NOTES TO UNAUDITED
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Rambus Inc. (“Rambus” or the “Company”) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring items) necessary to state fairly the financial position and results of operations for each interim period presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Certain information and Note disclosures included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted in these interim statements pursuant to such SEC rules and regulations. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in Form 10-K for the year ended
December 31, 2017
.
Operating Segment Definitions
Operating segments are based upon Rambus' internal organization structure, the manner in which its operations are managed, the criteria used by its Chief Operating Decision Maker ("CODM") to evaluate segment performance and availability of separate financial information regularly reviewed for resource allocation and performance assessment.
The Company determined its CODM to be the Chief Executive Officer and determined its operating segments to be: (1) Memory and Interfaces Division ("MID"), which focuses on the design, development, manufacturing through partnerships and licensing of technology and solutions that is related to memory and interfaces; (2) Rambus Security Division ("RSD"), which focuses on the design, development, deployment and licensing of technologies for chip, system and in-field application security, anti-counterfeiting, smart ticketing and mobile payments; and (3) Emerging Solutions Division ("ESD"), which includes the Rambus Labs team and the development efforts in the area of emerging technologies.
On January 30, 2018, the Company announced its plans to close its lighting division ("RLD") including related manufacturing operations in Brecksville, Ohio. The Company believes that such business is not core to its strategy and growth objectives. Refer to Note 15, “Restructuring Charges” for additional details.
For the
three and nine
months ended
September 30, 2018
, only MID and RSD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments were shown under “Other,” which included RLD.
Comparability
Effective January 1, 2018, Rambus adopted multiple new accounting standards. Prior periods were not retrospectively restated, so the consolidated balance sheet as of
December 31, 2017
and results of operations for the
three and nine
months ended
September 30, 2017
were prepared using accounting standards that were different than those in effect as of and for the
three and nine
months ended
September 30, 2018
. Therefore, the consolidated balance sheets as of
September 30, 2018
and December 31, 2017 are not directly comparable, nor are the results of operations for the
three and nine
months ended
September 30, 2018
and 2017.
Reclassifications
Certain prior periods' amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented.
2. Recent Accounting Pronouncements
Recent Accounting Pronouncements Adopted
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in this ASU allow entities to reclassify from AOCI to retained
earnings "stranded" tax effects resulting from passage of the Tax Cuts and Jobs Act ("the Act") on December 22, 2017. An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the change in federal tax rate for all items accounted for in other comprehensive income (e.g., employee benefits, cumulative translation adjustments). Entities may also elect to reclassify other stranded tax effects that relate to the Act but do not directly relate to the change in the federal tax rate (e.g., state taxes). However, because the amendments only relate to the reclassification of the income tax effects of the Act, the underlying guidance requiring the effect of a change in tax laws or rates to be included in income from operations is not affected. Upon adoption of this ASU, entities are required to disclose their policy for releasing the income tax effects from AOCI. ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU may be applied retrospectively to each period in which the effect of the Act is recognized or an entity may elect to apply the amendments in the period of adoption. The Company early adopted this ASU in the first quarter of 2018. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted this ASU on January 1, 2018. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." The amendment seeks to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. This ASU is effective for interim and annual reporting periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective dates. The Company adopted this ASU on January 1, 2018. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, which amends certain aspects of the recognition, measurement, presentation and disclosure of certain financial instruments, including equity investments and liabilities measured at fair value under the fair value option. The main provisions include a requirement that all investments in equity securities be measured at fair value through earnings, with certain exceptions, and a requirement to present separately in other comprehensive income the portion of the total change in fair value attributable to an entity’s own credit risk for financial liabilities where the fair value option has been elected. The Company adopted this ASU on January 1, 2018. Upon adoption, the Company reclassified approximately
$1.1 million
of unrealized gain related to its equity investment security classified as available-for-sale from accumulated other comprehensive income (AOCI) to retained earnings as a cumulative-effect adjustment, and began recording changes in fair value through earnings.
ASU No. 2014-09, Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers in Accounting Standards Codification (ASC) Topic 606 ("ASC 606" or "the New Revenue Standard"), which superseded the revenue recognition requirements in ASC Topic 605, Revenue Recognition (“ASC 605”). The New Revenue Standard sets forth a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. The New Revenue Standard requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The New Revenue Standard can be applied either retrospectively to each prior reporting period presented (i.e., full retrospective adoption) or with the cumulative effect of initially applying the update recognized at the date of the initial application (i.e., modified retrospective adoption) along with additional disclosures.
The Company adopted the New Revenue Standard on January 1, 2018 and all the related amendments using the modified retrospective method. The Company had previously planned on adopting the New Revenue Standard using the full retrospective method, but ultimately determined to adopt the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit as of January 1, 2018. The comparative information for prior periods has not been recasted and continues to be reported under the accounting standards in effect for those periods. The Company recognized unbilled receivables (contract assets) of
$818 million
predominantly due to how revenue is recognized for the Company's fixed-fee licensing arrangements (as noted in the first bullet point below), deferred revenue (contract liabilities) of
$2 million
, withholding tax liabilities of
$105 million
(and a corresponding deferred tax asset of
$105 million
, with an offsetting
$16 million
valuation allowance), and
$174 million
deferred tax liability. In the aggregate, these adjustments resulted in a
$626 million
net credit to accumulated deficit.
The most significant impacts of the New Revenue Standard relate to the following:
|
|
•
|
Revenue recognized for certain patent and technology licensing arrangements has changed under the New Revenue Standard. Revenue for (i) fixed-fee arrangements (including arrangements that include minimum guaranteed amounts), (ii) variable royalty arrangements that the Company has concluded are fixed in substance and (iii) the fixed portion of hybrid fixed/variable arrangements is recognized upon control over the underlying IP use right transferring to the licensee rather than upon billing under ASC 605, net of the effect of significant financing components calculated using customer-specific, risk-adjusted lending rates and recognized over time on an effective rate basis. As a consequence of the acceleration of revenue recognition and for matching purposes, all withholding taxes to be paid over the term of these licensing arrangements were expensed on the date the licensing revenue was recognized.
|
|
|
•
|
Adoption of the New Revenue Standard resulted in revenue recognition being accelerated for variable royalties and the variable portion of hybrid fixed/variable patent and technology licensing arrangements. Under the New Revenue Standard, royalty revenue is being recognized on the basis of management’s estimates of sales or usage, as applicable, of the licensed IP in the period of reference, with a true-up being recorded in subsequent periods based on actual sales or usage as reported by licensees (rather than upon receiving royalty reports from licensees as was the case under ASC 605).
|
|
|
•
|
Adoption of the New Revenue Standard also resulted in revenue recognition being accelerated for certain professional services arrangements, including arrangements consisting of significant software customization or modification and development arrangements. Under the New Revenue Standard, such arrangements are accounted for based on man-days incurred during the reporting period as compared to estimated total man-days necessary for contract completion, as the customer either controls the asset as it is created or enhanced by us or, where the asset has no alternative use to us, we are entitled to payment for performance to date and expect to fulfill the contract - revenue recognition is no longer capped to the lesser of inputs in the period or accepted billable project milestones as was the case under ASC 605.
|
Adoption of the New Revenue Standard had no impact to cash provided by (used in) operating, financing, or investing activities on the Company's Consolidated Statements of Cash Flows.
