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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2022
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-35451
MACOM Technology Solutions Holdings, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 27-0306875 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
100 Chelmsford Street
Lowell, MA 01851
(Address of principal executive offices and zip code)
(978) 656-2500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of exchange on which registered |
Common Stock, par value $0.001 per share | MTSI | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | | Smaller reporting company | ☐ |
| | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 25, 2022, there were 69,997,229 shares of the registrant’s common stock outstanding.
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
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| | | Page No. |
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
| |
PART I—FINANCIAL INFORMATION
| | | | | |
ITEM 1. | FINANCIAL STATEMENTS |
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
| | | | | | | | | | | |
| July 1, 2022 | | October 1, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 132,170 | | | $ | 156,537 | |
Short-term investments | 404,169 | | | 188,365 | |
Accounts receivable, net | 106,594 | | | 84,570 | |
Inventories | 110,228 | | | 82,699 | |
Prepaid and other current assets | 12,344 | | | 9,365 | |
Total current assets | 765,505 | | | 521,536 | |
Property and equipment, net | 122,498 | | | 120,526 | |
Goodwill | 311,958 | | | 314,240 | |
Intangible assets, net | 59,289 | | | 84,685 | |
Deferred income taxes | 37,519 | | | 39,516 | |
Other investments | 2,500 | | | 15,342 | |
Other long-term assets | 33,801 | | | 38,300 | |
Total assets | $ | 1,333,070 | | | $ | 1,134,145 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Current portion of finance lease obligations | $ | 977 | | | $ | 958 | |
| | | |
Accounts payable | 42,725 | | | 28,712 | |
Accrued liabilities | 57,731 | | | 63,374 | |
Total current liabilities | 101,433 | | | 93,044 | |
Finance lease obligations, less current portion | 27,292 | | | 28,037 | |
Financing obligation | 9,544 | | | 8,720 | |
Long-term debt | 565,509 | | | 492,097 | |
Other long-term liabilities | 33,652 | | | 40,511 | |
Total liabilities | 737,430 | | | 662,409 | |
Commitments and contingencies (see Note 12) | | | |
Stockholders’ equity: | | | |
Common stock | 70 | | | 69 | |
Treasury stock, at cost | (330) | | | (330) | |
Accumulated other comprehensive income | (2,766) | | | 4,150 | |
Additional paid-in capital | 1,192,288 | | | 1,269,601 | |
Accumulated deficit | (593,622) | | | (801,754) | |
Total stockholders’ equity | 595,640 | | | 471,736 | |
Total liabilities and stockholders' equity | $ | 1,333,070 | | | $ | 1,134,145 | |
See notes to condensed consolidated financial statements.
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| July 1, 2022 | | July 2, 2021 | | July 1, 2022 | | July 2, 2021 |
Revenue | $ | 172,259 | | | $ | 152,622 | | | $ | 497,027 | | | $ | 451,709 | |
Cost of revenue | 67,717 | | | 65,353 | | | 199,353 | | | 200,065 | |
Gross profit | 104,542 | | | 87,269 | | | 297,674 | | | 251,644 | |
Operating expenses: | | | | | | | |
Research and development | 37,625 | | | 33,610 | | | 108,550 | | | 105,165 | |
Selling, general and administrative | 30,914 | | | 29,985 | | | 93,481 | | | 91,758 | |
| | | | | | | |
Total operating expenses | 68,539 | | | 63,595 | | | 202,031 | | | 196,923 | |
Income from operations | 36,003 | | | 23,674 | | | 95,643 | | | 54,721 | |
Other (expense) income: | | | | | | | |
Warrant liability expense | — | | | — | | | — | | | (11,130) | |
Interest expense, net | (845) | | | (5,526) | | | (3,928) | | | (15,111) | |
Other income (expense), net | 13 | | | (2,661) | | | 114,866 | | | (4,287) | |
Total other (expense) income, net | (832) | | | (8,187) | | | 110,938 | | | (30,528) | |
Income before income taxes | 35,171 | | | 15,487 | | | 206,581 | | | 24,193 | |
Income tax expense | 2,937 | | | 482 | | | 5,962 | | | 3,349 | |
Net income | $ | 32,234 | | | $ | 15,005 | | | $ | 200,619 | | | $ | 20,844 | |
| | | | | | | |
Net income per share: | | | | | | | |
Income per share - Basic | $ | 0.46 | | | $ | 0.22 | | | $ | 2.88 | | | $ | 0.31 | |
Income per share - Diluted | $ | 0.45 | | | $ | 0.21 | | | $ | 2.82 | | | $ | 0.30 | |
Weighted average shares used: | | | | | | | |
Basic | 69,946 | | | 68,732 | | | 69,712 | | | 68,331 | |
Diluted | 71,060 | | | 70,880 | | | 71,130 | | | 70,282 | |
See notes to condensed consolidated financial statements.
