xper-10q_20180930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37956

 

XPERI CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

81-4465732

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

3025 Orchard Parkway, San Jose, California

 

95134

(Address of Principal Executive Offices)

 

(Zip Code)

(408) 321-6000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

 

Name of each exchange on which registered

Common stock, par value $0.001 per share

 

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:    None

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. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

Large accelerated filer  Accelerated filer  Non-accelerated filer 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

The number of shares outstanding of the registrant’s common stock as of October 31, 2018 was 48,418,161.

 

 

 


 

XPERI CORPORATION

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2018 and 2017

 

3

 

Condensed Consolidated Balance Sheets – September 30, 2018 and December 31, 2017

 

4

 

Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2018 and 2017

 

5

 

Condensed Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2018 and 2017

 

6

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

39

Item 4.

Controls and Procedures

 

39

 

 

 

 

 

PART II

 

 

Item 1.

Legal Proceedings

 

40

Item 1A.

Risk Factors

 

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

61

Item 3.

Defaults Upon Senior Securities

 

61

Item 4.

Mine Safety Disclosures

 

61

Item 5.

Other Information

 

61

Item 6.

Exhibits

 

62

 

 

 

 

Signatures

 

 

63

 

2


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

XPERI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(83,049

)

 

$

(62,202

)

Adjustments to reconcile net loss to net cash from operating activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

5,073

 

 

 

5,351

 

Amortization of intangible assets

 

 

81,573

 

 

 

84,475

 

Stock-based compensation expense

 

 

22,080

 

 

 

23,961

 

Deferred income tax

 

 

(21,247

)

 

 

(25,295

)

Amortization of debt issuance costs and other

 

 

2,636

 

 

 

2,193

 

Bad debt expense

 

 

345

 

 

 

1,849

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(10,234

)

 

 

(1,214

)

Unbilled contracts receivable, net

 

 

93,005

 

 

 

42,019

 

Other assets

 

 

(479

)

 

 

4,104

 

Accounts payable

 

 

(872

)

 

 

(1,258

)

Accrued legal fees

 

 

(618

)

 

 

(2,484

)

Accrued and other liabilities

 

 

(18,129

)

 

 

10,587

 

Deferred revenue

 

 

(1,451

)

 

 

3,683

 

Net cash from operating activities

 

 

68,633

 

 

 

85,769

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,451

)

 

 

(2,487

)

Acquisition, net of cash acquired

 

 

(500

)

 

 

 

Purchases of intangible assets

 

 

(3,350

)

 

 

 

Purchases of investments

 

 

(20,095

)

 

 

(22,572

)

Proceeds from sales of property and equipment

 

 

 

 

 

40

 

Proceeds from sales of investments

 

 

19,675

 

 

 

1,035

 

Proceeds from maturities of investments

 

 

8,540

 

 

 

8,400

 

Net cash from investing activities

 

 

1,819

 

 

 

(15,584

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Dividend paid

 

 

(29,508

)

 

 

(29,664

)

Repayment of debt

 

 

(100,000

)

 

 

(4,500

)

Proceeds from exercise of stock options

 

 

8,004

 

 

 

4,827

 

Proceeds from employee stock purchase program

 

 

5,197

 

 

 

4,132

 

Repurchase of common stock

 

 

(40,539

)

 

 

(13,531

)

Net cash from financing activities

 

 

(156,846

)

 

 

(38,736

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(86,394

)

 

 

31,449

 

Cash and cash equivalents at beginning of period

 

 

138,260

 

 

 

65,626

 

Cash, cash equivalents and restricted cash at end of period

 

$

51,866

 

 

$

97,075

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

16,949

 

 

$

21,258

 

Income taxes paid, net of refunds

 

$

12,768

 

 

$

11,614

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 

XPERI CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,866

 

 

$

138,260

 

Investments

 

 

53,569

 

 

 

62,432

 

Accounts receivable, net

 

 

26,219

 

 

 

17,010

 

Unbilled contracts receivable

 

 

154,417

 

 

 

10,866

 

Other current assets

 

 

17,029

 

 

 

16,949

 

