MARVELL TECHNOLOGY, INC. Management’s Discussion and Analysis of the Financial Position and Results of Operations (Form 10-Q)



[ad_1]

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which are subject to the "safe harbor" created by
those sections. These statements involve known and unknown risks, uncertainties
and other factors, which may cause our actual results to differ materially from
those implied by the forward-looking statements. Words such as "anticipates,"
"expects," "intends," "plans," "projects," "believes," "seeks," "estimates,"
"forecasts," "targets," "may," "can," "will," "would" and similar expressions
identify such forward-looking statements.

Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those indicated in the
forward-looking statements. Factors that could cause actual results to differ
materially from those predicted include, but are not limited to:

• the impact of the COVID-19 pandemic or other future pandemics, on the global
economy and on our customers, suppliers, employees and business;
• our ability to successfully integrate and to realize anticipated synergies, on
a timely basis or at all, in connection with the Inphi merger and the
acquisition of Innovium;
• our ability to define, design and develop products for the Cloud,
infrastructure and 5G markets and to market and sell these products to our
customers;
• extension of lead time due to supply chain disruption, component shortages
that impact the production of our products and constrained availability from
other electronic suppliers impacting our customers' ability to ship their
products, which in turn may adversely impact our sales to those customers;
• the impact of international conflict, trade relations between the U.S. and
other countries, and continued economic volatility in either domestic or foreign
markets;
• the impact and costs associated with changes in international financial and
regulatory conditions such as the addition of new trade restrictions, tariffs or
embargos;
• our ability and the ability of our customers to successfully compete in the
markets in which we serve;
• our ability and our customers' ability to develop new and enhanced products
and the adoption of those products in the market;
• risks related to our debt obligations;
• our ability to scale our operations in response to changes in demand for
existing or new products and services;
• our reliance on our manufacturing partners for the manufacture, assembly and
testing of our products;
• the risks associated with manufacturing and selling a majority of our products
and our customers' products outside of the United States;
• the effects of transitioning to smaller geometry process technologies;
• the impact of any change in our application of the United States federal
income tax laws and the loss of any beneficial tax treatment that we currently
enjoy;
• our ability to execute on changes in strategy and realize the expected
benefits from restructuring activities;
• our ability to implement our plans, forecasts and other expectations with
respect to our strategic investments, divestitures, mergers, or joint ventures
and to fully realize the anticipated synergies and cost savings in the time
frame anticipated;
• our ability to limit costs related to defective products;
• our ability to recruit and retain experienced executive management as well as
highly-skilled personnel;
• our ability to mitigate risks related to our information technology systems;
• our ability to protect our intellectual property, particularly outside of the
U.S.;
• our ability to estimate customer demand and future sales accurately;
• our reliance on third-party distributors and manufacturers' representatives to
sell our products;
• our maintenance of an effective system of internal controls;
• the impact of the highly cyclical and intensely competitive nature of the
markets for our products;
• our dependence on a small number of customers;
• our ability to accurately categorize our products by end markets;
• severe financial hardship or bankruptcy of one or more of our major customers;
• risks associated with acquisition and consolidation activity in the
semiconductor industry;
• decreases in our gross margin and results of operations in the future due to a
number of factors;
• the impact of natural disasters and other catastrophic events; and
• the outcome of pending or future litigation and legal proceedings.

Additional factors which could cause actual results to differ materially include
those set forth in the following discussion, as well as the risks discussed in
Part II, Item 1A, "Risk Factors," and other sections of this Quarterly Report on
Form 10-Q. These forward-looking statements speak only as of the date hereof. We
undertake no obligation to update any forward-looking statements.
                                       32
--------------------------------------------------------------------------------
  Table of Contents
Overview

We are a leading supplier of infrastructure semiconductor solutions, spanning
the data center core to network edge. We are a fabless semiconductor supplier of
high-performance standard and semi-custom products with core strengths in
developing and scaling complex System-on-a-Chip architectures, integrating
analog, mixed-signal and digital signal processing functionality. Leveraging
leading intellectual property and deep system-level expertise, as well as highly
innovative security firmware, our solutions are empowering the data economy and
enabling the data center, carrier infrastructure, enterprise networking,
consumer, and automotive/industrial end markets.

In the third quarter of fiscal 2022, our net revenue increased year over year by
61% from $750.1 million net revenue in the third quarter of fiscal 2021 compared
with $1.2 billion in the third quarter of fiscal 2022. This was due to an
increase in sales from all our end markets. Revenue increased from the data
center end market by 109%, from the carrier infrastructure end market by 28%,
from the enterprise networking end market by 56%, from the consumer end market
by 20%, and the automotive/industrial end market by 114% compared to the three
months ended October 31,2020.