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| July 1, 2022 | | July 2, 2021 | | July 1, 2022 | | July 2, 2021 |
Net income | $ | 32,234 | | | $ | 15,005 | | | $ | 200,619 | | | $ | 20,844 | |
Unrealized (loss) gain on short term investments | (1,219) | | | 75 | | | (4,171) | | | (121) | |
Foreign currency translation loss, net of tax | (1,742) | | | (69) | | | (2,745) | | | (420) | |
Other comprehensive (loss) income, net of tax | (2,961) | | | 6 | | | (6,916) | | | (541) | |
Total comprehensive income | $ | 29,273 | | | $ | 15,011 | | | $ | 193,703 | | | $ | 20,303 | |
See notes to condensed consolidated financial statements.
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| | | | | Accumulated Other Comprehensive Income | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Common Stock | | Treasury Stock |
| Shares | | Amount | | Shares | | Amount |
Balance as of April 1, 2022 | 69,910 | | | $ | 70 | | | (23) | | | $ | (330) | | | $ | 195 | | | $ | 1,180,204 | | | $ | (625,856) | | | $ | 554,283 | |
| | | | | | | | | | | | | | | |
Vesting of restricted common stock and units | 67 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock pursuant to employee stock purchase plan | 66 | | | — | | | — | | | — | | | — | | | 2,917 | | | — | | | 2,917 | |
Shares repurchased for tax withholdings on restricted stock awards | (23) | | | — | | | — | | | — | | | — | | | (1,178) | | | — | | | (1,178) | |
Share-based compensation | — | | | — | | | — | | | — | | | — | | | 10,345 | | | — | | | 10,345 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (2,961) | | | — | | | — | | | (2,961) | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 32,234 | | | 32,234 | |
Balance as of July 1, 2022 | 70,020 | | | $ | 70 | | | (23) | | | $ | (330) | | | $ | (2,766) | | | $ | 1,192,288 | | | $ | (593,622) | | | $ | 595,640 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Nine Months Ended |
| | | | | Accumulated Other Comprehensive Income | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Common Stock | | Treasury Stock |
| Shares | | Amount | | Shares | | Amount |
Balance as of October 1, 2021 | 68,877 | | | $ | 69 | | | (23) | | | $ | (330) | | | $ | 4,150 | | | $ | 1,269,601 | | | $ | (801,754) | | | $ | 471,736 | |
Stock option exercises | 190 | | | — | | | — | | | — | | | — | | | 2,688 | | | — | | | 2,688 | |
Vesting of restricted common stock and units | 1,351 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Issuance of common stock pursuant to employee stock purchase plan | 122 | | | — | | | — | | | — | | | — | | | 5,364 | | | — | | | 5,364 | |
Shares repurchased for tax withholdings on equity awards | (520) | | | — | | | — | | | — | | | — | | | (35,935) | | | — | | | (35,935) | |
Share-based compensation | — | | | — | | | — | | | — | | | — | | | 30,260 | | | — | | | 30,260 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (6,916) | | | — | | | — | | | (6,916) | |
Cumulative-effect adjustment from adoption of ASU 2020-06, net | — | | | — | | | — | | | — | | | — | | | (79,690) | | | 7,513 | | | (72,177) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 200,619 | | | 200,619 | |
Balance as of July 1, 2022 | 70,020 | | | $ | 70 | | | (23) | | | $ | (330) | | | $ | (2,766) | | | $ | 1,192,288 | | | $ | (593,622) | | | $ | 595,640 | |
See notes to condensed consolidated financial statements.