In accordance with the New Revenue Standard requirements, the disclosure of the impact of adoption on the Company's Consolidated Statement of Operations and Balance Sheet was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
(In thousands)
|
As Reported
|
|
Effect of Change Higher/ (Lower)
|
|
Amounts under ASC 605
|
|
As Reported
|
|
Effect of Change Higher/ (Lower)
|
|
Amounts under ASC 605
|
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
$
|
33,599
|
|
|
$
|
42,105
|
|
|
$
|
75,704
|
|
|
$
|
85,022
|
|
|
$
|
141,482
|
|
|
$
|
226,504
|
|
Product revenue
|
11,753
|
|
|
—
|
|
|
11,753
|
|
|
27,153
|
|
|
377
|
|
|
27,530
|
|
Contract and other revenue
|
14,402
|
|
|
(2,019
|
)
|
|
12,383
|
|
|
50,463
|
|
|
(5,378
|
)
|
|
45,085
|
|
Total revenue
|
$
|
59,754
|
|
|
$
|
40,086
|
|
|
$
|
99,840
|
|
|
$
|
162,638
|
|
|
$
|
136,481
|
|
|
$
|
299,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other income (expense), net
|
$
|
8,008
|
|
|
$
|
(6,532
|
)
|
|
$
|
1,476
|
|
|
$
|
25,373
|
|
|
$
|
(21,087
|
)
|
|
$
|
4,286
|
|
Provision for income taxes
|
$
|
89,758
|
|
|
$
|
(10,509
|
)
|
|
$
|
79,249
|
|
|
$
|
85,514
|
|
|
$
|
—
|
|
|
$
|
85,514
|
|
Net loss
|
$
|
(104,893
|
)
|
|
$
|
44,063
|
|
|
$
|
(60,830
|
)
|
|
$
|
(155,939
|
)
|
|
$
|
115,394
|
|
|
$
|
(40,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
(In thousands)
|
As Reported
|
|
Effect of Change Higher/ (Lower)
|
|
Amounts under ASC 605
|
Consolidated Balance Sheet
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Unbilled receivables
|
$
|
699,909
|
|
|
$
|
(699,909
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Deferred revenue
|
12,877
|
|
|
(88
|
)
|
|
12,789
|
|
Income taxes payable
|
99,184
|
|
|
(94,117
|
)
|
|
5,067
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
Accumulated deficit
|
202,276
|
|
|
510,894
|
|
|
713,170
|
|
Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU remove certain disclosures, modify certain disclosures and add additional disclosures. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation - Stock Compensation (Topic 718)," to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11,
"Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815)." The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this ASU recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the FASB codification, to a scope exception. Those amendments do not have an accounting effect. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities," which amends the amortization period for certain purchased callable debt securities held at a premium. This ASU will shorten the amortization period for the premium to be amortized to the earliest call date. This ASU does not apply to securities held at a discount, which will continue to be amortized to maturity. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13. The purpose of this ASU is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact that this guidance will have on its financial condition and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, "Leases." This ASU requires lessees to recognize right-of-use assets and liabilities for operating leases, initially measured at the present value of the lease payments, on the balance sheet. In addition, it requires lessees to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. In July 2018, the FASB issued ASU No. 2018-10,
"Codification Improvements to Topic 842, Leases," and ASU No. 2018-11, "Leases (Topic 842)," which allow the application of the new guidance at the beginning of the year of adoption, recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, in addition to the method of applying the new guidance retrospectively to each prior reporting period presented. The amendments in ASU No. 2018-10 and ASU No. 2018-11 have the same effective and transition requirements as ASU 2016-02.
This ASU will become effective for the Company in the first quarter of fiscal year 2019. The Company is evaluating the impact that the new accounting standard will have on its consolidated financial statements, which will consist primarily of a balance sheet gross up of right-of-use assets and lease liabilities on the consolidated balance sheets upon adoption, which will increase the Company's total assets and liabilities.
3. Revenue Recognition
The Company recognizes revenue upon transfer of control of promised goods and services in an amount that reflects the consideration it expects to receive in exchange for those goods and services. Unless indicated otherwise below, all of the goods and services are distinct and are accounted for as separate performance obligations.
Where an arrangement includes multiple performance obligations, the transaction price is allocated to these on a relative standalone selling prices basis. The Company has established standalone selling prices for all of its offerings - specifically, a same pricing methodology is consistently applied to all licensing arrangements; all services offerings are priced within tightly controlled bands and all contracts that include support and maintenance state a renewal rate or price that is systematically enforced.
Rambus’ revenue consists of royalty, product and contract and other revenue. Royalty revenue consists of patent and technology license royalties. Products consist of memory buffer chipsets sold directly and indirectly to module manufacturers and OEMs worldwide through multiple channels, including our direct sales force and distributors. Contract and other revenue consists of software license fees, engineering fees associated with integration of Rambus’ technology solutions into its customers’ products and support and maintenance fees.
1.
Royalty Revenue
Rambus’ patent and technology licensing arrangements generally range between
1
and
7
years in duration and generally grant the licensee the right to use the Company's entire IP portfolio as it evolves over time. These arrangements do not typically grant the licensee the right to terminate for convenience and where such rights exist, termination is prospective, with no refund of fees already paid by the licensee. There is no interdependency or interrelation between the IP included in the portfolio licensed upon contract inception and any IP subsequently made available to the licensee, and the Company would be able to fulfill its promises by transferring the portfolio and the additional IP use rights independently. However, the numbers of additions to, and removals from the portfolio (for example when a patent expires and renewal is not granted to the Company) in any given period have historically been relatively consistent; as such, the Company does not allocate the transaction price between the rights granted at contract inception and those subsequently granted over time as a function of these additions.
Patent and technology licensing arrangements result in fixed payments received over time, with guaranteed minimum payments on occasion, variable payments calculated based on the licensee’s sale or use of the IP, or a mix of fixed and variable payments.
|
|
•
|
For fixed-fee arrangements (including arrangements that include minimum guaranteed amounts), variable royalty arrangements that the Company has concluded are fixed in substance and the fixed portion of hybrid fixed/variable arrangements, the Company recognizes revenue upon control over the underlying IP use right transferring to the licensee, net of the effect of significant financing components calculated using customer-specific, risk-adjusted lending rates ranging between
3%
and
6%
, with the related interest income being recognized over time on an effective rate basis. Where a licensee has the contractual right to terminate a fixed-fee arrangement for convenience without any substantive penalty payable upon such termination, the Company applies the guidance in the New Revenue Standard to the duration of the contract in which the parties have present enforceable rights and obligations and only recognizes revenue for amounts that are due and payable.
|
|
|
•
|
For variable arrangements, the Company recognizes revenue based on an estimate of the licensee’s sale or usage of the IP during the period of reference, typically quarterly, with a true-up being recorded when the Company receives the actual royalty report from the licensee.
|
2.
Product Revenue
Product revenue is recognized upon shipment of product to customers, net of accruals for estimated sales returns and allowances, and to distributors, net of accruals for price protection and rights of return on products unsold by the distributors. To date, none of these accruals have been significant. The Company transacts with direct customers primarily pursuant to standard purchase orders for delivery of products and generally allows customers to cancel or change purchase orders within limited notice periods prior to the scheduled shipment date.
3.
Contract and Other Revenue
Contract and other revenue consists of software license fees and engineering fees associated with integration of Rambus’ technology solutions into its customers’ related support and maintenance.
An initial software arrangement generally consists of a term-based or perpetual license, significant software customization services and support and maintenance services that include post-implementation customer support and the right to unspecified software updates and enhancements on a when and if available basis. The Company recognizes the license and customization services revenue based on man-days incurred during the reporting period as compared to the estimated total man-days necessary for each contract, and the support and maintenance revenue ratably over term. The Company recognizes license renewal revenue at the beginning of the renewal period. The Company recognizes revenue from professional services purchased in addition to an initial software arrangement on a cumulative catch-up basis if these services are not distinct from the services provided as part of the initial software arrangement, or as a separate contract if these services are distinct.
During the first quarter of 2016, the Company acquired Smart Card Software Ltd., which included Bell Identification Ltd. (Payment Product Group) and Ecebs Ltd. (Ticketing Products Group), which transact mostly in software and Software-as-a-Service arrangements, respectively.
The Company's Payment Product Group derives a significant portion of its revenue from heavily customized software in the mobile market, whereby the Payment Product Group’s software solution interacts with third-party solutions and other payment platforms to provide the functionality the customer requires. Historically, these third-party solutions have evolved at a rapid pace, with the Payment Product Group being required to deliver as part of its support and maintenance services the patches and updates needed to maintain the functionality of its own software offering. As the utility of the solution to the end customer erodes very quickly without these updates, these are viewed as critical and the customized software solution and updates are not separately identifiable. As such, these arrangements are treated as a single performance obligation; revenue is deferred until completion of the customization services, and recognized ratably over the committed support and maintenance term, typically ranging from
1 year
to
3 years
.
The Company's Ticketing Products Group primarily derives revenue from ticketing services arrangements that systematically consist of a software component, support and maintenance, managed services and hosting services. The software could be hosted by third-party hosting service providers or the Company. All arrangements entered into subsequent to the acquisition preclude customers from taking possession of the software at any time during the hosting term and the Company has concluded that should a customer that was under contract as of the acquisition date ever request possession of the software, the Ticketing Products Group would have the ability to charge the customer, and enforce a claim to payment of a substantive fee in exchange for such right, and that the costs of setting up the environment needed to run the software would act as a
significant disincentive to the customer taking possession of the software. Based on the above, the Company concluded that these services are a single performance obligation, with customers simultaneously receiving and consuming the benefits provided by the Ticketing Products Group’s performance, and recognize ticketing services revenue ratably over the term, commencing upon completion of setup activities. The Company recognizes setup fees upon completion. While these activities do not transfer a service to the customer, the Company elected not to defer and amortize these fees over the expected duration of the customer relationship owing to the immateriality of the amounts charged.
