Marvell today reported financial results for the second quarter of fiscal year 2017, ended July 30, 2016

Marvell Technology Group Ltd.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

Three Months Ended

Six Months Ended

July 30,

April 30,

August 1,

July 30,

August 1,

2016

2016

2015

2016

2015

Net revenue

$ 626,404

$ 540,822

$  710,492

$ 1,167,226

$ 1,434,780

Cost of goods sold

287,608

259,210

461,719

546,818

812,872

Gross profit

338,796

281,612

248,773

620,408

621,908

Operating expenses:

Research and development

228,562

241,271

297,321

469,833

577,435

Selling and marketing

31,094

31,379

30,841

62,473

67,015

General and administrative

37,173

35,623

691,230

72,796

732,257

Amortization of acquired intangible assets

2,461

2,461

2,568

4,922

5,136

Total operating expenses

299,290

310,734

1,021,960

610,024

1,381,843

Operating income (loss)

39,506

(29,122)

(773,187)

10,384

(759,935)

Interest and other income, net

6,284

1,488

6,790

7,772

11,957

Income (loss) before income taxes

45,790

(27,634)

(766,397)

18,156

(747,978)

Provision (benefit) for income taxes

(5,515)

(4,955)

5,543

(10,470)

9,872

Net income (loss)

$   51,305

$ (22,679)

$ (771,940)

$      28,626

$  (757,850)

Basic net income (loss) per share

$       0.10

$     (0.04)

$       (1.49)

$          0.06

$        (1.47)

Diluted net income (loss) per share

$       0.10

$     (0.04)

$       (1.49)

$          0.06

$        (1.47)

Shares used in computing basic earnings (loss) per share

511,235

508,794

516,368

510,014

516,298

Shares used in computing diluted earnings (loss) per share

514,314

508,794

516,368

513,669

516,298

Marvell Technology Group Ltd.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands)

July 30,

January 30,

Assets

2016

2016

Current assets:

Cash, cash equivalents and short-term investments

$ 1,624,009

$  2,282,749

Accounts receivable, net

348,683

323,300

Inventories

202,717

210,017

Prepaid expenses and other current assets

54,870

102,560

Total current assets

2,230,279

2,918,626

Property and equipment, net

274,774

299,540

Long-term investments

8,974

11,296

Goodwill and acquired intangible assets, net

2,042,063

2,047,955

Other non-current assets

160,586

164,710

Total assets

$ 4,716,676

$  5,442,127

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable

$    212,950

$     180,372

Accrued liabilities

219,489

253,691

Carnige Mellon University accrued litigation settlement

-

736,000

Deferred income

72,049

55,722

Total current liabilities

504,488

1,225,785

Other non-current liabilities

53,100

76,219

Total liabilities

557,588

1,302,004

Shareholders' equity:

Common stock

1,022

1,015

Additional paid-in capital

3,075,579

3,028,921

Accumulated other comprehensive income

4,015

(795)

Retained earnings

1,078,472

1,110,982

Total shareholders' equity

4,159,088

4,140,123

Total liabilities and shareholders' equity

$ 4,716,676

$  5,442,127

Marvell Technology Group Ltd.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

Three Months Ended

Six Months Ended

July 30,

August 1,

July 30,

August 1,

2016

2015

2016

2015

Cash flows from operating activities:

Net income (loss)

$   51,305

$ (771,940)

$    28,626

$ (757,850)

Adjustments to reconcile net income (loss) to net cash provided

  by operating activities:

Depreciation and amortization

26,866

25,191

53,980

51,811

Share-based compensation

37,196

36,674

61,649

69,895

Amortization of acquired intangible assets

2,946

3,053

5,892

6,106

Non-cash restructuring and other related charges

129

900

1,025

1,473

Other non-cash expense, net

589

2,282

1,950

1,721

Excess tax benefits from share-based compensation

(5)

(7)

(5)

(25)

Changes in assets and liabilities:

Accounts receivable

(68,025)

(23,907)

(25,383)

3,234

Inventories

(6,364)

12,903

7,234

(18,415)

Prepaid expenses and other assets(a)

6,658

9,359

(9,035)

11,328

Accounts payable

20,437

(5,167)

40,359

11,958

Accrued liabilities and other non-current liabilities (a)

(7,741)

753,191

(766,243)

741,615

Accrued employee compensation

(22,270)

(14,507)

(15,118)

(28,931)

Deferred income

17,561

(1,441)

16,327

(8,468)

Net cash provided by (used in) operating activities

59,282

26,584

(598,742)

85,452

Cash flows from investing activities:

Purchases of available-for-sale securities

(110,358)

(173,465)

(203,723)

(566,365)

Sales and maturities of available-for-sale securities

116,506

222,295

486,565

469,790

Purchase of time deposits

(75,000)