On April 20, 2021, we completed our acquisition of Inphi Corporation ("Inphi").
Inphi is a global leader in high-speed data movement enabled by optical
interconnects. The unaudited condensed consolidated financial statements include
the operating results of Inphi for the period from the date of acquisition
through our third quarter ended October 30, 2021. In conjunction with the
acquisition transaction, Marvell Technology Group Ltd. and Inphi became wholly
owned subsidiaries of the new parent company, Marvell Technology, Inc. ("MTI")
on April 20, 2021. The parent company is domiciled in and subject to taxation in
the United States.

On October 5, 2021, we completed our acquisition of Innovium, Inc. ("Innovium"),
a leading provider of networking solutions for cloud and edge data centers, in
an all-stock transaction. The unaudited condensed consolidated financial
statements include the operating results of Innovium for the period from the
date of acquisition through our third quarter ended October 30, 2021. See "Note
3 - Business Combinations", "Note 4 - Goodwill and Acquired Intangible Assets,
Net" for more information.

In response to growth in demand from customers for our products, our operations
team is continuing to ramp production with our global supply chain partners.
However, we are experiencing a number of industry-wide supply constraints
affecting the type of high complexity products we provide for data
infrastructure. These supply challenges are currently limiting our ability to
fully satisfy the increase in demand for some of our products. To secure
additional capacity, we entered into capacity reservation arrangements with
certain foundries and test & assembly partners. See "Note 10 - Commitments and
Contingencies" in the Notes to the Unaudited Condensed Consolidated Financial
Statements for additional information.

Securing capacity for growth remains a high priority for our operations team,
even as this supply expansion comes with an increase in input costs. As we have
done throughout the supply constraints, we are working with our customers to
adjust prices to offset the impact of these cost increases, which lets us
jointly benefit from sustained growth.

We continue to monitor the impact of COVID-19 on our business. While many of our
offices around the world remain open to enable critical on-site business
functions in accordance with local government guidelines, the majority of our
employees continue to work from home. We expect COVID-19 to continue to impact
our business and for a further discussion of the uncertainties and business
risks associated with the COVID-19 pandemic, see Part II, Item 1A, "Risk
Factors," including but not limited to the risk detailed under the caption "We
face risks related to the COVID-19 pandemic which currently has, and may
continue in the future to, significantly disrupt our manufacturing, research and
development, operations, sales and financial results."

We expect that the U.S. government's export restrictions on certain Chinese
customers will continue to impact our revenue in fiscal year 2022. Moreover,
concerns that U.S. companies may not be reliable suppliers as a result of these
and other actions has caused, and may in the future cause, some of our customers
in China to amass large inventories of our products well in advance of need or
cause some of our customers to replace our products in favor of products from
other suppliers. Customers in China may also choose to develop indigenous
solutions, as replacements for products that are subject to U.S. export
controls. In addition, there may be indirect impacts to our business that we
cannot easily quantify such as the fact that some of our other customers'
products which use our solutions may also be impacted by export restrictions.

                                       33
--------------------------------------------------------------------------------
  Table of Contents
Capital Return Program. We remain committed to delivering stockholder value
through our share repurchase and dividend programs. On October 16, 2018, we
announced that our Board of Directors authorized a $700 million addition to the
balance of our existing share repurchase program. Under the program authorized
by our Board of Directors, we may repurchase shares in the open-market or
through privately negotiated transactions. The extent to which we repurchase our
shares and the timing of such repurchases will depend upon market conditions and
other corporate considerations, as determined by our management team. The share
repurchase program was temporarily suspended in late March 2020 to preserve cash
during the COVID-19 pandemic. We are focusing on reducing our debt and
de-levering our balance sheet. As a result, we did not repurchase any shares
during the nine months ended October 30, 2021. We will continue to evaluate
business conditions to decide when we can restart the share repurchase program.
As of October 30, 2021, there was $564.5 million remaining available for future
share repurchases of the authorization.

As of October 30, 2021, a total of 308.1 million shares have been repurchased to
date under our share repurchase programs for a total $4.3 billion in cash. We
returned $140.3 million to stockholders in the nine months ended October 30,
2021 in cash dividends.

Cash and Cash Equivalents. Our cash and cash equivalents were $523.5 million at
October 30, 2021, which was $225.0 million lower than our balance at our fiscal
year ended January 30, 2021 of $748.5 million.

