Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 000-30877
Marvell Technology Group Ltd.
(Exact name of registrant as specified in its charter)
Bermuda
 
77-0481679
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda
(441) 296-6395
(Address of principal executive offices, Zip Code and registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨ 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨ 
 
 
Emerging growth company
¨ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
The number of common shares of the registrant outstanding as of August 24, 2017 was 495.8 million shares.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
 

1


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value per share)
 
 
July 29,
2017
 
January 28,
2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
630,501

 
$
814,092

Short-term investments
943,006

 
854,268

Accounts receivable, net
371,697

 
335,384

Inventories
175,355

 
170,842

Prepaid expenses and other current assets
46,491

 
58,771

Assets held for sale
41,896

 
57,077

Total current assets
2,208,946

 
2,290,434

Property and equipment, net
235,354

 
243,397

Goodwill and acquired intangible assets, net
1,994,743

 
1,996,880

Other non-current assets
148,407

 
117,939

Total assets
$
4,587,450

 
$
4,648,650

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
153,862

 
$
143,484

Accrued liabilities
106,351

 
143,491

Accrued employee compensation
131,272

 
139,647

Deferred income
70,063

 
63,976

Liabilities held for sale
1,015

 
5,818

Total current liabilities
462,563

 
496,416

Non-current income taxes payable
55,714

 
60,646

Other non-current liabilities
95,076

 
63,937

Total liabilities
613,353

 
620,999

Commitments and contingencies (Note 9)

 

Shareholders’ equity:
 
 
 
Common shares, $0.002 par value
991

 
1,012

Additional paid-in capital
2,752,541

 
3,016,775

Accumulated other comprehensive income
899

 
23

Retained earnings
1,219,666

 
1,009,841

Total shareholders’ equity
3,974,097

 
4,027,651

 
 
 
 
Total liabilities and shareholders’ equity
$
4,587,450

 
$
4,648,650

See accompanying notes to unaudited condensed consolidated financial statements

2


MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
 
Three Months Ended
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Net revenue
$
604,750

 
$
597,346

 
$
1,177,459

 
$
1,110,979

Cost of goods sold
239,572

 
270,427

 
466,770

 
510,360

Gross profit
365,178

 
326,919

 
710,689

 
600,619

Operating expenses:
 
 
 
 
 
 
 
Research and development
180,871

 
207,943

 
368,967

 
427,351

Selling, general and administrative
55,659

 
67,896

 
110,763

 
131,964

Restructuring related charges
4,285

 
721

 
5,171

 
5,162

Total operating expenses
240,815

 
276,560

 
484,901

 
564,477

Operating income from continuing operations
124,363

 
50,359

 
225,788

 
36,142

Interest and other income, net
7,188

 
6,284

 
10,521

 
7,772

Income from continuing operations before income taxes
131,551

 
56,643

 
236,309

 
43,914

Provision (benefit) for income taxes
(3,899
)
 
(5,823
)
 
1,267

 
(11,260
)
Income from continuing operations, net of tax
135,450

 
62,466

 
235,042

 
55,174

Income (loss) from discontinued operations, net of tax
29,809

 
(11,161
)
 
36,838

 
(26,548
)
Net income
$
165,259

 
$
51,305

 
$
271,880

 
$
28,626

 
 
 
 
 
 
 
 
Net income (loss) per share - Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.27

 
$
0.12

 
$
0.47

 
$
0.11

Discontinued operations
$
0.06

 
$
(0.02
)
 
$
0.07

 
$
(0.05
)
Net income per share - basic
$
0.33

 
$
0.10

 
$
0.54

 
$
0.06

 
 
 
 
 
 
 
 
Net income (loss) per share - Diluted:
 
 
 
 
 
 
 
       Continuing operations
$
0.26

 
$
0.12

 
$
0.46

 
$
0.11

       Discontinued operations
$
0.06

 
$
(0.02
)
 
$
0.07

 
$
(0.05
)
Net income per share - diluted
$
0.32

 
$
0.10

 
$
0.53

 
$
0.06

 
 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
500,817

 
511,235

 
502,303

 
510,014

Diluted
510,309

 
514,314

 
513,951

 
513,669

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.06

 
$
0.06

 
$
0.12

 
$
0.12




See accompanying notes to unaudited condensed consolidated financial statements


3

Table of Contents

MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Net income
$
165,259

 
$
51,305

 
$
271,880

 
$
28,626

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in unrealized gain (loss) on marketable securities
556

 
1,976

 
(117
)
 
4,409

Net change in unrealized gain (loss) on cash flow hedges
(765
)
 
(183
)
 
993

 
401

Net change in pension liability
1,272

 

 

 

Other comprehensive income, net of tax
1,063

 
1,793

 
876

 
4,810

Comprehensive income, net of tax
$
166,322

 
$
53,098

 
$
272,756

 
$
33,436





See accompanying notes to unaudited condensed consolidated financial statements

4

Table of Contents

MARVELL TECHNOLOGY GROUP LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
Cash flows from operating activities:
 
 
 
Net income
$
271,880

 
$
28,626

Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
 
 
 
Depreciation and amortization
41,186

 
53,980

Share-based compensation
46,439

 
61,649

Amortization and write-off of acquired intangible assets
2,136

 
5,892

Deferred income taxes
2,791

 
(2,423
)
Excess tax benefits from share-based compensation

 
(5
)
Gain on sale of businesses
(47,464
)
 

Other
(1,886
)
 
2,975

Changes in assets and liabilities:
 
 
 
Accounts receivable
(36,313
)
 
(25,383
)
Inventories
(14,712
)
 
7,234

Prepaid expenses and other assets
8,882

 
(6,612
)
Accounts payable
3,968

 
40,359

Accrued liabilities and other non-current liabilities
(33,418
)
 
(30,243
)
Carnegie Mellon University accrued litigation settlement

 
(736,000
)
Accrued employee compensation
(8,375
)
 
(15,118
)
Deferred income
1,284

 
16,327

Net cash provided by (used in) operating activities
236,398

 
(598,742
)
Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(376,227
)
 
(203,723
)
Sales of available-for-sale securities
116,700

 
340,095

Maturities of available-for-sale securities
169,611

 
146,470

Purchase of time deposits
(150,000
)
 
(125,000
)
Maturities of time deposits
150,000

 

Return of investment from privately-held companies
2,388

 

Purchases of technology licenses
(1,701
)
 
(8,045
)
Purchases of property and equipment
(14,046
)
 
