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EX-32.2 - EXHIBIT 32.2 - MARVELL TECHNOLOGY GROUP LTDq219_10qx08042018exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - MARVELL TECHNOLOGY GROUP LTDq219_10qx08042018exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - MARVELL TECHNOLOGY GROUP LTDq219_10qx08042018exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - MARVELL TECHNOLOGY GROUP LTDq219_10qx08042018exhibit311.htm
EX-10.3 - EXHIBIT 10.3 - MARVELL TECHNOLOGY GROUP LTDraghibofferletterfinal-exh.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 000-30877
Marvell Technology Group Ltd.
(Exact name of registrant as specified in its charter)
Bermuda
 
77-0481679
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda
(441) 296-6395
(Address of principal executive offices, Zip Code and registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨ 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨ 
 
 
Emerging growth company
¨ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes    ý No
The number of common shares of the registrant outstanding as of September 5, 2018 was 658.4 million shares.



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

1


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value per share)
 
 
August 4,
2018
 
February 3,
2018
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
498,659

 
$
888,482

Short-term investments
25,000

 
952,790

Accounts receivable, net
443,276

 
280,395

Inventories
473,429

 
170,039

Prepaid expenses and other current assets
72,388

 
41,482

Assets held for sale
31,182

 
30,767

Total current assets
1,543,934

 
2,363,955

Property and equipment, net
327,645

 
202,222

Goodwill
5,497,608

 
1,993,310

Acquired intangible assets, net
2,718,061

 

Other non-current assets
275,598

 
148,800

Total assets
$
10,362,846

 
$
4,708,287

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
196,297

 
$
145,236

Accrued liabilities
277,098

 
86,958

Accrued employee compensation
127,381

 
127,711

Deferred income
3,511

 
61,237

Liabilities held for sale
3,935

 

Total current liabilities
608,222

 
421,142

Long-term debt
1,878,617

 

Non-current income taxes payable
52,438

 
56,976

Deferred tax liabilities
114,312

 
52,204

Other non-current liabilities
44,191

 
36,552

Total liabilities
2,697,780

 
566,874

Commitments and contingencies (Note 12)

 

Shareholders’ equity:
 
 
 
Common shares, $0.002 par value
1,316

 
991

Additional paid-in capital
6,153,890

 
2,733,292

Accumulated other comprehensive loss

 
(2,322
)
Retained earnings
1,509,860

 
1,409,452

Total shareholders’ equity
7,665,066

 
4,141,413

Total liabilities and shareholders’ equity
$
10,362,846

 
$
4,708,287

See accompanying notes to unaudited condensed consolidated financial statements

2


MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
 
Three Months Ended
 
Six Months Ended
 
August 4,
2018
 
July 29,
2017
 
August 4,
2018
 
July 29,
2017
Net revenue
$
665,310

 
$
604,750

 
$
1,269,941

 
$
1,177,459

Cost of goods sold
288,200

 
239,572

 
517,138

 
466,770

Gross profit
377,110

 
365,178

 
752,803

 
710,689

Operating expenses:
 
 
 
 
 
 
 
Research and development
216,285

 
180,871

 
393,019

 
368,967

Selling, general and administrative
133,701

 
55,659

 
206,014

 
110,763

Restructuring related charges
35,415

 
4,285

 
36,982

 
5,171

Total operating expenses
385,401

 
240,815

 
636,015

 
484,901

Operating income (loss) from continuing operations
(8,291
)
 
124,363

 
116,788

 
225,788

Interest income
3,575

 
3,830

 
9,644

 
7,342

Interest expense
(15,795
)
 
(80
)
 
(16,039
)
 
(131
)
Other income (loss), net
(2,701
)
 
3,438

 
(1,230
)
 
3,310

Interest and other income (loss), net
(14,921
)
 
7,188

 
(7,625
)
 
10,521

Income (loss) from continuing operations before income taxes
(23,212
)
 
131,551

 
109,163

 
236,309

Provision (benefit) for income taxes
(29,971
)
 
(3,899
)
 
(26,208
)
 
1,267

Income from continuing operations, net of tax
6,759

 
135,450

 
135,371

 
235,042

Income from discontinued operations, net of tax

 
29,809

 

 
36,838

Net income
$
6,759

 
$
165,259

 
$
135,371

 
$
271,880

 
 
 
 
 
 
 
 
Net income per share - Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.01

 
$
0.27

 
$
0.26

 
$
0.47

Discontinued operations
$

 
$
0.06

 
$

 
$
0.07

Net income per share - Basic
$
0.01

 
$
0.33

 
$
0.26

 
$
0.54

 
 
 
 
 
 
 
 
Net income per share - Diluted:
 
 
 
 
 
 
 
       Continuing operations
$
0.01

 
$
0.26

 
$
0.25

 
$
0.46

       Discontinued operations
$

 
$
0.06

 
$

 
$
0.07

Net income per share - Diluted
$
0.01

 
$
0.32

 
$
0.25

 
$
0.53

 
 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
552,238

 
500,817

 
524,787

 
502,303

Diluted
562,149

 
510,309

 
535,433

 
513,951

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.06

 
$
0.06

 
$
0.12

 
$
0.12

See accompanying notes to unaudited condensed consolidated financial statements

3


MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
August 4,
2018
 
July 29,
2017
 
August 4,
2018
 
July 29,
2017
Net income
$
6,759

 
$
165,259

 
$
135,371

 
$
271,880

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in unrealized gain (loss) on marketable securities
2,404

 
556

 
2,322

 
(117
)
Net change in unrealized gain (loss) on cash flow hedges

 
(765
)
 

 
993

Net change in pension liability

 
1,272

 

 

Other comprehensive income, net of tax
2,404

 
1,063

 
2,322

 
876

Comprehensive income, net of tax
$
9,163

 
$
166,322

 
$
137,693

 
$
272,756

See accompanying notes to unaudited condensed consolidated financial statements

4


MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Six Months Ended
 
August 4,
2018
 
July 29,
2017
Cash flows from operating activities:
 
 
 
Net income
$
135,371

 
$
271,880

Adjustments to reconcile net income to net cash provided by
operating activities:
 
 
 
Depreciation and amortization
47,097

 
41,186

Share-based compensation
83,244

 
46,439

Amortization and write-off of acquired intangible assets
25,939

 
2,136

Amortization of inventory fair value adjustment associated with acquisition of Cavium
22,933

 

Amortization of deferred debt issuance costs and debt discounts
7,073

 

Restructuring related impairment charges (gain)
1,993

 
(446
)
Gain from investment in privately-held company
(1,100
)
 
(750
)
Amortization of premium/discount on available-for-sale securities
624

 
803

Other non-cash expense (income), net
4,227

 
(1,423
)
Deferred income taxes
(21,414
)
 
2,791

Gain on sale of property and equipment
(120
)
 
(283
)
Gain on sale of discontinued operations

 
(42,187
)
Gain on sale of business

 
(5,254
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(48,749
)
 
(36,313
)
Inventories
6,866

 
(14,712
)
Prepaid expenses and other assets
(19,504
)
 
7,854

Accounts payable
(271
)
 
3,968

Accrued liabilities and other non-current liabilities
(11,232
)
 
(33,418
)
Accrued employee compensation
(41,539
)
 
(8,375
)
Deferred income
(729
)
 
1,284

Net cash provided by operating activities
190,709

 
235,180

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(14,956
)
 
(376,227
)
Sales of available-for-sale securities
623,896

 
116,700

Maturities of available-for-sale securities
187,985

 
169,612

Return of investment from privately-held companies

 
2,388

Purchases of time deposits
(25,000
)
 
(150,000
)
Maturities of time deposits
150,000

 
150,000

Purchases of technology licenses
(1,263
)
 
(1,701
)
Purchases of property and equipment
(34,389
)
 
(14,544
)
Proceeds from sales of property and equipment
223

 
1,739

Cash payment for acquisition of Cavium, net of cash and cash equivalents acquired
(2,649,465
)
 

Net proceeds from sale of discontinued operations

 
72,205

Net proceeds from sale of business
1,250

 

