Adeia Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to promote understanding of the results of operations and financial condition and should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the year ended December 31, 2021 found in the Form 10-K filed by Xperi Holding Corporation on February 24, 2022 (the “Form 10-K”). This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property rights, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management’s plans and objectives for our current and future operations, our plans for quarterly dividends and stock repurchases, the levels of customer spending or research and development activities, general economic conditions, the impact of the COVID-19 pandemic and related events, the impact of the Mergers (as defined below) and other acquisitions on our financial condition and results of operations, our plans to separate our product and IP licensing businesses, and the sufficiency of financial resources to support future operations and capital expenditures. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed under the heading “Risk Factors” in our annual report on Form 10-K and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), such as our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report, other than as required by law. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects . Business Overview On December 18, 2019, Xperi Corporation (“Xperi”) entered into a definitive agreement with TiVo Corporation (“TiVo”), to combine in an all-stock merger of equals transaction (the “Mergers”). Following consummation of the Mergers on June 1, 2020, Xperi Holding Corporation (“we”) became the parent company of both Xperi and TiVo. We are a leading consumer and entertainment product/solutions licensing company and one of the industry’s largest intellectual property licensing platforms, with a diverse portfolio of media and semiconductor intellectual property and more than 11,000 patents and patent applications worldwide. We create extraordinary experiences at home and on the go for millions of consumers around the world, elevating content and how audiences connect with it in a way that is more intelligent, immersive and personal. Powering smart devices, connected cars, entertainment experiences and more, we have created a unified ecosystem that reaches highly engaged consumers, uncovering significant new business opportunities, now and in the future. Our technologies are integrated into billions of consumer devices, media platforms, and semiconductors worldwide, driving increased value for partners, customers and consumers. Headquartered in Silicon Valley with operations around the world, we have approximately 1,950 employees and more than 35 years of operating experience. We are currently planning, subject to any required regulatory approvals, a separation of our Product business and IP Licensing business through a tax-efficient transaction, resulting in two independent, publicly traded companies. We continue to evaluate the optimal timing of the contemplated business separation and currently anticipate that such separation will be completed in the second half of 2022. 30 COVID-19 Impact Our business and results of operations have been adversely affected by the global COVID-19 pandemic and related events and we expect its impact to continue. The impact to date has included periods of significant volatility in various markets and industries. The volatility has had, and we anticipate it will continue to have, an adverse effect on our customers and on our business, financial condition and results of operations, and may result in an impairment of our long-lived assets, including goodwill, increased credit losses and impairments of investments in other companies. In particular, the automotive market, as well as the broad consumer electronics industry, has been and may continue to be impacted by the pandemic and/or other events beyond our control, and further volatility could have an additional negative impact on these industries, customers, and our business. In addition, the COVID-19 pandemic and, to a lesser extent, U.S. restrictions on trade with certain Chinese customers, have impacted and may continue to impact the financial conditions of our customers. Actions by United States federal, state and local governments, as well as by foreign governments, to address the COVID-19 pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, also had a significant adverse effect on the markets in which we conduct our businesses. COVID-19 poses the risk that our workforce, suppliers, and other partners may be prevented from conducting normal business activities for an extended period of time, including due to shutdowns or stay-at-home orders that may be requested or mandated by governmental authorities. We have implemented policies to allow our employees to work remotely as a result of the pandemic as we reviewed processes related to workplace safety, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention (“CDC”). The COVID-19 pandemic could also cause delays in acquiring new customers and executing license renewals, and changes in consumer behaviors in response to the pandemic and related impacts may also affect our business operations and financial performance. After surges in daily cases and hospitalization associated with the Omicron variant from late 2021 to early 2022, reported COVID-19 cases and hospitalizations declined sharply in the U.S. in