company may not redeem the 2020 Notes prior to their maturity date.
On March 5 and March 9, 2015, in connection with the offering of the 2020 Notes, we entered into convertible note hedge transactions that cover approximately
3.8 million
and approximately
0.6 million
shares of our common stock, respectively, and they have a strike price that corresponds to the conversion price of the 2020 Notes and are exercisable upon conversion of the 2020 Notes.
The cost of the March 5 and March 9, 2015 convertible note hedge transactions was approximately
$51.7 million
and approximately
$7.7 million
, respectively.
On March 5 and March 9, 2015, we sold warrants to acquire approximately
3.8 million
and approximately
0.6 million
, respectively, of common stock, subject to customary anti-dilution adjustments. As of December 31, 2018, the warrants had a strike price of approximately
$86.99
per share, as adjusted. The warrants become exercisable and expire in daily tranches over a three-and-a-half-month period starting in June 2020. As consideration for the warrants issued on March 5 and March 9, 2015, we received approximately
$37.3 million
and approximately
$5.6 million
, respectively.
The Company also repurchased
0.8 million
shares of our common stock at
$53.61
per share, the closing price of the stock on March 5, 2015, from institutional investors through one of the initial purchasers and its affiliate, as our agent, concurrently with the pricing of the offering of the 2020 Note
On April 3, 2018, in connection with the reorganization of the Company’s holding company structure, the predecessor company (now known as InterDigital Wireless, Inc., the "Predecessor Company") and the successor company (now known as InterDigital, Inc., the "Successor Company") entered into a First Supplemental Indenture (the “Supplemental Indenture”) to the Indenture with the trustee. The Supplemental Indenture effected certain amendments to the Indenture in connection with the Reorganization, which, among other things, amended the conversion right of the 2020 Notes so that at the effective time of the Reorganization, the holder of each Note outstanding as of the effective time of the Reorganization will have the right to convert, subject to the terms of the Indenture, each $1,000 principal amount of such 2020 Note into the number of shares of the Successor Company’s common stock that a holder of a number of shares of the Predecessor Company’s common stock equal to the conversion rate immediately prior to the effective time of the Reorganization would have been entitled to receive upon the Reorganization. In addition, pursuant to the Supplemental Indenture, the Successor Company guaranteed the Predecessor Company’s obligations under the 2020 Notes and the Indenture.
Accounting Treatment of the 2020 Notes and Related Convertible Note Hedge and Warrant Transactions
The offering of the 2020 Notes on March 5, 2015 was for
$275.0 million
and included an overallotment option that allowed the initial purchasers to purchase up to an additional
$41.0 million
aggregate principal amount of 2020 Notes. The
initial purchasers exercised their overallotment option on March 9, 2015, bringing the total amount of 2020 Notes issued on March 11, 2015 to
$316.0 million
.
In connection with the offering of the 2020 Notes, as discussed above, InterDigital entered into convertible note hedge transactions with respect to its common stock. The
$59.4 million
cost of the convertible note hedge transactions was partially offset by the proceeds from the sale of the warrants described above, resulting in a net cost of
$16.5 million
. Both the convertible note hedge and warrants were classified as equity.
The Company bifurcated the proceeds from the offering of the 2020 Notes between liability and equity components. On the date of issuance, the liability and equity components were calculated to be approximately
$256.7 million
and
$59.3 million
, respectively. The initial
$256.7 million
liability component was determined based on the fair value of similar debt instruments excluding the conversion feature. The initial
$59.3 million
(
$38.6 million
net of tax) equity component represents the difference between the fair value of the initial
$256.7 million
in debt and the
$316.0 million
of gross proceeds. The related initial debt discount of
$59.3 million
is being amortized using the effective interest method over the life of the 2020 Notes. An effective interest rate of
5.89%
was used to calculate the debt discount on the 2020 Notes.
In connection with the above-noted transactions, the Company incurred
$9.3 million
of directly related costs. The initial purchasers' transaction fees and related offering expenses were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively. We allocated
$7.0 million
of debt issuance costs to the liability component, which were capitalized as deferred financing costs. These costs are being amortized to interest expense over the term of the debt using the effective interest method. The remaining
$2.4 million
of costs allocated to the equity component were recorded as a reduction of the equity component.
The following table presents the amount of interest cost recognized
for the years ended
December 31, 2018
, 2017 and 2016 related to the contractual interest coupon, accretion of the debt discount and the amortization of financing costs (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Contractual coupon interest
|
|
$
|
4,740
|
|
|
$
|
4,740
|
|
|
$
|
6,178
|
|
Accretion of debt discount
|
|
12,434
|
|
|
11,715
|
|
|
13,536
|
|
Amortization of financing costs
|
|
1,390
|
|
|
1,390
|
|
|
1,716
|
|
Total
|
|
$
|
18,564
|
|
|
$
|
17,845
|
|
|
$
|
21,430
|
|
We have entered into various operating lease agreements. Total rent expense, primarily for office space, was
$4.8 million
,
$3.9 million
and
$4.2 million
in
2018
,
2017
and
2016
, respectively. Minimum future payments for operating leases and purchase commitments as of
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
2019
|
$
|
10,856
|
|
2020
|
8,648
|
|
2021
|
7,883
|
|
2022
|
2,920
|
|
2023
|
2,184
|
|
Thereafter
|
5,582
|
|
12. LITIGATION AND LEGAL PROCEEDINGS
ARBITRATIONS AND COURT PROCEEDINGS (OTHER THAN DE DISTRICT COURT ACTIONS RELATED TO USITC PROCEEDINGS)
2012 Huawei China Proceedings
On February 21, 2012, InterDigital was served with two complaints filed by Huawei Technologies Co., Ltd. in the Shenzhen Intermediate People's Court in China on December 5, 2011. The first complaint named as defendants InterDigital,
Inc. and its wholly owned subsidiaries InterDigital Technology Corporation and InterDigital Communications, LLC (now InterDigital Communications, Inc.), and alleged that InterDigital had abused its dominant market position in the market for the licensing of essential patents owned by InterDigital by engaging in allegedly unlawful practices, including differentiated pricing, tying and refusal to deal. The second complaint named as defendants the Company's wholly owned subsidiaries InterDigital Technology Corporation, InterDigital Communications, LLC (now InterDigital Communications, Inc.), InterDigital Patent Holdings, Inc. and IPR Licensing, Inc. and alleged that InterDigital had failed to negotiate on FRAND terms with Huawei. Huawei asked the court to determine the FRAND rate for licensing essential Chinese patents to Huawei and also sought compensation for its costs associated with this matter.
On February 4, 2013, the Shenzhen Intermediate People's Court issued rulings in the two proceedings. With respect to the first complaint, the court decided that InterDigital had violated the Chinese Anti-Monopoly Law by (i) making proposals for royalties from Huawei that the court believed were excessive, (ii) tying the licensing of essential patents to the licensing of non-essential patents, (iii) requesting as part of its licensing proposals that Huawei provide a grant-back of certain patent rights to InterDigital and (iv) commencing a USITC action against Huawei while still in discussions with Huawei for a license. Based on these findings, the court ordered InterDigital to cease the alleged excessive pricing and alleged improper bundling of InterDigital's Chinese essential and non-essential patents, and to pay Huawei 20.0 million RMB (approximately $2.9 million based on the exchange rate as of December 31, 2018) in damages related to attorneys’ fees and other charges, without disclosing a factual basis for its determination of damages. The court dismissed Huawei's remaining allegations, including Huawei's claim that InterDigital improperly sought a worldwide license and improperly sought to bundle the licensing of essential patents on multiple generations of technologies. With respect to the second complaint, the court determined that, despite the fact that the FRAND requirement originates from ETSI's Intellectual Property Rights policy, which refers to French law, InterDigital's license offers to Huawei should be evaluated under Chinese law. Under Chinese law, the court concluded that the offers did not comply with FRAND. The court further ruled that the royalties to be paid by Huawei for InterDigital's 2G, 3G and 4G essential Chinese patents under Chinese law should not exceed 0.019% of the actual sales price of each Huawei product.
On March 11, 2013, InterDigital filed notices of appeal with respect to the judgments in both proceedings, seeking reversal of the court’s February 4, 2013 rulings. On October 16, 2013, the Guangdong Province High Court issued a ruling affirming the ruling of the Shenzhen Intermediate People's Court in the second proceeding, and on October 21, 2013, issued a ruling affirming the ruling of the Shenzhen Intermediate People's Court in the first proceeding.
InterDigital believes that the decisions are seriously flawed both legally and factually. For instance, in determining a purported FRAND rate, the Chinese courts applied an incorrect economic analysis by evaluating InterDigital’s lump-sum 2007 patent license agreement with Apple (the “2007 Apple PLA”) in hindsight to posit a running royalty rate. Indeed, the ALJ in USITC Inv. No. 337-TA-800 rejected that type of improper analysis. Moreover, the Chinese courts had an incomplete record and applied incorrect facts, including with respect to the now-expired and superseded 2007 Apple PLA, which had been found in an arbitration between InterDigital and Apple to be limited in scope.
