NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Unaudited Interim Financial Information
—The accompanying unaudited, condensed consolidated financial statements have been prepared according to the rules and regulations of the United States (the “U.S.”) Securities and Exchange Commission (the “SEC”) and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statement of comprehensive loss, condensed consolidated
statements
of stockholders' equity and condensed consolidated statements of cash flows of MACOM Technology Solutions Holdings, Inc. (“MACOM”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles we use for our annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The consolidated balance sheet at
September 28, 2018
is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our
September 28, 2018
consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended
September 28, 2018
filed with the SEC on
November 16, 2018
. We recommend that the financial statements included in this Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for our fiscal year ended
September 28, 2018
.
Principles of Consolidation—
We have
one
reportable segment, semiconductors and modules. The accompanying consolidated financial statements include our accounts and the accounts of our majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
We have a 52- or 53-week fiscal year ending on the Friday closest to the last day of September. The fiscal years 2019 and 2018 include 52 weeks. To offset the effect of holidays, for fiscal years in which there are 53 weeks, we include the extra week arising in such fiscal years in the first quarter.
Use of Estimates
—The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities during the reporting periods, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, we base estimates and assumptions on historical experience, currently available information and various other factors that management believes to be reasonable under the circumstances. Actual results may differ materially from these estimates and assumptions.
Revenue Recognition—
Substantially all of our revenue is derived from sales of high-performance radio frequency ("RF"), microwave, millimeterwave and lightwave semiconductor solutions into three primary markets: Telecom, Data Centers and Industrial and Defense ("I&D"). Revenue is recognized when a customer obtains control of products or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of Accounting Standards Codification ("ASC") 606,
Revenue from Contracts with Customers
, we perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy performance obligations. Sales, value add and other taxes collected on behalf of third parties are excluded from revenue. Our revenue arrangements do not contain significant financing components.
Contracts with our customers principally contain only one distinct performance obligation, which is the sale of products. However, due to multiple products potentially being sold on a single order, we are required to allocate consideration based on the estimated relative standalone selling prices of the promised products.
Periodically, we enter into non-product development and license contracts with certain customers. We generally recognize revenue from these contracts as services are provided based on the terms of the contract. Revenue is deferred for amounts billed or received prior to delivery of the services. Certain contracts may contain multiple performance obligations for which we allocate revenue to each performance obligation on a relative stand-alone selling price.
Our product revenue is recognized when the customer obtains control of the product or services, which generally occurs at a point in time, and is based on the contractual shipping terms of a contract. Non-product revenue is generally recognized over time. For each contract, the promise to transfer the control of the products or services, each of which is individually distinct, is considered to be the identified performance obligation. We provide an assurance type warranty which is not sold separately and does not
represent a separate performance obligation. Therefore, we account for such warranties under ASC 460,
Guarantees
, and the estimated costs of warranty claims are generally accrued as cost of revenue in the period the related revenue is recorded.
We have agreements with certain customers which may include certain rights of return and pricing programs, including returns for aged inventory, stock rotation and price protection which affect the transaction price. Sales to these customers and programs offered are in accordance with terms set forth in written agreements, which require us to assess the potential revenue effects of this variable consideration utilizing the expected value method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. As such, revenue on sales to customers that include rights of return and pricing programs are recorded net of estimated variable consideration, utilizing the expected value method based on historical sales data. We believe that the judgments and estimates we utilize are reasonable based upon current facts and circumstances, however utilizing different judgments and estimates could result in different amounts.
Practical Expedients and Elections
—
ASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of the reporting periods presented. The guidance provides certain practical expedients that limit this requirement and, therefore, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which we have the right to invoice for services performed. We have elected not to disclose the aggregate amount of transaction prices associated with unsatisfied or partially unsatisfied performance obligations for contracts where these criteria are met.
Our policy is to capitalize any incremental costs incurred to obtain a customer contract, only to the extent that the benefit associated with the costs is expected to be longer than one year. Capitalizable contract costs were not significant both at the date of adoption and as of
June 28, 2019
.
We account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. When shipping and handling costs are incurred after a customer obtains control of the products, we have elected to account for these as costs to fulfill the promise and not as a separate performance obligation. Shipping and handling costs associated with the distribution of products to customers are recorded in costs of revenue generally when the related product is shipped to the customer.
Recent Accounting Pronouncements
—Our Recent Accounting Pronouncements are described in the notes to our
September 28, 2018
consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended
September 28, 2018
.
Pronouncements Adopted in Fiscal Year 2019
We adopted Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers,
on September 29, 2018. The FASB subsequently issued several amendments and updates to the new revenue standard. We refer to ASU 2014-09 and its related ASUs as "ASC 606". We applied ASC 606 using the modified retrospective method and elected to apply this initial application of the standard only to contracts that are not completed at the date of initial application. We have analyzed this effect and found the adoption of the new guidance did not have a material impact on our consolidated financial statements as of the adoption date. The reported results for our fiscal year 2019 reflect the application of ASC 606 guidance while the reported results for our fiscal year 2018 were prepared under the guidance of ASC 605,
Revenue Recognition
.
We adopted ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities,
on September 29, 2018. In February 2018, the FASB issued further amendments to this guidance. This update made amendments to the guidance in GAAP on the classification and measurement of financial instruments. The new standard significantly revised an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amended certain disclosure requirements associated with the fair value of financial instruments. The adoption of this update did not have a material impact on our consolidated financial statements and related disclosures.
We adopted ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments,
on September 29, 2018. This update addressed debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The adoption of this update did not have a material impact on our consolidated financial statements and related disclosures.
We adopted ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory,
on September 29, 2018. This update amended the guidance on recognizing the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendment eliminated the exception for an intra entity transfer of an asset other than
inventory. The adoption of this updated standard did not have a material impact on our consolidated financial statements and related disclosures.
Pronouncements for Adoption in Subsequent Periods
In February 2016, the FASB issued ASU 2016-02,
Leases
("ASC 842"). The FASB subsequently issued several amendments and updates to the new leasing standard. The new standard increases transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASC 842, leases are classified as either operating or finance, based on criteria similar to current lease accounting, but without explicit bright lines. ASC 842 is effective for us as of September 28, 2019, and we intend to apply ASC 842 using the cumulative-effect adjustment on this date, with comparative periods presented in accordance with the previous guidance in ASC 840,
Leases
("ASC 840"). We intend to use certain targeted transitional approaches that are intended to provide relief in implementing the new standards. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases under ASC 840. We are currently evaluating the impact that the adoption of ASC 842 will have on our consolidated financial statements. This evaluation process includes reviewing all forms of leases and performing a completeness assessment over our lease population to identify any embedded leases with our vendors. We anticipate that due to this new accounting standard, we will recognize additional liabilities and corresponding assets related to our operating leases on our consolidated balance sheet.