spring 2022. In response, the CDC and state/local governments have eased restrictive measures aimed at slowing transmission. At the same time, the recent, rapid spread of the highly transmissible BA.2 Omicron subvariant is causing a significant rise in COVID-19 cases in parts of Europe and in Asia, raising concerns that the U.S. could experience another COVID-19 surge in the foreseeable future. Our operations and those of our customers have also been negatively impacted by certain trends arising from the COVID-19 pandemic, including labor market constraints, shortage of semiconductor components and manufacturing capacities, and delays in shipments, product development and product launches. In addition, the widespread supply chain disruption has impeded global and regional economic activities, such as consumer spending and product availabilities, which has adversely affected our business operations and financial results, and such disruption may continue to negatively impact our operations. Moreover, the COVID-19 pandemic, its related impact, and United States federal, state and foreign government policies enacted to combat the pandemic have contributed to a recent rise of inflation that may increase the cost of our operations and reduce demand for our products and services and those of our customers, which may adversely affect our financial performance. We have been closely monitoring the COVID-19 pandemic and its impact on our business, including legislation to mitigate the impact of COVID-19 such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act which was enacted in March 2020, and the American Rescue Plan Act of 2021 which was enacted in March 2021. Although a significant portion of our anticipated revenue for 2022 is derived from fixed-fee and minimum-guarantee arrangements, primarily from large, well-capitalized customers which we believe somewhat mitigates the risks to our business, our per-unit and variable-fee based revenue will continue to be susceptible to the volatility, labor shortages, supply chain disruptions, microchip shortages, and potential market downturns precipitated by the COVID-19 pandemic. The full extent of the future impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the spread of new variants of COVID-19; the continued and renewed imposition of protective public safety measures; the continuing global disruption in supply chains in our industries; rising inflation rates and costs of goods; and the impact of the pandemic on the global economy and demand for consumer products. Although we are unable to predict the full impact and duration of the COVID-19 pandemic on our business, we are actively managing our financial expenditures in response to continued uncertainty. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part I, Item 1A – Risk Factors of the Form 10-K. Results of Operations Revenue 31 We derive the majority of our revenue from the licensing of our technologies and intellectual property (“IP”) rights to customers. For our revenue recognition policy including descriptions of revenue-generating activities, refer to “Note 3 – Revenue ” of the Notes to Condensed Consolidated Financial Statements. The following table presents our historical operating results for the periods indicated as a percentage of revenue: Three Months Ended March 31, 2022 March 31, 2021 Revenue: 100 100 % Operating expenses: Cost of revenue, excluding depreciation and amortization of intangible assets 11 13 Research, development and other related costs 23 25 Selling, general and administrative 27 30 Depreciation expense 2 2 Amortization expense 15 24 Litigation expense 1 1 Total operating expenses 79 95 Operating income 21 5 Interest expense 3 5 Other income (expense), net — — Income before taxes 18 — Provision for (benefit from) income taxes 9 (2 ) Net income 9 % 2 % Revenue (in thousands, except for percentages): Three Months Ended March 31, 2022 March 31, 2021 Increase/ (Decrease) % Change Revenue $ 257,420 $ 221,596 $ 35,824 16 % The $35.8 million, or 16% increase in revenue for the three months ended March 31, 2022, compared to the same period in the prior year, was primarily due to the execution of a new, multi-year license agreement with Micron Technology for which a meaningful portion of the total revenue was recognized in the quarter, partially offset by a decline in Product revenue driven largely by a significant settlement of past royalties from a customer in the first quarter of 2021 and by continued supply chain disruptions from the COVID-19 pandemic. Cost of Revenue, E xcluding Depreciation and Amortization of Intangible Assets Cost of revenue, excluding depreciation and amortization of intangible assets, consists primarily of employee-related costs, royalties paid to third parties, hardware product-related costs, maintenance costs and an allocation of facilities costs, as well as service center and other expenses related to providing our technology solution offerings and NRE services. Cost of revenue, excluding depreciation and amortization of intangible assets, for the three months ended March 31, 2022 was $27.7 million, as compared to $28.1 million for the three months ended March 31, 2021, a decrease of $0.4 million. The decrease was primarily attributable to lower hardware product-related costs due to a decline in hardware product sales in the first quarter of 2022. Research, Development and Other Related Costs Research, development and other related costs (“R&D