Sales and Customer Composition. During the three and nine months ended October
30, 2021 and October 31, 2020, there was no net revenue attributable to a
customer, other than one distributor, whose revenues as a percentage of net
revenue was 10% or greater of total net revenues. Net revenue attributable to
significant distributors whose revenue as a percentage of net revenue was 10% or
greater of total net revenue is presented in the following table:

                         Three Months Ended                      Nine Months Ended
                    October 30,         October 31,        October 30,         October 31,
                       2021                2020                2021               2020

Distributor:
Distributor A                 14  %            12  %                 16  %            12  %



We continuously monitor the creditworthiness of our distributors and believe
their sales to diverse end customers and geographies further serve to mitigate
our exposure to credit risk.

Most of our sales are made to customers located outside of the United States,
primarily in Asia, and a majority of our products are manufactured outside the
United States. Sales shipped to customers with operations in Asia represented
approximately 79% of our net revenue in the three and nine months ended
October 30, 2021, and approximately 81% and 80% of net revenue in the three and
nine months ended October 31, 2020, respectively. Because many manufacturers and
manufacturing subcontractors of our customers are located in Asia, we expect
that most of our net revenue will continue to be represented by sales to our
customers in that region. For risks related to our global operations, see Part
II, Item 1A, "Risk Factors," including but not limited to the risk detailed
under the caption "We face additional risks due to the extent of our global
operations since a majority of our products, and those of our customers, are
manufactured and sold outside of the United States. The occurrence of any or a
combination of the additional risks described below would significantly and
negatively impact our business and results of operations."

The development process for our products is long, which may cause us to
experience a delay between the time we incur expenses and the time revenue is
generated from these expenditures. We anticipate that the rate of new orders may
vary significantly from quarter to quarter. For risks related to our sales
cycle, see Part II, Item 1A, "Risk Factors," including but not limited to the
risk detailed under the caption "We are subject to order and shipment
uncertainties. If we are unable to accurately predict customer demand, we may
hold excess or obsolete inventory, which would reduce our gross margin.
Conversely, we may have insufficient inventory, which would result in lost
revenue opportunities and potential loss of market share as well as damaged
customer relationships."


                                       34
--------------------------------------------------------------------------------
  Table of Contents
Critical Accounting Policies and Estimates

There have been no material changes during the three months ended October 30,
2021 to our critical accounting policies and estimates from the information
provided in the "Critical Accounting Policies and Estimates" section of our
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the fiscal year ended
January 30, 2021.

In the current macroeconomic environment affected by COVID-19, our estimates
could require increased judgment and carry a higher degree of variability and
volatility. We continue to monitor and assess our estimates in light of
developments, and as events continue to evolve and additional information
becomes available, our estimates may change materially in future periods.


Results of operations

The following table sets forth information derived from our Unaudited Condensed
Consolidated Statements of Operations expressed as a percentage of net revenue:

                                                               Three Months Ended                                   Nine Months Ended
                                                     October 30,               October 31,               October 30,               October 31,
                                                        2021                      2020                      2021                      2020
Net revenue                                                100.0  %                    100.0  %                100.0  %                    100.0  %
Cost of goods sold                                          51.5                        49.2                    55.8                        50.8
Gross profit                                                48.5                        50.8                    44.2                        49.2
Operating expenses:
Research and development                                    30.7                        34.1                    32.9                        37.4
Selling, general and administrative                         20.1                        15.4                    22.6                        16.1
Restructuring related charges                                0.5                         2.6                     1.0                         7.4
Total operating expenses                                    51.3                        52.1                    56.5                        60.9
Operating loss                                              (2.8)                       (1.3)                  (12.3)                      (11.7)
Interest income                                                -                         0.1                       -                         0.1
Interest expense                                            (2.9)                       (2.1)                   (3.3)                       (2.2)
Other income (loss), net                                     0.1                           -                       -                         0.2
Loss before income taxes                                    (5.6)                       (3.3)                  (15.6)                      (13.6)
Provision for income taxes                                  (0.4)                       (0.2)                   (1.9)                       (0.3)
Net loss                                                    (5.2) %                     (3.1) %                (13.7) %                    (13.3) %



                                       35
--------------------------------------------------------------------------------
  Table of Contents
Three and nine months ended October 30, 2021 and October 31, 2020

Net Revenue

                    Three Months Ended                             Nine Months Ended
               October 30,      October 31,         %         October 30,      October 31,        %
                  2021              2020          Change         2021             2020          Change

                                          (in thousands, except percentage)
Net revenue   $ 1,211,245      $    750,143       61.5%      $ 3,119,405      $ 2,171,081       43.7%