(24,377
)
Net proceeds from sale of businesses
72,229

 

Net cash provided by (used in) investing activities
(31,046
)
 
125,420

Cash flows from financing activities:
 
 
 
Repurchases of common stock
(387,558
)
 

Proceeds from employee stock plans
97,811

 
559

Minimum tax withholding paid on behalf of employees for net share settlement
(24,814
)
 
(15,382
)
Dividend payments to shareholders
(60,086
)
 
(61,136
)
Payments on technology license obligations
(14,296
)
 
(10,152
)
Excess tax benefits on share-based compensation

 
5

Net cash used in financing activities
(388,943
)
 
(86,106
)
Net decrease in cash and cash equivalents
(183,591
)
 
(559,428
)
Cash and cash equivalents at beginning of period
814,092

 
1,278,180

Cash and cash equivalents at end of period
$
630,501

 
$
718,752

See accompanying notes to unaudited condensed consolidated financial statements

5

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Note 1. Basis of Presentation

The unaudited condensed consolidated financial statements of Marvell Technology Group Ltd., a Bermuda exempted company, and its wholly owned subsidiaries (the “Company”), as of and for the three and six months ended July 29, 2017, have been prepared as required by the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted as permitted by the SEC. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company's fiscal year 2017 audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2017. In the opinion of management, the financial statements include all adjustments, including normal recurring adjustments and other adjustments that are considered necessary for fair presentation of the Company’s financial position and results of operations. All inter-company accounts and transactions have been eliminated. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for the entire year. The Company's financial results for prior periods presented herein have been recast to reflect certain businesses that were classified as discontinued operations during the fourth quarter of fiscal year 2017 and second quarter of fiscal year 2018. See Note 3. Discontinued Operations for additional information. Certain prior year amounts have been reclassified to conform to current year presentation. These amounts were not material to any of the periods presented.

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. Accordingly, every fifth or sixth fiscal year will have a 53-week period. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal 2017 had a 52-week year. Fiscal 2018 is a 53-week year.

During the first fiscal quarter of 2018, the Company recorded certain out-of-period adjustments of $4.7 million related to revenue-related accruals and $3.2 million related to other expenses.  The net effect of these out-of-period adjustments resulted in a $7.9 million increase in income from continuing operations for the six months ended July 29, 2017 and an increase in earnings per share from continuing operations of $0.02 per share, as well as contributing to the increase in revenue and gross margin for the six months ended July 29, 2017. 

Note 2. Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Effective

In May 2014, the FASB issued a new accounting standard on the recognition of revenue from contracts with customers that will supersede nearly all existing revenue recognition guidance under GAAP. The new standard will require an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses, in particular, contracts with more than one performance obligation, as well as the accounting for certain costs to obtain or fulfill a contract with a customer, and provides for additional disclosures with respect to revenue and cash flows arising from contracts with customers. Public entities are required to apply the amendments on either a full or modified retrospective basis for annual periods beginning after December 15, 2017 and for interim periods within those annual periods. This update will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company plans to adopt the standard on a modified retrospective basis, with the cumulative effect recognized at adoption.

The Company’s initial assessment has identified a change in revenue recognition timing on our component sales made to distributors. The Company expects to recognize revenue when the Company transfers control to the distributor rather than deferring recognition until the distributor sells the components. Other changes may be identified as the Company continues its implementation planning process. On the date of initial adoption, the Company will remove the deferred income on component sales made to distributors through a cumulative adjustment to retained earnings.

To date, the Company has completed the assessment phase of its revenue project and is currently in the implementation, planning, design and development phase, identifying systems and process changes necessary to enable compliance with the new standard. The Company will continue to monitor relevant elements and finalize its evaluation of any changes to its accounting policies and disclosures.

In January 2016, the FASB issued an accounting standard update that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The

6

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In February 2016, the FASB issued a new standard on the accounting for leases, which requires a lessee to record a right-of-use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve months. The standard also expands the required quantitative and qualitative disclosures for lease arrangements. The standard is effective for the Company beginning in the first quarter of fiscal year 2020. The Company is currently evaluating the effect this new guidance will have on its consolidated financial statements.

In June 2016, the FASB issued a new standard requiring financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard eliminates the probable initial recognition in current GAAP and reflects an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. The standard is effective for the Company beginning in the first quarter of fiscal year 2021. The Company does not expect the adoption of this guidance will have a material effect on its consolidated financial statements.

In August 2016, the FASB issued an accounting standards update to add or clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The amendments in the update provide guidance on eight specific cash flow issues and is effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted, including adoption in an interim period. The amendments to the guidance should be applied using a retrospective transition method for each period presented and, if it is impracticable to apply all of the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company does not expect the adoption of this guidance to have a material effect on the Company's consolidated financial statements.

In October 2016, the FASB issued new guidance that simplifies the accounting for the income tax effects of intra-entity transfers and will require companies to recognize the income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs. Previous guidance required companies to defer the income tax effects of intra-entity transfers of assets until the asset had been sold to an outside party or otherwise recognized. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In November 2016, the FASB issued new guidance that requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. As a result, companies will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

In January 2017, the FASB issued an accounting standards update that revises the definition of a business. The amendments provide a more robust framework for determining when a set of assets and activities is a business. The update is intended to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted for certain transactions, as specifically described in the guidance. The Company is evaluating the effect this new guidance will have on its consolidated financial statements.

In May 2017, the FASB issued an accounting standards update that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Unless the changes in terms or conditions meet all three criteria outlined in the guidance, modification accounting should be applied. The three criteria relate to changes in the terms and conditions that affect the fair value, vesting conditions, or classification of a share-based payment award. The amendment is effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.
Note 3. Discontinued Operations


7

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In November 2016, the Company announced a plan to restructure its operations to refocus its research and development, increase operational efficiency and improve profitability. As part of those actions, the Company began an active program to locate buyers for several businesses. The Company concluded that the divestitures of these businesses represented a strategic shift that has a major effect on the Company’s operations and financial results. These businesses were deemed not to align with the Company’s core business.

In February 2017, the Company entered into an agreement to sell the assets of one of these businesses, the Broadband operations. The transaction closed on April 4, 2017. Based on the terms of the agreement, the Company received sale consideration of $23 million in cash proceeds. The divestiture resulted in a pre-tax gain on sale of $8.2 million, which is included within income from discontinued operations in the consolidated statements of operations.

