What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-25 compared with 2022-07-27 · 108 added, 92 removed, 237 unchanged (46% of the section changed)

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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 six months ended June 30, 2022, revenues of $543.9 million were derived 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.

In the nine months ended September 30, 2022, revenues of $829.7 million were derived 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.

Our ability to achieve revenue growth in the future will depend, among other factors, on our ability to further penetrate existing markets;

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changes in government trade policies;

changes in export control regulations;

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 81% and 82% of net revenue during the three months ended June 30, 2022 and 2021, respectively, including 40% from products shipped to Hong Kong and 22% from products shipped to mainland China during the three months ended June 30, 2022 and 44% from products shipped to Hong Kong and 14% from products shipped to Vietnam during the three months ended June 30, 2021.

Products shipped to Asia accounted for 81% and 82% of net revenue during the six months ended June 30, 2022 and 2021, respectively, including 39% from products shipped to Hong Kong and 17% from products shipped to mainland China during the six months ended June 30, 2022 and 40% from products shipped to Hong Kong, 11% from products shipped to mainland China, and 13% from products shipped to Vietnam during the six months ended June 30, 2021.

Products shipped to Asia accounted for 82% and 83% of net revenue during the three months ended September 30, 2022 and 2021, respectively, including 51% from products shipped to Hong Kong and 14% from products shipped to mainland China during the three months ended September 30, 2022 and 40% from products shipped to Hong Kong, 12% from products shipped to mainland China, and 11% from products shipped to Vietnam during the three months ended September 30, 2021.

Products shipped to Asia accounted for 81% and 83% of net revenue during the nine months ended September 30, 2022 and 2021, respectively, including 43% from products shipped to Hong Kong and 16% from products shipped to mainland China during the nine months ended September 30, 2022 and 40% from products shipped to Hong Kong, 12% from products shipped to Vietnam, and 11% from products shipped to mainland China during the nine months ended September 30, 2021.

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 six months ended June 30, 2022 and 2021 related principally to sales to Asian ODMs and contract manufacturers delivering products into European and North American markets.

For example, revenue generated from sales of our products during the nine months ended September 30, 2022 and 2021 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.

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Sales to customers comprise both direct sales to customers and indirect sales through distributors.

In the three months ended June 30, 2022, our top two customers accounted for 29% of our net revenue, and our ten largest customers collectively accounted for 71% of our net revenue, of which distributor customers accounted for 29% of our net revenue.

In the six months ended June 30, 2022, our top two customers accounted for 28% of our net revenue, and our ten largest customers collectively accounted for 71% of our net revenue, of which distributor customers accounted for 30% of our net revenue.

In the three months ended September 30, 2022, one customer accounted for 31% of our net revenue, and our ten largest customers collectively accounted for 68% of our net revenue, of which distributor customers accounted for 18% of our net revenue.

In the nine months ended September 30, 2022, one customer accounted for 22% of our net revenue, and our ten largest customers collectively accounted for 68% of our net revenue, of which distributor customers accounted for 24% 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.

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has exacerbated bottlenecks in the supply chain, resulting in a global semiconductor supply shortage impacting our industry.

Some chip manufacturers are estimating this supply shortage may continue into 2023.

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 which may continue into 2023.

Global supply shortages, and uncertainty in customer demand and the worldwide economy has continued as a result of the COVID-19 pandemic and may be further exacerbated by the impacts of high inflation, and we may experience increased volatility in our sales and revenues in the near future.

Consistent with the prior year, we continue to operate in a supply constrained environment and are working closely with our suppliers to mitigate the impact of such shortage.

Furthermore, we believe this supply-constrained environment may continue into 2023.

Global supply shortages, inflation, and uncertainty in customer demand and the worldwide economy has continued as a result of the COVID-19 pandemic, and we may experience continued 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.

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We will also assume Silicon Motion’s vested and unvested employee stock-based compensation awards.

The merger is not subject to any financing conditions but is pending satisfaction of customary closing conditions, including Silicon Motion shareholders’ approval and regulatory approval in the People’s Republic of China, or China.

The merger is not subject to any financing conditions but is pending satisfaction of customary closing conditions, including regulatory approval in the People’s Republic of China, or China.