Our net revenue for the three months ended October 30, 2021 increased by $461.1
million compared to net revenue for the three months ended October 31,
2020. This was due to an increase in sales from all our end markets. Revenue
increased from the data center end market by 109%, from the carrier
infrastructure end market by 28%, from the enterprise networking end market by
56%, from the consumer end market by 20%, and from the automotive/industrial end
market by 114% compared to the three months ended October 31, 2020. The increase
in revenue from the data center end market was primarily due to the acquisition
of Inphi and increase in demand for multiple product lines such as our embedded
processors, flash controllers, networking and nearline HDD controllers and
preamplifiers. The increase in revenue from the carrier infrastructure end
market was primarily due to the acquisition of Inphi and increase in demand from
5G base station related customers for our embedded processors and ethernet
products. The increase in revenue from the enterprise networking end market was
primarily due to the increase in demand for our ethernet products. The increase
in revenue from the consumer end market was primarily due to the increase in
demand for our custom SSD controllers. The increase in revenue from the
automotive/industrial end market was primarily due to the increase in demand for
our automotive ethernet connectivity products which continue to be designed into
additional automotive models.

Our net revenue for the nine months ended October 30, 2021 increased by $948.3
million compared to net revenue for the nine months ended October 31, 2020. This
was due to an increase in sales from all our end markets. Revenue increased from
the data center end market by 57%, from the carrier infrastructure end market by
34%, from the enterprise networking end market by 36%, from the consumer end
market by 26% , and from the automotive/industrial end market by 103% compared
to the nine months ended October 31, 2020. The increase in revenue from the data
center end market was primarily due to the acquisition of Inphi and increase in
demand for multiple product lines such as our embedded processors, flash
controllers, networking and nearline HDD controllers and preamplifiers. The
increase in revenue from the carrier infrastructure end market was primarily due
to the acquisition of Inphi and increase in demand from 5G base station related
customers for our embedded processors and ethernet products. The increase in
revenue from the enterprise networking end market was primarily due to the
increase in demand for our ethernet products. The increase in revenue from the
consumer end market was primarily due to the increase in demand for our custom
SSD controllers. The increase in revenue from the automotive/industrial end
market was primarily due to the increase in demand for our automotive ethernet
connectivity products.

In the three months ended October 30, 2021, unit shipments were 49% higher and
average selling prices increased 13% compared to the three months ended
October 31, 2020, for an overall increase in net revenue of 61%. In the nine
months ended October 30, 2021, unit shipments were 29% higher and average
selling prices increased 15% compared to the nine months ended October 31, 2020.
This was primarily driven by our recent portfolio changes, including the
acquisition of Inphi.


Cost of goods sold and gross profit

                           Three Months Ended                             

Nine months ended

                      October 30,      October 31,        %         October 30,       October 31,         %
                         2021             2020          Change          2021              2020          Change

                                                 (in thousands, except percentage)

Cost of goods sold $ 623,425 $ 369,083 68.9% $ 1,741,614 $ 1,103,863 57.8%% of net sales

           51.5  %          49.2  %                       55.8  %           50.8  %

Gross profit $ 587,820 $ 381,060 54.3% $ 1,377,791 $ 1,067,218 29.1%% of net sales

           48.5  %          50.8  %                       44.2  %           49.2  %



Cost of goods sold as a percentage of net revenue increased for the three and
nine months ended October 30, 2021 compared to the three and nine months ended
October 31, 2020, which is primarily due to increased costs associated with the
Inphi and Innovium acquisitions including amortization of inventory fair value
adjustment and amortization of acquired intangible assets. As a result, gross
margin for the three and nine months ended October 30, 2021 decreased 2.3% and
5% percentage points compared to the three and nine months ended October 31,
2020.
                                       36

————————————————– ——————————

  Table of Contents

Research and Development

                                  Three Months Ended                                              Nine Months Ended
                            October 30,         October 31,               %                October 30,          October 31,              %
                               2021                2020                 Change                 2021                2020               Change

                                                                     (in thousands, except percentage)
Research and development   $  371,894          $  255,637               45.5%             $ 1,025,037          $  812,360              26.2%
% of net revenue                 30.7  %             34.1  %                                     32.9  %             37.4  %



Research and development expense increased by $116.3 million in the three months
ended October 30, 2021 compared to the three months ended October 31, 2020. The
increase was primarily due to additional costs from our acquisition of Inphi and
Innovium, including $82.1 million of higher employee personnel-related costs,
$13.5 million of higher computer-aided design software related costs, and
$8.9 million of higher depreciation and amortization costs.

Research and development expense increased by $212.7 million in the nine months
ended October 30, 2021 compared to the nine months ended October 31, 2020. The
increase was primarily due to additional costs from our acquisition of Inphi and
Innovium, including $146.0 million of higher employee personnel-related costs,
$26.4 million of higher computer-aided design software related costs,
$22.9 million of higher engineering design and supplies costs, and $11.1 million
of higher depreciation and amortization costs.