In May 2017, the Company sold the assets of a second business, the LTE thin-modem operations. The transaction closed on May 18, 2017.  Based on the terms of the agreement, the Company received sale consideration of $52.9 million. The divestiture resulted in a pre-tax gain on sale of $34.0 million, which is included within income from discontinued operations in the consolidated statements of operations. The Company has classified this business as discontinued operations for all periods presented in its consolidated financial statements starting with the filing of this Form 10-Q for the three and six months ended July 29, 2017.

In June 2017, the Company entered into an agreement to sell the assets of a third business, the Multimedia operations. This business continues to be presented as discontinued operations in the consolidated statements of operations as of July 29, 2017. The transaction is expected to close in the third quarter of fiscal 2018.

The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations to the total assets and liabilities of the disposal group classified as held for sale that are presented separately in the consolidated balance sheets (in thousands):

 
July 29, 2017
January 28, 2017
Assets held for sale:
 
 
       Inventory
$
16,609

$
9,281

       Property and equipment, net
2,797

5,270

       Goodwill
20,775

36,636

       Acquired intangible assets, net

3,799

       Other
1,715

1,490

Assets held for sale for discontinued operations
41,896

56,476

Other assets held for sale

601

Total assets of the disposal group classified as held for sale
$
41,896

$
57,077

 
 
 
Liabilities held for sale:
 
 
       Deferred income
$
1,015

$
5,818


The following table presents a reconciliation of the major financial lines constituting the results of operations for discontinued operations to the net income (loss) from discontinued operations presented separately in the consolidated statements of operations (in thousands):


8

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
Three Months Ended
 
Six Months Ended
 
July 29, 2017
July 30, 2016
 
July 29, 2017
July 30, 2016
Net revenue
$
32,994

$
29,057

 
$
72,020

$
56,247

Operating costs and expenses:
 
 
 
 
 
       Cost of goods sold
16,870

17,182

 
36,978

36,460

       Research and development
14,555

20,948

 
32,169

41,998

       Selling, general and administrative
910

1,782

 
2,642

3,549

Operating costs and expenses
32,335

39,912

 
71,789

82,007

Income (loss) from discontinued operations before income taxes
659

(10,855
)
 
231

(25,760
)
Gain from sale of a business
34,032


 
42,187


Provision for income taxes
4,882

306

 
5,580

788

Income (loss) from discontinued operations, net of tax
$
29,809

$
(11,161
)
 
$
36,838

$
(26,548
)

The Company has elected not to report separately discontinued operations in its consolidated statements of cash flows since its effect is not material. Non-cash operating amounts reported for discontinued operations include share-based compensation expense of $1.1 million and $3.3 million for the three and six months ended July 29, 2017 and $4.1 million and $7.1 million for the three and six months ended July 30, 2016, respectively. Depreciation, amortization and capital expenditures are not material. The proceeds from sale of the LTE thin-modem business of $49.2 million and proceeds from sale of the Broadband business of $23.0 million are classified in investing activities for the six months ended July 29, 2017, and the gain on sale of such business is presented in operating activities. Due to the Company's transfer pricing arrangements, the Company generates income in most jurisdictions in which it operates, regardless of a loss that may exist on a consolidated basis. In addition, the Company recognized a tax expense of $4.6 million on the sale of is LTE thin-modem business for the three and six month period ended July 29, 2017. As such, the Company has reflected a tax expense of $4.9 million and $5.6 million for the three and six months ended July 29, 2017 and $0.3 million and $0.8 million for the three and six months ended July 30, 2016, respectively, attributable to discontinued operations.

Note 4. Restructuring Related Charges
In November 2016, the Company announced a restructuring plan intended to refocus its research and development, increase operational efficiency and improve profitability. As a continuation of such plan, the Company recorded restructuring related charges of $4.3 million and $5.2 million in the three and six months ended July 29, 2017. The following table presents details of charges recorded by the Company related to the restructuring actions described below (in thousands):
 

9

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
Three Months Ended
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Restructuring related charges:
 
 
 
 
 
 
 
     Severance and related costs
$
3,628

 
$
15

 
$
5,836

 
$
15

     Facilities and related costs
841

 
846

 
442

 
4,477

     Other exit-related costs
40

 

 
420

 

 
4,509

 
861

 
6,698

 
4,492

Release of reserves:
 
 
 
 
 
 
 
Severance
(194
)
 

 
(911
)
 
(86
)
       Facilities and related costs

 

 

 

Other exit-related
(100
)
 
(269
)
 
(170
)
 
(269
)
 
(294
)
 
(269
)
 
(1,081
)
 
(355
)
Impairment and write-off of assets:
 
 
 
 
 
 
 
Technology license

 

 
174

 

Equipment and other
70

 
129

 
(620
)
 
1,025

 
70

 
129

 
(446
)
 
1,025

 
 
 
 
 
 
 
 
Restructuring related charges
$
4,285

 
$
721

 
$
5,171

 
$
5,162


The Company is on track to complete activities related to the restructuring plan as previously announced.
The following table sets forth a reconciliation of the beginning and ending restructuring liability balances by each major type of cost associated with the restructuring charges (in thousands):
 
 
November 2016 & Other Prior Restructuring
 
 
 
Severance
and Related
Costs
 
Facilities
and Related
Costs
 
Other
Exit-Related
Costs
 
Total
Balance at January 28, 2017
$
17,000

 
$
2,474

 
$
4,625

 
$
24,099

Restructuring charges
11,921

 
442

 
420

 
12,783

Net cash payments
(20,049
)
 
(1,287
)
 
(4,122
)
 
(25,458
)
Release of reserves
(911
)
 
(70
)
 
(100
)
 
(1,081
)
Balance at July 29, 2017
$
7,961

 
$
1,559

 
$
823

 
$
10,343


The remaining accrued severance represents termination benefits determined to have been established under a substantive ongoing benefit arrangement for which payment was considered probable due to the timing of notification to certain additional employee groups, and is expected to be paid in the third quarter of fiscal 2018. Severance charges of $5.4 million and $6.1 million in the three and six months ended July 29, 2017, respectively, relate to discontinued operations and have been included in income (loss) from discontinued operations, net of tax, in the Company's condensed consolidated statements of operations. The accrued balance at July 29, 2017 for facilities and related costs includes remaining payments under lease obligations related to vacated space that are expected to be paid through fiscal 2020. Other exit-related costs are expected to be paid in the third quarter of fiscal 2018.