Significant Judgments
Historically and with the exception noted below, no significant judgment has generally been required in determining the amount and timing of revenue from the Company's contracts with customers.
|
|
•
|
The Company has adequate tools and controls in place, and substantial experience and expertise in timely and accurately tracking man-days incurred in completing customization and other professional services, and quantifying changes in estimates.
|
Key estimates used in recognizing revenue predominantly consist of the following:
|
|
•
|
All fixed-fee arrangements result in cash being received after control over the underlying IP use right has transferred to the licensee, and over a period exceeding a year. As such, all these arrangements include a significant financing component. The Company calculates a customer-specific lending rate using a Daily Treasury Yield Curve Rate that changes depending on the date on which the licensing arrangement was entered into and the term (in years) of the arrangement, and takes into consideration a licensee-specific risk profile determined based on a review of the licensee’s “Full Company View” Dun & Bradstreet report obtained on the date the licensing arrangement was signed by the parties, with a risk premium being added to the Daily Treasury Yield Curve Rate considering the overall business risk, financing strength and risk indicators, as listed.
|
|
|
•
|
The Company recognizes revenue on variable fee licensing arrangements on the basis of estimates. In connection with the adoption of the New Revenue Standard, the Company has set up specific procedures and controls to ensure timely and accurate quantification of variable royalties, and implemented new systems to enable the preparation of the estimates and reporting of the financial information required by the New Revenue Standard.
|
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to the Company's customers. The Company records contract assets when revenue is recognized prior to invoicing, and a contract liability when revenue is recognized subsequent to invoicing.
The contract assets are primarily related to the Company’s fixed fee IP licensing arrangements and rights to consideration for performance obligations delivered but not billed as of
September 30, 2018
. The contract assets are transferred to receivables when the billing occurs.
The Company’s contract balances were as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
(In thousands)
|
September 30, 2018
|
|
January 1, 2018
|
Unbilled receivables
|
$
|
699,909
|
|
|
$
|
818,371
|
|
Deferred revenue
|
12,877
|
|
|
20,737
|
|
During the
three and nine
months ended
September 30, 2018
, the Company recognized
$3.2 million
and
$19.6 million
of revenue, respectively, that was included in the contract balances, as adjusted for ASC 606, as of January 1, 2018.
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted but unsatisfied performance obligations were approximately
$10.3
million as of
September 30, 2018
, which the Company primarily expects to recognize over the next
2 years
.
4. Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the earnings by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, employee stock purchases, restricted stock and restricted stock units and shares issuable upon the conversion of convertible notes. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees and the amount of unrecognized stock-based compensation related to future services. No potential dilutive common shares are included in the computation of any diluted per share amount when a net loss is reported.
The following table sets forth the computation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income (loss) per share:
|
(In thousands, except per share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(104,893
|
)
|
|
$
|
7,695
|
|
|
$
|
(155,939
|
)
|
|
$
|
13,306
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
107,897
|
|
|
109,555
|
|
|
108,324
|
|
|
110,353
|
|
Effect of potential dilutive common shares
|
—
|
|
|
3,564
|
|
|
—
|
|
|
3,508
|
|
Weighted-average shares outstanding - diluted
|
107,897
|
|
|
113,119
|
|
|
108,324
|
|
|
113,861
|
|
Basic net income (loss) per share
|
$
|
(0.97
|
)
|
|
$
|
0.07
|
|
|
$
|
(1.44
|
)
|
|
$
|
0.12
|
|
Diluted net income (loss) per share
|
$
|
(0.97
|
)
|
|
$
|
0.07
|
|
|
$
|
(1.44
|
)
|
|
$
|
0.12
|
|
For the three months ended
September 30, 2018
and
2017
, options to purchase approximately
1.4 million
and
1.8 million
shares, respectively, and for the nine months ended
September 30, 2018
and
2017
, options to purchase approximately
1.3 million
and
1.9 million
shares, respectively, were excluded from the calculation because they were anti-dilutive after considering proceeds from exercise and related unrecognized stock-based compensation expense. For the
three and nine
months ended
September 30, 2018
, an additional
1.9 million
and
2.8 million
shares, respectively, were excluded from the weighted average dilutive shares because there was a net loss position for the periods.
5. Intangible Assets and Goodwill
Goodwill
The following tables present goodwill information for each of the reportable segments for the
nine
months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segment:
|
|
As of December 31, 2017
|
|
Effect of Exchange Rates (1)
|
|
As of September 30, 2018
|
|
|
(In thousands)
|
MID
|
|
$
|
66,643
|
|
|
$
|
—
|
|
|
$
|
66,643
|
|
RSD
|
|
143,018
|
|
|
(1,545
|
)
|
|
141,473
|
|
Total
|
|
$
|
209,661
|
|
|
$
|
(1,545
|
)
|
|
$
|
208,116
|
|
(1) Effect of exchange rates relates to foreign currency translation adjustments for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2018
|
Reportable Segment:
|
|
Gross Carrying Amount
|
|
Accumulated Impairment Losses
|
|
Net Carrying Amount
|
|
|
(In thousands)
|
MID
|
|
$
|
66,643
|
|
|
$
|
—
|
|
|
$
|
66,643
|
|
RSD
|
|
141,473
|
|
|
—
|
|
|
141,473
|
|
Other
|
|
21,770
|
|
|
(21,770
|
)
|
|
—
|
|
Total
|
|
$
|
229,886
|
|
|
$
|
(21,770
|
)
|
|
$
|
208,116
|
|
Intangible Assets
The components of the Company’s intangible assets as of
September 30, 2018
and
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
Useful Life
|
|
Gross Carrying
Amount (1)
|
|
Accumulated
Amortization (1)
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
Existing technology
|
3 to 10 years
|
|
$
|
259,131
|
|
|
$
|
(210,086
|
)
|
|
$
|
49,045
|
|
Customer contracts and contractual relationships
|
1 to 10 years
|
|
68,167
|
|
|
(53,401
|
)
|
|
14,766
|
|
Non-compete agreements and trademarks
|
3 years
|
|
300
|
|
|
(300
|
)
|
|
—
|
|
In-process research and development
|
Not applicable
|
|
1,600
|
|
|
—
|
|
|
1,600
|
|
Total intangible assets
|
|
|
$
|
329,198
|
|
|
$
|
(263,787
|
)
|
|
$
|
65,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Useful Life
|
|
Gross Carrying
Amount (1)
|
|
Accumulated
Amortization (1)
|
|
Net Carrying
Amount
|
|
|
|
(In thousands)
|
Existing technology
|
3 to 10 years
|
|
$
|
258,008
|
|
|
$
|
(191,554
|
)
|
|
$
|
66,454
|
|
Customer contracts and contractual relationships
|
1 to 10 years
|
|
68,794
|
|
|
(48,626
|
)
|
|
20,168
|
|
Non-compete agreements and trademarks
|
3 years
|
|
300
|
|
|
(300
|
)
|
|
—
|
|
In-process research and development
|
Not applicable
|
|
5,100
|
|
|
—
|
|
|
5,100
|
|
Total intangible assets
|
|
|
$
|
332,202
|
|
|
$
|
(240,480
|
)
|
|
$
|
91,722
|
|
(1) The changes in gross carrying amount and accumulated amortization reflect the effects of exchange rates during the period.
During the
three and nine
months ended
September 30, 2018
, the Company did not purchase or sell any intangible assets. During the
three and nine
months ended
September 30, 2017
, the Company acquired patents related to its memory technology for an immaterial amount.
Included in customer contracts and contractual relationships are favorable contracts which are acquired software and service agreements where the Company has no performance obligations. Cash received from these acquired favorable contracts reduces the favorable contract intangible asset. For the three months ended
September 30, 2018
and
2017
, the Company received
$0.2 million
and
$0.5 million
, respectively, related to the favorable contracts. For the nine months ended
September 30, 2018
and
2017
, the Company received
$1.1 million
and
$2.8 million
, respectively, related to the favorable contracts. As of
September 30, 2018
and
December 31, 2017
, the net balance of the favorable contract intangible assets was
$1.0 million
and
$1.7 million
, respectively.