Selling, general and administrative expenses

                                       Three Months Ended                                              Nine Months Ended
                                 October 30,         October 31,               %                October 30,         October 31,              %
                                    2021                2020                 Change                2021                2020               Change

                                                                         (in thousands, except percentage)
Selling, general and
administrative                  $  243,406          $  115,501               110.7%            $  704,033          $  350,322             101.0%
% of net revenue                      20.1  %             15.4  %                                    22.6  %             16.1  %



Selling, general and administrative expense increased by $127.9 million in the
three months ended October 30, 2021 compared to the three months ended
October 31, 2020. The increase was primarily due to additional costs from our
acquisition of Inphi and Innovium, including $83.2 million of higher intangibles
amortization expense, $25.7 million of higher employee personnel-related costs
and $18.7 million of higher integration costs.

Selling, general and administrative expense increased by $353.7 million in the
nine months ended October 30, 2021 compared to the nine months ended October 31,
2020. The increase was primarily due to additional costs from our acquisition of
Inphi and Innovium, including $174.8 million of higher intangibles amortization
expense, $108.8 million of higher employee personnel-related costs and
$85.0 million of higher integration costs.

Restructuring charges

                                     Three Months Ended                                             Nine Months Ended
                              October 30,          October 31,               %               October 30,          October 31,              %
                                  2021                 2020                Change                2021                2020                Change

                                                                       (in thousands, except percentage)
Restructuring related
charges                      $     5,861          $    19,312             (69.7)%           $    31,041          $  161,189             (80.7)%
% of net revenue                     0.5  %               2.6  %                                    1.0  %              7.4  %



We recognized $5.9 million and $31.0 million of total restructuring related
charges in the three and nine months ended October 30, 2021 as we continue to
evaluate our existing operations to increase operational efficiency, decrease
costs, and increase profitability. See "Note 7 - Restructuring" in the Notes to
the Unaudited Condensed Consolidated Financial Statements for further
information.

                                       37
--------------------------------------------------------------------------------
  Table of Contents
Interest Income

                                  Three Months Ended                                                   Nine Months Ended
                         October 30,               October 31,                %                October 30,          October 31,               %
                             2021                     2020                 Change                  2021                 2020                Change

                                                                      (in thousands, except percentage)
Interest income         $      189                $      608               (68.9)%            $      561           $     2,243             (75.0)%
% of net revenue                 -   %                   0.1  %                                        -   %               0.1  %


Interest income decreased by $ 0.4 million and $ 1.7 million in the three and nine months ended October 30, 2021 compared to the three and nine months ended
October 31, 2020 due to the fall in interest rates on our invested cash.


Interest Expense

                         Three Months Ended                            Nine Months Ended
                    October 30,      October 31,        %         October 30,      October 31,        %
                       2021             2020          Change         2021             2020          Change

                                              (in thousands, except percentage)

Interest charges $ (35,423) $ (16,066) 120.5% (104,378) $ $ (48,531) 115.1%% of net sales (2.9)% (2.1)%

(3.3)% (2.2)%



Interest expense increased by $19.4 million in the three months ended
October 30, 2021 compared to the three months ended October 31, 2020. The
increase was primarily due to the interest expense on the 2020 term loans in
addition to the new 2026, 2028, and 2031 senior unsecured notes issued in the
first quarter of fiscal 2022.

Interest expense increased by $55.8 million in the nine months ended October 30,
2021 compared to the nine months ended October 31, 2020. The increase was
primarily due to the interest expense on the 2020 term loans in addition to the
new 2026, 2028, and 2031 senior unsecured notes issued in the first quarter of
fiscal 2022, as well as the write-off of issuance costs related to the bridge
loan when the loan was terminated in the first quarter of fiscal 2022.

Other income (losses), net

                                 Three Months Ended                                                  Nine Months Ended
                        October 30,               October 31,               %                October 30,          October 31,               %
                            2021                     2020                 Change                 2021                 2020                Change

                                                                     (in thousands, except percentage)
Other income (loss),
net                    $      999                $      299               234.1%            $      568           $     3,613             (84.3)%
% of net revenue              0.1   %                     -  %                                       -   %               0.2  %


Other income (losses), net, modified by $ 0.7 million during the three months ended
October 30, 2021 compared to the three months ended October 31, 2020. The variation is mainly explained by fluctuations in exchange rates.

Other income (loss), net, changed by $3.0 million in the nine months ended
October 30, 2021 compared to the nine months ended October 31, 2020. The change
was primarily due to the impairment recognized on a certain equity investment
during the second quarter of fiscal 2022, as well as foreign currency rate
fluctuations.