-

(125,000)

-

Distribution from (investments in) privately-held companies

-

208

-

208

Purchases of technology licenses

(3,995)

(2,071)

(8,045)

(5,677)

Purchases of property and equipment

(12,509)

(16,986)

(24,377)

(24,320)

Purchase of equipment previously leased 

-

-

-

(10,240)

Net cash provided by (used in) investing activities

(85,356)

29,981

125,420

(136,604)

Cash flows from financing activities:

Repurchase of common stock (b)

-

(175,311)

-

(195,584)

Proceeds from employee stock plans

244

44,161

559

57,174

Minimum tax withholding paid on behalf of employees 

 for net share settlement

(112)

(697)

(15,382)

(23,007)

Dividend payments to shareholders

(30,675)

(31,194)

(61,136)

(62,104)

Payments on technology license obligations

(4,858)

(4,732)

(10,152)

(8,799)

Excess tax benefits from share-based compensation

5

7

5

25

Net cash used in financing activities

(35,396)

(167,766)

(86,106)

(232,295)

Net increase (decrease) in cash and cash equivalents

(61,470)

(111,201)

(559,428)

(283,447)

Cash and cash equivalents at beginning of period

780,222

1,038,731

1,278,180

1,210,977

Cash and cash equivalents at end of period

$ 718,752

$  927,530

$  718,752

$  927,530

(a) 

In the six months ended July 30, 2016, the Company paid a total of $750.0 million to CMU in connection with the settlement agreement that was reached in February 2016. Of this settlement, the Company recognized a charge of $736.0 million in fiscal 2016. The remaining $14.0 million was recorded in prepaid expenses and other assets, to be recognized in cost of good sold over the remaining term of the license from February 2016 through April 2018. For further detail of the accounting for the settlement, see "Note 13 – Carnegie Mellon University Settlement" in the Notes to the Unaudited Condensed  Consolidated Financial Statements included in the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 2016. 

(b) 

Marvell records all repurchases of common stock consistent with the way it records investment purchases and sales, based on trade date in accordance with U.S. GAAP. In the three and six months ended August 1, 2015, cash paid for repurchase of Marvell common shares was adjusted for repurchases of $19.7 million made within the final three days of the quarter that are accrued but not yet paid due to the standard settlement period that normally takes up to three days. 

Reconciliations from GAAP to Non-GAAP

(Unaudited)

(In thousands, except per share amounts)

Three Months Ended

Six Months Ended

July 30,

April 30,

August 1,

July 30,

August 1,

2016

2016(d)

2015

2016

2015

GAAP net income (loss)

$   51,305

$ (22,679)

$ (771,940)

$   28,626

$ (757,850)

Share-based compensation

37,196

24,453

36,674

61,649

69,895

Restructuring and other related charges (a)

721

4,441

13,000

5,162

13,592

Amortization of acquired intangible assets

2,946

2,946

3,346

5,892

6,839

Litigation matters (b)

(115)

100

748,117

(15)

746,417

Other (c)

103

(2,743)

10,205

173

31,587

Non-GAAP net income, as reported

$   92,156

$     6,518

$    39,402

$ 101,487

$  110,480

Non-GAAP net income, as adjusted (d)

$     9,331

GAAP weighted average shares - diluted

514,314

508,794

516,368

513,669

516,298

Non-GAAP adjustment

12,139

13,569

16,574

10,739

17,753

Non-GAAP weighted average shares diluted (e)

526,453

522,363

532,942

524,408

534,051

GAAP diluted net income per share

$       0.10

$     (0.04)

$       (1.49)

$       0.06

$       (1.47)

Non-GAAP diluted net income per share, as reported

$       0.18

$       0.01

$        0.07

$       0.19

$        0.21

Non-GAAP diluted net income per share, as adjusted (d)

$       0.02

GAAP gross profit:

$ 338,796

$ 281,612

$  248,773

$ 620,408

$  621,908

Share-based compensation

2,832

1,802

2,012

4,634

3,559

Restructuring and other related charges (a)

-

-

-

-

-

Amortization of acquired intangible assets

485

485

778

970

1,703

Litigation matters (b)

-

-

81,390

-

79,690

Non-GAAP gross profit

$ 342,113

$ 283,899

$  332,953

$ 626,012

$  706,860

GAAP gross margin

54.1%

52.1%

35.0%

53.2%

43.3%

Share-based compensation

0.4%

0.3%

0.3%

0.3%

0.3%

Restructuring and other related charges (a)

0.0%

0.0%

0.0%

0.0%

0.0%

Amortization of acquired intangible assets

0.1%

0.1%

0.1%

0.1%

0.1%

Litigation matters (b)