On April 14, 2014, InterDigital filed a petition for retrial of the second proceeding with the Chinese Supreme People’s Court (“SPC”), seeking dismissal of the judgment or at least a higher, market-based royalty rate for a license to InterDigital’s Chinese standards-essential patents (“SEPs”). The petition for retrial argues, for example, that (1) the lower court improperly determined a Chinese FRAND running royalty rate by using as a benchmark the 2007 Apple lump sum fixed payment license agreement, and looking in hindsight at the unexpectedly successful sales of Apple iPhones to construct an artificial running royalty rate that neither InterDigital nor Apple could have intended and that would have varied significantly depending on the relative success or failure in hindsight of Apple iPhone sales; (2) the 2007 Apple PLA was also an inappropriate benchmark because its scope of product coverage was significantly limited as compared to the license that the court was considering for Huawei, particularly when there are other more comparable license agreements; and (3) if the appropriate benchmarks had been used, and the court had considered the range of royalties offered by other similarly situated SEP holders in the wireless telecommunications industry, the court would have determined a FRAND royalty that was substantially higher than 0.019%, and would have found, consistent with findings of the ALJ’s initial determination in the USITC 337-TA-800 proceeding, that there was no proof that InterDigital’s offers to Huawei violated its FRAND commitments.
The SPC held a hearing on October 31, 2014, regarding whether to grant a retrial and requested that both parties provide additional information regarding the facts and legal theories underlying the case. The SPC convened a second hearing on April 1, 2015 regarding whether to grant a retrial. On December 24, 2018, InterDigital was notified that the SPC granted InterDigital’s petition for retrial of the October 16, 2013 Guangdong Province High Court decision. The SPC also issued a mediation order that terminated the proceeding. The SPC’s grant of InterDigital’s retrial petition suspends enforcement of the decision of the Guangdong High Court and, combined with the SPC’s issuance of the mediation order, effectively vacates the Guangdong High Court’s decision. There are no further proceedings in this matter.
ZTE China Proceedings
On July 10 and 11, 2014, InterDigital was served with two complaints filed by ZTE Corporation in the Shenzhen Intermediate People's Court in China on April 3, 2014. The first complaint names as defendants the Company's wholly owned subsidiaries InterDigital Technology Corporation, InterDigital Communications, Inc., InterDigital Patent Holdings, Inc. and IPR Licensing, Inc. This complaint alleges that InterDigital has failed to comply with its FRAND obligations for the licensing of its Chinese standards-essential patents. ZTE is asking the court to determine the FRAND rate for licensing InterDigital’s standards-essential Chinese patents to ZTE and also seeks compensation for its litigation costs associated with this matter. The second complaint names as defendants InterDigital, Inc. and its wholly owned subsidiaries InterDigital Technology Corporation and InterDigital Communications, Inc. This complaint alleges that InterDigital has a dominant market position in China and the United States in the market for the licensing of essential patents owned by InterDigital, and abused its dominant market position in violation of the Chinese Anti-Monopoly Law by engaging in allegedly unlawful practices, including excessively high pricing, tying, discriminatory treatment, and imposing unreasonable trading conditions. ZTE originally sought relief in the amount of 20.0 million RMB (approximately $2.9 million based on the exchange rate as of December 31, 2018), an order requiring InterDigital to cease the allegedly unlawful conduct and compensation for its litigation costs associated with this matter.
On August 7, 2014, InterDigital filed petitions challenging the jurisdiction of the Shenzhen Intermediate People's Court to hear the actions. On August 28, 2014, the court denied InterDigital’s jurisdictional challenge with respect to the anti-monopoly law case. InterDigital filed an appeal of this decision on September 26, 2014. On September 28, 2014, the court denied InterDigital’s jurisdictional challenge with respect to the FRAND case, and InterDigital filed an appeal of that decision on October 27, 2014. On December 18, 2014, the Guangdong High Court issued decisions on both appeals upholding the Shenzhen Intermediate Court’s decisions that it had jurisdiction to hear these cases. On February 10, 2015, InterDigital filed a petition for retrial with the Supreme People’s Court regarding its jurisdictional challenges to both cases.
The Shenzhen Court held hearings on the anti-monopoly law case on May 11, 13, 15 and 18, 2015. At the May hearings, ZTE withdrew its claims alleging discriminatory treatment and the imposition of unfair trading conditions and increased its damages claim to 99.8 million RMB (approximately $14.5 million based on the exchange rate as of December 31, 2018). The Shenzhen Court held hearings in the FRAND case on July 29-31, 2015 and held a second hearing on the anti-monopoly law case on October 12, 2015.
On September 18, 2018, ZTE independently filed a petition with the Shenzhen Court to withdraw the complaint in its FRAND case against InterDigital, and on September 28, 2018, the Shenzhen Court granted ZTE’s petition and dismissed the FRAND case without prejudice. On October 25, 2018, ZTE independently filed a petition with the Shenzhen Court to withdraw the complaint in its anti-monopoly law case against InterDigital, and on October 26, 2018, the Shenzhen Court granted ZTE’s petition and dismissed the anti-monopoly law case without prejudice.
Asustek Actions
On April 15, 2015, Asustek Computer Incorporated (“Asus”) filed a complaint in the CA Northern District Court against InterDigital, Inc., and its subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc., and InterDigital Patent Holdings, Inc. The complaint asserted the following causes of action: violation of Section Two of the Sherman Act, violation of Section 17200 of the California Business and Professions Code, breach of contract resulting from ongoing negotiations, breach of contract leading to and resulting in the parties’ April 2008 patent license agreement (the “2008 Asus PLA”), promissory estoppel, waiver, and fraudulent inducement to contract. Among other allegations, Asus alleged that InterDigital breached its FRAND commitment. As relief, Asus sought a judgment that the 2008 Asus PLA is void or unenforceable, damages in the amount of excess royalties Asus paid under the 2008 Asus PLA plus interest, a judgment setting the proper FRAND terms and conditions for InterDigital’s patent portfolio, an order requiring InterDigital to grant Asus a license on FRAND terms and conditions, and punitive damages and other relief.
In response, on May 30, 2015, InterDigital filed an Arbitration Demand with the ICDR. InterDigital claimed that Asus breached the 2008 Asus PLA’s dispute resolution provision by filing its CA Northern District Court lawsuit and sought declaratory relief that it is not liable for any of the claims in Asus’s complaint. On June 2, 2015, InterDigital filed in the CA Northern District Court a motion to compel arbitration on each of Asus’s claims. On August 25, 2015, the court granted InterDigital’s motion for all of Asus’s claims except its claim for breach of contract resulting from ongoing negotiations. Aside from this claim, the court ruled that the issue of arbitrability should be decided by an arbitrator, and stayed the proceedings pending that determination.
Asus asserted counterclaims in the arbitration that mirrored its CA Northern District Court claims, except that it did not assert the breach of contract claim that the court determined was not arbitrable and it added a claim of violation of the
Delaware Consumer Fraud Act. Asus also contended that its counterclaims were not arbitrable. InterDigital added a claim for breach of the 2008 Asus PLA’s confidentiality provision.
On July 14, 2016, Asus filed a motion to lift the stay in the CA Northern District Court proceeding along with a notice of the arbitral tribunal’s decision on arbitrability, informing the court of the arbitrators’ decision that, other than InterDigital’s breach of contract claims and Asus’s fraudulent inducement claim, no other claim or counterclaim is arbitrable. Asus then filed in the CA Northern District Court an amended complaint on August 18, 2016. This amended complaint includes all of the claims in Asus’s first CA Northern District Court complaint except fraudulent inducement and adds a claim of violation of the Delaware Consumer Fraud Act. It seeks the same relief as its first CA Northern District Court complaint, but also seeks a ruling that each of InterDigital’s patents “declared [to standards-setting organizations] to be essential or potentially essential” is unenforceable and any contracts InterDigital entered into in furtherance of its unlawful conduct are void. On September 8, 2016, InterDigital filed its answer and counterclaims to Asus’s amended complaint. It denied Asus’s claims and filed a counterclaim for declaratory judgment that Asus’s tort claims are invalid or preempted as applied under the First Amendment to the U.S. Constitution, the Patent Clause of the U.S. Constitution, and Title 35 of the U.S. Code. On September 28, 2016, Asus answered and denied InterDigital’s counterclaims.
With respect to its arbitration counterclaim for fraudulent inducement, Asus stated in its pleadings that it was seeking return of excess royalties (which totaled close to $63 million as of the August 2016 date referenced in the pleadings and had increased with additional royalty payments made by Asus since such time), plus interest, costs and attorneys’ fees. The evidentiary hearing in the arbitration was held in January 2017, and the parties presented oral closing arguments on March 22, 2017. On August 2, 2017, the arbitral tribunal issued its Final Award. The tribunal fully rejected Asus’s counterclaim, finding that InterDigital did not fraudulently induce Asus to enter into the 2008 Asus PLA. Accordingly, the tribunal dismissed Asus’s fraudulent inducement counterclaim in its entirety. The tribunal also dismissed InterDigital’s claims that Asus breached the confidentiality provisions and the dispute resolution provisions of the 2008 Asus PLA. On October 20, 2017, InterDigital and Asus jointly moved to confirm both the tribunal’s Final Award and the Interim Award on Jurisdiction in the CA Northern District. The court confirmed both awards on October 25, 2017.
On April 16, 2018, InterDigital filed a motion in the CA Northern District Court proceeding for leave to amend its counterclaims to include a claim of intentional interference with contract. On June 12, 2018, the court denied this motion.
On April 17, 2018, the parties served opening expert reports in the CA Northern District Court proceeding. Asus’s damages expert contends that Asus is currently owed damages in the amount of $75.9 million based on its claims that InterDigital charged royalties inconsistent with its FRAND commitments. Those damages, which represent a substantial portion of the royalties paid by Asus through third quarter 2017, do not reflect Asus’s most recent royalty payments. Asus also seeks interest, costs and attorneys’ fees, as well as, in connection with its Sherman Act claim, treble damages.
On August 16, 2018, the parties filed motions for summary judgment in the CA Northern District Court proceeding. The parties filed oppositions on September 13, 2018 and replies on September 27, 2018, and the court held an oral argument on October 11, 2018.
