Marvell Technology(MRVL) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Marvell Technology, Inc.'s unaudited condensed consolidated financial statements and explanatory notes are presented for the specified periods Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in millions) | Metric | Oct 28, 2023 | Jan 28, 2023 | | :-------------------------------- | :----------- | :----------- | | Assets | | | | Cash and cash equivalents | $725.6 | $911.0 | | Accounts receivable, net | $1,214.6 | $1,192.2 | | Inventories | $941.5 | $1,068.3 | | Total current assets | $2,973.2 | $3,281.1 | | Property and equipment, net | $701.6 | $577.4 | | Goodwill | $11,586.9 | $11,586.9 | | Acquired intangible assets, net | $4,290.4 | $5,102.0 | | Total assets | $21,714.4 | $22,522.1 | | Liabilities and Stockholders' Equity | | | | Accounts payable | $419.1 | $465.8 | | Short-term debt | $96.3 | $584.4 | | Total current liabilities | $1,879.6 | $2,386.7 | | Long-term debt | $4,089.6 | $3,907.7 | | Total liabilities | $6,481.0 | $6,884.9 | | Total stockholders' equity | $15,233.4 | $15,637.2 | | Total liabilities and stockholders' equity | $21,714.4 | $22,522.1 | Unaudited Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in millions, except per share amounts) | Metric | 3 Months Ended Oct 28, 2023 | 3 Months Ended Oct 29, 2022 | 9 Months Ended Oct 28, 2023 | 9 Months Ended Oct 29, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenue | $1,418.6 | $1,537.3 | $4,081.2 | $4,501.1 | | Cost of goods sold | $867.4 | $760.0 | $2,451.7 | $2,186.9 | | Gross profit | $551.2 | $777.3 | $1,629.5 | $2,314.2 | | Operating income (loss) | $(146.3) | $105.8 | $(534.4) | $214.7 | | Net income (loss) | $(164.3) | $13.3 | $(540.7) | $(148.1) | | Net income (loss) per share — basic | $(0.19) | $0.02 | $(0.63) | $(0.17) | | Net income (loss) per share — diluted | $(0.19) | $0.02 | $(0.63) | $(0.17) | Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in millions) | Metric | 3 Months Ended Oct 28, 2023 | 3 Months Ended Oct 29, 2022 | 9 Months Ended Oct 28, 2023 | 9 Months Ended Oct 29, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(164.3) | $13.3 | $(540.7) | $(148.1) | | Other comprehensive loss, net of tax | $(0.4) | $(0.8) | $(1.4) | $(0.8) | | Comprehensive income (loss), net of tax | $(164.7) | $12.5 | $(542.1) | $(148.9) | Unaudited Condensed Consolidated Statements of Stockholders' Equity - Total stockholders' equity decreased from $15,637.2 million at January 28, 2023, to $15,233.4 million at October 28, 2023. Key changes include $142.2 million in stock-based compensation, $168.9 million net loss for the quarter ended April 29, 2023, and $164.3 million net loss for the quarter ended October 28, 2023. Cash dividends of $51.4 million, $51.7 million, and $51.8 million were paid for the respective quarters[13] Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | 9 Months Ended Oct 28, 2023 | 9 Months Ended Oct 29, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $823.9 | $937.3 | | Net cash used in investing activities | $(274.3) | $(264.2) | | Net cash used in financing activities | $(735.0) | $(563.2) | | Net increase (decrease) in cash and cash equivalents | $(185.4) | $109.9 | | Cash and cash equivalents at end of period | $725.6 | $723.4 | Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Basis of Presentation - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC requirements, with certain information condensed or omitted. Fiscal 2024 is a 53-week year, unlike the 52-week fiscal 2023. Management's estimates, particularly in the current macroeconomic environment, require increased judgment and carry higher variability[20][21][22] Note 2. Recent Accounting Pronouncements - The FASB issued an ASU in November 2023 to improve reportable segment disclosures, effective for fiscal years beginning after December 15, 2023, with retrospective application. The Company is currently evaluating its impact[23] Note 3. Revenue Net Revenue by End Market (in millions, except percentages) | End Market | 3 Months Ended Oct 28, 2023 | % of Total | 3 Months Ended Oct 29, 2022 | % of Total | 9 Months Ended Oct 28, 2023 | % of Total | 9 Months Ended Oct 29, 2022 | % of Total | | :-------------------- | :-------------------------- | :--------- | :-------------------------- | :--------- | :-------------------------- | :--------- | :-------------------------- | :--------- | | Data center | $555.8 | 39 % | $627.3 | 41 % | $1,451.4 | 36 % | $1,911.2 | 42 % | | Enterprise networking | $271.1 | 19 % | $376.0 | 24 % | $963.4 | 24 % | $1,002.9 | 22 % | | Carrier infrastructure | $316.5 | 22 % | $271.4 | 18 % | $881.9 | 22 % | $808.6 | 18 % | | Consumer | $168.7 | 12 % | $178.4 | 12 % | $478.5 | 12 % | $521.3 | 12 % | | Automotive/industrial | $106.5 | 8 % | $84.2 | 5 % | $306.0 | 6 % | $257.1 | 6 % | | Total | $1,418.6 | | $1,537.3 | | $4,081.2 | | $4,501.1 | Net Revenue by Destination of Shipment (in millions, except percentages) | Destination | 3 Months Ended Oct 28, 2023 | % of Total | 3 Months Ended Oct 29, 2022 | % of Total | 9 Months Ended Oct 28, 2023 | % of Total | 9 Months Ended Oct 29, 2022 | % of Total | | :------------ | :-------------------------- | :--------- | :-------------------------- | :--------- | :-------------------------- | :--------- | :-------------------------- | :--------- | | China | $605.3 | 43 % | $604.1 | 39 % | $1,690.3 | 41 % | $1,941.7 | 43 % | | United States | $217.1 | 15 % | $184.6 | 12 % | $607.2 | 15 % | $519.1 | 12 % | | Finland | $158.4 | 11 % | $47.4 | 3 % | $353.7 | 9 % | $125.4 | 3 % | | Singapore | $73.5 | 5 % | $134.5 | 9 % | $256.7 | 6 % | $251.7 | 6 % | | Thailand | $94.5 | 7 % | $115.2 | 7 % | $215.9 | 5 % | $289.4 | 6 % | | Malaysia | $31.6 | 2 % | $85.1 | 6 % | $169.5 | 4 % | $280.2 | 6 % | | Taiwan | $22.9 | 2 % | $89.4 | 6 % | $135.8 | 3 % | $204.3 | 5 % | | Japan | $37.5 | 3 % | $70.1 | 5 % | $125.4 | 3 % | $208.2 | 5 % | | Other | $177.8 | 12 % | $206.9 | 13 % | $526.7 | 14 % | $681.1 | 14 % | | Total | $1,418.6 | | $1,537.3 | | $4,081.2 | | $4,501.1 | Net Revenue by Customer Type (in millions, except percentages) | Customer Type | 3 Months Ended Oct 28, 2023 | % of Total | 3 Months Ended Oct 29, 2022 | % of Total | 9 Months Ended Oct 28, 2023 | % of Total | 9 Months Ended Oct 29, 2022 | % of Total | | :-------------- | :-------------------------- | :--------- | :-------------------------- | :--------- | :-------------------------- | :--------- | :-------------------------- | :--------- | | Direct customers | $937.6 | 66 % | $986.0 | 64 % | $2,685.7 | 66 % | $2,955.9 | 66 % | | Distributors | $481.0 | 34 % | $551.3 | 36 % | $1,395.5 | 34 % | $1,545.2 | 34 % | | Total | $1,418.6 | | $1,537.3 | | $4,081.2 | | $4,501.1 | Note 4. Debt Outstanding Debt (in millions) | Debt Type | Oct 28, 2023 | Jan 28, 2023 | | :-------------------------------- | :----------- | :----------- | | 2024 Term Loan - 3-Year Tranche | $— | $735.0 | | 2026 Term Loan - 5-Year Tranche | $721.9 | $787.5 | | Senior Notes Total | $3,499.9 | $2,999.9 | | Total borrowings | $4,221.8 | $4,522.4 | | Net carrying amount of debt | $4,185.9 | $4,492.1 | | Current portion | $96.3 | $584.4 | | Non-current portion | $4,089.6 | $3,907.7 | - The 3-Year Tranche Loan ($735.0 million) was repaid in full during the quarter ended October 28, 2023. The Company issued $500.0 million of 5.750% Senior Notes due 2029 and $500.0 million of 5.950% Senior Notes due 2033 on September 18, 2023. The weighted average interest rate on short-term debt increased from 4.448% at January 28, 2023, to 6.795% at October 28, 2023[36][39][42] Aggregate Future Contractual Maturities of Outstanding Debt (in millions) | Fiscal Year | Amount | | :------------ | :----- | | Remainder of 2024 | $21.9 | | 2025 | $109.4 | | 2026 | $131.2 | | 2027 | $959.4 | | 2028 | $— | | Thereafter | $2,999.9 | | Total | $4,221.8 | Note 5. Commitments and Contingencies - The Company's commitments include wafer purchase obligations, supply capacity reservation payments, and technology license fees. Total unconditional purchase commitments as of October 28, 2023, are $2,812.4 million for foundries and test & assembly partners, and $460.1 million for technology license fees[66] - The Company recognized approximately $198.0 million in charges for product-related claims as of the end of the third quarter of fiscal 2024. A $100.0 million legal settlement related to a contractual dispute was paid in full during fiscal 2023[70][71] Note 6. Goodwill and Acquired Intangible Assets, Net - Goodwill remained at $11.6 billion as of October 28, 2023, and January 28, 2023. Acquired intangible assets, net, decreased from $5,102.0 million to $4,290.4 million during the same period[77][78] Acquired Intangible Assets, Net (in millions) | Asset Type | Oct 28, 2023 Net Carrying Amount | Jan 28, 2023 Net Carrying Amount | Weighted-Average Remaining Amortization Period (Years) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------------------------------------- | | Developed technologies | $2,569.8 | $3,063.5 | 4.04 | | Customer contracts and related relationships | $1,076.8 | $1,325.8 | 3.53 | | Trade names | $24.8 | $33.7 | 2.48 | | Total acquired amortizable intangible assets | $3,671.4 | $4,423.0 | 3.88 | | IPR&D | $619.0 | $679.0 | n/a | | Total acquired intangible assets | $4,290.4 | $5,102.0 | | - Amortization expense for acquired intangible assets was $269.8 million for the three months ended October 28, 2023, and $811.6 million for the nine months ended October 28, 2023[81] Note 7. Fair Value Measurements - The Company uses a three-tier fair value hierarchy (Level 1, 2, 3) for asset and liability measurements. Level 1 assets include money market funds and marketable equity investments. Level 2 assets include time deposits and severance pay funds, and Level 2 liabilities include foreign currency forward contracts. Non-marketable equity investments are classified as Level 3[82][83][85][86] - The estimated aggregate fair value of unsecured senior notes was $3.1 billion at October 28, 2023, and $2.7 billion at January 28, 2023, classified as Level 2[87] Note 8. Restructuring - The Company initiated a restructuring plan in Q1 fiscal 2024 to streamline the organization and optimize resources. Charges for the three and nine months ended October 28, 2023, were $3.4 million and $105.3 million, respectively, primarily for employee severance and asset impairment[90] Restructuring Related Charges (in millions) | Charge Type | 3 Months Ended Oct 28, 2023 | 3 Months Ended Oct 29, 2022 | 9 Months Ended Oct 28, 2023 | 9 Months Ended Oct 29, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Employee severance | $3.0 | $12.6 | $69.1 | $13.5 | | Impairment and write-off of assets | | | | | | Purchased IP licenses | $— | $— | $28.6 | $— | | Equipment | $— | $— | $1.3 | $— | | Other | $0.4 | $3.0 | $6.3 | $4.6 | | Total | $3.4 | $15.6 | $105.3 | $18.1 | - The total restructuring liability at October 28, 2023, was $15.1 million, with $14.2 million classified as current and $0.9 million as non-current[90] Note 9. Income Tax - The Company recorded an income tax benefit of $23.2 million for the three months ended October 28, 2023, and $130.7 million for the nine months ended October 28, 2023. This contrasts with tax expenses of $52.0 million and $256.4 million for the comparable periods in 2022[92] - The effective tax rate differs from the U.S. statutory rate of 21% due to foreign earnings/losses taxed at lower rates, U.S. taxation of foreign operations, tax credits, valuation allowance releases, and discrete tax benefits/expenses[92] - Tax incentives in certain countries, like Israel, and the extension of Singapore's Development and Expansion Incentive (DEI) impact the tax provision. A $22.4 million tax expense was recorded in Q3 fiscal 2023 for estimated clawback taxes on prior Israeli earnings[93][94] Note 10. Net Income (Loss) Per Share Net Income (Loss) Per Share (in millions, except per share amounts) | Metric | 3 Months Ended Oct 28, 2023 | 3 Months Ended Oct 29, 2022 | 9 Months Ended Oct 28, 2023 | 9 Months Ended Oct 29, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(164.3) | $13.3 | $(540.7) | $(148.1) | | Weighted-average shares — basic | 862.6 | 852.6 | 860.1 | 850.5 | | Weighted-average shares — diluted | 862.6 | 858.4 | 860.1 | 850.5 | | Basic EPS | $(0.19) | $0.02 | $(0.63) | $(0.17) | | Diluted EPS | $(0.19) | $0.02 | $(0.63) | $(0.17) | - Anti-dilutive potential shares from stock-based awards were excluded from diluted EPS calculations for periods with net losses (three and nine months ended October 28, 2023, and nine months ended October 29, 2022)[101] Note 11. Supplemental Financial Information Inventories (in millions) | Inventory Type | Oct 28, 2023 | Jan 28, 2023 | | :--------------- | :----------- | :----------- | | Work-in-process | $579.9 | $756.3 | | Finished goods | $361.6 | $312.0 | | Total Inventories | $941.5 | $1,068.3 | Property and Equipment, Net (in millions) | Asset Type | Oct 28, 2023 | Jan 28, 2023 | | :-------------------------- | :----------- | :----------- | | Machinery and equipment | $1,296.1 | $1,083.9 | | Land, buildings, and leasehold improvements | $314.7 | $306.2 | | Computer software | $118.0 | $114.5 | | Furniture and fixtures | $31.8 | $30.9 | | Less: Accumulated depreciation | $(1,059.0) | $(958.1) | | Property and equipment, net | $701.6 | $577.4 | - Total trade accounts receivable sold under factoring arrangements were $174.4 million for the three and nine months ended October 28, 2023[103] - The accumulated other comprehensive loss, net of tax, was $(1.4) million at October 28, 2023, compared to $0 at January 28, 2023[109] - The Company repurchased 0.8 million shares of common stock for $50.0 million during the three and nine months ended October 28, 2023. As of October 28, 2023, $399.5 million remained available for future stock repurchases[114][124] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Marvell Technology, Inc.'s financial condition and results, highlighting revenue declines, market trends, and strategic initiatives Overview - Net revenue in Q3 fiscal 2024 was $1.4 billion, an 8% decrease YoY, primarily due to declines in data center (-11%), enterprise networking (-28%), and consumer (-5%) end markets. This was partially offset by growth in automotive/industrial (+26%) and carrier infrastructure (+17%)[121] - Customer inventory corrections continued to impact storage, enterprise networking, and wired carrier customers. Demand for optical products, driven by AI applications, saw a strong increase starting in Q1 fiscal 2024[122] - Restructuring charges of $3.4 million (Q3) and $105.3 million (YTD) were recorded in fiscal 2024 to streamline the organization. The Company returned $204.9 million to stockholders in the nine months ended October 28, 2023, through stock repurchases ($50.0 million) and cash dividends ($154.9 million)[123][124][125] - Cash and cash equivalents decreased by $185.4 million to $725.6 million at October 28, 2023, from $911.0 million at January 28, 2023[125] - Accounts receivable were concentrated with four customers (72% of gross accounts receivable) at October 28, 2023. Sales to customers with operations in Asia represented 66% and 68% of net revenue for the three and nine months ended October 28, 2023, respectively[126][127] Critical Accounting Policies and Estimates - No material changes to critical accounting policies and estimates were made during the three months ended October 28, 2023. However, the current macroeconomic environment necessitates increased judgment and introduces higher variability and volatility in estimates[128] Results of Operations Key Financial Metrics as Percentage of Net Revenue | Metric | 3 Months Ended Oct 28, 2023 | 3 Months Ended Oct 29, 2022 | 9 Months Ended Oct 28, 2023 | 9 Months Ended Oct 29, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenue | 100.0 % | 100.0 % | 100.0 % | 100.0 % | | Cost of goods sold | 61.1 % | 49.4 % | 60.1 % | 48.6 % | | Gross profit | 38.9 % | 50.6 % | 39.9 % | 51.4 % | | Research and development | 33.9 % | 29.1 % | 35.2 % | 29.8 % | | Selling, general and administrative | 15.0 % | 13.5 % | 15.2 % | 14.2 % | | Operating income (loss) | (10.2)% | 7.0 % | (13.1)% | 4.8 % | | Net income (loss) | (11.5)% | 1.0 % | (13.2)% | (3.2)% | - Net revenue decreased by 7.7% for the three months and 9.3% for the nine months ended October 28, 2023, primarily due to lower unit shipments of storage products[130][131][132] - Gross margin decreased by 11.7 and 11.5 percentage points for the three and nine months, respectively, primarily due to charges for product claim related matters[132] - R&D expense increased by $33.0 million (QoQ) and $95.4 million (YoY) due to higher mask prototyping and employee compensation costs. SG&A expense increased by $5.2 million (QoQ) due to an intellectual property matter, but decreased by $18.2 million (YoY) due to lower intangibles amortization and employee compensation costs[133][135] - Interest expense increased by $7.4 million (QoQ) and $37.8 million (YoY) due to higher interest associated with term loans. Other income, net, increased by $6.5 million (QoQ) and $4.2 million (YoY) due to net gain from equity investments and exchange rate fluctuations[138][139] - The Company recorded an income tax benefit of $23.2 million (QoQ) and $130.7 million (YoY), contrasting with tax expenses in the prior year, primarily due to foreign earnings/losses taxed at lower rates and tax credits[139][140] Liquidity and Capital Resources - As of October 28, 2023, principal liquidity sources included $725.6 million in cash and cash equivalents, with $408.3 million held by foreign subsidiaries. The Company repaid the $735.0 million 3-Year Tranche Loan and $200.0 million from the 2023 Revolving Credit Facility during the quarter[144][145][146] - The 2023 Revolving Credit Facility, with a $1.0 billion borrowing capacity, was undrawn and available as of October 28, 2023. The Company believes existing cash, cash from operations, and the revolving credit facility will cover working capital, capital expenditures, and commitments for at least the next twelve months[146][149] - Net cash provided by operating activities was $823.9 million for the nine months ended October 28, 2023, driven by net loss adjustments and working capital changes, including a decrease in inventory and prepaid expenses[152] - Net cash used in investing activities was $274.3 million, primarily for property and equipment purchases ($265.3 million). Net cash used in financing activities was $735.0 million, mainly due to debt repayments and dividend payments, partially offset by proceeds from new bond issuances and employee stock plans[154][155] Item 3. Quantitative and Qualitative Disclosures About Market Risk Marvell Technology, Inc.'s exposure to market risks, including interest rate and foreign currency exchange fluctuations, is detailed - A hypothetical 1 percentage point increase or decrease in interest rates could result in an annual interest expense change of approximately $6.9 million, primarily due to the variable rate 2026 Term Loan[160] - The Company's investment policy limits long-term interest rate risk by requiring effective maturities of generally less than five years for highly liquid debt instruments. No such investments were held at October 28, 2023, aside from cash and cash equivalents[161] - A 10% weakening of the U.S. dollar could increase operating expenses by approximately 2%, as a percentage of international operational expenses are denominated in foreign currencies[163] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and procedures, with no material changes to internal control over financial reporting - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective as of October 28, 2023[165] - No changes in internal control over financial reporting occurred during the three months ended October 28, 2023, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[166] - Management acknowledges that control systems provide only reasonable, not absolute, assurance and are subject to inherent limitations, meaning they may not prevent or detect all errors or fraud[167] PART II. OTHER INFORMATION Item 1. Legal Proceedings Information on legal proceedings and contingencies is incorporated by reference from Note 5 of the financial statements - Information on legal proceedings is incorporated by reference from Note 5 – Commitments and Contingencies in the financial statements[169] Item 1A. Risk Factors Significant risks affecting Marvell Technology, Inc.'s business, financial condition, and operating results are detailed SUMMARY OF FACTORS THAT MAY AFFECT OUR FUTURE RESULTS - Key risks include macroeconomic conditions (inflation, interest rates, trade restrictions with China), customer order cancellations/deferrals, ability to scale, debt obligations, product development for 5G/Cloud/AI, integration of acquisitions, intense competition, dependence on few customers, restructuring execution, competitive cost structure, supply chain disruptions, talent retention, litigation, design win loss, seasonality, product qualification failures, IP protection, natural disasters, ESG programs, and NRE cost recovery[172][173] CHANGES IN PRODUCT DEMAND CAN ADVERSELY AFFECT OUR FINANCIAL RESULTS - Weak macroeconomic conditions (recessions, inflation, rising interest rates) can lead to customer order cancellations, delayed purchasing, increased inventory, and financial challenges for partners, adversely affecting business and financial results[177] - Unfavorable or uncertain conditions in 5G, Cloud, and AI markets, including evolving regulations and unpredictable demand, could impact revenue growth and financial results. The Company's sales are concentrated in a few large customers, with the loss or significant reduction in sales to any of these customers potentially harming financial condition and results of operations[179][181][182] - Inability to accurately predict customer demand can lead to excess or obsolete inventory, reducing gross margin, or insufficient inventory, resulting in lost revenue opportunities and damaged customer relationships[187][191] WE OPERATE IN INTENSELY COMPETITIVE MARKETS - The semiconductor industry, particularly storage, networking, and infrastructure markets (including AI solutions), is highly competitive. Failure to compete effectively against larger, better-resourced companies could negatively impact revenue and gross margins[192][194] - Industry consolidation among competitors (e.g., NVIDIA-Mellanox, AMD-Xilinx) can alter the competitive landscape, potentially putting the Company at a disadvantage[195] Our gross margin and results of operations may be adversely affected in the future by a number of factors, including decreases in our average selling prices of products over time, shifts in our product mix, or price increases of certain components or third-party services due to inflation, supply chain constraints, or for other reasons. Gross margins and operating results face risks from pricing pressures, product mix shifts, and increased costs due to inflation or supply chain issues - Gross margins are vulnerable to pricing pressures, shifts in product mix (e.g., lower-margin ASIC model), and increased costs from inflation, supply chain constraints, or component shortages. The Company's fabless model limits rapid cost reduction compared to integrated device manufacturers[196][197][198][199][200] WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE RAPID GROWTH OF THE COMPANY AND WITH OUR STRATEGIC TRANSACTIONS - Rapid growth requires scaling business, internal systems, and organization, which is expensive, complex, and carries risks of inefficiencies or operational failures. Failure to effectively implement expansion could negatively impact performance[201] - Acquisitions, strategic investments, and divestitures involve significant financial, managerial, and operational challenges, including underperformance of acquired businesses, integration difficulties, overpayment, and potential dilution from stock financing. Uncompleted transactions can incur significant expenses and negative publicity[202][203][204][205][207] - Substantial indebtedness incurred for acquisitions (e.g., Inphi) reduces liquidity, limits flexibility, and increases vulnerability to adverse economic conditions. Debt covenants impose restrictions on business operations, and a breach could lead to immediate debt repayment[208] WE ARE VULNERABLE TO PRODUCT DEVELOPMENT AND MANUFACTURING-RELATED RISKS - Reliance on third-party manufacturing, assembly, testing, and packaging partners exposes the Company to risks including regional concentration (Taiwan, China, Malaysia, Singapore, Canada), limited capacity, supply disruptions, and the inability to secure necessary raw materials. Geopolitical events (e.g., Russia-Ukraine, Israel-Hamas conflicts) can indirectly impact supply chains[209][210][211][212][213][214][216] - The complex fabrication process and transition to smaller geometry technologies can lead to manufacturing defects, lower yields, and increased costs. Poor yields or product defects can cause customer relations issues, financial harm, and potential product liability claims[217][218][219][220][234][235][236] - The long product development cycle means significant expenses are incurred before revenue generation, with no assurance of design wins or commercial success. Failure to develop and introduce new products timely and cost-effectively harms competitive position[222][223][224][225][226][228][229][230][231][232] WE OPERATE GLOBALLY AND ARE SUBJECT TO SIGNIFICANT RISKS IN MANY JURISDICTIONS - Adverse changes in political, regulatory, and economic policies, particularly trade restrictions with China (e.g., tariffs, export controls, Entity List additions), have reduced and may continue to reduce demand for products, harming results of operations and reputation. Concerns about U.S. reliability may lead Chinese customers to amass inventory or seek alternative suppliers[240][241][242][243][244][245] - Global operations expose the Company to risks including political/economic instability, compliance with export/import regulations, local laws favoring domestic companies, natural disasters, trade restrictions, and currency fluctuations. The Israel-Hamas conflict could impact employees and operations in Israel[248][249][250][251][252][253] WE ARE SUBJECT TO RISKS RELATED TO OUR DEBT OBLIGATIONS - The Company's $4.2 billion outstanding debt (as of Oct 28, 2023) increases vulnerability to adverse economic conditions, requires a substantial portion of cash flow for payments, limits financial flexibility, and exposes to interest rate risk. Debt ratings downgrades could increase borrowing costs and affect access to debt markets[254][255][258] - Credit agreements and indentures impose restrictive covenants (e.g., on liens, additional indebtedness, mergers, dividends) that could limit business operations. Failure to comply or generate sufficient cash flow to service debt could lead to default, acceleration of debt, and potential bankruptcy or liquidation[256][257][259][260][261] CHANGES IN OUR EFFECTIVE TAX RATE MAY REDUCE OUR NET INCOME - Changes in U.S. and foreign tax laws (e.g., GILTI, IRA's corporate alternative minimum tax, OECD's global minimum tax) could increase tax liabilities and adversely impact financial results. Tax incentives in foreign jurisdictions (e.g., Singapore, Israel) are conditional and their termination or changes in criteria could harm operations[263][264][265] - Valuations of intellectual property transferred to related entities (e.g., Singapore) may be challenged by tax authorities, reducing expected tax benefits. The effective tax rate is subject to fluctuations from geographic mix of earnings, deferred tax asset valuations, and audit assessments[266][268] WE ARE SUBJECT TO RISKS RELATED TO OUR ASSETS - The Company is exposed to potential impairment charges on its $11.6 billion goodwill and $4.3 billion acquired intangible assets. Impairment reviews are triggered by significant underperformance, changes in business strategy, negative industry trends, or sustained stock price decline[269][270][271] - Restructuring activities in fiscal 2024 resulted in $105.3 million in charges, indicating potential asset write-offs. Investments in private companies also carry impairment risk if those companies underperform[272][274] - Owning real property (e.g., Santa Clara, Shanghai) subjects the Company to risks such as environmental contamination, adverse changes in property value, structural improvement costs, business disruption from relocation, and uninsured losses from natural disasters[275] WE ARE SUBJECT TO IP RISKS AND RISKS ASSOCIATED WITH LITIGATION AND REGULATORY PROCEEDINGS - Failure to protect intellectual property (patents, copyrights, trademarks, trade secrets) could allow competitors to use proprietary technology, harming competitive position and revenue. Patent applications may not be issued or sufficiently broad, and existing patents can be challenged or circumvented[277][278][280] - The Company must comply with a variety of global laws and regulations (e.g., export controls, anti-corruption, data privacy, environmental) and ESG initiatives. Non-compliance or perceived shortcomings in ESG programs can lead to fines, restrictions, reputational damage, and impact talent acquisition and investor relations[282][283][284][285] - Litigation, particularly involving patents and intellectual property, is prevalent in the semiconductor industry and can result in significant liability, damages, licensing fees, product redesigns, and diversion of management resources. The Company has indemnification obligations to customers for third-party IP infringement claims[289][290][291][292][293] WE ARE SUBJECT TO CYBER SECURITY RISKS - The Company's technology infrastructure and sensitive data are vulnerable to cyber-attacks (phishing, malware, ransomware, nation-state threats), which are becoming more prevalent and sophisticated, potentially leveraging AI technology. Despite mitigation efforts, material breaches are likely in the future, leading to significant costs, operational disruptions, and reputational damage[294][295][296][297][298] GENERAL RISK FACTORS - The Company's success depends on attracting and retaining highly skilled personnel, especially engineers. Intense competition for talent, increased work-from-home arrangements, and stock price volatility can impair retention and recruitment efforts, increasing expenses and impacting strategy execution[299][300][301][303] - Future cash dividends and stock repurchases are subject to various factors and are not assured. A reduction or elimination could negatively affect stock price. Indemnification obligations for directors and officers, coupled with limited insurance coverage, could result in significant unreimbursed costs[304][305][306][307][308][309] - Global pandemics (e.g., COVID-19) can disrupt manufacturing, R&D, operations, and sales. Adverse developments in the financial services industry (e.g., bank insolvencies) could impact access to cash and investments. Classification of non-U.S. subsidiaries as Passive Foreign Investment Companies (PFICs) could lead to adverse tax consequences for U.S. holders[310][311][312][313][314][315] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company reports on equity security transactions, detailing stock repurchases under its publicly announced program - No sales of unregistered equity securities occurred during the three months ended October 28, 2023[316] Issuer Purchases of Equity Securities (in millions, except per share data) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan or Programs | | :-------------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------- | :----------------------------------------------------------------------------------- | | July 30, 2023 to August 26, 2023 | 0.8 | $59.23 | 0.8 | $399.5 | | August 27, 2023 to September 23, 2023 | — | $— | — | $399.5 | | September 24, 2023 to October 28, 2023 | — | $— | — | $399.5 | | Total | 0.8 | $59.23 | 0.8 | | - As of October 28, 2023, $399.5 million remained available for future stock repurchases under the authorized program[321] Item 5. Other Information Additional information is provided, noting no Rule 10b5-1 trading arrangements were adopted or terminated by officers or directors - No director or Section 16 officer adopted or terminated any Rule 10b5-1 trading or similar arrangements during the quarter ended October 28, 2023[322] Item 6. Exhibits All exhibits filed with the Form 10-Q, including key agreements and corporate documents, are listed - The exhibits include various agreements and documents such as merger agreements (e.g., Inphi, Cavium), corporate governance documents (Certificate of Incorporation, Bylaws), debt instruments (Senior Notes, Term Loan Agreements), equity incentive plans, and certifications (Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350)[324][325][326][327][328][329][330][331][332][333][334][335][336][337][338][339][341][342][343][344][345][346][347][348][349][350][351][352][353][354][355][356][357][358][359][360][361][362][363][364][365][366][367][368][369][370][371][372][373][375][376][377][378][379][380][381][382][383][384][385][386][387][388][389][390][391][392][393][394][396][397][398] Signatures The required signatures for the Form 10-Q, certifying its submission by the Chief Financial Officer, are included - The report was signed by Willem Meintjes, Chief Financial Officer (Principal Financial Officer), on December 1, 2023[400]