Total current assets

 

 

303,100

 

 

 

245,517

 

Long-term unbilled contracts receivable

 

 

59,797

 

 

 

2,930

 

Property and equipment, net

 

 

31,769

 

 

 

34,442

 

Intangible assets, net

 

 

353,847

 

 

 

431,789

 

Goodwill

 

 

385,784

 

 

 

385,574

 

Other assets

 

 

5,479

 

 

 

9,772

 

Total assets

 

$

1,139,776

 

 

$

1,110,024

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,361

 

 

$

4,233

 

Accrued legal fees

 

 

6,865

 

 

 

7,483

 

Accrued liabilities

 

 

30,513

 

 

 

47,969

 

Current portion of long-term debt

 

 

 

 

 

34,451

 

Deferred revenue

 

 

452

 

 

 

2,686

 

Total current liabilities

 

 

41,191

 

 

 

96,822

 

Long-term deferred tax liabilities

 

 

58,112

 

 

 

15,085

 

Long-term debt, net

 

 

481,574

 

 

 

545,211

 

Other long-term liabilities

 

 

17,089

 

 

 

17,330

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock: $0.001 par value; 10,000 shares authorized and

   no shares issued and outstanding

 

 

 

 

 

 

Common stock: $0.001 par value; 150,000 shares authorized; 62,158

   and 60,608 shares issued, respectively, and 48,663 and 49,103 shares

   outstanding, respectively

 

 

62

 

 

 

60

 

Additional paid-in capital

 

 

721,939

 

 

 

686,660

 

Treasury stock at cost: 13,495 and 11,505 shares of common stock

   at each period end, respectively

 

 

(359,936

)

 

 

(319,397

)

Accumulated other comprehensive loss

 

 

(382

)

 

 

(303

)

Retained earnings

 

 

180,127

 

 

 

68,556

 

Total stockholders’ equity

 

 

541,810

 

 

 

435,576

 

Total liabilities and stockholders’ equity

 

$

1,139,776

 

 

$

1,110,024

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


 

XPERI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

 

September 30,

2018

 

 

September 30,

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty and license fees

 

$

72,365

 

 

$

88,508

 

 

$

201,851

 

 

$

247,085

 

Total revenue

 

 

72,365

 

 

 

88,508

 

 

 

201,851

 

 

 

247,085

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

5,003

 

 

 

1,667

 

 

 

9,407

 

 

 

4,370

 

Research, development and other related costs

 

 

24,189

 

 

 

25,840

 

 

 

75,874

 

 

 

78,165

 

Selling, general and administrative

 

 

28,084

 

 

 

33,995

 

 

 

93,262

 

 

 

108,202

 

Amortization expense

 

 

27,208

 

 

 

27,769

 

 

 

81,573

 

 

 

84,475

 

Litigation expense

 

 

7,642

 

 

 

9,163

 

 

 

21,593

 

 

 

27,368

 

Total operating expenses

 

 

92,126

 

 

 

98,434

 

 

 

281,709

 

 

 

302,580

 

Operating loss

 

 

(19,761

)

 

 

(9,926

)

 

 

(79,858

)

 

 

(55,495

)

Interest expense

 

 

(6,343

)

 

 

(7,371

)

 

 

(18,861

)

 

 

(20,876

)

Other income and expense, net

 

 

1,737

 

 

 

739

 

 

 

7,120

 

 

 

1,005

 

Loss before taxes

 

 

(24,367

)

 

 

(16,558

)

 

 

(91,599

)

 

 

(75,366

)

Benefit from income taxes

 

 

(2,591

)

 

 

(4,442

)

 

 

(8,550

)

 

 

(13,164

)

Net loss

 

$

(21,776

)

 

$

(12,116

)

 

$

(83,049

)

 

$

(62,202

)

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.44

)

 

$

(0.24

)

 

$

(1.69

)

 

$

(1.26

)

Diluted

 

$

(0.44

)

 

$

(0.24

)

 

$

(1.69

)

 

$

(1.26

)

Cash dividends declared per share

 

$

0.20

 

 

$

0.20

 

 