Other
(5,000
)
 

Net cash used in investing activities
(1,766,719
)
 
(29,828
)
Cash flows from financing activities:
 
 
 
Repurchases of common stock

 
(387,558
)
Proceeds from employee stock plans
44,580

 
97,811

Minimum tax withholding paid on behalf of employees for net share settlement
(36,776
)
 
(24,814
)
Dividend payments to shareholders
(69,181
)
 
(60,086
)
Payments on technology license obligations
(29,478
)
 
(14,296
)
Proceeds from issuance of debt
1,892,605

 

Principal payments of debt
(606,128
)
 

Payment of equity and debt financing costs
(9,435
)
 

Net cash provided by (used in) financing activities
1,186,187

 
(388,943
)
Net decrease in cash and cash equivalents
(389,823
)
 
(183,591
)
Cash and cash equivalents at beginning of period
888,482

 
814,092

Cash and cash equivalents at end of period
$
498,659

 
$
630,501

See accompanying notes to unaudited condensed consolidated financial statements

5


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




Note 1. Basis of Presentation

The unaudited condensed consolidated financial statements of Marvell Technology Group Ltd., a Bermuda exempted company, and its wholly owned subsidiaries (the “Company”), as of and for the three and six months ended August 4, 2018, have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted as permitted by the SEC. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company's fiscal year 2018 audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2018. In the opinion of management, the financial statements include all adjustments, including normal recurring adjustments and other adjustments, that are considered necessary for fair presentation of the Company’s financial position and results of operations. All inter-company accounts and transactions have been eliminated. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for the entire year. Certain prior year amounts have been reclassified to conform to current year presentation. These amounts were not material to any of the periods presented. These financial statements should also be read in conjunction with the Company’s critical accounting policies included in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018 and those included in this Form 10-Q below.

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. Accordingly, every fifth or sixth fiscal year will have a 53-week period. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal 2018 had a 53-week year. Fiscal 2019 is a 52-week year.

On July 6, 2018, the Company completed its acquisition of Cavium, Inc. (“Cavium”). Cavium is a provider of highly integrated semiconductor processors that enable intelligent processing for wired and wireless infrastructure and cloud for networking, communications, storage and security applications. Cavium designs, develops and markets semiconductor processors for intelligent and secure networks. The consolidated financial statements include the operating results of Cavium for the period from the date of acquisition to the Company's second quarter ended August 4, 2018. See “Note 3 - Business Combination” for more information.


6

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


Note 2. Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In May 2014, the FASB issued a new accounting standard on the recognition of revenue from contracts with customers that superseded nearly all existing revenue recognition guidance under GAAP. The new standard requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses, in particular, contracts with more than one performance obligation, as well as the accounting for certain costs to obtain or fulfill a contract with a customer, and provides for additional disclosures with respect to revenue and cash flows arising from contracts with customers. Public entities are required to apply the amendments on either a full or modified retrospective basis for annual periods beginning after December 15, 2017 and for interim periods within those annual periods. The Company adopted the standard on a modified retrospective basis in the first quarter of fiscal year 2019, with the cumulative effect recognized in retained earnings at the date of adoption. See "Note 5 - Revenue" for additional information on the impact of the adoption of the new standard on the Company’s consolidated financial statements.

In January 2016, the FASB issued an accounting standard update that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The Company adopted the standard in the first quarter of fiscal 2019. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.

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

In October 2016, the FASB issued new guidance that simplifies the accounting for the income tax effects of intra-entity transfers and will require companies to recognize the income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs. Previous guidance required companies to defer the income tax effects of intra-entity transfers of assets until the asset had been sold to an outside party or otherwise recognized. The Company adopted the standard in the first quarter of fiscal 2019. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

In November 2016, the FASB issued new guidance that requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. As a result, companies will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The Company adopted the standard in the first quarter of fiscal 2019. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.

In January 2017, the FASB issued an accounting standards update that revises the definition of a business. The amendments provide a more robust framework for determining when a set of assets and activities is a business. The update is intended to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company adopted the standard in the first quarter of fiscal 2019. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

In May 2017, the FASB issued an accounting standards update that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Unless the changes in terms or conditions meet all three criteria outlined in the guidance, modification accounting should be applied. The three criteria relate to changes in the terms and conditions that affect the fair value, vesting conditions, or classification of a share-based payment award. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company adopted the standard in the first quarter of fiscal 2019. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.


7

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


In June 2018, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that substantially aligns the accounting for shared-based payments to non-employees and employees. The standard is required to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company early adopted the standard in the second quarter of fiscal 2019. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.

Accounting Pronouncements Not Yet Effective

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

In June 2016, the FASB issued a new standard requiring financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard eliminates the threshold for initial recognition in current GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The standard is effective for the Company beginning in the first quarter of fiscal year 2020. The Company does not expect the adoption of this guidance will have a material effect on its consolidated financial statements.

In August 2017, the FASB issued an accounting standards update that simplifies the application and administration of hedge accounting. The guidance amends the presentation and disclosure requirements and changes how companies assess effectiveness. The guidance is intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance is effective for the Company beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The guidance will be applied to cash flow and net investment hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. The Company is evaluating the effect this new guidance will have on its consolidated financial statements.

In August 2018, the FASB issued an accounting standard update to align the requirements for capitalizing implementation costs incurred in a software hosting arrangement that is a service contract and costs to develop or obtain internal-use software. The guidance is effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The Company is evaluating the effect this new guidance will have on its consolidated financial statements.


Note 3. Business Combination
On July 6, 2018, the Company completed the acquisition of Cavium (the “Cavium acquisition”). Cavium is a provider of highly integrated semiconductor processors that enable intelligent processing for wired and wireless infrastructure and cloud for networking, communications, storage and security applications. The Cavium acquisition was primarily intended to create an opportunity for the combined company to emerge as a leader in infrastructure solutions. In accordance with the terms of the Agreement and Plan of Merger, dated as of November 19, 2017, by and among the Company and Cavium (the “Cavium merger agreement”), the Company acquired all outstanding shares of common stock of Cavium (the “Cavium shares”) for $40.00 per share in cash and 2.1757 shares of the Company’s common stock exchanged for each share of Cavium stock. The Company also made cash payments for the fractional shares that resulted from conversion as specified in the Cavium merger agreement. The merger consideration was funded with a combination of cash on hand, new debt financing and issuance of the Company’s common shares. See “Note 4 - Debt” for discussion of the debt financing.

8

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


The following table summarizes the total merger consideration (in thousands, except share and per share data):
Cash consideration to Cavium common stockholders
 
$
2,819,812

Common stock (153,376,408 shares of the Company's common
   stock at $21.34 per share)
 
3,273,053

Cash consideration for intrinsic value of vested director stock options and employee accelerated awards attributable to pre-acquisition service
 
10,642

Stock consideration for employee accelerated awards attributable to pre-acquisition service
 
7,804

Fair value of the replacement equity awards attributable to
pre-acquisition service
 
50,485

Total merger consideration
 
$
6,161,796


Pursuant to the Cavium merger agreement, the Company assumed the outstanding employee equity awards originally granted by Cavium and converted such shares into the Company’s equivalent awards. The outstanding vested options held by directors of Cavium were settled in cash as specified in the Cavium merger agreement. The portion of the fair value of partially vested awards associated with pre-acquisition service of Cavium employees represented a component of the total consideration, as presented above.
The merger consideration allocation set forth herein is preliminary and may be revised as additional information becomes available during the measurement period which could be up to 12 months from the closing date of the acquisition. Any such revisions or changes may be material.

In accordance with US GAAP requirements for business combinations, the Company allocated the fair value of the purchase consideration to the tangible assets, liabilities and intangible assets acquired, including in-process research and development, or IPR&D, generally based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. Goodwill of $3.5 billion recorded for the Cavium acquisition is not expected to be deductible for tax purposes. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life.  The Company’s valuation assumptions of acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets. Acquisition-related costs are expensed in the periods in which the costs are incurred.