                                       38
--------------------------------------------------------------------------------
  Table of Contents
Benefit for Income Taxes

                                Three Months Ended                                                 Nine Months Ended
                        October 30,           October 31,                %                 October 30,           October 31,               %
                            2021                 2020                  Change                 2021                  2020                Change

                                                                    (in thousands, except percentage)
Benefit for income
taxes                  $    (5,044)         $     (1,641)              207.4%            $    (58,367)         $     (5,494)            962.4%



Our income tax benefit for the three months ended October 30, 2021 was $5.0
million compared to a tax benefit of $1.6 million for the three months ended
October 31, 2020. Our income tax benefit for the three months ended October 30,
2021 differs from the tax benefit recorded in the same period in the prior year
primarily due to the tax impact of discrete tax benefits from stock-based
compensation deductions versus prior periods, tax rate differentials on foreign
income (losses), as well as the recognition of tax benefits related to the
settlement of audits in certain jurisdictions. These items were the primary
drivers of the income tax benefits for the three months ended October 30, 2021
and the differences between the federal statutory tax rates of 21% and our
effective income tax rates for these periods.

Our income tax benefit for the nine months ended October 30, 2021 was $58.4
million compared to a tax benefit of $5.5 million for the nine months ended
October 31, 2020. Our income tax benefit for the nine months ended October 30,
2021 differs from the same period in the prior year primarily due to the tax
impact of an intra-entity transfer of certain intellectual property to a
subsidiary in Singapore, which resulted in a tax benefit of $10.0 million during
the period. This amount, combined with discrete tax benefits from stock based
compensation deductions versus prior periods, tax rate differentials on foreign
income/(losses), as well as the recognition of tax benefits related to
settlement of audits and the expirations of the statutes of limitations for the
assessment of taxes in certain jurisdictions were the primary drivers of the
income tax benefits for the nine months ended October 30, 2021 and the
differences between the federal statutory tax rates of 21% and our effective
income tax rates for these periods.

Our provision for income taxes may be affected by changes in the geographic mix
of earnings with different applicable tax rates, changes in the realizability of
deferred tax assets and liabilities, discrete items, intra-entity transfers of
intellectual property, accruals related to contingent tax liabilities and
period-to-period changes in such accruals, the results of income tax audits, the
expiration of statutes of limitations, the implementation of tax planning
strategies, tax rulings, court decisions, settlements with tax authorities and
changes in tax laws and regulations. It is also possible that significant
negative evidence may become available that causes us to conclude that a
valuation allowance is needed on certain of our deferred tax assets, which would
adversely affect our income tax provision in the period of such change in
judgment.

We also continually assess potential changes to our legal structure in response to the guidelines and requirements of the various international tax jurisdictions in which we do business. In addition, please see the information in Section 1A: Risk Factors under the section “Changes in tax benefits, existing rules or practices may adversely affect our financial results”.

Liquidity and capital resources

Our principal source of liquidity as of October 30, 2021 consisted of
approximately $523.5 million of cash and cash equivalents, of which
approximately $437.0 million was held by subsidiaries outside of the United
States. We manage our worldwide cash requirements by, among other things,
reviewing available funds held by our foreign subsidiaries and the cost
effectiveness by which those funds can be accessed in the United States. See
"Note 12 - Income Taxes" in the Notes to the Unaudited Condensed Consolidated
Financial Statements for further information.

In April 2021, we assumed $15.7 million in principal of Inphi's 0.75%
convertible senior notes due 2021 and $506 million in principal of Inphi's 0.75%
convertible senior notes due 2025 from Inphi. We also acquired capped call
assets in relation to the convertible debt. See "Note 5 - Debt" in the Notes to
the Unaudited Condensed Consolidated Financial Statements for additional
information. As of October 30, 2021, the Inphi convertible notes have been
settled.
                                       39

————————————————– ——————————

Contents

In December 2020, to fund the Inphi acquisition, we executed a debt agreement to
obtain a $875 million 3-year term loan and a $875 million 5-year term loan.
During the quarter ended October 30, 2021, the Company repaid $140 million and
$10.9 million of the principal outstanding of the 3-year term loan and 5-year
term loan, respectively. We also executed a debt agreement to obtain a
$750 million revolving credit facility ("2020 Revolving Credit Facility"). In
April 2021, we completed an offering and issued (i) $500 million of senior notes
with a 5 year term due in 2026, (ii) $750 million of senior notes with a 7 year
term due in 2028, and (iii) $750 million of senior notes with a 10 year term due
in 2031. On October 8, 2021, the senior notes issued in April 2021 were
exchanged for new notes. The terms of the new notes issued in the exchange are
substantially identical to the notes issued in April 2021, except that the new
notes are registered under the Securities Act of 1933 and the transfer
restrictions and registration rights applicable to the Senior Notes issued in
April 2021 do not apply to the new notes. In addition, in May 2021, in
conjunction with the U.S. domiciliation, we exchanged certain of our existing
senior notes due in 2023 ("MTG 2023 Notes") and 2028 ("MTG 2028 Notes") that
were previously issued by the former Bermuda-based parent with like notes that
are now issued by the new parent domiciled in Delaware. See "Note 5 - Debt" in
the Notes to the Unaudited Condensed Consolidated Financial Statements for
additional information.