2
. REVENUE
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by markets and geography, as we believe it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The following tables present our revenue disaggregated by markets and geography (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
6/28/2019
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|
6/29/2018
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|
6/28/2019
|
|
6/29/2018
|
Revenue by Market:
|
|
|
|
|
|
|
|
Industrial & Defense
|
$
|
46,809
|
|
|
$
|
48,399
|
|
|
$
|
154,563
|
|
|
$
|
132,994
|
|
Data Center
|
17,614
|
|
|
38,911
|
|
|
91,518
|
|
|
116,269
|
|
Telecom
|
43,883
|
|
|
50,562
|
|
|
141,379
|
|
|
169,947
|
|
Total
|
$
|
108,306
|
|
|
$
|
137,872
|
|
|
$
|
387,460
|
|
|
$
|
419,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
6/28/2019
|
|
6/29/2018
|
|
6/28/2019
|
|
6/29/2018
|
Revenue by Geographic Region:
|
|
|
|
|
|
|
|
United States
|
$
|
52,340
|
|
|
$
|
67,861
|
|
|
$
|
185,172
|
|
|
$
|
197,540
|
|
China
|
27,451
|
|
|
39,016
|
|
|
104,491
|
|
|
115,068
|
|
Asia Pacific, excluding China
(1)
|
16,371
|
|
|
17,795
|
|
|
60,384
|
|
|
64,028
|
|
Other Countries
(2)
|
12,144
|
|
|
13,200
|
|
|
37,413
|
|
|
42,574
|
|
Total
|
$
|
108,306
|
|
|
$
|
137,872
|
|
|
$
|
387,460
|
|
|
$
|
419,210
|
|
|
|
(1)
|
Asia Pacific represents Taiwan, Japan, Singapore, India, Thailand, South Korea, Australia, Malaysia, New Zealand and the Philippines.
|
|
|
(2)
|
No international country or region represented greater than 10% of the total revenue as of the dates presented, other than China and the Asia Pacific region as presented above.
|
Contract Balances
We record contract assets or contract liabilities depending on the timing of revenue recognition, billings and cash collections on a contract-by-contract basis. Our contract liabilities primarily relate to deferred revenue, including advance consideration received from customers for contracts prior to the transfer of control to the customer, and therefore revenue is recognized upon delivery of products and services.
The following table presents the changes in contract liabilities during the
nine months ended
June 28, 2019
(in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
September 28, 2018
|
|
$ Change
|
|
% Change
|
Contract liabilities
|
$
|
10,685
|
|
|
$
|
7,757
|
|
|
$
|
2,928
|
|
|
38
|
%
|
As of
June 28, 2019
, approximately
$8.3 million
of our contract liabilities were recorded as other long-term liabilities on our balance sheet with the remainder recorded as deferred revenue. The increase in contract liabilities during the
nine months ended
June 28, 2019
was primarily from the deferral of revenue for funds received prior to when certain of our customers obtain control of the product or services, partially offset by the March 29, 2019 recognition of
$7.0 million
associated with a license contract.
During the
three and nine months ended
June 28, 2019
, we recognized the following net sales as a result of changes in the contract liabilities balance (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 28, 2019
|
|
June 28, 2019
|
Net revenue recognized in the period from:
|
|
|
|
Amounts included in contract liabilities at the beginning of the period
|
$
|
59
|
|
|
$
|
7,640
|
|
3
. DIVESTED BUSINESS AND DISCONTINUED OPERATIONS
Divested Business
On May 10, 2018, we completed the sale and transfer of certain assets associated with our Japan-based long-range optical subassembly business (the “LR4 Business”), pursuant to an Asset Purchase and Intellectual Property License Agreement, dated April 30, 2018 (the “LR4 Agreement”). The LR4 Agreement provided that the buyer would pay us
$5.0 million
within 30 days following the closing of the transactions contemplated by the LR4 Agreement, provide us with the opportunity to supply components and pay us further amounts to be determined for inventory and fixed assets within 60 days of receipt of required Chinese government approvals. As of September 28, 2018,
$7.4 million
had been recorded as other current assets and
$4.8 million
had been recorded as assets held for sale, as the assets had not been transferred to the buyer as of September 28, 2018.
As a result of the transaction, during fiscal year 2018 we recorded a loss on disposal of
$34.3 million
associated with the LR4 Business as other expense, comprised of expected proceeds of
$17.2 million
, subject to receipt of required Chinese government approvals, less the carrying value of assets sold, primarily including customer relationship intangible assets of
$27.7 million
, inventory of
$13.7 million
, fixed assets of
$7.6 million
and goodwill of
$2.6 million
. The transaction did not meet the criteria of discontinued operations. We also entered into a transition services agreement (the "LR4 TSA") with the buyer, pursuant to which we agreed to incur up to
$2.0 million
of operating expenses for certain ongoing administrative services to support the buyer for up to six months after the closing of the transaction. During the
three and nine months ended
June 28, 2019
, we have incurred
no
expenses associated with the LR4 TSA. During the three and nine months ended June 29, 2018, we incurred
$0.4 million
of expenses associated with the LR4 TSA.
As of June 28, 2019, we have
$14.0 million
of receivables, net of a
$0.3 million
reserve, associated with the LR4 Agreement recorded as other current assets, which includes
$11.9 million
of additional consideration, net of tax, and
$1.5 million
associated with the LR4 TSA.
Discontinued Operations
On October 27, 2017, we entered into a purchase agreement to sell the Compute business. In consideration for the transfer and sale of the Compute business, we received an equity interest in the buyer, a privately held limited liability company ("Compute"), valued at approximately
$36.5 million
, and representing less than
20.0%
of Compute's total outstanding equity. The operations of the Compute business were accounted for as discontinued operations through the date of divestiture.
We also entered into a transition services agreement (the "Compute TSA"), pursuant to which we agreed to perform certain primarily general and administrative functions on Compute's behalf during a migration period and for which we are reimbursed for costs incurred. During the three months ended
June 28, 2019
, we received
no
reimbursements under the Compute TSA. During the
nine months ended
June 28, 2019
, we received
$0.1 million
of reimbursements under the Compute TSA, which was recorded as a reduction of our general and administrative expenses. During the
three and nine months ended
June 29, 2018
, we received
$1.0 million
and
$3.5 million
, respectively, of reimbursements under the Compute TSA.
The accompanying consolidated statements of operations include the following operating results related to these discontinued operations (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
June 29, 2018
|
|
June 29, 2018
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
Cost of revenue
|
|
—
|
|
|
(596
|
)
|
Gross profit
|
|
—
|
|
|
596
|
|
Operating expenses:
|
|
|
|
|
Research and development
|
|
175
|
|
|
4,873
|
|
Selling, general and administrative
|
|
45
|
|
|
1,560
|
|
Total operating expenses
|
|
220
|
|
|
6,433
|
|
Loss from operations
|
|
(220
|
)
|
|
(5,837
|
)
|
Loss before income taxes
|
|
(220
|
)
|
|
(5,837
|
)
|
Income tax provision
|
|
—
|
|
|
—
|
|
Loss from discontinued operations
|
|
$
|
(220
|
)
|
|
$
|
(5,837
|
)
|
|
|
|
|
|
Cash flow from operating activities
|
|
(29
|
)
|
|
(10,356
|
)
|
4
. INVESTMENTS
Our short-term
investments are invested in corporate bonds and commercial paper, and are classified as available-for-sale. The amortized cost, gross unrealized holding gains or losses, and fair value of our investments by major investment type as of
June 28, 2019
and
September 28, 2018
are summarized in the tables below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
Amortized
Cost
|
|
Gross
Unrealized
Holding Gains
|
|
Gross
Unrealized
Holding Losses
|
|
Aggregate Fair
Value
|
Corporate bonds
|
$
|
29,235
|
|
|
$
|
128
|
|
|
$
|
(120
|
)
|
|
$
|
29,243
|
|
Commercial paper
|
71,306
|
|
|
4
|
|
|
(33
|
)
|
|
71,277
|
|
Total short-term investments
|
$
|
100,541
|
|
|
$
|
132
|
|
|
$
|
(153
|
)
|
|
$
|
100,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Holding Gains
|
|
Gross
Unrealized
Holding Losses
|
|
Aggregate Fair
Value
|
Corporate bonds
|
$
|
28,731
|
|
|
$
|
—
|
|
|
$
|
(460
|
)
|
|
$
|
28,271
|
|
Commercial paper
|
69,966
|
|
|
—
|
|
|
(16
|
)
|
|
69,950
|
|
Total short-term investments
|
$
|
98,697
|
|
|
$
|
—
|
|
|
$
|
(476
|
)
|
|
$
|
98,221
|
|
The contractual maturities of available-for-sale investments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
September 28, 2018
|
Less than 1 year
|
$
|
73,078
|
|
|
$
|
70,200
|
|
Over 1 year
|
27,442
|
|
|
28,021
|
|
Total short-term investments
|
$
|
100,520
|
|
|
$
|
98,221
|
|
Available-for-sale investments are reported at fair value and as such, their associated unrealized gains and losses are reported as a separate component of stockholders’ equity within accumulated other comprehensive income.