9

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


The purchase price allocation is as follows (in thousands):
Cash and cash equivalents
 
$
180,989

Accounts receivable
 
112,270

Inventories
 
330,778

Prepaid expense and other current assets
 
19,890

Assets held for sale
 
483

Property and equipment
 
115,428

Acquired intangible assets
 
2,744,000

Other non-current assets
 
89,139

Goodwill
 
3,504,302

Accounts payable
 
(52,383
)
Accrued liabilities
 
(127,837
)
Accrued employee compensation
 
(34,813
)
Deferred income
 
(2,466
)
Current portion of long-term debt
 
(6,123
)
Liabilities held for sale
 
(3,032
)
Long-term debt
 
(600,005
)
Non-current income taxes payable
 
(8,365
)
Deferred tax liabilities
 
(84,360
)
Other non-current liabilities
 
(16,099
)
Total merger consideration
 
$
6,161,796

    
The valuation of identifiable intangible assets and their estimated useful lives are as follows:
 
Asset Fair Value
 
Weighted
Average
Useful Life
(Years)
 
 
(in thousands, except for useful life)
Developed technology
 
$
1,743,000

 
7.59
In process research and development ("IPR&D")
 
513,000

 
n/a
Customer contracts and related relationships
 
465,000

 
8.92
Trade names
 
23,000

 
4.32
 
$
2,744,000

 
 

The intangible assets are amortized on a straight-line basis over the estimated useful lives, except for customer contracts and related relationships, which are amortized using an accelerated method of amortization over the expected customer lives, which more accurately reflects the pattern of realization of economic benefits expected to be obtained. The IPR&D will be accounted for as an indefinite-lived intangible asset and will not be amortized until the underlying projects reach technological feasibility and commercial production or are abandoned at which point the IPR&D will be amortized over the estimated useful life. Useful lives for these IPR&D projects are expected to range between 4 to 9 years.
During the three and six months ended August 4, 2018, the Company incurred $28.2 million and $43.5 million, respectively, in acquisition related costs which were recorded in selling, general and administrative expense in the condensed consolidated statements of operations.  The Company also incurred $22.8 million of debt financing costs. As of August 4, 2018, $0.4 million associated with the Revolving Credit Facility was classified in prepaid expenses and other current assets, $1.5 million associated with the Revolving Credit Facility was classified in other non-current assets, and $14.1 million associated with the term loan and senior notes was classified in long-term debt in the condensed consolidated balance sheet. See “Note 4. Debt” for additional information. Additionally, the Company incurred $2.9 million of equity issuance costs, which were recorded in additional paid-in capital in the condensed consolidated balance sheet.

10

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


Since the date of the acquisition, Cavium contributed $41.3 million of the consolidated net revenue for the three and six months ended August 4, 2018. Cavium net loss incurred in the period ended August 4, 2018 was $120.6 million, which included restructuring costs of $22.3 million.
Supplemental Pro Forma Information
The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions the Company believe are reasonable under the circumstances.

The following supplemental pro forma information presents the combined results of operations for each of the periods presented, as if Cavium had been acquired as of the beginning of fiscal year 2018. The supplemental pro forma information includes adjustments to amortization and depreciation for acquired intangible assets and property and equipment, adjustments to share-based compensation expense, the purchase accounting effect on inventories acquired, interest expense, and transaction costs. For fiscal year 2018, nonrecurring pro forma adjustments directly attributable to the Merger included (i) share-based compensation expense of $37.8 million, (ii) the purchase accounting effect of inventories acquired of $199.7 million, (iii) interest expense of $6.1 million and (iv) transaction costs of $114.6 million. The supplemental pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the Merger actually occurred at the beginning of fiscal year 2018 or of the results of our future operations of the combined business.
The supplemental pro forma financial information for the periods presented is as follows:
 
 
Six months ended
 
August 4, 2018
 
July 29, 2017
 
 
(in thousands, except per share data)
Pro forma net revenue
 
$
1,612,873

 
$
1,649,129

Pro forma net income (loss)
 
57,453

 
(204,632
)
 
 
 
 
 
Pro forma net income (loss) per share, basic
 
$
0.09

 
$
(0.31
)
Pro forma net income (loss) per share, diluted
 
0.09

 
(0.31
)



11

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


Note 4. Debt
On July 6, 2018, the Company completed its acquisition of Cavium. In connection with the acquisition (see "Note 3 - Business Combination"), the Company executed debt agreements in June 2018 to obtain a $900 million term loan, a $500 million revolving credit facility and $1.0 billion of senior unsecured notes. Upon completion of the offering of the senior unsecured notes in June 2018, the Company terminated an $850 million bridge loan commitment. This bridge loan commitment was provided by the underwriting bankers at the time of the Merger Agreement executed in November 2017. The bridge loan was never drawn upon.
Term Loan and Revolving Credit Facility
On June 13, 2018, the Company entered into a credit agreement (“Credit Agreement”) with certain lenders and Goldman Sachs Bank USA, as the general administrative agent and the term facility agent, and Bank of America, N.A., as the revolving facility agent. The Credit Agreement provides for borrowings of: (i) up to $500.0 million in the form of a revolving line of credit (“Revolving Credit Facility”) and (ii) $900.0 million in the form of a term loan (“Term Loan”). The proceeds of the Term Loan were used to fund a portion of the cash consideration for the Cavium acquisition, repay Cavium’s debt, and pay transaction expenses in connection with the Cavium acquisition. The proceeds of the Revolving Credit Facility is intended for general corporate purposes of the Company and its subsidiaries, which may include, among other things, the financing of acquisitions, the refinancing of other indebtedness and the payment of transaction expenses related to the foregoing. As of August 4, 2018, the Revolving Credit Facility has not been drawn upon. Following is further detail of the terms of the various debt agreements.
The Term Loan has a three year term which matures on June 13, 2021 and has a stated floating interest rate which equates to reserve-adjusted LIBOR + 137.5 bps as of August 4, 2018. The effective interest rate for the Term Loan was 3.912% as of August 4, 2018. As of August 4, 2018, the entire principal balance of $900.0 million Term Loan was outstanding. The Term Loan does not require any scheduled principal payments prior to final maturity. The Revolving Credit Facility has a five year term and has a stated floating interest rate which equates to reserve-adjusted LIBOR + 150.0 bps. As of August 4, 2018, the full amount of the Revolving Credit Facility of $500 million was undrawn and will be available for draw down through June 13, 2023. An unused commitment fee is payable quarterly based on unused balances at a rate that is based on the ratings of the Company's senior unsecured long-term indebtedness. This rate was initially 0.175% per year.
The Credit Agreement requires that the Company and its subsidiaries comply, subject to certain exceptions, with covenants relating to customary matters such as creating or permitting certain liens, entering into sale and leaseback transactions, consolidating, merging, liquidating or dissolving, and entering into restrictive agreements. It also prohibits subsidiaries of the Company from incurring additional indebtedness, and requires the Company to comply with a leverage ratio financial covenant not to exceed 3 to 1 as of the end of any fiscal quarter. As of August 4, 2018, the Company was in compliance with all of its debt covenants.
Senior Unsecured Notes
On June 22, 2018, the Company completed a public offering of (i) $500.0 million aggregate principal amount of the Company's 4.200% Senior Notes due 2023 (the “2023 Notes”) and (ii) $500.0 million aggregate principal amount of the Company's 4.875% Senior Notes due 2028 ("the “2028 Notes” and, together with the 2023 Notes, “the Senior Notes”).
The 2023 Notes mature on June 22, 2023 and the 2028 Notes mature on June 22, 2028. The stated and effective interest rates for the 2023 Notes are 4.200% and 4.423%, respectively. The stated and effective interest rates for the 2028 Notes are 4.875% and 5.012%, respectively. The Company may redeem the Senior Notes, in whole or in part, at any time prior to their maturity at the redemption prices set forth in Senior Notes. In addition, upon the occurrence of a change of control repurchase event (which involves the occurrence of both a change of control and a ratings event involving the Senior Notes being rated below investment grade), the Company will be required to make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest to, but excluding, the repurchase date. The indenture governing the Senior Notes also contains certain limited covenants restricting the Company’s ability to incur certain liens, enter into certain sale and leaseback transactions and merge or consolidate with any other entity or convey, transfer or lease all or substantially all of the Company’s properties or assets to another person, which, in each case, are subject to certain qualifications and exceptions.