After the end of the quarter, the 22 November 2021, the Company has withdrawn
$ 90.0 million on the 2020 revolving credit facility. The Company intends to repay the amount drawn by the end of the fourth quarter of fiscal 2022.

We believe that our existing cash, cash equivalents, together with cash
generated from operations, and funds from our 2020 Revolving Credit Facility
will be sufficient to cover our working capital needs, capital expenditures,
investment requirements and any declared dividends, repurchase of our common
stock and commitments for at least the next twelve months. Our capital
requirements will depend on many factors, including our rate of sales growth,
market acceptance of our products, costs of securing access to adequate
manufacturing capacity, the timing and extent of research and development
projects and increases in operating expenses, all of which are subject to
uncertainty.

To the extent that our existing cash and cash equivalents, together with cash
generated by operations, and funds available under our 2020 Revolving Credit
Facility are insufficient to fund our future activities, we may need to raise
additional funds through public or private debt or equity financing. We may also
acquire additional businesses, purchase assets or enter into other strategic
arrangements in the future, which could also require us to seek debt or equity
financing. Additional equity financing or convertible debt financing may be
dilutive to our current stockholders. If we elect to raise additional funds, we
may not be able to obtain such funds on a timely basis or on acceptable terms,
if at all. In addition, the equity or debt securities that we issue may have
rights, preferences or privileges senior to our common shares.

Future payment of a regular quarterly cash dividend on our common shares and our
planned repurchases of common stock will be subject to, among other things, the
best interests of us and our stockholders, our results of operations, cash
balances and future cash requirements, financial condition, developments in
ongoing litigation, statutory requirements under Delaware law, market conditions
and other factors that our Board of Directors may deem relevant. Our dividend
payments and repurchases of common stock may change from time to time, and we
cannot provide assurance that we will continue to declare dividends or
repurchase shares at all or in any particular amounts. Our share repurchase
program was temporarily suspended in late March 2020 to preserve cash during the
COVID-19 pandemic. We are focusing on reducing our debt and de-levering our
balance sheet. We will continue to evaluate business conditions to decide when
we can restart the share repurchase program.

Cash flow from operating activities

Net cash flow provided by operating activities for the nine months ended
October 30, 2021 was $473.0 million. We had a net loss of $427.2 million
adjusted for the following non-cash items: amortization of acquired intangible
assets of $684.6 million, share-based compensation expense of $325.9 million,
amortization of inventory fair value adjustment associated with the Inphi and
Innovium acquisitions of $191.0 million, depreciation and amortization of $189.7
million, deferred income tax benefit of $67.6 million, and $60.1 million net
loss from other non-cash items. Cash outflow from working capital of $507.7
million for the nine months ended October 30, 2021 was primarily driven by
increases in accounts receivable, inventory, and prepaid expenses and other
assets, partially offset by increase in accounts payable. The increase in
accounts receivable is primarily due to increased sales, as well as the timing
of shipments due to ongoing supply chain challenges. The increase in inventory
is due to increased procurement to support our future growth. The increase in
prepaid expenses and other assets is primarily due to prepayments on supply
capacity reservation agreements. The higher accounts payable is due to increase
in purchases and timing of payments.

                                       40
--------------------------------------------------------------------------------
  Table of Contents
Net cash flow provided by operating activities for the nine months ended
October 31, 2020 was $659.0 million. We had a net loss of $293.8 million
adjusted for the following non-cash items: amortization of acquired intangible
assets of $333.9 million, share-based compensation expense of $182.1 million,
depreciation and amortization of $149.9 million, restructuring related non-cash
charges of $123.6 million, amortization of inventory fair value adjustment
associated with the Aquantia and Avera acquisition of $17.3 million and $19.4
million net loss from other non-cash items. Cash inflow from working capital of
$123.0 million for the nine months ended October 31, 2020 was primarily driven
by an increase in accrued employee compensation, an increase in accounts
payable, an increase in accrued liabilities and other non-current liabilities,
as well as a decrease in inventories. The increase in accrued employee
compensation is due to increase in our bonus accrual and increase in employee
contributions to the employee stock purchase plan. The increase in accounts
payable is mainly due to timing of payments. The increase in accrued liabilities
and other non-current liabilities was due to an increase in ship and debit
reserve. The decrease in inventory is due to improved supply chain management.