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| | | | | Accumulated Other Comprehensive Income | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Common Stock | | Treasury Stock |
| Shares | | Amount | | Shares | | Amount |
Balance as of April 2, 2021 | 68,692 | | | $ | 69 | | | (23) | | | $ | (330) | | | $ | 4,462 | | | $ | 1,241,820 | | | $ | (833,888) | | | $ | 412,133 | |
Stock option exercises | 10 | | | — | | | — | | | — | | | — | | | 161 | | | — | | | 161 | |
Vesting of restricted common stock and units | 62 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of common stock pursuant to employee stock purchase plan | 73 | | | — | | | — | | | — | | | — | | | 2,557 | | | — | | | 2,557 | |
Shares repurchased for tax withholdings on equity awards | (21) | | | — | | | — | | | — | | | — | | | (1,066) | | | — | | | (1,066) | |
Share-based compensation | — | | | — | | | — | | | — | | | — | | | 8,141 | | | — | | | 8,141 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 6 | | | — | | | — | | | 6 | |
| | | | | | | | | | | | | | | |
Equity component of convertible notes, net | — | | | — | | | — | | | — | | | — | | | 8,856 | | | — | | | 8,856 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 15,005 | | | 15,005 | |
Balance as of July 2, 2021 | 68,816 | | | $ | 69 | | | (23) | | | $ | (330) | | | $ | 4,468 | | | $ | 1,260,469 | | | $ | (818,883) | | | $ | 445,793 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Nine Months Ended |
| | | | | Accumulated Other Comprehensive Income | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Common Stock | | Treasury Stock |
| Shares | | Amount | | Shares | | Amount |
Balance as of October 2, 2020 | 66,921 | | | $ | 67 | | | (23) | | | $ | (330) | | | $ | 5,009 | | | $ | 1,135,127 | | | $ | (839,727) | | | $ | 300,146 | |
| | | | | | | | | | | | | | | |
Stock option exercises | 60 | | | — | | | — | | | — | | | — | | | 978 | | | — | | | 978 | |
Vesting of restricted common stock and units | 1,284 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | |
Issuance of common stock pursuant to employee stock purchase plan | 166 | | | — | | | — | | | — | | | — | | | 4,796 | | | — | | | 4,796 | |
Shares repurchased for tax withholdings on equity awards | (473) | | | — | | | — | | | — | | | — | | | (23,404) | | | — | | | (23,404) | |
Share-based compensation | — | | | — | | | — | | | — | | | — | | | 26,841 | | | — | | | 26,841 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (541) | | | — | | | — | | | (541) | |
Issuance of common stock for the cashless exercise of warrants | 858 | | | 1 | | | — | | | — | | | — | | | 36,441 | | | — | | | 36,442 | |
Equity component of convertible notes, net | — | | | — | | | — | | | — | | | — | | | 79,690 | | | — | | | 79,690 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 20,844 | | | 20,844 | |
Balance as of July 2, 2021 | 68,816 | | | $ | 69 | | | (23) | | | $ | (330) | | | $ | 4,468 | | | $ | 1,260,469 | | | $ | (818,883) | | | $ | 445,793 | |
See notes to condensed consolidated financial statements.