expense”) are comprised primarily of employee-related costs, stock-based compensation expense, engineering consulting expenses associated with new product and technology development, product commercialization, quality assurance and testing costs, as well as costs related to patent applications and examinations, reverse engineering, materials, supplies, and an allocation of facilities costs. All research, development and other related costs are expensed as incurred. R&D expense for the three months ended March 31, 2022 was $59.4 million, as compared to $55.2 million for the three months ended March 31, 2021, an increase of $4.2 million. The increase was primarily due to employees hired in connection with the 32 acquisition of certain assets of MobiTV ( the “ MobiTV Acquisition”) in May 202 1, as well as hiring of employees that were previously outsourced , partially offset by reductions in outside services and contractor expenditure in the first quarter of 202 2 . We believe that a significant level of R&D expense will be required for us to remain competitive in the future. We also anticipate that R&D expense will increase in 2022 when compared to 2021 primarily due to the inclusion of a full year of expense in 2022 related to the employees added in connection with the MobiTV Acquisition during 2021. Selling, General and Administrative Selling expenses consist primarily of compensation and related costs for sales and marketing personnel engaged in sales and licensee support, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance personnel, legal fees and expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities-related expenses, are not allocated to other expense line items. Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2022 were $70.4 million, as compared to $67.4 million for the three months ended March 31, 2021, an increase of $3.0 million. The increase was due principally to incremental stock-based compensation recognized in connection with the accelerated vesting of outstanding restricted stock units upon the separation of a former executive, and an increase in costs related to planned business separation, partially offset by a reduction in the provision for credit losses, and decreases in severance and retention expenses in the first quarter of 2022. Depreciation Expense Depreciation expense for the three months ended March 31, 2022 was $5.9 million, as compared to $5.7 million for the three months ended March 31, 2021, an increase of $0.2 million. Amortization Expense Amortization expense for the three months ended March 31, 2022 was $39.3 million, as compared to $52.2 million for the three months ended March 31, 2021, a decrease of $12.9 million. The decrease was due to certain acquired intangible assets becoming fully amortized over the past six months. With the Mergers, we anticipate that amortization expense will continue to be a significant expense since we acquired approximately $878 million in intangible assets which will be amortized over the next several years. See “Note 8 – Goodwill and Identified Intangible Assets” in the Notes to Condensed Consolidated Financial Statements for additional information. Litigation Expense Litigation expense for the three months ended March 31, 2022 was $1.8 million, as compared to $2.5 million for the three months ended March 31, 2021, a decrease of $0.7 million. The decrease was primarily due to reduced case activity. We expect that litigation expense will continue to be a material portion of our operating expenses. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights. Upon expiration of our customers’ licenses, if those licenses are not renewed, litigation may become necessary to secure payment of reasonable royalties for the use of our patented technology. If we plan for or initiate such litigation, our future litigation expenses may increase. 33 Stock- based Compensation Expense The following table sets forth our stock-based compensation (“SBC”) expense for the three and nine months ended March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 March 31, 2021 Cost of revenue, excluding depreciation and amortization of intangible assets $ 628 $ 323 Research, development and other related costs 5,475 4,347 Selling, general and administrative 10,701 8,549 Total stock-based compensation expense $ 16,804 $ 13,219 Stock-based compensation awards include employee stock options, restricted stock awards and units, and employee stock plan purchases. The increase in SBC expense for the three months ended March 31, 2022, compared to the corresponding period in 2021, was primarily a result of incremental SBC recognized, in the first quarter of 2022, in connection with the accelerated vesting of outstanding restricted stock units upon the separation of a former executive, and secondarily from the vesting of stock award grants made in 2021 to increased employees resulting from the Mergers and the MobiTV Acquisition. Interest Expense Interest expense for the three months ended March 31, 2022 was $8.4 million, as compared to $11.3 million for the three months ended March 31, 2021. The decrease in interest expense was primarily due to a reduction in interest rate as a result of the debt refinancing in June 2021 described below, and secondly to a lower average debt balance as compared to the same period in 2021 as we continued to pay down principal balance during the intervening period. We anticipate interest expense will decrease in 2022 when compared to 2021 as a result of a full year of the lower debt balance and amortization of debt discount and issuance costs. However, those reductions could potentially be offset by increasing interest rates since our interest rate is variable. Other Income and Expense, Net Other income and expense, net, for the three months ended March 31, 2022 was $1.0 million, as compared to $1.4 million for the three months ended March 31, 2021. Other income and expense, net, was slightly higher in the first quarter of 2021 due principally to miscellaneous other income . Provision for Income Taxes Our provision for income taxes is based on our worldwide estimated annualized effective tax rate. For jurisdictions in which a loss is forecast but no benefit can be realized for those losses, the tax is estimated separately. In certain circumstances we also record the income tax effects of discrete transactions in the quarter in which the transaction has occurred. Foreign withholding taxes, U.S. federal and state income taxes, and unrealized foreign exchange loss from the prior year South Korea refund claims are the primary drivers of income tax expense and the primary reasons for cash tax payments of income taxes. For the three months ended March 31, 2022, our effective tax rate varies significantly from the 21% U.S. federal tax rate due to foreign withholding taxes, BEAT, state income taxes, and unrealized foreign exchange loss from prior year South Korea refund claims. For the three months ended March 31, 2022, we recorded an income tax expense of $21.5 million on pretax income of $45.5 million, which resulted in an effective tax rate of 47.3%. The income tax provision for the three months ended March 31, 2022 was primarily related to foreign withholding taxes, U.S. federal and state income taxes, and unrealized foreign exchange loss from prior year South Korea refund claims. For the three months ended March 31, 2021, we recorded an income tax benefit of $4.0 million on pretax income of $0.5 million, which resulted in an effective tax rate of (786.4)%. The income tax benefit for the three months ended March 31, 2021 was primarily related to foreign withholding taxes, BEAT, and unrealized foreign exchange loss from prior year South Korea refund claims. The year-over-year increase in income tax expense for the quarter ended March 31, 2022 is largely attributable to the application of a negative effective tax rate to the March 31, 2021 year-to-date U.S. pre-tax income. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that it was not 34 more-likely-than-not that we would realize our federal, certain state and certain foreign deferred tax assets given the substantial amount of tax attributes that will remain unutilized to offset forecasted future tax liabilities. In the future, we may release our deferred tax asset valuation allowance associated with our federal, state or foreign deferred tax assets depending on achievement of future profitability in relevant jurisdictions or the implementation of tax planning strategies that enable us to utilize deferred tax assets. There can be no assurance that we will generate profits or implement tax strategies in future periods enabling us to fully realize our deferred tax assets. The timing of recording a deferred tax asset valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be known in advance. We intend to continue maintaining a full valuation allowance on our federal deferred tax assets until there is sufficient evidence to support the reversal of all or a portion of these allowances. However, given our current earning and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of our federal valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain federal deferred tax assets and a decrease to income tax expense for the period the release is recorded . Segment Operating Results We operate in two reportable segments: (1) IP Licensing and (2) Product. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments. Our Chief Executive Officer has been determined to be the Chief Operating Decision Maker (“CODM”) in consideration with the authoritative guidance on segment reporting. In our IP Licensing segment, we primarily license our innovations to leading companies in the broader entertainment and semiconductor industries, and those developing new technologies that will help drive the industries forward. Licensing arrangements include access to one or more of our foundational patent portfolios and may also include access to some of our industry-leading technologies and proven know-how. In our Product segment, we derive the majority of the revenue from licensing our technology to customers primarily through Technology License arrangements and Technology Solutions arrangements. For Technology License arrangements, the customer obtains rights to the technology delivered at the commencement of the agreement. For Technology Solutions arrangements, the customer receives access to a platform, media or data that includes frequent updates, where access to such updates is critical to the functionality of the technology. We do not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there are none to report. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments. The following table sets forth our segments’ revenue, operating expenses and operating income (in thousands): Three Months Ended March 31, 2022 March 31, 2021 Revenue: IP Licensing segment $ 138,531 $ 98,014 Product segment 118,889 123,582 Total revenue 257,420 221,596 Operating expenses: IP Licensing segment 35,292 33,567 Product segment 97,511 108,563 Unallocated operating expenses (1) 71,648 69,067 Total operating expenses 204,451 211,197 Operating income: IP Licensing segment 103,239 64,447 Product segment 21,378 15,019 Unallocated operating expenses (1) (71,648 ) (69,067 ) Total operating income $ 52,969 $ 10,399 (1) Unallocated operating expenses consist primarily of selling, marketing, general and administrative expenses, including administration, human resources, finance, information technology, corporate development and procurement. These expenses are not allocated because these amounts are not considered in evaluating the operating performance of our business segments. 35 For the three months ended March 31, 202 2 , the unallocated operating expenses were $ 7 1 . 6 million , compared to $ 69.1 million for the three months ended March 31, 202 1 . The increase of $ 2.5 million was due principally to incremental stock-based compensation recognized in connection with the accelerated vesting of outstanding restricted stock units upon the separation of a former executive, and an increase in costs related to planned business separation, partially offset by a reduction in the provision for credit losses , and de creases in severance and retention expenses in the first quarter of 2022 . The revenue and operating income amounts in this section have been presented on a basis consistent with GAAP applied at the segment level. As of March 31, 2022, we had a total of $850.1 million in goodwill, and approximately $322.3 million of which was allocated to our IP Licensing segment and approximately $527.8 million of which was allocated to our Product segment. IP Licensing Segment Three Months Ended March 31, 2022 March 31, 2021 Revenue $ 138,531 $ 98,014 Operating expenses: Cost of revenue, excluding depreciation and amortization of intangible assets 290 146 Research, development and other related costs 9,155 7,225 Litigation 1,078 1,443 Depreciation 242 253 Amortization 24,527 24,500 Total operating expenses 35,292 33,567 Total operating income $ 103,239 $ 64,447 IP Licensing revenue for the three months ended March 31, 2022 was $138.5 million as compared to $98.0 million for the three months ended March 31, 2021, an increase of $40.5 million. The increase was primarily attributable to the execution of a new, multi-year license agreement with Micron Technology for which a meaningful portion of the total revenue was recognized in the quarter, partially offset by a decline in revenue from the Media IP licensing business due to past royalty revenue recorded in the first quarter of 2021. Operating expenses for the three months ended March 31, 2022 were $35.3 million, as compared to $33.6 million for the three months ended March 31, 2021, an increase of $1.7 million. The increase was primarily due to an increase in R&D cost due to increased headcount and personnel cost as well as investments in both Media and Semiconductor technology, partially offset by a decrease in litigation expense. We expect that litigation expense will continue to be a material portion of our operating expenses and may fluctuate between periods because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceedings, in this report, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights. Operating income for the three months ended March 31, 2022 was $103.2 million compared to operating income of $64.4 million for the three months ended March 31, 2021, and the increase was due to reasons stated above, including the execution of a new, multi-year Semiconductor IP license agreement. Product Segment Three Months Ended March 31, 2022 March 31, 2021 Revenue $ 118,889 $ 123,582 Operating expenses: Cost of revenue, excluding depreciation and amortization of intangible assets 27,407 27,986 Research, development and other related costs 50,215 47,998 Litigation 675 1,090 Depreciation 4,422 3,794 Amortization 14,792 27,695 Total operating expenses 97,511 108,563 Total operating income $ 21,378 $ 15,019 36 Product revenue for the three months ended March 31, 2022 was $118.9 million as compared to $123.6 million for the three months ended March 31, 2021, a decrease of $4.7 million. The decrease was primarily due to a significant settlement of past royalties from a customer in the first quarter of 2021, and to continued supply chain constraints that impacted our customers’ shipment volumes in Connected Car and Consumer Electronics. Operating expenses for the three months ended March 31, 2022 were $97.5 million, as compared to $108.6 million for the three months ended March 31, 2021, a decrease of $11.1 million. The decrease was primarily driven by lower amortization expense, partially offset by an increase in R&D cost primarily due to employees hired in connection with the MobiTV Acquisition in May 2021. The lower amortization was attributable to certain intangible assets becoming fully amortized over the past six months. Operating income in the three months ended March 31, 2022 was $21.4 million compared to operating income of $15.0 million in the three months ended March 31, 2021, and the increase was due to the reasons stated above. Liquidity and Capital Resources The following table presents selected financial information related to our liquidity and significant sources and uses of cash and cash equivalents as of and for the periods presented. As of (in thousands, except