Cash flow from investing activities

For the nine months ended October 30, 2021, net cash used in investing
activities of $3.7 billion was primarily driven by net cash paid to acquire
Inphi of $3.6 billion, purchases of property and equipment of $130.5 million,
and purchases of technology licenses of $9.4 million, partially offset by cash
acquired from Innovium of $60.4 million.

For the nine months ended October 31, 2020, the net cash used in investing activities of $ 96.5 million was mainly driven by the purchase of property, plant and equipment of $ 88.2 million and the purchase of technological licenses from $ 8.5 million.

Cash flow from financing activities

For the nine months ended October 30, 2021, net cash provided by financing
activities of $3.0 billion was primarily attributable to proceeds from issuance
of debt of $3.8 billion, proceeds from capped calls of $160.3 million, partially
offset by $425.9 million repayment of debt, $181.2 million of repurchases and
settlement of convertible notes, $169.0 million tax withholding payments on
behalf of employees for net share settlements, $140.3 million for payment of our
quarterly dividends and $97.9 million payments on technology license
obligations.

For the nine months ended October 31, 2020, net cash used in financing
activities of $378.1 million was primarily attributable to $120.1 million for
payment of our quarterly dividends, $100.0 million repayment of debt, $82.6
million tax withholding payments on behalf of employees for net share
settlements, $76.8 million payments for technology license obligations and $25.2
million for repurchases of our common stock and $22.3 million payment of debt
financing cost. These outflows were partially offset by $50.5 million proceeds
from employee stock plans.


                                       41
--------------------------------------------------------------------------------
  Table of Contents
Contractual Obligations and Commitments

As part of the Company’s manufacturing relationships with its foundry partners, cancellation of pending purchase orders is permitted but requires payment of all costs and expenses incurred up to the date of cancellation.

The following table summarizes our contractual obligation as of October 30, 2021
and the effect that such obligations are expected to have on our liquidity and
cash flow in future periods (in thousands):

                                                                            

Contractual obligations by financial year

                              Remainder of
                                  2022                 2023                 2024                2025               2026             Thereafter             Total

Contractual obligations: Principal payments on debt $ 10,938 $ 65,625 $ 1,322,452 $ 109,375 $ 131,250 $ 2,959,290

          $ 4,598,930
Interest obligations on debt      29,208              116,177              103,966             84,527             80,608              216,797          

631 283

Facilities operating leases
(1)                               11,995               40,428               38,923             26,504             22,864               64,858           

205,572

Purchase commitments to
foundries and test & assembly
partners (2)                      61,899            1,068,090              498,975            541,868            498,569              539,972          

3,209,373

Capital purchase obligations      41,272                    -                    -                  -                  -                    -               41,272
Technology license
obligations (3)                   41,562              128,292               96,842             74,178             32,533              227,992              601,399
Other contractual commitments     17,981                7,228                1,769                503                350                4,665           

32,496

Total contractual obligations $ 214,855 $ 1,425,840 $ 2,062,927 $ 836,955 $ 766,174 $ 4,013,574

          $ 9,320,325



(1)Amounts exclude contractual sublease proceeds of $38.6 million to be received
through fiscal 2031.
(2)Amounts include outstanding purchase orders with foundries and contractual
obligations from supply capacity reservation agreements, see "Note 10 -
Commitments and Contingencies" for details.
(3)Amounts represent anticipated future cash payments, including anticipated
interest payments not recorded in the consolidated balance sheet.

In addition to the above commitments and contingencies, as of October 30, 2021,
we have $32.9 million of unrecognized tax benefits as liabilities. We also have
a liability for potential interest and penalties of $3.7 million as of October
30, 2021. It is reasonably possible that the amount of unrecognized tax benefits
could increase or decrease significantly due to changes in tax law in various
jurisdictions, new tax audits and changes in the U.S. dollar as compared to
foreign currencies within the next 12 months. Excluding these factors, uncertain
tax positions may decrease by as much as $1.9 million from the lapse of statutes
of limitation in various jurisdictions during the next 12 months. Government tax
authorities from several non-U.S. jurisdictions are also examining our tax
returns. We believe that we have adequately provided for any reasonably
foreseeable outcomes related to these tax audits and that any settlement will
not have a material effect on our results at this time.

Compensation obligations

See “Note 10 – Commitments and contingencies” in the notes to the unaudited condensed consolidated financial statements appearing in part I, article 1 of this quarterly report on form 10-Q.

                                       42

————————————————– ——————————

Contents

© Edgar online, source Previews

[ad_2]

Previous Exactly what exactly is trying an online cash advance?
Next Managing the world's largest sovereign wealth fund will become complicated