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| | | | | | | | | | | |
| Nine Months Ended |
| July 1, 2022 | | July 2, 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 200,619 | | | $ | 20,844 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and intangibles amortization | 43,052 | | | 52,854 | |
Share-based compensation | 30,260 | | | 26,841 | |
Warrant liability expense | — | | | 11,130 | |
Deferred financing cost and discount amortization and write-offs | 1,281 | | | 6,029 | |
Accretion of discount on convertible note | — | | | 3,925 | |
Deferred income taxes | 2,110 | | | 2,200 | |
(Gain) loss on equity method investment, net | (114,908) | | | 287 | |
Other adjustments, net | (85) | | | 1,053 | |
Change in operating assets and liabilities: | | | |
Accounts receivable | (22,024) | | | (25,735) | |
Inventories | (27,529) | | | 8,089 | |
Prepaid expenses and other assets | 897 | | | (1,025) | |
Accounts payable | 14,128 | | | 3,100 | |
Accrued and other liabilities | (12,657) | | | (1,606) | |
Income taxes | 1,845 | | | (384) | |
Net cash provided by operating activities | 116,989 | | | 107,602 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Proceeds from sale of equity method investment | 127,750 | | | — | |
Purchases of property and equipment | (18,818) | | | (12,926) | |
Proceeds from sales and maturities of short-term investments | 165,998 | | | 191,306 | |
Purchases of short-term investments | (386,762) | | | (152,336) | |
| | | |
Proceeds from sale of property and equipment | 23 | | | 280 | |
Net cash (used in) provided by investing activities | (111,809) | | | 26,324 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Proceeds from convertible notes, net of issuance costs | — | | | 444,249 | |
Payments on long-term debt | — | | | (545,321) | |
Payments on finance leases | (726) | | | (1,012) | |
Proceeds from stock option exercises and employee stock purchases | 8,052 | | | 5,774 | |
Repurchase of common stock - tax withholdings on equity awards | (35,935) | | | (23,404) | |
Net cash used in financing activities | (28,609) | | | (119,714) | |
Foreign currency effect on cash | (938) | | | 481 | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | (24,367) | | | 14,693 | |
CASH AND CASH EQUIVALENTS — Beginning of period | 156,537 | | | 129,441 | |
CASH AND CASH EQUIVALENTS — End of period | $ | 132,170 | | | $ | 144,134 | |
See notes to condensed consolidated financial statements.
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information—The accompanying unaudited, condensed consolidated financial statements have been prepared according to the rules and regulations of the United States (the “U.S.”) Securities and Exchange Commission (the “SEC”) and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the condensed consolidated balance sheets, condensed consolidated statements of operations, comprehensive income, stockholders' equity and cash flows of MACOM Technology Solutions Holdings, Inc. (“MACOM”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles we use for our annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The condensed consolidated balance sheet as of October 1, 2021 is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our October 1, 2021 consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended October 1, 2021 filed with the SEC on November 15, 2021 (the “2021 Annual Report on Form 10-K”). We recommend that the financial statements included in this Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in our 2021 Annual Report on Form 10-K.
Principles of Consolidation—The accompanying condensed consolidated financial statements include our accounts and the accounts of our majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
We have a 52- or 53-week fiscal year ending on the Friday closest to the last day of September. Fiscal years 2022 and 2021 each include 52 weeks. To offset the effect of holidays, for fiscal years in which there are 53 weeks, we include the extra week arising in such fiscal years in the first fiscal quarter.
Use of Estimates—The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities during the reporting periods, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, we determine estimates and assumptions on historical experience, currently available information and various other factors that management believes to be reasonable under the circumstances. Actual results may differ materially from these estimates and assumptions. The accounting policies which our management believes involve the most significant application of judgment or involve complex estimation, are inventories and associated reserves; goodwill and long-lived asset valuations and associated impairment assessments; revenue reserves; share-based compensation valuations and income taxes.
Recent Accounting Pronouncements—Our Recent Accounting Pronouncements are described in our 2021 Annual Report on Form 10-K.
Pronouncements Adopted in Fiscal Year 2022
In August 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liability and equity, including convertible instruments and contracts on an entity’s own equity. The standard reduces the number of models used to account for convertible instruments, removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and requires the if-converted method for calculation of diluted earnings per share for all convertible instruments. We early adopted this standard effective October 2, 2021 using the modified retrospective approach transition method. Therefore, the condensed consolidated financial statements for the three and nine months ended July 1, 2022 are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company's historical accounting policy. Refer to Note 8 - Debt for the impact of adoption on our 2026 Convertible Notes (as defined below).