Note 5. Supplemental Financial Information (in thousands)
Consolidated Balance Sheets
 

10

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
July 29,
2017
 
January 28,
2017
Inventories:
 
 
 
Work-in-process
$
126,730

 
$
109,362

Finished goods
48,625

 
61,480

Total inventories
$
175,355

 
$
170,842


Inventory held by third-party logistics providers is recorded as consigned inventory on the Company’s unaudited condensed consolidated balance sheet. The amount of inventory held at third-party logistics providers was $16.7 million and $26.5 million at July 29, 2017 and January 28, 2017, respectively.

 
July 29,
2017
 
January 28,
2017
Property and equipment, net:
 
 
 
Machinery and equipment
$
518,940

 
$
578,248

Buildings and building improvements
194,399

 
194,290

Computer software
93,724

 
99,186

Land
53,373

 
53,373

Leasehold improvements
45,847

 
49,004

Furniture and fixtures
23,064

 
23,903

Construction in progress
16,269

 
11,240

 
945,616

 
1,009,244

Less: Accumulated depreciation and amortization
(710,262
)
 
(765,847
)
Total property and equipment, net
$
235,354

 
$
243,397



Current accrued liabilities are comprised of the following at July 29, 2017 and January 28, 2017, respectively:

 
July 29,
2017
 
January 28,
2017
Accrued liabilities:
 
 
 
Technology license obligations
$
24,421

 
$
21,905

Accrued royalties
16,646

 
17,349

Accrued rebates
16,250

 
26,095

Accrued legal related expenses
13,483

 
7,727

Unsettled investment trades
3,666

 
15,371

Restructuring liability
4,970

 
23,150

Other
26,915

 
31,894

Total accrued liabilities
$
106,351

 
$
143,491


Unsettled investment trades represent the accrual to address the timing difference between trade date and cash settlement date.

 
July 29,
2017
 
January 28,
2017
Deferred income:
 
 
 
Deferred revenue
$
94,039

 
$
87,968

Deferred cost of goods sold
(23,976
)
 
(23,992
)
Deferred income
$
70,063

 
$
63,976


11

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
 
July 29,
2017
 
January 28,
2017
Other non-current liabilities:
 
 
 
Deferred tax liabilities
$
52,593

 
$
38,777

Technology license obligations
39,592

 
14,949

Long-term accrued employee compensation
1,287

 
4,075

Other
1,604

 
6,136

Other non-current liabilities
$
95,076

 
$
63,937

Accumulated other comprehensive income (loss)
The changes in accumulated other comprehensive income (loss) by components are presented in the following tables (in thousands):
 
Unrealized Gain
(Loss) on
Marketable
Securities
 
Unrealized Gain
(Loss) on Cash
Flow Hedges
 
Total
Balance at January 28, 2017
$
(801
)
 
$
824

 
$
23

Other comprehensive income (loss) before reclassifications
(146
)
 
2,341

 
2,195

Amounts reclassified from accumulated other comprehensive income (loss)
29

 
(1,348
)
 
(1,319
)
Other comprehensive income (loss)
(117
)
 
993

 
876

Balance at July 29, 2017
$
(918
)
 
$
1,817

 
$
899

 
Unrealized Gain
(Loss) on
Marketable
Securities
 
Unrealized Gain
(Loss) on Cash
Flow Hedges
 
Total
Balance at January 30, 2016
$
(656
)
 
$
(139
)
 
$
(795
)
Other comprehensive income before reclassifications
4,471

 
788

 
5,259

Amounts reclassified from accumulated other comprehensive income
(62
)
 
(387
)
 
(449
)
Other comprehensive income
4,409

 
401

 
4,810

Balance at July 30, 2016
$
3,753

 
$
262

 
$
4,015


The amounts reclassified from accumulated other comprehensive income (loss) by components are presented in the following table (in thousands):
 
 
Three Months Ended
 
Six Months Ended
Affected Line Item in the Statements of Operations:
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Interest and other income, net:
 
 
 
 
 
 
 
     Available-for-sale securities:
 
 
 
 
 
 
 
     Marketable securities
$
12

 
$
178

 
$
(29
)
 
$
62

Operating costs and expenses:
 
 
 
 
 
 
 
     Cash flow hedges:
 
 
 
 
 
 
 
     Research and development
1,003

 
390

 
1,074

 
339

     Selling, general and administrative
265

 
54

 
274

 
48

Total
$
1,280

 
$
622

 
$
1,319

 
$
449



12

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Consolidated Statements of Operations

 
Three Months Ended
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Interest and other income, net:
 
 
 
 
 
 
 
Interest income
$
3,830

 
$
3,193

 
$
7,342

 
$
6,635

Net realized gain (loss) on investments
(53
)
 
261

 
(28
)
 
425

Currency remeasurement gain (loss)
(467
)
 
2,958

 
(557
)
 
1,017

Other income (expense)
3,958

 
(31
)
 
3,895

 
(90
)
Interest expense
(80
)
 
(97
)
 
(131
)
 
(215
)
 
$
7,188

 
$
6,284

 
$
10,521

 
$
7,772

Share Repurchase Program
The Company repurchased 23.6 million of its common shares for $386.1 million during the six months ended July 29, 2017. There were no shares repurchased during the six months ended July 30, 2016. The repurchased shares were retired immediately after the repurchases were completed.
As of July 29, 2017, a total of 278.5 million shares have been repurchased to date under the Company’s share repurchase program for a total $3.6 billion in cash and there was $498.0 million remaining available for future share repurchases.
Subsequent to the end of the quarter, the Company repurchased an additional 0.5 million of its common shares for $8.8 million at an average price per share of $17.43. 