12

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


Summary of Borrowings and Outstanding Debt

The following table summarizes the Company's outstanding debt at August 4, 2018 (in thousands):
 
 
August 4, 2018
Face Value Outstanding:
 
 
Term Loan
 
$
900,000

2023 Notes
 
500,000

2028 Notes
 
500,000

Total borrowings
 
$
1,900,000

Less: Unamortized debt discount and issuance cost
 
(21,383
)
Net carrying amount of debt
 
$
1,878,617

Less: Current portion
 
$

Non-current portion
 
$
1,878,617


During the three and six months ended August 4, 2018, the Company recognized $9.1 million interest expense in its consolidated statements of operations related to interest, amortization of debt issuance costs and accretion of discount associated with the outstanding Term Loan and Senior Notes, respectively.
As of August 4, 2018, the aggregate future contractual maturities of the Company's outstanding debt, at face value, were as follows (in thousands):
Fiscal year
 
Amount
2019
 
$

2020
 

2021
 

2022
 
900,000

2023
 

Thereafter
 
$
1,000,000


Repayment of Debt and Termination of Credit Facility of Cavium
On July 6, 2018, concurrent with completing the acquisition of Cavium as further described in “Note 3 - Business Combination,” the Company assumed and paid all of Cavium's outstanding debt and accrued interest of $606.6 million. Cavium's debt was governed under a credit agreement dated August 16, 2016, which was terminated following the repayment.



13

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


Note 5. Revenue
Effect of the Adoption of the New Revenue Standard
At the beginning of fiscal year 2019, the Company adopted the new revenue recognition standard on a modified retrospective basis, with the cumulative effect recognized in retained earnings at the date of adoption. The Company elected to apply the new revenue standard retrospectively to all contracts that are not completed contracts at the date of the initial adoption. Based on the Company’s assessment of this new accounting standard, a change in revenue recognition timing on its component sales made to distributors was made in the first quarter of fiscal year 2019 and the Company started to recognize revenue when the Company transfers control to the distributor rather than deferring recognition until the distributor sells the components. In addition, the Company established accruals for the variable consideration aspect of sales, estimated based on historical experience, which include estimates for price discounts, price protection, rebates, returns and stock rotation programs. On the date of initial adoption, the Company removed the deferred income on component sales made to distributors and recorded estimates of the accruals for variable consideration through a cumulative adjustment to retained earnings. The net impact to the opening balance of retained earnings related to the adoption of the new standard was an increase of $34.2 million.

The following table summarizes the effects of adopting the new revenue standard on the Company's financial statements for the fiscal year beginning February 4, 2018 as an adjustment to the opening balance. Such adjustments were of a non-cash nature.
(In thousands)
Balance as of February 3, 2018
 
Adjustments
 
Opening Balance as of February 4, 2018
Consolidated balance sheet:
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable, net
$
280,395

 
$
1,862

 
$
282,257

Inventory
170,039

 
2,016

 
172,055

Other non-current assets
148,800

 
42,116

 
190,916

Liabilities and shareholders' equity:
 
 
 
 
 
Accrued liabilities
86,958

 
70,336

 
157,294

Deferred income
61,237

 
(58,560
)
 
2,677

Retained earnings
$
1,409,452

 
$
34,218

 
$
1,443,670


The following tables summarize financial statement line items that are affected in the current reporting period by the application of the new revenue recognition policy as compared with the previous revenue recognition policy which was in effect in prior periods in accordance with ASC 605, Revenue Recognition:

14

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


 
August 4, 2018
(In thousands)
As currently reported
 
Adjustments
 
Balances without adoption of new revenue standard
Consolidated balance sheet:

 

 

Assets

 

 

Accounts receivable, net
$
443,276

 
$

 
$
443,276

Inventory
473,429

 
(1,478
)
 
471,951

Other non-current assets
275,598

 
(59,174
)
 
216,424

Liabilities and shareholders' equity:

 


 


Accrued liabilities
277,098

 
(92,890
)
 
184,208

Deferred income
3,511

 
78,492

 
82,003

Retained earnings
$
1,509,860

 
$
(46,254
)
 
$
1,463,606


 
Three Months Ended August 4, 2018
 
Six Months Ended August 4, 2018
(In thousands, except per share amounts)
As currently reported
 
Adjustments
 
Balances without adoption of new revenue standard
 
As currently reported
 
Adjustments
 
Balances without adoption of new revenue standard
Consolidated statement of operation:
 
 
 
 
 
 
 
 
 
 
 
Net revenue
$
665,310

 
$
(2,002
)
 
$
663,308

 
$
1,269,941

 
$
(17,531
)
 
$
1,252,410

Cost of goods sold
288,200

 
(2,099
)
 
286,101

 
517,138

 
(5,495
)
 
511,643

Net income (loss)
6,759

 
97

 
6,856

 
135,371

 
(12,036
)
 
123,335

Net income (loss) per share - Basic
0.01

 

 
0.01

 
0.26

 
(0.02
)
 
0.24

Net income (loss) per share - Diluted
$
0.01

 
$

 
$
0.01

 
$
0.25

 
$
(0.02
)
 
$
0.23


Adoption of the new revenue standard had no impact to cash from or used in operating, financing, or investing activities on the condensed consolidated statements of cash flow.
New Revenue Recognition Policy Including Significant Judgments and Estimates
Through the fiscal year ended February 3, 2018, in accordance with ASC 605, Revenue Recognition, the Company recognized revenue when there was persuasive evidence of an arrangement, delivery had occurred, the fee was fixed or determinable, and collection was reasonably assured. If the Company granted extended payment terms greater than its standard terms for a customer such that collectability was not assured, the revenue was deferred upon shipment and would be recognized when the payment became due provided all other revenue recognition criteria had been satisfied.

Product revenue was generally recognized upon shipment of product to customers, net of accruals for estimated sales returns and rebates. However, some of the Company’s sales were made through distributors under agreements allowing for price protection and limited rights of stock rotation on products unsold by the distributors. Product revenue on sales made through distributors were deferred until the distributors sold the product to end customers. Deferred revenue less the related cost of the inventories was reported as deferred income. The Company did not believe that there was any significant exposure related to impairment of deferred cost of sales, as its historical returns had been minimal and inventory turnover for its distributors generally ranged from 60 to 90 days. The Company’s sales to direct customers were made primarily pursuant to standard purchase orders for delivery of products.


15

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


As a result of the adoption of the new revenue standard on February 4, 2018, at the beginning of the first quarter of fiscal year 2019, the Company revised its revenue recognition policy. The Company now recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Under the new revenue recognition standard, the Company applies the following five step approach: (1) identify the contract 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 a performance obligation is satisfied.

The Company enters into contracts that may include various combinations of products and services that are capable of being distinct and accounted for as separate performance obligations. To date, the majority of the revenue has been generated by sales associated with storage and networking products. Revenue from services has been insignificant. Performance obligations associated with product sales transactions are generally satisfied when control passes to customers upon shipment. Accordingly, product revenue is recognized at a point in time when control of the asset is transferred to the customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For product revenue, the performance obligation is deemed to be the delivery of the product and therefore, the revenue is generally recognized upon shipment to customers, net of accruals for estimated sales returns and rebates. These estimates are based on historical returns, analysis of credit memo data and other known factors. Actual returns could differ from these estimates. The Company accounts for rebates by recording reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms agreed to with the customer. Some of the Company’s sales are made to distributors under agreements allowing for price protection, price discounts and limited rights of stock rotation on products unsold by the distributors. Control passes to the distributor upon shipment, and terms and payment by the Company’s distributors is not contingent on resale of the product. Product revenue on sales made to distributors with price protection and stock rotation rights is recognized upon shipment to distributors, with an accrual for the variable consideration aspect of sales to distributors, estimated based on historical experience, including estimates for price discounts, price protection, rebates, and stock rotation programs.