Pronouncements for Adoption in Subsequent Periods
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, to simplify the accounting for transitioning from the London Interbank Offered Rate, and other interbank offered rates expected to be discontinued, to alternative reference rates. The guidance in this update was effective upon its issuance. If elected, the guidance is to be applied prospectively through December 31, 2022. We are currently evaluating the effect the potential adoption of this ASU will have on our consolidated financial statements, including, but not limited to, our Credit Agreement (defined below). For additional information regarding our Credit Agreement, refer to Note 8 - Debt.
2. REVENUE
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by markets and geography, as we believe it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The following tables present our revenue disaggregated by markets and geography (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| July 1, 2022 | | July 2, 2021 | | July 1, 2022 | | July 2, 2021 |
Revenue by Market: | | | | | | | |
Telecommunications | $ | 61,988 | | | $ | 47,995 | | | $ | 180,738 | | | $ | 141,799 | |
Industrial & Defense | 75,509 | | | 71,370 | | | 215,794 | | | 205,078 | |
Data Center | 34,762 | | | 33,257 | | | 100,495 | | | 104,832 | |
Total | $ | 172,259 | | | $ | 152,622 | | | $ | 497,027 | | | $ | 451,709 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| July 1, 2022 | | July 2, 2021 | | July 1, 2022 | | July 2, 2021 |
Revenue by Geographic Region: | | | | | | | |
United States | $ | 77,434 | | | $ | 70,329 | | | $ | 226,407 | | | $ | 206,566 | |
China | 47,613 | | | 44,521 | | | 129,705 | | | 124,097 | |
Asia Pacific, excluding China (1) | 27,225 | | | 22,023 | | | 83,756 | | | 69,310 | |
Other Countries (2) | 19,987 | | | 15,749 | | | 57,159 | | | 51,736 | |
Total | $ | 172,259 | | | $ | 152,622 | | | $ | 497,027 | | | $ | 451,709 | |
(1)Asia Pacific primarily represents Australia, Japan, Malaysia, Singapore, South Korea, Taiwan and Thailand.
(2)No country or region represented greater than 10% of our total revenue as of the dates presented, other than the United States, China and Asia Pacific region as presented above.
Contract Balances
We record contract assets or contract liabilities depending on the timing of revenue recognition, billings and cash collections on a contract-by-contract basis. Our contract liabilities primarily relate to deferred revenue, including advanced consideration received from customers for contracts prior to the transfer of control to the customer, and therefore revenue is subsequently recognized upon delivery of products and services.
The following table presents the changes in contract liabilities during the nine months ended July 1, 2022 (in thousands, except percentage):
| | | | | | | | | | | | | | | | | | | | | | | |
| July 1, 2022 | | October 1, 2021 | | $ Change | | % Change |
Contract liabilities | $ | 2,633 | | | $ | 2,793 | | | $ | (160) | | | (6) | % |
As of July 1, 2022 and October 1, 2021, $0.2 million and $0.9 million, respectively, of our contract liabilities, were recorded as other long-term liabilities on our balance sheet with the remainder recorded as accrued liabilities. During the three and nine months ended July 1, 2022, we recognized net sales of $0.3 million and $1.3 million, respectively, that were included in the contract liabilities balance as of the beginning of the period. The decrease in contract liabilities during the nine months
ended July 1, 2022 was primarily related to recognition of revenue that was previously deferred for products and services invoiced prior to when certain of our customers obtained control of such products and/or services.
