Form 10-K MARVELL TECHNOLOGY GROUP For: Feb 02

March 28, 2019 4:12 PM



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2019
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 0-30877
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
(Address of principal executive offices)
(441) 296-6395
(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 shares, $0.002 par value per share
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
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  x    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).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

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.
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
Emerging growth company ¨
 
 
(Do not check if a smaller reporting 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  x
The aggregate market value of the registrant’s common shares held by non-affiliates of the registrant was $13,935,080,448 based upon the closing price of $21.37 per share on the NASDAQ Global Select Market on August 3, 2018 (the last business day of the registrant’s most recently completed second quarter).
As of March 21, 2019, there were 659.1 million common shares of the registrant outstanding.






DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this Form 10-K are incorporated by reference from the registrant’s definitive proxy statement for its 2019 annual general meeting of shareholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

TRADEMARKS
Marvell®, the Marvell logo, and other trademarks listed at https://www.marvell.com/company/trademarks/ are trademarks of Marvell International Ltd. and/or its affiliates. These trademarks include the following trademarks that we recently acquired from Cavium including OCTEON®, OCTEON Fusion-M®, OCTEON XL®, OCTEON TX®, LiquidIO®, LiquidSecurity®, NITROX®, ThunderX®, ThunderX2®, Xpliant®, XPA®, QLogic® and FastLinQ®. Any other trademarks or trade names mentioned are the property of their respective owners. The information contained on any website referred to on this Cover Page to Form 10-K does not form any part of this Annual Report on Form 10-K and is not incorporated by reference herein unless expressly noted.





TABLE OF CONTENTS
 
 
Page
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
Item 15.
 
 






MARVELL TECHNOLOGY GROUP LTD.
Forward-Looking Statements
This Annual Report on Form 10-K 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 implement our plans, forecasts and other expectations with respect to the acquisition of Cavium Inc. and to fully realize the anticipated synergies and cost savings in the timeframe anticipated;
our dependence on a small number of customers;
severe financial hardship or bankruptcy of one or more of our major customers;
the effects of any potential future acquisitions, strategic investments, divestitures, mergers or joint ventures;
risks associated with acquisition and consolidation activity in the semiconductor industry;
our ability and the ability of our customers to successfully compete in the markets in which we serve;
our dependence upon the storage market, which is highly cyclical and intensely competitive;
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 reliance on independent foundries and subcontractors for the manufacture, assembly and testing of our products;
the risks associated with manufacturing and selling a majority of our products and our customers’ products outside of the United States;
the effects of transitioning to smaller geometry process technologies;
our ability to scale our operations in response to changes in demand for existing or new products and services;
our ability to limit costs related to defective products;
our ability to recruit and retain experienced executive management as well as highly-skilled engineering and sales and marketing personnel;
our ability to mitigate risks related to our information technology systems;
our ability to protect our intellectual property;
our ability to estimate customer demand and future sales accurately;
our reliance on third-party distributors and manufacturers' representatives to sell our products;
the impact of international conflict and continued economic volatility in either domestic or foreign markets;
the impact and costs associated with changes in international financial and regulatory conditions;
the impact of any change in our application of the United States federal income tax laws and the loss of any beneficial tax treatment that we currently enjoy;
our maintenance of an effective system of internal controls; and
the outcome of pending or future litigation and legal proceedings.
Additional factors that could cause actual results to differ materially include the risks discussed in Part I, Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. Unless required by law, we undertake no obligation to update publicly any forward-looking statements.



1






PART I
Item 1.
Business
Overview
Marvell Technology Group Ltd., together with its consolidated subsidiaries (“Marvell,” the “Company,” “we,” or “us”) is a fabless semiconductor provider of high-performance application-specific standard products. Our core strength is developing highly integrated and 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 and networking. We were incorporated in Bermuda in January 1995.
On July 6, 2018, the Company completed the acquisition of Cavium (the “Cavium acquisition”). The Cavium acquisition was primarily intended to create an opportunity for the combined company to emerge as a leader in infrastructure solutions. In accordance with the terms of the Agreement and Plan of Merger, dated as of November 19, 2017, by and among the Company and Cavium (the “Cavium merger agreement”), the Company acquired all outstanding shares of common stock of Cavium (the “Cavium shares”) for $40.00 per share in cash and 2.1757 shares of the Company’s common stock exchanged for each share of Cavium stock. The merger consideration was funded with a combination of cash on hand, new debt financing and issuance of the Company’s common shares. See “Note 5 - Business Combination” for discussion of the acquisition and “Note 12 - Debt” for discussion of the debt financing in the Notes to Consolidated Financial Statements set forth in Part II, Item 8 of the Annual Report on Form 10-K.
Our registered and mailing address is Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda, and our telephone number there is (441) 296-6395. The address of our U.S. operating subsidiary is Marvell Semiconductor, Inc., 5488 Marvell Lane, Santa Clara, California 95054, and our telephone number there is (408) 222-2500. We also have operations in many countries, including China, India, Israel, Japan, Singapore, South Korea, Taiwan and Vietnam. Our fiscal year ends on the Saturday nearest January 31.
Available Information
Our website address is www.marvell.com. The information contained on any website referred to in this Form 10-K does not form any part of this Annual Report on Form 10-K and is not incorporated by reference herein unless expressly noted. We make available free of charge through our website our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file this material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). In addition, the SEC’s website, www.sec.gov, contains reports, proxy statements, and other information that we file electronically with the SEC.
Our Markets and Products
Over the last several years, we have transitioned from a supplier of stand-alone semiconductor components to a supplier of fully integrated platform solutions. We have been focusing our investment on infrastructure markets such as enterprise, datacenter and service provider networks and have reduced our investment in consumer markets such as personal computers. Infrastructure markets have a number of very attractive attributes including long product lifecycles, deep customer relationships and typically sole-sourced design wins. Our platform solutions contain multiple intellectual property components in integrated hardware, along with software that incorporates digital, analog and mixed-signal computing and communication technologies, designed and configured to provide an optimized solution. Our solutions have become increasingly integrated, with more and more components resulting in an all-in-one solution for a given customer’s end product. The demand for such highly integrated platform solutions is generally driven by technological changes and anticipation of the future needs of device manufacturers and end users, including enterprises, campus and service provider networks and, to an increasing extent, data center providers.
A device manufacturer may require technologies leveraged from one end market product into products for other end markets, integrating components and technologies traditionally associated with one end market with components and technologies from another end market. The integration of these various technologies onto a single piece of silicon is referred to as SoC.
In addition, software has become increasingly important to our business over the last several years and we believe software will become even more relevant as the market expects hardware and software to be delivered as an integrated solution. On-chip software, which acts as the “driver” for the functionality of the chip, has always been a critical part of our business. However, the software and application-level software that we deliver with our products have become significantly more complex as the range of uses and the needs have increased.

