MaxLinear(MXL) - 2018 Q4 - Annual Report

PART I ITEM 1. BUSINESS MaxLinear designs RF, analog, and mixed-signal systems-on-chip for connected home, infrastructure, and industrial markets - MaxLinear is a fabless integrated circuit design company specializing in RF, high-performance analog, and mixed-signal communications systems-on-chip solutions[14][28][413] - Key target markets include connected home (e.g., cable modems, set-top boxes), wired and wireless infrastructure (e.g., 5G, data centers), and industrial/multi-market applications (e.g., IoT, power management)[14][17][22] - The company's core competency lies in designing analog and mixed-signal circuits in standard CMOS processes, enabling high integration, small die size, and low power consumption[15][16][29] - Sales are made directly and indirectly to OEMs, module makers, and ODMs, with a significant portion (81% in 2018) shipped to Asia, though end products are often sold globally[36][38][238] Net Revenue by Key Customer (2016-2018) | Customer | 2018 (% of Net Revenue) | 2017 (% of Net Revenue) | 2016 (% of Net Revenue) | | :--------- | :---------------------- | :---------------------- | :---------------------- | | Arris Group, Inc. | 18% | 25% | 27% | | Technicolor | <10% | <10% | 10% | - The company holds 1050 issued patents and 285 pending patent applications in the United States, along with 59 issued foreign patents and 17 pending foreign applications[52] Research and Development Expense (2016-2018) | Year | R&D Expense (Millions USD) | | :--- | :------------------------- | | 2018 | $120.0 | | 2017 | $112.3 | | 2016 | $97.7 | ITEM 1A. RISK FACTORS MaxLinear faces risks from competition, customer concentration, product declines, R&D, IP, and global operations - The semiconductor market is highly competitive, with risks of price pressure, reduced profitability, and loss of market share due to industry consolidation and larger competitors[63][64][65] - Dependence on a limited number of customers (top 10 accounted for 61% of net revenue in 2018) and their consolidation trends pose a significant risk to revenue and operating results[68][69] Revenue Attributable to Connected Home Applications (2016-2018) | Year | % of Net Revenue | | :--- | :--------------- | | 2018 | 54% | | 2017 | 69% | | 2016 | 89% | - The company experienced a decline in net revenues in 2018 ($385.0 million) from 2017 ($420.3 million), primarily due to anticipated declines in legacy video SoC applications and a slowdown in the cable market (DOCSIS 3.0 to 3.1 transition)[81][293] - The complexity of products may lead to undetected defects or bugs, potentially damaging reputation, reducing market acceptance, and incurring significant costs for recalls or warranty claims[83][85] - The company relies on third-party foundries and assembly/test contractors, primarily located in the Pacific Rim (China, Taiwan, Singapore), exposing it to risks of capacity shortages, quality control issues, and disruptions from natural disasters or political unrest[121][122][123] - Intellectual property litigation is a recurring risk in the semiconductor industry, with past and ongoing cases (e.g., CrestaTech, Trango Systems) potentially leading to substantial costs, diversion of management attention, and loss of significant rights[89][90][104] - Changes in trade policies, such as tariffs, could adversely affect gross profit margins and make products less competitive, particularly given the substantial business conducted in Asia, especially China (63% of 2018 revenues shipped to China)[149][150][151] - The company incurred $425.0 million in secured term loan indebtedness for the Exar acquisition, with $262.0 million outstanding as of December 31, 2018, introducing interest rate risk and operational covenants[187][188][523] Risks Related to Our Business Risks Relating to Our Common Stock Risks Relating to Our Acquisitions ITEM 1B. UNRESOLVED STAFF COMMENTS No unresolved staff comments from the SEC were reported - No unresolved staff comments were reported[200] ITEM 2. PROPERTIES MaxLinear's headquarters is in Carlsbad, California, with leased facilities globally for business and engineering - Corporate headquarters: Carlsbad, California (68,000 sq ft, lease expires June 2022)[201] - Global presence: Leased facilities in Irvine, San Jose (California), Burnaby (Canada), Bangalore (India), Singapore, Taipei, Hsinchu (Taiwan), Shenzhen, Shanghai (China), Seoul (South Korea), Tokyo (Japan), and Paterna (Spain)[201] ITEM 3. LEGAL PROCEEDINGS Ongoing legal proceedings