The Company’s products are generally subject to warranty, which provides for the estimated future costs of replacement upon shipment of the product. The Company’s products carry a standard one-year warranty, with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements. The warranty accrual is estimated primarily based on historical claims compared to historical revenues and assumes that the Company will have to replace products subject to a claim. From time to time, the Company becomes aware of specific warranty situations, and it records specific accruals to cover these exposures. Warranty expenses were not material for the periods presented.
Disaggregation of Revenue
The majority of the Company's revenue is generated from sales of the Company’s products.

The following table summarizes net revenue disaggregated by product group (in thousands, except percentages):
 
Three Months Ended
 
Six Months Ended
 
 
August 4, 2018
 
% of Total
 
August 4, 2018
 
% of Total
Net revenue by product group:
 
 
 
 
 
 
 
 
Storage (1)
 
$
335,764

 
50
%
 
652,833

 
51
%
Networking (2)
 
283,330

 
43
%
 
527,558

 
42
%
Other (3)
 
46,216

 
7
%
 
89,550

 
7
%
 
 
$
665,310

 
 
 
$
1,269,941

 


 
1)
Storage products are comprised primarily of HDD, SSD Controllers, Fibre Channel Adapters and Data Center Storage Solutions.
2)
Networking products are comprised primarily of Ethernet Switches, Ethernet Transceivers, Ethernet NICs, Embedded Communications and Infrastructure Processors, Automotive Ethernet, Security Adapters and Processors as well as Connectivity products. In addition, this grouping includes a few legacy product lines in which the Company no longer invests, but will generate revenue for several years.

16

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


3)
Other products are comprised of primarily Printer Solutions, Application Processors and others.

The following table summarizes net revenue disaggregated by primary geographical market (in thousands, except percentages):
 
Three Months Ended
 
Six Months Ended
 
 
August 4, 2018
 
% of Total
 
August 4, 2018
 
% of Total
Net revenue based on destination of shipment:
 
 
 
 
 
 
 
 
China
 
$
292,033

 
44
%
 
$
566,542

 
45
%
Malaysia
 
96,127

 
14
%
 
186,750

 
15
%
Philippines
 
55,416

 
8
%
 
113,183

 
9
%
Thailand
 
39,256

 
6
%
 
80,790

 
6
%
United States
 
16,563

 
2
%
 
32,592

 
3
%
Other
 
165,915

 
26
%
 
290,084

 
22
%
 
 
$
665,310

 
 
 
$
1,269,941

 



The following table summarizes net revenue disaggregated by customer type (in thousands, except percentages):
 
Three Months Ended
 
Six Months Ended
 
 
August 4, 2018
 
% of Total
 
August 4, 2018
 
% of Total
Net revenue by customer type:
 
 
 
 
 
 
 
 
Direct customers
 
$
532,351

 
80
%
 
1,002,827

 
79
%
Distributors
 
132,959

 
20
%
 
267,114

 
21
%
 
 
$
665,310

 
 
 
$
1,269,941

 
 
Contract Liabilities
Contract liabilities consist of the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration or the amount is due from the customer. As of August 4, 2018, contract liability balances are comprised of variable consideration estimated based on a portfolio basis using the expected value methodology based on analysis of historical data, current economic conditions, and contractual terms. Variable consideration estimates consist of the estimated returns, price discounts, price protection, rebates, and stock rotation programs. As of the end of a reporting period, some of the performance obligations associated with contracts will have been unsatisfied or only partially satisfied. In accordance with the practical expedients available in the guidance, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Contract liabilities are included in accrued liabilities in the condensed consolidated balance sheets.

The opening balance of contract liabilities at the beginning of the first quarter of fiscal year 2019 was $79.6 million. During the six months ended August 4, 2018, contract liabilities increased by $363.3 million associated with variable consideration estimates for additional shipments in the quarter, offset by $336.7 million decrease in such reserves primarily due to credit memos issued to customers. The ending balance of contract liabilities as of the second quarter ended in fiscal year 2019 was $106.2 million.
Sales Commissions
Sales commissions are generally earned by the salespersons based on shipments to customers. The Company has elected to apply the practical expedient to expense these costs when incurred as the amortization period is typically one year or less. These costs are recorded in selling, general and administrative expenses in the condensed consolidated statements of operations.


17

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


Note 6. Goodwill and Acquired Intangible Assets, Net
Goodwill
    
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The carrying value of goodwill as of August 4, 2018 and February 3, 2018 is $5.5 billion and $2.0 billion, respectively. The change in the carrying value of goodwill from February 3, 2018 to August 4, 2018 was due to the Cavium acquisition. See “Note 3 - Business Combination” for further discussion of the acquisition.
Acquired Intangible Assets, Net
There had been no new acquired intangible assets in fiscal year 2018, and as of February 3, 2018, the gross value of acquired intangible assets was fully amortized. In connection with the Cavium acquisition on July 6, 2018, the Company acquired $2.7 billion of intangible assets. As of the second quarter ended August 4, 2018, net carrying amounts are as follows (in thousands, except for weighted average remaining amortization period):
 
August 4, 2018
 
Gross Carrying Amounts
 
Accumulated Amortization
 
Net Carrying Amounts
 
Weighted average remaining amortization period (years)
Developed technologies
$
1,743,000

 
$
(18,984
)
 
$
1,724,016

 
7.59
Customer contracts and related relationships
465,000

 
(6,501
)
 
458,499

 
8.92
Trade names
23,000

 
(454
)
 
22,546

 
4.32
Total acquired amortizable intangible assets
$
2,231,000

 
$
(25,939
)
 
$
2,205,061

 
7.83
IPR&D
513,000

 

 
513,000

 
 
Total acquired intangible assets
$
2,744,000

 
$
(25,939
)
 
$
2,718,061

 
 

Amortization expense from acquired intangible assets for the three and six months ended August 4, 2018 was $25.9 million. The following table presents the estimated future amortization expense of acquired amortizable intangible assets as of August 4, 2018 (in thousands):
Fiscal Year
 
Amount

Remainder of 2019
 
$
157,380

2020
 
309,701

2021
 
301,580

2022
 
293,024

2023
 
285,596

Thereafter
 
857,780

 
 
$
2,205,061





18

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


Note 7. Restructuring and Other Related Charges
The Company continuously evaluates its existing operations to increase operational efficiency, decrease costs and increase profitability. In connection with the Cavium acquisition, the Company recorded restructuring and other related charges of $35.4 million for the three months ended August 4, 2018. These restructuring costs consist of approximately $22.3 million in severance and related costs, $11.0 million in facilities and related costs, and $2.1 million in other exit-related costs. The Company expects to complete these restructuring actions by the end of fiscal 2020.
The following table sets forth a reconciliation of the beginning and ending restructuring liability balances by each major type of cost associated with the restructuring charges (in thousands):
 
Severance and related costs
 
Facilities and related costs
 
Other exit-related costs
 
Total
Balance at February 3, 2018
$
654

 
$
462

 
$
555

 
$
1,671

Restructuring charges - continuing operations
24,057

 
11,057

 
262

 
35,376

Net cash payments
(3,617
)
 
(1,743
)
 
(541
)
 
(5,901
)
Release of reserves
(307
)
 

 

 
(307
)
Exchange rate adjustment
(91
)
 

 

 
(91
)
Balance at August 4, 2018
$
20,696

 
$
9,776

 
$
276

 
$
30,748

Less: non-current portion
$

 
$
5,878

 
$

 
$
5,878

Current portion
$
20,696

 
$
3,898

 
$
276

 
$
24,870

The remaining accrued severance and related costs and the other exit-related costs are expected to be paid in fiscal 2019. The remaining accrued facility and related costs includes remaining payments under lease obligations related to vacated space that are expected to be paid through fiscal 2028, net of estimated sub-lease income.