13

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 6. Investments
The following tables summarize the Company’s investments (in thousands):
 
July 29, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. government and agency debt
$
209,351

 
$
84

 
$
(287
)
 
$
209,148

Foreign government and agency debt
7,846

 

 
(17
)
 
7,829

Municipal debt securities
20,965

 
13

 
(5
)
 
20,973

Corporate debt securities
465,001

 
869

 
(269
)
 
465,601

Equity securities
59,389

 

 
(1,310
)
 
58,079

Asset backed securities
31,373

 
22

 
(19
)
 
31,376

Held-to-maturity:
 
 
 
 
 
 
 
Time deposits
150,000

 

 

 
150,000

Total investments
$
943,925

 
$
988

 
$
(1,907
)
 
$
943,006

 
 
 
 
 
 
 
 

 
 
January 28, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. government and agency debt
$
185,584

 
$
86

 
$
(283
)
 
$
185,387

Foreign government and agency debt
13,425

 

 
(50
)
 
13,375

Municipal debt securities
27,916

 
4

 
(49
)
 
27,871

Corporate debt securities
432,603

 
281

 
(776
)
 
432,108

Asset backed securities
45,541

 
33

 
(47
)
 
45,527

Held-to-maturity:
 
 
 
 
 
 
 
Time deposits
150,000

 

 

 
150,000

Total short-term investments
855,069

 
404

 
(1,205
)
 
854,268

Long-term investments:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Auction rate securities
4,615

 

 

 
4,615

Long-term investments
4,615

 

 

 
4,615

Total investments
$
859,684

 
$
404

 
$
(1,205
)
 
$
858,883


Gross realized gains and gross realized losses on sales of available-for-sale securities are presented in the following tables (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Gross realized gains
$
16

 
$
280

 
$
85

 
$
668

Gross realized losses
(69
)
 
(19
)
 
(113
)
 
(243
)
Total net realized gains (losses)
$
(53
)
 
$
261

 
$
(28
)
 
$
425


14

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The contractual maturities of available-for-sale securities are presented in the following tables (in thousands):
 
 
July 29, 2017
 
January 28, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
482,883

 
$
482,877

 
$
423,151

 
$
423,058

Due between one and five years
401,653

 
402,050

 
423,669

 
422,995

Due over five years

 

 
12,864

 
12,830

 
$
884,536

 
$
884,927

 
$
859,684

 
$
858,883

For individual securities that have been in a continuous unrealized loss position, the fair value and gross unrealized loss for these securities aggregated by investment category and length of time in an unrealized position are presented in the following tables (in thousands):
 
 
July 29, 2017
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government and agency debt
$
106,164

 
$
(287
)
 
$

 
$

 
$
106,164

 
$
(287
)
Foreign government and agency debt
7,829

 
(17
)
 

 

 
7,829

 
(17
)
Municipal debt securities
7,256

 
(4
)
 
1,249

 
(1
)
 
8,505

 
(5
)
Corporate debt securities
123,358

 
(261
)
 
2,217

 
(8
)
 
125,575

 
(269
)
Equity securities
58,079

 
(1,310
)
 

 

 
58,079

 
(1,310
)
Asset backed securities
12,962

 
(19
)
 

 

 
12,962

 
(19
)
Total securities
$
315,648

 
$
(1,898
)
 
$
3,466

 
$
(9
)
 
$
319,114

 
$
(1,907
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 28, 2017
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government and agency debt
$
94,064

 
$
(283
)
 
$

 
$

 
$
94,064

 
$
(283
)
Foreign government and agency debt
11,875

 
(48
)
 
1,499

 
(2
)
 
13,374

 
(50
)
Municipal debt securities
17,450

 
(47
)
 
1,248

 
(2
)
 
18,698

 
(49
)
Corporate debt securities
199,382

 
(751
)
 
16,063

 
(25
)
 
215,445

 
(776
)
Asset backed securities
16,754

 
(47
)
 

 

 
16,754

 
(47
)
Total securities
$
339,525

 
$
(1,176
)
 
$
18,810

 
$
(29
)
 
$
358,335

 
$
(1,205
)


As of July 29, 2017, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the amortized cost basis. In addition, as of July 29, 2017, the Company anticipates that it will recover the amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three months ended July 29, 2017.

The Company has evaluated its equity securities as of July 29, 2017 and has determined that there were no other-than-temporary impairments in such securities with unrealized loss positions. This determination was based on several factors, including the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the equity securities for a period of time sufficient to allow for any anticipated recovery in market value.
Note 7. Derivative Financial Instruments
The Company manages some of its foreign currency exchange rate risk through the purchase of foreign currency exchange contracts that hedge against the short-term effect of currency fluctuations. The Company’s policy is to enter into

15

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

foreign currency forward contracts with maturities less than 12 months that mitigate the effect of rate fluctuations on certain local currency denominated operating expenses. All derivative instruments are recorded at fair value in either prepaid expenses and other current assets or accrued liabilities. The Company reports cash flows from derivative instruments in cash flows from operating activities. The Company uses quoted prices to value its derivative instruments.
The notional amounts of outstanding forward contracts were as follows (in thousands):
 
 
Buy Contracts
 
July 29,
2017
 
January 28,
2017
Israeli shekel
$
21,121

 
$
63,523


Cash Flow Hedges. The Company designates and documents its foreign currency forward exchange contracts as cash flow hedges for certain operating expenses. The Company evaluates and calculates the effectiveness of each hedge at least quarterly. The effective change is recorded in accumulated other comprehensive income and is subsequently reclassified to operating expense when the hedged expense is recognized. Ineffectiveness is recorded in interest and other income, net.
The following table provides information about gains (losses) associated with the Company’s derivative financial instruments (in thousands):
 
 
 
 
Amount of Gains (Losses) in Statement of Operations
 
 
 
Three Months Ended
 
Six Months Ended
 
Location of Gains (Losses)
in Statement of Operations
 
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
Forward contracts:
Research and development
 
$
1,251

 
$
265

 
$
1,726

 
$
451

 
Selling, general and administrative
 
331

 
37

 
394

 
63

 
 
 
$
1,582

 
$
302

 
$
2,120

 
$
514

 
The portion of gains (losses) excluded from the assessment of hedge effectiveness is included in interest and other income, net, and these amounts were not material in the three and six months ended July 29, 2017 and July 30, 2016. The Company did not have hedge ineffectiveness from derivative financial instruments in the three and six months ended July 29, 2017 and July 30, 2016. No cash flow hedges were terminated as a result of forecasted transactions that did not occur.
Note 8. Fair Value Measurements
Fair value is an exit price representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1—Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company’s Level 1 assets include institutional money-market funds that are classified as cash equivalents, equity securities, and U.S. government and agency debt securities, which are valued primarily using quoted market prices in active markets for identical assets. The Company’s Level 2 assets include its marketable investments in time deposits, foreign government and agency debt, municipal debt securities, corporate debt securities and asset backed securities as the market inputs used to value these instruments consist of market yields, reported trades and broker/dealer quotes, which are

16

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

corroborated with observable market data. In addition, forward contracts and the severance pay fund are classified as Level 2 assets as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Company’s investments in auction rate securities were classified as Level 3 assets because there were no active markets for the auction rate securities and consequently the Company was unable to obtain independent valuations from market sources. Therefore, the auction rate securities were valued using a discounted cash flow model. In the three months ended July 29, 2017, the auction rate securities were sold.
 