Amortization expense for intangible assets for the
three and nine
months ended
September 30, 2018
was
$5.1 million
and
$24.4 million
, respectively. Amortization expense for intangible assets for the
three and nine
months ended September 30, 2017 was
$10.5 million
and
$31.4 million
, respectively. The estimated future amortization of intangible assets as of
September 30, 2018
was as follows (amounts in thousands):
|
|
|
|
|
Years Ending December 31:
|
Amount
|
2018 (remaining 3 months)
|
$
|
4,874
|
|
2019
|
20,251
|
|
2020
|
20,293
|
|
2021
|
13,083
|
|
2022
|
2,002
|
|
Thereafter
|
3,308
|
|
Total amortizable purchased intangible assets
|
$
|
63,811
|
|
In-process research and development
|
1,600
|
|
Total intangible assets
|
$
|
65,411
|
|
It is reasonably possible that the businesses could perform significantly below the Company's expectations or a deterioration of market and economic conditions could occur. This would adversely impact the Company's ability to meet its projected results, which could cause the goodwill in any of its reporting units or long-lived assets in any of its asset groups to become impaired. Significant differences between these estimates and actual cash flows could materially affect the Company's future financial results. If the Company determines that its goodwill or long-lived assets are impaired, it would be required to record a non-cash charge that could have a material adverse effect on its results of operations and financial position.
6.
Segments and Major Customers
For the
three and nine
months ended
September 30, 2018
, MID and RSD were reportable segments as each of them met the quantitative thresholds for disclosure as a reportable segment. The results of the remaining operating segments were shown under “Other.”
The Company evaluates the performance of its segments based on segment operating income (loss), which is defined as revenue minus segment operating expenses. Segment operating expenses are comprised of direct operating expenses.
Segment operating expenses do not include sales, general and administrative expenses and the allocation of certain expenses managed at the corporate level, such as stock-based compensation, amortization, and certain bonus and acquisition costs. The “Reconciling Items” category includes these unallocated sales, general and administrative expenses as well as corporate level expenses.
The tables below present reported segment operating income (loss) for the
three and nine
months ended
September 30, 2018
and
2017
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2018
|
|
For the Nine Months Ended September 30, 2018
|
|
MID
|
|
RSD
|
|
Other
|
|
Total
|
|
MID
|
|
RSD
|
|
Other
|
|
Total
|
|
(In thousands)
|
|
(In thousands)
|
Revenues
|
$
|
44,737
|
|
|
$
|
15,017
|
|
|
$
|
—
|
|
|
$
|
59,754
|
|
|
$
|
113,702
|
|
|
$
|
46,495
|
|
|
$
|
2,441
|
|
|
$
|
162,638
|
|
Segment operating expenses
|
27,035
|
|
|
12,538
|
|
|
3,154
|
|
|
42,727
|
|
|
72,581
|
|
|
40,216
|
|
|
11,994
|
|
|
124,791
|
|
Segment operating income (loss)
|
$
|
17,702
|
|
|
$
|
2,479
|
|
|
$
|
(3,154
|
)
|
|
$
|
17,027
|
|
|
$
|
41,121
|
|
|
$
|
6,279
|
|
|
$
|
(9,553
|
)
|
|
$
|
37,847
|
|
Reconciling items
|
|
|
|
|
|
|
|
|
(36,194
|
)
|
|
|
|
|
|
|
|
|
|
(120,614
|
)
|
Operating loss
|
|
|
|
|
|
|
|
|
$
|
(19,167
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(82,767
|
)
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
4,032
|
|
|
|
|
|
|
|
|
|
|
12,342
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
$
|
(15,135
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(70,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2017
|
|
For the Nine Months Ended September 30, 2017
|
|
MID
|
|
RSD
|
|
Other
|
|
Total
|
|
MID
|
|
RSD
|
|
Other
|
|
Total
|
|
(In thousands)
|
|
(In thousands)
|
Revenues
|
$
|
68,787
|
|
|
$
|
26,312
|
|
|
$
|
4,035
|
|
|
$
|
99,134
|
|
|
$
|
206,784
|
|
|
$
|
72,883
|
|
|
$
|
11,538
|
|
|
$
|
291,205
|
|
Segment operating expenses
|
21,130
|
|
|
11,796
|
|
|
7,802
|
|
|
40,728
|
|
|
65,187
|
|
|
36,409
|
|
|
25,191
|
|
|
126,787
|
|
Segment operating income (loss)
|
$
|
47,657
|
|
|
$
|
14,516
|
|
|
$
|
(3,767
|
)
|
|
$
|
58,406
|
|
|
$
|
141,597
|
|
|
$
|
36,474
|
|
|
$
|
(13,653
|
)
|
|
$
|
164,418
|
|
Reconciling items
|
|
|
|
|
|
|
|
|
(41,396
|
)
|
|
|
|
|
|
|
|
|
|
(125,730
|
)
|
Operating income
|
|
|
|
|
|
|
|
|
$
|
17,010
|
|
|
|
|
|
|
|
|
|
|
$
|
38,688
|
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
(3,079
|
)
|
|
|
|
|
|
|
|
|
|
(9,263
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
$
|
13,931
|
|
|
|
|
|
|
|
|
|
|
$
|
29,425
|
|
The Company’s CODM does not review information regarding assets on an operating segment basis. Additionally, the Company does not record intersegment revenue or expense.
Accounts receivable from the Company's major customers representing 10% or more of total accounts receivable at
September 30, 2018
and
December 31, 2017
, respectively, was as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
Customer
|
|
September 30, 2018
|
|
December 31, 2017
|
Customer 1 (MID reportable segment)
|
|
12
|
%
|
|
*
|
|
Customer 2 (RSD reportable segment)
|
|
*
|
|
|
11
|
%
|
Customer 3 (Other segment)
|
|
*
|
|
|
12
|
%
|
Customer 4 (MID and RSD reportable segment)
|
|
*
|
|
|
13
|
%
|
Customer 5 (MID and RSD reportable segment)
|
|
43
|
%
|
|
*
|
|
_________________________________________
* Customer accounted for less than 10% of total accounts receivable in the period
Revenue from the Company’s major customers representing 10% or more of total revenue for the
three and nine
months ended
September 30, 2018
and
2017
, respectively, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Customer
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Customer A (MID and RSD reportable segments)
|
|
*
|
|
|
18
|
%
|
|
*
|
|
|
17
|
%
|
Customer B (MID reportable segment)
|
|
*
|
|
|
12
|
%
|
|
*
|
|
|
13
|
%
|
Customer C (MID reportable segment)
|
|
*
|
|
|
13
|
%
|
|
*
|
|
|
13
|
%
|
Customer D (MID reportable segment)
|
|
13
|
%
|
|
*
|
|
|
*
|
|
|
*
|
|
Customer E (MID and RSD reportable segments)
|
|
*
|
|
|
*
|
|
|
11
|
%
|
|
*
|
|
Customer F (MID and RSD reportable segments)
|
|
34
|
%
|
|
*
|
|
|
13
|
%
|
|
*
|
|
_________________________________________
* Customer accounted for less than 10% of total revenue in the period
Revenue from customers in the geographic regions based on the location of contracting parties was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Taiwan
|
|
$
|
3,962
|
|
|
$
|
1,392
|
|
|
$
|
20,419
|
|
|
$
|
7,410
|
|
South Korea
|
|
388
|
|
|
29,476
|
|
|
10,656
|
|
|
86,736
|
|
USA
|
|
37,899
|
|
|
43,532
|
|
|
78,983
|
|
|
123,115
|
|
Japan
|
|
3,889
|
|
|
4,933
|
|
|
20,201
|
|
|
18,508
|
|
Europe
|
|
4,156
|
|
|
9,160
|
|
|
11,628
|
|
|
17,850
|
|
Canada
|
|
820
|
|
|
933
|
|
|
4,115
|
|
|
3,353
|
|
Singapore
|
|
7,953
|
|
|
4,927
|
|
|
14,103
|
|
|
17,563
|
|
Asia-Other
|
|
687
|
|
|
4,781
|
|
|
2,533
|
|
|
16,670
|
|
Total
|
|
$
|
59,754
|
|
|
$
|
99,134
|
|
|
$
|
162,638
|
|
|
$
|
291,205
|
|
7. Marketable Securities
Rambus invests its excess cash and cash equivalents primarily in U.S. government-sponsored obligations, commercial paper, corporate notes and bonds, money market funds and municipal notes and bonds that mature within
three
years. As of
September 30, 2018
and
December 31, 2017
, all of the Company’s cash equivalents and marketable securities had a remaining maturity of less than
one year
.