Note 8. Supplemental Financial Information (in thousands)
Consolidated Balance Sheets
 
 
August 4,
2018
 
February 3,
2018
Inventories:
 
 
 
Work-in-process
$
257,906

 
$
103,711

Finished goods
215,523

 
66,328

Total inventories
$
473,429

 
$
170,039

        
The inventory balance at August 4, 2018 includes $200.4 million related to the inventory step-up adjustment from the Cavium acquisition.

 
August 4,
2018
 
February 3,
2018
Property and equipment, net:
 
 
 
Machinery and equipment
$
609,376

 
$
535,416

Land, buildings, and leasehold improvements
279,880

 
247,675

Computer software
102,943

 
98,253

Furniture and fixtures
27,235

 
21,139

 
1,019,434

 
902,483

Less: Accumulated depreciation and amortization
(691,789
)
 
(700,261
)
Total property and equipment, net
$
327,645

 
$
202,222



19

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


Current accrued liabilities are comprised of the following at August 4, 2018 and February 3, 2018, respectively:

 
August 4,
2018
 
February 3,
2018
Accrued liabilities:
 
 
 
Contract liabilities
$
106,191

 
$

Technology license obligations
76,050

 
28,488

Accrued royalties
18,003

 
11,860

Accrued rebates (1)

 
9,292

Accrued legal related expenses
14,664

 
13,050

Unsettled investment trades (2)

 
4,497

Restructuring liabilities
24,870

 
1,612

Accrued income tax payable
9,735

 
959

Other
27,585

 
17,200

Total accrued liabilities
$
277,098

 
$
86,958


(1) Accrued rebates are classified as part of contract liabilities beginning in fiscal year 2019 upon adoption of the new revenue recognition standard.

(2) Unsettled investment trades represent amounts owed to third parties for investment purchases for which cash settlement has not yet occurred.

Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by components are presented in the following tables:
 
Unrealized Gain
(Loss) on
Marketable
Securities (1)
Balance at February 3, 2018
$
(2,322
)
Other comprehensive loss before reclassifications
(733
)
Amounts reclassified from accumulated other comprehensive gain
3,055

Net current-period other comprehensive gain, net of tax
2,322

Balance at August 4, 2018
$

 
Unrealized Gain
(Loss) on
Marketable
Securities (1)
 
Unrealized Gain
(Loss) on Cash
Flow Hedges (2)
 
Total
Balance at January 28, 2017
$
(801
)
 
$
824

 
$
23

Other comprehensive income (loss) before reclassifications
(146
)
 
2,341

 
2,195

Amounts reclassified from accumulated other comprehensive income (loss)
29

 
(1,348
)
 
(1,319
)
Net current-period other comprehensive income (loss), net of tax
(117
)
 
993

 
876

Balance at July 29, 2017
$
(918
)
 
$
1,817

 
$
899


20

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


(1) The amounts of gains (losses) associated with the Company's marketable securities reclassified from accumulated other comprehensive income (loss) are recorded in interest and other income, net.
(2) The amounts of gains (losses) associated with the Company's derivative financial instruments reclassified from accumulated other comprehensive income (loss) are recorded in operating expenses. See "Note 10- Derivative Financial Instruments" for additional information on the affected line items in the condensed consolidated statements of operations.

Consolidated Statements of Cash Flows
The noncash consideration paid for the acquisition of Cavium was $3.3 billion for the three and six months ended August 4, 2018.

Note 9. Investments
As of August 4, 2018, the Company has $25.0 million time deposits on hand. As of February 3, 2018, the following table summarizes the Company’s investments (in thousands):
 
February 3, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. government and agency debt
$
248,336

 
$
49

 
$
(644
)
 
$
247,741

Foreign government and agency debt
7,004

 

 
(17
)
 
6,987

Municipal debt securities
2,734

 

 
(6
)
 
2,728

Corporate debt securities
504,609

 
469

 
(1,999
)
 
503,079

Asset backed securities
42,429

 
3

 
(177
)
 
42,255

Held-to-maturity:
 
 
 
 
 
 
 
Time deposits
150,000

 

 

 
150,000

Total short-term investments
955,112

 
521

 
(2,843
)
 
952,790

Total investments
$
955,112

 
$
521

 
$
(2,843
)
 
$
952,790

Short-term, highly liquid investments of $78.5 million and $267.6 million as of August 4, 2018 and February 3, 2018, respectively, included in cash and cash equivalents on the accompanying consolidated balance sheets are not included in the table above because the gross unrealized gains and losses were immaterial as the carrying values approximate fair value due to the short term maturity of such investments.
Gross realized gains and gross realized losses on sales of available-for-sale securities are presented in the following tables (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
August 4,
2018
 
July 29,
2017
 
August 4,
2018
 
July 29,
2017
Gross realized gains
$
369

 
$
16

 
$
371

 
$
85

Gross realized losses
(2,575
)
 
(69
)
 
(3,437
)
 
(113
)
Total net realized gains (losses)
$
(2,206
)
 
$
(53
)
 
$
(3,066
)
 
$
(28
)

21

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


The contractual maturities of available-for-sale and held-to-maturity securities are presented in the following tables (in thousands):
 
 
August 4, 2018
 
February 3, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
25,000

 
$
25,000

 
$
554,247

 
$
553,866

Due between one and five years

 

 
400,866

 
398,924

Due over five years

 

 

 

 
$
25,000

 
$
25,000

 
$
955,113

 
$
952,790

There are no securities on hand at August 4, 2018 that have been in a continuous unrealized loss position. Such securities are presented as follows for the fiscal year ended February 3, 2018:
 
 
February 3, 2018
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government and agency debt
$
148,538

 
$
(298
)
 
$
51,332

 
$
(346
)
 
$
199,870

 
$
(644
)
Foreign government and agency debt
3,993

 
(1
)
 
2,994

 
(16
)
 
6,987

 
(17
)
Municipal debt securities
1,969

 
(6
)
 

 

 
1,969

 
(6
)
Corporate debt securities
253,380

 
(1,514
)
 
46,805

 
(485
)
 
300,185

 
(1,999
)
Asset backed securities
37,636

 
(145
)
 
2,167

 
(32
)
 
39,803

 
(177
)
Total securities
$
445,516

 
$
(1,964
)
 
$
103,298

 
$
(879
)
 
$
548,814

 
$
(2,843
)

    


22

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


Note 10. Derivative Financial Instruments
The Company manages some of its foreign currency exchange rate risk through the purchase of foreign currency exchange contracts that hedge against the short-term effect of currency fluctuations. The Company’s policy is to enter into foreign currency forward contracts with maturities less than 12 months which mitigates the effect of rate fluctuations on certain local currency denominated operating expenses. All derivative instruments are recorded at fair value in either prepaid expenses and other current assets or accrued liabilities. The Company reports cash flows from derivative instruments in cash flows from operating activities. The Company uses quoted prices to value its derivative instruments. There were no outstanding forward contracts at August 4, 2018 and February 3, 2018.

Cash Flow Hedges. The Company designates and documents its foreign currency forward exchange contracts as cash flow hedges for certain operating expenses. The Company evaluates and calculates the effectiveness of each hedge at least quarterly. The effective change is recorded in accumulated other comprehensive income and is subsequently reclassified to operating expense when the hedged expense is recognized. Ineffectiveness is recorded in interest and other income, net.
For the three and six months ended August 4, 2018, the Company did not have any derivative financial instruments. The following table provides information about gains (losses) associated with the Company’s derivative financial instruments for the three and six months ended July 29, 2017 (in thousands):
 
 
 
Amount of Gains (Losses) in Statements of Operations
 
 
Three Months Ended
Six Months Ended
 
Location of Gains (Losses) in Statements of Operations
 
July 29,
2017
 
July 29,
2017
Derivatives designated as cash flow hedges:
 
 
 
 
 
Forward contracts:
Research and development
 
$
1,251

 
$
1,726

 
Selling, general and administrative
 
331

 
394

 
 
 
$
1,582

 
$
2,120


The amounts of gains (losses) associated with the Company's derivative financial instruments reclassified from accumulated other comprehensive loss for the three and six months ended July 29, 2017 are presented in the following table (in thousands):
 
 
Three Months Ended
 
Six Months Ended
Affected Line Item in the Statements of Operations:
 
July 29,
2017
 
July 29,
2017
Operating costs and expenses:
 
 
 
 
     Cash flow hedges:
 
 
 
 
     Research and development
 
$
1,003

 
$
1,074

     Selling, general and administrative
 
265

 
274

Total
 
$
1,268

 
$
1,348


The portion of gains (losses) excluded from the assessment of hedge effectiveness is included in interest and other income, net. These amounts were not material in the three and six months ended July 29, 2017. The Company did not have hedge ineffectiveness from derivative financial instruments in the three and six months ended August 4, 2018 and July 29, 2017. No cash flow hedges were terminated as a result of forecasted transactions that did not occur.