On December 20, 2018, the CA Northern District Court issued an order on the parties’ motions for summary judgment. InterDigital’s motion was granted in part and denied in part, and Asus’s motion was denied in its entirety. The court: (1) granted summary judgment that Asus is judicially estopped from arguing that the 2008 Asus PLA is not FRAND compliant in light of Asus’s prior inconsistent positions; (2) denied to the extent ruled on by the courtInterDigital’s motion that issue preclusion prevents Asus from re-litigating issues decided in the arbitration; (3) granted summary judgment that Asus cannot invalidate the 2008 Asus PLA on the theory that, even if FRAND when signed, the 2008 Asus PLA became non-FRAND thereafter; (4) denied InterDigital’s motion for summary judgment that Asus’s Sherman Act claim fails as a matter of law; and (5) granted summary judgment that Asus’s promissory estoppel and California UCL claims fail as a matter of law. In addition, the court denied Asus’s motion for summary judgment that, as a matter of law, InterDigital breached its contractual obligation to license its essential patents on FRAND terms and conditions by engaging in discriminatory licensing practices. On December 21, 2018, the court referred the case to a magistrate judge for a settlement conference. The settlement conference was held on February 14, 2019. A settlement was not reached. The trial in the CA Northern District Court proceeding is scheduled for May 6-17, 2019.
The Company has not recorded any accrual at December 31, 2018, for contingent losses associated with the CA Northern District Court Proceeding. While a material loss is reasonably possible, the Company cannot estimate the potential range of loss given the range of possible outcomes, as this matter is not at a sufficiently advanced stage to allow for such an estimate.
2019 Huawei China Proceeding
On January 3, 2019, InterDigital was notified that a civil complaint was filed on January 2, 2019, by Huawei Technologies Co., Ltd. and certain of its subsidiaries against InterDigital, Inc. and certain of its subsidiaries in the Shenzhen Intermediate People’s Court. The complaint seeks a ruling that the InterDigital defendants have violated an obligation to license their patents that are essential to 3G, 4G and 5G wireless telecommunication standards on fair, reasonable and non-discriminatory terms and conditions. The complaint also seeks a determination of the terms for licensing all of the InterDigital defendants’ Chinese patents that are essential to 3G, 4G and 5G wireless telecommunication standards to the Huawei plaintiffs for the plaintiffs’ wireless terminal unit products made and/or sold in China from 2019 to 2023. InterDigital’s patent license agreement with Huawei expired on December 31, 2018.
REGULATORY PROCEEDINGS
Investigation by National Development and Reform Commission of China
On September 23, 2013, counsel for InterDigital was informed by China’s National Development and Reform Commission (“NDRC”) that the NDRC had initiated a formal investigation into whether InterDigital has violated China’s Anti-Monopoly Law (“AML”) with respect to practices related to the licensing of InterDigital’s standards-essential patents to Chinese companies. Companies found to violate the AML may be subject to a cease and desist order, fines and disgorgement of any illegal gains. On March 3, 2014, the Company submitted to NDRC, pursuant to a procedure set out in the AML, a formal application for suspension of the investigation that included proposed commitments by the Company. On May 22, 2014, NDRC formally suspended its investigation of the Company based on the commitments proposed by the Company. The Company’s commitments with respect to the licensing of its patent portfolio for wireless mobile standards to Chinese manufacturers of cellular terminal units (“Chinese Manufacturers”) are as follows:
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Whenever InterDigital engages with a Chinese Manufacturer to license InterDigital’s patent portfolio for 2G, 3G and 4G wireless mobile standards, InterDigital will offer such Chinese Manufacturer the option of taking a worldwide portfolio license of only its standards-essential wireless patents, and comply with F/RAND principles when negotiating and entering into such licensing agreements with Chinese Manufacturers.
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As part of its licensing offer, InterDigital will not require that a Chinese Manufacturer agree to a royalty-free, reciprocal cross-license of such Chinese Manufacturer's similarly categorized standards-essential wireless patents.
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Prior to commencing any action against a Chinese Manufacturer in which InterDigital may seek exclusionary or injunctive relief for the infringement of any of its wireless standards-essential patents, InterDigital will offer such Chinese Manufacturer the option to enter into expedited binding arbitration under fair and reasonable procedures to resolve the royalty rate and other terms of a worldwide license under InterDigital's wireless standards-essential patents. If the Chinese Manufacturer accepts InterDigital's binding arbitration offer or otherwise enters into an agreement with InterDigital on a binding arbitration mechanism, InterDigital will, in accordance with the terms of the arbitration agreement and patent license agreement, refrain from seeking exclusionary or injunctive relief against such company.
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The commitments contained in item 3 above will expire five years from the effective date of the suspension of the investigation, or May 22, 2019. With the consolidation of China’s antimonopoly enforcement authorities into the State Administration for Market Regulation ("SAMR") in April 2018, SAMR is now responsible for overseeing InterDigital’s commitments.
USITC PROCEEDINGS AND RELATED DELAWARE DISTRICT COURT PROCEEDINGS
2013 USITC Proceeding (337-TA-868) and Related ZTE Delaware District Court Proceeding
USITC Proceeding (337-TA-868)
On January 2, 2013, the Company’s wholly owned subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Holdings, Inc. filed a complaint with the United States International Trade Commission (the “USITC” or “Commission”) against Samsung Electronics Co., Ltd., Samsung Electronics America, Inc. and Samsung Telecommunications America, LLC, Nokia Corporation and Nokia Inc., Huawei Technologies Co., Ltd., Huawei Device USA, Inc. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) and ZTE Corporation and ZTE (USA) Inc. (collectively, the “337-TA-868 Respondents”), alleging violations of Section 337 of the Tariff Act of 1930 in that they engaged in unfair trade practices by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G and 4G wireless devices (including WCDMA-, cdma2000-
and LTE-capable mobile phones, USB sticks, mobile hotspots, laptop computers and tablets and components of such devices) that infringe one or more of up to seven of InterDigital’s U.S. patents. The complaint also extended to certain WCDMA and cdma2000 devices incorporating Wi-Fi functionality. InterDigital’s complaint with the USITC sought an exclusion order that would bar from entry into the United States infringing 3G or 4G wireless devices (and components), including LTE devices, that are imported by or on behalf of the 337-TA-868 Respondents, and also sought a cease-and-desist order to bar further sales of infringing products that have already been imported into the United States. Certain of the asserted patents were also asserted against Nokia, Huawei and ZTE in earlier pending USITC proceedings (including the Nokia, Huawei and ZTE 2011 USITC Proceeding (337-TA-800) and the Nokia 2007 USITC Proceeding (337-TA-613), as set forth below) and therefore were not asserted against those 337-TA-868 Respondents in this investigation.
On December 23, 2013, InterDigital and Huawei reached a settlement agreement to enter into binding arbitration to resolve their global patent licensing disputes. Pursuant to the settlement agreement, InterDigital and Huawei moved to dismiss all litigation matters pending between the parties except the action filed by Huawei in China to set a fair, reasonable and non-discriminatory (“FRAND”) rate for the licensing of InterDigital’s Chinese standards-essential patents (discussed above under “Huawei China Proceedings”), the decision in which InterDigital is permitted to further appeal. As a result, effective February 12, 2014, the Huawei Respondents were terminated from the 337-TA-868 investigation.
From February 10 to February 20, 2014, ALJ Essex presided over the evidentiary hearing in this investigation. The patents in issue in this investigation as of the hearing were U.S. Patent Nos. 7,190,966 (the “’966 patent”) and 7,286,847 (the “’847 patent”) asserted against ZTE and Samsung, and U.S. Patent No. 7,941,151 (the “’151 patent”) asserted against ZTE, Samsung and Nokia.
On June 3, 2014, InterDigital and Samsung filed a joint motion to terminate the investigation as to Samsung on the basis of settlement. The ALJ granted the joint motion by initial determination issued on June 9, 2014, and the USITC determined not to review the initial determination on June 30, 2014.
On June 13, 2014, the ALJ issued an Initial Determination (“ID”) in the 337-TA-868 investigation. In the ID, the ALJ found that no violation of Section 337 had occurred in connection with the importation of 3G/4G devices by ZTE or Nokia, on the basis that the accused devices do not infringe asserted claims 1-6, 8-9, 16-21 or 23-24 of the ’151 patent, claims 1, 3, 6, 8, 9, or 11 of the ’966 patent, or claims 3 or 5 of the ’847 patent. The ALJ also found that claim 16 of the ’151 patent was invalid as indefinite. Among other determinations, the ALJ further determined that InterDigital did not violate any FRAND obligations, a conclusion also reached by the ALJ in the 337-TA-800 investigation, and that Respondents have engaged in patent “hold out.”
On June 30, 2014, InterDigital filed a Petition for Review with the USITC seeking review and reversal of certain of the ALJ’s conclusions in the ID. On the same day, Respondents filed a Conditional Petition for Review urging alternative grounds for affirmance of the ID’s finding that Section 337 was not violated and a Conditional Petition for Review with respect to FRAND issues.
In June 2014, Microsoft Mobile Oy (“MMO”) was added as a respondent in the investigation.
On August 14, 2014, the Commission determined to review in part the June 13, 2014 ID but terminated the investigation with a finding of no violation.
On October 10, 2014, InterDigital filed a petition for review with the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”), appealing certain of the adverse determinations in the Commission’s August 8, 2014 final determination including those related to the ’966 and ’847 patents. On June 2, 2015, InterDigital moved to voluntarily dismiss the Federal Circuit appeal, because, even if it were to prevail, it did not believe there would be sufficient time following the court’s decision and mandate for the USITC to complete its proceedings on remand such that the accused products would be excluded before the ’966 and ’847 patents expire in June 2016. The court granted the motion and dismissed the appeal on June 18, 2015.