include patent infringement lawsuits (CrestaTech) and contract disputes (Trango Systems) - CrestaTech Litigation: All 13 asserted patent claims (U.S. Patent Nos. 7,075,585 and 7,265,792) were found unpatentable by the PTAB and Federal Circuit, and the District Court Litigation was dismissed in April 2018[101][103][211][213] - Trango Systems, Inc. Litigation: Trango alleges fraud, breach of contract, and interference with economic relations concerning a chip line acquired from Broadcom in 2016; MaxLinear filed a motion for summary judgment in December 2018, with a trial date set for May 3, 2019[180][214][215] - The company believes no other pending litigation would have a material effect on its business or would not be covered by existing liability insurance[217][602] CrestaTech Litigation Trango Systems, Inc. Litigation Other Matters ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to MaxLinear, Inc - Not applicable[218] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities MaxLinear's common stock trades on NYSE (MXL); no dividends paid, earnings retained for business development - Common stock is traded on the NYSE under the symbol MXL[221] - As of January 29, 2019, there were 60 record holders and approximately 22,000 beneficial holders of common stock[6][221] - The company has never paid cash dividends and plans to retain all future earnings for business development[175][222] - No recent sales of unregistered securities or repurchases of equity securities were reported[227][228] ITEM 6. SELECTED FINANCIAL DATA Presents five-year selected financial data (2014-2018), noting ASC 606 adoption's impact on 2018 revenue recognition - The company adopted ASC 606 on January 1, 2018, using the modified retrospective method, which changed revenue recognition for certain distributor sales from sell-through to sell-in; prior periods were not adjusted[230][244] Selected Consolidated Statement of Operations Data (2014-2018, in thousands) | Years Ended December 31, | 2018 | 2017 | 2016 | 2015 | 2014 | | :----------------------- | :----- | :----- | :----- | :----- | :----- | | Net revenue | $384,997 | $420,318 | $387,832 | $300,360 | $133,112 | | Gross profit | $208,774 | $207,963 | $229,990 | $155,423 | $81,958 | | Research and development | $120,046 | $112,279 | $97,745 | $85,405 | $56,625 | | Selling, general and administrative | $101,789 | $105,831 | $64,454 | $77,981 | $34,191 | | Income (loss) from operations | $(19,097) | $(21,671) | $63,059 | $(43,649) | $(8,858) | | Net income (loss) | $(26,199) | $(9,187) | $61,292 | $(42,331) | $(7,041) | | Basic EPS | $(0.38) | $(0.14) | $0.96 | $(0.79) | $(0.19) | | Diluted EPS | $(0.38) | $(0.14) | $0.91 | $(0.79) | $(0.19) | Selected Consolidated Balance Sheet Data (2014-2018, in thousands) | As of December 31, | 2018 | 2017 | 2016 | 2015 | 2014 | | :----------------- | :----- | :----- | :----- | :----- | :----- | | Cash, cash equivalents, restricted cash, and short- and long-term investments, available-for-sale | $74,191 | $74,412 | $136,805 | $130,498 | $79,351 | | Working capital | $110,044 | $124,918 | $158,304 | $134,170 | $67,668 | | Total assets | $738,831 | $824,862 | $422,652 | $334,505 | $135,711 | | Total stockholders' equity | $399,936 | $387,424 | $352,424 | $262,924 | $99,102 | ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses financial condition and operations, noting 2018 revenue decrease, significant expenses, and acquisition-related debt - Net revenue decreased by $35.3 million (8%) to $385.0 million in 2018, from $420.3 million in 2017[293] Net Revenue by Market Segment (2016-2018, in thousands) | Market Segment | 2018 Net Revenue | % Change YoY (2018) | 2017 Net Revenue | % Change YoY (2017) | 2016 Net Revenue | | :--------------- | :--------------- | :------------------ | :--------------- | :------------------ | :--------------- | | Connected home | $207,336 | (28)% | $288,610 | (17)% | $346,990 | | Infrastructure | $82,388 | 15% | $71,779 | 92% | $37,411 | | Industrial and multi-market | $95,273 | 59% | $59,929 | 1,647% | $3,431 | | Total Net Revenue | $384,997 | (8)% | $420,318 | 8% | $387,832 | - Gross profit percentage increased to 54% in 2018 from 49% in 2017, primarily due to a decrease in acquired inventory step-up amortization[297] Operating Expenses (2016-2018, in thousands) | Expense Category | 2018 | 2017 | 2016 | | :----------------- | :----- | :----- | :----- | | Research and development | $120,046 | $112,279 | $97,745 | | Selling, general and administrative | $101,789 | $105,831 | $64,454 | | Impairment losses | $2,198 | $2,000 | $1,300 | | Restructuring charges | $3,838 | $9,524 | $3,432 | - Net cash provided by operating activities was $102.7 million in 2018, up from $75.1 million in 2017[324] - Net cash used in investing activities was $7.8 million in 2018, significantly lower than $432.2 million in 2017, which included the Exar acquisition[327][328] - Net cash used in financing activities was $93.8 million in 2018, primarily due to $93.0 million in debt prepayments[330] - The company's cash and cash equivalents were $73.1 million as of December 31, 2018, deemed sufficient for projected operating requirements for at least the next twelve months[319][333] Overview Critical Accounting Policies and Estimates Recently Adopted Accounting Pronouncements Recently Issued Accounting Pronouncements Results of Operations Liquidity and Capital Resources Warranties and Indemnifications Off-Balance Sheet Arrangements Contractual Obligations ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk MaxLinear manages foreign currency and interest rate risks, hedging variable-rate debt with a fixed-for-floating swap - Primary market risks are foreign currency exchange rates and interest rates[340] - Limited foreign currency exposure as international agreements are mostly USD-denominated; a hypothetical 100 basis point change in foreign currency exchange rates would result in a $0.3 million change to translation gain/loss[341] - To hedge interest rate risk on its $262.0 million variable-rate term loan, the company entered a fixed-for-floating interest rate swap in November 2017, effectively fixing a substantial portion of the interest rate at approximately 4.25% (1.74685% swap rate + 2.5% fixed margin)[342][343] - A hypothetical 10% (1000 basis points) increase in LIBOR interest rates would have increased interest expense by approximately $1.8 million during the periods presented[343] ITEM 8. Financial Statements and Supplementary Data Financial statements and supplementary data are cross-referenced to Part IV, Item 15 - Financial statements and supplementary data are located in Part IV, Item 15[344] ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes or disagreements with accountants on accounting and financial disclosure were reported - No changes in or disagreements with accountants on accounting and financial disclosure were reported[345] ITEM 9A. Controls and Procedures Management affirmed effective disclosure controls and internal control over financial reporting as of December 31, 2018 - Disclosure controls and procedures were evaluated and deemed effective as of December 31, 2018[347] - Management concluded that internal control over financial reporting was effective as of December 31, 2018, based on COSO (2013) framework[348][349] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2018[350] ITEM 9B. Other Information No other information was reported under this item - No other information was reported[359] PART III ITEM 10. Directors, Executive Officers and Corporate Governance Director, executive, and governance information is incorporated by reference from the 2019 Proxy Statement - Information on directors, executive officers, and corporate governance will be incorporated by reference from the 2019 Proxy Statement[361][365] - The company has a Code of Conduct for its board and employees, accessible on its website[363][364] ITEM 11. Executive Compensation Executive compensation information is incorporated by reference from the 2019 Proxy Statement - Information on executive compensation will be incorporated by reference from the 2019 Proxy Statement[366] ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan data are incorporated by reference from the 2019 Proxy Statement - Information on security ownership and equity compensation plans will be incorporated by reference from the 2019 Proxy Statement[367] ITEM 13. Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence information are incorporated by reference from the 2019 Proxy Statement - Information on related person transactions and director independence will be incorporated by reference from the 2019 Proxy Statement[368] ITEM 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2019 Proxy Statement - Information on principal accounting fees and services will be incorporated by reference from the 2019 Proxy Statement[369] PART IV ITEM 15. Exhibits, Financial Statement Schedules Lists financial statements, schedules, and exhibits, including consolidated financials, valuation accounts, and key agreements - Includes consolidated financial statements and Schedule II – Valuation and Qualifying Accounts for 2016-2018[371][372][373] - A detailed list of exhibits is provided, covering merger agreements (e.g., Exar acquisition), corporate governance documents (e.g., Certificate of Incorporation, Bylaws), equity incentive plans, employment offer letters, and various other agreements[374][375][376] Report of Independent Registered Public Accounting Firm Grant Thornton LLP issued unqualified opinions on 2018 financials and internal controls, noting ASC 606 adoption - Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements for the period ended December 31, 2018[391] - An unqualified opinion was also issued on the effectiveness of internal control over financial reporting as of December 31, 2018[392] - The report highlights the change in accounting principle for revenue recognition in 2018 due to the adoption of ASC 606[393] Consolidated Balance Sheets Presents MaxLinear's financial position as of December 31, 2018 and 2017, detailing assets and equity Consolidated Balance Sheet Highlights (in thousands) | Item | December 31, 2018 | December 31, 2017 | | :------------------------------------------------ | :------------------ | :------------------ | | Cash and cash equivalents | $73,142 | $71,872 | | Accounts receivable, net | $59,491 | $66,099 | | Inventory | $41,738 | $53,434 | | Total current assets | $180,611 | $201,304 | | Intangible assets, net | $244,900 | $315,045 | | Goodwill | $238,330 | $237,992 | | Total assets | $738,831 | $824,862 | | Total current liabilities | $70,567 | $76,386 | | Long-term debt | $255,757 | $347,609 | | Total liabilities | $338,895 | $437,438 | | Total stockholders' equity | $399,936 | $387,424 | Consolidated Statements of Operations Details financial performance for 2016-2018, showing net losses in 2018 and 2017, and net income in 2016 Consolidated Statements of Operations Highlights (in thousands, except per share data) | Item | 2018 | 2017 | 2016 | | :-------------------------------- | :------- | :------- | :------- | | Net revenue | $384,997 | $420,318 | $387,832 | | Gross profit | $208,774 | $207,963 | $229,990 | | Total operating expenses | $227,871 | $229,634 | $166,931 | | Income (loss) from operations | $(19,097) | $(21,671) | $63,059 | | Net income (loss) | $(26,199) | $(9,187) | $61,292 | | Basic net income (loss) per share | $(0.38) | $(0.14) | $0.96 | | Diluted net income (loss) per share | $(0.38) | $(0.14) | $0.91 | Consolidated Statements of Comprehensive Income (Loss) Presents net income/loss and other comprehensive income/loss components for 2016-2018 Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Item | 2018 | 2017 | 2016 | | :------------------------------------------ | :-------- | :-------- | :-------- | | Net income (loss) | $(26,199) | $(9,187) | $61,292 | | Foreign currency translation adjustments, net of tax | $(1,572) | $2,122 | $(749) | | Unrealized gain on interest rate swap, net of tax | $702 | $477 | — | | Other comprehensive income (loss) | $(870) | $2,599 | $(738) | | Total comprehensive income (loss) | $(27,069) | $(6,588) | $60,554 | Consolidated Statements of Stockholders' Equity Details changes in stockholders' equity for 2016-2018, reflecting capital, net income/loss, and comprehensive income Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Item | December 31, 2018 | December 31, 2017 | December 31, 2016 | | :-------------------------- | :------------------ | :------------------ | :------------------ | | Total Stockholders' Equity | $399,936 | $387,424 | $352,424 | | Additional Paid-In Capital | $493,287 | $455,497 | $413,909 | | Accumulated Deficit | $(93,630) | $(69,119) | $(59,932) | | Stock-based compensation | $31,734 (2018) | $32,603 (2017) | $21,975 (2016) | - In March 2017, Class A and Class B common stock automatically converted into a single class of common stock, with no impact on the total number of shares outstanding[535][536] Consolidated Statements of Cash Flows Provides cash flow breakdown for 2016-2018, highlighting operating cash, acquisition investing, and debt financing Consolidated Statements of Cash Flows Highlights (in thousands) | Item | 2018 | 2017 | 2016 | | :------------------------------------------ | :-------- | :-------- | :-------- | | Net cash provided by operating activities | $102,689 | $75,064 | $117,317 | | Net cash used in investing activities | $(7,825) | $(432,151) | $(101,313) | | Net cash provided by (used in) financing