MaxLinear(MXL) - 2020 Q2 - Quarterly Report

Part I Financial Statements (Unaudited) This chapter presents the company's unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, cash flows, and detailed notes on key accounting areas Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates | Metric | June 30, 2020 (USD thousands) | December 31, 2019 (USD thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and Cash Equivalents | 107,362 | 92,708 | | Total Current Assets | 190,578 | 181,770 | | Total Assets | 693,060 | 705,791 | | Liabilities and Stockholders' Equity | | | | Total Current Liabilities | 69,964 | 66,562 | | Long-Term Debt | 207,486 | 206,909 | | Total Liabilities | 291,085 | 290,871 | | Total Stockholders' Equity | 401,975 | 414,920 | | Total Liabilities and Stockholders' Equity | 693,060 | 705,791 | Consolidated Statements of Operations This section presents the company's financial performance over specific periods, detailing net revenue, costs, gross profit, operating expenses, and net loss | Metric | Q2 2020 (USD thousands) | Q2 2019 (USD thousands) | H1 2020 (USD thousands) | H1 2019 (USD thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | 65,220 | 82,507 | 127,247 | 167,142 | | Cost of Net Revenue | 32,477 | 38,427 | 63,742 | 77,985 | | Gross Profit | 32,743 | 44,080 | 63,505 | 89,157 | | Total Operating Expenses | 55,518 | 47,047 | 106,414 | 99,954 | | Operating Loss | (22,775) | (2,967) | (42,909) | (10,797) | | Net Loss | (21,807) | (2,229) | (37,276) | (7,080) | | Basic Net Loss Per Share | (0.30) | (0.03) | (0.51) | (0.10) | | Diluted Net Loss Per Share | (0.30) | (0.03) | (0.51) | (0.10) | Consolidated Statements of Comprehensive Income (Loss) This section details the company's net loss and other comprehensive income (loss) components, leading to total comprehensive loss for the periods presented | Metric | Q2 2020 (USD thousands) | Q2 2019 (USD thousands) | H1 2020 (USD thousands) | H1 2019 (USD thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Loss | (21,807) | (2,229) | (37,276) | (7,080) | | Other Comprehensive Income (Loss) | 410 | (703) | (323) | (678) | | Total Comprehensive Loss | (21,397) | (2,932) | (37,599) | (7,758) | Consolidated Statements of Stockholders' Equity This section outlines changes in the company's stockholders' equity, including common stock, additional paid-in capital, accumulated other comprehensive loss, and accumulated deficit H1 2020 Stockholders' Equity Changes (USD thousands): | Item | Balance December 31, 2019 | Equity Award Issuance | Stock-Based Compensation | Other Comprehensive Income (Loss) | Net Loss | Balance June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Common Stock | 7 | — | — | — | — | 7 | | Additional Paid-in Capital | 529,596 | 3,600 | 18,912 | — | — | 554,250 | | Accumulated Other Comprehensive Loss | (887) | — | — | (323) | — | (1,210) | | Accumulated Deficit | (113,796) | — | — | — | (37,276) | (151,072) | | Total Stockholders' Equity | 414,920 | 3,600 | 18,912 | (323) | (37,276) | 401,975 | Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities, and the impact of exchange rate changes | Cash Flow Activity | H1 2020 (USD thousands) | H1 2019 (USD thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | 15,908 | 28,489 | | Net Cash from Investing Activities | (4,949) | (2,679) | | Net Cash from Financing Activities | 3,143 | (33,894) | | Effect of Exchange Rate Changes | 210 | 931 | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | 14,312 | (7,153) | | Cash, Cash Equivalents, and Restricted Cash at End of Period | 107,429 | 67,038 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering various accounting policies and financial instrument details 1. Organization and Summary of Significant Accounting Policies The company is a fabless integrated circuit design firm for communication solutions, impacted by COVID-19 in H1 2020, and adopted new accounting standards with no significant financial impact - The company is a provider of RF, high-performance analog, and mixed-signal communication system-on-chip solutions for connected home, wired and wireless infrastructure, and industrial and multi-market applications[27] - The COVID-19 pandemic led to lower-than-expected Q1 2020 revenue, customer-requested shipment delays, and supply chain constraints, with anticipated short-term sales and revenue declines, particularly impacting high-performance analog products in industrial and multi-market businesses[32] - The company adopted ASC Topic 326 (Financial Instruments—Credit Losses) on January 1, 2020, revising its accounting policy for accounts receivable allowance for doubtful accounts, with no material impact[36][39] - The company adopted ASU No. 2017-04 (Goodwill and Other Intangible Assets—Simplifying the Test for Goodwill Impairment) starting in fiscal year 2020, with no significant impact on financial position or operating results[40][41] 2. Net Income (Loss) Per Share The company reported basic and diluted net loss per share for Q2 and H1 2020 and 2019, noting that all potentially dilutive securities were excluded from diluted EPS calculations due to net losses | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Loss (USD thousands) | (21,807) | (2,229) | (37,276) | (7,080) | | Basic Weighted-Average Common Shares (thousand shares) | 72,740 | 70,917 | 72,389 | 70,445 | | Diluted Weighted-Average Common Shares (thousand shares) | 72,740 | 70,917 | 72,389 | 70,445 | | Basic Net Loss Per Share | (0.30) | (0.03) | (0.51) | (0.10) | | Diluted Net Loss Per Share | (0.30) | (0.03) | (0.51) | (0.10) | - Due to the company incurring net losses during the reporting periods, all potentially dilutive securities, including stock options, restricted stock units, and restricted stock awards, were excluded from the diluted net loss per share calculation due