Related Delaware District Court Proceeding
On January 2, 2013, the Company’s wholly owned subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Holdings, Inc. filed four related district court actions in the Delaware District Court against the 337-TA-868 Respondents. The proceedings against Huawei, Samsung and Nokia were subsequently dismissed, as discussed below. The remaining complaint alleges that ZTE infringes the same patents with respect to the same products alleged in the complaint filed by InterDigital in USITC Proceeding (337-TA-868). The complaint seeks a permanent injunction and compensatory damages in an amount to be determined, as well as enhanced damages based on willful infringement, and recovery of reasonable attorneys’ fees and costs.
On January 31, 2013, ZTE filed its answer and counterclaims to InterDigital’s Delaware District Court complaint; ZTE asserted counterclaims for breach of contract, equitable estoppel, waiver of right to enjoin and declarations that InterDigital has not offered ZTE licenses on FRAND terms, declarations seeking the determination of FRAND terms and
declarations of noninfringement, invalidity and unenforceability. In addition to the declaratory relief specified in its counterclaims, ZTE seeks specific performance of InterDigital's purported contracts with ZTE and standards-setting organizations, appropriate damages in an amount to be determined at trial, reasonable attorneys’ fees and such other relief as the court may deem appropriate.
On March 21, 2013, pursuant to stipulation, the Delaware District Court granted InterDigital leave to file an amended complaint against ZTE to assert allegations of infringement of the ’244 patent. On March 22, 2013, ZTE filed its answer and counterclaims to InterDigital’s amended Delaware District Court complaint. On April 9, 2013, InterDigital filed a motion to dismiss ZTE’s counterclaims relating to its FRAND allegations. On July 12, 2013, the Delaware District Court held a hearing on InterDigital’s motion to dismiss. By order issued the same day, the Delaware District Court granted InterDigital’s motion, dismissing ZTE's counterclaims for equitable estoppel and waiver of the right to injunction or exclusionary relief with prejudice. It further dismissed the counterclaims for breach of contract and declaratory relief related to InterDigital’s FRAND commitments with leave to amend.
On August 6, 2013, ZTE filed its answer and amended counterclaims for breach of contract and for declaratory judgment seeking determination of FRAND terms. The counterclaims also continue to seek declarations of noninfringement, invalidity, and unenforceability. On August 30, 2013, InterDigital filed a motion to dismiss the declaratory judgment counterclaim relating to the request for determination of FRAND terms. On May 28, 2014, the court granted InterDigital’s motion and dismissed ZTE's FRAND-related declaratory judgment counterclaim, ruling that such declaratory judgment would serve no useful purpose.
On December 30, 2013, InterDigital and Huawei filed a stipulation of dismissal on account of the confidential settlement agreement and agreement to arbitrate their disputes in this action. On the same day, the Delaware District Court granted the stipulation of dismissal and dismissed the action against Huawei.
On February 11, 2014, the Delaware District Court judge entered an InterDigital, Nokia, and ZTE stipulated Amended Scheduling Order that bifurcated issues relating to damages, FRAND-related affirmative defenses, and any FRAND-related counterclaims.
On August 28, 2014, the court granted in part a motion by InterDigital for summary judgment that the asserted ’151 patent is not unenforceable by reason of inequitable conduct, holding that only one of the references forming the basis of defendants’ allegations would remain in issue, and granted a motion by InterDigital for summary judgment that the asserted claims of the ’966 and ’847 patents are not invalid for lack of enablement.
On August 5, 2014, InterDigital and Samsung filed a stipulation of dismissal in light of the parties’ settlement agreement. On the same day, the court granted the stipulation of dismissal and dismissed the action against Samsung with prejudice.
By order dated August 28, 2014, MMO was joined in the case against Nokia as a defendant.
The ZTE trial addressing infringement and validity of the ’966, ’847, ’244 and ’151 patents was held from October 20 to October 27, 2014. During the trial, the judge determined that further construction of certain claim language of the ’151 patent was required, and the judge decided to hold another trial as to ZTE's infringement of the ’151 patent at a later date. On October 28, 2014, the jury returned a unanimous verdict in favor of InterDigital, finding that the ’966, ’847 and ’244 patents are all valid and infringed by ZTE 3G and 4G cellular devices. The court issued formal judgment to this effect on October 29, 2014.
On November 26, 2014, ZTE filed a motion for judgment as a matter of law that the asserted claims of the ’966, ’847 and ’244 patents are not infringed and, in the alternative, for a new trial. InterDigital filed an opposition on December 15, 2014, and ZTE filed a reply on January 7, 2015.
The ZTE trial addressing infringement of the ’151 patent was held from April 20 to April 22, 2015. On April 22, 2015, the jury returned a verdict in favor of ZTE, finding that the ’151 patent is not infringed by ZTE 3G and 4G cellular devices.
On May 29, 2015, the court entered a new scheduling order for damages and FRAND-related issues, scheduling the ZTE trial related to damages and FRAND-related issues for October 2016.
On September 14, 2015, a panel of Administrative Law Judges of the United States Patent and Trademark Office Patent Trial and Appeal Board (the “PTAB”) issued a final written decision in two Inter Partes Review (“IPR”) cases concerning the ’244 patent. These IPR proceedings were commenced on petitions filed by ZTE Corporation and ZTE (USA) Inc. and by Microsoft Corporation, respectively. Specifically, the panel determined that a number of claims of the ’244 patent are unpatentable as obvious. IPR Licensing, Inc. appealed to the Federal Circuit seeking review of the PTAB’s decision. Oral argument in the appeal was heard on April 7, 2017. On April 20, 2017, the Federal Circuit affirmed the PTAB’s decision that
most of the challenged claims of the ’244 patent are unpatentable as obvious. However, the court vacated and remanded the PTAB’s obviousness finding as to claim 8, which returned the matter to the PTAB for further proceedings as to that claim. On July 28, 2017, IPR Licensing, Inc., filed a petition for a writ of certiorari with the U.S. Supreme Court seeking to appeal the Federal Circuit decision, arguing that the petition should be held pending the Supreme Court’s decision in
Oil States Energy Services, LLC v. Greene’s Energy Group, LLC
, which will determine whether the IPR process as a whole is unconstitutional. On October 2, 2017, ZTE filed a response to the petition for a writ of certiorari in which ZTE agreed that the petition should be held pending the Court’s decision in
Oil States
and then disposed of as appropriate in light of that decision. On April 24, 2018, the Supreme Court rejected the petitioner’s constitutional challenge to the IPR process in the
Oil States
case, and on April 30, 2018 denied IPR Licensing, Inc.’s July 28, 2017 petition for a writ of certiorari. On March 6, 2018, in the PTAB remand proceeding, the PTAB again found claim 8 to be invalid. On April 10, 2018, IPR Licensing, Inc. appealed to the Federal Circuit seeking review of the PTAB’s decision. That appeal (the “’244 patent PTAB remand appeal”) remains pending.
On December 21, 2015, the district court entered another scheduling order that vacated the October 2016 date for the ZTE trial related to damages and FRAND-related issues as set forth in the May 2015 scheduling order.
On March 18, 2016, the court denied ZTE’s motion for judgment as a matter of law, or in the alternative for a new trial, with respect to the ’966 and ’847 patents. The court postponed its ruling on ZTE’s motion as to the ’244 patent pending the Federal Circuit’s decision on InterDigital’s appeal of the September 14, 2015 PTAB ruling and administratively closed that portion of the motion.
On April 18, 2016, ZTE filed a stipulated request for dismissal with prejudice of its counterclaims for breach of contract and patent unenforceability based on FRAND and withdrew its corresponding FRAND-related affirmative defenses. The court granted this request the same day. Also on April 18, 2016, ZTE filed a motion under Federal Rule of Civil Procedure 54(b) seeking certification of partial final judgment on the claims for infringement of the ’966 and ’847 patents to allow ZTE to file an immediate appeal as to those patents. The motion was granted on June 7, 2016, and a partial final judgment was entered on June 20, 2016. On July 18, 2016, ZTE filed its notice of appeal with the Federal Circuit regarding the Delaware District Court’s judgment against ZTE with respect to the ’966 and ’847 patents. Oral argument on ZTE’s appeal was heard on October 4, 2017. On November 3, 2017, the Federal Circuit issued its decision affirming the Delaware District Court judgment finding that the ’966 and ’847 patents are not invalid and are infringed by ZTE 3G and 4G cellular devices. On December 4, 2017, ZTE filed a petition for panel rehearing of the Federal Circuit’s decision. The Federal Circuit denied ZTE’s petition on December 20, 2017, and the court’s mandate issued on December 27, 2017.
On May 15, 2017, InterDigital and Nokia/MMO filed a stipulation of dismissal of the case against MMO, Nokia Corporation and Nokia, Inc. pursuant to a Settlement Agreement and Release of Claims among InterDigital, Microsoft Corporation, Microsoft Mobile, Inc., and MMO, dated May 9, 2017, (the “Microsoft Settlement Agreement”). On May 16, 2017, the Delaware District Court granted the stipulation and dismissed the case against MMO, Nokia Corporation and Nokia, Inc. with prejudice.
The case against ZTE remains pending. On January 16, 2018, InterDigital and ZTE filed a joint status report that informed the court of the Federal Circuit’s decision regarding the ’966 and ’847 patents and that the PTAB proceedings regarding the ’244 patent remained pending. The parties jointly requested that the case remain stayed so that the portion of the case related to damages potentially owed by ZTE as to the three patents-in-suit may be coordinated. The court granted this request on January 17, 2018. The case remains stayed pending the conclusion of the 244 patent PTAB remand appeal, including any further proceedings.
2011 USITC Proceeding (337-TA-800) and Related ZTE Delaware District Court Proceeding
USITC Proceeding (337-TA-800)
On July 26, 2011, InterDigital’s wholly owned subsidiaries InterDigital Communications, LLC (now InterDigital Communications, Inc.), InterDigital Technology Corporation and IPR Licensing, Inc. filed a complaint with the USITC against Nokia Corporation and Nokia Inc., Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) and ZTE Corporation and ZTE (USA) Inc. (collectively, the “337-TA-800 Respondents”), alleging violations of Section 337 of the Tariff Act of 1930 in that they engaged in unfair trade practices by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G wireless devices (including WCDMA- and cdma2000-capable mobile phones, USB sticks, mobile hotspots and tablets and components of such devices) that infringe several of InterDigital’s U.S. patents. The action also extended to certain WCDMA and cdma2000 devices incorporating WiFi functionality. InterDigital’s complaint with the USITC sought an exclusion order that would bar from entry into the United States any infringing 3G wireless devices (and components) that are imported by or on behalf of the 337-TA-800 Respondents, and also sought a cease-and-desist order to bar further sales of infringing products that have already been imported into the United States. In May 2012, Huawei Device USA, Inc. was added as a 337-TA-800 Respondent.
The ALJ held an evidentiary hearing from February 12-21, 2013. The patents in issue as of the hearing were U.S. Patent Nos. 8,009,636 (the “’636 patent”), 7,706, 830 (the “’830 patent”), 7,502,406 (the “’406 patent”), 7,616,970 (the “’970 patent”), 7,706,332 (the “’332 patent”), 7,536,013 (the “’013 patent”) and 7,970,127 (the “’127 patent”). The ALJ’s Initial Determination (“ID”) issued on June 28, 2013, finding no violation because the asserted patents were not infringed and/or invalid. Among other determinations, with respect to the 337-TA-800 Respondents’ FRAND and other equitable defenses, the ALJ found that Respondents had failed to prove either that InterDigital violated any FRAND obligations, that InterDigital failed to negotiate in good faith, or that InterDigital’s licensing offers were discriminatory. The ALJ also found that InterDigital is not precluded from seeking injunctive relief based on any alleged FRAND commitments.
Petitions for review of the ID to the Commission were filed by InterDigital and the 337-TA-800 Respondents on July 15, 2013. On September 4, 2013, the Commission determined to review the ID in its entirety.
On December 19, 2013, the Commission issued its final determination. The Commission adopted, with some modification, the ALJ’s finding of no violation of Section 337 as to Nokia, Huawei, and ZTE. The Commission did not rule on any other issue, including FRAND and domestic industry, and stated that all other issues remain under review.
On December 20, 2013, InterDigital filed in the Federal Circuit a petition for review seeking reversal of the Commission’s final determination. On February 18, 2015, the Federal Circuit issued a decision affirming the USITC’s determinations that the claims of the ’830, ’636, ’406 and ’332 patents were not infringed, that the claims of the ’970 patent are invalid, and that the Respondents did not violate Section 337. On April 6, 2015, InterDigital filed a combined petition for panel rehearing and rehearing e
n banc
as to the ’830 and ’636 patents. The petition was denied on May 12, 2015, and the court’s mandate issued on May 19, 2015.
Related Delaware District Court Proceeding
On July 26, 2011, the same date that InterDigital filed USITC Proceeding (337-TA-800), it filed a parallel action in the United States District Court for the District of Delaware against the 337-TA-800 Respondents alleging infringement of the same asserted patents identified in USITC Proceeding (337-TA-800). The Delaware District Court complaint seeks a permanent injunction and compensatory damages in an amount to be determined, as well as enhanced damages based on willful infringement, and recovery of reasonable attorneys' fees and costs. On September 23, 2011, the defendants in the Delaware District Court complaint filed a motion to stay the Delaware District Court action pending the parallel proceedings in the USITC. Because the USITC has instituted USITC Proceeding (337-TA-800), the defendants have a statutory right to a mandatory stay of the Delaware District Court proceeding pending a final determination in the USITC. On October 3, 2011, InterDigital amended the Delaware District Court complaint, adding LG as a defendant and adding the same additional patent that InterDigital requested be added to USITC Proceeding (337-TA-800). On October 11, 2011, the Delaware District Court granted the defendants' motion to stay. The case is currently stayed through March 11, 2019.
On January 14, 2014, InterDigital and Huawei filed a stipulation of dismissal of their disputes in this action on account of the confidential settlement agreement mentioned above. On the same day, the Delaware District Court granted the stipulation of dismissal.
On May 15, 2017, InterDigital and Nokia filed a stipulation of dismissal of their dispute pursuant to the Microsoft Settlement Agreement discussed above. On May 16, 2017, the Delaware District Court granted the stipulation and dismissed the case with prejudice with respect to Nokia Corporation and Nokia Inc.
In December 2017, InterDigital entered into a patent license agreement with LG, pursuant to which the parties agreed to terms for dismissal by InterDigital of the outstanding litigation among the parties and their affiliates. Accordingly, on December 5, 2017, InterDigital and LG filed a stipulation of dismissal of the case against LG. On the same day, the Delaware District Court granted the stipulation and dismissed the case against LG with prejudice.
The case remains pending with respect to ZTE.
OTHER
We are party to certain other disputes and legal actions in the ordinary course of business, including arbitrations and legal proceedings with licensees regarding the terms of their agreements and the negotiation thereof. We do not currently believe that these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows. None of the preceding matters have met the requirements for accrual or disclosure of a potential range as of December 31, 2018.
|
|
13.
|
COMPENSATION PLANS AND PROGRAMS
|
Compensation Programs
We use a variety of compensation programs to both attract and retain employees, and to more closely align employee compensation with company performance. These programs include, but are not limited to, short-term incentive awards tied to performance goals and cash awards to inventors for filed patent applications and patent issuances, as well as stock option awards, time-based RSU awards, performance-based awards and cash awards under our LTCP.
Our LTCP typically includes annual time-based RSU grants and cash award grants with a three-year vesting period, as well as annual performance-based RSU grants and cash award grants with a three to five-year performance period; as a result, in any one year, we are typically accounting for at least three active LTCP cycles. We issue new shares of our common stock to satisfy our obligations under the share-based components of these programs. However, our Board of Directors has the right to authorize the issuance of treasury shares to satisfy such obligations in the future.
Equity Incentive Plans
On June 14, 2017, our shareholders adopted and approved the 2017 Equity Incentive Plan (the "2017 Plan"), under which officers, employees, non-employee directors and consultants can receive share-based awards such as RSUs, restricted stock and stock options as well as other stock or cash awards. From June 2009 through June 14, 2017, we granted such awards pursuant to our 2009 Stock Incentive Plan (the “2009 Plan," and, together with the 2017 Plan, the "Equity Plans"), which was adopted and approved by our shareholders on June 4, 2009, and the material terms of which were re-approved on June 12, 2014. Upon the adoption of the 2017 Plan in June 2017, the 2009 Plan was terminated and all shares remaining available for grant under the 2009 Plan were canceled. The number of shares available for issuance under the 2017 Plan is equal to
2,400,000
shares plus any shares subject to awards granted under the 2009 Plan that, on or after June 14, 2017, expire or otherwise terminate without having been exercised in full, or that are forfeited to or repurchased by us.
The following table summarizes changes in the number of equity instruments available for grant (in thousands) under the Equity Plans for the current year:
|
|
|
|
|
Available for Grant
|
Balance as of December 31, 2017
|
2,403
|
|
RSUs granted (a)
|
(441
|
)
|
Options granted (b)
|
(335
|
)
|
Options expired and RSUs canceled
|
262
|
|
Balance as of December 31, 2018
|
1,889
|
|
|
|
(a)
|
RSUs granted include time-based RSUs, performance-based RSUs and dividend equivalents credited. Granted amounts include performance-based RSU awards at their maximum potential payout level of 200%.
|
|
|
(b)
|
Options granted include performance-based options at their maximum potential payout level of 200%.
|
RSUs and Restricted Stock
We may issue RSUs and/or shares of restricted stock to officers, employees, non-employee directors and consultants. Any cancellations of outstanding RSUs granted under the Equity Plans will increase the number of RSUs and/or shares of restricted stock remaining available for grant under the 2017 Plan. Time-based RSUs vest over periods generally ranging from 1 to 3 years from the date of the grant. Performance-based RSUs generally have a vesting period of between 3 and 5 years.
As of December 31, 2018, we had unrecognized compensation cost related to share-based awards of
$9.9 million
, at current performance accrual rates. For grants made that cliff vest, we expect to amortize the associated unrecognized compensation cost as of December 31, 2018, on a straight-line basis generally over a three to five-year period.
Vesting of performance-based RSU awards is subject to attainment of specific goals established by the Compensation Committee of the Board of Directors. Depending upon performance against these goals, the number of shares that vest can be anywhere from 0 to 2 times the target number of shares.
Information with respect to current RSU activity is summarized as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
Number of
Unvested
RSUs
|
|
Weighted
Average Per Share
Grant Date
Fair Value
|
Balance at December 31, 2017
|
1,005
|
|
|
$
|
57.95
|
|
Granted*
|
441
|
|
|
73.75
|
|
Forfeited
|
(181
|
)
|
|
73.49
|
|
Vested
|
(350
|
)
|
|
54.75
|
|
Balance at December 31, 2018
|
915
|
|
|
$
|
63.70
|
|
* These numbers include less than
0.1 million
RSUs credited on unvested RSU awards as dividend equivalents. Dividend equivalents accrue with respect to unvested RSU awards when and as cash dividends are paid on the Company's common stock, and vest if and when the underlying RSUs vest. Granted amounts include performance-based RSU awards at their maximum potential payout level of 200%.
During 2018, 2017 and 2016, we granted approximately
0.3 million
,
0.2 million
and
0.4 million
RSUs under the Equity Plans, respectively, with weighted-average grant date fair values of
$73.75
,
$58.63
and
$62.10
, respectively. The total vest date fair value of the RSUs that vested in 2018, 2017 and 2016 was
$25.2 million
,
$56.0 million
and
$9.8 million
, respectively. The weighted average per share grant date fair value of the awards that vested in 2018, 2017 and 2016 was
$54.75
,
$35.14
and
$44.08
, respectively.
Other Equity Grants
We may also grant equity awards to non-management Board members, certain consultants and, in special circumstances, employees outside of the LTCP. Grants of this type are supplemental to any awards granted through the LTCP.
Stock Options
The 2009 Plan allowed, and the 2017 Plan allows, for the granting of incentive and non-qualified stock options, as well as other securities. The administrator of the Equity Plans, the Compensation Committee of the Board of Directors, determines the number of options to be granted, subject to certain limitations set forth in the 2017 Plan. Annually, since 2013, both incentive and non-qualified stock options have been granted as part of the LTCP, which have generally vested over three years. During the year ended December 31, 2018, performance-based options were granted for the first time. The number of options which cliff vest, if at all, is anywhere from 0 to 2 times the target number of options subject to the attainment of performance goals measured at the end of the performance period. Performance-based options have a vesting period between three and five years.
Under the terms of the Equity Plans, the exercise price per share of each option, other than in the event of options granted in connection with a merger or other acquisition, cannot be less than
100%
of the fair market value of a share of common stock on the date of grant. Options granted under the Equity Plans are generally exercisable for a period of between 7 to 10 years from the date of grant and may vest on the grant date, another specified date, over a period of time and/or dependent upon the attainment of specified performance goals. We also have approximately
0.1 million
options outstanding under a prior stock plan that have an indefinite contractual life.
The fair value for option awards is computed using the Black-Scholes pricing model, whose inputs and assumptions are determined as of the date of grant and which require considerable judgment. Expected volatility was based upon a combination of implied and historic volatilities. The weighted-average grant date fair value per option award granted during the years ended December 31, 2018, 2017 and 2016 was
$24.56
,
$19.90
, and
$13.98
, respectively, based upon the assumptions included in the table below:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Expected term (in years)
|
7.7
|
|
|
4.5
|
|
|
4.5
|
|
Expected volatility
|
30.14
|
%
|
|
28.51
|
%
|
|
33.11
|
%
|
Risk-free interest rate
|
2.97
|
%
|
|
1.93
|
%
|
|
1.29
|
%
|
Dividend yield
|
1.77
|
%
|
|
1.40
|
%
|
|
1.46
|
%
|
Information with respect to current year stock option activity is summarized as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
Weighted
Average Exercise Price
|
Balance at December 31, 2017
|
531
|
|
|
$
|
39.55
|
|
Granted*
|
335
|
|
|
79.07
|
|
Forfeited
|
(18
|
)
|
|
54.92
|
|
Exercised
|
(153
|
)
|
|
43.89
|
|
Balance at December 31, 2018
|
695
|
|
|
$
|
57.21
|
|
* Granted amounts include performance-based option awards at their maximum potential payout level of 200%.
The weighted average remaining contractual life of our outstanding options was
9.7
years as of
December 31, 2018
. We currently have approximately
0.1 million
options outstanding that have an indefinite contractual life. These options were granted between 1983 and 1986 under a prior stock plan. For purposes of calculating the weighted average remaining contractual life, these options were assigned an original life in excess of 50 years. The majority of these options have an exercise price between
$9.00
and
$11.63
.
The total intrinsic value of our outstanding options as of
December 31, 2018
was
$11.2 million
. Of the
0.7 million
outstanding options as of December 31, 2018,
0.3 million
were exercisable with a weighted-average exercise price of
$33.19
. Options exercisable as of December 31, 2018 had total intrinsic value of
$10.9 million
and a weighted average remaining contractual life of
10.3
. The total intrinsic value of stock options exercised during the years ended
December 31, 2018
,
2017
and
2016
was
$5.6 million
,
$0.3 million
and
$1.5 million
, respectively. In
2018
, we recorded cash received from the exercise of options of approximately
$6.7 million
. Upon option exercise, we issued new shares of stock.
As of
December 31, 2018
, we had unrecognized compensation cost on our unvested stock options of
$0.1 million
, at current performance accrual rates. As of
December 31, 2018
and
2017
, we had approximately
0.3 million
and
0.5 million
options outstanding, respectively, that had exercise prices less than the fair market value of our stock at the respective balance sheet date. These options would have generated cash proceeds to the Company of
$11.2 million
and
$21.2 million
, respectively, if they had been fully exercised on those dates.
Defined Contribution Plans
We have a 401(k) plan (“Savings Plan”) wherein employees can elect to defer compensation within federal limits. We match a portion of employee contributions. Our 401(k) contribution expense was approximately
$1.3 million
,
$1.4 million
and
$1.1 million
for
2018
,
2017
and
2016
, respectively. At our discretion, we may also make a profit-sharing contribution to our employees’ 401(k) accounts. Additionally, the company contributed
$0.2 million
,
$0.3 million
and
$0.5 million
in 2018, 2017 and 2016, respectively, to other defined contribution plans.
Our income tax provision (benefit) consists of the following components for
2018
,
2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(3,148
|
)
|
|
$
|
3,656
|
|
|
$
|
14,637
|
|
State
|
239
|
|
|
(1
|
)
|
|
(60
|
)
|
Foreign source withholding tax
|
25,187
|
|
|
47,592
|
|
|
79,932
|
|
|
22,278
|
|
|
51,247
|
|
|
94,509
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
(63,030
|
)
|
|
21,671
|
|
|
(48,086
|
)
|
State
|
(1,554
|
)
|
|
(1,074
|
)
|
|
(557
|
)
|
Foreign source withholding tax
|
14,889
|
|
|
49,832
|
|
|
70,925
|
|
|
(49,695
|
)
|
|
70,429
|
|
|
22,282
|
|
Total
|
$
|
(27,417
|
)
|
|
$
|
121,676
|
|
|
$
|
116,791
|
|
The deferred tax assets and liabilities were comprised of the following components at
December 31, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
Net operating losses
|
$
|
—
|
|
|
$
|
123,951
|
|
|
$
|
2,995
|
|
|
$
|
126,946
|
|
Deferred revenue, net
|
48
|
|
|
391
|
|
|
39,272
|
|
|
39,711
|
|
Stock compensation
|
3,273
|
|
|
1,764
|
|
|
—
|
|
|
5,037
|
|
Patent amortization
|
18,508
|
|
|
12
|
|
|
—
|
|
|
18,520
|
|
Depreciation
|
271
|
|
|
(25
|
)
|
|
—
|
|
|
246
|
|
Other-than-temporary impairment
|
422
|
|
|
68
|
|
|
—
|
|
|
490
|
|
Other accrued liabilities
|
2,743
|
|
|
238
|
|
|
—
|
|
|
2,981
|
|
Other employee benefits
|
5,380
|
|
|
1,025
|
|
|
—
|
|
|
6,405
|
|
|
30,645
|
|
|
127,424
|
|
|
42,267
|
|
|
200,336
|
|
Less: valuation allowance
|
—
|
|
|
(122,163
|
)
|
|
(2,995
|
)
|
|
(125,158
|
)
|
Net deferred tax asset
|
$
|
30,645
|
|
|
$
|
5,261
|
|
|
$
|
39,272
|
|
|
$
|
75,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Federal
|
|
State
|
|
Foreign
|
|
Total
|
Net operating losses
|
$
|
1,804
|
|
|
$
|
122,364
|
|
|
$
|
988
|
|
|
$
|
125,156
|
|
Deferred revenue, net
|
9,058
|
|
|
35
|
|
|
29,189
|
|
|
38,282
|
|
Stock compensation
|
6,643
|
|
|
2,293
|
|
|
—
|
|
|
8,936
|
|
Patent amortization
|
16,052
|
|
|
7
|
|
|
—
|
|
|
16,059
|
|
Depreciation
|
(214
|
)
|
|
(65
|
)
|
|
—
|
|
|
(279
|
)
|
Other accrued liabilities
|
268
|
|
|
(26
|
)
|
|
—
|
|
|
242
|
|
Other-than-temporary impairment
|
379
|
|
|
71
|
|
|
—
|
|
|
450
|
|
Other employee benefits
|
3,449
|
|
|
649
|
|
|
—
|
|
|
4,098
|
|
|
37,439
|
|
|
125,328
|
|
|
30,177
|
|
|
192,944
|
|
Less: valuation allowance
|
(1,773
|
)
|
|
(121,155
|
)
|
|
(988
|
)
|
|
(123,916
|
)
|
Net deferred tax asset
|
$
|
35,666
|
|
|
$
|
4,173
|
|
|
$
|
29,189
|
|
|
$
|
69,028
|
|
Note: Included within the balance sheet, but not reflected in the tables are deferred tax assets primarily related to foreign withholding taxes that are expected to be paid within the next twelve months of $1.5 million and $14.9 million as of December 31, 2018 and December 31, 2017, respectively.