All cash equivalents and marketable securities are classified as available-for-sale. Total cash, cash equivalents and marketable securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
(In thousands)
|
|
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Weighted
Rate of
Return
|
Money market funds
|
|
$
|
10,838
|
|
|
$
|
10,838
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1.95
|
%
|
U.S. Government bonds and notes
|
|
24,989
|
|
|
24,990
|
|
|
—
|
|
|
(1
|
)
|
|
1.86
|
%
|
Corporate notes, bonds, commercial paper and other
|
|
163,929
|
|
|
164,024
|
|
|
—
|
|
|
(95
|
)
|
|
2.16
|
%
|
Total cash equivalents and marketable securities
|
|
199,756
|
|
|
199,852
|
|
|
—
|
|
|
(96
|
)
|
|
|
|
Cash
|
|
48,415
|
|
|
48,415
|
|
|
—
|
|
|
—
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
248,171
|
|
|
$
|
248,267
|
|
|
$
|
—
|
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
(In thousands)
|
|
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Weighted
Rate of
Return
|
Money market funds
|
|
$
|
10,915
|
|
|
$
|
10,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1.16
|
%
|
U.S. Government bonds and notes
|
|
55,220
|
|
|
55,221
|
|
|
—
|
|
|
(1
|
)
|
|
1.12
|
%
|
Corporate notes, bonds, commercial paper and other
|
|
195,073
|
|
|
195,204
|
|
|
—
|
|
|
(131
|
)
|
|
1.39
|
%
|
Total cash equivalents and marketable securities
|
|
261,208
|
|
|
261,340
|
|
|
—
|
|
|
(132
|
)
|
|
|
|
Cash
|
|
68,168
|
|
|
68,168
|
|
|
—
|
|
|
—
|
|
|
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
329,376
|
|
|
$
|
329,508
|
|
|
$
|
—
|
|
|
$
|
(132
|
)
|
|
|
|
Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30,
2018
|
|
December 31,
2017
|
|
(In thousands)
|
Cash equivalents
|
$
|
86,119
|
|
|
$
|
157,676
|
|
Short term marketable securities
|
113,637
|
|
|
103,532
|
|
Total cash equivalents and marketable securities
|
199,756
|
|
|
261,208
|
|
Cash
|
48,415
|
|
|
68,168
|
|
Total cash, cash equivalents and marketable securities
|
$
|
248,171
|
|
|
$
|
329,376
|
|
The Company continues to invest in highly rated quality, highly liquid debt securities. As of
September 30, 2018
, these securities have a remaining maturity of less than one year. The Company holds all of its marketable securities as available-for-sale, marks them to market, and regularly reviews its portfolio to ensure adherence to its investment policy and to monitor individual investments for risk analysis, proper valuation, and unrealized losses that may be other than temporary.
The estimated fair value of cash equivalents and marketable securities classified by the length of time that the securities have been in a continuous unrealized loss position at
September 30, 2018
and
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Gross Unrealized Loss
|
|
September 30,
2018
|
|
December 31,
2017
|
|
September 30,
2018
|
|
December 31,
2017
|
|
(In thousands)
|
Less than one year
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government bonds and notes
|
$
|
24,989
|
|
|
$
|
42,581
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Corporate notes, bonds and commercial paper
|
163,929
|
|
|
194,015
|
|
|
(95
|
)
|
|
(131
|
)
|
Total Corporate notes, bonds, and commercial paper and U.S. Government bonds and notes
|
$
|
188,918
|
|
|
$
|
236,596
|
|
|
$
|
(96
|
)
|
|
$
|
(132
|
)
|
The gross unrealized loss at
September 30, 2018
and
December 31, 2017
was not material in relation to the Company’s total available-for-sale portfolio. The gross unrealized loss can be primarily attributed to a combination of market conditions as well as the demand for and duration of the U.S. government-sponsored obligations and corporate notes and bonds. There is no need to sell these investments, and the Company believes that it can recover the amortized cost of these investments. The Company has found no evidence of impairment due to credit losses in its portfolio. Therefore, these unrealized losses were recorded in other comprehensive income. However, the Company cannot provide any assurance that its portfolio of cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require the Company in the future to record an impairment charge for credit losses which could adversely impact its financial results.
See Note 8, “Fair Value of Financial Instruments,” for discussion regarding the fair value of the Company’s cash equivalents and marketable securities.
8. Fair Value of Financial Instruments
The following table presents the financial instruments that are carried at fair value and summarizes the valuation of its cash equivalents and marketable securities by the above pricing levels as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
Total
|
|
Quoted
Market
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In thousands)
|
Money market funds
|
$
|
10,838
|
|
|
$
|
10,838
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Government bonds and notes
|
24,989
|
|
|
—
|
|
|
24,989
|
|
|
—
|
|
Corporate notes, bonds, commercial paper and other
|
163,929
|
|
|
—
|
|
|
163,929
|
|
|
—
|
|
Total available-for-sale securities
|
$
|
199,756
|
|
|
$
|
10,838
|
|
|
$
|
188,918
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Total
|
|
Quoted
Market
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In thousands)
|
Money market funds
|
$
|
10,915
|
|
|
$
|
10,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Government bonds and notes
|
55,220
|
|
|
—
|
|
|
55,220
|
|
|
—
|
|
Corporate notes, bonds, commercial paper and other
|
195,073
|
|
|
1,058
|
|
|
194,015
|
|
|
—
|
|
Total available-for-sale securities
|
$
|
261,208
|
|
|
$
|
11,973
|
|
|
$
|
249,235
|
|
|
$
|
—
|
|
The Company monitors its investments for other-than-temporary impairment and records appropriate reductions in carrying value when necessary. The Company monitors its investments for other-than-temporary losses by considering current factors, including the economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, reductions in carrying values when necessary and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in the market. Any other-than-temporary loss is reported under “Interest and other income (expense), net” in the condensed consolidated statement of operations.
For the
three and nine
months ended
September 30, 2018
and
2017
, there were no transfers of financial instruments between different categories of fair value.
The following table presents the financial instruments that are not carried at fair value but require fair value disclosure as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
As of December 31, 2017
|
(In thousands)
|
|
Face
Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Face
Value
|
|
Carrying
Value
|
|
Fair Value
|
1.375% Convertible Senior Notes due 2023 (the "2023 Notes")
|
|
$
|
172,500
|
|
|
$
|
140,279
|
|
|
$
|
155,897
|
|
|
$
|
172,500
|
|
|
$
|
135,447
|
|
|
$
|
173,450
|
|
1.125% Convertible Senior Notes due 2018 (the "2018 Notes")
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
81,207
|
|
|
$
|
78,451
|
|
|
$
|
100,802
|
|
The fair value of the convertible notes at each balance sheet date is determined based on recent quoted market prices for these notes which is a level 2 measurement. As discussed in Note 9, "Convertible Notes," as of
September 30, 2018
, the 2023 Notes are carried at their aggregate face value of
$172.5 million
, less any unamortized debt discount and unamortized debt issuance costs. The carrying value of other financial instruments, including accounts receivable, accounts payable and other liabilities, approximates fair value due to their short maturities.
9. Convertible Notes
The Company’s convertible notes are shown in the following table:
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of September 30, 2018
|
|
As of December 31, 2017
|
2023 Notes
|
$
|
172,500
|
|
|
$
|
172,500
|
|
2018 Notes
|
—
|
|
|
81,207
|
|
Total principal amount of convertible notes
|
$
|
172,500
|
|
|
$
|
253,707
|
|
Unamortized discount - 2023 Notes
|
(30,048
|
)
|
|
(34,506
|
)
|
Unamortized discount - 2018 Notes
|
—
|
|
|
(2,547
|
)
|
Unamortized debt issuance costs - 2023 Notes
|
(2,173
|
)
|
|
(2,547
|
)
|
Unamortized debt issuance costs - 2018 Notes
|
—
|
|
|
(209
|
)
|
Total convertible notes
|
$
|
140,279
|
|
|
$
|
213,898
|
|
Less current portion
|
—
|
|
|
78,451
|
|
Total long-term convertible notes
|
$
|
140,279
|
|
|
$
|
135,447
|
|
During the third quarter of 2018, the Company paid upon maturity the remaining
$81.2 million
in aggregate principal amount of the 2018 Notes. Additionally, the Company delivered
423,873
shares of the Company's common stock as settlement related to the in-the-money conversion feature of the 2018 Notes at maturity. The value of the shares delivered was approximately
$5.0 million
.
Interest expense related to the notes for the
three and nine
months ended
September 30, 2018
and
2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(In thousands)
|
2023 Notes coupon interest at a rate of 1.375%
|
$
|
593
|
|
|
$
|
—
|
|
|
$
|
1,779
|
|
|
$
|
—
|
|
2023 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 4.9%
|
1,632
|
|
|
—
|
|
|
4,831
|
|
|
—
|
|
2018 Notes coupon interest at a rate of 1.125%
|
96
|
|
|
388
|
|
|
377
|
|
|
1,164
|
|
2018 Notes amortization of discount and debt issuance costs at an additional effective interest rate of 5.5%
|
559
|
|
|
1,801
|
|
|
2,756
|
|
|
5,324
|
|
Total interest expense on convertible notes
|
$
|
2,880
|
|
|
$
|
2,189
|
|
|
$
|
9,743
|
|
|
$
|
6,488
|
|
10. Commitments and Contingencies
As of
September 30, 2018
, the Company’s material contractual obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Remainder
of 2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
Contractual obligations (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Imputed financing obligation (2)
|
$
|
11,102
|
|
|
$
|
1,631
|
|
|
$
|
6,602
|
|
|
$
|
2,869
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Leases and other contractual obligations
|
23,844
|
|
|
4,932
|
|
|
5,518
|
|
|
4,558
|
|
|
4,683
|
|
|
3,291
|
|
|
862
|
|
Software licenses (3)
|
6,324
|
|
|
2,792
|
|
|
3,532
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Convertible notes
|
172,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
172,500
|
|
Interest payments related to convertible notes
|
10,680
|
|
|
—
|
|
|
2,372
|
|
|
2,372
|
|
|
2,372
|
|
|
2,372
|
|
|
1,192
|
|
Total
|
$
|
224,450
|
|
|
$
|
9,355
|
|
|
$
|
18,024
|
|
|
$
|
9,799
|
|
|
$
|
7,055
|
|
|
$
|
5,663
|
|
|
$
|
174,554
|
|
_________________________________________
|
|
(1)
|
The above table does not reflect possible payments in connection with uncertain tax benefits of approximately
$23.7 million
including
$21.6 million
recorded as a reduction of long-term deferred tax assets and
$2.1 million
in long-term income taxes payable as of
September 30, 2018
. As noted below in Note 13, “Income Taxes,” although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
|
|
|
(2)
|
With respect to the imputed financing obligation, the main components of the difference between the amount reflected in the contractual obligations table and the amount reflected on the unaudited condensed consolidated balance sheets are the interest on the imputed financing obligation and the estimated common area expenses over the future periods. The amount includes the amended Ohio lease and the amended Sunnyvale lease.
|
|
|
(3)
|
The Company has commitments with various software vendors for agreements generally having terms longer than
one
year.
|
Building lease expense was approximately
$1.3 million
and
$3.8 million
for the
three and nine
months ended
September 30, 2018
, respectively. Building lease expense was approximately
$1.2 million
and
$3.2 million
for the
three and nine
months ended
September 30, 2017
, respectively. Deferred rent of
$1.5 million
and
$0.5 million
as of
September 30, 2018
and
December 31, 2017
, respectively, was included in other liabilities.
Indemnification
From time to time, the Company indemnifies certain customers as a necessary means of doing business. Indemnification covers customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement or any other claim by any third party arising as result of the applicable agreement with the Company. The Company generally attempts to limit the maximum amount of indemnification or liability that the Company could be exposed to under these agreements, however, this is not always possible. The fair value of the liability as of
September 30, 2018
and
December 31, 2017
is not material.
11. Equity Incentive Plans and Stock-Based Compensation
As of
September 30, 2018
,
10,076,069
shares of the
35,400,000
cumulative shares approved under both the current 2015 Equity Incentive Plan (the “2015 Plan”) and past 2006 Equity Incentive Plan (the “2006 Plan”) remain available for grant, which included an increase of
4,000,000
shares approved under the 2015 Plan. On April 23, 2015, the Company's stockholders approved the 2015 Plan, which authorizes
4,000,000
shares for future issuance plus the number of shares that remained available for grant under the 2006 Plan as of the effective date of the 2015 Plan. The 2015 Plan became effective and replaced the 2006 Plan on April 23, 2015. The 2015 Plan was the Company’s only plan for providing stock-based incentive awards to eligible employees, executive officers, non-employee directors and consultants as of
September 30, 2018
. No further awards will be made under the 2006 Plan, but the 2006 Plan will continue to govern awards previously granted under it. In addition, any shares subject to stock options or other awards granted under the 2006 Plan that on or after the effective date of the 2015 Plan are forfeited, cancelled, exchanged or surrendered or terminate under the 2006 Plan will become available for grant under the 2015 Plan. Also, on April 26, 2018, the Company's stockholders approved an additional
5,500,000
shares for issuance under the 2015 Plan.
A summary of shares available for grant under the Company’s plans is as follows:
|
|
|
|
|
Shares Available
for Grant
|
Shares available as of December 31, 2017
|
5,051,147
|
|
Increase in shares approved for issuance
|
5,500,000
|
|
Stock options granted
|
(711,479
|
)
|
Stock options forfeited
|
875,417
|
|
Nonvested equity stock and stock units granted (1) (2)
|
(4,630,283
|
)
|
Nonvested equity stock and stock units forfeited (1)
|
3,991,267
|
|
Total available for grant as of September 30, 2018
|
10,076,069
|
|
_________________________________________
|
|
(1)
|
For purposes of determining the number of shares available for grant under the 2015 Plan against the maximum number of shares authorized, each share of restricted stock granted reduces the number of shares available for grant by
1.5
shares and each share of restricted stock forfeited increases shares available for grant by
1.5
shares.
|
|
|
(2)
|
Amount includes
525,965
shares that have been reserved for potential future issuance related to certain performance unit awards granted in the first quarter of 2018 and discussed under the section titled "Nonvested Equity Stock and Stock Units" below.
|
General Stock Option Information
The following table summarizes stock option activity under the 2006 Plan and 2015 Plan for the
nine
months ended
September 30, 2018
and information regarding stock options outstanding, exercisable, and vested and expected to vest as of
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
|
(In thousands, except per share amounts)
|
Outstanding as of December 31, 2017
|
4,310,361
|
|
|
$
|
9.78
|
|
|
|
|
|
|
Options granted
|
711,479
|
|
|
$
|
12.84
|
|
|
|
|
|
|
Options exercised
|
(877,436
|
)
|
|
$
|
6.71
|
|
|
|
|
|
|
Options forfeited
|
(875,417
|
)
|
|
$
|
13.73
|
|
|
|
|
|
|
Outstanding as of September 30, 2018
|
3,268,987
|
|
|
$
|
10.21
|
|
|
4.25
|
|
$
|
6,220
|
|
Vested or expected to vest at September 30, 2018
|
3,232,308
|
|
|
$
|
10.19
|
|
|
4.20
|
|
$
|
6,220
|
|
Options exercisable at September 30, 2018
|
2,625,887
|
|
|
$
|
9.61
|
|
|
3.11
|
|
$
|
6,220
|
|
No stock options that contain a market condition were granted during the
three and nine
months ended
September 30, 2018
and
2017
. As of
September 30, 2018
and
December 31, 2017
, there were no stock options outstanding that require the Company to achieve minimum market conditions in order for the options to become exercisable.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at
September 30, 2018
, based on the
$10.91
closing stock price of Rambus’ common stock on September 28, 2018 on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of
September 30, 2018
was
1,611,633
and
1,611,633
, respectively.
Employee Stock Purchase Plan
Under the 2015 Employee Stock Purchase Plan ("2015 ESPP"), the Company issued
297,497
shares at a price of
$11.66
per share during the
nine
months ended
September 30, 2018
. Under the 2015 ESPP, the Company issued
361,994
shares at a price of
$10.33
per share during the
nine
months ended
September 30, 2017
. On April 26, 2018, the Company's stockholders
approved an additional
2,000,000
shares to be reserved for issuance under the 2015 ESPP. As of
September 30, 2018
,
2,538,776
shares under the 2015 ESPP remain available for issuance.
Stock-Based Compensation
For the
nine
months ended
September 30, 2018
and
2017
, the Company maintained stock plans covering a broad range of potential equity grants including stock options, nonvested equity stock and equity stock units and performance based instruments. During the second quarter of 2018, the Company's former chief executive officer was terminated which resulted in a reversal of stock-based compensation expense of
$5.8 million
during the period as he did not vest any of the awards, which were primarily related to performance unit awards and nonvested equity stock units. In addition, the Company sponsors the 2015 ESPP, whereby eligible employees are entitled to purchase common stock semi-annually, by means of limited payroll deductions, at a
15%
discount from the fair market value of the common stock as of specific dates.
Stock Options
During the three months ended
September 30, 2018
, the Company granted
90,000
stock options with an estimated grant-date fair value of
$0.4 million
. During the
nine
months ended
September 30, 2018
, the Company granted
711,479
stock options with an estimated total grant-date fair value of
$3.0 million
. During the
three and nine
months ended
September 30, 2018
, the Company recorded stock-based compensation expense related to stock options of
$0.4 million
and
$1.4 million
, respectively.