activities | $(93,784) | $347,021 | $(670) | | Increase (decrease) in cash, cash equivalents and restricted cash | $(221) | $(8,484) | $14,940 | - Cash used in acquisitions, net of cash acquired, was $473.3 million in 2017 (primarily Exar) and $101.0 million in 2016 (wireless infrastructure businesses)[328][329] - Net proceeds from debt issuance were $416.8 million in 2017, with debt repayments of $93.0 million in 2018 and $70.0 million in 2017[330][331] Notes to Consolidated Financial Statements 1. Organization and Summary of Significant Accounting Policies Describes MaxLinear's business and significant accounting policies, including ASC 606 revenue recognition and impairment - MaxLinear is a fabless integrated circuit design company providing RF, analog, and mixed-signal communications system-on-chip solutions for connected home, wired/wireless infrastructure, and industrial/multi-market applications[413] - Adopted ASC 606 on January 1, 2018, accelerating revenue recognition for certain distributor sales from sell-through to sell-in, and requiring estimation of pricing credits and stock rotation rights[431][432][434] Impact of ASC 606 Adoption on 2018 Financials (in thousands) | Item | Amounts under Legacy GAAP | Impact of Adoption | As reported | | :-------------------------------- | :------------------------ | :----------------- | :---------- | | Net revenue | $370,033 | $14,964 | $384,997 | | Gross profit | $199,314 | $9,460 | $208,774 | | Net loss | $(33,672) | $7,473 | $(26,199) | | Total assets | $738,563 | $268 | $738,831 | | Deferred revenue and deferred profit | $19,499 | $(19,499) | $0 | | Total liabilities | $347,734 | $(8,839) | $338,895 | | Accumulated deficit | $(102,737) | $9,107 | $(93,630) | - Goodwill and indefinite-lived intangible assets (IPR&D) are tested for impairment annually on October 31 or more frequently if indicators exist[425][426] - The Tax Cuts and Jobs Act (2017) significantly impacted income taxes, including a reduction in the U.S. federal corporate tax rate to 21%; the company completed its accounting for the Tax Act in 2018[453][455] 2. Net Income (Loss) Per Share Details basic and diluted net income (loss) per share computation, excluding anti-dilutive equivalents during losses Net Income (Loss) Per Share Computation (in thousands, except per share amounts) | Item | 2018 | 2017 | 2016 | | :-------------------------------------- | :------- | :------- | :------- | | Net income (loss) | $(26,199) | $(9,187) | $61,292 | | Weighted average common shares outstanding—basic | 68,490 | 66,252 | 63,781 | | Dilutive common stock equivalents | — | — | 3,872 | | Weighted average common shares outstanding—diluted | 68,490 | 66,252 | 67,653 | | Basic net income (loss) per share | $(0.38) | $(0.14) | $0.96 | | Diluted net income (loss) per share | $(0.38) | $(0.14) | $0.91 | - For 2018 and 2017, 3.7 million and 4.5 million common stock equivalents, respectively, were excluded from diluted EPS calculations due to net losses[482] 3. Business Combinations Outlines recent business acquisitions, including Exar, Marvell G.hn, Broadcom, and Microsemi wireless businesses - Acquired Exar Corporation on May 12, 2017, for $688.1 million in cash, funded by cash on hand and $416.8 million in net proceeds from new transaction debt[483] - Acquired certain assets and liabilities of Marvell Semiconductor's G.hn business on April 4, 2017, for $21.0 million in cash[485] - Acquired Broadcom's wireless infrastructure backhaul business on July 1, 2016, for $80.0 million in cash[488] - Acquired Microsemi's wireless infrastructure access business on April 28, 2016, for $21.0 million in cash[489] 4. Restructuring Activity Details restructuring charges for 2016-2018, primarily for employee separation and lease-related expenses Restructuring Charges (in thousands) | Item | 2018 | 2017 | 2016 | | :------------------------ | :----- | :----- | :----- | | Employee separation expenses | $2,094 | $8,353 | $1,038 | | Lease related expenses | $1,608 | $1,025 | $2,264 | | Other | $136 | $146 | $130 | | Total Restructuring Charges | $3,838 | $9,524 | $3,432 | - 2017 restructuring charges included $5.1 million in stock-based compensation from accelerated Exar awards due to change in control provisions[490][308] - Total sublease income from vacated facilities was $2.4 million in 2018, $2.1 million in 2017, and $1.3 million in 2016[491][583] 5. Goodwill and Intangible Assets Details goodwill and intangible assets, including finite-lived assets, amortization, and impairment losses Goodwill Carrying Amount (in thousands) | Item | 2018 | 2017 | | :---------------- | :----- | :----- | | Beginning balance | $237,992 | $76,015 | | Acquisitions | — | $162,318 | | Adjustments | $338 | $(341) | | Ending balance | $238,330 | $237,992 | - No goodwill impairment was recognized as of October 31, 2018[497] Finite-Lived Intangible Assets, Net (in thousands) | Asset Category | Weighted Average Useful Life (Years) | December 31, 2018 Net Carrying Amount | December 31, 2017 Net Carrying Amount | | :------------------- | :--------------------------------- | :------------------------------------ | :------------------------------------ | | Licensed technology | 3.7 | $940 | $1,495 | | Developed technology | 6.9 | $164,331 | $202,309 | | Trademarks and trade names | 6.1 | $9,548 | $11,808 | | Customer relationships | 4.6 | $65,453 | $94,439 | | Non-compete covenants | 3.0 | $228 | $594 | | Total | 6.1 | $240,500 | $310,645 | Amortization Expense of Finite-Lived Intangible Assets (in thousands) | Item | 2018 | 2017 | 2016 | | :-------------------------------- | :----- | :----- | :----- | | Cost of net revenue | $35,821 | $25,316 | $8,512 | | Research and development | $150 | $551 | $619 | | Selling, general and administrative | $31,976 | $28,827 | $6,953 | | Total | $67,947 | $54,694 | $16,084 | - Impairment losses of $2.2 million were recognized on acquired developed technology in 2018; no impairment losses on finite-lived intangible assets in 2017 and 2016[503] - Indefinite-lived IPR&D assets were $4.4 million at December 31, 2018 and 2017; impairment losses of $2.0 million were recognized in 2017 and $1.3 million in 2016 related to abandoned IPR&D projects[505] 6. Financial Instruments Details financial instruments, primarily an interest rate swap measured at fair value as a cash flow hedge Fair Value of Financial Instruments (in thousands) | Item | December 31, 2018 | December 31, 2017 | | :---------------- | :------------------ | :------------------ | | Interest rate swap | $1,623 | $734 | - The interest rate swap is classified within Level 2 of the fair value hierarchy, valued using market observable inputs[510] - The fair value of the interest rate swap asset increased by $0.9 million in 2018 and $0.7 million in 2017, recognized in other comprehensive income[511] 7. Balance Sheet Details Provides detailed breakdowns of balance sheet accounts, including cash, inventory, property, and various liabilities Cash, Cash Equivalents, and Restricted Cash (in thousands) | Item | December 31, 2018 | December 31, 2017 | | :-------------------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | $73,142 | $71,872 | | Short-term restricted cash | $645 | $1,476 | | Long-term restricted cash | $404 | $1,064 | | Total | $74,191 | $74,412 | Inventory Composition (in thousands) | Item | December 31, 2018 | December 31, 2017 | | :-------------- | :------------------ | :------------------ | | Work-in-process | $17,618 | $21,823 | | Finished goods | $24,120 | $31,611 | | Total | $41,738 | $53,434 | Property and Equipment, Net (in thousands) | Item | December 31, 2018 | December 31, 2017 | | :-------------------------- | :------------------ | :------------------ | | Gross Property and Equipment | $72,191 | $66,711 | | Less accumulated depreciation and amortization | $(53,787) | $(44,053) | | Net Property and Equipment | $18,404 | $22,658 | Accrued Price Protection Liability (in thousands) | Item | 2018 | 2017 | | :-------------------------- | :----- | :----- | | Beginning balance | $21,571 | $15,176 | | Charged as a reduction of revenue | $34,288 | $46,520 | | Reversal of unclaimed rebates | $(2,413) | $(101) | | Payments | $(36,992) | $(40,024) | | Ending balance | $16,454 | $21,571 | 8. Debt and Interest Rate Swap Details long-term debt, primarily a secured term loan for the Exar acquisition, and an interest rate swap hedge Long-Term Debt Carrying Amount (in thousands) | Item | December 31, 2018 | December 31, 2017 | | :-------------------------------- | :------------------ | :------------------ | | Principal | $262,000 | $355,000 | | Less: Unamortized debt discount | $(1,630) | $(1,930) | | Less: Unamortized debt issuance costs | $(4,613) | $(5,461) | | Net carrying amount of long-term debt | $255,757 | $347,609 | - The Initial Term Loan facility was $425.0 million, with $262.0 million outstanding as of December 31, 2018; it matures on May 12, 2024[523][524][533] - The loan bears interest at an Adjusted LIBOR or Adjusted Base Rate plus an applicable margin (2.50% for LIBOR, 1.50% for base rate); the weighted average effective interest rate was approximately 4.6% in 2018 and 4.1% in 2017[524][529] - A fixed-for-floating interest rate swap was entered in November 2017, effectively fixing the interest rate on a substantial portion of long-term debt at approximately 4.25%; the swap expires in October 2020[534] 9. Stock-Based Compensation and Employee Benefit Plans Details stock-based compensation and employee benefit plans, including equity incentive plans and expense - In March 2017, Class A and Class B common stock converted to a single class of common stock, with identical voting rights[535][536] - The 2010 Equity Incentive Plan was amended in December 2018 to include a clawback policy for executive officers' incentive compensation in case of financial restatements due to fraud or intentional misconduct[541] Stock-Based Compensation Expense by Department (in thousands) | Department | 2018 | 2017 | 2016 | | :-------------------------------- | :----- | :----- | :----- | | Cost of net revenue | $489 | $332 | $210 | | Research and development | $17,953 | $16,190 | $14,403 | | Selling, general and administrative | $13,279 | $11,016 | $7,152 | | Restructuring expense | — | $5,130 | — | | Total | $31,721 | $32,668 | $21,765 | - Total unrecognized compensation cost for unvested restricted stock units was $53.4 million as of December 31, 2018, with a weighted average vesting period of 2.62 years[547] Restricted Stock Unit and Award Activity (in thousands) | Item | Number of Shares | Weighted-Average Grant-Date Fair Value per Share | | :-------------------------- | :--------------- | :--------------------------------------------- | | Outstanding at Dec 31, 2017 | 3,183 | $20.13 | | Granted | 2,460 | $19.40 | | Vested | (1,736) | $18.64 | | Canceled | (644) | $20.90 | | Outstanding at Dec 31, 2018 | 3,263 | $20.23 | Stock Option Activity (in thousands) | Item | Number of Options | Weighted-Average Exercise Price | | :-------------------------------- | :---------------- | :------------------------------ | | Outstanding at Dec 31, 2017 | 3,069 | $8.95 | | Granted | 335 | $18.40 | | Exercised | (636) | $7.04 | | Canceled | (109) | $16.82 | | Outstanding at Dec 31, 2018 | 2,659 | $10.27 | 10. Income Taxes Details income tax provision/benefit, deferred tax assets/liabilities, and the impact of the Tax Cuts and Jobs Act Income (Loss) Before Income Taxes by Component (in thousands) | Component | 2018 | 2017 | 2016 | | :---------- | :------- | :------- | :------- | | Domestic | $16,405 | $42,580 | $75,778 | | Foreign | $(49,257) | $(76,578) | $(12,088) | | Total | $(32,852) | $(33,998) | $63,690 | Income Tax Provision (Benefit) (in thousands) | Item | 2018 | 2017 | 2016 | | :-------------------------- | :-------- | :-------- | :-------- | | Current | $4,969 | $15,280 | $2,297 | | Deferred | $(11,622) | $(40,091) | $101 | | Total | $(6,653) | $(24,811) | $2,398 | - The 2018 income tax benefit was primarily due to a partial release of the valuation allowance ($11.3 million) resulting from the Tax Act, and the mix of pre-tax income among jurisdictions[568][571][314][315] Net Deferred Tax Assets (in thousands) | Item | December 31, 2018 | December 31, 2017 | | :-------------------------- | :------------------ | :------------------ | | Deferred tax assets (gross) | $152,938 | $162,632 | | Less valuation allowance | $(79,196) | $(84,560) | | Deferred tax liabilities | $(22,224) | $(38,194) | | Net deferred tax assets | $51,518 | $39,878 | - As of December 31, 2018, the company had federal, state, and foreign net operating loss carryforwards of $261.4 million, $95.5 million, and $13.6 million, respectively[564] - Unrecognized tax benefits totaled $61.5 million at December 31, 2018[572] 11. Employee Retirement Plan MaxLinear offers a 401(k) defined contribution plan but has not made company contributions - The company has a 401(k) defined contribution retirement plan for eligible employees[579] - MaxLinear is not required to contribute and has not contributed to the 401(k) Plan for the periods presented[579] 12. Commitments and Contingencies Details contractual obligations and legal proceedings, including debt, leases, and ongoing litigation Contractual Obligations as of December 31, 2018 (in thousands) | Item | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :-------------------------- | :------ | :--------------- | :-------- | :-------- | :---------------- | | Long-term debt obligations | $262,000 | — | — | — | $262,000 | | Operating lease obligations | $33,943 | $9,365 | $18,862 | $5,716 | — | | Inventory purchase obligations | $65,661 | $65,661 | — | — | — | | Other obligations | $14,375 | $8,386 | $5,117 | $872 | — | | Total | $375,979 | $83,412 | $23,979 | $6,588 | $262,000 | - Exar's iML divestiture indemnification obligations range from $13.6 million (general) to $34.0 million (IP) and up to $136.0 million (fundamental representations); the company believes it does not have a material indemnification obligation as of December 31, 2018[584] - CrestaTech Litigation: All 13 asserted patent claims were found unpatentable, and the District Court Litigation was dismissed in April 2018; the company cannot predict if the litigation will be reinstated[595][597][599] - Trango Systems, Inc. Litigation: Ongoing lawsuit alleging fraud and breach of contract related to an acquired chip line; MaxLinear filed a motion for summary judgment in December 2018, with a trial set for May 3, 2019[600][601] 13. Concentration of Credit Risk, Significant Customers and Geographic Information Highlights credit risk, significant customer concentration, and geographic revenue distribution, particularly in Asia Significant Customers (% of Net Revenues) | Customer | 2018 | 2017 | 2016 | | :--------- | :--- | :--- | :--- | | Customer A | 18% | 25% | 27% | | Customer B | * | * | 10% | Geographic Net Revenues (Ship-to Location, in thousands) | Region | 2018 Amount | % of total net revenue | 2017 Amount | % of total net revenue | 2016 Amount | % of total net revenue | | :------------ | :------------ | :--------------------- | :------------ | :--------------------- | :------------ | :--------------------- | | Asia | $312,877 | 81% | $372,103 | 89% | $360,325 | 93% | | United States | $18,060 | 5% | $10,829 | 2% | $9,181 | 2% | | Rest of world | $54,060 | 14% | $37,386 | 9% | $18,326 | 5% | | Total | $384,997 | 100% | $420,318 | 100% | $387,832 | 100% | - China accounted for 63% of total net revenue in 2018, 71% in 2017, and 78% in 2016[613] Long-Lived Assets by Geographic Area (in thousands) | Region | December 31, 2018 Amount | % of total | December 31, 2017 Amount | % of total | | :------------ | :----------------------- | :--------- | :----------------------- | :--------- | | United States | $426,321 | 85% | $481,638 | 84% | | Singapore | $71,945 | 14% | $92,414 | 16% | | Rest of world | $3,368 | 1% | $1,643 | <1% | | Total | $501,634 | 100% | $575,695 | 100% | 14. Revenue from Contracts with Customers Disaggregates net revenues by market segment and details contract liabilities, reflecting ASC 606 adoption Net Revenues by Market (in thousands) | Market | 2018 | 2017 | 2016 | | :------------------------ | :------- | :------- | :------- | | Connected home | $207,336 | $288,610 | $346,990 | | % of net revenue | 54% | 69% | 89% | | Infrastructure | $82,388 | 21% | $71,779 | 17% | $37,411 | 10% | | Industrial and multi-market | $95,273 | 25% | $59,929 | 14% | $3,431 | 1% | | Total net revenue | $384,997 | $420,318 | $387,832 | - Customer contract liabilities for rebates were approximately $0.1 million as of December 31, 2018[616] - Obligations to customers for price protection rights totaled $16.5 million, and for price adjustments and stock rotation rights were $7.6 million and $1.5 million, respectively, as of December 31, 2018[618] 15. Selected Quarterly Financial Data (Unaudited) Presents unaudited quarterly financial data for 2017-2018, including revenue, gross profit, and net income/loss Selected Quarterly Financial Data (2018, in thousands, except per share amounts) | Quarter | Net revenue | Gross profit | Net income (loss) | Basic EPS | Diluted EPS | | :-------------- | :---------- | :----------- | :---------------- | :-------- | :---------- | | First Quarter | $110,827 | $62,668 | $1,847 | $0.03 | $0.03 | | Second Quarter | $101,533 | $56,330 | $(14,422) | $(0.21) | $(0.21) | | Third Quarter | $85,010 | $43,876 | $(13,935) | $(0.20) | $(0.20) | | Fourth Quarter | $87,627 | $45,900 | $311 | $0.00 | $0.00 | Selected Quarterly Financial Data (2017, in thousands, except per share amounts) | Quarter | Net revenue | Gross profit | Net income (loss) | Basic EPS | Diluted EPS | | :-------------- | :---------- | :----------- | :---------------- | :-------- | :---------- | | First Quarter | $88,841 | $52,924 | $8,463 | $0.13 | $0.12 | | Second Quarter | $104,175 | $51,104 | $10,965 | $0.17 | $0.16 | | Third Quarter | $113,581 | $51,842 | $(9,167) | $(0.14) | $(0.14) | | Fourth Quarter | $113,721 | $52,093 | $(19,448) | $(0.29) | $(0.29) |