Other Investments
— As of
June 28, 2019
, we held
two
non-marketable equity investments classified as other long-term investments.
One of these is an investment in a Series B preferred stock ownership of a privately held manufacturing corporation with preferred liquidation rights over other equity shares. As the equity securities do not have a readily determinable fair value and do not qualify for the practical expedient under ASC 820 we have elected to account for this investment at cost less any impairment. As of
June 28, 2019
and
September 28, 2018
, the cost of this investment was
$5.0 million
. We evaluate this investment for impairment at each balance sheet date, and through
June 28, 2019
,
no
impairment has been recorded for this investment.
In addition, we have a minority investment of less than
20.0%
in the outstanding equity of Compute that was acquired in conjunction with the divestiture of the Compute business during the fiscal quarter ended December 29, 2017. We contributed net assets valued at approximately
$36.5 million
in exchange for this equity interest. This investment value is updated quarterly based on our proportionate share of the losses or earnings of Compute, as well as any changes in Compute's equity, utilizing the equity method. During the
three and nine months ended
June 28, 2019
we recorded
income
of
$5.0 million
and
losses
of
$3.9 million
, respectively, associated with this investment as other income (expense) in our consolidated statements of operations. During the
three and nine months ended
June 29, 2018
, we recorded
losses
of
$3.1 million
and
$7.2 million
, respectively, associated with this investment. As of
June 28, 2019
and
September 28, 2018
, the carrying value of this investment was
$22.2 million
and
$26.1 million
, respectively.
5
. FAIR VALUE
We group our financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
|
Level 1
- Quoted prices in active markets for identical assets or liabilities.
|
Level 2
- Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
|
Level 3
- Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by us.
|
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
We measure certain assets and liabilities at fair value on a recurring basis such as our financial instruments and derivatives. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the
three and nine months ended
June 28, 2019
.
Assets and liabilities measured at fair value on a recurring basis consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2019
|
|
Fair Value
|
|
Active Markets for Identical Assets (Level 1)
|
|
Observable Inputs (Level 2)
|
|
Unobservable Inputs (Level 3)
|
Assets
|
|
|
|
|
|
|
|
Money market funds
|
$
|
241
|
|
|
$
|
241
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial paper
|
71,277
|
|
|
—
|
|
|
71,277
|
|
|
—
|
|
Corporate bonds
|
29,243
|
|
|
—
|
|
|
29,243
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
100,761
|
|
|
$
|
241
|
|
|
$
|
100,520
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Common stock warrant liability
|
7,341
|
|
|
—
|
|
|
—
|
|
|
7,341
|
|
Total liabilities measured at fair value
|
$
|
7,341
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2018
|
|
Fair Value
|
|
Active Markets for Identical Assets (Level 1)
|
|
Observable Inputs (Level 2)
|
|
Unobservable Inputs (Level 3)
|
Assets
|
|
|
|
|
|
|
|
Money market funds
|
$
|
253
|
|
|
$
|
253
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial paper
|
69,950
|
|
|
—
|
|
|
69,950
|
|
|
—
|
|
Corporate bonds
|
28,271
|
|
|
—
|
|
|
28,271
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
98,474
|
|
|
$
|
253
|
|
|
$
|
98,221
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
585
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
585
|
|
Common stock warrant liability
|
13,129
|
|
|
—
|
|
|
—
|
|
|
13,129
|
|
Total liabilities measured at fair value
|
$
|
13,714
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,714
|
|
As of
June 28, 2019
and
September 28, 2018
, the fair value of the common stock warrants has been estimated using a Black-Scholes option pricing model.
The fair value of the contingent consideration liability was estimated based upon a risk-adjusted present value of the probability-weighted expected payments by us. Specifically, we considered base, upside and downside scenarios for the operating metrics upon which the contingent payments are to be based. Probabilities were assigned to each scenario and the probability weighted payments were discounted to present value using risk-adjusted discount rates.
The quantitative information utilized in the fair value calculation of our Level 3 liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inputs
|
Liabilities
|
Valuation Technique
|
|
Unobservable Input
|
|
June 28, 2019
|
|
September 28, 2018
|
Contingent consideration
|
Discounted cash flow
|
|
Discount rate
|
|
N/A
|
|
9.2%
|
|
|
|
Probability of achievement
|
|
N/A
|
|
90%
|
|
|
|
Timing of cash flows
|
|
N/A
|
|
1 month
|
|
|
|
|
|
|
|
|
Warrant liability
|
Black-Scholes model
|
|
Volatility
|
|
73.4%
|
|
60.7%
|
|
|
|
Discount rate
|
|
1.84%
|
|
2.81%
|
|
|
|
Expected life
|
|
1.5 years
|
|
2.2 years
|
|
|
|
Exercise price
|
|
$14.05
|
|
$14.05
|
|
|
|
Stock price
|
|
$15.13
|
|
$20.60
|
|
|
|
Dividend rate
|
|
—%
|
|
—%
|
The changes in liabilities with inputs classified within Level 3 of the fair value hierarchy consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28,
2018
|
|
Net Realized/Unrealized Losses (Gains) Included in Earnings
|
|
Purchases
and
Issuances
|
|
Sales and
Settlements
|
|
June 28,
2019
|
Contingent consideration
|
$
|
585
|
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
(650
|
)
|
|
$
|
—
|
|
Common stock warrant liability
|
$
|
13,129
|
|
|
$
|
(5,788
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29,
2017
|
|
Net Realized/Unrealized Gains Included in Earnings
|
|
Purchases
and
Issuances
|
|
Sales and
Settlements
|
|
June 29,
2018
|
Contingent consideration
|
$
|
1,679
|
|
|
$
|
(469
|
)
|
|
$
|
—
|
|
|
$
|
(700
|
)
|
|
$
|
510
|
|
Common stock warrant liability
|
$
|
40,775
|
|
|
$
|
(24,895
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,880
|
|
6
. INVENTORIES
Inventories, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 28,
2019
|
|
September 28,
2018
|
Raw materials
|
$
|
60,958
|
|
|
$
|
71,408
|
|
Work-in-process
|
13,949
|
|
|
13,466
|
|
Finished goods
|
35,639
|
|
|
37,963
|
|
Total inventory, net
|
$
|
110,546
|
|
|
$
|
122,837
|
|
7
. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 28,
2019
|
|
September 28,
2018
|
Construction in process
|
$
|
29,288
|
|
|
$
|
49,661
|
|
Machinery and equipment
|
172,934
|
|
|
174,638
|
|
Leasehold improvements
|
13,449
|
|
|
14,984
|
|
Furniture and fixtures
|
3,683
|
|
|
2,306
|
|
Computer equipment and software
|
18,616
|
|
|
17,317
|
|
Capital lease assets
|
47,096
|
|
|
19,380
|
|
Total property and equipment
|
$
|
285,066
|
|
|
$
|
278,286
|
|
Less accumulated depreciation and amortization
|
(145,686
|
)
|
|
(128,363
|
)
|
Property and equipment, net
|
$
|
139,380
|
|
|
$
|
149,923
|
|
Depreciation and amortization expense related to property, plant and equipment for the
three and nine months ended
June 28, 2019
was
$7.3 million
and
$22.4 million
, respectively. Depreciation and amortization expense related to property, plant and equipment for the
three and nine months ended
June 29, 2018
was
$7.7 million
and
$23.0 million
, respectively. Accumulated depreciation on capital lease assets as of
June 28, 2019
and
September 28, 2018
was
$4.7 million
and
$3.2 million
, respectively.