2






Our current product offerings are primarily in two broad product groups: storage and networking. In storage, we are a market leader in fibre channel products and data storage controller solutions spanning cloud, enterprise, edge and personal computing markets. Our networking products include ethernet solutions, embedded processors and WiFi connectivity solutions. These products address multiple end markets in cloud, consumer, enterprise, and service provider networks.
In connection with the November 2016 announcement of our plan to restructure our operations to refocus our research and development, increase operational efficiency and improve profitability, we divested three businesses in fiscal 2018. As required, we have retrospectively recast our consolidated statements of operations and balance sheets for all periods presented to reflect these businesses as discontinued operations. Unless noted otherwise, the following discussion refers to our continuing operations. As part of our restructuring initiated in July 2018, our former Networking and Connectivity product group was combined and named Networking. Prior years’ amounts have been revised to conform to the current year’s presentation. Our net revenue by product group for the last three fiscal years is as follows:
 
Year Ended
 
February 2, 2019
 
 
 
February 3, 2018
 
 
 
January 28, 2017
 
 
 
(in millions, except for percentages)
Storage
$
1,377

 
48
%
 
$
1,254

 
52
%
 
$
1,158

 
50
%
Networking
1,313

 
46
%
 
962

 
40
%
 
908

 
40
%
Other
176

 
6
%
 
193

 
8
%
 
235

 
10
%
Total
$
2,866

 
 
 
$
2,409

 
 
 
$
2,301

 
 
Storage
Storage Controllers
Hard disk drive (“HDD”) controllers provide high-performance input/output (“I/O”) interface control between the HDD and the host system. We support a variety of host system interfaces, including Serial Advanced Technology Attachment (“SATA") and Serial Attached SCSI (“SAS”), which support the complete range of cloud, enterprise, desktop and mobile HDDs.
We are a leading HDD controller supplier and currently supply products to all of the major hard drive manufacturers. Our HDD controllers provide a technological advantage that enables a higher level of data storage on smaller form factors and higher volumetric densities. Our advanced HDD controller SoCs incorporate the latest Marvell IPs, using leading advanced semiconductor process nodes.
Our solid-state-drive (“SSD”) controller SoCs are targeted at the market for flash-based storage devices and systems for the cloud, enterprise, consumer and mobile computing markets. We support a variety of host system interfaces, including SAS, SATA, peripheral component interconnect express (“PCIe”), and non-volatile memory express (“NVMe”).
We are a leading supplier of SSD controllers across a range of customers and market segments. Our advanced SSD controller SoCs incorporate the latest Marvell technology using leading advanced process nodes.
Our preamplifiers transmit the signal from the magnetic head reading and writing data to and from the HDD platter to the HDD controller SoC with minimal noise and distortion. Our preamplifiers typically support multiple signal paths or channels, and are designed into cloud, enterprise and client HDDs.
We develop software-enabled silicon solutions for enterprise, data centers and cloud computing businesses. The solutions include SATA port multipliers, bridges, SATA, SAS and NVMe redundant array of independent disk controllers and converged storage processors. Recently, we introduced three new products to enable innovative flash-based storage architectures in data centers. Our aggregators increase SSD densities to maximize throughput for new emerging SSD form factors and architectures. Our accelerators and converters reduce the need for additional servers while optimizing overall data storage utilization, performance and scalability.

Fibre Channel Products
The QLogic Fibre Channel product family includes both adapters for server connectivity as well as ASICs and adapters for storage system connectivity. These products accelerate enterprise applications, deliver a highly resilient infrastructure, enable greater virtualization density along with an advanced set of datacenter diagnostic, orchestration and Quality of Service capabilities to optimize IT staff productivity. Our latest high-performance, high port density, Fibre Channel products are particularly well-suited for use with all-flash arrays.