The following is a reconciliation of income taxes at the federal statutory rate with income taxes recorded by the Company for the years ended
December 31, 2018
,
2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Tax at U.S. statutory rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State tax provision
|
(8.9
|
)%
|
|
—
|
%
|
|
(0.1
|
)%
|
Effects of rates different than statutory
|
(1.4
|
)%
|
|
—
|
%
|
|
—
|
%
|
Change in federal and state valuation allowance
|
8.5
|
%
|
|
0.5
|
%
|
|
0.1
|
%
|
Research and development tax credits
|
(4.3
|
)%
|
|
(0.8
|
)%
|
|
(0.5
|
)%
|
Uncertain tax positions
|
3.9
|
%
|
|
(2.4
|
)%
|
|
2.1
|
%
|
Permanent differences
|
4.9
|
%
|
|
1.0
|
%
|
|
0.6
|
%
|
Domestic production activities deduction
|
—
|
%
|
|
(2.0
|
)%
|
|
(9.8
|
)%
|
Stock compensation
|
(5.0
|
)%
|
|
(4.0
|
)%
|
|
—
|
%
|
Rate change (a)
|
—
|
%
|
|
14.6
|
%
|
|
—
|
%
|
Foreign derived intangible income deduction (b)
|
(56.3
|
)%
|
|
—
|
%
|
|
—
|
%
|
Amended return benefit
|
(49.4
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other
|
1.5
|
%
|
|
(0.3
|
)%
|
|
0.3
|
%
|
Total tax provision (benefit) (c)
|
(85.5
|
)%
|
|
41.6
|
%
|
|
27.7
|
%
|
(a) In 2017, the inclusion of the revaluation of the deferred tax assets attributable to the TCJA signed into law in December 2017 increased the tax provision by
14.6%
.
(b) In 2018, the new Foreign Derived Intangible Income ("FDII") deduction that was enacted as part of the TCJA decreased the tax provision by 56.3%.
(c) In 2016, the inclusion of benefits associated with domestic production activities, net of uncertain tax provisions, related to prior years reduced the tax provision by 5.6%.
Income Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act, or TCJA, was signed into law. The TCJA significantly revised the U.S. corporate income tax regime by, among other things: lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018; imposing a 13.1% tax rate on income that qualifies as FDII; repealing the deduction for domestic production activities; implementing a territorial tax system; and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Company is continually monitoring IRS regulations and guidance on tax reform, specifically as it relates to income that qualifies for the favorable FDII rate. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
As a result of the TCJA, we recorded a tax benefit of $18.0 million in 2018 due to our income qualifying for the favorable FDII rate. During 2017, we recorded a tax charge of $42.6 million due to a re-measurement of deferred tax assets and liabilities. On a go-forward basis, we expect a significant portion of our income to qualify as FDII and thus be subject to the 13.1% tax rate.
Valuation Allowances and Net Operating Losses
We establish a valuation allowance for any portion of our deferred tax assets for which management believes it is more likely than not that we will be unable to utilize the assets to offset future taxes. We believe it is more likely than not that the majority of our state net operating losses and net operating losses in France will not be utilized; therefore we have maintained a near full valuation allowance against our state and French net operating losses as of
December 31, 2018
. All other deferred tax assets are fully benefited.
Uncertain Income Tax Positions
As of December 31, 2018, 2017 and 2016, we had
$4.4 million
,
$3.3 million
and
$10.4 million
, respectively, of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate. The total amount of unrecognized tax benefits could change within the next twelve months for a number of reasons including audit settlements, tax examination activities and the recognition and measurement considerations under this guidance.
During 2018, we established a reserve of
$1.1 million
related to the recognition of the 2006 to 2010 research and development credits and manufacturing deduction credits.
During 2017, we released a reserve of
$6.5 million
as a result of the IRS Joint Committee issuing a letter ruling in acceptance of the refund claims associated with the domestic production activities deduction and research and development credit. Additionally, we reduced the previously established reserve for the 2016 domestic production activities deduction and research and development credit by
$1.6 million
. These reductions in reserves were partially offset by the establishment of a
$1.0 million
reserve related to the 2017 research and development and manufacturing deduction credit, as well an increase for interest and penalty on previously recognized reserves.
During 2016, we established a reserve of
$3.2 million
related to the recognition of the 2016 research and development credit and manufacturing deduction credit. We also established a reserve of
$6.3 million
related to the recognition of a gross benefit for manufacturing deduction credits related to prior years and released a reserve of
$0.6 million
for research and development credits. The 2016 reserve was also increased for interest and penalty on previously recognized reserves.
The following is a roll forward of our total gross unrecognized tax benefits, which if reversed would impact the effective tax rate, for the fiscal years
2016
through
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Balance as of January 1
|
$
|
3,252
|
|
|
$
|
10,397
|
|
|
$
|
1,469
|
|
Tax positions related to current year:
|
|
|
|
|
|
|
Additions
|
73
|
|
|
1,009
|
|
|
3,209
|
|
Reductions
|
—
|
|
|
—
|
|
|
—
|
|
Tax positions related to prior years:
|
|
|
|
|
|
Additions
|
1,054
|
|
|
—
|
|
|
6,281
|
|
Reductions
|
(27
|
)
|
|
(1,610
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
(6,544
|
)
|
|
(562
|
)
|
Lapses in statues of limitations
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31
|
$
|
4,352
|
|
|
$
|
3,252
|
|
|
$
|
10,397
|
|
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For certain positions that related to years prior to 2018, we have recorded approximately
$0.1 million
of accrued interest during 2018 and 2017.
The Company and its subsidiaries are subject to United States federal income tax, foreign income and withholding taxes and income taxes from multiple state jurisdictions. Our federal income tax returns for 2011 to the present are currently open and will not close until the respective statutes of limitations have expired. The statutes of limitations generally expire three years following the filing of the return or in some cases three years following the utilization or expiration of net operating loss carry forwards. The statute of limitations applicable to our open federal returns will expire at the end of 2021. Excluding the Competent Authority Proceeding described in the section below, specific tax treaty procedures remain open for certain jurisdictions for 2006 and for 2014 to the present. Many of our subsidiaries have filed state income tax returns on a separate company basis. To the extent these subsidiaries have unexpired net operating losses, their related state income tax returns remain open. These returns have been open for varying periods, some exceeding ten years. The total amount of state net operating losses is
$1.7 billion
. In November 2018, the Company received notice that its 2016 U.S. Federal income tax return will be subject to audit. In December 2018, the Company received a notice of proposed assessment related to an ongoing audit of its California tax returns for 2013 through 2015. The Company filed a protest to the California assessment in February 2019.
Foreign Taxes
We pay foreign source withholding taxes on patent license royalties and state taxes when applicable. We apply foreign source withholding tax payments against our United States federal income tax obligations to the extent we have foreign source income to support these credits. In
2018
,
2017
and
2016
, we paid
$25.1 million
,
$46.7 million
and
$79.9 million
in foreign source withholding taxes, respectively, and applied these payments as credits against our United States federal tax obligation.
Between 2006 and 2018, we paid approximately
$177.5 million
in foreign taxes to foreign governments that have tax treaties with the U.S., for which we have claimed foreign tax credits against our U.S. tax obligations, and for which the tax treaty procedures are still open. It is possible that as a result of tax treaty procedures, the U.S. government may reach an agreement with the related foreign governments that will result in a partial refund of foreign taxes paid with a related reduction in our foreign tax credits. Due to foreign currency fluctuations, any such agreement could result in foreign currency gain or loss.
On July 24, 2018, the Company received notification that its request for competent authority pertaining to Article 27 (Mutual Agreement 14 Table of Contents Procedure) of the United States-Republic of Korea Income Tax Convention had been reviewed by the IRS and an agreement had been reached (the "Competent Authority Proceeding"). As a result of this agreement, the Company received refunds of
$97.4 million
, inclusive of interest. In addition, we have recorded a net tax benefit of
$14.7 million
in our full year 2018 results related to an anticipated refund the Company expects to receive as a result of amending tax returns for tax years covered by this agreement.
Basic Earnings Per Share ("EPS") is calculated by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options or other securities with features that could result in the issuance of common stock were exercised or converted to common stock. The following table reconciles the numerator and the denominator of the basic and diluted net income per share computation (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
$
|
63,868
|
|
|
$
|
63,868
|
|
|
$
|
174,293
|
|
|
$
|
174,293
|
|
|
$
|
309,001
|
|
|
$
|
309,001
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: Basic
|
34,491
|
|
|
34,491
|
|
|
34,605
|
|
|
34,605
|
|
|
34,526
|
|
|
34,526
|
|
Dilutive effect of stock options, RSUs and convertible securities
|
|
|
816
|
|
|
|
|
1,174
|
|
|
|
|
663
|
|
Weighted-average shares outstanding: Diluted
|
|
|
35,307
|
|
|
|
|
35,779
|
|
|
|
|
35,189
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income: Basic
|
$
|
1.85
|
|
|
1.85
|
|
|
$
|
5.04
|
|
|
5.04
|
|
|
$
|
8.95
|
|
|
8.95
|
|
Dilutive effect of stock options, RSUs and convertible securities
|
|
|
(0.04
|
)
|
|
|
|
(0.17
|
)
|
|
|
|
(0.17
|
)
|
Net income: Diluted
|
|
|
$
|
1.81
|
|
|
|
|
$
|
4.87
|
|
|
|
|
$
|
8.78
|
|
Certain shares of common stock issuable upon the exercise or conversion of certain securities have been excluded from our computation of earnings per share because the strike price or conversion rate, as applicable, of such securities was greater than the average market price of our common stock for the years ended December 31,
2018
,
2017
and
2016
, as applicable, and, as a result, the effect of such exercise or conversion would have been anti-dilutive. Set forth below are the securities and the weighted average number of shares of common stock underlying such securities that were excluded from our computation of earnings per share for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Restricted stock units and stock options
|
|
25
|
|
|
19
|
|
|
110
|
|
Convertible securities
|
|
—
|
|
|
—
|
|
|
4,366
|
|
Warrants
|
|
4,404
|
|
|
—
|
|
|
6,534
|
|
Total
|
|
4,429
|
|
|
19
|
|
|
11,010
|
|
Repurchase of Common Stock
In June 2014, our Board of Directors authorized a $300 million share repurchase program (the “2014 Repurchase Program”). In June 2015, September 2017 and December 2018, our Board of Directors authorized three $100 million increases to the program, respectively, bringing the total amount of the 2014 Repurchase Program to $600 million. The Company may repurchase shares under the 2014 Repurchase Program through open market purchases, pre-arranged trading plans or privately negotiated purchases.