During the three months ended
June 28, 2019
, we entered into a plan to sell certain equipment with a net carrying value of
$5.1 million
. As of
June 28, 2019
, the assets had not yet been sold and are recorded as assets held for sale. During July 2019, we completed the sale of these assets and did not incur a gain or loss on the sale.
8
. DEBT
As of
June 28, 2019
, we are party to a credit agreement dated as of May 8, 2014 with a syndicate of lenders and Goldman Sachs Bank USA ("Goldman Sachs"), as administrative agent (as amended on February 13, 2015, August 31, 2016, March 10, 2017, May 19, 2017, May 2, 2018 and May 9, 2018, the “Credit Agreement”).
As of
June 28, 2019
, the Credit Agreement consisted of term loans with an aggregate principal amount of
$700.0 million
(“Term Loans”) and a revolving credit facility with an aggregate borrowing capacity of
$160.0 million
(the "Revolving Facility"). The Revolving Facility will mature in November 2021 and the Term Loans will mature in May 2024 and bear interest at: (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of
2.25%
; and (ii) for base rate loans, a rate per annum equal to the greater of (a) the prime rate quoted in the print edition of the Wall Street Journal, Money Rates Section, (b) the federal funds rate plus one-half of
1.00%
and (c) the LIBOR rate applicable to a one-month interest period plus
1.00%
(but, in each case, not less than
1.00%
), plus an applicable margin of
1.25%
.
All principal amounts outstanding and interest rate information as of
June 28, 2019
, for the Credit Agreement were as follows (in thousands, except rate data):
|
|
|
|
|
|
|
Principal Outstanding
|
LIBOR Rate
|
Margin
|
Effective Interest Rate
|
Term loans
|
$674,693
|
2.44%
|
2.25%
|
4.69%
|
As of
June 28, 2019
, approximately
$8.7 million
of deferred financing costs remain unamortized, of which
$8.0 million
is related to the Term Loans and is recorded as a direct reduction of the recognized debt liabilities in our accompanying consolidated balance sheet, and
$0.7 million
is related to the Revolving Facility and is recorded in other long-term assets in our accompanying consolidated balance sheet.
The Term Loans and Revolving Facility are secured by a first priority lien on substantially all of our assets and provide that we must comply with certain financial and non-financial covenants.
The Term Loans are payable in quarterly principal installments of approximately
$1.7 million
on the last business day of each calendar quarter, with the remainder due on the maturity date. In the event that we divest a business, the net cash proceeds of the divestment are generally required, subject to certain exceptions, to be applied to repayment of outstanding Term Loans except to the extent we reinvest such proceeds in assets useful for our business within
18 months
of receiving the proceeds. If we enter into a binding agreement to reinvest such proceeds within
18 months
of receiving them, we have until the later of
18 months
following our receipt of the proceeds and
6 months
following the date of such agreement to complete the reinvestment.
As of
June 28, 2019
, we had
$160.0 million
of borrowing capacity under our Revolving Facility.
As of
June 28, 2019
, the following remained outstanding on the Term Loans (in thousands):
|
|
|
|
|
Principal balance
|
$
|
674,693
|
|
Unamortized discount
|
(3,717
|
)
|
Unamortized deferred financing costs
|
(8,045
|
)
|
Total term loans
|
$
|
662,931
|
|
Current portion
|
6,885
|
|
Long-term, less current portion
|
$
|
656,046
|
|
As of
June 28, 2019
, the minimum principal payments under the Term Loans in future fiscal years were as follows (in thousands):
|
|
|
|
|
2019 (remainder of fiscal year)
|
$
|
1,722
|
|
2020
|
6,885
|
|
2021
|
6,885
|
|
2022
|
6,885
|
|
2023
|
6,885
|
|
Thereafter
|
645,431
|
|
Total
|
$
|
674,693
|
|
The fair value of the Term Loans was estimated to be approximately
$602.2 million
as of
June 28, 2019
, and was determined using Level 2 inputs, including a quoted rate from a bank.
9
. CAPITAL LEASE AND FINANCING OBLIGATIONS
Corporate Facility Financing Obligation
On December 28, 2016, we entered into three lease agreements including: (1) a
20
year leaseback of a facility located at 100 Chelmsford Street, (2) a
20
year build-to-suit lease arrangement for the construction and subsequent lease back of a new facility located at 144 Chelmsford Street, and (3) a
14
year building lease renewal of an adjacent facility at 121 Hale Street (collectively, the “Lowell Leases”). We account for the Lowell Leases as a single unit of accounting under the financing method. As of October 1, 2018, the construction of the facility at 144 Chelmsford Street was completed, the building was placed in service and the associated lease term commenced.
We calculated a lease obligation based on the future minimum lease payments discounted at
7.2%
as of October 1, 2018. The discount rate represents the estimated incremental borrowing rate over the lease term of
20
years. The minimum lease payments are recorded as interest expense and in part as a payment of principal reducing the lease obligation. The real property assets in the transaction remain on the consolidated balance sheets and continue to be depreciated over the remaining useful lives. As of
June 28, 2019
and
September 28, 2018
, the outstanding lease obligations associated with the Lowell Leases included in leases payable in the consolidated balance sheets, were
$28.3 million
and
$28.3 million
, respectively.
Additionally, we have certain capital equipment lease obligations, of which
$1.9 million
and
$1.2 million
was outstanding as of
June 28, 2019
and
September 28, 2018
, respectively.