23

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


Note 11. Fair Value Measurements
Fair value is an exit price representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1—Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company’s Level 1 assets include institutional money-market funds that are classified as cash equivalents and marketable investments in U.S. government and agency debt, which are valued primarily using quoted market prices. The Company’s Level 2 assets include its marketable investments in time deposits, foreign government and agency debt, municipal debt securities, corporate debt securities and asset backed securities as the market inputs used to value these instruments consist of market yields, reported trades and broker/dealer quotes, which are corroborated with observable market data. In addition, the severance pay fund is classified as Level 2 assets as the valuation inputs are based on quoted prices and market observable data of similar instruments.
 
The tables below set forth, by level, the Company’s assets and liabilities that are measured at fair value on a recurring basis. The tables do not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):
 
Fair Value Measurements at August 4, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Items measured at fair value on a recurring basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
17,759

 
$

 
$

 
$
17,759

Time deposits

 
60,730

 

 
60,730

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
25,000

 

 
25,000

Other non-current assets:
 
 
 
 
 
 
 
Severance pay fund

 
869

 

 
869

Total assets
$
17,759

 
$
86,599

 
$

 
$
104,358

 




24

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


 
Fair Value Measurements at February 3, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Items measured at fair value on a recurring basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
18,503

 
$

 
$

 
$
18,503

Time deposits

 
65,117

 

 
65,117

U.S. government and agency debt
51,589

 

 

 
51,589

Municipal debt securities

 
5,290

 

 
5,290

Corporate debt securities

 
127,076

 

 
127,076

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
150,000

 

 
150,000

U.S. government and agency debt
247,741

 

 

 
247,741

Foreign government and agency debt

 
6,987

 

 
6,987

Municipal debt securities

 
2,728

 

 
2,728

Corporate debt securities

 
503,079

 

 
503,079

Asset backed securities

 
42,255

 

 
42,255

Other non-current assets:
 
 
 
 
 
 
 
Severance pay fund

 
896

 

 
896

Total assets
$
317,833

 
$
903,428

 
$

 
$
1,221,261

 
Fair Value of Debt

The Company classified the Term Loan, the 2023 Notes and 2028 Notes under Level 2 of the fair value measurement hierarchy. The carrying value of the Term Loan approximates its fair value as the Term Loan is carried at a market observable interest rate that resets periodically. At August 4, 2018, the estimated aggregate fair value of the 2023 Notes and 2028 Notes was $1.0 billion and were classified as Level 2 as there are quoted prices from less active markets for the notes.

Note 12. Commitments and Contingencies
Lease Commitments
The Company leases some of its facilities, equipment and computer aided design software under non-cancelable operating leases. Further, the Company assumed operating leases following the acquisition of Cavium. The Company also purchases certain intellectual property under technology license obligations and assumed similar liability from the acquisition of Cavium. Technology license obligations include the liabilities under agreements for technology licenses between the Company and various vendors. Future minimum lease payments, net of estimated sublease income, and payments under technology license obligations as of August 4, 2018 are presented in the following table (in thousands):


25

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


Fiscal Year
Technology License Obligations
 
Operating Leases
 
Total
Remainder of 2019
$
22,934

 
$
31,994

 
$
54,928

2020
30,522

 
40,812

 
71,334

2021
7,800

 
28,299

 
36,099

2022

 
26,005

 
26,005

2023

 
19,215

 
19,215

Thereafter

 
28,569

 
28,569

Total future minimum lease payments
$
61,256

 
$
174,894

 
$
236,150

Less: Amount representing interest
(986
)
 
 
 
 
Present value of future minimum payments
$
60,270

 
 
 
 
Less: Current portion
(35,352
)
 
 
 
 
Non-current portion
$
24,918

 
 
 
 

Purchase Commitments
Under the Company’s manufacturing relationships with its foundry partners, cancellation of outstanding purchase orders is allowed but requires payment of all costs and expenses incurred through the date of cancellation. As of August 4, 2018, these foundries had incurred approximately $160.8 million of manufacturing costs and expenses relating to the Company’s outstanding purchase orders.

Intellectual Property Indemnification
The Company has agreed to indemnify certain customers for claims made against the Company’s products where such claims allege infringement or misappropriation of third-party intellectual property rights, including, but not limited to, patents, registered trademarks, copyrights and/or trade secrets. Under the aforementioned indemnification clauses, the Company may be obligated to defend customers and pay for the damages awarded against the customer under an infringement or misappropriation claim, as well as customers' attorneys’ fees and costs. The Company’s indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. However, there are typically limits on and exceptions to the Company’s potential liability for indemnification. Although historically the Company has not made significant payments under these indemnification obligations, the Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. The maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.
Contingencies and Legal Proceedings
The Company and certain of its subsidiaries are engaged in legal proceedings and claims which arise in the ordinary course of its business. The Company is currently unable to predict the final outcome of these matters and, therefore, cannot determine the likelihood of loss or estimate a range of possible loss, except with respect to amounts where it has determined a loss is both probable and estimable and where it has made an accrual. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling in litigation, particularly patent litigation, could require the Company to pay damages, one-time license fees or ongoing royalty payments, and could prevent the Company from manufacturing or selling some of its products or limit or restrict the type of work that employees involved in such litigation may perform for the Company, any of which could adversely affect financial results in future periods. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company’s business, financial condition, results of operations or cash flows.

26

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


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

Note 13. Shareholder's Equity
Following the Cavium acquisition and in accordance with the Cavium merger agreement, certain outstanding options to purchase shares of Cavium common stock and certain restricted stock units with respect to Cavium common stock, each granted under Cavium 2016 Equity Incentive Plan (“Cavium 2016 EIP”), Cavium 2007 Equity Incentive Plan (“Cavium 2007 EIP”) and QLogic 2005 Performance Incentive Plan, as assumed by Cavium effective August 16, 2016 (“QLogic 2005 Plan”), (and collectively, with the Cavium 2016 EIP and the Cavium 2007 EIP, the “Cavium Plans”), were assumed by the Company and converted into options to purchase common shares of the Company and restricted stock units with respect to common shares of the Company, respectively. The Company filed a registration statement on July 6, 2018 to register 15,824,555 common shares of the Company, issuable under the Cavium Plans, comprised of 2,535,940 common shares issuable pursuant to outstanding but unexercised options under the Cavium Plans and 13,288,615 common shares issuable pursuant to outstanding unvested restricted stock units under the Cavium Plans.
Cavium 2016 EIP
    
The Cavium 2016 EIP was adopted by Cavium on June 15, 2016 and was intended as the successor to and continuation of Cavium 2007 EIP. The Cavium 2016 EIP provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards, which may be granted to employees, directors and consultants. Awards under the Cavium 2016 EIP generally vest over four years and expire seven to ten years from the date of grant. Following the effective date, no additional awards were granted under the Cavium 2007 EIP.

Cavium 2007 EIP
    
Cavium adopted the Cavium 2017 EIP in May 2017 upon completion of its initial public offering. The Cavium 2007 EIP provided for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, and other forms of equity compensation and performance cash awards, all of which may be granted to employees (including officers), directors, and consultants or affiliates. Awards granted under the Cavium 2007 EIP vest at the rate specified by the plan administrator, for stock options, typically with 1/8th of the shares vesting six months after the date of grant and 1/48th of the shares vesting monthly thereafter over the next three and one half years and for restricted stock unit awards typically with quarterly vesting over four years. Awards expire seven to ten years from the date of grant.