The table below sets forth the total number of shares repurchased and the dollar value of shares repurchased under the 2014 Repurchase Program, in thousands. As of December 31, 2018, there was approximately $168.1 million remaining under the stock repurchase authorization.
|
|
|
|
|
|
|
|
|
2014 Repurchase Program
|
|
# of Shares
|
|
Value
|
2018
|
1,478
|
|
|
$
|
110,505
|
|
2017
|
107
|
|
|
$
|
7,693
|
|
2016
|
1,304
|
|
|
64,685
|
|
2015
|
1,836
|
|
|
96,410
|
|
2014
|
3,554
|
|
|
152,625
|
|
Total
|
8,279
|
|
|
$
|
431,918
|
|
Dividends
Cash dividends on outstanding common stock declared in
2018
and
2017
were as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
Per Share
|
|
Total
|
|
Cumulative by Fiscal Year
|
First quarter
|
$
|
0.35
|
|
|
$
|
12,124
|
|
|
$
|
12,124
|
|
Second quarter
|
0.35
|
|
|
12,192
|
|
|
24,316
|
|
Third quarter
|
0.35
|
|
|
11,996
|
|
|
36,312
|
|
Fourth quarter
|
0.35
|
|
|
11,610
|
|
|
47,922
|
|
|
$
|
1.40
|
|
|
$
|
47,922
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
First quarter
|
$
|
0.30
|
|
|
$
|
10,404
|
|
|
$
|
10,404
|
|
Second quarter
|
0.30
|
|
|
10,413
|
|
|
20,817
|
|
Third quarter
|
0.35
|
|
|
12,149
|
|
|
32,966
|
|
Fourth quarter
|
0.35
|
|
|
12,156
|
|
|
45,122
|
|
|
$
|
1.30
|
|
|
$
|
45,122
|
|
|
|
In September 2017, we announced that our Board of Directors had approved an increase in the Company’s quarterly cash dividend to
$0.35
per share. We currently expect to continue to pay dividends comparable to our quarterly
$0.35
per share cash dividend in the future; however, continued payment of cash dividends and changes in the Company's dividend policy will depend on the Company's earnings, financial condition, capital resources and capital requirements, alternative uses of capital, restrictions imposed by any existing debt, economic conditions and other factors considered relevant by our Board of Directors.
Common Stock Warrants
On March 5 and March 9, 2015, we sold warrants to acquire approximately
3.8 million
and approximately
0.6 million
shares of our common stock, respectively, subject to customary anti-dilution adjustments. As of December 31, 2018, the warrants had a strike price of approximately
$86.99
per share, as adjusted. The warrants become exercisable and expire in daily tranches over a three-and-a-half-month period starting in June 2020. As consideration for the warrants issued on March 5 and March 9, 2015, we received approximately
$37.3 million
and approximately
$5.6 million
, respectively.
|
|
17.
|
OTHER (EXPENSE) INCOME
|
Other expense is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Interest expense
|
$
|
(35,956
|
)
|
|
$
|
(17,845
|
)
|
|
$
|
(21,126
|
)
|
Interest and investment income
|
14,590
|
|
|
8,488
|
|
|
3,748
|
|
Other
|
(9,171
|
)
|
|
252
|
|
|
2,343
|
|
|
$
|
(30,537
|
)
|
|
$
|
(9,105
|
)
|
|
$
|
(15,035
|
)
|
|
|
18.
|
SELECTED QUARTERLY RESULTS (UNAUDITED)
|
The table below presents quarterly data for the years ended
December 31, 2018
and
2017
. Quarterly revenue within the year ended December 31, 2018 is presented in accordance with ASC 606, and quarterly revenue within the year ended December 31, 2017 is presented in accordance with ASC 605.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(In thousands, except per share amounts, unaudited)
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (a)
|
$
|
87,444
|
|
|
$
|
69,555
|
|
|
$
|
75,079
|
|
|
$
|
75,326
|
|
Net income applicable to InterDigital, Inc.'s common shareholders
|
$
|
29,925
|
|
|
$
|
10,706
|
|
|
$
|
21,407
|
|
|
$
|
1,830
|
|
Net income per common share — basic
|
$
|
0.86
|
|
|
$
|
0.31
|
|
|
$
|
0.62
|
|
|
$
|
0.05
|
|
Net income per common share — diluted
|
$
|
0.84
|
|
|
$
|
0.30
|
|
|
$
|
0.60
|
|
|
$
|
0.05
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (b)
|
$
|
94,530
|
|
|
$
|
135,779
|
|
|
$
|
97,325
|
|
|
$
|
205,304
|
|
Net income applicable to InterDigital, Inc.'s common shareholders
|
$
|
33,756
|
|
|
$
|
52,499
|
|
|
$
|
35,536
|
|
|
$
|
52,502
|
|
Net income per common share — basic
|
$
|
0.98
|
|
|
$
|
1.51
|
|
|
$
|
1.02
|
|
|
$
|
1.52
|
|
Net income per common share — diluted
|
$
|
0.93
|
|
|
$
|
1.46
|
|
|
$
|
1.00
|
|
|
$
|
1.48
|
|
|
|
(a)
|
In 2018, we recognized
$26.3 million
of non-current patent royalties primarily attributable to the Kyocera and Signal Trust for Wireless Innovation patent license agreements, both signed in first quarter 2018.
|
(b) In 2017, we recognized
$162.9 million
of non-current patent royalties primarily attributable to the LG patent license agreement, the recognition of a prepayment balance remaining under a patent license agreement that expired in fourth quarter 2017 and our second quarter 2017 settlement agreement with Microsoft Corporation.
|
|
19.
|
VARIABLE INTEREST ENTITIES
|
As further discussed below, we are the primary beneficiary of two variable interest entities. As of December 31, 2018, the combined book values of the assets and liabilities associated with these variable interest entities included in our consolidated balance sheet were
$29.9 million
and
$6.1 million
, respectively. Assets included
$11.7 million
of cash and cash equivalents,
$1.3 million
of accounts receivable,
$14.4 million
of patents, net, and
$2.5 million
of other non-current assets. As of December 31, 2017, the combined book values of the assets and liabilities associated with these variable interest entities included in our consolidated balance sheet were
$34.4 million
and
$0.2 million
, respectively. Assets included
$23.3 million
of cash and cash equivalents and
$11.1 million
of patents, net. We recognized
$10.0 million
of non-current patent royalties during the year ended December 31, 2018 related to a patent license agreement signed by the Signal Trust for Wireless Innovation (the “Signal Trust”).
Convida Wireless
Convida Wireless was launched in 2013 and most recently renewed in 2018 to combine Sony's consumer electronics expertise with our pioneering IoT expertise to drive IoT communications and connectivity. Based on the terms of the agreement, the parties will contribute funding and resources for additional research and platform development, which we will perform. SCP IP Investment LLC, an affiliate of Stephens Inc., is a minority investor in Convida Wireless.
Convida Wireless is a variable interest entity. Based on our provision of research and platform development services to Convida Wireless, we have determined that we are the primary beneficiary for accounting purposes and will continue to consolidate Convida Wireless. For the years ended December 31, 2018, 2017 and 2016, we have allocated approximately
$4.4 million
,
$3.6 million
and
$3.5 million
, respectively, of Convida Wireless' net loss to noncontrolling interests held by other parties.
Signal Trust for Wireless Innovation
In 2013, we established the Signal Trust, the goal of which is to monetize a large InterDigital patent portfolio related to cellular infrastructure. The more than 500 patents and patent applications transferred from InterDigital to the Signal Trust focus primarily on 3G and LTE technologies, and were developed by InterDigital's engineers and researchers over more than a decade, with a number of the innovations contributed to the worldwide standards process.
The distributions from the Signal Trust will support continued research related to cellular wireless technologies. A small portion of the proceeds from the Signal Trust will be used to fund, through the Signal Foundation for Wireless Innovation, scholarly analysis of intellectual property rights and the technological, commercial and creative innovations they facilitate. The Signal Trust is a variable interest entity. Based on the terms of the Trust Agreement, we previously determined that we are the primary beneficiary for accounting purposes and must consolidate the Signal Trust.
On February 11, 2019, we announced that we had made a binding offer to acquire the R&I unit of Technicolor SA. R&I is a premier research lab that conducts fundamental research into video coding, IoT and smart home, imaging sciences, AR and VR and artificial intelligence and machine learning technologies. After completing the required prior consultation with Technicolor’s works council, the companies expect to execute a definitive acquisition agreement, the terms of which have been negotiated. The transaction is expected to close in mid-2019, subject to customary closing conditions.
As consideration for the acquisition, the parties have agreed to terminate the jointly-funded R&D collaboration that was entered into as part of the Technicolor Acquisition. In addition, Technicolor has agreed to reduce its rights to a revenue-sharing arrangement announced as part of the Technicolor Acquisition. There is no cash consideration for the transaction.