As of
June 28, 2019
, future minimum payments under capital lease obligations were as follows (in thousands):
|
|
|
|
|
|
Fiscal year ending:
|
|
Amount
|
2019 (remainder of fiscal year)
|
|
$
|
847
|
|
2020
|
|
3,384
|
|
2021
|
|
3,304
|
|
2022
|
|
2,661
|
|
2023
|
|
2,563
|
|
Thereafter
|
|
42,247
|
|
Total minimum capital lease payments
|
|
55,006
|
|
Less amount representing interest
|
|
(26,433
|
)
|
Present value of net minimum capital lease payments
|
|
$
|
28,573
|
|
10
. IMPAIRMENTS
During the fiscal quarter ended
June 28, 2019
, we initiated a plan to strategically realign, streamline and improve our operations, including reducing our workforce and exiting certain product offerings and research and development facilities. See
Note 15 - Restructurings
, for additional information about the June 2019 restructuring plan. These activities led us to reassess our previous estimates for expected future revenue growth. We performed impairment analyses to determine whether our goodwill and long-lived assets, comprised of definite-lived intangible assets and property, plant and equipment, were recoverable. Based on the estimated undiscounted cash flow assessment for long-lived assets, we determined that for an asset group, the cash flows were not sufficient to recover the carrying value of the long-lived assets over their remaining useful lives. Accordingly, we recorded impairment charges of
$217.5 million
and
$33.2 million
to our customer relationship intangible assets and technology intangible assets, respectively, in the fiscal quarter ended June 28, 2019, based on the difference between the fair value and the carrying value of the long-lived assets. We will continue to monitor for events or changes in business circumstances that may indicate that the remaining carrying value of the asset group may not be recoverable. We used the income approach to determine the fair value of the definite-lived intangible assets and the cost approach to determine the fair value of its property, plant and equipment.
Additionally, in connection with the June 2019 restructuring plan, we determined that certain intangible assets would be abandoned and would not have a future benefit. Accordingly, we recorded impairment charges of
$2.4 million
and
$3.9 million
to our customer relationship intangible assets and technology intangible assets, respectively, during the quarter ended June 28, 2019.
During the three months ended
June 28, 2019
, we determined that an asset recorded as construction in process would not be able to be placed in service as a productive asset, and therefore had no fair value. Accordingly, we recorded an impairment charge of
$7.1 million
for this asset during the three months ended June 28, 2019.
During the nine months ended June 29, 2018, we recorded impairment charges of
$6.6 million
related to property and equipment and other assets designated for future use with one of our customers, Zhongxing Telecommunications Equipment Corporation ("ZTE").
See
Note
15
- Restructurings
for information related to property and equipment impaired as part of our restructuring actions.
11
. INTANGIBLE ASSETS
Amortization expense related to intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 28,
2019
|
|
June 29,
2018
|
|
June 28,
2019
|
|
June 29,
2018
|
Cost of revenue
|
$
|
8,139
|
|
|
$
|
8,594
|
|
|
$
|
24,074
|
|
|
$
|
24,913
|
|
Selling, general and administrative
|
13,723
|
|
|
13,081
|
|
|
38,115
|
|
|
35,827
|
|
Total
|
$
|
21,862
|
|
|
$
|
21,675
|
|
|
$
|
62,189
|
|
|
$
|
60,740
|
|
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 28,
2019
|
|
September 28,
2018
|
Acquired technology
|
$
|
179,682
|
|
|
$
|
251,673
|
|
Customer relationships
|
245,870
|
|
|
518,234
|
|
Trade name
|
3,400
|
|
|
3,400
|
|
Total
|
$
|
428,952
|
|
|
$
|
773,307
|
|
Less accumulated amortization
|
(235,194
|
)
|
|
(260,522
|
)
|
Intangible assets — net
|
$
|
193,758
|
|
|
$
|
512,785
|
|
Our trade name is an indefinite-lived intangible asset.
A summary of the activity in intangible assets and goodwill, which includes the impairment of
$344.6 million
of gross intangible assets, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
|
|
Total Intangible Assets
|
|
Acquired
Technology
|
|
Customer
Relationships
|
|
Trade Name
|
|
Goodwill
|
Balance at September 28, 2018
|
$
|
773,307
|
|
|
$
|
251,673
|
|
|
$
|
518,234
|
|
|
$
|
3,400
|
|
|
$
|
314,076
|
|
Currency translation adjustment
|
270
|
|
|
270
|
|
|
—
|
|
|
—
|
|
|
611
|
|
Impairments of intangible assets
|
(344,625
|
)
|
|
(72,261
|
)
|
|
(272,364
|
)
|
|
—
|
|
|
—
|
|
Balance at June 28, 2019
|
$
|
428,952
|
|
|
$
|
179,682
|
|
|
$
|
245,870
|
|
|
$
|
3,400
|
|
|
$
|
314,687
|
|
In connection with the impairment of certain customer relationships and acquired technology intangible assets, we revised the useful lives of these intangible assets to reflect the estimated period over which these assets are expected to contribute to future cash flows. As of June 28, 2019, the weighted-average amortization periods for our customer relationships and acquired technology are
9 years
and
7 years
, respectively. See
Note 10 - Impairments
, for additional information related to the impairment of our intangible assets.
As of
June 28, 2019
, our estimated amortization of our intangible assets in future fiscal years was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Remaining
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
Total
|
Amortization expense
|
$
|
12,530
|
|
50,330
|
|
46,213
|
|
33,433
|
|
26,048
|
|
21,804
|
|
$
|
190,358
|
|
Accumulated amortization for acquired technology and customer relationships were
$129.1 million
and
$106.1 million
, respectively, as of
June 28, 2019
, and
$140.0 million
and
$120.5 million
, respectively, as of
September 28, 2018
.
12
. STOCKHOLDERS' EQUITY
We have authorized
10 million
shares of
$0.001
par value preferred stock and
300 million
shares of
$0.001
par value common stock as of
June 28, 2019
and
September 28, 2018
, respectively.
Common Stock Warrants
—In March 2012, we issued warrants to purchase
1,281,358
shares of common stock for
$14.05
per share. The warrants expire on
December 21, 2020
, or earlier as per the terms of the agreement, including immediately following consummation of a sale of all or substantially all assets or capital stock or other equity securities, including by merger, consolidation, recapitalization or similar transactions. We do not currently have sufficient registered and available shares to immediately satisfy a request for registration, if such a request were made. As of
June 28, 2019
, no exercise of the warrants had occurred, and no request had been made to register the warrants or any underlying securities for resale by the holders.
We are recording the estimated fair values of the warrants as a long-term liability in the accompanying consolidated financial statements with changes in the estimated fair value being recorded in the accompanying statements of operations. See
Note
5
- Fair Value
for additional information related to the fair value of our warrant liability.