The tables below set forth, by level, the Company’s assets and liabilities that are measured at fair value on a recurring basis. The tables do not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):
 
Fair Value Measurements at July 29, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Items measured at fair value on a recurring basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
14,579

 
$

 
$

 
$
14,579

Time deposits

 
36,030

 

 
36,030

U.S. government and agency debt
19,492

 

 

 
19,492

Municipal debt securities

 
7,290

 

 
7,290

Corporate debt securities

 
57,441

 

 
57,441

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
150,000

 

 
150,000

U.S. government and agency debt
209,148

 

 

 
209,148

Foreign government and agency debt

 
7,829

 

 
7,829

Municipal debt securities

 
20,973

 

 
20,973

Corporate debt securities

 
465,601

 

 
465,601

Equity securities
58,079

 

 

 
58,079

Asset backed securities

 
31,376

 

 
31,376

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts

 
1,651

 

 
1,651

Other non-current assets:
 
 
 
 
 
 
 
Severance pay fund

 
827

 

 
827

Total assets
$
301,298

 
$
779,018

 
$

 
$
1,080,316

 




17

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
Fair Value Measurements at January 28, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Items measured at fair value on a recurring basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
36,122

 
$

 
$

 
$
36,122

Time deposits

 
67,000

 

 
67,000

U.S. government and agency debt
17,497

 

 

 
17,497

Foreign government and agency debt

 
1,500

 

 
1,500

Corporate debt securities

 
31,280

 

 
31,280

Municipal debt securities

 
8,740

 

 
8,740

Short-term investments:
 
 
 
 
 
 
 
Time deposits

 
150,000

 

 
150,000

U.S. government and agency debt
185,387

 

 

 
185,387

Corporate debt securities

 
432,108

 

 
432,108

Foreign government and agency debt

 
13,375

 

 
13,375

Municipal debt securities

 
27,871

 

 
27,871

Asset backed securities

 
45,527

 

 
45,527

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts

 
735

 

 
735

Long-term investments:
 
 
 
 
 
 
 
Auction rate securities

 

 
4,615

 
4,615

Other non-current assets:
 
 
 
 
 
 
 
Severance pay fund

 
736

 

 
736

Total assets
$
239,006

 
$
778,872

 
$
4,615

 
$
1,022,493

Liabilities
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$
58

 
$

 
$
58

 
The following table summarizes the change in fair value for Level 3 assets (in thousands):
 
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
Beginning balance
$
4,615

 
$
11,296

Sales and redemptions
(4,550
)
 
(2,413
)
Realized gain (loss)
(65
)
 
91

Ending balance
$

 
$
8,974

Note 9. Commitments and Contingencies
Purchase Commitments
Under the Company’s manufacturing relationships with its foundry partners, cancellation of outstanding purchase orders is allowed but requires payment of all costs and expenses incurred through the date of cancellation. As of July 29, 2017, these foundries had incurred approximately $185.3 million of manufacturing costs and expenses relating to the Company’s outstanding purchase orders.

Intellectual Property Indemnification

18

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company has agreed to indemnify certain customers for claims made against the Company’s products where such claims allege infringement of third-party intellectual property rights, including, but not limited to, patents, registered trademarks and/or copyrights. Under the aforementioned indemnification clauses, the Company may be obligated to defend the customer and pay for the damages awarded against the customer under an infringement claim, as well as the customer's attorneys’ fees and costs. The Company’s indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. Generally, there are limits on and exceptions to the Company’s potential liability for indemnification. Although historically the Company has not made significant payments under these indemnification obligations, the Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. The maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.
Contingencies and Legal Proceedings
The Company and certain of its subsidiaries are currently parties to various legal proceedings, including those noted in this section. The legal proceedings and claims described below could result in substantial costs and could divert the attention and resources of the Company’s management. The Company is also engaged in other legal proceedings and claims not described below, which arise in the ordinary course of its business. The Company is currently unable to predict the final outcome of these lawsuits and therefore cannot determine the likelihood of loss or estimate a range of possible loss, except with respect to amounts where it has determined a loss is both probable and estimable and where it has made an accrual. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling in litigation, particularly patent litigation, could require the Company to pay damages, one-time license fees or ongoing royalty payments, and could prevent the Company from manufacturing or selling some of its products or limit or restrict the type of work that employees involved in such litigation may perform for the Company, any of which could adversely affect financial results in future periods. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company’s business, financial condition, results of operations or cash flows.
Luna Litigation and Consolidated Cases. On September 11, 2015, Daniel Luna filed an action asserting putative class action claims on behalf of the Company’s shareholders in the United States District Court for the Southern District of New York (“S.D. of New York”). This action was consolidated with two additional, nearly identical complaints subsequently filed by Philip Limbacher and Jim Farno. The complaints asserted violations of federal securities laws based on allegations that the Company and certain of its officers and directors (Sehat Sutardja, Michael Rashkin, and Sukhi Nagesh) made, caused to be made, or failed to correct false and/or misleading statements in the Company’s press releases and public filings. The complaints request damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
 
On November 18, 2015, the S.D. of New York granted the Company’s motion to transfer the consolidated cases to the N.D. of California. On December 21, 2015, the N.D. of California granted the Company’s motion to deem the consolidated cases related to the Saratoga litigation, discussed below. On February 8, 2016, the N.D. of California granted an unopposed motion to appoint Plumbers and Pipefitters National Pension Fund as Lead Plaintiff. On March 19, 2016, Lead Plaintiff filed a consolidated amended complaint. On April 29, 2016, Marvell and each of the individual defendants each filed motions to dismiss. The hearing on the motions to dismiss took place on July 29, 2016 and the court took the matter under submission. On October 12, 2016, the Court granted Defendants’ motions to dismiss with leave to amend and granted lead plaintiff 30 days to file an amended complaint. The parties agreed that the plaintiffs would file and serve an amended complaint by November 28, 2016. Plaintiffs filed and served the amended complaint on November 28, 2016. The Initial Case Management Conference took place on January 12, 2017. Marvell and co-defendants filed separate Motions to Dismiss on January 17, 2017. A hearing on the Motion to Dismiss took place on May 4, 2017, and on May 17, 2017, the Court granted the Motion to Dismiss as to Rashkin and Nagesh and denied the Motion to Dismiss as to Sutardja and Marvell. At a Case Management Conference on June 1, 2017, the Court set a deadline of December 29, 2017 for the conclusion of fact discovery and confirmed a trial date of March 5, 2018.
Indemnities, Commitments and Guarantees
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities may include intellectual property indemnities to the Company’s customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties’ technology based upon the Company’s products, indemnities for general commercial obligations, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of Bermuda. In addition, the Company has contractual commitments to various customers that could require the Company to incur

19

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

costs to repair an epidemic defect with respect to its products outside of the normal warranty period if such defect were to occur. The duration of these indemnities, commitments and guarantees varies and, in certain cases, is indefinite. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. In general, the Company does not record any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets as the amounts cannot be reasonably estimated and are not considered probable. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when the loss is both estimable and probable.

Note 10. Income Tax

The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.
The Company’s quarterly tax provision, and estimate of its annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income (or loss) and the mix of jurisdictions to which they relate, changes in how the Company does business, and tax law developments. The Company’s estimated effective tax rate for the year differs from the U.S. statutory rate primarily due to the benefit of a substantial portion of its earnings being taxed at rates lower than the U.S. statutory rate.
The income tax benefit for the three months ended July 29, 2017 included a tax benefit of $8.9 million from a net reduction in unrecognized tax benefits, offset by current income tax expense of $4.4 million and an expense of $0.5 million related to other discrete items recorded in the quarter. The net reduction in unrecognized tax benefits arose from the release of $9.5 million due to the expiration of the statute of limitations in certain non-US jurisdictions, which was partially offset by penalties and interest of $0.6 million accrued on the outstanding unrecognized tax benefit balance. The income tax expense for the six months ended July 29, 2017 included current income tax expense of $7.9 million and expense of $1.2 million related to other discrete items, offset by a tax benefit of $7.9 million from a net reduction in unrecognized tax benefits. The net reduction in unrecognized tax benefits arose from the release of $9.8 million due to expiration of the statute of limitations in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $1.3 million accrued on the outstanding unrecognized tax benefit balance and the accrual of $0.6 million for changes in prior year tax positions.

The income tax benefit for the three months ended July 30, 2016 included a tax benefit of $12.7 million from a net reduction in unrecognized tax benefits, offset by current income tax expense of $6.6 million and an expense of $0.3 million related to other discrete items recorded in the quarter. The net reduction in unrecognized tax benefits arose from the release of $13.8 million due to expiration of the statute of limitations in certain non-US jurisdictions, which was partially offset by penalties and interest of $0.8 million accrued on the outstanding unrecognized tax benefit balance and the accrual of an additional $0.3 million for a prior year tax position. The income tax benefit for the six months ended July 30, 2016 included a tax benefit of $12.5 million from a net reduction in unrecognized tax benefits and a deferred tax benefit of $2.5 million for the portion of a payment to the Company’s former Chief Executive Officer that became deductible after his departure from the Company in April 2016, offset by current income tax expense of $3.4 million and an expense of $0.4 million related to other discrete items. The net reduction in unrecognized tax benefits arose from the release of $14.3 million due to expiration of the statute of limitations in certain non-U.S. jurisdictions, which was partially offset by penalties and interest of $1.5 million accrued on the outstanding unrecognized tax benefit balance and the accrual of an additional $0.3 million for a prior year tax position.

It is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to foreign currencies within the next 12 months. Excluding these factors, uncertain tax positions may decrease by as much as $7.6 million from the lapse of statutes of limitation in various jurisdictions during the next twelve months. Government tax authorities from several non-U.S. jurisdictions are also examining the Company’s tax returns. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to its tax audits and that any settlement will not have a material effect on its results at this time.

The Company operates under tax incentives in certain countries that may be extended if certain additional requirements are satisfied. The tax incentives are conditional upon meeting certain employment and investment thresholds. The impact of these tax incentives decreased foreign taxes by $0.8 million and $1.5 million for the three and six months ended July 29, 2017, respectively, and $1.3 million and $2.2 million for the three and six months ended July 30, 2016, respectively. The benefit of

20

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the tax incentives on net income per share was less than $0.01 per share for both the three and six months ended July 29, 2017 and July 30, 2016.

The Company’s principal source of liquidity as of July 29, 2017 consisted of approximately $1.6 billion of cash, cash equivalents and short-term investments, of which approximately $960 million was held by foreign subsidiaries (outside Bermuda). Approximately $600 million of this amount held by foreign subsidiaries is related to undistributed earnings that have been indefinitely reinvested outside of Bermuda. These funds are primarily held in China, Israel and the United States. The Company plans to use such amounts to fund various activities outside of Bermuda, including working capital requirements, capital expenditures for expansion, funding of future acquisitions or other financing activities. If such funds were needed by the parent company in Bermuda or if the amounts were otherwise no longer considered indefinitely reinvested, the Company would incur a tax expense of approximately $180 million.
Note 11. Net Income Per Share
The Company reports both basic net income per share, which is based on the weighted average number of common shares outstanding during the period, and diluted net income per share, which is based on the weighted average number of common shares outstanding and potentially dilutive shares outstanding during the period. The computations of basic and diluted net income per share are presented in the following table (in thousands, except per share amounts):
 
 
Three Months Ended
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
135,450

 
$
62,466

 
$
235,042

 
$
55,174

Income (loss) from discontinued operations
29,809

 
(11,161
)
 
36,838

 
(26,548
)
Net income
$
165,259

 
$
51,305

 
$
271,880

 
$
28,626

Denominator:
 
 
 
 
 
 
 
Weighted average shares — basic
500,817

 
511,235

 
502,303

 
510,014

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based awards
9,492

 
3,079

 
11,648

 
3,655

Weighted average shares — diluted
510,309

 
514,314

 
513,951

 
513,669

Income from continuing operations per share:
 
 
 
 
 
 
 
       Basic
$
0.27

 
$
0.12

 
$
0.47

 
$
0.11

       Diluted
$
0.26

 
$
0.12

 
$
0.46

 
$
0.11

Income (loss) from discontinued operations per share:
 
 
 
 
 
 
 
       Basic
$
0.06

 
$
(0.02
)
 
$
0.07

 
$
(0.05
)
       Diluted
$
0.06

 
$
(0.02
)
 
$
0.07

 
$
(0.05
)
Net income per share:
 
 
 
 
 
 
 
       Basic
$
0.33

 
$
0.10

 
$
0.54

 
$
0.06

       Diluted
$
0.32

 
$
0.10

 
$
0.53

 
$
0.06

Potential dilutive securities include dilutive common shares from share-based awards attributable to the assumed exercise of stock options, restricted stock units and employee stock purchase plan shares using the treasury stock method. Under the treasury stock method, potential common shares outstanding are not included in the computation of diluted net income per share if their effect is anti-dilutive.
 