3. INVESTMENTS
All investments are short-term in nature and are invested in corporate bonds and commercial paper and are classified as available-for-sale. The amortized cost, gross unrealized holding gains or losses and fair value of our available-for-sale investments by major investment type are summarized in the tables below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| July 1, 2022 |
| Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Aggregate Fair Value |
Corporate bonds | $ | 130,741 | | | $ | 8 | | | $ | (2,821) | | | $ | 127,928 | |
Commercial paper | 277,605 | | | 50 | | | (1,414) | | | 276,241 | |
Total short-term investments | $ | 408,346 | | | $ | 58 | | | $ | (4,235) | | | $ | 404,169 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| October 1, 2021 |
| Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Aggregate Fair Value |
Corporate bonds | $ | 73,653 | | | $ | 151 | | | $ | (171) | | | $ | 73,633 | |
Commercial paper | 114,718 | | | 21 | | | (7) | | | 114,732 | |
Total short-term investments | $ | 188,371 | | | $ | 172 | | | $ | (178) | | | $ | 188,365 | |
The contractual maturities of available-for-sale investments were as follows (in thousands):
| | | | | | | | |
| July 1, 2022 | October 1, 2021 |
Less than one year | $ | 316,363 | | $ | 120,590 | |
Over one year | 87,806 | | 67,775 | |
Total available-for-sale investments | $ | 404,169 | | $ | 188,365 | |
We have determined that the gross unrealized losses on available for sale securities as of July 1, 2022 and October 1, 2021 are temporary in nature and/or do not relate to credit loss, and therefore there is no expense for credit losses recorded in our condensed consolidated statements of operations. Unrealized gains and losses on available-for-sale investments are reported as a separate component of stockholders’ equity within accumulated other comprehensive income.
Other Investments — As of July 1, 2022, we held a non-marketable equity investment in Series B preferred stock of a privately held manufacturing corporation with preferred liquidation rights over other equity shares. As the equity securities do not have a readily determinable fair value and do not qualify for the practical expedient under Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, we have elected to account for this investment at cost less any impairment. We evaluate this investment for impairment at each balance sheet date. As of July 1, 2022 and October 1, 2021, the carrying value of this investment was $2.5 million and is classified as a long-term investment.
As of October 1, 2021, also included in long-term investments was a non-controlling investment of less than 10% in the outstanding equity of a private company, Ampere Computing Holdings LLC (“Ampere”), that was acquired in conjunction with our divestiture of our compute business during our fiscal year 2018. This investment’s carrying value was updated quarterly based on our proportionate share of the gains or losses, as well as any changes in Ampere's equity, utilizing the equity method. As of October 1, 2021, the carrying value of this investment was $12.8 million.
On December 23, 2021, we sold our investment in Ampere to one of Ampere’s other limited liability company members, pursuant to the terms of a previously negotiated call option included in Ampere’s limited liability company agreement, as amended and restated (the “LLC Agreement”), in exchange for a predetermined fixed price as set forth in the LLC Agreement of approximately $127.8 million in cash consideration. As of December 23, 2021, the carrying value of this investment was approximately $9.5 million. As a result of this transaction, during the three months ended December 31, 2021, we recorded a gain of $118.2 million in Other income (expense), net in our condensed consolidated statements of operations.
During the three months ended December 31, 2021, we also recorded our proportionate share of the losses on this investment of $3.3 million in Other income (expense), net in our condensed consolidated statements of operations. We do not anticipate any further Ampere income or losses to be recorded. During the three and nine months ended July 2, 2021, we
recorded net losses of $2.0 million and $0.3 million, respectively, associated with this investment. The nine months ended July 2, 2021 include a non-cash gain of $9.8 million associated with an increase in Ampere's equity.
4. FAIR VALUE
We group our financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value. These levels are:
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Level 1 - Quoted prices in active markets for identical assets or liabilities. |
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data. |
Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by us. |
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
We measure certain assets and liabilities at fair value on a recurring basis such as our financial instruments. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the three and nine months ended July 1, 2022.