13
. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation for basic and diluted net loss per share of common stock (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 28, 2019
|
|
June 29, 2018
|
|
June 28, 2019
|
|
June 29, 2018
|
Numerator:
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(324,714
|
)
|
|
$
|
(85,210
|
)
|
|
$
|
(394,314
|
)
|
|
$
|
(117,647
|
)
|
Loss from discontinued operations
|
—
|
|
|
(220
|
)
|
|
—
|
|
|
(5,837
|
)
|
Net loss
|
$
|
(324,714
|
)
|
|
$
|
(85,430
|
)
|
|
$
|
(394,314
|
)
|
|
$
|
(123,484
|
)
|
Warrant liability gain
|
(1,927
|
)
|
|
—
|
|
|
(5,788
|
)
|
|
(24,895
|
)
|
Net loss attributable to common stockholders
|
$
|
(326,641
|
)
|
|
$
|
(85,430
|
)
|
|
$
|
(400,102
|
)
|
|
$
|
(148,379
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic
|
65,858
|
|
|
64,920
|
|
|
65,555
|
|
|
64,598
|
|
Dilutive effect of warrants
|
87
|
|
|
—
|
|
|
166
|
|
|
600
|
|
Weighted average common shares outstanding-diluted
|
65,945
|
|
|
$
|
64,920
|
|
|
$
|
65,722
|
|
|
$
|
65,198
|
|
Loss per share-basic:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(4.93
|
)
|
|
$
|
(1.31
|
)
|
|
$
|
(6.01
|
)
|
|
$
|
(1.82
|
)
|
Discontinued operations
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
|
(0.09
|
)
|
Net loss to common stock holders per share-basic
|
$
|
(4.93
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(6.01
|
)
|
|
$
|
(1.91
|
)
|
Loss per share-diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(4.95
|
)
|
|
$
|
(1.31
|
)
|
|
$
|
(6.09
|
)
|
|
$
|
(2.19
|
)
|
Discontinued operations
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
|
(0.09
|
)
|
Net loss to common stock holders per share-diluted
|
$
|
(4.95
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(6.09
|
)
|
|
$
|
(2.28
|
)
|
As of
June 28, 2019
, we had warrants outstanding which were reported as a liability on the consolidated balance sheet. During the
three and nine months ended
June 28, 2019
and the
nine months ended
June 29, 2018
, we recorded
$1.9 million
,
$5.8 million
and
$24.9 million
of warrant gains, respectively, associated with adjusting the fair value of the warrants in the consolidated statements of operations primarily as a result of changes in our stock price. When calculating earnings per share, we are required to adjust for the dilutive effect of outstanding common stock equivalents, including adjustment to the numerator for the dilutive effect of contracts that must be settled in stock. During the
three and nine months ended
June 28, 2019
and the
nine months ended
June 29, 2018
, we adjusted the numerator by the warrant gains of
$1.9 million
,
$5.8 million
and
$24.9 million
, respectively, and the denominator by the incremental shares of
86,746
,
166,318
and
600,192
, respectively, under the treasury stock method. The table above excludes the effects of
80,046
and
129,599
shares for the
three and nine months ended
June 28, 2019
, respectively, and
724,886
and
422,584
shares for the
three and nine months ended
June 29, 2018
, respectively, of potential shares of common stock issuable upon exercise of stock options, warrants, restricted stock and restricted stock units, as applicable, as the inclusion would be antidilutive.
14
. COMMITMENTS AND CONTINGENCIES
From time to time, we may be subject to commercial disputes, employment issues, claims by other companies in the industry that we have infringed their intellectual property rights and other similar claims and litigations. Any such claims may lead to future litigation and material damages and defense costs. We were not involved in any material pending legal proceedings during the fiscal quarter ended
June 28, 2019
.
15
. RESTRUCTURINGS
We have periodically implemented restructuring actions in connection with broader plans to reduce staffing, reduce our internal manufacturing footprint and generally reduce operating costs. The restructuring expenses are primarily comprised of direct and incremental costs related to headcount reductions including severance and outplacement fees for the terminated employees, as well as facility closure costs.
The following is a summary of the restructuring charges incurred for the
three and nine months ended
June 28, 2019
and
June 29, 2018
under these restructuring plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 28,
2019
|
|
June 29,
2018
|
|
June 28,
2019
|
|
June 29,
2018
|
Employee related expenses
|
$
|
5,135
|
|
|
$
|
4
|
|
|
$
|
6,742
|
|
|
$
|
2,796
|
|
Facility related expenses
|
3,752
|
|
|
98
|
|
|
10,305
|
|
|
3,506
|
|
Total restructuring charges
|
$
|
8,887
|
|
|
$
|
102
|
|
|
$
|
17,047
|
|
|
$
|
6,302
|
|
The following is a summary of the costs incurred for the
nine months ended
June 28, 2019
(in thousands):
|
|
|
|
|
Balance as of September 28, 2018
|
$
|
89
|
|
Current period expense
|
17,047
|
|
Charges paid/settled
|
(11,956
|
)
|
Balance as of June 28, 2019
|
$
|
5,180
|
|
Long Beach, Belfast and Sydney Plan
During the fiscal quarter ended December 29, 2017, we initiated plans to restructure and close our facility in Long Beach, California and to close our facilities in Belfast, United Kingdom and Sydney, Australia. The operations from the Long Beach facility were consolidated into our other California locations in order to achieve operational synergies. The Belfast and Sydney facilities were closed as we discontinued certain product development activities that were performed in those locations. This action is complete, and no further costs will be incurred.
Ithaca Plan
During the fiscal quarter ended September 28, 2018, we initiated a plan to exit certain production and product lines, primarily related to certain production facilities located in Ithaca, New York. For these facilities, we incurred restructuring charges of
$0.2 million
in the
three months ended
June 28, 2019
, including
$0.1 million
of employee-related costs. We incurred
$5.5 million
in the
nine months ended
June 28, 2019
, including
$1.5 million
of employee-related costs and
$4.0 million
of facility-related costs. We do not expect to incur material restructuring costs during the remainder of fiscal year
2019
as we complete this restructuring action.
Design Facilities Plan
During the fiscal quarter ended March 29, 2019, we committed to a plan to exit certain design facilities and activities. We incurred restructuring reimbursements and charges of
$(0.3) million
and
$2.5 million
in the
three and nine months ended
June 28, 2019
, respectively, under this plan. We do not expect to incur material restructuring costs during the remainder of fiscal year
2019
as we complete this restructuring action.
2019 Plan
During the fiscal quarter ended June 28, 2019, we committed to a plan to strategically realign, streamline and improve certain of our business and operations, including reducing our workforce by approximately 250 employees and exiting seven development facilities in France, Japan, the Netherlands, Florida, Massachusetts, New Jersey and Rhode Island. Additionally, we will no longer invest in the design and development of optical modules and subsystems for Data Center applications. We incurred restructuring charges of
$9.0 million
in the three months ended
June 28, 2019
under this plan, including
$4.9 million
of employee-related costs,
$4.0 million
of impairment expense for fixed assets that will be disposed of and
$0.1 million
of other costs. We expect to incur restructuring costs of approximately
$2.9 million
to
$3.9 million
through fiscal year 2020 as we complete this restructuring action, including approximately
$2.2 million
of employee-related costs and
$1.7 million
of facility-related costs.
16
. SHARE-BASED COMPENSATION
Stock Plans
As of
June 28, 2019
, we had
14.7 million
shares available for issuance under our 2012 Omnibus Incentive Plan (as Amended and Restated) (the “2012 Plan”) and
3.4 million
shares available for issuance under our Employee Stock Purchase Plan. Under the 2012 Plan, we have the ability to issue incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), performance based non-statutory stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance-based restricted stock units (“PRSUs”), performance shares and other equity-based awards to employees, directors and outside consultants. The ISOs and NSOs must be granted at a price per share not less than the fair value of our common stock on the date of grant. Options granted to date primarily vest based on certain market-based and performance-based criteria. Options granted generally have a term of
four years
to
seven years
. Certain of the share-based awards granted and outstanding as of
June 28, 2019
are subject to accelerated vesting upon a change in control of the Company.