3






Networking
Ethernet Solutions
Ethernet connectivity is pervasive throughout networking infrastructures built for enterprises, small and medium businesses, home offices, service providers, data centers and now also entering the automotive market. Our Ethernet solutions address a wide variety of end-customer products for those markets, from small, cost-effective appliances to large, high-performance modular solutions.
We offer a broad selection of Ethernet switches with market-optimized innovative features, such as advanced tunneling and routing, high throughput forwarding, and packet processing that make networks more effective at delivering content. Our Ethernet switch product portfolio ranges from low-power, five-port switches to highly integrated, multi-terabit Ethernet SoC devices that can be interconnected to form massive network solutions.
We complement our Ethernet switch and embedded communication processors with a broad selection of Ethernet physical-layer transceivers for both fiber and copper interconnect with advanced power management, link security, and time synchronization features.
We also offer a family of Ethernet Adapters and controllers that serve the connectivity needs of both server and storage systems.
Embedded Processors
We offer highly integrated semiconductors that provide single or multiple cores of processors, along with intelligent Layer 2 through 7 processing for enterprise, datacenter, storage, broadband and consumer, and service provider markets. All of our products are compatible with standards-based operating systems and general purpose software to enable ease of programming, and are supported by our ecosystem partners.
Our OCTEON multi-core processor families provide integrated Layer 4 through 7 data and security processing with additional capabilities at Layers 2 and 3 at line speeds. These software-compatible processors integrate next-generation networking I/Os along with advanced security, storage, and application hardware acceleration, offering programmability for the Layer 2 through Layer 7 processing requirements of intelligent networks. The OCTEON processors are targeted for use in a wide variety of original equipment manufacturer, or OEM, networking and storage equipment, including routers, switches, security and UTM appliances, content-aware switches, application-aware gateways, triple-play gateways, WLAN, 3G/4G/5G wireless base stations, storage arrays, storage networking equipment, servers, and intelligent network interface controllers, NFV and SDN infrastructure and service provider CPE.
Our OCTEON Fusion-M family of wireless baseband processors is a highly scalable product family supporting enterprise small cells, high capacity outdoor picocells and microcells all the way up to multi-sector macrocells for multiple wireless protocols including 5G. The key features include highly optimized processor cores, a highly efficient caching subsystem, high memory bandwidth digital signal processing engines along with a host of hardware accelerators. Additionally, multiple OCTEON Fusion-M chips can be cascaded for even denser deployments or higher order multiple-input and multiple-output, or MIMO.
Our NITROX processor family offers stand-alone security processors that provide the functionality required for Layer 3 to Layer 5 secure communication in a single chip. This single chip, custom-designed processors provide complete security protocol processing, encryption, authentication and compression algorithms to reduce the load on the system processor and increase total system throughput. The LiquidSecurity product family is a high-performance hardware-based transaction security solution for cloud datacenters, enterprise, government organizations and ecommerce applications. It addresses the high-performance security requirements for private key management and administration. This family is available as an adapter with complete software or as a standalone appliance.
Our LiquidIO Server Adapter family is a high-performance, general-purpose programmable adapter platform that enables cloud service providers to offload any functionality in the datacenter. The LiquidIO Server Adapter family is supported by a feature rich software development kit that allows customers and partners to develop high-performance SDN (software defined networking) applications with packet processing, switching, security, tunneling, quality of service, and metering.
Our ThunderX processor family is a highly integrated, scalable family of multi-core SoC processors optimized for cloud and datacenter servers. These processors incorporate highly optimized, full custom cores based on 64-bit ARMv8 instruction set architecture targeting cloud compute, secure compute, cloud storage/big data and networking/network function virtualization workloads. ThunderX2 is the second-generation workload optimized ARMv8 processor built using FinFET process that targets high-performance volume servers deployed by public/private cloud and telco datacenters and high-performance computing applications.

4






WiFi Connectivity
We offer a broad portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated SOCs. These products are integrated into a wide variety of end devices, such as enterprise access points, home gateways and voice assistants, multimedia devices, gaming, printers, automotive infotainment and telematics units, and smart industrial devices. Our products are well-positioned to deliver low-power and high-performance functionality with cutting-edge technologies, and to lead the fast-paced developments of Wi-Fi 802.11 and Bluetooth standards. Our connectivity product portfolio includes a single stream 1x1, as well as multi-stream 2x2, 4x4 and 8x8 multiple input multiple output devices. We deliver both the radio control and processing as well as the RF components for a complete customer solution.
Other Products
Our other products include printer SoC products and application processors. Our printer SoC products power many of today’s laser and ink printers and multi-function peripherals.
 Our application processors are targeted for non-mobile applications and deliver leading-edge performance for today’s embedded and Internet of Things solutions.
Financial Information about Segments and Geographic Areas
We have determined that we operate in one reportable segment: the design, development and sale of integrated circuits. For information regarding our revenue by geographic area, and property and equipment by geographic area, please see “Note 18 — Segment and Geographic Information” in our Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K. See “Risk Factors” under Item 1A of this Annual Report on Form 10-K for a discussion of the risks associated with our international operations.    
Customers, Sales and Marketing
Our target customers are original equipment manufacturers and original design manufacturers, both of which design and manufacture end market devices. Our sales force is strategically aligned along key customer lines in order to offer fully integrated platforms to our customers. In this way, we believe we can more effectively offer a broader set of content into our key customers’ end products, without having multiple product groups separately engage the same customer. We complement and support our direct sales force with manufacturers’ representatives for our products in North America, Europe and Asia. In addition, we have distributors who support our sales and marketing activities in the United States, Europe and Asia. We also use third-party logistics providers who maintain warehouses in close proximity to our customers’ facilities. We expect that a significant percentage of our sales will continue to come from direct sales to key customers.
We use field application engineers to provide technical support and assistance to existing and potential customers in designing, testing and qualifying systems designs that incorporate our products. Our marketing team works in conjunction with our field sales and application engineering force, and is organized around our product groups.
Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. Net revenue attributable to significant customers whose revenues as a percentage of net revenue was 10% or greater of total net revenues is presented in the following table:
 
Year Ended
 
February 2, 2019
 
February 3, 2018
 
January 28, 2017
Customer:
 
 
 
 
 
Western Digital
12
%
 
20
%
 
21
%
Toshiba *
11
%
 
14
%
 
14
%
Seagate
10
%
 
11
%
 
9
%
Distributor:
 
 
 
 
 
Wintech
**

 
10
%
 
10
%
 
 
 
 
 
 
* The percentage of net revenue reported for Toshiba for fiscal year 2019 excludes net revenue of Toshiba Memory Corporation after Toshiba divested Toshiba Memory Corporation during fiscal year 2019.
** Less than 10% of net revenue

5






Some of our products are being incorporated into consumer electronics products, including gaming devices and personal computers, which are subject to significant seasonality and fluctuations in demand. Seasonality, including holiday buying trends, may at times negatively impact our results in the first and fourth quarter, and positively impact our results in the second and third quarter of our fiscal years. In addition, the timing of new product introductions by our customers may cause variations in our quarterly revenues, which may not be indicative of future trends.
Inventory and Working Capital
We place firm orders for products with our suppliers generally up to 16 weeks prior to the anticipated delivery date and typically prior to an order for the product. These lead times typically change based on the current capacity at the foundries. We often maintain substantial inventories of our products because the semiconductor industry is characterized by short lead time orders and quick delivery schedules.
Backlog
We do not believe that backlog is a meaningful or reliable indicator for future demand, due to the following:
an industry practice that allows customers to cancel or change orders prior to the scheduled shipment dates;
a portion of our revenue comes from products shipped to customers using third-party logistics providers, or “hubs” wherein the product can be pulled at any time by the customer and is therefore never reflected in backlog
Research and Development
We believe that our future success depends on our ability to introduce improvements to our existing products and to develop new products that deliver cost-effective solutions for both existing and new markets. Our research and development efforts are directed largely to the development of high-performance analog, mixed-signal, digital signal processing and embedded microprocessor integrated circuits with the smallest die size and lowest power. We devote a significant portion of our resources to expanding our product portfolio based on a broad intellectual property portfolio with designs that enable high-performance, reliable communications over a variety of physical transmission media. We are also focused on incorporating functions currently provided by stand-alone integrated circuits into our integrated platform solutions to reduce our customers’ overall system costs.
We have assembled a core team of engineers who have experience in the areas of mixed-signal circuit design, digital signal processing, embedded microprocessors, complementary metal oxide semiconductor (“CMOS”) technology and system-level architectures. We have invested and will continue to invest a significant amount in research and development. See our discussion of research and development expenses in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K for further information.
Manufacturing
Integrated Circuit Fabrication
The vast majority of our integrated circuits are fabricated using widely available CMOS processes, which provide greater flexibility to engage independent foundries to manufacture integrated circuits at lower costs. By outsourcing manufacturing, we are able to avoid the cost associated with owning and operating our own manufacturing facility. This allows us to focus our efforts on the design and marketing of our products. We work closely with our foundry partners to forecast on a monthly basis our manufacturing capacity requirements. We closely monitor foundry production to ensure consistent overall quality, reliability and yield levels. Our integrated circuits are currently fabricated in several advanced manufacturing processes. Because finer manufacturing processes lead to enhanced performance, smaller silicon chip size and lower power requirements, we continually evaluate the benefits and feasibility of migrating to smaller geometry process technology in order to reduce cost and improve performance.
Assembly and Test
We outsource all product packaging and testing requirements for our products in production to several assembly and test subcontractors primarily located in China, Korea, Singapore and Taiwan.
Environmental Management
We believe that our products comply with the current Restriction of Hazardous Substances Directive, the European legislation that restricts the use of a number of substances, including lead, and the Regulation, Evaluation and Authorization of Chemicals SVHC Substances Directive. In addition, each of our manufacturing subcontractors complies with ISO 14001:2004, the international standard related to environmental management. We are also working to establish a “conflict-free” supply chain, including ethical sourcing of certain minerals for our products.

6






Intellectual Property
Our future revenue growth and overall success depend in large part on our ability to protect our intellectual property. We rely on a combination of patents, copyrights, trademarks, trade secrets, contractual provisions, confidentiality agreements and licenses to protect our intellectual property. As of February 2, 2019, we have approximately 10,000 U.S. and foreign patents issued and approximately 1600 U.S. and foreign patent applications pending on various aspects of our technology. While we believe the duration of our patents generally covers the expected lives of our products, our patents may not collectively or individually cover every feature on innovation in our product. In addition, our efforts may not be sufficient to protect our intellectual property from misappropriation or infringement. See “Risk Factors” under Item 1A of this Annual Report on Form 10-K for a discussion of the risks associated with our intellectual property.
We have expended and will continue to expend considerable resources in establishing a patent position designed to protect our intellectual property. While our ability to compete is enhanced by our ability to protect our intellectual property, we believe that in view of the rapid pace of technological change, the combination of the technical experience and innovative skills of our employees may be as important to our business as the legal protection of our patents and other proprietary information.
From time to time, we may desire or be required to renew or to obtain licenses from third parties in order to further develop and effectively market commercially viable products or in connection with a pending or future claim or action asserted against us. We cannot be sure that any necessary licenses will be available or will be available on commercially reasonable terms.
The integrated circuit industry is characterized by vigorous pursuit and protection of intellectual property rights, which has resulted in significant and often time consuming and expensive litigation. From time to time, we receive, and may continue to receive in the future, notices that claim we have infringed upon, misappropriated or misused the proprietary rights of other parties.
In addition, we have in the past and may in the future be sued by other parties who claim that we have infringed their patents or misappropriated or misused other intellectual property rights, or who may seek to invalidate one or more of our patents, trademarks, or other rights. Although we defend these claims vigorously, it is possible that we will not prevail in pending or future lawsuits. See “Risk Factors” under Item 1A of this Annual Report on Form 10-K and “Note 13 — Commitments and Contingencies” in our Notes to the Consolidated Financial Statements set forth in Part II, Item 8, of this Annual Report on Form 10-K for further discussion of the risks associated with patent litigation matters.
Competition
The markets for our products are intensely competitive, and are characterized by rapid technological change, evolving industry standards, frequent new product introductions and pricing pressures. Competition has intensified as a result of the increasing demand for higher levels of performance and integration and smaller process geometries. We expect competition to intensify as current competitors continue to strengthen the depth and breadth of their product offerings, either through in-house development or by acquiring existing technology. We believe that our ability to compete successfully in the rapidly evolving markets for our products depends on a number of factors, including, but not limited to:
the performance, features, quality and price of our products;
the timing and success of new product introductions by us, our customers and our competitors;
emergence, rate of adoption and acceptance of new industry standards;
our ability to obtain adequate foundry capacity with the appropriate technological capability; and
the number and nature of our competitors in a given market.
Our major competitors for our products include Advanced Micro Devices Inc., Aquantia Corporation, Broadcom Limited, Cypress Semiconductor Corporation, Inphi Corporation, Intel Corporation, MediaTek Inc., Mellanox Technologies Limited, Microchip Technology Inc., NXP Semiconductors N.V., Phison Electronics Corporation, Qualcomm Inc., Quantenna Communications Inc. and Silicon Motion Technology Corporation. We expect increased competition in the future from emerging or established companies, or alliances among competitors, customers or other third parties, any of which could acquire significant market share. See “Risk Factors” under Item 1A of this Annual Report on Form 10-K for a discussion of competitive risks associated with our business.
Historically, average unit selling prices in the integrated circuit industry in general, and for our products in particular, have decreased over the life of a particular product. We expect that the average unit selling prices of our products will continue to be subject to significant pricing pressures. In order to offset expected declines in the selling prices of our products, we will need to continue to introduce innovative new products and reduce the cost of our products. To accomplish this, we intend to continue to implement design changes that lower the cost of manufacturing, assembly and testing of our products. See “Risk Factors” under Item 1A of this Annual Report on Form 10-K for a discussion of pricing risks.

7






Employees
As of February 2, 2019, we had a total of 5,275 employees.

Item 1A.
Risk Factors
Investing in our common shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this report before you decide to purchase our common shares. Many of these risks and uncertainties are beyond our control, including business cycles and seasonal trends of the computing, infrastructure, semiconductor and related industries and end markets. If any of the possible adverse events described below actually occurs, we may be unable to conduct our business as currently planned and our financial condition and operating results could be harmed. In addition, the trading price of our common shares could decline due to the occurrence of any of these risks, and you could lose all or part of your investment.
Risks Related to Our Acquisition of Cavium
Our acquisition of Cavium involves a number of risks, including, among others, those associated with our use of a significant portion of our cash and our taking on substantial indebtedness, other financial risks, integration risks, and risk associated with the reactions of customers, suppliers and employees.
We used a significant portion of our cash and incurred substantial indebtedness in connection with the financing of our acquisition of Cavium (the "Cavium acquisition") that will reduce our liquidity and may (i) limit our flexibility in responding to other business opportunities and (ii) increase our vulnerability to adverse economic and industry conditions.
The benefits we expect to realize from the Cavium acquisition will depend, in part, on our ability to integrate the businesses successfully and efficiently. See also the Risk Factor entitled “Any potential future acquisitions, strategic investments, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business." If we are unable to successfully integrate the businesses of Cavium with that of the Company, the combined company’s business, results of operations, financial condition or cash flows could be harmed. The challenges in integrating the operations of the companies include, among others:

difficulties in fully achieving anticipated cost savings, synergies, business opportunities and growth prospects from combining the businesses;     

difficulties entering new markets or manufacturing in new geographies where we have no or limited direct prior experience;     

difficulties in the integration of operations and systems;     

difficulties in the assimilation or retention of employees;     

difficulties in managing the expanded operations of a significantly larger and more complex company; and     

challenges in maintaining existing, and establishing new, business relationships.
Any of the above could harm the combined company and thus decrease the benefits we expect to receive from the acquisition.

We may not fully realize the benefits we expect to receive from the transaction, such as increasing revenue or profits, or receive them in the anticipated time frame. In addition, if we have not identified or accurately assessed the magnitude of Cavium’s liabilities, it could result in unexpected litigation or regulatory exposure, unfavorable accounting charges, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, results of operations, financial condition or cash flows. Moreover, the integration of the businesses and the employee compensation and benefits could result in increased employee voluntary attrition. Loss of key or skilled personnel could adversely impact product development or other aspects of the Company's business and operations.

The occurrence of any of these risks could have a material adverse effect on the combined company's business, results of operations, financial condition or cash flows.


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Factors That May Affect Our Future Results
Our financial condition and results of operations may vary from quarter to quarter, which may cause the price of our common shares to decline.
Our quarterly results of operations have fluctuated in the past and could do so in the future. Because our results of operations are difficult to predict, you should not rely on quarterly comparisons of our results of operations as an indication of our future performance.
Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and those identified throughout this “Risk Factors” section:
our ability to realize anticipated synergies in connection with the Cavium acquisition;
changes in general economic and political conditions and specific conditions in the end markets we address, including the continuing volatility in the technology sector and semiconductor industry;
the effects of any acquisitions, divestitures or significant investments, including the Cavium acquisition;
the highly competitive nature of the end markets we serve, particularly within the semiconductor industry;
our dependence on a few customers for a significant portion of our revenue;
severe financial hardship or bankruptcy of one or more of our major customers;
our ability to maintain a competitive cost structure for our manufacturing and assembly and test processes and our reliance on third parties to produce our products;
any current and future litigation that could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully maintain and grow our business;
cancellations, rescheduling or deferrals of significant customer orders or shipments, as well as the ability of our customers to manage inventory;
gain or loss of a design win or key customer;
seasonality in sales of consumer devices in which our products are incorporated;
failure to qualify our products or our suppliers’ manufacturing lines;
our ability to develop and introduce new and enhanced products in a timely and effective manner, as well as our ability to anticipate and adapt to changes in technology;
failure to protect our intellectual property;
impact of a significant natural disaster, including earthquakes, floods and tsunamis, particularly in certain regions in which we operate or own buildings, such as Santa Clara, California, and where our third party suppliers operate, such as Taiwan and elsewhere in the Pacific Rim; and
our ability to attract, retain and motivate a highly skilled workforce, especially managerial, engineering, sales and marketing personnel.
Due to fluctuations in our quarterly results of operations and other factors, the price at which our common shares will trade is likely to continue to be volatile. Accordingly, you may not be able to resell your common shares at or above the price you paid. In future periods, our stock price could decline if, amongst other factors, our revenue or operating results are below our estimates or the estimates or expectations of securities analysts and investors. Our stock is traded on the NASDAQ stock exchange under the ticker symbol "MRVL". As a result of stock price volatility, we may be subject to securities class action litigation. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully maintain and grow our business.
Our sales are concentrated in a few large customers. If we are unable to increase the number of large customers in key markets, or if we lose or experience a significant reduction in sales to these key customers, if these key customers experience a significant decline in market share, or if these customers experience significant financial difficulties, our revenue may decrease substantially and our results of operations and financial condition may be harmed.
We receive a significant amount of our revenue from a limited number of customers. Net revenue from our two largest customers represented 23% and 34% of our net revenue for the year ended February 2, 2019 and February 3, 2018, respectively. Sales to our largest customers have fluctuated significantly from period to period and year to year and will likely continue to fluctuate in the future, primarily due to the timing and number of design wins with each customer, the continued diversification of our customer base as we expand into new markets, global economic conditions, natural disasters or other issues that may impact a customer’s operations. The loss of any of our large customers or a significant reduction in sales we make to them would likely harm our financial condition and results of operations. To the extent one or more of our large customers experience significant financial difficulty, bankruptcy or insolvency, this could have a material adverse effect on our sales and our ability to collect on receivables, which could harm our financial condition and results of operations.


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If we are unable to increase the number of large customers in key markets, then our operating results in the foreseeable future will continue to depend on sales to a relatively small number of customers, as well as the ability of these customers to sell products that incorporate our products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past, or alter their purchasing patterns in some other way, particularly because:
a significant portion of our sales are made on a purchase order basis, which allows our customers to cancel, change or delay product purchase with relatively short notice to us;
customers may purchase integrated circuits from our competitors;
customers may discontinue sales or lose market share in the markets for which they purchase our products;
customers may develop their own solutions or acquire fully developed solutions from third-parties;
customers may be subject to severe business disruptions, including, but not limited to, those driven by financial instability; or
customers may consolidate (for example, Western Digital acquired SanDisk in 2017, and Toshiba Corporation sold control of a portion of its semiconductor business in 2018), which could lead to changing demand for our products, replacement of our products by the merged entity with those of our competitors and cancellation of orders.
In addition, if regulatory activity, such as enforcement of U.S. export control and sanctions laws, or the imposition of new tariffs, were to materially limit our ability to makes sales to any of our significant customers, it could harm our results of operations, reputation and financial condition.
Any potential future acquisitions, strategic investments, divestitures, mergers or joint ventures may subject us to significant risks, any of which could harm our business.
Our long-term strategy may include identifying and acquiring, investing in or merging with suitable candidates on acceptable terms, or divesting of certain business lines or activities. In particular, over time, we may acquire, make investments in, or merge with providers of product offerings that complement our business or may terminate such activities. Mergers, acquisitions and divestitures include a number of risks and present financial, managerial and operational challenges, including but not limited to:
diversion of management attention from running our existing business;
increased expenses, including, but not limited to, legal, administrative and compensation expenses related to newly hired or terminated employees;
key personnel of an acquired company may decide not to work for us;
increased costs to integrate or, in the case of a divestiture, separate the technology, personnel, customer base and business practices of the acquired or divested business or assets;
assuming the legal obligations of the acquired company, including potential exposure to material liabilities not discovered in the due diligence process;
ineffective or inadequate control, procedures and policies at the acquired company may negatively impact our results of operations;
potential adverse effects on reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions;
potential damage to customer relationships or loss of synergies in the case of divestitures; and
unavailability of acquisition financing on reasonable terms or at all.
Any acquired business, technology, service or product could significantly under-perform relative to our expectations and may not achieve the benefits we expect from possible acquisitions. Given that our resources are limited, our decision to pursue a transaction has opportunity costs; accordingly, if we pursue a particular transaction, we may need to forgo the prospect of entering into other transactions that could help us achieve our strategic objectives.
When we decide to sell assets or a business, we may have difficulty selling on acceptable terms in a timely manner. These circumstances could delay the achievement of our strategic objectives or cause us to incur additional expense, or we may sell a business at a price or on terms that are less favorable than we had anticipated, resulting in a loss on the transaction.
If we do enter into agreements with respect to acquisitions, divestitures, or other transactions, we may fail to complete them due to factors such as:
failure to obtain regulatory or other approvals;
IP disputes or other litigation; or
difficulties obtaining financing for the transaction.
For all these reasons, our pursuit of an acquisition, investment, divestiture, merger or joint venture could cause our actual results to differ materially from those anticipated.

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We operate in intensely competitive markets. Our failure to compete effectively would harm our results of operations.
The semiconductor industry, and specifically the storage and networking markets, is extremely competitive. We currently compete with a number of large domestic and international companies in the business of designing integrated circuits and related applications, some of which have greater financial, technical and management resources than us. Our efforts to introduce new products into markets with entrenched competitors exposes us to additional competitive pressures. For example, we are facing, and expect we will continue to face, significant competition in the infrastructure, networking and SSD storage markets. Additionally, customer expectations and requirements have been evolving rapidly. For example, customers expect us to provide turnkey solutions and commit to future roadmaps that have technical risks.
Some of our competitors may be better situated to meet changing customer needs and secure design wins. Increasing competition in the markets in which we operate may negatively impact our revenue and gross margins. For example, competitors with greater financial resources may be able to offer lower prices than us, or they may offer additional products, services or other incentives that we may not be able to match, such as bundling multiple products and pricing. In addition, many of our competitors operate and maintain their own fabrication facilities and have longer operating histories, greater name recognition, larger customer bases, and greater sales, marketing and distribution resources than we do.
In addition, the semiconductor industry has experienced increased consolidation over the past several years. For example, Microchip Technology acquired Microsemi in May 2018; Avago Technologies Limited (now Broadcom Limited (“Broadcom”)) acquired Broadcom Corporation in February 2016 and LSI Corporation in May 2014; Intel acquired Altera Corporation in December 2015; and NXP Semiconductors acquired Freescale Semiconductor, Ltd. in December 2015. Consolidation among our competitors could lead to a changing competitive landscape, capabilities and market share, which could put us at a competitive disadvantage and harm our results of operations.     
We rely on our customers to design our products into their systems, and the nature of the design process requires us to incur expenses prior to customer commitments to use our products or recognizing revenues associated with those expenses which may adversely affect our financial results.
One of our primary focuses is on winning competitive bid selection processes, known as “design wins,” to develop products for use in our customers’ products. We devote significant time and resources in working with our customers’ system designers to understand their future needs and to provide products that we believe will meet those needs and these bid selection processes can be lengthy. If a customer’s system designer initially chooses a competitor’s product, it becomes significantly more difficult for us to sell our products for use in that system because changing suppliers can involve significant cost, time, effort and risk for our customers. Thus, our failure to win a competitive bid can result in our foregoing revenues from a given customer’s product line for the life of that product. In addition, design opportunities may be infrequent or may be delayed. Our ability to compete in the future will depend, in large part, on our ability to design products to ensure compliance with our customers’ and potential customers’ specifications. We expect to invest significant time and resources and to incur significant expenses to design our products to ensure compliance with relevant specifications.
We often incur significant expenditures in the development of a new product without any assurance that our customers’ system designers will select our product for use in their applications. We often are required to anticipate which product designs will generate demand in advance of our customers expressly indicating a need for that particular design. Even if our customers’ system designers select our products, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred.
The reasons for this delay generally include the following elements of our product sales and development cycle timeline and related influences:    
our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their designs.
it can take from six months to three years from the time our products are selected to commence commercial shipments; and