$

0.60

 

 

$

0.60

 

Weighted average number of shares used in per share

   calculations-basic

 

 

48,958

 

 

 

49,469

 

 

 

49,005

 

 

 

49,293

 

Weighted average number of shares used in per share

   calculations-diluted

 

 

48,958

 

 

 

49,469

 

 

 

49,005

 

 

 

49,293

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


 

XPERI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

 

September 30,

2018

 

 

September 30,

2017

 

Net loss

 

$

(21,776

)

 

$

(12,116

)

 

$

(83,049

)

 

$

(62,202

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on available-for-sale

   securities, net of tax

 

 

74

 

 

 

(16

)

 

 

(79

)

 

 

38

 

Other comprehensive income (loss)

 

 

74

 

 

 

(16

)

 

 

(79

)

 

 

38

 

Comprehensive loss

 

$

(21,702

)

 

$

(12,132

)

 

$

(83,128

)

 

$

(62,164

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6


 

XPERI CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Xperi Corporation (the “Company”) completed the acquisition of DTS, Inc. ("DTS"), a publicly-traded developer of sound-based technologies, in December 2016. At the time of the acquisition, Tessera Technologies, Inc. and DTS were combined under the newly-formed Tessera Holding Corporation. During the first quarter of 2017, the Company introduced its new corporate name, Xperi Corporation, launched a new corporate logo, and began trading under a new ticker symbol XPER.

Xperi Corporation licenses its innovative products, technologies and inventions to global electronics companies which, in turn, integrate the technologies into their own consumer electronics and semiconductor products. The Company's technologies and inventions are widely adopted and used every day by millions of people. The Company's audio technologies have shipped in billions of devices for the home, mobile and automotive markets. The Company's imaging technologies are embedded in more than 25% of smartphones on the market today. The Company's semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips.

The accompanying interim unaudited condensed consolidated financial statements as of September 30, 2018 and 2017, and for the three and nine months then ended, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information. The amounts as of December 31, 2017 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on February 23, 2018 (the “Form 10-K”).

The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2018 or any future period and the Company makes no representations related thereto.

Reclassification

Certain reclassifications have been made to prior period balances in order to conform to the current period’s presentation.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are detailed in "Note 2 - Summary of Significant Accounting Policies" in its Form 10-K for the year ended December 31, 2017. Significant changes to its accounting policies as a result of adopting Topic 606 are discussed in Note 3 - Revenue.

Recently Adopted Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amended guidance requires certain equity investments that are not consolidated and not accounted for under the equity method to be measured at fair value with changes in fair value recognized in net income. The Company adopted ASU 2016-01 on January 1, 2018 using the modified retrospective method, which did not have an impact on its consolidated financial statements as there were no unrealized gains or losses associated with marketable equity securities on the adoption date. Following the adoption of the standard, unrealized gains and losses on equity securities are recorded in other income and expense, net, on the Condensed Consolidated Statements of Operations. See “Note 5 – Financial Instruments” for further information.

In August 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim

7


 

periods within those fiscal years, with early adoption permitted. The Company adopted this standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company adopted this standard as of January 1, 2018 on a prospective basis. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting.” ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment awarded require an entity to apply modification accounting. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the standard as of January 1, 2018 on a prospective basis. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. Under the prior standard, licensing companies generally reported revenue from per-unit royalty based arrangements one quarter in arrears. Under the new guidance, the Company estimates per-unit royalty-based revenue prior to receiving customer royalty reports. The Company also expects the standard to have a significant impact on the timing of revenue recognition associated with its fixed fee and minimum guarantee arrangements, as a majority of such revenue which had previously been recognized over the license term is expected to be recognized at the inception of the license term. On January 1, 2018, the Company adopted the new standard using the modified retrospective method, under which the Company recorded a $224 million cumulative net of tax adjustment to the opening balance of retained earnings on January 1, 2018. The adjustment was determined by measuring the impact of the new standard on existing contracts that were not completed as of December 31, 2017. Prior period comparative information has not been restated and continues to be reported under Topic 605 in effect for those periods. This new standard had a material impact on the Company’s revenue and its consolidated statement of operations and balance sheet as of and for the three and nine months ended September 30, 2018, and is expected to have a material impact on an ongoing basis, with no impact on the timing of customer billings or on cash flows. See “Note 3 - Revenue" for further discussion.

The cumulative effect of the changes made to the Company's Condensed Consolidated Balance Sheet for the adoption of Topic 606 was as follows (in thousands):

 

 

 

Balance at

December 31,

2017

 

 

Adjustments due

to Topic 606

 

 

Balance at

January 1, 2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Unbilled contracts receivable

 

$

10,866

 

 

$

188,760

 

 

$

199,626

 

Other current assets

 

 

16,949

 

 

 

(2,000

)

 

 

14,949

 

Long-term unbilled contracts receivable

 

 

2,930

 

 

 

103,983

 

 

 

106,913

 

Other assets

 

 

9,772

 

 

 

(2,446

)

 

 

7,326

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

47,969

 

 

 

432

 

 

 

48,401

 

Deferred revenue

 

 

2,686

 

 

 

(783

)

 

 

1,903

 

Long-term deferred tax liabilities

 

 

15,085

 

 

 

64,520

 

 

 

79,605

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

68,556

 

 

 

224,128

 

 

 

292,684

 

 

The most significant impact from adopting Topic 606 was a substantial increase in unbilled contracts receivable, long-term deferred tax liabilities and retained earnings, which was driven primarily by applying the standard on fixed fee and minimum guarantee contracts that were not completed as of December 31, 2017, and secondarily by recording to retained earnings those royalties from customer shipments completed in the fourth quarter of 2017 and reported to the Company in the first quarter of 2018. The adjustments noted above had no impact on the Company's Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018.

8


 

Adoption of the new revenue standard had the following impact on the Company's condensed consolidated financial statements as compared to the comparable data under the previous accounting standards (in thousands, except per share amounts):

 

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

 

STATEMENT OF OPERATIONS

 

As Reported

 

 

Amounts

under

Topic 605

 

 

Effect of

Change

Higher/(lower)

 

 

As Reported

 

 

Amounts

under

Topic 605

 

 

Effect of

Change

Higher/(lower)

 

Royalty and license fees

 

$

72,365

 

 

$

100,375

 

 

$

(28,010

)

 

$

201,851

 

 

$

293,251

 

 

$

(91,400

)

Cost of revenue

 

 

5,003

 

 

 

2,231

 

 

 

2,772

 

 

 

9,407

 

 

 

6,560

 

 

 

2,847

 

Operating income (loss)

 

 

(19,761

)

 

 

11,021

 

 

 

(30,782

)

 

 

(79,858

)

 

 

14,390

 

 

 

(94,248

)

Other income and expense, net

 

 

1,737

 

 

 

160

 

 

 

1,577

 

 

 

7,120

 

 

 

1,245

 

 

 

5,875

 

Income (loss) before taxes

 

 

(24,367

)

 

 

4,839

 

 

 

(29,206

)

 

 

(91,599

)

 

 

(3,226

)

 

 

(88,373

)

Provision for (benefit from) income taxes

 

 

(2,591

)

 

 

1,956

 

 

 

(4,547

)

 

 

(8,550

)

 

 

6,665

 

 

 

(15,215

)

Net income (loss)

 

 

(21,776

)

 

 

2,883

 

 

 

(24,659

)

 

 

(83,049

)

 

 

(9,891

)

 

 

(73,158

)

Basic net income (loss) per share

 

$

(0.44

)

 

$

0.06

 

 

$

(0.50

)

 

$

(1.69

)

 

$

(0.20

)

 

$

(1.49

)

 

 

 

As of September 30, 2018

 

BALANCE SHEET

 

As Reported

 

 

Amounts under

Topic 605

 

 

Effect of Change

Higher/(lower)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Unbilled contracts receivable

 

$

154,417

 

 

$

4,653

 

 

$

149,764

 

Other current assets

 

 

17,029

 

 

 

18,279

 

 

 

(1,250

)

Long-term unbilled contracts receivable

 

 

59,797

 

 

 

1,823

 

 

 

57,974

 

Other assets

 

 

5,479

 

 

 

7,545

 

 

 

(2,066

)

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

30,513

 

 

 

26,445

 

 

 

4,068

 

Deferred revenue

 

 

452

 

 

 

889

 

 

 

(437

)

Long-term deferred tax liabilities

 

 

58,112

 

 

 

8,358

 

 

 

49,754

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

180,127

 

 

 

29,090

 

 

 

151,037

 

 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for the Company in the first quarter of 2019, and early adoption is permitted. The Company will adopt the new standard effective January 1, 2019. While the Company continues to evaluate the effect of adopting this guidance on its consolidated financial statements and related disclosures, it is expected the Company's operating leases, as disclosed in Note 13 - "Commitments and Contingencies," will be subject to the new standard. In the third quarter of 2018, the Company continued to develop and implement new accounting policies and processes necessary to adopt the requirements of the new standard. In addition, the Company has completed its preliminary assessment of leasing arrangements and expects to finalize its estimates of adoption impact by the end of fiscal 2018. The Company expects to adopt the new standard using the optional transition method, under which the Company will initially apply the transition requirements to all leases that exist at December 31, 2018, with the effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening balance of retained earnings on January 1, 2019. The Company currently expects that adoption will result in increases in lease-related Right-of-Use assets and liabilities on its consolidated balance sheet and have no impact on its consolidated statement of operations or cash flows.

In September 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for the Company in the first quarter of the year ending December 31, 2020. The Company is in the process of evaluating the impact of the adoption of this new standard on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, “Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting,” which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. The effective date for the standard is

9


 

for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than the Company's adoption date of Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company currently does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

NOTE 3 – REVENUE

As discussed in Note 2, on January 1, 2018, the Company adopted Topic 606 using the modified retrospective method. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not restated and continue to be reported in accordance with the historic accounting under Topic 605.

Revenue Recognition

The Company derives its revenue primarily from royalty and license fees for rights to use the Company’s intellectual property and technologies (“IP”). Revenue is recognized upon transfer of control of promised products, services or IP rights to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products, services or licensing of the IP rights.

Certain licensees have entered into fixed fee or minimum guarantee arrangements, whereby licensees pay a fixed fee for the right to incorporate the Company's technology in the licensee's products over the license term. In arrangements with a minimum guarantee, the fixed fee component corresponds to a minimum number of units or dollars that the customer must produce or pay, with additional per-unit fees for any units or dollars exceeding the minimum. In most cases, the customer pays the fixed license fee in specified installments over the license term. For these agreements, the Company recognizes the full fixed fee as revenue at the beginning of the license term, when the licensee has the right to use the IP and begins to benefit from the license.

If the contract term of a fixed fee or minimum guarantee arrangement is longer than one year, the Company also considers the scheduled payment arrangements to determine whether a significant financing component exists. In general, if the payment arrangements extend beyond the initial twelve months of the contract, the Company treats a portion of the payments as a significant financing component. When the payments are expected to be received within one year or less, the Company does not adjust the promised amount of consideration for the effects of a financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between the Company and the licensee at contract inception, and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income and expense in the Condensed Consolidated Statements of Operations.

For certain licensees, royalty revenues are generated based on a licensee's production or shipment of licensed products incorporating the Company’s IP, technologies or software. Licensees with a per-unit arrangement pay a per-unit royalty for each product manufactured or sold, as set forth in its license agreement. Licensees generally report manufacturing or sales information in the quarter subsequent to when the production or shipment activity takes place. The Company estimates the royalties earned each quarter based on its forecast of manufacturing and sales activity incurred by its licensees in that quarter. Any differences between actual royalties owed by a licensee and the Company’s quarterly estimate are recognized in the following quarter, when the licensee’s royalty report is received. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires the Company to make significant assumptions and judgments that could have a material impact on the amount of revenue it reports on a quarterly basis.

The Company actively monitors and enforces its IP, including seeking appropriate compensation from customers that have under-reported royalties owed under a license agreement and from third parties that utilize the Company’s intellectual property without a license. As a result of these activities, the Company may, from time to time, recognize revenue from payments resulting from periodic compliance audits of licensees for underreporting royalties incurred in prior periods, as part of a settlement of a patent infringement dispute, or legal judgments from a license dispute. These recoveries and settlements may cause revenue to be higher than expected during a particular reporting period and such recoveries may not occur in subsequent periods. The Company recognizes revenue from recoveries when a binding agreement has been executed and the Company concludes collection under that agreement is likely.

In some instances, the Company may enter into license agreements that contain multiple performance obligations that include engineering services in addition to a technology or software license. For such arrangements where all components are capable of being distinct and accounted for as separate performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on

10


 

the prices ordinarily charged to customers, or in some cases by applying a reasonable cost-plus margin. The consideration for engineering services is recognized as the underlying performance obligations are satisfied. Generally, the Company satisfies performance obligations over time and therefore recognizes revenue over time by measuring the progress toward completion of the performance obligation at each reporting period.

From time to time, the Company enters into arrangements with licensees in which the Company pays consideration to the licensee. Such payments can take the form of marketing development funds or various rebate incentives. The Company typically accounts for consideration paid to its licensees as a reduction to the transaction price and revenue, unless the payment to the licensee is in exchange for a distinct good or service that the licensee transfers to the Company. In cases where the consideration paid to the licensee is variable, the Company estimates the variable consideration based on the terms of the arrangement and expectations of future outcomes. The Company recognizes the reduction to revenue when it recognizes revenue for transfer of control of promised products, services or IP rights to the licensee.

Revenue is recognized gross of withholding taxes that are remitted directly by the Company's licensees directly to a local tax authority.

For additional detail on the Company's revenue disaggregated by geographic location, refer to Note 14 - "Segment and Geographic Information."

Contract Balances

Unbilled Contracts Receivable

Timing of revenue recognition may differ significantly from the timing of invoicing to customers. Accounts receivable, net, includes amounts billed and currently due from customers. Unbilled contracts receivable represents unbilled amounts expected to be received from customers in future periods, where the revenue recognized to date (or cumulative adjustments to retained earnings in the initial period of adopting Topic 606) exceeds the amount billed, and right to payment is subject to the underlying contractual terms. Unbilled contracts receivable amounts may not exceed their net realizable value and are classified as long-term assets if the payments are expected to be received more than one year from the reporting date.

Deferred Revenue

Deferred revenue includes payments made by licensees for which the corresponding performance obligations have not yet been fully satisfied by the Company and typically arises where performance obligations are satisfied over time.

Additional Disclosures Under Topic 606

The following table presents additional revenue and contract disclosures (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue recognized in the period from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in deferred revenue at the beginning of

   the period

 

$

3,852

 

 

$

845

 

 

$

1,602

 

 

$

1,123

 

Performance obligations satisfied in previous periods (true

   ups and licensee reporting adjustments)*

 

$

3,375

 

 

$

40

 

 

$

3,001

 

 

$

4,115

 

 

*True ups represent the differences between the Company’s quarterly estimates of per unit royalty revenue and actual production/sales-based royalties reported by licensees in the following period. Licensee reporting adjustments represent corrections or revisions to previously reported per unit royalties by licensees, generally resulting from the Company’s inquiries or compliance audits.

11


 

 

Remaining revenue under contracts with performance obligations represents the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) under the Company’s engineering services contracts. The Company's remaining revenue under contracts with performance obligations was as follows (in thousands):

 

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Revenue from contracts with performance obligations expected to be satisfied in:

 

 

 

 

 

 

 

 

One year or less

 

$

3,420

 

 

$

2,440

 

More than one year but less than two years

 

 

335

 

 

 

149

 

More than two years

 

 

 

 

 

240

 

Total

 

$

3,755

 

 

$

2,829

 

 

Practical Expedients

The Company expenses sales commissions when incurred because the amortization period generally would have been one year or less. In addition, sales commissions have historically not been a significant expense and are not contemplated to be significant in the future. Sales commissions are recorded in selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