During the three months ended
September 30, 2017
, the Company did not grant any stock options. During the nine months ended
September 30, 2017
, the Company granted
498,426
stock options with an estimated grant-date fair value of
$2.1 million
. During the
three and nine
months ended
September 30, 2017
, the Company recorded stock-based compensation expense related to stock options of
$0.7 million
and
$2.1 million
, respectively.
As of
September 30, 2018
, there was
$4.4 million
of total unrecognized compensation cost, net of expected forfeitures, related to non-vested stock-based compensation arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of
2.9
years. The total fair value of shares vested as of
September 30, 2018
was
$12.8 million
.
The total intrinsic value of options exercised was
$3.2 million
and
$5.3 million
for the
three and nine
months ended
September 30, 2018
, respectively. The total intrinsic value of options exercised was
$1.9 million
and
$5.7 million
for the
three and nine
months ended
September 30, 2017
, respectively. Intrinsic value is the total value of exercised shares based on the price of the Company’s common stock at the time of exercise less the cash received from the employees to exercise the options.
During the
nine
months ended
September 30, 2018
, net proceeds from employee stock option exercises totaled approximately
$5.9 million
.
Employee Stock Purchase Plan
For the
three and nine
months ended
September 30, 2018
, the Company recorded compensation expense related to the 2015 ESPP of
$0.3 million
and
$1.1 million
, respectively. For the
three and nine
months ended
September 30, 2017
, the Company recorded compensation expense related to the 2015 ESPP of
$0.4 million
and
$1.3 million
, respectively. As of
September 30, 2018
, there was
$0.1 million
of total unrecognized compensation cost related to stock-based compensation arrangements granted under the 2015 ESPP. That cost is expected to be recognized over
one
month.
No tax benefits were realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the three months ended
September 30, 2018
calculated in accordance with accounting for share-based payments due to the Company's full U.S. valuation allowance. For the nine months ended
September 30, 2018
, there were
$0.3 million
in tax benefits calculated in accordance with accounting for share-based payments which were realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units. Tax benefits realized as a result of employee stock option exercises, stock purchase plan purchases, and vesting of equity stock and stock units for the
three and nine
months ended
September 30, 2017
were
$0.2 million
and
$0.8 million
, respectively.
Valuation Assumptions
The fair value of stock awards is estimated as of the grant date using the Black-Scholes-Merton (“BSM”) option-pricing model assuming a dividend yield of
0%
and the additional weighted-average assumptions as listed in the table below.
The following table presents the weighted-average assumptions used to estimate the fair value of stock options granted that contain only service conditions in the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plan
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2018
|
|
2017
|
Stock Option Plan
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
32
|
%
|
|
24% - 32%
|
|
|
32
|
%
|
Risk free interest rate
|
2.8
|
%
|
|
2.6% - 2.8%
|
|
|
1.8% - 1.9%
|
|
Expected term (in years)
|
5.8
|
|
|
5.8
|
|
|
5.3 - 5.4
|
|
Weighted-average fair value of stock options granted to employees
|
$
|
4.34
|
|
|
$
|
4.23
|
|
|
$
|
4.12
|
|
There were no stock options granted during the three months ended
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
|
|
Nine Months Ended
|
|
September 30,
|
|
2018
|
|
2017
|
Employee Stock Purchase Plan
|
|
|
|
|
|
Expected stock price volatility
|
27
|
%
|
|
27
|
%
|
Risk free interest rate
|
2.05
|
%
|
|
0.98
|
%
|
Expected term (in years)
|
0.5
|
|
|
0.5
|
|
Weighted-average fair value of purchase rights granted under the purchase plan
|
$
|
3.14
|
|
|
$
|
2.87
|
|
Nonvested Equity Stock and Stock Units
The Company grants nonvested equity stock units to officers, employees and directors. During the
three and nine
months ended
September 30, 2018
, the Company granted nonvested equity stock units totaling
333,909
and
2,736,212
shares under the 2015 Plan, respectively. During the
three and nine
months ended
September 30, 2017
, the Company granted nonvested equity stock units totaling
463,346
and
2,654,508
shares under the 2015 Plan. These awards have a service condition, generally a service period of
four years
, except in the case of grants to directors, for which the service period is
1 year
. For the
three and nine
months ended
September 30, 2018
, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately
$4.1 million
and
$35.6 million
, respectively. For the
three and nine
months ended
September 30, 2017
, the nonvested equity stock units were valued at the date of grant giving them a fair value of approximately
$6.0 million
and
$34.1 million
, respectively. During the first quarters of 2018 and 2017, the Company granted performance unit awards to certain Company executive officers with vesting subject to the achievement of certain performance conditions. The ultimate number of performance units that can be earned can range from
0%
to
200%
of target depending on performance relative to target over the applicable period. The shares earned will vest on the third anniversary of the date of grant. The Company's shares available for grant have been reduced to reflect the shares that could be earned at the maximum target.
During the
three and nine
months ended
September 30, 2018
, the Company recorded expense of
$0.5 million
and a net reversal of
$2.1 million
, respectively, of stock-based compensation expense related to all outstanding nonvested performance unit awards. The net reversal was primarily due to the termination of the Company's former chief executive officer during the second quarter of 2018. During the
three and nine
months ended
September 30, 2017
, the Company recorded
$1.2 million
and
$3.1 million
, respectively, of stock-based compensation expense related to all outstanding nonvested performance unit awards.
For the
three and nine
months ended
September 30, 2018
, the Company recorded stock-based compensation expense of approximately
$5.5 million
and
$13.0 million
, respectively, related to all outstanding nonvested equity stock grants. For the
three and nine
months ended
September 30, 2017
, the Company recorded stock-based compensation expense of approximately
$5.9 million
and
$16.7 million
, respectively, related to all outstanding nonvested equity stock grants. Unrecognized stock-based compensation related to all nonvested equity stock grants, net of estimated forfeitures, was approximately
$40.0 million
at
September 30, 2018
. This amount is expected to be recognized over a weighted average period of
2.5 years
.
The following table reflects the activity related to nonvested equity stock and stock units for the
nine
months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
Nonvested Equity Stock and Stock Units
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Nonvested at December 31, 2017
|
|
5,861,349
|
|
|
$
|
12.68
|
|
Granted
|
|
2,736,212
|
|
|
$
|
13.00
|
|
Vested
|
|
(1,381,795
|
)
|
|
$
|
12.36
|
|
Forfeited
|
|
(2,027,435
|
)
|
|
$
|
12.97
|
|
Nonvested at September 30, 2018
|
|
5,188,331
|
|
|
$
|
12.83
|
|
12.
Stockholders’ Equity
Share Repurchase Program
During the
nine
months ended
September 30, 2018
, the Company repurchased shares of its common stock under its share repurchase program as discussed below.
On January 21, 2015, the Company's Board approved a share repurchase program authorizing the repurchase of up to an aggregate of
20.0 million
shares. Share repurchases under the plan may be made through the open market, established plans or privately negotiated transactions in accordance with all applicable securities laws, rules, and regulations. There is no expiration date applicable to the plan.
On March 5, 2018, the Company initiated an accelerated share repurchase program with Citibank N.A. The accelerated share repurchase program is part of the broader share repurchase program previously authorized by the Company's Board on January 21, 2015. Under the accelerated share repurchase program, the Company pre-paid to Citibank N.A., the
$50.0 million
purchase price for its common stock and, in turn, the Company received an initial delivery of approximately
3.1 million
shares of its common stock from Citibank N.A., in the first quarter of 2018, which were retired and recorded as a
$40.0 million
reduction to stockholders' equity. The remaining
$10.0 million
of the initial payment was recorded as a reduction to stockholders’ equity as an unsettled forward contract indexed to the Company's stock. During the second quarter of 2018, the accelerated share repurchase program was completed and the Company received an additional
0.7 million
shares of its common stock as the final settlement of the accelerated share repurchase program.
As of
September 30, 2018
, there remained an outstanding authorization to repurchase approximately
3.6 million
shares of the Company's outstanding common stock under the current share repurchase program.
The Company records stock repurchases as a reduction to stockholders’ equity. The Company records a portion of the purchase price of the repurchased shares as an increase to accumulated deficit when the price of the shares repurchased exceeds the average original proceeds per share received from the issuance of common stock. During the
nine
months ended
September 30, 2018
, the cumulative price of
$37.5 million
was recorded as an increase to accumulated deficit.