to their anti-dilutive nature[49] 3. Restructuring Activity The company implemented restructuring plans for resource alignment and cost savings, including facility relocation, workforce reductions, and contract terminations, with H1 2020 restructuring charges of USD 553 thousand, primarily for employee severance and lease-related costs, significantly down from 2019 | Restructuring Expense Category | Q2 2020 (USD thousands) | Q2 2019 (USD thousands) | H1 2020 (USD thousands) | H1 2019 (USD thousands) | | :--- | :--- | :--- | :--- | :--- | | Employee Severance Costs | 52 | 402 | 97 | 874 | | Lease-Related Costs | — | (44) | 275 | 1,301 | | Other | 12 | 58 | 181 | 158 | | Total | 64 | 416 | 553 | 2,333 | - Total restructuring liabilities for H1 2020 amounted to USD 802 thousand, with USD 358 thousand classified as current and USD 444 thousand as long-term, primarily comprising lease-related costs[54] 4. Goodwill and Intangible Assets As of June 30, 2020, goodwill remained at USD 238.3 million with no impairment recognized, while finite-lived intangible assets had a net book value of USD 159.4 million, primarily comprising developed technology, customer relationships, and trademarks, with amortization expensed to cost of sales and SG&A - As of June 30, 2020, the carrying value of goodwill was USD 238.3 million, unchanged from December 31, 2019[11][56] - The company performs its annual goodwill impairment assessment on October 31 or more frequently if impairment indicators exist, with no goodwill impairment recognized in H1 2020 or the corresponding 2019 period[56][57] Net Book Value of Finite-Lived Intangible Assets (USD thousands): | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Licensed Technology | 296 | 573 | | Developed Technology | 117,676 | 134,839 | | Trademarks and Trade Names | 6,159 | 7,289 | | Customer Relationships | 35,310 | 45,253 | | Non-Compete Covenants | — | 17 | | Total | 159,441 | 187,971 | Amortization Expense for Finite-Lived Intangible Assets (USD thousands): | Category | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Cost of Net Revenue | 8,592 | 8,488 | 17,183 | 16,922 | | Research and Development | 1 | 12 | 2 | 46 | | Selling, General and Administrative | 5,549 | 5,792 | 11,272 | 11,590 | | Total | 14,142 | 14,292 | 28,457 | 28,558 | 5. Financial Instruments The company primarily holds interest rate swaps as financial instruments, recorded as an USD 85 thousand liability at June 30, 2020, measured at Level 2 fair value, which cash flow hedge floating interest payments on long-term debt, effectively fixing most debt at approximately 4.25% Financial Instrument Composition (USD thousands): | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Interest Rate Swap | 85 | 37 | - Interest rate swaps are classified as Level 2 fair value measurements, with valuations based on models provided by third-party pricing services utilizing market-observable inputs such as the one-month LIBOR yield curve[64] - The interest rate swap is designated as a cash flow hedge for floating interest payments on long-term debt, effectively fixing most of the long-term debt interest rate at approximately 4.25%[82] 6. Balance Sheet Details This section provides detailed components of key balance sheet items, including cash and cash equivalents, restricted cash, inventory, net property and equipment, accrued price protection liabilities, and accrued expenses; as of June 30, 2020, cash and cash equivalents were USD 107.4 million, inventory was USD 34.3 million, and net property and equipment was USD 18.1 million Cash, Cash Equivalents, and Restricted Cash (USD thousands): | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and Cash Equivalents | 107,362 | 92,708 | | Short-Term Restricted Cash | 9 | 349 | | Long-Term Restricted Cash | 58 | 60 | | Total | 107,429 | 93,117 | Inventory Composition (USD thousands): | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Work-in-Process | 14,638 | 14,525 | | Finished Goods | 19,646 | 16,985 | | Total | 34,284 | 31,510 | Net Property and Equipment (USD thousands): | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Furniture and Fixtures | 2,229 | 2,199 | | Machinery and Equipment | 37,357 | 35,660 | | Molds and Production Equipment | 17,293 | 15,209 | | Software | 6,132 | 5,956 | | Leasehold Improvements | 15,302 | 16,186 | | Construction in Progress | 1,636 | 746 | | Accumulated Depreciation and Amortization | (61,890) | (59,343) | | Net | 18,059 | 16,613 | Accrued Price Protection Liabilities (USD thousands): | Item | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Beginning Balance | 12,557 | 16,454 | | Recognized as Reduction of Revenue | 2,191 | 14,880 | | Unclaimed Rebates Written Off | (159) | (719) | | Payments | (8,687) | (19,321) | | Ending Balance | 5,902 | 11,294 | 7. Debt and Interest Rate Swap As of June 30, 2020, the company's net long-term debt was USD 207.5 million, primarily from a USD 425 million Term Loan B for the Exar acquisition, with a weighted-average effective interest rate of approximately 4.4%, largely hedged by an interest rate swap fixing the rate at 4.25% Long-Term Debt Composition (USD thousands): | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Principal | 212,000 | 212,000 | | Less: Unamortized Debt Discount | (1,177) | (1,328) | | Less: Unamortized Debt Issuance Costs | (3,337) | (3,763) | | Net Carrying Value of Long-Term Debt | 207,486 | 206,909 | - The weighted-average effective interest rates for long-term debt were approximately 4.4% as of June 30, 2020, and 4.9% as of December 31, 2019[78] - The company entered into an interest rate swap agreement in November 2017, converting most floating LIBOR interest payments to a fixed rate of 1.74685%, effectively fixing most long-term debt at approximately 4.25%, with the swap maturing in October 2020[82] 8. Stock-Based Compensation and Employee Benefit Plans The company provides equity incentives through its 2010 Equity Incentive Plan and Employee Stock Purchase Plan; H1 2020 stock-based compensation totaled USD 18.9 million, primarily allocated to R&D and SG&A, with USD 76 million in unrecognized costs as of June 30, 2020, and average vesting periods ranging from 1.90 to 2.93 years Stock-Based Compensation Expense (USD thousands): | Category | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Cost of Net Revenue | 126 | 147 | 274 | 277 | | Research and Development | 5,040 | 4,222 | 8,786 | 8,435 | | Selling, General and Administrative | 6,919 | 3,838 | 9,852 | 7,242 | | Total | 12,085 | 8,207 | 18,912 | 15,954 | - As of June 30, 2020, unrecognized compensation cost for unvested restricted stock units and restricted stock awards was USD 55.5 million, with a weighted-average vesting period of 2.93 years[85] - As of June 30, 2020, unrecognized compensation cost for unvested performance-based restricted stock units was USD 19.0 million, with a weighted-average vesting period of 1.90 years[85] - As of June 30, 2020, unrecognized compensation cost for unvested stock options was USD 1.5 million, with a weighted-average vesting period of 1.96 years[85] 9. Income Taxes The company recorded income tax benefits in Q2 and H1 2020, driven by the mix of pre-tax income across jurisdictions, excess tax benefits from stock-based compensation, and release of uncertain tax position reserves, with H1 2020 also including benefits from the CARES Act and a change in judgment for the Altera tax case Income Tax Benefit (USD thousands): | Period | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Income Tax Benefit | (3,201) | (3,413) | (9,937) | (9,875) | - H1 2020 income tax benefit includes a tax benefit from the CARES Act, allowing the company to carry back 2019 net operating losses to offset prior income taxes paid at a 35% federal rate[100] - The company maintains a full valuation allowance against state, certain federal, and certain foreign deferred tax assets due to the unlikelihood of realization in jurisdictions with cumulative losses or where certain tax attributes are not expected to be utilized[98][191] - The Singapore subsidiary operates under tax incentives, taxing certain qualifying income at preferential rates and applying lower withholding tax rates on intercompany royalties, but these benefits had no significant impact on H1 2020 income tax benefit due to net operating losses and a full valuation allowance in Singapore[104][192] 10. Concentration of Credit Risk, Significant Customers and Revenue by Geographic Region The company's revenue is highly dependent on a few customers and specific geographic regions; in Q2 2020, one distributor contributed 16% of net revenue and one direct customer 10%, with Asia accounting for 83% of net revenue, primarily Hong Kong and mainland China, and the company also relies on a few suppliers for inventory purchases Customers Accounting for More Than 10% of Net Revenue: | Customer | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Customer A (Distributor) | 16 % | * | 17 % | * | | Customer B (Direct) | 10 % | 12 % | 10 % | 12 % | * Represents less than 10% of net revenue for the period Net Revenue by Geographic Region (USD thousands): | Region | Q2 2020 | Percentage | Q2 2019 | Percentage | H1 2020 | Percentage | H1 2019 | Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Asia | 54,095 | 83 % | 68,319 | 83 % | 105,480 | 83 % | 139,867 | 84 % | | United States | 3,289 | 5 % | 3,775 | 4 % | 5,227 | 4 % | 8,127 | 5 % | | Rest of World | 7,836 | 12 % | 10,413 | 13 % | 16,540 | 13 % | 19,148 | 11 % | | Total | 65,220 | 100 % | 82,507 | 100 % | 127,247 | 100 % | 167,142 | 100 % | Countries/Regions Accounting for More Than 10% of Net Revenue: | Country/Region | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Hong Kong | 42 % | 46 % | 46 % | 45 % | | China | 11 % | 14 % | 10 % | 19 % | * Represents less than 10% of net revenue for the period - The company relies on a few suppliers for inventory purchases, with Vendor A, Vendor B, Vendor C, and Vendor D each contributing over 10% of inventory purchases in Q2 and H1 2020[112] 11. Revenue from Contracts with Customers Net revenue by market shows connected home, infrastructure, and industrial and multi-market as primary sources; distributor sales accounted for 64% and 63% of net revenue in Q2 and H1 2020, respectively, and the company estimates customer price adjustments and return obligations as liabilities Net Revenue by Market (USD thousands): | Market | Q2 2020 | Percentage | Q2 2019 | Percentage | H1 2020 | Percentage | H1 2019 | Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Connected Home | 29,068 | 45 % | 38,593 | 47 % | 61,322 | 48 % | 82,025 | 49 % | | Infrastructure | 19,238 | 29 % | 22,571 | 27 % | 36,779 | 29 % | 44,673 | 27 % | | Industrial and Multi-Market | 16,914 | 26 % | 21,343 | 26 % | 29,146 | 23 % | 40,444 | 24 % | | Total Net Revenue | 65,220 | 100 % | 82,507 | 100 % | 127,247 | 100 % | 167,142 | 100 % | - Distributor sales accounted for 64% and 63% of net revenue in Q2 and H1 2020, respectively, up from 49% and 45% in the corresponding 2019 periods[117][118] - As of June 30, 2020, customer price adjustment obligations were USD 8.0 million and inventory rotation rights obligations were USD 1.1 million, both included in accrued expenses and other current liabilities[121] 12. Leases The company primarily leases office facilities through operating leases, typically 3-5 years with renewal or termination options; as of June 30, 2020, operating leases had a weighted-average discount rate of 5.0% and a remaining lease term of 2.4 years, with future minimum sublease income of USD 1.642 million from unused facilities - As of June 30, 2020, operating leases had a weighted-average discount rate of 5.0% and a weighted-average remaining lease term of 2.4 years[123] Operating Lease Future Minimum Payments (USD thousands): | Year | Amount | | :--- | :--- | | 2020 (6 months) | 2,646 | | 2021 | 5,160 | | 2022 | 3,547 | | 2023 | 1,014 | | Total Minimum Payments | 12,367 | | Less: Imputed Interest | (758) | | Less: Unrealized Foreign Exchange Loss | (4) | | Total Lease Liability | 11,605 | | Less: Current Lease Liability | (4,772) | | Long-Term Lease Liability | 6,833 | - As of June 30, 2020, total future minimum sublease income from non-cancelable subleases amounted to USD 1.642 million, with USD 317 thousand due in H2 2020[127] 13. Commitments and Contingencies As of June 30, 2020, total future minimum inventory purchase and other contractual obligations were USD 63.989 million, an increase of USD 41.4 million from year-end 2019, primarily due to increased software licenses and vendor orders; the company does not believe any material litigation will adversely affect its financial condition Future Minimum Payments (USD thousands): | Category | 2020 (6 months) | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Inventory Purchase Obligations | 23,141 | 358 | — | — | — | — | 23,499 | | Other Obligations | 5,733 | 14,211 | 13,716 | 6,830 | — | — | 40,490 | | Total | 28,874 | 14,569 | 13,716 | 6,830 | — | — | 63,989 | - As of June 30, 2020, total inventory purchase and other obligations increased by USD 41.4 million to USD 63.989 million, primarily due to increased software licenses and vendor orders[129] - The company does not believe any currently pending litigation matters that, if determined adversely, would have a material effect on its financial position, results of operations, or cash flows, or exceed the coverage of its existing liability insurance[130] 14. Subsequent Event On April 5, 2020, the company entered an asset purchase agreement with Intel to acquire its Home Gateway Platform Division (WiFi and broadband assets) for USD 150 million cash, expected to close in Q3 2020, financed primarily by USD 140 million in new debt and USD 10 million in cash, with FTC approval obtained and employee consultations underway - On April 5, 2020, the company entered into an agreement with Intel Corporation to acquire its Home Gateway Platform Division (WiFi and broadband assets) for USD 150 million in cash[131] - The transaction is expected to close in Q3 2020, primarily financed by USD 140 million in new transaction debt and USD 10 million in cash on hand[131] - The company has received early termination of the waiting period approval from the U.S. Federal Trade Commission (FTC) for the acquisition[133] Management's Discussion and Analysis of Financial Condition and Results of Operations This chapter discusses the company's financial condition and operating results as of June 30, 2020, covering business overview, COVID-19 impact, recent developments including the Intel WiFi and broadband asset acquisition, key accounting policies, operating performance analysis, liquidity, capital resources, and contractual obligations, noting decreased net revenue and expanded operating loss but increased cash and cash equivalents in H1 2020 Overview This section provides a general business overview, highlighting the company's product offerings, revenue sources, geographic concentration, and customer dependency - The company is a provider of RF, high-performance analog, and mixed-signal communication system-on-chip solutions for connected home, wired and wireless infrastructure, and industrial and multi-market applications[136] - Net revenue for H1 2020 was USD 127.2 million, primarily from sales of RF receivers, system-on-chip, and connectivity solutions[138] - The Asia region contributed 83% of H1 2020 net revenue, with Hong Kong accounting for 46% and mainland China 10%[139] - The top ten customers accounted for 68% of the company's net revenue in H1 2020, with distributor customers representing 48%[140] Impact of COVID-19 This section discusses the COVID-19 pandemic's impact on the company's operations, revenue, and acquisition integration, highlighting shipment delays, supply chain constraints, and market uncertainties - The COVID-19 pandemic caused temporary delays in product shipments in Q1 2020 and impacted H1 2020 net revenue and gross profit, including supply chain constraints and deferred customer orders[142] - The company anticipates the pandemic will continue to cause high volatility and uncertainty in customer demand and the global economy, potentially leading to near-term declines in sales and revenue, particularly affecting high-performance analog products in industrial and multi-market businesses[142] - The pandemic complicated the acquisition and integration of Intel's WiFi and broadband assets business, particularly posing challenges in recruiting and retaining key employees globally[143] Recent Developments This section highlights the company's recent acquisition of Intel's Home Gateway Platform Division, including the transaction details and financing plans - On April 5, 2020, the company entered into an agreement with Intel Corporation to acquire its Home Gateway Platform Division (WiFi and broadband assets) for USD 150 million in cash, with the transaction expected to close in Q3 2020[145] - The company plans to finance the acquisition with USD 140 million in new transaction debt and USD 10 million in cash on hand, with the new debt having a three-year term and an interest rate of adjusted LIBOR plus 4.25% or adjusted base rate plus 3.25%[145][146] Critical Accounting Policies and Estimates This section outlines the company's critical accounting policies and estimates, including revenue recognition, bad debt, inventory, goodwill, intangible assets, income taxes, and stock-based compensation, noting no significant changes in H1 2020 - The company's critical accounting policies and estimates include revenue recognition, allowance for doubtful accounts, inventory valuation, goodwill and other intangible asset valuation, income taxes, and stock-based compensation[148] - No significant changes occurred in critical accounting policies and estimates during the six months ended June 30, 2020[150] Recently Adopted Accounting Pronouncements This section details the company's recent adoption of ASC Topic 326 (Credit Losses), ASU No. 2017-04 (Goodwill Impairment), and ASU No. 2020-04 (Reference Rate Reform), with no significant impact on financial condition or operating results - The company adopted ASC Topic 326 (Financial Instruments—Credit Losses) on January 1, 2020, with no significant impact on financial position or operating results[151][152] - The company adopted ASU No. 2017-04 (Goodwill and Other Intangible Assets—Simplifying the Test for Goodwill Impairment) starting in fiscal year 2020, with no significant impact on financial position or operating results[153] - The company adopted ASU No. 2020-04 (Reference Rate Reform) in March 2020, but due to the LIBOR interest rate swap maturing in October 2020, no significant impact on financial position or operating results is expected[156] Recently Issued Accounting Pronouncements This section covers recently issued accounting standards, including ASU No. 2019-12 (Income Taxes) and SEC final rules on business acquisitions, with no expected significant impact on the company's 2020 financial condition or operating results - FASB issued ASU No. 2019-12 (Income Taxes—Simplifying the Accounting for Income Taxes) in December 2019, effective for fiscal year 2021, with no significant impact expected on the company's financial position or operating results[157] - The SEC issued final rules in May 2020, revising financial statement requirements for business acquisitions and related pro forma financial information, which the company plans to early adopt for future filings related to the Intel WiFi and broadband asset acquisition, with no impact expected on 2020 financial position or operating results[158] Results of Operations This section analyzes the company's operating performance, detailing changes in net revenue, cost of revenue, gross profit, and various operating expenses for the reported periods Net Revenue The company's Q2 2020 net revenue was USD 65.2 million, a 21% year-over-year decrease, and H1 2020 net revenue was USD 127.2 million, a 24% decrease, primarily due to declines in connected home, infrastructure, and industrial and multi-market businesses, partly attributable to the COVID-19 pandemic Net Revenue (USD thousands): | Period | Q2 2020 | Q2 2019 | Change Amount | Change Percentage | H1 2020 | H1 2019 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Connected Home | 29,068 | 38,593 | (9,525) | (25) % | 61,322 | 82,025 | (20,703) | (25) % | | Infrastructure | 19,238 | 22,571 | (3,333) | (15) % | 36,779 | 44,673 | (7,894) | (18) % | | Industrial and Multi-Market | 16,914 | 21,343 | (4,429) | (21) % | 29,146 | 40,444 | (11,298) | (28) % | | Total Net Revenue | 65,220 | 82,507 | (17,287) | (21) % | 127,247 | 167,142 | (39,895) | (24) % | - Connected Home net revenue decreased primarily due to continued deterioration in satellite demand and lower MoCA shipments, the latter resulting from a pause in new program launches by a large telecom customer[167] - Infrastructure revenue declined primarily due to slower wireless backhaul deployments, partly attributable to COVID-19, and reduced demand for high-speed interconnect products[167][168] - Industrial and Multi-Market revenue decreased primarily due to lower shipments of high-performance analog products, largely attributable to the COVID-19 pandemic[167][168] Cost of Net Revenue and Gross Profit The company's Q2 2020 cost of net revenue was USD 32.5 million, down 15% year-over-year, with gross profit of USD 32.7 million, down 26%; H1 2020 cost of net revenue was USD 63.7 million, down 18%, with gross profit of USD 63.5 million, down 29%, primarily due to lower absorption of intangible asset amortization from decreased sales Cost of Net Revenue and Gross Profit (USD thousands): | Period | Q2 2020 | Q2 2019 | Change Amount | Change Percentage | H1 2020 | H1 2019 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Cost of Net Revenue | 32,477 | 38,427 | (5,950) | (15) % | 63,742 | 77,985 | (14,243) | (18) % | | Cost of Net Revenue as a Percentage of Net Revenue | 50 % | 47 % | | | 50 % | 47 % | | | | Gross Profit | 32,743 | 44,080 | (11,337) | (26) % | 63,505 | 89,157 | (25,652) | (29) % | | Gross Profit as a Percentage of Net Revenue | 50 % | 53 % | | | 50 % | 53 % | | | - The decrease in gross profit percentage was primarily due to lower absorption of intangible asset amortization resulting from decreased sales[172][173] Research and Development The company's Q2 2020 R&D expenses were USD 28.0 million, up 15% year-over-year, and H1 2020 expenses were USD 53.7 million, up 4%, driven by increased performance bonuses, stock-based compensation, design tools, and consulting fees, partially offset by reduced travel expenses Research and Development Expenses (USD thousands): | Period | Q2 2020 | Q2 2019 | Change Amount | Change Percentage | H1 2020 | H1 2019 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Research and Development Expenses | 27,984 | 24,304 | 3,680 | 15 % | 53,673 | 51,703 | 1,970 | 4 % | | As a Percentage of Net Revenue | 43 % | 29 % | | | 42 % | 31 % | | | - The increase in R&D expenses was primarily due to a USD 2.8 million increase in performance bonuses and stock-based compensation, a USD 0.6 million increase in design tool expenses, a USD 0.3 million increase in consulting fees, and a USD 0.2 million increase in prototype expenses[176] - Travel expenses decreased by USD 0.3 million due to the suspension of travel during the COVID-19 pandemic to protect employee health and safety[176] Selling, General and Administrative The company's Q2 2020 SG&A expenses were USD 27.5 million, up 23% year-over-year, and H1 2020 expenses were USD 52.1 million, up 13%, primarily driven by increased compensation-related expenses, including performance bonuses and stock-based compensation, and professional fees related to the Intel WiFi and broadband asset acquisition Selling, General and Administrative Expenses (USD thousands): | Period | Q2 2020 | Q2 2019 | Change Amount | Change Percentage | H1 2020 | H1 2019 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Selling, General and Administrative Expenses | 27,470 | 22,327 | 5,143 | 23 % | 52,102 | 45,918 | 6,184 | 13 % | | As a Percentage of Net Revenue | 42 % | 27 % | | | 41 % | 27 % | | | - The increase in expenses was primarily due to a USD 4.7 million increase in compensation-related expenses, such as performance bonuses and stock-based compensation, and a USD 1.3 million increase in professional fees related to the Intel WiFi and broadband asset acquisition[180] - Part of the increase was offset by a USD 0.5 million decrease in travel expenses and a USD 0.3 million decrease in depreciation expense[180] Impairment Losses The company recognized approximately USD 0.1 million in impairment losses in H1 2020 related to abandoned intellectual property licenses, with no impairment losses in Q2 2020 or the corresponding 2019 periods Impairment Losses (USD thousands): | Period | Q2 2020 | Q2 2019 | Change Amount | Change Percentage | H1 2020 | H1 2019 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Impairment Losses | — | — | — | N/A | 86 | — | 86 | N/A | - Approximately USD 0.1 million in impairment losses in H1 2020 were related to abandoned intellectual property licenses[183] Restructuring Charges The company's Q2 2020 restructuring charges were USD 0.1 million, down 85% year-over-year, and H1 2020 charges were USD 0.6 million, down 76%, primarily due to higher lease restructuring and employee severance costs in the prior year Restructuring Charges (USD thousands): | Period | Q2 2020 | Q2 2019 | Change Amount | Change Percentage | H1 2020 | H1 2019 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Restructuring Charges | 64 | 416 | (352) | (85) % | 553 | 2,333 | (1,780) | (76) % | | As a Percentage of Net Revenue | — % | 1 % | | | — % | 1 % | | | - Q2 2020 restructuring charges primarily included approximately USD 0.1 million in employee severance costs[184] - H1 2020 restructuring charges primarily included USD 0.3 million in lease restructuring costs and USD 0.2 million in other costs[185] Interest and Other Income (Expense) The company reported a net interest and other expense of USD 2.2 million in Q2 2020, an improvement from USD 2.7 million in Q2 2019, primarily due to lower interest expense from a reduced average debt balance; H1 2020 saw a net expense of USD 4.3 million, an improvement from USD 6.2 million in H1 2019, benefiting from lower interest expense and favorable foreign exchange impacts Interest and Other Income (Expense), Net (USD thousands): | Period | Q2 2020 | Q2 2019 | Change Amount | Change Percentage | H1 2020 | H1 2019 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Interest and Other Income (Expense), Net | (2,233) | (2,675) | 442 | (17) % | (4,304) | (6,158) | 1,854 | (30) % | | As a Percentage of Net Revenue | (3) % | (3) % | | | (3) % | (4) % | | | - The change in Q2 2020 net interest and other income (expense) was primarily due to a USD 0.7 million decrease in interest expense from a lower average debt balance, partially offset by a USD 0.2 million decrease in interest income[186] - The change in H1 2020 net interest and other income (expense) was primarily due to a USD 1.2 million decrease in interest expense from a lower average debt balance and a USD 0.8 million positive impact from favorable foreign exchange effects[187] Income Tax Benefit The company recorded income tax benefits of USD 3.2 million in Q2 2020 and USD 9.9 million in H1 2020, consistent with 2019, primarily from the mix of pre-tax income across jurisdictions, excess tax benefits from stock-based compensation, and release of uncertain tax position reserves, with H1 2020 also including CARES Act benefits allowing 2019 net operating loss carrybacks Income Tax Benefit (USD thousands): | Period | Q2 2020 | Q2 2019 | Change Amount | Change Percentage | H1 2020 | H1 2019 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Income Tax Benefit | (3,201) | (3,413) | 212 | (6) % | (9,937) | (9,875) | (62) | 1 % | | As a Percentage of Net Revenue | (5) % | (4) % | | | (8) % | (6) % | | | - H1 2020 income tax benefit includes a tax benefit from the CARES Act, allowing the company to carry back 2019 net operating losses to offset prior income taxes paid at a 35% federal rate[190] - The company maintains a full valuation allowance against state, certain federal, and certain foreign deferred tax assets due to the unlikelihood of realization in jurisdictions with cumulative losses or where certain tax attributes are not expected to be utilized[191] Liquidity and Capital Resources This section discusses the company's liquidity position, including working capital, cash and cash equivalents, and cash flow activities, and outlines plans for financing the Intel WiFi and broadband asset acquisition Liquidity Metrics (USD thousands): | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Working Capital | 120,614 | 115,208 | | Cash and Cash Equivalents | 107,362 | 92,708 | | Short-Term Restricted Cash | 9 | 349 | | Long-Term Restricted Cash | 58 | 60 | | Total Cash, Cash Equivalents, and Restricted Cash | 107,429 | 93,117 | Cash Flow Summary (USD thousands): | Cash Flow Activity | H1 2020 | H1 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | 15,908 | 28,489 | | Net Cash from Investing Activities | (4,949) | (2,679) | | Net Cash from Financing Activities | 3,143 | (33,894) | | Effect of Exchange Rate Changes | 210 | 931 | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | 14,312 | (7,153) | - The company expects its USD 107.4 million in cash and cash equivalents as of June 30, 2020, to be sufficient to meet operating requirements for at least the next twelve months[207] - The company plans to finance the upcoming acquisition of Intel's WiFi and broadband assets business with approximately USD 140 million in new transaction debt and approximately USD 10 million in cash on hand[197][207] Off-Balance Sheet Arrangements This section confirms that as of June 30, 2020, the company had no off-balance sheet arrangements involving unconsolidated entities or special purpose entities - As of June 30, 2020, the company was not involved in any transactions that would establish relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, nor was it involved in any unconsolidated special purpose entity transactions[210] Contractual Obligations This section details the company's future minimum payments for long-term debt, operating leases, inventory purchases, and other obligations, noting an increase in total contractual obligations due to software license orders Contractual Obligations Future Minimum Payments (USD thousands): | Category | Total | Less than 1 Year | 1-3 Years | 3-5 Years | | :--- | :--- | :--- | :--- | :--- | | Long-Term Debt Obligations | 212,000 | — | — | 212,000 | | Operating Lease Obligations | 12,367 | 2,646 | 8,707 | 1,014 | | Inventory Purchase Obligations | 23,499 | 23,141 | 358 | — | | Other Obligations | 40,490 | 5,733 | 27,927 | 6,830 | | Total | 288,356 | 31,520 | 36,992 | 219,844 | - As of June 30, 2020, total contractual obligations increased by USD 38.5 million to USD 288.4 million, primarily due to increased software license orders[213] - As of June 30, 2020, the balance sheet included USD 5.5 million in other long-term liabilities for uncertain tax positions, which are not presented in the contractual obligations table due to uncertainty regarding the amount and timing of settlement[212] Quantitative and Qualitative Disclosures about Market Risk The company primarily faces market risks from foreign currency exchange rates and interest rate fluctuations; foreign exchange risk is limited as most international agreements are USD-denominated, while interest rate risk stems from floating-rate long-term debt, largely hedged by a swap maturing in October 2020, with new USD 140 million acquisition debt introducing additional floating-rate exposure - The company primarily faces market risks from foreign currency exchange rates and interest rate fluctuations but does not hold or issue financial instruments for trading purposes[214] - The company has limited foreign exchange risk and does not engage in foreign currency hedging transactions; a hypothetical 100-basis-point change in foreign exchange rates would impact accumulated other comprehensive income by approximately USD 0.3 million[215] - As of June 30, 2020, the company's long-term debt was USD 212 million, with most floating interest rate risk hedged by an interest rate swap, effectively fixing the rate at approximately 4.25%, but the swap matures in October 2020[216][217] - The upcoming USD 140 million transaction debt for the Intel WiFi and broadband asset acquisition will also introduce floating interest rate risk, further increasing the company's exposure to interest rate fluctuations[218] Controls and Procedures The company maintains disclosure controls and procedures to ensure timely recording, processing, summarization, and reporting of information required for periodic reports; as of June 30, 2020, management assessed these controls as effective, with no significant changes in internal control reporting during the quarter - The company maintains disclosure controls and procedures designed to ensure that information required for SEC periodic reports is timely recorded, processed, summarized, and reported[220] - As of June 30, 2020, the company's Chief Executive Officer and Chief Financial Officer evaluated and concluded that the disclosure controls and procedures were effective[221] - No significant changes in internal control reporting occurred during the fiscal quarter ended June 30, 2020[222] Part II Legal Proceedings The company occasionally faces litigation threats or actual lawsuits in its ordinary course of business; management believes no currently pending litigation, if determined adversely, would materially affect its financial position, operating results, cash flows, or exceed existing liability insurance coverage - The company occasionally faces litigation threats or actual lawsuits in the ordinary course of its business[225] - Management believes there are no currently pending litigation matters that, if determined adversely, would have a material effect on the company's financial position, results of operations, or cash flows, or exceed the coverage of its existing liability insurance[225] Risk Factors This section details significant risks, including those related to the Intel Home Gateway Platform Division acquisition, business operations (e.g., COVID-19, competition, supply chain, IT failures, global conditions), and common stock (e.g., management's cash use, anti-takeover provisions, stock price volatility) Risks Relating to the Proposed Acquisition of the Home Gateway Platform Division of Intel Corporation This section outlines risks associated with the proposed Intel acquisition, including potential discrepancies in financial performance, integration challenges, business relationship disruptions, talent loss, increased debt, and future impairment of goodwill and intangible assets - If the acquisition is completed, actual financial and operating results may differ materially from expectations, including the financial impact of cost savings and synergies[228] - Failure to successfully integrate the WiFi and broadband assets business could adversely affect MaxLinear's operating results and financial condition[232] - Uncertainties related to the acquisition could lead to disruptions in business relationships, including customer relationships[234] - The acquisition may result in the loss of key personnel, making it difficult to motivate and retain employees[236] - The company will incur approximately USD 140 million in incremental secured term loan debt, which, combined with existing USD 212 million debt, will increase interest payment obligations and restrict operational flexibility[238][239] - The acquisition will result in additional goodwill and other intangible assets, which may be subject to future impairment, adversely affecting operating results[244][245] Risks Related to Our Business This section details various business risks, including the impact of COVID-19, intense competition, high customer concentration, R&D challenges, supply chain dependencies, IT failures, global economic conditions, and regulatory compliance - The COVID-19 pandemic could adversely affect the company's business, financial condition, and operating results, including decreased demand, supply chain constraints, shipment disruptions, and delayed acquisition integration[251][252] - The company faces intense market competition, and increased competition could lead to pricing pressure, reduced profitability, and loss of market share[254][255] - The company relies on a few key customers, and a reduction or loss of orders from these customers could materially adversely affect revenue and operating results[258][259] - Failure to timely develop and introduce new or enhanced products could harm the company's ability to attract and retain customers and weaken its competitive position[282][283] - The company relies on a limited number of third parties for product manufacturing, assembly, and testing; failure to successfully manage relationships with these contractors, or impacts from natural disasters or public health crises, could adversely affect product sales[287][288][289][290] - The company faces risks of information technology failures, including data protection breaches and cyberattacks, which could disrupt operations, harm reputation, and adversely affect financial performance[305][306] - Global economic conditions, including factors affecting consumer spending on the company's integrated circuit products, could adversely affect revenue, margins, and operating results[331] - The company's business is subject to various government regulations, with high compliance costs; failure to comply could lead to product recalls, cessation of manufacturing and distribution, and civil or criminal penalties[338][339] Risks Relating to Our Common Stock This section addresses risks related to the company's common stock, including management's discretion over cash use, anti-takeover provisions, stock price volatility, and the absence of dividend payments - Management may use available cash and cash equivalents in ways that stockholders may not agree with or that may not yield returns[349][350] - Anti-takeover provisions in the company's charter documents and Delaware law could make acquiring the company more difficult, limit attempts by stockholders to replace or remove current management, and restrict the market price of common stock[351][352] - The company's stock price may fluctuate due to various factors, including actual or anticipated variations in financial condition and operating results, customer changes, market acceptance, new product introductions, competition, key personnel changes, intellectual property disputes, acquisitions, financing activities, stock sales, and macroeconomic and market conditions[353][354] - The company does not intend to pay dividends in the foreseeable future, and investors must rely on stock price appreciation for investment returns[360] Unregistered Sales of Equity Securities and Use of Proceeds The company had no unregistered sales of equity securities or repurchases of any equity securities during the quarter - There were no unregistered sales of equity securities during the quarter[361] - No equity securities were repurchased during the quarter[361] Defaults Upon Senior Securities No defaults upon senior securities occurred during the quarter - No defaults upon senior securities occurred during the quarter[362] Mine Safety Disclosures This item is not applicable - This item is not applicable[363] Other Information No other information required disclosure during the quarter - No other information required disclosure during the quarter[364] Exhibits This section lists exhibits filed with the quarterly report, including CEO and CFO certifications under Sarbanes-Oxley Act Section 302, 18 U.S.C. Section 1350 certifications, and XBRL instance and taxonomy extension files Exhibit List: | Exhibit Number | Exhibit Title | | :--- | :--- | | 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 32.1(*) | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | XBRL Instance Document | | 101.SCH | XBRL Taxonomy Extension Schema Document | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | 104 | Cover Page Interactive Data File (formatted as Inline XBRL) | Signatures This quarterly report was duly signed by Steven G. Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer of MaxLinear, Inc. on July 23, 2020 - This report was signed by Steven G. Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer of MaxLinear, Inc. on July 23, 2020[370]