0.0%

0.0%

11.5%

0.0%

5.6%

Non-GAAP gross margin

54.6%

52.5%

46.9%

53.6%

49.3%

GAAP research and development:

$ 228,562

$ 241,271

$  297,321

$ 469,833

$  577,435

Share-based compensation

(28,581)

(24,396)

(27,807)

(52,977)

(52,588)

Restructuring and other related charges (a)

329

(813)

(11,680)

(484)

(11,680)

Litigation matters (b)

-

-

(5,000)

-

(5,000)

Other (c)

(174)

49

(134)

(125)

(134)

Non-GAAP research and development

$ 200,136

$ 216,111

$  252,700

$ 416,247

$  508,033

GAAP selling and marketing:

$   31,094

$   31,379

$    30,841

$   62,473

$    67,015

Share-based compensation

(3,315)

(2,942)

(2,707)

(6,257)

(5,284)

Restructuring and other related charges (a)

(27)

1

-

(26)

-

Other (c)

71

(304)

-

(233)

-

Non-GAAP selling and marketing

$   27,823

$   28,134

$    28,134

$   55,957

$    61,731

GAAP general and administrative:

$   37,173

$   35,623

$    36,563

$   72,796

$    77,590

Share-based compensation

(2,468)

4,687

(4,148)

2,219

(8,464)

Restructuring and other related charges (a)

(1,023)

(3,629)

(1,320)

(4,652)

(1,912)

Litigation matters (b)

115

(100)

(7,060)

15

(7,060)

Other (c)

-

(886)

(2,748)

(886)

(21,050)

Non-GAAP general and administrative

$   33,797

$   35,695

$    21,287

$   69,492

$    39,104

GAAP Carnegie Mellon University litigation settlement

$           -

$           -

$  654,667

$           -

$  654,667

Litigation matters (b)

-

-

(654,667)

-

(654,667)

Non-GAAP Carnegie Mellon University litigation settlement

$           -

$           -

$            -

$           -

$            -

GAAP provision (benefit) for income taxes

$   (5,515)

$   (4,955)

$      5,543

$ (10,470)

$      9,872

Other (c)

-

3,884

(7,323)

1,071

(10,403)

Non-GAAP provision (benefit) for income taxes, as reported

$   (5,515)

$   (1,071)

$     (1,780)

$   (9,399)

$        (531)

Non-GAAP provision (benefit) for income taxes, as adjusted (d)

$   (3,884)

(a) 

Restructuring and other related charges include costs that qualify under U.S. GAAP as restructuring costs and other incremental charges that are a direct result of restructuring. Examples of other incremental charges include impairment of equipment specifically identified as part of the restructuring action. 

(b) 

The amounts recorded represent charges recognized for pending litigation proceedings.

(c) 

Other costs for each of the three months ended July 30, 2016, April 30, 2016 and August 1, 2015, and the six months ended July 30, 2016 and August 1, 2015 include expenses related to retention bonuses offered to employees expected to remain through the ramp down of certain operations related to the mobile business, as well as the closure of certain design center operations in Europe.  Other costs for the three months ended April 30, 2016 and August 1, 2015, and the six months ended July 30, 2016 and August 1, 2015 also include costs for the surety bonds related to the litigation with CMU that was settled in February 2016. In addition, other costs for the six months ended August 1, 2015 include a payment of $15.4 million due to Dr. Sehat Sutardja, the Company's former Chief Executive Officer (see "Note 14 – Related Party Transactions" in the Notes to the Consolidated Financial Statements set forth in the Company's Annual Report on Form 10-K for fiscal 2016). The related tax effect of the payment to Dr. Sutardja is also included in other costs for the three months ended April 30, 2016, and the six months ended July 30, 2016 and August 1, 2015. The tax effect of certain restructuring charges in the three and six months ended August 1, 2015 is also included in other costs for those periods.

(d) 

For the three months ended April 30, 2016, the Company made a correction to the non-GAAP benefit for income taxes of $1,071 thousand that it previously reported in its fiscal 2017 first quarter earnings announcement on Wednesday, July 27, 2016. As a result, the Company now reports non-GAAP net income, as adjusted of $9,331 thousand, non-GAAP earnings per share, as adjusted of $0.02 per share, and non-GAAP benefit for income taxes, as adjusted of $3,884 thousand for the three months ended April 30, 2016. 

(e) 

For purposes of calculating non-GAAP diluted net income per share, the GAAP diluted weighted average shares outstanding is adjusted to exclude the potential benefits of share-based compensation costs expected to be incurred in future periods but not yet recognized in the financial statements and to also include the dilutive/anti-dilutive effects of common stock options and restricted stock units, as applicable. The expected compensation costs are treated as proceeds assumed to be used to repurchase shares under the GAAP treasury stock method.