for percentages) March 31, 2022 December 31, 2021 Cash and cash equivalents $ 214,095 $ 201,121 Short-term investments 52,720 60,534 Total cash, cash equivalents and short-term investments $ 266,815 $ 261,655 Percentage of total assets 11 % 11 % Three Months Ended March 31, 2022 March 31, 2021 Net cash from operating activities $ 46,273 $ 26,729 Net cash from investing activities $ 3,064 $ (17,387 ) Net cash from financing activities $ (35,671 ) $ (44,033 ) Our primary sources of liquidity and capital resources are our operating cash flows and our short-term investments. Cash, cash equivalents and short-term investments were $266.8 million at March 31, 2022, an increase of $5.1 million from $261.7 million at December 31, 2021. This increase resulted primarily from $46.3 million in cash generated from operations and $8.0 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans, which was partially offset by $5.2 million in dividends paid, $28.3 million in repurchases of common stock, $10.1 million in repayment of long-term debt, and $4.3 million of capital expenditures. Cash and cash equivalents totaled $214.1 million at March 31, 2022, an increase of $13.0 million from $201.1 million at December 31, 2021. The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including money market funds and debt securities including corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit. We invest excess cash predominantly in high-quality investment grade debt securities with less than three years to maturity. Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss. For information about our material cash requirements, see “Liquidity and Capital Resources” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. Other than the principal payment of $10.1 million made by us under the Refinanced Term B Loans in March 2022, our cash requirements have not changed materially since December 31, 2021. In addition to our cash requirements, we have returned cash to stockholders through both quarterly dividend payments and repurchases of our common stock under our stock repurchase plan. Quarterly Dividends 37 In April 2022, our Board of Directors authorized payment of a quarterly dividend of $0.05 per share, to be paid in June 2022. We anticipate that all quarterly dividends will be paid out of cash, cash equivalents and short-term investments. Stock Repurchase Plan On June 12, 2020, our Board of Directors terminated a prior stock repurchase program and approved a new stock repurchase plan (the “Plan”) providing for the repurchase of up to $150.0 million of our common stock dependent on market conditions, share price and other factors. No expiration has been specified for this Plan. On April 22, 2021, our Board of Directors authorized an additional $100.0 million of purchases under the Plan. The stock repurchases may be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions, or pursuant to a Rule 10b5-1 plan. Since the inception of the Plan, and through March 31, 2022, we have repurchased an aggregate of approximately 10.0 million shares of common stock at a total cost of $172.2 million at an average price of $17.24. During the three months ended March 31, 2022, we repurchased an aggregate of approximately 1.0 million shares of common stock at a total cost of $17.3 million at an average price of $16.78. As of March 31, 2022, the total remaining amount available for repurchase under the Plan was $77.8 million. We may continue to execute authorized repurchases from time to time under the Plan. The amount and timing of any repurchases under the Plan depend on a number of factors, including but not limited to, the trading price, volume and availability of our common shares. In addition, as we plan for the separation of our Product business and IP Licensing business we may reduce or suspend share repurchases as we plan for the capital needs of two independent businesses. There is no guarantee that such repurchases under the Plan will enhance the value of our common stock. From 2020 through the first quarter of 2022, we generated approximately $709 million of cash flows from operating activities. While we expect to continue to generate cash flows from operating activities in 2022, the COVID-19 pandemic continues to present uncertainties as to the level of such cash flows as compared to prior years. Additionally, transaction costs relating to the planned separation of our two business segments are expected to impact operating cash flow for at least the next 6 months. We have taken actions to manage cash flows by reducing discretionary spending and other variable costs, and closely monitoring receivables and payables. We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and investments currently available, will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve (12) months and thereafter for the foreseeable future. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses, or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and may include covenants that would restrict our operations. Cash Flows from Operating Activities Cash flows provided by operations were $46.3 million for the three months ended March 31, 2022, primarily due to our net income of $24.0 million being further adjusted for non-cash items of depreciation of $5.9 million, amortization of intangible assets of $39.3 million and stock-based compensation expense of $16.8 million. These increases were partially offset by $40.8 million in changes in operating assets and liabilities including payment during the quarter of employee bonuses earned in 2021. Cash flows provided by operations were $26.7 million for the three months ended March 31, 2021, primarily due to our net income of $4.5 million being further adjusted for non-cash items of depreciation of $5.7 million, amortization of intangible assets of $52.5 million and stock-based compensation expense of $13.2 million. These increases were partially offset by $52.8 million in changes in operating assets and liabilities including payment during the quarter of employee bonuses earned in 2020. Cash Flows from Investing Activities Net cash provided by investing activities was $3.1 million for the three months ended March 31, 2022, primarily related to maturities and sales of securities of $12.0 million, partially offset by purchases of short-term investments of $4.5 million and capital expenditures of $4.3 million. Net cash used in investing activities was $17.4 million for the three months ended March 31, 2021, primarily related to purchases of short-term investments of $42.5 million and capital expenditures of $1.8 million, partially offset by maturities and sales of securities of $26.9 million. Capital Expenditures 38 Our capital expenditures for property, plant, and equipment consist primarily of purchases of computer hardware and software, information systems, production and test equipment. During the three months ended March 31, 2022 and 2021, we spent $4.3 million and $1.8 million on capital expenditures, respectively, and we expect capital expenditures in 2022 to be between $20.0 million to $25.0 million. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of our capital expenditure needs. Cash Flows from Financing Activities Net cash used in financing activities was $35.7 million for the three months ended March 31, 2022 principally due to $10.1 million in repayment of indebtedness, $5.2 million in dividends paid, and $28.3 million in repurchases of common stock, partially offset by $8.0 million in proceeds due to the issuance of common stock under our employee stock grant programs and employee stock purchase plans. Net cash used in financing activities was $44.0 million for the three months ended March 31, 2021 principally due to $13.1 million in repayment of indebtedness, $5.3 million in dividends paid, and $32.4 million in repurchases of common stock, partially offset by $6.7 million in proceeds due to the issuance of common stock under our employee stock grant programs and employee stock purchase plans. Long-term Debt On June 8, 2021, we amended that certain Credit Agreement dated June 1, 2020 by and among us, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “2020 Credit Agreement”). The 2020 Credit Agreement initially provided for a five-year senior secured term B loan facility in an aggregate principal amount of $1,050 million (the “2020 Term B Loan Facility”). In connection with the amendment (the “Amendment”), we made a voluntary prepayment of $50.6 million of the term loan outstanding under the 2020 Credit Agreement using cash on hand. The Amendment provided for, among other things, (i) a new tranche of term loans (the “Refinanced Term B Loans”) in an aggregate principal amount of $810.0 million, (ii) a reduction of the interest rate margin applicable to such loans to (x) in the case of base rate loans, 2.50% per annum and (y) in the case of Eurodollar loans, LIBOR plus a margin of 3.50% per annum, (iii) a prepayment premium of 1.00% in connection with any repricing transaction with respect to the Refinanced Term B Loans within six months of the closing date of the Amendment, (iv) an extension of the maturity to June 8, 2028, and (v) certain additional amendments, including amendments to provide us with additional flexibility under the covenant governing restricted payments. We commenced repaying quarterly installments under the Refinanced Term B Loans in the third quarter of 2021. At March 31, 2022, $779.6 million was outstanding under the Refinanced Term B Loans with an interest rate, including amortization of debt discount and issuance costs, of 4.2%. Interest is payable monthly. Under the existing loan agreements, we have future minimum principal payments for our debt of $30.4 million for the remainder of 2022, $40.5 million in each year from 2023 through 2027, with the remaining principal balance of $546.8 million due in 2028. We are obligated to pay a portion of excess cash flow on an annual basis beginning in March 2023 based on certain leverage ratios and our excess cash flow generated for the immediately preceding calendar year. The Refinanced Term B Loans contain customary covenants, and as of March 31, 2022, we were in full compliance with such covenants. Critical Accounting Policies and Estimates During the three months ended March 31, 2022, there were no significant changes in our critical accounting policies and estimates. See “Note 2 – Summary of Significant Accounting Policies” of Notes to the Condensed Consolidated Financial Statements for additional detail. For a discussion of our critical accounting policies and estimates, see Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. Recent Accounting Pronouncements See “Note 2 – Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption. Item 3. Quantitative and Qualitative Disclosures About Market Risk For a discussion of our market risk, see Part II, Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the Form 10-K. 39