On June 27, 2022, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR, waiting period expired with respect to the pending merger.

On July 13, 2022, the Form S-4 was declared effective by the SEC.

On August 31, 2022, the Silicon Motion securityholders approved the merger at the extraordinary general meeting.

On June 17, 2022, we entered into an amended and restated commitment letter with Wells Fargo Bank and other lenders pursuant to which, subject to the terms and conditions set forth therein, the lenders have committed to provide (i) a senior secured term B loan facility in an aggregate principal amount of up to $2.7375 billion (ii) a senior secured term A loan facility in an aggregate principal amount of up to $512.5 million and (iii) a senior secured revolving credit facility in an aggregate principal amount of up to $250.0 million, which we collectively refer to as the Senior Secured Credit Facilities.

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A portion of the proceeds from the Senior Secured Credit Facilities will be used to repay existing debt in full.

Expanded U.S.

Export Controls

In October 2022, the Bureau of Industry and Security (“BIS”) of the U.S.

Commerce Department issued an interim final rule to implement additional export controls which primarily has the impact of requiring us to obtain a license to do business with certain customers, semiconductor foundries and outsource assembly and testing (“OSAT”) facilities in China that sell or produce certain advanced computing integrated circuits, among other things, which resulted in expanding the scope of foreign-produced items subject to license requirements to entities on Export Administration Regulations’ (“EAR”) Entity List that are located in China, and also added new entities in China to the EAR’s Unverified List.

We may experience a temporary loss of revenues or supply while we are obtaining licenses with certain customers, semiconductor foundries, and/or OSAT providers recently added to the Entity List, or failure to obtain any required license could result in a reduction of anticipated revenues or supply until an alternate source of supply can be obtained.

We are currently assessing the impact of the interim final rule and addition of new entities to the Entity List and the Unverified List on our business, financial condition and results of operations.

Critical Accounting Policies and Estimates

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Accordingly, those 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, 2021, which we filed with the Securities and Exchange Commission, or SEC, on February 2, 2022, or our Annual Report.

There have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2022.

Commission, or SEC, on February 2, 2022, or our Annual Report.

There have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2022.

Recently Issued Accounting Pronouncements

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Other income (expense) generally consists of income (expense) generated from non-operating transactions and unrealized holding gains (losses) from certain investments required to be marked to market value.

Income Tax Provision (Benefit).

Income Tax Provision.

We make certain estimates and judgments in determining income taxes for financial statement purposes.

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The following table sets forth our consolidated statement of income data as a percentage of net revenue for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Total other income (expense), net (3) (1) (1) (3)

Income (loss) before income taxes 16 (4) 16 —

Income tax provision (benefit) 4 (4) 4 (1)

Income before income taxes 16 9 16 3

Income tax provision 6 5 5 1

Net income 10 % 4 % 11 % 2 %

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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Total net revenue $ 285,730 $ 229,774 $ 55,956 24 % $ 829,666 $ 644,509 $ 185,157 29 %

Net revenue increased $74.6 million to $280.0 million for the three months ended June 30, 2022, as compared to $205.4 million for the three months ended June 30, 2021, due to improvement in supply and market strength attributed to the work-from-home environment.

Net revenue increased $56.0 million to $285.7 million for the three months ended September 30, 2022, as compared to $229.8 million for the three months ended September 30, 2021, in significant part due to improvement in supply and market strength attributed to the work-from-home environment.

The decrease in broadband net revenue of $5.9 million was primarily from a decrease in tuner and cable shipments, partially offset by an increase in gateway revenues.

The increase in connectivity revenue of $44.7 million was primarily driven by higher Wi-Fi revenues, and to a lesser extent, ethernet revenues as our supply improved.

The increase in infrastructure revenues of $6.4 million was primarily driven by increased shipments of high-performance analog and wireless backhaul products in this category.

The increase in industrial and multi-market revenue of $10.9 million was related to increased shipments of high-performance analog and component products.

Net revenue increased $185.2 million to $829.7 million for the nine months ended September 30, 2022, as compared to $644.5 million for the nine months ended September 30, 2021, due to improvement in supply and market strength attributed to the work-from-home environment.

The increase in broadband net revenue of $30.8 million was primarily from gateway revenues.

The increase in connectivity revenue of $102.5 million was primarily driven by higher Wi-Fi and ethernet revenues as our supply improved and an increase in MoCA product shipments.

The increase in infrastructure revenues of $6.5 million was primarily driven by increased shipments of high-performance analog, MoCA last-mile access, and wireless access products in this category.

The increase in industrial and multi-market revenue of $16.7 million was related to increased shipments of component and high-performance analog products.

Net revenue increased $129.2 million to $543.9 million for the six months ended June 30, 2022, as compared to $414.7 million for the six months ended June 30, 2021, due to improvement in supply and market strength attributed to the work-from-home environment.

The increase in broadband net revenue of $36.7 million was primarily from gateway revenues and, to a lesser extent, improvements in satellite shipments.

The increase in connectivity revenue of $57.8 million was primarily driven by higher Wi-Fi and ethernet revenues as our supply improved and an increase in MoCA product shipments.

The increase in infrastructure revenues of $10.9 million was primarily driven by an increase in 5G wireless access and high-performance analog product shipments.

The increase in industrial and multi-market revenue of $23.8 million was related to increased shipments of component and high-performance analog products.

The increase in infrastructure revenues of $17.3 million was primarily driven by an increase in high-performance analog, 5G wireless access and wireless backhaul product shipments.

The increase in industrial and multi-market revenue of $34.6 million was related to increased shipments of high-performance analog and component products.

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, as well as uncertainty in supply from the global semiconductor chip shortage, we may experience increased volatility in our sales and revenues.

Further, due to heightened volatility and uncertainty in customer demand resulting from the global semiconductor supply shortage, we expect to continue to experience increased volatility in our sales and revenues.

Cost of Net Revenue and Gross Profit

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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% of net revenue 59 % 56 % 59 % 55 %

Cost of net revenue increased $22.8 million to $115.7 million for the three months ended June 30, 2022, as compared to $92.8 million for the three months ended June 30, 2021.

Cost of net revenue increased $18.3 million to $118.2 million for the three months ended September 30, 2022, as compared to $100.0 million for the three months ended September 30, 2021.

The increase was primarily driven by higher sales and incremental expenses.

Gross profit percentage improved for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, due primarily to revenue mix and improved absorption of amortization of intangible assets.

Cost of net revenue increased $34.5 million to $225.0 million for the six months ended June 30, 2022, as compared to $190.5 million for the six months ended June 30, 2021.

Gross profit percentage improved for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, due primarily to revenue mix and improved absorption of amortization of intangible assets.

Cost of net revenue increased $52.8 million to $343.2 million for the nine months ended September 30, 2022, as compared to $290.5 million for the nine months ended September 30, 2021.

The increase was primarily driven by higher sales and incremental expenses.

Gross profit percentage improved for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, due primarily to revenue mix and improved absorption of amortization of intangible assets.

Gross profit percentage improved for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, due primarily to revenue mix and improved absorption of amortization of intangible assets.

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.

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Research and Development

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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% of net revenue 27 % 29 % 27 % 32 %

Research and development expense increased $6.0 million to $80.4 million for the three months ended June 30, 2022 from $74.4 million in the three months ended June 30, 2021.

The increase was primarily driven by increased headcount.

Research and development expense increased $8.7 million to $146.3 million for the six months ended June 30, 2022 from $137.6 million in the six months ended June 30, 2021.

The increase was primarily driven by increased headcount.

Research and development expense increased $8.9 million to $76.4 million for the three months ended September 30, 2022 from $67.5 million in the three months ended September 30, 2021.

The increase was primarily driven by increased headcount to support increased R&D projects this year.

Research and development expense increased $17.6 million to $222.7 million for the nine months ended September 30, 2022 from $205.1 million in the nine months ended September 30, 2021.

The increase was primarily driven by increased headcount to support increased R&D projects this year.

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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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% of net revenue 13 % 17 % 15 % 17 %

Selling, general and administrative expense increased $8.6 million to $44.5 million for the three months ended June 30, 2022, as compared to $35.9 million for the three months ended June 30, 2021.

The increase was primarily due to merger costs of approximately $6.4 million, as well as increased headcount.

Selling, general and administrative expense increased $12.7 million to $85.1 million for the six months ended June 30, 2022, as compared to $72.4 million for the six months ended June 30, 2021.

Selling, general and administrative expense remained flat at $38.5 million for the three months ended September 30, 2022, as compared to $38.5 million for the three months ended September 30, 2021.

Selling, general and administrative expense increased $12.7 million to $123.5 million for the nine months ended September 30, 2022, as compared to $110.8 million for the nine months ended September 30, 2021.

The increase was primarily due to increased headcount as well as increased acquisition and integration costs of $7.6 million.

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Restructuring Charges

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

(dollars in thousands) (dollars in thousands)

Restructuring charges $ 462 $ 38 $ 424 1,116 % $ 462 $ 2,204 $(1,742) (79)%

Restructuring charges $ 631 $ — $ 631 N/A $ 1,093 $ 2,204 $(1,111) (50)%

% of net revenue — % — % — % — %

Restructuring charges increased $0.4 million to $0.5 million for the three months ended June 30, 2022, compared to $0.04 million for the three months ended June 30, 2021.

Restructuring charges in the three months ended June 30, 2022 primarily consisted of $0.5 million of lease-related charges, which consisted of impairment of leased right-of-use assets from partial abandonment of a facility.

Restructuring charges in the three months ended June 30, 2021 primarily consisted of $0.02 million in employee severance-related charges.

Restructuring charges decreased $1.7 million to $0.5 million for the six months ended June 30, 2022, compared to $2.2 million for the six months ended June 30, 2021.

Restructuring charges in the six months ended June 30, 2022 primarily consisted of $0.5 million of lease-related charges, which consisted of impairment of leased right-of-use assets from partial abandonment of a facility.

Restructuring charges in the six months ended June 30, 2021 included $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 increased $0.6 million to $0.6 million for the three months ended September 30, 2022, compared to $0 for the three months ended September 30, 2021.

Restructuring charges in the three months ended September 30, 2022 primarily consisted of $0.6 million of employee severance-related charges.

Restructuring charges decreased $1.1 million to $1.1 million for the nine months ended September 30, 2022, compared to $2.2 million for the nine months ended September 30, 2021.

Restructuring charges in the nine months ended September 30, 2022 consisted of $0.6 million of employee severance-related charges and $0.5 million of lease-related charges, which comprised impairment of leased right-of-use assets from partial abandonment of a facility.

Restructuring charges in the nine months ended September 30, 2021 primarily included $1.3 million in employee severance-related charges and $0.6 million of lease-related charges, which comprised impairment of leased right-of-use assets and leasehold improvements.

Loss on Extinguishment of Debt

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

(dollars in thousands) (dollars in thousands)

Loss on extinguishment of debt $ — $ (5,221) $ 5,221 (100) % $ — $ (5,221) $5,221 (100)%

Loss on extinguishment of debt $ — $ — $ — N/A $ — $ (5,221) $5,221 (100)%

% of net revenue — % — % — % (1) %

Loss on extinguishment of debt in the three and six months ended June 30, 2021 consists of the charge-off of remaining unamortized debt discount and issuance costs on debt under a prior term loan which we repaid early with proceeds from a new term loan in June 2021.

Loss on extinguishment of debt in the nine months ended September 30, 2021 consists of the charge-off of remaining unamortized debt discount and issuance costs on debt under a prior term loan which we repaid early with proceeds from a new term loan in June 2021.

Interest and Other Income (Expense )

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

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% of net revenue (3) % (1) % (1) % (2) %

Interest and other income (expense), net changed by $9.1 million from a net expense of $4.3 million in the three months ended June 30, 2021 to a net income of $4.8 million for the three months ended June 30, 2022.

The change in interest and other income (expense), net was primarily due to the impact of a $7.7 million change in other income (expense), net, from expense of $0.5 million in the 2021 period to income of $7.2 million in the 2022 period, and a $1.3 million decrease in interest expense.

The $7.7 million change in other income (expense), net primarily related to $4.8 million in unrealized holding gain on equity securities that are marked to market value on the balance sheet and $2.7 million impact from foreign currency fluctuations.

The $1.3 million decrease in interest expense primarily relates to a decrease in interest expense on outstanding debt, mostly related to a lower average balance of term loan debt outstanding.

Interest and other income (expense), net changed by $10.3 million from a net expense of $8.6 million in the six months ended June 30, 2021 to a net income of $1.8 million for the six months ended June 30, 2022.

The change in interest and other income (expense), net was primarily due to the impact of a $7.1 million decrease in other income (expense), net, from expense of $0.6 million in the 2021 period to income of $6.4 million in the 2022 period and a $3.2 million decrease in interest expense.

The $7.1 million change in other income (expense), net primarily related to $3.9 million in net unrealized holding gain on equity securities that are marked to market value on the balance sheet and $3.1 million impact from foreign currency fluctuations.

Interest and other income (expense), net changed by $4.6 million from a net expense of $2.7 million in the three months ended September 30, 2021 to a net expense of $7.4 million for the three months ended September 30, 2022.

The change in interest and other income (expense), net was primarily due to the impact of a $4.6 million change in other income (expense), net, from expense of $0.1 million in the 2021 period to expense of $4.7 million in the 2022 period.

The $4.6 million change in other income (expense), net primarily related to $5.3 million in unrealized holding loss on equity securities that are marked to market value on the balance sheet, partially offset by $0.5 million of foreign currency fluctuations.

Interest and other income (expense), net changed by $5.7 million from a net expense of $11.3 million in the nine months ended September 30, 2021 to a net expense of $5.6 million for the nine months ended September 30, 2022.

The change in interest and other income (expense), net was primarily due to the impact of a $3.1 million decrease in interest expense and a $2.5 million change in other income (expense), net, from expense of $0.7 million in the 2021 period to income of $1.7 million in the 2022 period.

The $3.1 million decrease in interest expense primarily relates to a decrease in interest expense on outstanding debt, mostly related to a lower average balance of term loan debt outstanding.

Income Tax Provision (Benefit)

Three Months Ended June 30, Six Months Ended June 30,

The $2.5 million change in other income (expense), net primarily related to $3.6 million impact from foreign currency fluctuations, partially offset by $1.4 million in net unrealized holding loss on equity securities that are marked to market value on the balance sheet.

Income Tax Provision

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 $ Change % Change 2022 2021 $ Change % Change

(dollars in thousands) (dollars in thousands)

Income tax provision (benefit) $ 11,886 $ (8,010) $ 19,896 (248) % $ 23,339 $ (6,204) $ 29,543 (476) %

The income tax provision for the three months ended June 30, 2022 was $11.9 million compared to an income tax benefit of $8.0 million for the three months ended June 30, 2021.

The income tax provision for the six months ended June 30, 2022 was $23.3 million compared to an income tax benefit of $6.2 million for the six months ended June 30, 2021.

Income tax provision $ 16,186 $ 11,802 $ 4,384 37 % $ 39,525 $ 5,598 $ 33,927 606 %

The income tax provision for the three months ended September 30, 2022 was $16.2 million compared to an income tax provision of $11.8 million for the three months ended September 30, 2021.

The income tax provision for the nine months ended September 30, 2022 was $39.5 million compared to an income tax provision of $5.6 million for the nine months ended September 30, 2021.

The difference between our effective tax rate and the 21.0% U.S.

federal statutory rate for the six months ended June 30, 2022 primarily related to the mix of pre-tax income among jurisdictions, permanent tax items including a tax on global intangible low-taxed income, stock based compensation, excess tax benefits related to stock-based compensation, release of uncertain tax positions under ASC 740-10, and release of the valuation allowance on certain federal research and development credits.

federal statutory rate for the nine months ended September 30, 2022 primarily related to the mix of pre-tax income among jurisdictions, permanent tax items including a tax on global intangible low-taxed income, stock based compensation, excess tax benefits related to stock-based compensation, release of uncertain tax positions under ASC 740-10, and release of the valuation allowance on certain federal research and development credits.

The permanent tax item related to global intangible low-taxed income also reflects recent legislative changes requiring the capitalization of research and experimentation costs, as well as limitations on the creditability of certain foreign income taxes.

The difference between our effective tax rate and the 21.0% U.S.

federal statutory rate for the six months ended June 30, 2021 primarily related to the mix of pre-tax income among jurisdictions, permanent tax items including the tax on global intangible low-taxed income, stock based compensation, excess tax benefits related to stock-based compensation, and release of certain reserves for uncertain tax positions under ASC 740-10.

federal statutory rate for the nine months ended September 30, 2021 primarily related to the mix of pre-tax income among jurisdictions, permanent tax items including the tax on global intangible low-taxed income, stock based compensation, 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.

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We also receive a reduced withholding tax rate on certain intercompany royalty payments made by our Singapore subsidiary during the incentive period.

We recorded a tax provision in the six months ended June 30, 2022 at the incentive rate.

In the six months ended June 30, 2021, due to our Singapore net operating losses and a full valuation allowance in Singapore, the incentives did not have a material impact on our income tax provision.

We recorded a tax provision in the nine months ended September 30, 2022 at the incentive rate.

In the nine months ended September 30, 2021, due to our Singapore net operating losses and a full valuation allowance in Singapore, the incentives did not have a material impact on our income tax provision.

The 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.

On August 9, 2022, the CHIPS and Science Act of 2022, or the CHIPS Act, was enacted in the United States.

The CHIPS Act will provide financial incentives to the semiconductor industry which are primarily directed at manufacturing activities within the United States for qualifying property placed in service after December 31, 2022.

As we currently outsource our manufacturing, the CHIPS Act is not expected to have a material impact to our consolidated tax provision for the year ending December 31, 2023.

The Inflation Reduction Act of 2022, or IRA, was signed into law on August 16, 2022.

The bill was meant to address the high inflation rate in the United States through various climate, energy, healthcare, and other incentives.

These incentives are meant to be paid for by the tax provisions included in the IRA, such as a new 15 percent corporate minimum tax, a 1 percent new excise tax on stock buybacks, additional IRS funding to improve taxpayer compliance, and others.

The IRA provisions are effective for tax years beginning after December 31, 2022.

At this time, none of the IRA tax provisions are expected to have a material impact to our consolidated tax provision for the year ending December 31, 2023.

We will continue to monitor updates to our business along with guidance issued with respect to both Acts to determine whether any adjustments are needed to our consolidated tax provision in future periods.

Liquidity and Capital Resources

As of June 30, 2022, we had cash and cash equivalents of $211.4 million, restricted cash of $1.1 million and net accounts receivable of $137.1 million.

Additionally, as of June 30, 2022, our working capital was $222.5 million.

As of September 30, 2022, we had cash and cash equivalents of $181.5 million, restricted cash of $1.0 million and net accounts receivable of $178.1 million.

Additionally, as of September 30, 2022, our working capital was $211.7 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.

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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.

As of June 30, 2022, $250.0 million of principal was outstanding under a senior secured term B loan facility or the “Initial Term Loan under the June 23, 2021 Credit Agreement.” The Company also has available a senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million which remained undrawn as of June 30, 2022.

As of September 30, 2022, $175.0 million of principal was outstanding under a senior secured term B loan facility or the “Initial Term Loan under the June 23, 2021 Credit Agreement.” The Company also has available a senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million which remained undrawn as of

September 30, 2022.

The proceeds of the revolving facility may be used to finance the working capital needs and other general corporate purposes of the Company and its subsidiaries.

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Cash proceeds from issuance of common stock and debt and cash used to pay down outstanding debt or repurchase common stock are included in financing activities in our consolidated statements of cash flows.

As of June 30, 2022, our material cash requirements include long-term debt, non-cancelable operating leases, inventory purchase obligations and other obligations, which primarily consist of contractual payments due for computer-aided design software, as follows:

As of September 30, 2022, our material cash requirements include long-term debt, non-cancelable operating leases, inventory purchase obligations and other obligations, which primarily consist of contractual payments due for computer-aided design software, as follows:

Total Less than 1 year 1-3 years 3-5 years More than 5 years

5 unchanged sentences

Total $ 422,604 $ 159,869 $ 71,557 $ 12,230 $ 178,948

Our planned capital expenditures as of June 30, 2022 were not material.

Our consolidated balance sheet at June 30, 2022 included $9.4 million in other long-term liabilities for uncertain tax positions, some of which may result in cash payment.

Our planned capital expenditures as of September 30, 2022 were not material.

Our consolidated balance sheet at September 30, 2022 included $5.8 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.

3 unchanged sentences

Following is a summary of our working capital, cash and cash equivalents, and restricted cash for the periods indicated:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

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Following is a summary of our cash flows provided by (used in) operating activities, investing activities and financing activities for the periods indicated:

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

3 unchanged sentences

Effect of exchange rate changes on cash, cash equivalents and restricted cash (2,400) (1,233)

Increase (decrease) in cash, cash equivalents and restricted cash $ 80,681 $ (18,600)

Increase in cash, cash equivalents and restricted cash $ 50,755 $ 20,520

Cash Flows from Operating Activities

Net cash provided by operating activities was $257.6 million for the six months ended June 30, 2022.

Net cash provided by operating activities was $319.4 million for the nine months ended September 30, 2022.

Net cash provided by operating activities consisted of positive impact of net income of $94.0 million, non-cash items of $120.3 million, and changes in operating assets and liabilities of $91.5 million and excess tax benefits and deferred income taxes totaling $13.6 million.

Non-cash items included in net income for the nine months ended September 30, 2022 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $61.9 million and stock-based compensation of $58.2 million.

Net cash provided by operating activities was $152.2 million for the nine months ended September 30, 2021.

Net cash provided by operating activities consisted of positive impact of net income of $13.8 million, non-cash items of $119.8 million, and changes in operating assets and liabilities of $22.6 million, partially offset by excess tax benefits and deferred income taxes totaling $4.0 million.

Non-cash items included in net income for the six months ended June 30, 2022 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $43.4 million and stock-based compensation of $38.0 million, partially offset by $3.9 million in unrealized holding gain on investments that are marked to market on the balance sheet.

Net cash provided by operating activities was $68.1 million for the six months ended June 30, 2021.

Net cash provided by operating activities consisted of the positive impact of net income of $4.5 million and non-cash items of $80.0 million, partially offset by the negative impact of deferred income taxes and excess tax benefits totaling $10.1 million and changes in operating assets and liabilities of $6.3 million.

Non-cash items included in net income for the six months ended June 30, 2021 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $44.3 million and stock-based compensation of $26.9 million, loss on extinguishment of debt of $5.2 million and amortization of issuance costs and discounts on debt and leases of $2.1 million.

Non-cash items included in net income for the nine months ended September 30, 2021 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $67.4 million, stock-based compensation of $42.9 million, loss on extinguishment of debt of $5.2 million and amortization of issuance costs and discounts on debt and leases of $2.6 million.

Cash Flows from Investing Activities

Net cash used in investing activities was $59.0 million for the six months ended June 30, 2022 and consisted of purchases of investments of $28.3 million, purchases of property and equipment of $15.5 million, proceeds loaned under notes receivable of $10.0 million, and purchases of intangible assets of $5.2 million.

Net cash used in investing activities was $50.9 million for the six months ended June 30, 2021 and consisted of payments of purchase price that were previously deferred from our 2020 acquisition of NanoSemi of $27.5 million, purchases of property and equipment of $17.3 million, purchases of investments of $5.0 million, and purchases of intangible assets of $1.1 million.

Net cash used in investing activities was $74.4 million for the nine months ended September 30, 2022 and consisted of purchases of investments of $29.3 million, purchases of property and equipment of $24.6 million, purchases of intangible assets of $10.4 million, and proceeds loaned under notes receivable of $10.0 million.

Net cash used in investing activities was $73.6 million for the nine months ended September 30, 2021 and consisted of $35.0 million in payments of purchase price that were previously deferred from our 2020 acquisition of NanoSemi, $26.9 million in purchases of property and equipment, $6.6 million in purchases of intangible assets, and $5.0 million in purchases of long-term investments in a private entity.

Cash Flows from Financing Activities

Net cash used in financing activities was $116.5 million for the six months ended June 30, 2022.

Net cash used in financing activities consisted primarily of repayments of debt of $60.0 million, common stock repurchases of $31.5 million, and minimum tax withholding paid on behalf of employees for restricted stock units of $28.1 million, partially offset by $3.1 million in net proceeds from issuance of our common stock upon exercise of stock options and purchases made under our ESPP.

Net cash used in financing activities was $35.1 million for the six months ended June 30, 2021.

Net cash used in financing activities consisted primarily of repayments of debt of $369.8 million, minimum tax withholding paid on behalf of employees for restricted stock units of $10.1 million, common stock repurchases of $7.1 million, and debt issuance costs of $4.1 million, partially offset by cash inflows from net proceeds from the issuance of debt of $350.0 million and from net proceeds from issuance of common stock upon exercise of stock options and purchases made under our ESPP of $6.1 million.

We believe that our $211.4 million of cash and cash equivalents at June 30, 2022 will be sufficient to fund our projected operating requirements for at least the next twelve months, excluding the pending merger and related integration costs.

As of June 30, 2022, our indebtedness totaled $250.0 million, which consists of outstanding principal under the Initial Term Loan under the June 23, 2021 Credit Agreement.

Net cash used in financing activities was $191.8 million for the nine months ended September 30, 2022.

Net cash used in financing activities consisted primarily of repayments of debt of $135.0 million, common stock repurchases of $31.5 million, and minimum tax withholding paid on behalf of employees for restricted stock units of $28.5 million, partially offset by $3.2 million in net proceeds from issuance of our common stock upon exercise of stock options and purchases made under our employee stock purchase plan.

Net cash used in financing activities was $56.9 million for the nine months ended September 30, 2021.

Net cash used in financing activities consisted primarily of $389.8 million in repayments of debt, $11.1 million in minimum tax withholding paid on behalf of employees for restricted stock units, $8.1 million in common stock repurchases, $4.1 million in debt issuance costs, partially offset by cash inflows from net proceeds from the issuance of debt of $350.0 million and from issuance of common stock upon exercise of stock options of $6.3 million.

We believe that our $181.5 million of cash and cash equivalents at September 30, 2022 will be sufficient to fund our projected operating requirements for at least the next twelve months, excluding anticipated cash expenditures for the pending merger and related integration costs which will be financed primarily through additional debt under the Senior Secured Credit Facilities.

As of September 30, 2022, our indebtedness totaled $175.0 million, which consists of outstanding principal under the Initial Term Loan under the June 23, 2021 Credit Agreement.

Upon consummation of our merger with Silicon Motion and execution of related merger financing agreements, we expect that a portion of the proceeds from the Senior Secured Credit Facilities associated with the merger, described in more detail above, will be used to repay our existing indebtedness in full, and our indebtedness may increase up to $3.5 billion under the Senior Secured Credit Facilities.

The June 23, 2021 Credit Agreement also provides the Company with the Revolving Facility in an aggregate principal amount of up to $100.0 million, which remained undrawn as of June 30, 2022.

The June 23, 2021 Credit Agreement also provides the Company with the Revolving Facility in an aggregate principal amount of up to $100.0 million, which remained undrawn as of September 30, 2022.

The Initial Term Loan under the June 23, 2021 Credit Agreement has a seven-year term expiring in June 2028 and bears interest, at the Company’s option, at a per annum rate equal to either (i) a base rate equal to the highest of (x) the federal funds rate, plus 0.50%, (y) the prime rate then in effect and (z) an adjusted LIBOR rate determined on the basis of a one-month interest period plus 1.00%, in each case, plus an applicable margin of 1.25% or (ii) an adjusted LIBOR rate, subject to a floor of 0.50%, plus an applicable margin of 2.25%.

5 unchanged sentences

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 2022, we issued 0.5 million freely-tradable shares of our common stock in settlement of bonus awards for the 2021 performance period.

In connection with that bonus program, in February 2022, we issued 0.5 million freely-tradable (subject to restrictions for affiliates) shares of our common stock in settlement of bonus awards for the 2021 performance period.

We expect to implement a similar equity-based plan for fiscal 2022, but our compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis