Adeia(ADEA) - 2023 Q4 - Annual Report

Part I Business Adeia Inc. is an intellectual property (IP) licensing company focused on the entertainment, media, consumer electronics, and semiconductor industries, holding approximately 10,950 patent assets globally, with a business model based on licensing these innovations - Adeia operates as an innovation incubator and IP licensing platform for the media, entertainment, consumer electronics, and semiconductor industries[10] - As of December 31, 2023, the company's IP portfolio consists of approximately 10,950 media and semiconductor patent assets worldwide[13][28] - On October 1, 2022, the company separated from its product business, which became the independent, publicly-traded Xperi Inc. Adeia retained the IP licensing business[14] - The company's strategy focuses on expanding licensing in high-growth areas like Over-the-Top (OTT) video, accelerating the semiconductor business (especially in hybrid bonding), and entering adjacent markets such as ad-tech, automotive, and gaming[23][24][25] - As of December 31, 2023, Adeia had approximately 130 full-time employees, located almost entirely in the U.S[30] Risk Factors The company faces risks from the 2022 Separation, business operations (patent strength, license renewals, litigation), financial (debt, interest rates, NOL limitations), regulatory, and common stock ownership - Risks from the Separation include not achieving expected benefits, potential significant tax liabilities if the spin-off fails to qualify for tax-free treatment, and managing indemnified liabilities[37][42][44] - Business operations are highly dependent on the strength of the patent portfolio, the ability to renew expiring license agreements on favorable terms, and the necessity of costly litigation to enforce IP rights[38][57][59][66] - A small number of customers represent a significant portion of revenue, with four customers accounting for 45.4% of aggregate revenue in 2023[61] - The company has significant indebtedness ($601.3 million as of Dec 31, 2023), which is subject to floating interest rates, posing a risk of increased debt service costs[96][98] - The ability to use net operating loss carryforwards ($2.6 million federal, $884.7 million state as of Dec 31, 2023) to offset future income may be limited by ownership changes under Section 382 of the Code[108] Unresolved Staff Comments Not applicable - Not applicable[129] Cybersecurity Adeia's cybersecurity risk management is integrated into its overall risk program, based on NIST and ISO frameworks, with Board oversight delegated to the Audit Committee and led by the VP of IT - The company's cybersecurity program is based on industry frameworks like NIST and ISO, with regular employee training and simulated phishing attacks[129] - The Board of Directors has oversight responsibility, which it has delegated to the Audit Committee. The VP of Information Technology, with over 25 years of experience, has primary day-to-day oversight[130][131] - Adeia engages third-party assessors for penetration testing and has retained an outside cybersecurity firm for managed security services[129][130] Properties The company leases its 62,000 sq ft corporate headquarters in San Jose, CA, and smaller offices in Burbank, CA, and Morrisville, NC, which are deemed adequate - The company leases its 62,000 sq ft corporate headquarters in San Jose, CA, and additional offices in Burbank, CA, and Morrisville, NC[132] Legal Proceedings Adeia is involved in several legal proceedings to enforce patent rights, including infringement cases against Videotron, Bell Canada, and Telus, and breach of contract cases against Shaw Cablesystems and X Corporation - The company is appealing an unfavorable decision in its patent infringement case against Videotron in Canada. A hearing was held in November 2023, and a decision is pending[135] - Adeia is also appealing an unfavorable decision in its patent infringement cases against Bell and Telus in Canada. A hearing was held in November 2023, and a decision is pending. The company paid $2.8 million for expense reimbursement in Q2 2023 related to this matter[137] - In October 2023, Adeia filed a breach of contract complaint against Shaw Cablesystems for failure to pay royalties[139] - In August 2023, Adeia filed a breach of contract complaint against X Corp. (formerly Twitter) for failure to pay royalties. X Corp. has since filed a countersuit for declaratory judgment of non-infringement[140][141] Mine Safety Disclosures Not applicable - Not applicable[141] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Adeia Inc.'s common stock trades on Nasdaq under "ADEA", with 355 stockholders of record as of Feb 7, 2024, and the company returns capital via quarterly dividends ($0.05 per share) and a stock repurchase program ($77.8 million remaining as of Dec 31, 2023) - The company's common stock trades on Nasdaq under the ticker "ADEA" since October 3, 2022, following the spin-off[142] - The Board has declared a quarterly cash dividend of $0.05 per share since July 2020[122] Stock Repurchase Program Status as of Dec 31, 2023 | Metric | Amount (in millions) | | :--- | :--- | | Initial Authorization (June 2020) | $150.0 | | Additional Authorization (April 2021) | $100.0 | | Total Authorization | $250.0 | | Repurchases during 2023 | $0.0 | | Remaining for Repurchase | $77.8 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Adeia's financial condition and results, detailing the impact of the October 2022 spin-off, revenue decrease in 2023, stable operating expenses, liquidity, and critical accounting policies Results of Operations For fiscal year 2023, total revenue decreased by 11.4% to $388.8 million from $438.9 million in 2022, driven by decreases in both non-recurring and recurring revenue, while R&D expenses increased by 22% and SG&A decreased by 30% Revenue Comparison (2021-2023) | Year | Revenue (in thousands) | Change from Prior Year | % Change | | :--- | :--- | :--- | :--- | | 2023 | $388,788 | $(50,145) | (11)% | | 2022 | $438,933 | $47,721 | 12% | | 2021 | $391,212 | - | - | Recurring vs. Non-Recurring Revenue (2022 vs 2023) | Revenue Type | 2023 (in millions) | 2022 (in millions) | Change (in millions) | % Change | | :--- | :--- | :--- | :--- | :--- | | Recurring | $338.7 | $363.6 | $(24.9) | (6.8)% | | Non-recurring | $50.1 | $75.3 | $(25.2) | (33.5)% | Operating Expenses Comparison (2022 vs 2023) | Expense Category | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Research & Development | $54,264 | $44,579 | 22% | | Selling, General & Administrative | $95,226 | $135,630 | (30)% | | Amortization Expense | $93,735 | $97,077 | (3)% | | Litigation Expense | $9,333 | $8,587 | 9% | - The decrease in 2023 revenue was primarily due to large license agreements with Micron and a consumer electronics/OTT provider recognized in 2022, partially offset by new agreements with Kioxia, Western Digital, and Samsung in 2023[166] Liquidity and Capital Resources As of December 31, 2023, Adeia held $83.6 million in cash, cash equivalents, and marketable securities, a decrease from $114.6 million at year-end 2022, primarily due to $148.0 million in debt repayments and $21.3 million in dividend payments, offset by $152.8 million in cash from operations Cash Flow Summary (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $152,755 | $183,023 | | Net cash used in investing activities | $(34,488) | $(2,913) | | Net cash used in financing activities | $(178,262) | $(263,257) | - As of Dec 31, 2023, the company had outstanding long-term debt of $601.3 million, with $40.5 million payable within 12 months, plus an additional $29.1 million excess cash flow payment due[202] - The company has a guarantee liability of $18.5 million as of Dec 31, 2023, related to an agreement with a third party entered into prior to the Separation of Xperi Inc[204] - The stock repurchase plan had $77.8 million remaining available as of Dec 31, 2023, with no repurchases made during the year[208] Critical Accounting Policies and Estimates Management identifies revenue recognition and accounting for income taxes as the most critical accounting policies, requiring significant judgment in allocating transaction prices, estimating variable consideration, and assessing deferred tax assets and uncertain tax positions - Revenue recognition requires significant judgment in allocating transaction prices for long-term license contracts between past infringement releases and prospective licenses, based on relative standalone selling prices[220][223] - Estimating quarterly royalties before receiving licensee reports requires significant assumptions about sales and usage trends, which can materially impact reported revenue[222] - Accounting for income taxes involves assessing the likelihood of realizing deferred tax assets and establishing valuation allowances, as well as estimating liabilities for uncertain tax positions[224][225] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from its $601.3 million floating-rate debt (a 1% increase would raise annual interest expense by approximately $5.7 million), investment risk from marketable securities, and bank liquidity risk from $48.8 million in operating accounts - The company has $601.3 million in floating-rate debt. A 1% increase in the effective interest rate would increase annual interest expense by about $5.7 million[228] - The company holds $29.0 million in marketable securities, exposing it to investment risk from market value fluctuations[229] - As of December 31, 2023, the company had $48.8 million in cash in operating accounts, posing a liquidity risk if the holding institutions were to fail[230] Financial Statements and Supplementary Data This section indicates that the company's Consolidated Financial Statements and related notes for the three-year period ended December 31, 2023, are provided in Item 15(a)(1) of the Annual Report Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable - Not applicable[233] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2023, and management's report on internal control over financial reporting also concluded effectiveness, which was audited and confirmed by PricewaterhouseCoopers LLP - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[236] - Management assessed internal control over financial reporting as effective as of December 31, 2023, based on the COSO framework, an assessment audited and confirmed by PricewaterhouseCoopers LLP[238] Other Information The company reports no information required to be disclosed in a Form 8-K during Q4 2023 that was not reported, and no directors or officers adopted or terminated a Rule 10b5-1 trading plan during the quarter - No information was required to be disclosed in a Form 8-K during Q4 2023 that was not already reported[241] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable - Not applicable[241] Part III Directors, Executive Officers and Corporate Governance The information required for this item, including details on executive officers, directors, board committees, and Section 16(a) reporting, is incorporated by reference from the company's Proxy Statement for its 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the 2024 Proxy Statement[242] Executive Compensation The information required for this item, including the Compensation Discussion and Analysis, executive compensation tables, and the Compensation Committee Report, is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[243] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item, including details on equity compensation plans and security ownership by beneficial owners and management, is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[243] Certain Relationships and Related Transactions, and Director Independence The information required for this item, covering related party transactions and director independence, is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[243] Principal Accountant Fees and Services The information required for this item, detailing fees paid to and services provided by the principal accountant, is incorporated by reference from the company's 2024 Proxy Statement under the caption "Ratification of Appointment of Independent Registered Public Accounting Firm" - Information is incorporated by reference from the 2024 Proxy Statement[244] Part IV Exhibits and Financial Statement Schedules This section contains the company's consolidated financial statements, the report from the independent registered public accounting firm, financial statement schedules, and a list of all exhibits filed with the Form 10-K Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on Adeia Inc.'s consolidated financial statements and internal control effectiveness, identifying "Revenue Recognition – Allocation of Transaction Price to Performance Obligations" as a Critical Audit Matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified (clean) opinion on the financial statements and the effectiveness of internal controls[248] - A Critical Audit Matter was identified related to the allocation of transaction price to performance obligations in revenue recognition, highlighting the significant management judgment required[254][255] Consolidated Financial Statements The consolidated financial statements present Adeia's financial position and results, reporting $67.4 million net income on $388.8 million revenues for 2023, with total assets of $1.11 billion and total liabilities of $748.9 million Consolidated Statement of Operations Highlights (Year Ended Dec 31, 2023) | Metric | Amount (in thousands) | | :--- | :--- | | Revenue | $388,788 | | Operating Income from Continuing Operations | $136,230 | | Net Income from Continuing Operations | $67,372 | | Net Income Attributable to the Company | $67,372 | | Diluted EPS from Continuing Operations | $0.60 | Consolidated Balance Sheet Highlights (As of Dec 31, 2023) | Metric | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $205,842 | | Total Assets | $1,105,556 | | Total Current Liabilities | $102,038 | | Long-term Debt, net | $519,550 | | Total Liabilities | $748,934 | | Total Stockholders' Equity | $356,622 | Notes to Consolidated Financial Statements The notes provide detailed disclosure on accounting policies and financial statement captions, covering the 2022 spin-off, revenue recognition, goodwill, debt, stock-based compensation, and income tax positions, including a $120.3 million refund claim in South Korea - Revenue is disaggregated by Media ($343.4 million) and Semiconductor ($45.4 million) for 2023[326] - As of Dec 31, 2023, the company has $526.4 million in remaining revenue to be recognized from unsatisfied performance obligations under existing fixed-fee contracts[333] - The company has outstanding long-term debt of $601.3 million under its Refinanced Term B Loans, maturing in 2028. The interest rate was 9.9% as of Dec 31, 2023[397][402] - The company has a pending income tax refund claim in South Korea, resulting in a noncurrent income tax receivable of $120.3 million as of Dec 31, 2023[442] Form 10-K Summary None - None[474]