Share-Based Compensation
The following table shows a summary of share-based compensation expense included in the Condensed Consolidated Statements of Operations for the
three and nine
months ended
June 28, 2019
and
June 29, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 28,
2019
|
|
June 29,
2018
|
|
June 28,
2019
|
|
June 29,
2018
|
Cost of revenue
|
$
|
651
|
|
|
$
|
1,019
|
|
|
$
|
2,165
|
|
|
$
|
2,881
|
|
Research and development
|
2,517
|
|
|
3,785
|
|
|
6,540
|
|
|
10,422
|
|
Selling, general and administrative
|
(353
|
)
|
|
3,950
|
|
|
11,458
|
|
|
10,792
|
|
Total share-based compensation expense
|
$
|
2,815
|
|
|
$
|
8,754
|
|
|
$
|
20,163
|
|
|
$
|
24,095
|
|
During the three months ended
June 28, 2019
, we assessed the potential vesting of the outstanding PRSU awards against the performance conditions. Based on this analysis, we determined that the probability of achieving certain performance conditions was lower than previously expected. As such, we reduced the estimated share-based compensation associated with these awards, which resulted in a cumulative adjustment of
$4.7 million
for these awards.
As of
June 28, 2019
, the total unrecognized compensation costs related to ISOs, RSAs and RSUs, including awards with time-based and performance-based vesting was
$62.7 million
, which we expect to recognize over a weighted-average period of
3.0
years. As of
June 28, 2019
, total unrecognized compensation cost related to our Employee Stock Purchase Plan was
$1.1 million
.
Stock Options
A summary of stock option activity for the
nine months ended June 28, 2019
is as follows (in thousands, except per share amounts and contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Exercise Price per Share
|
|
Weighted-Average Remaining Contractual Term (in Years)
|
|
Aggregate Intrinsic Value
|
Options outstanding - September 28, 2018
|
1,408
|
|
|
$
|
32.05
|
|
|
|
|
|
Granted
|
585
|
|
|
15.44
|
|
|
|
|
|
Exercised
|
(23
|
)
|
|
2.00
|
|
|
|
|
|
Forfeited, canceled or expired
|
(1,207
|
)
|
|
35.43
|
|
|
|
|
|
Options outstanding - June 28, 2019
|
763
|
|
|
$
|
14.86
|
|
|
4.30
|
|
$
|
892
|
|
Options vested and expected to vest - June 28, 2019
|
763
|
|
|
14.86
|
|
|
4.30
|
|
892
|
|
Options exercisable - June 28, 2019
|
188
|
|
|
$
|
13.11
|
|
|
1.50
|
|
$
|
706
|
|
Aggregate intrinsic value represents the difference between our closing stock price on
June 28, 2019
and the exercise price of outstanding, in-the-money options. During the
nine months ended
June 28, 2019
, there were
22,795
options exercised. The total intrinsic value of options exercised was
$0.1 million
and
$0.3 million
for the
three and nine months ended
June 28, 2019
, respectively, and
$0.7 million
for the
nine months ended
June 29, 2018
. There were
no
stock options exercised in the three months ended
June 29, 2018
.
Stock Options with Market-based Vesting Criteria
We grant non-qualified stock options that are subject to vesting only upon the market price of our underlying public stock closing above a certain price target within
seven years
of the date of grant. Share-based compensation expense is recognized regardless of the number of awards that are earned based on the market condition and is recognized on a straight-line basis over the estimated service period. If the required service period is not met for these options, then the share-based compensation expense would be reversed. In the event that our common stock achieves the target price per share based on a
30
-day trailing average prior to the end of the estimated service period, any remaining unamortized compensation cost will be recognized.
We granted
585,000
market-based stock options during the
nine months ended June 28, 2019
, at a weighted average grant date fair value of
$7.47
per share, or
$4.4 million
. These options have a weighted average exercise price of
$15.44
.
These non-qualified stock options with market based vesting conditions were valued using a Monte Carlo simulation model. The weighted average Monte Carlo input assumptions used for calculating the fair value of these market-based stock options are as follows:
|
|
|
|
|
Nine Months Ended
|
|
June 28, 2019
|
Risk-free interest rate
|
2.8
|
%
|
Expected term (years)
|
3.91
|
|
Expected volatility rate
|
51.9
|
%
|
Target price
|
$53.87
|
During the
nine months ended June 28, 2019
, we canceled
1,122,500
performance-based stock options with a concurrent grant of
748,328
PRSUs for
13
employees, which was accounted for as a modification. The incremental compensation cost resulting from the modification was
$8.2 million
, and will be recognized as share-based compensation expense over the requisite service period of
three years
for the new PRSU awards.
Restricted Stock, Restricted Stock Units and Performance-Based Restricted Stock Units
A summary of RSAs, RSUs and PRSUs activity for the
nine
months ended
June 28, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of RSAs, RSUs and PRSUs
(in thousands)
|
|
Weighted-
Average
Grate Date Fair Value
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Balance at September 28, 2018
|
1,872
|
|
|
$
|
34.15
|
|
|
$
|
38,452
|
|
Granted
|
2,916
|
|
|
18.18
|
|
|
|
Vested and released
|
(632
|
)
|
|
35.43
|
|
|
|
Forfeited, canceled or expired
|
(743
|
)
|
|
27.37
|
|
|
|
Balance at June 28, 2019
|
3,413
|
|
|
$
|
21.74
|
|
|
$
|
51,646
|
|
RSAs, RSUs and PRSUs that vested during the
nine months ended
June 28, 2019
and
June 29, 2018
had fair value of
$10.9 million
and
$19.2 million
, respectively, as of the vesting date.
We granted
200,000
market-based PRSUs during the
three months ended June 28, 2019
, at a weighted average grant date fair value of
$17.65
per share, or
$3.5 million
. These awards were valued using a Monte Carlo simulation model subject to vesting based on the total shareholder return of our underlying public stock in comparison to a peer group of companies in the Nasdaq Composite Index. Share-based compensation expense is recognized based on the grant date fair value of the awards of
$3.5 million
subject to the market condition. If the required service period is not met for these awards, then the share-based compensation expense would be reversed. The Monte Carlo input assumptions used for calculating the fair value of these market-based performance RSUs are as follows:
|
|
|
|
|
Nine Months Ended
|
|
June 28, 2019
|
Risk free interest rate
|
1.9
|
%
|
Years to maturity
|
3.33
|
|
Expected volatility rate
|
61.5
|
%
|
17
. INCOME TAXES
We are subject to income tax in the U.S. as well as other tax jurisdictions in which we conduct business. Earnings from non-U.S. activities are subject to local country income tax and may also be subject to current U.S. income tax. For interim periods, we record a tax provision or benefit based upon the estimated effective tax rate expected for the full fiscal year, adjusted for material discrete taxation matters arising during the interim periods.