27

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


QLogic 2005 Plan

The QLogic 2005 Plan was assumed and registered by Cavium upon its completion of acquisition of QLogic Corporation on August 16, 2016. The QLogic 2005 Plan provided for the issuance of restricted stock unit awards, incentive and non-qualified stock options, and other stock-based incentive awards. Restricted stock unit awards granted pursuant to the QLogic 2005 Plan to employees subject to a service condition generally vest over four years from the date of grant. Stock options granted pursuant to the QLogic 2005 Plan to employees have ten-year terms and generally vest over four years from the date of grant. 

Cavium Acquisition-related Equity Awards

The awards under the Cavium Plans assumed by the Company in the Cavium acquisition were measured at the acquisition date based on the estimated fair value of $357.1 million. A portion of that fair value, $68.9 million, which represented the pre-acquisition service provided by employees to Cavium, was included in the total consideration transferred as part of the acquisition. As of the acquisition date, the remaining portion of the fair value of those awards was $288.2 million, representing post-acquisition share-based compensation expense that will be recognized as these employees provide service over the remaining vesting periods. During the three months ended August 4, 2018, the Company recognized $47.1 million of share-based compensation expense in connection with the acquisition of Cavium, of which $37.8 million was due to the accelerated vesting of outstanding equity awards of certain Cavium employees.
Summary of Share-based Compensation Expense
The following table summarizes share-based compensation expense (in thousands):
 
Three Months Ended
 
Six Months Ended
 
August 4,
2018
 
July 29,
2017
 
August 4,
2018
 
July 29,
2017
Continuing operations:
 
 
 
 
 
 
 
     Cost of goods sold
$
4,748

 
$
1,810

 
$
6,653

 
$
3,236

     Research and development
26,859

 
12,371

 
41,144

 
26,361

     Selling, general and administrative
41,816

 
7,186

 
49,478

 
13,509

Share-based compensation - continuing operations
$
73,423

 
$
21,367

 
$
97,275

 
$
43,106

Discontinued operations:
 
 
 
 
 
 
 
      Cost of goods sold

 

 

 

      Research and development

 
954

 

 
3,098

      Selling, general and administrative

 
101

 

 
235

Share-based compensation - discontinued operations

 
1,055

 

 
3,333

Total share-based compensation
$
73,423

 
$
22,422

 
$
97,275

 
$
46,439

Share-based compensation capitalized in inventory was $2.3 million at August 4, 2018 and $1.3 million at February 3, 2018.

Note 14. Income Tax

The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period. The Company’s quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax regimes, changes in how we do business, and acquisitions, as well as the integration of such acquisitions.

28

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


The Company’s estimated effective tax rate for the year differs from the U.S. statutory rate of 21% primarily due to the benefit of a substantial portion of its earnings being taxed at rates lower than the U.S. statutory rate. The Company estimates that its effective tax rate could be adversely affected by pre-tax losses incurred in certain non-U.S. jurisdictions subject to tax rates lower than 21% for which it does not realize a tax benefit. These losses reduce the Company's pre-tax income without a corresponding reduction in its tax expense, and therefore increase its effective tax rate.
On July 6, 2018, the Company completed the acquisition of Cavium, Inc. (“Cavium”). With this acquisition, the Company is projecting significant amounts of pre-tax losses in the U.S. in the current fiscal year for which an income tax benefit is realized at the U.S. statutory rate of 21%. This income tax benefit is in excess of the Company's projected income taxes from other jurisdictions. As a result, the Company's estimated annual effective tax rate reflects a consolidated income tax benefit. It is possible that significant negative evidence may become available to reach a conclusion that a valuation allowance will be needed, and as such, the Company may recognize a valuation allowance in the next 12 months.
The income tax benefit of $30.0 million and $26.2 million, respectively, for the three and six months ended August 4, 2018, included a tax benefit from a net reduction in unrecognized tax benefits of $7.5 million and $7.2 million, respectively, and a tax benefit related to other discrete items recorded in the three and six month period of $2.8 million and $2.4 million, respectively.

The Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. The Company has not completed its determination of the accounting implications of the 2017 Tax Act on its tax accruals. However, the Company reasonably estimated the effects of the 2017 Tax Act and recorded provisional amounts in its financial statements as of February 3, 2018. There were no additional adjustments made to these amounts in the three or six month period ended August 4, 2018. As the Company continues its analysis of the 2017 Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service (“I.R.S.”), and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact the Company's provision for income taxes in the period in which the adjustments are made.
The Company's gross unrecognized tax benefits were $177.5 million and $23.2 million on August 4, 2018 and February 3, 2018, respectively. The net increase to the Company's gross unrecognized tax benefits of $154.3 million is primarily the result of certain unrecognized tax benefits recorded in the Company's accounting for the acquisition of Cavium. If the gross unrecognized tax benefits as of August 4, 2018 were realized in a subsequent period, the Company would record a tax benefit of $148.5 million within its provision of income taxes at such time. The amount of interest and penalties accrued as of August 4, 2018 and February 3, 2018 was $13.9 million and $17.2 million, respectively.

It is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to foreign currencies within the next 12 months. Excluding these factors, uncertain tax positions may decrease by as much as $13.5 million from the expiration of statutes of limitations in various jurisdictions during the next 12 months. Government tax authorities from several non-U.S. jurisdictions are also examining the Company’s tax returns. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to its tax audits and that any settlement will not have a material effect on its results at this time.

The Company operates under tax incentives in certain countries that may be extended if certain additional requirements are satisfied. The tax incentives are conditional upon meeting certain employment and investment thresholds. The impact of these tax incentives decreased foreign taxes by $0.5 million and $1.2 million for the three and six months ended August 4, 2018 respectively, and $0.8 million and $1.5 million for the three and six months ended July 29, 2017, respectively. The benefit of these tax incentives on net income per share was less than $0.01 per share for both the three and six months ended August 4, 2018 and July 29, 2017.


29

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


The Company’s principal source of liquidity as of August 4, 2018 consisted of approximately $520 million of cash, cash equivalents and short-term investments, of which approximately $510 million was held by subsidiaries outside of Bermuda. The Company has not recognized a deferred tax liability on $432 million of the excess financial reporting basis over the tax basis of investments in foreign subsidiaries outside of Bermuda that is indefinitely reinvested. The Company plans to use such amounts to fund various activities outside of Bermuda, including working capital requirements, capital expenditures for expansion, funding of future acquisitions or other financing activities. If such amounts were no longer considered indefinitely reinvested, the Company would incur a tax expense of approximately $113 million.

Note 15. Net Income Per Share
The Company reports both basic net income per share, which is based on the weighted average number of common shares outstanding during the period, and diluted net income per share, which is based on the weighted average number of common shares outstanding and potentially dilutive shares outstanding during the period.
In connection with the Cavium acquisition, the Company issued 153.4 million shares of the Company's common stock at $21.34 per share in exchange for Cavium shares on a 2.1757 to 1 basis as a part of the merger consideration. The Company also issued 1.1 million shares of the Company's common stock at $21.34 per share in exchange for Cavium employee accelerated awards on a 2.1757 to 1 basis as a part of the merger consideration. See “Note 3 - Business Combination” for more information. The equity related merger consideration resulted in increasing basic and diluted weighted average shares by 50.9 million weighted average shares for the three months ended August 4, 2018 and by 25.5 million weighted average shares for the six months ended August 4, 2018.
The computations of basic and diluted net income per share are presented in the following table (in thousands, except per share amounts):
 
 
Three Months Ended
 
Six Months Ended
 
August 4,
2018
 
July 29,
2017
 
August 4,
2018
 
July 29,
2017
Numerator:
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
6,759

 
$
135,450

 
$
135,371

 
$
235,042

Income from discontinued operations, net of tax

 
29,809

 

 
36,838

Net income
$
6,759

 
$
165,259

 
$
135,371

 
$
271,880

Denominator: