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 in Part II, Item 1A in this report. Overview We are a provider of communications systems-on-chip solutions used in broadband, mobile and wireline infrastructure, 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, or 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, or 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, or OEMs, and original design manufacturers, or ODMs, who incorporate our products in a wide range of electronic devices. Examples of such devices include cable Data Over Cable Service Interface Specifications, or 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, 2023, revenues of $248.4 million were 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. 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; 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 77% and 80% of net revenue during the three months ended March 31, 2023 and 2022, respectively, including 31% from products shipped to Hong Kong and 16% from products shipped to mainland China during the three months ended March 31, 2023 and 38% from products shipped to Hong Kong, 13% from products shipped to Vietnam, and 11% from products shipped to mainland China during the three months ended March 31, 2022. 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, 2023 and 2022 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. 33 Table of Contents A significant portion of our net revenue has historically been generated by a limited number of customers. Sales to customers is comprised of both direct sales to customers and indirect sales through distributors. In the three months ended March 31, 2023, one customer accounted for 15% of our net revenue, and our ten largest customers collectively accounted for 62% of our net revenue, of which distributor customers accounted for 16% 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 integrated circuits 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 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 the Global Economic Downturn Inflation, and uncertainty in customer demand and the worldwide economy has continued, and we expect to experience continued volatility in our sales and revenues in the near future. In particular, we believe an economic downturn and inventory oversupply, in the channel, due to changes in customer demand will continue to add to volatility in managing the business. In addition, inventory oversupply could also lead to inventory write-downs, including charges for any excess or obsolete inventory which, if material, could negatively impact our gross margins. However, the magnitude of such volatility on our business and its duration is uncertain and cannot be reasonably estimated at this time. Silicon Motion Merger On May 5, 2022, we entered into an agreement and plan of merger, or the Merger Agreement, with Silicon Motion Technology Corporation, or Silicon Motion, an exempted company with limited liability incorporated under the Law of the Cayman Islands, pursuant to which, subject to the terms and conditions thereof, we agreed to acquire Silicon Motion pursuant to a statutory merger of Shark Merger Sub, a wholly-owned subsidiary of MaxLinear, with and into Silicon Motion, with Silicon Motion surviving the merger as a wholly-owned subsidiary of MaxLinear. Silicon Motion is a provider of NAND flash controllers for solid state drives and other solid state storage devices. Under the terms of the Merger Agreement, the transaction consideration will consist of $93.54 in cash and 0.388 shares of our stock for each Silicon Motion American Depositary Share, or ADS, and $23.385 in cash and 0.097 shares of our common stock for each Silicon Motion ordinary share not represented by an ADS. Upon closing of the transaction, our current stockholders will own approximately 86% of the combined company and former Silicon Motion securityholders will own approximately 14% of the combined company. Based on the closing price of our common shares on May 4, 2022, the implied value of the total transaction consideration for Silicon Motion is approximately $4.3 billion. We may fund up to $3.5 billion of cash consideration with cash on hand and fully committed debt financing from Wells Fargo Bank, N.A., or Wells Fargo Bank, and other lenders as described below. 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 antitrust 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; however, if the merger is not consummated by June 27, 2023, the parties will need to re-file under the HSR Act. 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. 34 Table of Contents 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. The funding of the Senior Secured Credit Facilities is contingent on the satisfaction of customary conditions, including (i) the execution and delivery of definitive documentation with respect to credit facilities in accordance with the terms in the amended and restated commitment letter, and (ii) the consummation of the acquisition by us of Silicon Motion in accordance with the Merger Agreement. A portion of the proceeds from the Senior Secured Credit Facilities will be used to repay existing debt in full. On October 24, 2022, MaxLinear entered into a second amended and restated commitment letter with Wells Fargo Bank and other lenders, which allows for additional commitments in respect of the Term A Loan Facility to be effected by way of the joinder of additional commitment parties to the second amended and restated commitment letter, and allows for an increase in the Term Loan A Loan Facility on a dollar-for-dollar basis by a corresponding decrease in the amount of the Term Loan B facility. Recent Developments Acquisition of Company Y On January 17, 2023, the Company completed its acquisition of a business, or Company Y, pursuant to a Purchase and Sale Agreement, or the Purchase Agreement. The transaction consideration included $9.7 million in cash. In addition, Company Y stockholders may receive up to an additional $2.6 million in potential contingent consideration, subject to the acquired business satisfying certain personnel objectives by June 17, 2024. Company Y is headquartered in Bangalore, India and operates as a provider of engineering design services. 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 of America. 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, and income taxes. 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, 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, 2022, which we filed with the Securities and Exchange Commission, or SEC, on February 1, 2023, or our Annual Report. There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2023. Recently Issued Accounting Pronouncements See Note 1 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently issued accounting pronouncements not yet adopted as of the date of this report. Results of Operations The following describes the line items set forth in our unaudited consolidated statements of income. 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. 35 Table of Contents 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 and certain purchased licensed technology intangible assets; amortization of certain production mask costs and computer-aided design software license 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 salaries and benefits and 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 salaries and benefits and 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 and amortization of discounts on debt and other liabilities. 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. 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 income data as a percentage of net revenue for the periods indicated: Three Months Ended March 31, 2023 2022 Net revenue 100 % 100 % Cost of net revenue 44 41 Gross profit 56 59 Operating expenses: Research and development 27 25 Selling, general and administrative 16 15 Impairment losses 1 — Restructuring charges 2 — Total operating expenses 45 40 Income from operations 11 18 Interest income — — Interest expense (1) (1) Other income (expense), net — — Total other income (expense), net (1) (1) Income before income taxes 10 17 Income tax provision 6 4 Net income 4 % 13 % Net Revenue Three Months Ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Broadband $ 81,681 $ 134,556 $ (52,875) (39) % % of net revenue 33 % 51 % Connectivity 66,268 60,179 6,089 10 % % of net revenue 27 % 23 % Infrastructure 46,302 33,181 13,121 40 % % of net revenue 18 % 12 % Industrial and multi-market 54,191 36,011 18,180 50 % % of net revenue 22 % 14 % Total net revenue $ 248,442 $ 263,927 $ (15,485) (6) % Net revenue decreased $15.5 million to $248.4 million for the three months ended March 31, 2023, as compared to $263.9 million for the three months ended March 31, 2022, due primarily to a decrease in broadband products, as a result of macroeconomic conditions impacting customer demand for such products. The decrease in broadband net revenue of $52.9 million was primarily from gateway revenues, and to a lesser extent, cable, tuners and satellite. The increase in connectivity revenue of $6.1 million was primarily driven by higher Wi-Fi revenues. The increase in infrastructure revenues of $13.1 million was primarily driven by an increase in wireless backhaul and high-performance analog product shipments. The increase in industrial and multi-market revenue of $18.2 million was related to increased shipments of component and high-performance analog products. We currently expect that revenue will fluctuate in the future, from period-to-period, due to macroeconomic conditions impacting customer demand for certain products that is consistent with the cyclical nature of our industry. 37 Table of Contents Cost of Net Revenue and Gross Profit Three Months Ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Cost of net revenue $ 108,135 109,337 (1,202) (1) % % of net revenue 44 % 41 % Gross profit 140,307 154,590 (14,283) (9) % % of net revenue 56 % 59 % Cost of net revenue decreased $1.2 million to $108.1 million for the three months ended March 31, 2023, as compared to $109.3 million for the three months ended March 31, 2022. The decrease was primarily driven by lower sales and expenses. Gross profit percentage declined for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, due primarily to revenue mix and decreased 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. Research and Development Three Months Ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Research and development $ 67,291 $ 65,886 $ 1,405 2 % % of net revenue 27 % 25 % Research and development expense increased $1.4 million to $67.3 million for the three months ended March 31, 2023, as compared to $65.9 million for the three months ended March 31, 2022. The increase was primarily driven by increased design tools expenses, partially offset by the impact from the decrease in headcount from a reduction in force. We are closely managing our research and development expenses to meet evolving demand; however, we expect our research and development expenses to increase in future years when we expand our product portfolio and enhance existing products. Selling, General and Administrative Three Months Ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Selling, general and administrative $ 38,653 $ 40,577 $ (1,924) (5) % % of net revenue 16 % 15 % Selling, general and administrative expense decreased $1.9 million to $38.7 million for the three months ended March 31, 2023, as compared to $40.6 million for the three months ended March 31, 2022. The decrease was primarily due to decreased amortization of intangibles and stock based-compensation expenses, partially offset by increased professional services and acquisition and integration costs. We are closely managing our selling, general and administrative expenses; however, we expect selling, general and administrative expenses to increase in future years when we grow our sales and marketing organization to expand into existing and new markets. 38 Table of Contents Impairment losses Three Months Ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Impairment losses $ 2,438 $ — $ 2,438 N/A % of net revenue 1 % — % Impairment losses in the three months ended March 31, 2023 related to abandonment of certain intellectual property licenses. Restructuring Charges Three Months Ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Restructuring charges $ 4,648 $ — $4,648 N/A % of net revenue 2 % — % Restructuring charges increased $4.6 million to $4.6 million for the three months ended March 31, 2023, compared to $0 for the three months ended March 31, 2022. Restructuring charges in the three months ended March 31, 2023 consisted primarily of $4.6 million of employee severance-related charges from a reduction in force. Interest and Other Income (Expense) Three Months Ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Interest and other income (expense), net $ (2,178) $ (3,088) $ 910 (29) % % of net revenue (1) % (1) % Interest and other income (expense), net changed by $0.9 million from a net expense of $3.1 million in the three months ended March 31, 2022 to a net expense of $2.2 million for the three months ended March 31, 2023. The change in interest and other income (expense), net was primarily due to the impact of a $0.6 million increase in interest income plus a $0.4 million change in other income (expense), net, from expense of $0.8 million in the 2022 period to expense of $0.3 million in the 2023 period. The $0.6 million increase in interest income is due to higher interest rates on a higher balance of interest bearing cash equivalents. The $0.4 million change in other income (expense), net primarily related to $0.7 million impact from foreign currency fluctuations, partially offset by $1.1 million impact of change from $1.0 million in net unrealized holding gain in the 2022 period to net unrealized holding loss of $0.2 million recognized on equity securities that are marked to market value in other income (expense), net. Income Tax Provision Three Months Ended March 31, 2023 2022 $ Change % Change (dollars in thousands) Income tax provision $ 15,566 $ 11,453 $ 4,113 36 % 39 Table of Contents The income tax provision for the three months ended March 31, 2023 was $15.6 million compared to an income tax provision of $11.5 million for the three months ended March 31, 2022. The difference between our effective tax rate and the 21.0% U.S. federal statutory rate for the three months ended March 31, 2023 primarily related to the mix of pre-tax income among jurisdictions, permanent tax items including a tax on global intangible low-taxed income, research and development credits, stock based compensation, excess tax benefits related to stock-based compensation, and the release of uncertain tax positions under ASC 740-10. 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 three months ended March 31, 2022 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, release of certain reserves for uncertain tax positions under ASC 740-10, and release of the valuation allowance on certain federal R&D 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. 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 effective 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. We recorded a tax provision in the three months ended March 31, 2023 and 2022 at the incentive rate. 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. Liquidity and Capital Resources As of March 31, 2023, we had cash and cash equivalents of $207.9 million, restricted cash of $1.0 million and net accounts receivable of $188.7 million. Additionally, as of March 31, 2023, our working capital was $293.4 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. In May 2022, we entered into the Merger Agreement to acquire Silicon Motion. As described in Note 3 to our unaudited consolidated financial statements, the implied value of the total transaction consideration for Silicon Motion is approximately $4.3 billion. MaxLinear may fund up to $3.5 billion of cash consideration with cash on hand and fully committed debt financing from Wells Fargo Bank and other lenders. In June 2022 and October 2022, we amended and restated the 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. Funding of the Senior Secured Credit Facilities is contingent on customary conditions, including, but not limited to the consummation of the merger and execution of definitive loan agreements. A portion of the proceeds from the Senior Secured Credit Facilities will be used to repay our existing debt in full. We also use cash to pay down outstanding debt, and from time to time, make investments. As of March 31, 2023, $125.0 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 40 Table of Contents amount of up to $100.0 million which remained undrawn as of March 31, 2023. 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. Commencing on September 30, 2021, the Initial Term Loan under the June 23, 2021 Credit Agreement has amortized in equal quarterly installments equal to 0.25% of the original principal amount of the Initial Term Loan under the June 23, 2021 Credit Agreement, with the balance payable on June 23, 2028. We could be subject to substantial variable interest rate risk because our interest rate under term loans typically vary based on a fixed margin over an indexed rate or an adjusted base rate. While we are mitigating the impact of rising interest rates with large amounts of prepayments on our outstanding debt, if interest rates were to further increase substantially, particularly with respect to our anticipated debt associated with the Silicon Motion merger, it would have a material adverse effect our operating results and could affect our ability to service the indebtedness. Please refer to the Risk Factor entitled “ In order to consummate the merger and distribute the cash consideration payable to Silicon Motion securityholders, we will incur material indebtedness of up to $3.5 billion and we may also use a portion of Silicon Motion’s and our cash resources, and we may decide to issue additional shares of our common stock to reduce our overall leverage ratio. This material increase in our indebtedness will adversely affect our operating results and cash-flows as we satisfy our underlying interest and principal payment obligations. Issuing additional shares of our common stock, if material, will result in dilution of existing shares outstanding. The loan agreement is also expected to contain financial and operational covenants that would adversely affect our operational freedom or ability to pursue strategic transactions that we would otherwise consider to be in the best interests of stockholders, including obtaining additional indebtedness to finance such transactions ” for a discussion for a discussion of how our indebtedness could have a material adverse effect on our liquidity and capital resources. Our future capital requirements will depend on many factors, including 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, our pending merger with Silicon Motion, and any other 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 and leased right-of-use assets and property and equipment, stock-based compensation, impairment of intangible assets and unrealized holding gains or losses on marketable equity securities. 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 issuance of common stock and debt and cash used to pay down outstanding debt are included in financing activities in our consolidated statements of cash flows. As of March 31, 2023, 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: Payments due Total Less than 1 year 2-3 years 4-5 years More than 5 years (in thousands) Long-term debt obligations $ 125,000 $ — $ — $ — $ 125,000 Operating lease obligations 33,379 8,444 15,619 8,745 571 Inventory purchase obligations 92,414 92,387 27 — — Other obligations 33,346 20,820 12,526 — — Total $ 284,139 $ 121,651 $ 28,172 $ 8,745 $ 125,571 Our planned capital expenditures as of March 31, 2023 were not material. Our consolidated balance sheet at March 31, 2023 included $6.4 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. 41 Table of Contents Our primary sources of cash are cash receipts on accounts receivable from our shipment of products to distributors and direct customers. 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. The June 23, 2021 Credit Agreement, under which we entered into a senior secured term B loan facility and a revolving credit facility, permits us to request incremental loans in an aggregate principal amount not to exceed the sum of an amount equal to the greater of (x) $175.0 million and (y) 100% of “Consolidated EBITDA” (as defined in such agreement), plus the amount of certain voluntary prepayments, plus an unlimited amount that is subject to pro forma compliance with certain first lien net leverage ratio, secured net leverage ratio and total net leverage ratio tests. Following is a summary of our working capital, cash and cash equivalents, and restricted cash for the periods indicated: March 31, 2023 December 31, 2022 (in thousands) Working capital $ 293,424 $ 222,038 Cash and cash equivalents $ 207,850 $ 187,353 Short-term restricted cash 964 982 Long-term restricted cash 22 22 Total cash, cash equivalents, and restricted cash $ 208,836 $ 188,357 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, 2023 2022 (in thousands) Net cash provided by operating activities $ 42,159 $ 134,166 Net cash used in investing activities (15,511) (42,762) Net cash used in financing activities (6,170) (70,659) Effect of exchange rate changes on cash, cash equivalents and restricted cash 1 (230) Increase in cash, cash equivalents and restricted cash $ 20,479 $ 20,515 Cash Flows from Operating Activities Net cash provided by operating activities was $42.2 million for the three months ended March 31, 2023. Net cash provided by operating activities consisted of positive impact of net income of $9.5 million, non-cash items of $38.9 million, and changes in operating assets and liabilities of $13.9 million and excess tax benefits and deferred income taxes totaling $7.6 million. Non-cash items included in net income for the three months ended March 31, 2023 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $19.2 million, stock-based compensation of $16.4 million, and impairment losses of $2.4 million. Net cash provided by operating activities was $134.2 million for the three months ended March 31, 2022. Net cash provided by operating activities consisted of positive impact of net income of $33.6 million, non-cash items of $43.7 million, and changes in operating assets and liabilities of $57.1 million, partially offset by excess tax benefits and deferred income taxes totaling $0.3 million. Non-cash items included in net income for the three months ended March 31, 2022 primarily consisted of depreciation and amortization of property, equipment, acquired intangible assets and leased right-of-use assets of $23.9 million and stock-based compensation of $18.6 million. Cash Flows from Investing Activities Net cash used in investing activities was $15.5 million for the three months ended March 31, 2023 and consisted of cash used in acquisition of Company Y of $9.7 million and purchases of property and equipment of $5.2 million. 42 Table of Contents Net cash used in investing activities was $42.8 million for the three months ended March 31, 2022 and consisted of purchases of long-term investments in a private entity of $23.3 million, proceeds loaned under notes receivable of $10.0 million, purchases of property and equipment of $4.8 million, and purchases of intangible assets of $4.6 million. Cash Flows from Financing Activities Net cash used in financing activities was $6.2 million for the three months ended March 31, 2023. Net cash used in financing activities consisted primarily of minimum tax withholding paid on behalf of employees for restricted stock units of $6.2 million. Net cash used in financing activities was $70.7 million for the three months ended March 31, 2022. Net cash used in financing activities consisted primarily of common stock repurchases of $26.3 million, minimum tax withholding paid on behalf of employees for restricted stock units of $24.4 million, and repayments of debt of $20.0 million. We believe that our $207.9 million of cash and cash equivalents at March 31, 2023 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 March 31, 2023, our indebtedness totaled $125.0 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 March 31, 2023. 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%. Loans under the Revolving Facility initially bear interest, at a per annum rate equal to either (i) a base rate (as calculated above) plus an applicable margin of 0.00%, or (ii) an adjusted LIBOR rate (as calculated above) plus an applicable margin of 1.00%. Following delivery of financial statements for the Company’s fiscal quarter ending June 30, 2021, the applicable margin for loans under the Revolving Facility will range from 0.00% to 0.75% in the case of base rate loans and 1.00% to 1.75% in the case of LIBOR rate loans, in each case, depending on the Company’s secured net leverage ratio as of the most recently ended fiscal quarter. The Company is required to pay commitment fees ranging from 0.175% to 0.25% per annum on the daily undrawn commitments under the Revolving Facility, depending on the Company’s secured net leverage ratio as of the most recently ended fiscal quarter. Commencing on September 30, 2021, the Initial Term Loan under the June 23, 2021 Credit Agreement amortizes in equal quarterly installments equal to 0.25% of the original principal amount, with the balance payable at maturity on June 23, 2028. The June 23, 2021 Credit Agreement contains customary provisions specifying alternative interest rate calculations to be employed at such time as LIBOR ceases to be available as a benchmark for establishing the interest rate on floating interest rate borrowings. 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 2023, we issued 0.9 million freely-tradable (subject to restrictions for affiliates) shares of our common stock in settlement of bonus awards for the 2022 performance period. We expect to implement a similar equity-based plan for fiscal 2023, but our compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.