MAXLINEAR, INC 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this report. Overview We are a provider of communications systems-on-chip solutions used in broadband, mobile and wireline infrastructure, 32 Table of Contents data center, and industrial and multi-market applications. We are a fabless integrated circuit design company whose products integrate all or substantial portions of a high-speed communication system, including radio frequency (RF), high-performance analog, mixed-signal, digital signal processing, security engines, data compression and networking layers, and power management. In most cases, these products are designed on a single silicon-die, using standard digital complementary metal oxide semiconductor (CMOS) processes and conventional packaging technologies. We believe this approach enables our solutions to achieve superior power, performance, and cost relative to our industry competition. Our customers include electronics distributors, module makers, original equipment manufacturers (OEMs), and original design manufacturers (ODMs), who incorporate our products in a wide range of electronic devices. Examples of such devices include cable Data Over Cable Service Interface Specifications (DOCSIS), fiber and DSL broadband modems and gateways; Wi-Fi and wireline routers for home networking; radio transceivers and modems for 4G/5G base-station and backhaul infrastructure; fiber-optic modules for data center, metro, and long-haul transport networks; as well as power management and interface products used in these and many other markets. Our highly integrated semiconductor devices and platform-level solutions are primarily manufactured using low-cost CMOS process technology. CMOS processes are ideally suited for large digital logic implementations targeting high-volume and low-cost consumer applications. Importantly, our ability to design analog and mixed-signal circuits in CMOS allows us to efficiently combine analog functionality and complex digital signal processing logic in the same integrated circuit. As a result, our solutions have exceptional levels of functional integration and performance, low manufacturing cost, and reduced power consumption. In addition, our proprietary CMOS-based radio and digital system architectures also enable shorter design cycles, significant design flexibility and low system-level cost across a wide range of broadband communications, wired and wireless infrastructure, and industrial and multi-market customer applications. In the three months ended March 31, 2021, revenues were $209.4 million. In the three months ended March 31, 2021, our net revenue was derived in part from sales of RF receivers and RF receiver systems-on-chip and connectivity solutions into broadband operator voice and data modems and gateways and connectivity adapters, global analog and digital RF receiver products, radio and modem solutions into wireless carrier access and backhaul infrastructure platforms, high-speed optical interconnect solutions sold into optical modules for data-center, metro and long-haul networks, and high-performance interface and power management solutions into a broad range of communications, industrial, automotive and multi-market applications, and in part from revenues attributable to our acquisition of the WiFi and Broadband assets business. Our ability to achieve revenue growth in the future will depend, among other factors, on our ability to further penetrate existing markets; our ability to expand our target addressable markets by developing new and innovative products; changes in government trade policies; and our ability to obtain design wins with device manufacturers, in particular manufacturers of set-top boxes, data modems, and gateways for the broadband service provider, storage networking market, cable infrastructure market, industrial and automotive markets, and optical module and telecommunications infrastructure markets. Products shipped to Asia accounted for 82% and 84% of net revenue during the three months ended March 31, 2021 and 2020, respectively, including 37% from products shipped to Hong Kong, 14% from products shipped to mainland China, and 12% from products shipped to Vietnam during the three months ended March 31, 2021 and 50% from products shipped to Hong Kong during the three months ended March 31, 2020. Although a large percentage of our products is shipped to Asia, we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold outside Asia. For example, revenue generated from sales of our products during the three months ended March 31, 2021 and 2020 related principally to sales to Asian ODMs and contract manufacturers delivering products into European and North American markets. To date, all of our sales have been denominated in United States dollars. A significant portion of our net revenue has historically been generated by a limited number of customers. Sales to customers comprise both direct sales to customers and indirect sales through distributors. In the three months ended March 31, 2021, our top three customers accounted for 37% of our net revenue, and our ten largest customers collectively accounted for 72% of our net revenue, of which distributor customers accounted for 39% of our net revenue. For certain customers, we sell multiple products into disparate end user applications such as cable modems, satellite set-top boxes and broadband gateways. Our business depends on winning competitive bid selection processes, known as design wins, to develop semiconductors for use in our customers’ products. These selection processes are typically lengthy, and as a result, our sales cycles will vary based on the specific market served, whether the design win is with an existing or a new customer and whether our product being designed in our customer’s device is a first generation or subsequent generation product. Our customers’ products can be complex and, if our engagement results in a design win, can require significant time to define, design and result in volume production. Because the sales cycle for our products is long, we can incur significant design and development expenditures in circumstances where we do not ultimately recognize any revenue. We do not have any long-term purchase commitments with any of our customers, all of whom purchase our products on a purchase order basis. Once one of our products is incorporated 33 Table of Contents into a customer’s design, however, we believe that our product is likely to remain a component of the customer’s product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative chip. Product life cycles in our target markets will vary by application. For example, in the cable operator modem and gateway sectors, a design-in can have a product life cycle of 24 to 48 months. In the industrial and wired and wireless infrastructure markets, a design-in can have a product life cycle of 24 to 60 months and beyond. Impact of COVID-19 and the Global Semiconductor Chip Shortage In late January 2020 and early February 2020, in response to a severe outbreak of the novel coronavirus disease, or COVID-19, the government of China instituted mandatory quarantines in Wuhan, China, extended lunar new year holiday closures, and restricted shipments out of the country. This resulted in a temporary delay in our product shipments in the first quarter of 2020. On March 11, 2020, the World Health Organization declared a global pandemic regarding COVID-19. The COVID-19 pandemic has reached all of the countries and states in which we operate, including in California where our headquarters and central engineering team are located, as well as Massachusetts, Spain, India, Singapore, Taiwan, Canada, France, Japan, South Korea, Hong Kong, Israel, Germany, and Austria, where additional engineering, sales, and administrative personnel are located. In many of these jurisdictions, local authorities have instituted stay-at-home or shelter-in-place orders. To protect the health and safety of our employees, we adopted social distancing policies including suspending employee travel and implementing remote work arrangements for substantially all of our workforce worldwide. As of March 31, 2021, some of our workforce has returned to the office at a reduced capacity adhering to local health authority guidelines and we are encouraging our employees to get COVID-19 vaccines as they become available. While we experienced some negative impact to our net revenue and gross profits in the first half of 2020 due to several industry-wide dynamics related to COVID-19, including the supply constraints described above, as well as certain customer order push-out requests, since then, we have been benefiting from the work-from-home environment that is driving an increase in demand for certain of our products. However, a sudden increase in demand for electronics containing semiconductor chips and stockpiling of chips by certain firms in China blacklisted by the U.S. has exacerbated bottlenecks in the supply chain, resulting in a global semiconductor chip shortage impacting our industry. Some chip manufacturers are estimating this supply shortage may continue into 2022. While these chip manufacturers are working to increase capacity in the future, and we are continuing to work closely with our suppliers and customers to minimize the potential adverse impacts of the supply shortage, such shortage may have a near-term impact on our ability to meet increased demand on certain products and have a negative impact on our operating results beginning in the second quarter of 2021 which may continue into 2022. Further, global financial markets reacted negatively to the COVID-19 pandemic’s impacts causing significant declines in the stock price and market capitalization of many companies across all industries, although some have recovered. Heightened volatility, global supply shortages, and uncertainty in customer demand and the worldwide economy has continued as a result of the COVID-19 pandemic, and we may experience increased volatility in our sales and revenues in the near future. However, the magnitude of such volatility on our business and its duration is uncertain and cannot be reasonably estimated at this time. As described below, on July 31, 2020, we consummated transactions contemplated by a definitive agreement to acquire certain assets and assume certain liabilities from Intel Corporation, or Intel, related to its Home Gateway Platform Division, which we refer to as the WiFi and Broadband assets business, and on September 9, 2020, we completed our acquisition of NanoSemi, Inc., or NanoSemi, pursuant to an Agreement and Plan of Merger with NanoSemi, dated September 9, 2020 (the “Merger Agreement”). These businesses also operate in jurisdictions that have been and continue to be materially affected by the COVID-19 pandemic. In particular, our WiFi and Broadband assets business has major engineering, development, and other personnel in Germany, Austria, Israel, India, Singapore, Taiwan, Hong Kong, and China and NanoSemi has engineering and development personnel in Boston, Massachusetts. Attempting to complete the integration of an acquisition of assets and new personnel around the world has been and will continue to be substantially complicated by continuing restrictions on travel and social distancing. In addition, engagement with newly integrated employees from the acquisitions has been and will continue to be similarly complicated and presents potential employee retention risks. We are taking various steps to mitigate these risks, but we cannot predict whether or to what extent the pandemic may adversely affect our ability to retain employees and successfully integrate the acquired businesses. In addition, the operating results of the acquired businesses are subject to the same financial and operational risks posed to MaxLinear’s current businesses, including potential declines in revenues, supply constraints, and other factors generally affecting businesses worldwide. For further discussion of potential risks arising from the acquisition, please see the discussion in Part II, Item 1A of this Quarterly Report on Form 10-Q captioned “Risk Factors.” 34 Table of Contents Acquisition of Home Gateway Platform Division of Intel Corporation On July 31, 2020, we completed our acquisition of the Home Gateway Platform Division, which we refer to as the Wi-Fi and Broadband assets business, pursuant to an Asset Purchase Agreement with Intel, dated April 5, 2020, and related agreements. We paid cash consideration of $ 150.0 million for the purchase of certain assets of the Wi-Fi and Broadband assets business, and assumed certain liabilities related to specified employment matters. The transaction was funded with a portion of the proceeds from a secured incremental term loan with an aggregate principal amount of $ 175.0 million (Note 8). Acquisition of NanoSemi, Inc. On September 9, 2020, we completed our acquisition of NanoSemi pursuant to the Merger Agreement. The initial closing transaction consideration consisted of $10 million in cash and 804,163 shares of our common stock. In addition, the NanoSemi stockholders will receive $35 million in deferred cash payments payable in 2021, and certain NanoSemi stockholders may also receive up to an additional $35 million in potential contingent consideration, subject to the acquired business’s satisfying certain financial objectives from July 1, 2020 through December 31, 2022. The stock consideration was issued in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended. In connection with the acquisition, we agreed to provide the NanoSemi stockholders with certain registration rights with respect to the shares of our common stock they received in the acquisition. For more information, please refer to Note 3 of our unaudited consolidated financial statements. Recent Developments On February 23, 2021, our board of directors authorized a plan to repurchase up to $100 million of our common stock over a period ending February 16, 2024. The amount and timing of repurchases are subject to a variety of factors including liquidity, share price, market conditions, and legal requirements. Any purchases will be funded from available working capital and may be effected through open market purchases, block transactions, and privately negotiated transactions. The share repurchase program does not obligate us to make any repurchases and may be modified, suspended, or terminated by us at any time without prior notice. For more information, please refer to Note 16 of our unaudited consolidated financial statements. Critical Accounting Policies and Estimates Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to business combinations, revenue recognition, inventory valuation, production masks, goodwill and other intangible assets valuation, income taxes and stock-based compensation. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. We believe that accounting policies we have identified as critical involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations. For a summary of our critical accounting policies and estimates, refer to Management’s Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2020, which we filed with the Securities and Exchange Commission, or SEC, on February 11, 2021, or our Annual Report. There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2021. 35 Table of Contents Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes , to remove certain exceptions related to the approach for intraperiod tax allocation, recognition of deferred tax liabilities for outside basis differences and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update are effective for us beginning with fiscal year 2021. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of the amendments in this update did not have a material impact on our consolidated financial position and results of operations as of and for the three months ended March 31, 2021, and is also not expected to have a material impact on our financial position and results of operations for the year ending December 31, 2021. In October 2020, the FASB issued ASU No. 2020-10 Codification Improvements , to make incremental improvements to GAAP and address stakeholder suggestions, including, among other things, clarifying that the requirement to provide comparative information in the financial statements extends to the corresponding disclosures section. The amendments in this update are effective for us beginning with fiscal year 2021. The amendments in this update should be applied retrospectively and at the beginning of the period that includes the adoption date. The adoption of the amendments in this update did not have a material impact on our financial disclosures as of and for the three months ended March 31, 2021, and is also not expected to have a material impact on our financial disclosures for the year ending December 31, 2021. Results of Operations The following describes the line items set forth in our unaudited consolidated statements of operations. Net Revenue. Net revenue is generated from sales of radio-frequency, analog, digital, and mixed-signal integrated circuits for access and connectivity, wired and wireless infrastructure, and industrial and multi-market applications. A significant portion of our sales are to distributors, who then resell our products. Cost of Net Revenue. Cost of net revenue includes the cost of finished silicon wafers processed by third-party foundries; costs associated with our outsourced packaging and assembly, test and shipping; costs of personnel, including stock-based compensation, and equipment associated with manufacturing support, logistics and quality assurance; amortization of acquired developed technology intangible assets; amortization of certain production mask costs; cost of production load boards and sockets; and an allocated portion of our occupancy costs. Research and Development. Research and development expense includes personnel-related expenses, including stock-based compensation, new product engineering mask costs, prototype integrated circuit packaging and test costs, computer-aided design software license costs, intellectual property license costs, reference design development costs, development testing and evaluation costs, depreciation expense and allocated occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications. All research and development costs are expensed as incurred. Selling, General and Administrative. Selling, general and administrative expense includes personnel-related expenses, including stock-based compensation, amortization of certain acquired intangible assets, merger, acquisition and integration costs, third-party sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs. Impairment Losses. Impairment losses consist of charges resulting from the impairment of intangible assets. Restructuring Charges . Restructuring charges consist of severance, lease and leasehold impairment charges, and other charges related to restructuring plans. Interest and Other Income (Expense), Net. Interest and other income (expense), net includes interest income, interest expense and other income (expense). Interest income consists of interest earned on our cash, cash equivalents and restricted cash balances. Interest expense consists of interest accrued on debt. Other income (expense) generally consists of income (expense) generated from non-operating transactions. Income Tax Provision (Benefit). We make certain estimates and judgments in determining income taxes for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expenses for tax and financial statement purposes and the realizability of assets in future years. 36 Table of Contents The following table sets forth our consolidated statement of operations data as a percentage of net revenue for the periods indicated: Three Months Ended March 31, 2021 2020 Net revenue 100 % 100 % Cost of net revenue 47 50 Gross profit 53 50 Operating expenses: Research and development 30 41 Selling, general and administrative 17 40 Impairment losses — — Restructuring charges 1 1 Total operating expenses 49 82 Income (loss) from operations 5 (32) Total interest and other income (expense), net (2) (3) Income (loss) before income taxes 3 (36) Income tax provision (benefit) 1 (11) Net income (loss) 2 % (25) % Net Revenue Three Months Ended March 31, 2021 2020 (1) $ Change % Change (dollars in thousands) Broadband $ 124,190 $ 26,638 $ 97,552 366 % % of net revenue 59 % 43 % Connectivity 27,449 5,616 21,833 389 % % of net revenue 13 % 9 % Infrastructure 28,792 17,542 11,250 64 % % of net revenue 14 % 28 % Industrial and multi-market 28,928 12,231 16,697 137 % % of net revenue 14 % 20 % Total net revenue $ 209,359 $ 62,027 $ 147,332 238 % _______________ (1) Our net revenues by market categories were revised during 2020 to align with changing end-market conditions, our current business priorities, as well as spending requirements and growth opportunities in the four categories. The broadband category includes our prior connected home category plus the SoC business from the Wi-Fi and Broadband assets business, but excludes wired connectivity. The infrastructure category remains unchanged. Industrial and multi-market includes the previously reported revenue plus component revenues from the Wi-Fi and Broadband assets business. Our connectivity category includes primarily our MoCA/G.hn products and Wi-Fi and Ethernet revenues from the Wi-Fi and Broadband assets business. Net revenue increased $147.3 million to $209.4 million for the three months ended March 31, 2021, as compared to $62.0 million for the three months ended March 31, 2020. The increase in broadband net revenue of $97.6 million was primarily the result of contribution of gateway revenues attributable to our acquisition of the Wi-Fi and Broadband assets business on July 31, 2020 and, to a lesser extent, improvements in cable product shipments, partially offset by reductions in satellite product shipments. The increase in connectivity revenue of $21.8 million was primarily driven by a partial-year contribution of Wi-Fi and ethernet revenues attributable to our Wi-Fi and Broadband assets business acquisition, further supplemented by an increase in MoCA and G.hn product shipments. The increase in industrial and multi-market revenue of $16.7 million was related to increased shipments of component products attributable to our Wi-Fi and Broadband assets business acquisition, further aided by an increase in shipments of high performance analog products in this category. The increase in infrastructure revenues of $11.3 million was primarily driven by an increase in wireless backhaul deployments and increased shipments of high performance analog products in this category. 37 Table of Contents We currently expect that revenue will fluctuate in the future, from period-to-period, based on evolving customer demand for existing products, the pace of adoption of newer products, and macroeconomic conditions. Further, due to heightened volatility and uncertainty in customer demand resulting from the COVID-19 pandemic, we may experience increased volatility in our sales and revenues. Cost of Net Revenue and Gross Profit Three Months Ended March 31, 2021 2020 $ Change % Change (dollars in thousands) Cost of net revenue $ 97,640 $ 31,265 $ 66,375 212 % % of net revenue 47 % 50 % Gross profit 111,719 30,762 80,957 263 % % of net revenue 53 % 50 % Cost of net revenue increased $66.4 million to $97.6 million for the three months ended March 31, 2021, as compared to $31.3 million for the three months ended March 31, 2020. The increase was primarily driven by higher sales and incremental expenses, primarily driven by our acquisition of the WiFi and Broadband assets business. Gross profit percentage improved for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, due primarily to improved absorption of amortization of intangible costs. We currently expect that gross profit percentage will fluctuate in the future, from period-to-period, based on changes in product mix, average selling prices, and average manufacturing costs. Further, due to heightened volatility and uncertainty in customer demand resulting from the COVID-19 pandemic and global semiconductor chip shortages, we may experience increased volatility in our cost of net revenues as a result. Research and Development Three Months Ended March 31, 2021 2020 $ Change % Change (dollars in thousands) Research and development $ 63,166 $ 25,689 $ 37,477 146 % % of net revenue 30 % 41 % Research and development expense increased $37.5 million to $63.2 million for the three months ended March 31, 2021 from $25.7 million in the three months ended March 31, 2020. The increase was primarily due to our business acquisitions of the WiFi and Broadband assets business on July 31, 2020 and NanoSemi on September 9, 2020, which resulted in added engineering headcount, facilities, and related expenses, as well as an increase in bonuses and performance stock-based compensation expenses. There were increases in personnel-related expense of $25.8 million, of which $6.3 million is from performance-based bonus accruals and stock-based compensation expense, outside services of $7.4 million which includes acquisition transition service costs and computer aided design and engineering fees of $6.8 million, depreciation expense of $1.7 million, occupancy expenses of $1.4 million, and prototype expense of $1.1 million. We expect our research and development expenses to increase in future years as we continue to expand our product portfolio and enhance existing products. Selling, General and Administrative Three Months Ended March 31, 2021 2020 $ Change % Change (dollars in thousands) Selling, general and administrative $ 36,469 $ 24,632 $ 11,837 48 % % of net revenue 17 % 40 % 38 Table of Contents Selling, general and administrative expense increased $11.8 million to $36.5 million for the three months ended March 31, 2021, as compared to $24.6 million for the three months ended March 31, 2020. The increase was primarily due to our acquisitions of the WiFi and Broadband assets business on July 31, 2020 and NanoSemi on September 9, 2020, which resulted in added personnel, facilities, and related expenses as well as an increase in performance-based bonuses and stock-based compensation expenses. There were increases in personnel expense of $7.9 million, including $3.4 million from performance-based bonus accruals and stock-based compensation expenses, outside services of $2.4 million primarily consisting of acquisition transition service costs, occupancy expenses of $0.9 million, and supplies and small tools expense of $0.5 million. We expect selling, general and administrative expenses to increase in future years as we grow our sales and marketing organization to expand into existing and new markets. Impairment Losses Three Months Ended March 31, 2021 2020 $ Change % Change (dollars in thousands) Impairment losses $ — $ 86 $ (86) (100) % % of net revenue — % — % Impairment losses in the 2020 period related to abandonment of a license of intellectual property. Restructuring Charges Three Months Ended March 31, 2021 2020 $ Change % Change (dollars in thousands) Restructuring charges $ 2,166 $ 489 $ 1,677 343% % of net revenue 1 % 1 % Restructuring charges increased $1.7 million to $2.2 million for the three months ended March 31, 2021, compared to $0.5 million for the three months ended March 31, 2020. Restructuring charges for the three months ended March 31, 2021 primarily consisted of $1.3 million in employee severance-related charges and $0.6 million of lease-related charges, which primarily consisted of impairment of leased right-of-use assets and leasehold improvements. Restructuring charges in the three months ended March 31, 2020 primarily consisted of lease restructuring charges of $0.3 million. Interest and Other Income (Expense ) Three Months Ended March 31, 2021 2020 $ Change % Change (dollars in thousands) Interest and other income (expense), net $ (4,310) $ (2,071) $ (2,239) 108 % % of net revenue (2) % (3) % Interest and other income (expense), net changed by $2.2 million from a net expense of $2.1 million in the three months ended March 31, 2020 to a net expense of $4.3 million for the three months ended March 31, 2021. The change in interest and other income (expense), net was primarily due to the impact of a $1.7 million increase in interest expense on outstanding debt, mostly related to an incremental term loan debt of $137.8 million, which was primarily used to fund our acquisition of the WiFi and Broadband assets business in July 2020. The remaining change included a $0.3 million change in other income (expense), net, from income of $0.2 million in the 2020 period to expense of $0.1 million primarily related to foreign currency fluctuations and a change in interest income from $0.2 million in the 2020 period to nil. Income Tax Provision (Benefit) Three Months Ended March 31, 2021 2020 $ Change % Change (dollars in thousands) Income tax provision (benefit) $ 1,806 $ (6,736) $ 8,542 (127) % 39 Table of Contents The income tax provision for the three months ended March 31, 2021 was $1.8 million compared to an income tax benefit of $6.7 million for the three months ended March 31, 2020. The income tax provision for the three months ended March 31, 2021 and 2020 each primarily related to the mix of pre-tax income among jurisdictions, excess tax benefits related to stock-based compensation, and release of certain reserves for uncertain tax positions under ASC 740-10. We continue to maintain a valuation allowance to offset state and certain federal and foreign deferred tax assets, as realization of such assets does not meet the more-likely-than-not threshold required under accounting guidelines. In making such determination, we consider all available positive and negative evidence quarterly, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, we continue to have a valuation allowance on state deferred tax assets, certain federal deferred tax assets, and certain foreign deferred tax assets in jurisdictions where we have cumulative losses or otherwise are not expected to utilize certain tax attributes. We do not incur income tax expense or benefit in certain tax-free jurisdictions in which we operate. Our subsidiary in Singapore operates under certain tax incentives in Singapore, which are generally effective through March 2022 and may be extended through March 2027. Under these incentives, qualifying income derived from certain sales of our integrated circuits is taxed at a concessionary rate over the incentive period. We also receive a reduced withholding tax rate on certain intercompany royalty payments made by our Singapore subsidiary during the incentive period. Such incentives are conditional upon our meeting certain minimum employment and investment thresholds within Singapore over time, and we may be required to return certain tax benefits in the event we do not achieve compliance related to that incentive period. We currently believe that we will be able to satisfy these conditions without material risk. Primarily because of our Singapore net operating losses and our full valuation allowance in Singapore, we do not believe the incentives will have a material impact on our income tax position in the year ending December 31, 2021. Liquidity and Capital Resources As of March 31, 2021, we had cash and cash equivalents of $148.1 million, restricted cash of $1.1 million and net accounts receivable of $87.5 million. Additionally, as of March 31, 2021, our working capital was $147.3 million. Our primary uses of cash are to fund operating expenses and purchases of inventory, property and equipment, and from time to time, the acquisition of businesses. We also use cash to pay down outstanding debt, repurchase our common stock under our stock repurchase plan, and from time to time, make investments. In July 2020, we funded our $150.0 million acquisition of the Wi-Fi and Broadband assets business with a portion of the net proceeds of our $175.0 million incremental term loan. In September 2020, we paid $10 million in cash to acquire NanoSemi and as of March 31, 2021, the NanoSemi stockholders have received $20 million of $35 million in deferred cash payments payable in 2021. Commencing on July 31, 2020, the incremental term loan of $175.0 million amortizes in quarterly installments of principal equal to (i) 1.25% of the original aggregate principal amount of the incremental term loan on the last day of each of the first through fourth full fiscal quarters of the Company after July 31, 2020, (ii) 2.50% of the original aggregate principal amount of the Incremental Term Loan on the last day of each of the fifth through eighth full fiscal quarters of the Company after July 31, 2020, and (iii) 3.75% of the original aggregate principal amount of the incremental term loan on the last day of each of the ninth through the eleventh full fiscal quarters of the Company after July 31, 2020. The incremental term loan has a term of three years and will mature on July 31, 2023, at which time all outstanding principal and accrued and unpaid interest on the incremental term loan is due. The Company also has an existing initial term loan with outstanding principal of $212.0 million due at maturity on May 12, 2024. 40 Table of Contents Heightened volatility, global semiconductor chip shortages, and uncertainty in customer demand and the worldwide economy in general continues to impact business and financial markets as a result of the COVID-19 pandemic, and we may experience decreased sales and revenues in the near future. A material adverse impact from COVID-19 and the global semiconductor chip shortage could result in a need to raise additional capital or incur additional indebtedness to fund strategic initiatives or operating activities, particularly if we pursue additional acquisitions. Our future capital requirements will depend on many factors, including impacts from the Wi-Fi and Broadband assets business and NanoSemi and our efforts to complete the integration of these businesses, changes in revenue, the expansion of our engineering, sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and potential material investments in, or acquisitions of, complementary businesses, services or technologies. Additional funds may not be available on terms favorable to us or at all. If we are unable to raise additional funds when needed, we may not be able to sustain our operations or execute our strategic plans. Our cash and cash equivalents are impacted by the timing of when we pay expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Cash used to fund operating expenses in our consolidated statements of cash flows excludes the impact of non-cash items such as amortization and depreciation of acquired intangible assets, leased right-of-use assets and property and equipment, stock-based compensation, and impairment of leased right-of-use assets and related leasehold improvements. Cash used to fund capital purchases and acquisitions of businesses and investments are included in investing activities in our consolidated statements of cash flows. Cash proceeds from debt and issuance of common stock and cash used to pay down outstanding debt or repurchase common stock is included in financing activities in our consolidated statements of cash flows. Our primary sources of cash are cash receipts on accounts receivable from our shipment of products to distributors and direct customers, and from billings made on our behalf to customers for products sold by Intel under a transition services agreement. Aside from the amounts billed to our customers, net cash collections of accounts receivable are impacted by the efficiency of our cash collections process, which can vary from period to period depending on the payment cycles of our major distributor customers, and relative linearity of shipments period-to-period. Our credit agreement, as amended, under which we entered into a term loan to partially fund our acquisition of Exar, permits us to request incremental loans in an aggregate principal amount not to exceed the sum of $160.0 million (subject to adjustments for any voluntary prepayments), plus an unlimited amount that is subject to pro forma compliance with certain secured leverage ratio and total leverage ratio tests. We incurred an incremental loan of $175.0 million under this credit agreement with new initial lenders and used a portion of the net proceeds to fund our $150.0 million acquisition of the WiFi and Broadband assets business. Following is a summary of our working capital, cash and cash equivalents, and restricted cash for the periods indicated: March 31, December 31, 2021 2020 (in thousands) Working capital $ 147,343 $ 128,057 Cash and cash equivalents $ 148,095 $ 148,901 Short-term restricted cash 114 115 Long-term restricted cash 984 1,018 Total cash, cash equivalents, and restricted cash $ 149,193 $ 150,034 Following is a summary of our cash flows provided by (used in) operating activities, investing activities and financing activities for the periods indicated: Three Months Ended March 31, 2021 2020 (in thousands) Net cash provided by operating activities $ 40,272 $ 6,648 Net cash used in investing activities (12,264) (1,035) Net cash provided by (used in) financing activities (28,817) 13 Effect of exchange rate changes on cash, cash equivalents and restricted cash (32) (303) Increase (decrease) in cash, cash equivalents and restricted cash $ (841) $ 5,323 41 Table of Contents Cash Flows from Operating Activities Net cash provided by operating activities was $40.3 million for the three months ended March 31, 2021. Net cash provided by operating activities consisted of positive impact of net income of $3.8 million and non-cash items of $37.7 million, offset by the negative impact of $0.6 million in changes in operating assets and liabilities and excess tax benefits totaling $1.3 million. Non-cash items included in net income for the three months ended March 31, 2021 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $22.3 million and stock-based compensation of $13.0 million. Net cash provided by operating activities was $6.6 million for the three months ended March 31, 2020. Net cash provided by operating activities consisted of positive cash flow from $17.8 million in non-cash items and $4.2 million in changes in operating assets and liabilities, partially offset by net loss of $15.5 million and excess tax benefits from stock-based compensation of $0.1 million. Non-cash items included in net loss for the three months ended March 31, 2020 primarily included depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $16.7 million and stock-based compensation of $6.8 million. Cash Flows from Investing Activities Net cash used in investing activities was $12.3 million for the three months ended March 31, 2021 and consisted primarily of $6.2 million in purchases of property and equipment, $5.0 million in purchases of long-term investments (Note 7), and $1.1 million in purchases of intangible assets. Net cash used in investing activities was $1.0 million for the three months ended March 31, 2020 and consisted entirely of purchases of property and equipment. Cash Flows from Financing Activities Net cash used in financing activities was $28.8 million for the three months ended March 31, 2021. Net cash used in financing activities consisted primarily of $20.0 million in repayments of debt, $7.4 million in minimum tax withholding paid on behalf of employees for restricted stock units, and $2.7 million in common stock repurchases, offset by cash inflows from net proceeds from issuance of common stock upon exercise of stock options of $1.3 million. Net cash provided by financing activities was $0.01 million for the three months ended March 31, 2020. Net cash provided by financing activities consisted primarily of cash inflows from net proceeds from issuance of common stock upon exercise of stock options, partially offset by minimum tax withholding paid on behalf of employees for restricted stock units. We believe that our $148.1 million of cash and cash equivalents at March 31, 2021 will be sufficient to fund our projected operating requirements for at least the next twelve months. As of March 31, 2021, our indebtedness totaled $349.8 million, which consists of $212.0 million outstanding principal under an initial term loan and $137.8 million under an incremental term loan. We have repaid $250.2 million of debt through March 31, 2021. The credit agreement, as amended, permits the Company to request incremental loans in an aggregate principal amount not to exceed the sum of $160.0 million (subject to adjustments for any voluntary prepayments), plus an unlimited amount that is subject to pro forma compliance with certain secured leverage ratio and total leverage ratio tests. Incremental loans are subject to certain additional conditions, including obtaining additional commitments from the lenders then party to the credit agreement or new lenders. The initial term loan facility has a seven-year term expiring in May 2024 and bears interest at either an Adjusted LIBOR or an Adjusted Base Rate, at our option, plus a fixed applicable margin. The outstanding principal on the initial term loan is due at maturity on May 12, 2024. The incremental term loan facility has a three-year term expiring in July 2023 and bears interest, at our option, at either an Adjusted LIBOR plus a fixed applicable margin of 4.25% per annum or an Adjusted Base Rate plus a fixed applicable margin of 3.25% per annum. The incremental term loan of $175.0 million amortizes in quarterly installments of principal equal to (i) 1.25% of the original aggregate principal amount of the incremental term loan on the last day of each of the first through fourth full fiscal quarters of the Company following the date of the incremental term loan, (ii) 2.50% of the original aggregate principal amount of the incremental term loan on the last day of each of the fifth through eighth full fiscal quarters of the Company, and (iii) 3.75% of the original aggregate principal amount of the incremental term loan on the last day of each of the ninth through the eleventh full fiscal quarters of the Company. Our cash and cash equivalents in recent years have been favorably affected by our implementation of an equity-based bonus program for our employees, including executives. In connection with that bonus program, in February 2021, we issued 0.5 million freely-tradable shares of our common stock in settlement of bonus awards for the 2020 performance period. We expect to implement a similar equity-based plan for fiscal 2021, but our compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock. 42 Table of Contents Warranties and Indemnifications In connection with the sale of products in the ordinary course of business, we often make representations affirming, among other things, that our products do not infringe on the intellectual property rights of others, and agree to indemnify customers against third-party claims for such infringement. Further, our certificate of incorporation and bylaws require us to indemnify our officers and directors against any action that may arise out of their services in that capacity, and we have also entered into indemnification agreements with respect to all of our directors and certain controlling persons. Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2021, we were not involved in any unconsolidated SPE transactions. Contractual Obligations As of March 31, 2021, future minimum payments under long-term debt, non-cancelable operating leases, inventory purchase obligations and other obligations were as follows: Payments due Total Less than 1 year 1-3 years 3-5 years More than 5 years (in thousands) Long-term debt obligations $ 349,812 $ — $ 137,812 $ 212,000 $— Operating lease obligations 34,509 7,741 13,896 7,923 4,949 Inventory purchase obligations 143,446 142,784 662 — — Other obligations 44,351 15,143 28,761 447 — Total $ 572,118 $ 165,668 $ 181,131 $ 220,370 $ 4,949 Other obligations consist of contractual payments due for software licenses. Our consolidated balance sheet at March 31, 2021 included $5.6 million in other long-term liabilities for uncertain tax positions, some of which may result in cash payment. The future payments related to uncertain tax positions recorded as other long-term liabilities have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlement with the taxing authorities. Our contractual obligations including long-term debt, leases, inventory purchase obligations and other obligations, increased by $49.9 million to $572.1 million as of March 31, 2021, from $522.2 million as of December 31, 2020. The increase was primarily due to increased orders of inventory placed with our vendors and with Intel under the transition services agreement during the period.