NOTE 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Other current assets consisted of the following (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Prepaid income taxes

 

$

8,190

 

 

$

6,713

 

Prepaid expenses

 

 

6,796

 

 

 

6,655

 

Other

 

 

2,043

 

 

 

3,581

 

 

 

$

17,029

 

 

$

16,949

 

 

Property and equipment, net, consisted of the following (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Equipment, furniture and other

 

$

28,378

 

 

$

26,029

 

Building and improvements

 

 

18,258

 

 

 

18,222

 

Land

 

 

5,300

 

 

 

5,300

 

Leasehold improvements

 

 

6,443

 

 

 

6,469

 

 

 

 

58,379

 

 

 

56,020

 

Less: accumulated depreciation and amortization

 

 

(26,610

)

 

 

(21,578

)

 

 

$

31,769

 

 

$

34,442

 

 

Depreciation and amortization expense for the three months ended September 30, 2018 and 2017 amounted to $1.6 million and $1.7 million, respectively.

Depreciation and amortization expense for the nine months ended September 30, 2018 and 2017 amounted to $5.1 million and $5.4 million, respectively.

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Employee compensation and benefits

 

$

16,691

 

 

$

37,056

 

Other

 

 

13,822

 

 

 

10,913

 

 

 

$

30,513

 

 

$

47,969

 

 

12


 

Accumulated other comprehensive loss consisted of the following (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Unrealized loss on available-for-sale securities, net of tax

 

$

(382

)

 

$

(303

)

 

 

$

(382

)

 

$

(303

)

 

Other income and expense, net, consisted of the following (in thousands):

 

 

 

Three Months Ended,

 

 

Nine Months Ended,

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Interest income from significant financing components under

   Topic 606

 

$

1,577

 

 

$

 

 

$

5,876

 

 

$

 

Interest income from investments

 

 

233

 

 

 

269

 

 

 

697

 

 

 

731

 

Unrealized loss on marketable equity securities

 

 

(566

)

 

 

 

 

 

(566

)

 

 

 

Other income (losses)

 

 

493

 

 

 

470

 

 

 

1,113

 

 

 

274

 

 

 

$

1,737

 

 

$

739

 

 

$

7,120

 

 

$

1,005

 

 

NOTE 5 – FINANCIAL INSTRUMENTS

The Company has investments in debt securities which include corporate bonds and notes, treasury and agency notes and bills, commercial paper, certificates of deposit, and in equity securities consisting of money market funds and common equity securities of a publicly traded Japanese company. The Company classifies its debt securities as available-for-sale, which are accounted for at fair value with unrealized gains and losses recognized in accumulated other comprehensive gain or loss on the Condensed Consolidated Balance Sheets.

Prior to January 1, 2018, the Company accounted for equity securities in the same manner as debt securities. Realized gains and losses on equity securities sold, if any, were recognized in other income and expense, net, on the Condensed Consolidated Statement of Operations.  

On January 1, 2018, the Company adopted ASU 2016-01 (Topic 321) which requires equity securities to be measured at fair value and starting January 1, 2018 unrealized gains and losses are recognized in other income and expense, net, on the Condensed Consolidated Statement of Operations.

The following is a summary of marketable securities at September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30, 2018

 

 

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair

Values

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

$

33,893

 

 

$

 

 

$

(306

)

 

$

33,587

 

Commercial paper

 

 

8,962

 

 

 

 

 

 

(5

)

 

 

8,957

 

Treasury and agency notes and bills

 

 

6,000

 

 

 

 

 

 

(71

)

 

 

5,929

 

Total debt securities

 

 

48,855

 

 

 

 

 

 

(382

)

 

 

48,473

 

Money market funds

 

 

67

 

 

 

 

 

 

 

 

 

67

 

Marketable equity securities

 

 

5,662

 

 

 

 

 

 

(566

)

 

 

5,096

 

Total equity securities

 

 

5,729

 

 

 

 

 

 

(566

)

 

 

5,163

 

Total marketable securities

 

$

54,584

 

 

$

 

 

$

(948

)

 

$

53,636

 

Reported in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$