13. Income Taxes
On December 22, 2017, the “Tax Cuts & Jobs Act” (hereafter referred to as “U.S. tax reform”) was signed into law and is effective for the Company starting in the quarter ended December 31, 2017. The TCJA provides for numerous significant tax law changes and modifications including the reduction of the U.S. federal corporate income tax rate from 35% to 21%, the requirement for companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and the creation of new taxes on certain foreign-sourced earnings. The impact on income taxes due to change in legislation is required under the authoritative guidance of Accounting Standards Codification (“ASC”) 740, Income Taxes, to be recognized in the period in which the law is enacted.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows the Company to record provisional amounts for the Tax Act during a measurement period not to extend beyond one year of the enactment date. The Company has recorded material provisional tax effects in the period of enactment due to the change in legislation. For the three months ended September 30, 2018, the Company did not have significant adjustments to its provisional amounts previously recognized. The Company expects that the provisions of the
Tax Act will be clarified by additional analysis and regulatory guidance. The Company will continue its analysis of these provisional amounts, which are still subject to change during the measurement period, and the Company anticipates further guidance on accounting interpretations from the FASB and application of the law from the Department of the Treasury.
With respect to the GILTI provisions specific, the 2017 Tax Act allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the entity is subject to the rules or (ii) account for GILTI in the entity’s measurement of deferred taxes. The Company's selection of an accounting policy will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, the impact that is expected. As there is still factual uncertainty around the future GILTI profile of the Company, the Company is not yet able to make its accounting policy election. Therefore, the Company has not recorded any deferred tax effects related to GILTI for the nine months ended September 30, 2018.
The Company recorded a provision for income taxes of
$89.8 million
and
$6.2 million
for the three months ended
September 30, 2018
and
2017
, respectively, and
$85.5 million
and
$16.1 million
for the
nine
months ended
September 30, 2018
and
2017
, respectively. The provision for income taxes for the three and nine months ended
September 30, 2018
was primarily comprised of the valuation allowance recorded on U.S. deferred tax assets. The income taxes for the
three and nine
months ended September 30, 2017 was primarily comprised of the Company's U.S. federal, state and foreign taxes and income tax expense recognized from exercises and expiration of out-of-the-money fully vested shares from equity incentive plans.
During the
three and nine
months ended
September 30, 2018
, the Company paid withholding taxes of
$5.1 million
and
$16.2 million
, respectively. During the
three and nine
months ended
September 30, 2017
, the Company paid withholding taxes of
$4.7 million
and
$15.6 million
, respectively.
As of
September 30, 2018
, the Company’s unaudited condensed consolidated balance sheets included net deferred tax assets, before valuation allowance, of approximately
$152.3 million
, which consists of net operating loss carryovers, tax credit carryovers, amortization, employee stock-based compensation expenses and certain liabilities.
The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. During the third quarter of 2018, the Company assessed the changes in its underlying facts and circumstances and evaluated the realizability of its existing deferred tax assets based on all available evidence, both positive and negative, and the weight accorded to each, and concluded a full valuation allowance associated with U.S. federal and state deferred tax assets was appropriate. The basis for this conclusion was derived primarily from the fact that the Company completed its forecasting process during the third quarter of 2018. At a domestic level, losses are expected in future periods in part due to the impact of the adoption of ASC 606. In addition, the decrease in the U.S. federal tax rate from 35% to 21% as a result of U.S. tax reform has further reduced the Company's ability to utilize its deferred tax assets. In light of the above factors, the Company concluded that it is not more likely than not that it can realize its U.S. deferred tax assets. As such, during the third quarter of 2018, the Company recorded an additional valuation allowance of
$87.2 million
through the consolidated financial statements, which represents a full valuation allowance against its U.S. federal and state deferred tax assets.
The Company has U.S. federal deferred tax assets related to research and development credits, foreign tax credits and other tax attributes that can be used to offset federal taxable income in future periods. These credit carryforwards will expire if they are not used within certain time periods. It is possible that some or all of these attributes could ultimately expire unused.
As of
September 30, 2018
, the Company has a total valuation allowance of
$165.1 million
on U.S. federal, state and foreign deferred tax assets, resulting in net deferred tax liability of
$12.8 million
.
The Company maintains liabilities for uncertain tax positions within its long-term income taxes payable accounts and as a reduction to existing deferred tax assets to the extent tax attributes are available to offset such liabilities. These liabilities involve judgment and estimation and are monitored by management based on the best information available including changes in tax regulations, the outcome of relevant court cases and other information.
As of
September 30, 2018
, the Company had approximately
$23.7 million
of unrecognized tax benefits, including
$21.6 million
recorded as a reduction of long-term deferred tax assets and
$2.1 million
in long-term income taxes payable. If recognized, approximately
$2.1 million
would be recorded as an income tax benefit. As of
December 31, 2017
, the Company had
$22.6 million
of unrecognized tax benefits, including
$20.4 million
recorded as a reduction of long-term deferred tax assets and
$2.2 million
recorded in long-term income taxes payable.
Although it is possible that some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.
The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. At
September 30, 2018
and
December 31, 2017
, an immaterial amount of interest and penalties is included in long-term income taxes payable.
Rambus files income tax returns for the U.S., California, India, the U.K., the Netherlands and various other state and foreign jurisdictions. The U.S. federal returns are subject to examination from 2014 and forward. The California returns are subject to examination from 2010 and forward. In addition, any research and development credit carryforward or net operating loss carryforward generated in prior years and utilized in these or future years may also be subject to examination. The India returns are subject to examination from fiscal year ending March 2012 and forward. The Company is currently under examination by the IRS for the 2015 tax year and California for the 2010 and 2011 tax years. The Company’s India subsidiary is under examination by the Indian tax administration for tax years beginning with 2011, except for 2014, which was assessed in the Company's favor. The Company’s France subsidiary is under examination by the French tax agency for the 2013 to 2017 tax years. These examinations may result in proposed adjustments to the income taxes as filed during these periods. Management regularly assesses the likelihood of outcomes resulting from income tax examinations to determine the adequacy of their provision for income taxes and believes their provision for unrecognized tax benefits is adequate.
Additionally, the Company's future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the Company has higher statutory rates or lower than anticipated in countries where it has lower statutory rates, by changes in valuation of its deferred tax assets and liabilities or by changes in tax laws or interpretations of those laws.
14. Litigation and Asserted Claims
Rambus is not currently a party to any material pending legal proceeding; however, from time to time, Rambus may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial position or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management attention and resources and other factors.
The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies.
15. Restructuring Charges
The 2018 Plan
On January 30, 2018, the Company announced its plans to close its lighting division and manufacturing operations in Brecksville, Ohio ("the 2018 Plan"). The Company believes that such business is not core to its strategy and growth objectives. In connection therewith, the Company has terminated approximately
fifty
employees, and began the process to exit the facilities in Ohio and sell the related equipment. The Company expected to record restructuring charges of approximately
$2 million
to
$5 million
related to employee terminations and severance costs, and facility related costs. No additional charges were recorded by the Company during the three months ended
September 30, 2018
. During the nine months ended
September 30, 2018
, the Company recorded a net charge of
$2.2 million
, related primarily to the reduction in workforce, of which
$2.0 million
was related to the Other segment and
$0.2 million
was related to corporate support functions. The 2018 Plan is expected to be substantially completed by the end of 2018.
The following table summarizes the 2018 Plan restructuring activities during the nine months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Severance
and Related Benefits
|
|
Facilities and Other
|
|
Total
|
|
(In thousands)
|
Balance at December 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges
|
2,234
|
|
|
1,178
|
|
|
3,412
|
|
Payments
|
(2,055
|
)
|
|
(217
|
)
|
|
(2,272
|
)
|
Non-cash settlements
|
—
|
|
|
(670
|
)
|
*
|
(670
|
)
|
Balance at September 30, 2018
|
$
|
179
|
|
|
$
|
291
|
|
|
$
|
470
|
|
______________________________________
*The non-cash charge of $0.7 million is primarily related to the write down of fixed assets and inventory related to the Other segment.
The Company concluded that the closure of its lighting division did not meet the criteria for reporting in discontinued operations in accordance with ASC 360, "Property, Plant, and Equipment". Consequently, the lighting division's long-lived assets were reclassified as held for sale. As of September 30, 2018, the Company sold all property, plant and equipment from its lighting division reclassified as held for sale on the condensed consolidated balance sheets of approximately
$3.5 million
and recognized a gain on the disposal of the held for sale assets of approximately
$1.2 million
included in restructuring charges on the condensed consolidated statements of operations.