Anti-dilutive potential shares are presented in the following table (in thousands):
 

21

Table of Contents
MARVELL TECHNOLOGY GROUP LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
Three Months Ended
 
Six Months Ended
 
July 29,
2017
 
July 30,
2016
 
July 29,
2017
 
July 30,
2016
Weighted average shares outstanding:
 
 
 
 
 
 
 
Share-based awards
2,770

 
38,873

 
7,301

 
38,264


Anti-dilutive potential shares from share-based awards are excluded from the calculation of diluted earnings per share for all periods reported above because either their exercise price exceeded the average market price during the period or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “seeks,” “estimates,” “may,” “can,” “will,” “would” and similar expressions identify such forward-looking statements.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially from those predicted, include, but are not limited to:

our ability to successfully restructure our operations with our anticipated amounts of costs and savings;
our dependence upon the storage, networking and connectivity markets, which are highly cyclical and intensely competitive;
the outcome of pending or future litigation and legal and regulatory proceedings;
our dependence on a small number of customers;
severe financial hardship or bankruptcy of one or more of our major customers;
our ability and the ability of our customers to successfully compete in the markets in which we serve;
our reliance on independent foundries and subcontractors for the manufacture, assembly and testing of our products;
our ability and our customers’ ability to develop new and enhanced products and the adoption of those products in the market;
decreases in our gross margin and results of operations in the future due to a number of factors;
our ability to estimate customer demand and future sales accurately;
our ability to scale our operations in response to changes in demand for existing or new products and services;
the impact of international conflict and continued economic volatility in either domestic or foreign markets;
the effects of transitioning to smaller geometry process technologies;
the risks associated with manufacturing and selling a majority of our products and our customers’ products outside of the United States;
risks associated with acquisition and consolidation activity in the semiconductor industry;
the impact of any change in the income tax laws in jurisdictions where we operate and the loss of any beneficial tax treatment that we currently enjoy;
the effects of any potential acquisitions or investments;
our ability to protect our intellectual property;
the impact and costs associated with changes in international financial and regulatory conditions; and
our maintenance of an effective system of internal controls.

22

Table of Contents


Additional factors which could cause actual results to differ materially include those set forth in the following discussion, as well as the risks discussed in Part II, Item 1A, “Risk Factors,” and other sections of this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date hereof. Unless required by law, we undertake no obligation to update any forward-looking statements.

Overview

We are a fabless semiconductor provider of high-performance, application-specific standard products. Our core strength of expertise is the development of complex System-on-a-Chip (“SoC”) devices, leveraging our technology portfolio of intellectual property in the areas of analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. We also develop integrated hardware platforms along with software that incorporates digital computing technologies designed and configured to provide an optimized computing solution. Our broad product portfolio includes devices for storage, networking and connectivity.

In the second quarter of fiscal 2018, we saw net revenue increase year over year by 1% from $597.3 million net revenue in the second quarter fiscal 2017 compared with $604.8 million in the second quarter of fiscal 2018. The increase was primarily due to a 13% increase in our storage product sales, offset in part by reduction in other sales. Our net revenue for the six months ended July 29, 2017 increased by $66.5 million compared to net revenue for the six months ended July 30, 2016. This increase was primarily due to increased sales of our storage products by 19%. This growth was offset by a decline in legacy applications.

As discussed in Note 1, during the first fiscal quarter of 2018, we recorded certain out-of-period adjustments of $4.7 million related to revenue-related accruals and $3.2 million related to other expenses. The net effect of these out-of-period adjustments resulted in a $7.9 million increase in income from continuing operations from the six months ended July 29, 2017 and an increase in earnings per share from continuing operations of $0.02 per share, as well as contributing to the increase in revenue and gross margin for six months ended July 29, 2017. 

Restructuring. In November 2016, we announced a restructuring plan intended to refocus our research and development, increase operational efficiency and improve profitability. As a continuation of such plan, we recorded restructuring related charges of $4.3 million and $5.2 million in the three and six months ended July 29, 2017, respectively. In addition, during the first half of fiscal 2018, we received proceeds of $72.2 million and recognized a gain on sale of $42.2 million from the sale of our Broadband and LTE thin-modem businesses. The Broadband and LTE thin-modem businesses were two of three businesses we had classified as discontinued operations. We continue our efforts to complete the divestiture of one other business, which is currently classified as discontinued operations. Unless noted otherwise, our discussion under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, refers to our continuing operations.

Capital Return Program. Our financial position is strong and we remain committed to delivering shareholder value through our share repurchase and dividend programs. For the six months ended July 29, 2017, we repurchased 23.6 million shares of our common stock for $386.1 million. As of July 29, 2017, a total of 278.5 million shares have been repurchased to date under the Company’s share repurchase program for a total $3.6 billion in cash and there was $498.0 million remaining available for future share repurchases. We returned $447.6 million to stockholders in the six months ended July 29, 2017, including our repurchases of common stock and $60.1 million of cash dividends.

Cash and Short Term Investments. Our total cash, cash equivalents and short-term investments were $1.6 billion at July 29, 2017, which remained relatively consistent with our balance at our fiscal year ended January 28, 2017.

Sales and Customer Composition. Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. Net revenue attributable to significant customers whose revenue as a percentage of net revenue was 10% or greater of total net revenue is presented in the following table:
 

23

Table of Contents

 
Three Months Ended
 
Six Months Ended
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
End Customer:
 
 
 
 
 
 
 
Western Digital*
21.8
%
 
18.3
%
 
21.8
%
 
19.4
%
Toshiba
15.1
%
 
13.6
%
 
14.2
%
 
12.9
%
Seagate
9.8
%
 
8.8
%
 
10.1
%
 
9.4
%
Cisco
10.6
%
 
10.0
%
 
10.0
%
 
10.1
%
Sony
**

 
10.0
%
 
**

 
**

Distributor:
 
 
 
 
 
 
 
Wintech
**

 
10.4
%
 
**

 
10.0
%
 

*
The percentage of net revenue reported for Western Digital in the three and six months ended July 29, 2017 and July 30, 2016 includes net revenue of HGST and Sandisk which became subsidiaries of Western Digital in late fiscal 2016.
**
Less than 10% of net revenue
We continuously moni