Assets and liabilities measured at fair value on a recurring basis consist of the following (in thousands):
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| July 1, 2022 |
| Fair Value | | Active Markets for Identical Assets (Level 1) | | Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
Assets | | | | | | | |
Money market funds | $ | 14,310 | | | $ | 14,310 | | | $ | — | | | $ | — | |
Commercial paper | 276,241 | | | — | | | 276,241 | | | — | |
Corporate bonds | 127,928 | | | — | | | 127,928 | | | — | |
Total assets measured at fair value | $ | 418,479 | | | $ | 14,310 | | | $ | 404,169 | | | $ | — | |
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| October 1, 2021 |
| Fair Value | | Active Markets for Identical Assets (Level 1) | | Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) |
Assets | | | | | | | |
Money market funds | $ | 26,363 | | | $ | 26,363 | | | $ | — | | | $ | — | |
Commercial paper | 114,732 | | | — | | | 114,732 | | | — | |
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Corporate bonds | 73,633 | | | — | | | 73,633 | | | — | |
Total assets measured at fair value | $ | 214,728 | | | $ | 26,363 | | | $ | 188,365 | | | $ | — | |
All common stock warrants were exercised during the fiscal quarter ended January 1, 2021. During the nine months ended July 2, 2021, the change in the fair value of the warrant liability, classified within Level 3 of the fair value hierarchy, consist of the following (in thousands):
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| October 2, 2020 | | Net Realized Losses Included in Earnings | | | | Sales and Settlements | | | | July 2, 2021 |
Common stock warrant liability | $ | 25,312 | | | $ | 11,130 | | | | | $ | (36,442) | | | | | $ | — | |
5. INVENTORIES
Inventories consist of the following (in thousands):
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| July 1, 2022 | | October 1, 2021 |
Raw materials | $ | 70,519 | | | $ | 50,950 | |
Work-in-process | 13,290 | | | 9,201 | |
Finished goods | 26,419 | | | 22,548 | |
Total inventory, net | $ | 110,228 | | | $ | 82,699 | |
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
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| July 1, 2022 | | October 1, 2021 |
Construction in process | $ | 19,058 | | | $ | 24,086 | |
Machinery and equipment | 222,362 | | | 200,843 | |
Leasehold improvements | 26,480 | | | 24,347 | |
Furniture and fixtures | 2,664 | | | 2,377 | |
Computer equipment and software | 17,983 | | | 17,749 | |
Finance lease assets | 34,417 | | | 35,589 | |
Total property and equipment | 322,964 | | | 304,991 | |
Less accumulated depreciation and amortization | (200,466) | | | (184,465) | |
Property and equipment, net | $ | 122,498 | | | $ | 120,526 | |
Depreciation and amortization expense related to property and equipment for the three and nine months ended July 1, 2022 was $5.9 million and $17.7 million, respectively. Depreciation and amortization expense related to property and equipment for the three and nine months ended July 2, 2021 was $5.8 million and $18.1 million, respectively.
7. INTANGIBLE ASSETS
Amortization expense related to intangible assets is as follows (in thousands):
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| Three Months Ended | | Nine Months Ended |
| July 1, 2022 | | July 2, 2021 | | July 1, 2022 | | July 2, 2021 |
Cost of revenue | $ | 1,779 | | | $ | 3,806 | | | $ | 6,062 | | | $ | 11,489 | |
Selling, general and administrative | 6,276 | | | 7,602 | | | 19,334 | | | 23,318 | |
Total | $ | 8,055 | | | $ | 11,408 | | | $ | 25,396 | | | $ | 34,807 | |
Intangible assets consist of the following (in thousands):
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| July 1, 2022 | | October 1, 2021 |
Acquired technology | $ | 179,434 | | | $ | 179,434 | |
Customer relationships | 245,870 | | | 245,870 | |
Trade name (indefinite-lived) | 3,400 | | | 3,400 | |
Total | 428,704 | | | 428,704 | |
Less accumulated amortization | (369,415) | | | (344,019) | |
Intangible assets — net | $ | 59,289 | | | $ | 84,685 | |
A summary of the activity in gross intangible assets and goodwill is as follows (in thousands):
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| Intangible Assets | | |
| Total Intangible Assets | | Acquired Technology | | Customer Relationships | | Trade Name | | Goodwill |
Balance as of October 1, 2021 | $ | 428,704 | | | $ | 179,434 | | | $ | 245,870 | | | $ | 3,400 | | | $ | 314,240 | |
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Currency translation adjustment | — | | | — | | | — | | | — | | | (2,282) | |
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Balance as of July 1, 2022 | $ | 428,704 | | | $ | 179,434 | | | $ | 245,870 | | | $ | 3,400 | | | $ | 311,958 | |
As of July 1, 2022, our estimated amortization of our intangible assets in future fiscal years was as follows (in thousands):