Income tax
expense
was
$0.3 million
for the
nine months ended
June 28, 2019
, compared to
a benefit
of
$11.2 million
for the
nine months ended
June 29, 2018
. The difference between the U.S. federal statutory income tax rate of
21%
for the three and
nine months ended
June 28, 2019
was primarily driven by the continuation of a full valuation allowance against any benefit associated with U.S. losses and income taxed in foreign jurisdictions at generally lower tax rates. The difference between the blended U.S. federal statutory income tax rate of
24.5%
for the three and
nine months ended
months ended
June 29, 2018
and our effective income tax rate was primarily driven by the continuation of a full valuation allowance against any benefit associated with U.S. losses and income taxed in foreign jurisdictions at generally lower tax rates.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making this determination, we consider available positive and negative evidence and factors that may impact the valuation of our deferred tax asset including results of recent operations, future reversals of existing taxable temporary differences, projected future taxable income, and tax-planning strategies. A significant piece of objective negative evidence evaluated was the cumulative U.S. loss initially incurred over the three-year period ended March 31, 2017, which we believe limited our ability to consider other subjective evidence, such as our projections for future growth. Significant negative objective evidence in the form of adjusted cumulative losses in the U.S. over the three-year period ended
June 28, 2019
resulted in our continued determination that there was not sufficient objectively verifiable positive evidence to offset this negative objective evidence and we concluded that a full valuation allowance was still appropriate for our U.S. deferred tax assets.
All earnings of foreign subsidiaries, other than our M/A-COM Technology Solutions International Limited Cayman Islands subsidiary (“Cayman Islands subsidiary”), are considered indefinitely reinvested for the periods presented. During the three months ended March 29, 2019, we changed our position for our Cayman Islands subsidiary to no longer have its earnings permanently reinvested. During the fiscal quarter ended June 28, 2019, we finalized our fiscal 2018 tax return, including the calculation of the
one-time deemed repatriation of gross foreign earnings and profits, totaling
$156.8 million
, which resulted in approximately
$86.7 million
in U.S. taxable income for the year ended September 28, 2018. As we have recorded a full valuation allowance for this period, the adjusted one-time deemed repatriation will continue to have no impact on our tax expense. The actual tax loss for the year ended September 28, 2018 has fully offset this one-time deemed repatriation of taxable income resulting in no additional cash tax payments.
The balance of the unrecognized tax benefits as of
June 28, 2019
and
September 28, 2018
was
$1.0 million
and
$0.3 million
, respectively. The increase of
$0.7 million
in unrecognized tax benefits during the nine months ended
June 28, 2019
was all recognized during the fiscal quarter ended December 28, 2018 and resulted from finalizing the transition tax impact relating to the one-time deemed repatriation of gross foreign earnings and profits for the year ended
September 28, 2018
. In finalizing the transition tax, we identified certain tax accounting method changes that were required to compute the correct transition tax, yet the tax law prohibited adopting these methods without filing for and receiving Internal Revenue Service ("IRS") permission to change our method. The increase in transition tax related to these non-automatic method changes requiring IRS approval was
$0.7 million
and represents the increase in our FIN 48 reserve balance to
$1.0 million
as of December 28, 2018 and
June 28, 2019
. Out of the total reserve balance of
$1.0 million
,
$0.3 million
, if recognized, will reduce income tax expense.
It is also our policy to recognize any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal quarters ended
June 28, 2019
and
September 28, 2018
, we did not make any accrual or payment of interest and penalties due to our net operating loss carryforward position within the U.S.
On December 22, 2017, the U.S. Congress enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act enacted a wide range of changes to the U.S. corporate income tax system, many of which differ significantly from the provisions of the previous U.S. tax law. The Tax Act also transitions international taxation from a worldwide system with deferral to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as global intangible low-taxed income. These changes became effective in our fiscal year beginning September 29, 2018.
18
. RELATED PARTY TRANSACTIONS
Cadence Design Systems, Inc. ("Cadence") provides us with certain engineering licenses on an ongoing basis. Geoffrey Ribar, who joined our board of directors on March 22, 2017, served as an officer of Cadence through September 30, 2017 and served as a Senior Advisor to Cadence until March 31, 2018. During the
nine months ended June 29, 2018
we made payments to Cadence of
$4.1 million
subsequent to Mr. Ribar joining our board of directors and prior to March 31, 2018.
19
. SUPPLEMENTAL CASH FLOW INFORMATION
As of
June 28, 2019
and
June 29, 2018
, we had
$6.2 million
and
$2.8 million
, respectively, in unpaid amounts related to purchases of property and equipment included in accounts payable and accrued liabilities during each period. These amounts have been excluded from the payments for purchases of property and equipment in the accompanying condensed consolidated statements of cash flows until paid.
During the
nine months ended
June 28, 2019
and
June 29, 2018
, we capitalized
$1.5 million
and
$16.5 million
, respectively, of net construction costs relating to the 144 Chelmsford Street facility, of which
$0.3 million
and
$10.8 million
, respectively, were accounted for as a non-cash transaction as the costs were paid by the developer.
During the
nine months ended
June 28, 2019
, we capitalized an additional
$1.5 million
of equipment under capital leases, which were accounted for as non-cash transactions. During the
nine months ended
June 29, 2018
,
no
additional capital leases were recorded.
The following is supplemental cash flow information regarding non-cash investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
June 28,
2019
|
|
June 29,
2018
|
Cash paid for interest
|
$
|
25,675
|
|
|
$
|
21,804
|
|
Cash (refunded) paid for income taxes
|
$
|
(1,713
|
)
|
|
$
|
3,435
|
|
20
. GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
We have
one
reportable operating segment that designs, develops, manufactures and markets semiconductors and modules. The determination of the number of reportable operating segments is based on the chief operating decision maker’s use of financial information for the purposes of assessing performance and making operating decisions. In evaluating financial performance and making operating decisions, the chief operating decision maker primarily uses consolidated revenue, gross profit and operating loss. We are currently evaluating our internal reporting structure and the potential impact of any changes on our segment reporting.
For information about our revenue in different geographic regions, based upon customer locations, see
Note
2
- Revenue
. Information about our long-lived assets in different geographic regions is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
Long-Lived Assets by Geographic Region
|
|
June 28,
2019
|
|
September 28,
2018
|
United States
|
|
$
|
114,326
|
|
|
$
|
122,888
|
|
Asia Pacific
(1)
|
|
16,820
|
|
|
24,702
|
|
Other Countries
(2)
|
|
8,234
|
|
|
2,333
|
|
Total
|
|
$
|
139,380
|
|
|
$
|
149,923
|
|
|
|
(1)
|
Asia Pacific represents Taiwan, India, Japan, Thailand, South Korea, Singapore, Malaysia, the Philippines, Vietnam and China.
|
|
|
(2)
|
No international country or region represented greater than 10% of the total net long-lived assets as of the dates presented, other than the Asia Pacific region as presented above.
|
The following is a summary of customer concentrations as a percentage of revenue and accounts receivable as of and for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Revenue
|
June 28,
2019
|
|
June 29,
2018
|
|
June 28,
2019
|
|
June 29,
2018
|
Customer A
|
17
|
%
|
|
14
|
%
|
|
15%
|
|
12%
|
|
|
|
|
|
|
|
Accounts Receivable
|
June 28,
2019
|
|
September 28,
2018
|
Customer A
|
23
|
%
|
|
19
|
%
|
Customer B
|
13
|
%
|
|
26
|
%
|
No other customer represented more than
10%
of revenue or accounts receivable in the periods presented in the accompanying consolidated financial statements. For the
three and nine months ended
June 28, 2019
, our top ten customers represented
54%
and
54%
, respectively, of total revenue, and for the
three and nine months ended
June 29, 2018
, our top ten customers represented
59%
and
55%
of total revenue, respectively.