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our customers may experience changed market conditions or product development issues. The resources devoted to product development and sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory if we have produced product in anticipation of expected demand. We may spend resources on the development of products that our customers may not adopt. If we incur significant expenses and investments in inventory in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.
Additionally, even if system designers use our products in their systems, we cannot assure you that these systems will be commercially successful or that we will receive significant revenue from the sales of our products for those systems. As a result, we may be unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions.
A significant portion of our revenue comes from the storage industry, which is highly cyclical, experiences rapid technological change, is subject to industry consolidation and is facing increased competition from alternative technologies.
The HDD and SSD storage industry is intensely competitive and technology inflections are happening rapidly. As a result, the average selling price of each of our products usually declines as individual products mature and competitors enter the market. 
This industry has historically been cyclical, with periods of increased demand and rapid growth followed by periods of oversupply and subsequent contraction. These cycles may affect us because some of our largest customers participate in this industry.
Manufacturers tend to order more components than they may need during growth periods, and sharply reduce orders for components during periods of contraction. Rapid technological changes in the industry often result in shifts in market share among the industry’s participants. If the HDD and SSD manufacturers using our products do not retain or increase their market share, our sales may decrease.
In addition, the storage industry has experienced significant consolidation. Consolidation among our customers will lead to changing demand for our products, replacement of our products by the merged entity with those of our competitors and cancellation of orders, each of which could harm our results of operations. If we are unable to leverage our technology and customer relationships, we may not capitalize on the increased opportunities for our products within the combined company.
Furthermore, future changes in the nature of information storage products and personal computing devices could reduce demand for traditional HDDs. For example, products using alternative technologies, such as SSD and other storage technologies are a source of competition to manufacturers of HDDs. Although we offer SSD controllers, leveraging our technology in hard drives, we cannot ensure that our overall business will not be adversely affected if demand for traditional HDDs decreases.
We depend on a few customers for our SSD controllers and as such, the loss of any SSD controller customer or a significant reduction in sales we make to them may harm our financial condition and results of operations. SSD customers have, and may in the future develop their own controllers, which could pose a challenge to our market share in the SSD space and adversely affect our revenues in the storage business.
If we are unable to develop and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our results of operations and competitive position will be harmed.
Our future success will depend on our ability to develop and introduce new products and enhancements to our existing products that address customer requirements, in a timely and cost-effective manner and are competitive as to a variety of factors. For example, for our products addressing the 5G market, we must successfully identify customer requirements and design, develop and produce products on time that compete effectively as to price, functionality and performance. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions, and increasing demand for higher levels of integration and smaller process geometries. In addition, the development of new silicon devices is highly complex, and due to supply chain cross-dependencies and other issues, we may experience delays in completing the development, production and introduction of our new products. See also, “We may be unable to protect our intellectual property, which would negatively affect our ability to compete.”

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Our ability to adapt to changes and to anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. We may also have to incur substantial unanticipated costs to comply with these new standards. Our success will also depend on the ability of our customers to develop new products and enhance existing products for the markets they serve and to introduce and promote those products successfully and in a timely manner. Even if we and our customers introduce new and enhanced products to the market, those products may not achieve market acceptance.

Unfavorable or uncertain conditions in the 5G infrastructure market may cause fluctuations in our rate of revenue growth or financial results.
Markets for 5G infrastructure may not develop in the manner or in the time periods we anticipate. If domestic and global economic conditions worsen, overall spending on 5G infrastructure may be reduced, which would adversely impact demand for our products in these markets. In addition, unfavorable developments with evolving laws and regulations worldwide related to 5G may limit global adoption, impede our strategy, and negatively impact our long-term expectations in this area. Even if the 5G infrastructure market develops in the manner or in the time periods we anticipate, if we do not have timely, competitively priced, market-accepted products available to meet our customers’ planned roll-out of 5G wireless communications systems, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Our indebtedness could adversely affect our financial condition and our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.
 
On July 6, 2018, in connection with our acquisition of Cavium, we incurred substantial indebtedness pursuant to a Credit Agreement. The Credit Agreement provides for a $900.0 million Term Loan. The Term Loan will mature on July 6, 2021. As of February 2, 2019, the outstanding principal balance of the Term Loan amounted to $750.0 million. See “Note 12 - Debt” for discussion of the debt financing in the Notes to Consolidated Financial Statements set forth in Part II, Item 8 of the Annual Report on Form 10-K.

In addition to the Term Loan under the Credit Agreement, on June 22, 2018, we completed a public offering of (i) $500.0 million aggregate principal amount of the Company’s 4.200% Senior Notes due 2023 (the “2023 Notes”) and (ii) $500.0 million aggregate principal amount of the Company’s 4.875% Senior Notes due 2028 (the “2028 Notes” and, together with the 2023 Notes, the “Senior Notes”). We are obligated to pay interest on the Senior Notes on June 22 and December 22 of each year, beginning on December 22, 2018. The 2023 Notes will mature on June 22, 2023 and the 2028 Notes will mature on June 22, 2028.

Our indebtedness could have important consequences to us including:
    
increasing our vulnerability to adverse general economic and industry conditions;     

requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business strategy, acquisitions and other general corporate purposes;
limiting our flexibility in planning for, or reacting to, changes in the economy and the semiconductor industry;
placing us at a competitive disadvantage compared to our competitors with less indebtedness;
exposing us to interest rate risk to the extent of our variable rate indebtedness; and     
 
making it more difficult to borrow additional funds in the future to fund growth, acquisitions, working capital, capital expenditures and other purposes.

Although the Credit Agreement contains restrictions on the incurrence of additional indebtedness and the indenture under which the Senior Notes were issued contains restrictions on creating liens and entering into certain sale-leaseback transactions, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness, liens or sale-leaseback transactions incurred in compliance with these restrictions could be substantial.


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The Credit Agreement and the Senior Notes contain customary events of default upon the occurrence of which, after any applicable grace period, the lenders would have the ability to immediately declare the loans due and payable in whole or in part. In such event, we may not have sufficient available cash to repay such debt at the time it becomes due, or be able to refinance such debt on acceptable terms or at all. Any of the foregoing could materially and adversely affect our financial condition and results of operations.

Adverse changes to our debt ratings could negatively affect our ability to raise additional capital.

We receive debt ratings from the major credit rating agencies in the United States. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities. Liquidity, asset quality, cost structure, reserve mix and commodity pricing levels could also be considered by the rating agencies. The applicable margins with respect to interest incurred on the Term Loan will vary based on the applicable public ratings assigned to the collateralized, long-term indebtedness for borrowed money by Moody's Investors Service, Inc., Standard & Poor's Financial Services LLC, Fitch’s and any successor to each such rating agency business. A ratings downgrade could adversely impact our ability to access debt markets in the future and increase the cost of current or future debt and may adversely affect our share price.
The Credit Agreement and the indenture under which the Senior Notes were issued impose restrictions on our business.
The Credit Agreement and the indenture for the Senior Notes each contains a number of covenants imposing restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions, among other things, restrict our ability and our subsidiaries’ ability to create or incur certain liens, incur or guarantee additional indebtedness, merge or consolidate with other companies, pay dividends, transfer or sell assets and make restricted payments. These restrictions are subject to a number of limitations and exceptions set forth in the Credit Agreement and the indenture for the Senior Notes. Our ability to meet the liquidity covenant set forth in the Credit Agreement may be affected by events beyond our control.
The foregoing restrictions could limit our ability to plan for, or react to, changes in market conditions or our capital needs. We do not know whether we will be granted waivers under, or amendments to, our Credit Agreement or to the Senior Notes if for any reason we are unable to meet these requirements, or whether we will be able to refinance our indebtedness on terms acceptable to us, or at all.
We may be unable to generate the cash flow to service our debt obligations.
We may not be able to generate sufficient cash flow to enable us to service our indebtedness, including the Senior Notes, or to make anticipated capital expenditures. Our ability to pay our expenses and satisfy our debt obligations, refinance our debt obligations and fund planned capital expenditures will depend on our future performance, which will be affected by general economic, financial competitive, legislative, regulatory and other factors beyond our control. If we are unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to service our debt, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt (including the Senior Notes) or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or borrow more money on terms acceptable to us, if at all. If we cannot make scheduled payments on our debt, we will be in default and holders of our debt could declare all outstanding principal and interest to be due and payable, and we could be forced into bankruptcy or liquidation. In addition, a material default on our indebtedness could suspend our eligibility to register securities using certain registration statement forms under SEC guidelines that permit incorporation by reference of substantial information regarding our business and operations, potentially hindering our ability to raise capital through the issuance of our securities and increasing our costs of registration.

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We may, under certain circumstances, be required to repurchase the Senior Notes at the option of the holder.

We will be required to repurchase the Senior Notes at the option of each holder upon the occurrence of a change of control repurchase event as defined in the indenture for the Senior Notes. However, we may not have sufficient funds to repurchase the notes in cash at the time of any change of control repurchase event. Our failure to repurchase the Senior Notes upon a change of control repurchase event would be an event of default under the indenture for the Senior Notes and could cause a cross-default or acceleration under certain future agreements governing our other indebtedness. The repayment obligations under the Senior Notes may have the effect of discouraging, delaying or preventing a takeover of our company. If we were required to pay the Senior Notes prior to their scheduled maturity, it could have a significant negative impact on our cash and liquidity and could impact our ability to invest financial resources in other strategic initiatives.
Our gross margin and results of operations may be adversely affected in the future by a number of factors, including decreases in average selling prices of products over time and shifts in our product mix.
The products we develop and sell are primarily used for high-volume applications. As a result, the prices of those products have historically decreased rapidly. In addition, our more recently introduced products tend to have higher associated costs because of initial overall development and production expenses. Therefore, over time, we may not be able to maintain or improve our gross margins. Our financial results could suffer if we are unable to offset any reductions in our average selling prices by other cost reductions through efficiencies, introduction of higher margin products and other means.
To attract new customers or retain existing customers, we may offer certain price concessions to certain customers, which could cause our average selling prices and gross margins to decline. In the past, we have reduced the average selling prices of our products in anticipation of future competitive pricing pressures, new product introductions by us or by our competitors and other factors. We expect that we will continue to have to reduce prices of existing products in the future. Moreover, because of the wide price differences across the markets we serve, the mix and types of performance capabilities of our products sold may affect the average selling prices of our products and have a substantial impact on our revenue and gross margin. We may enter new markets in which a significant amount of competition exists, and this may require us to sell our products with lower gross margins than we earn in our established businesses. If we are successful in growing revenue in these markets, our overall gross margin may decline. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover the fixed costs and investments associated with a particular product, and as a result may harm our financial results.
Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities and our costs may even increase, which could also reduce our gross margins.
We rely on independent foundries and subcontractors for the manufacture, assembly and testing of our integrated circuit products, and the failure of any of these third-party vendors to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our sales and limit our ability to grow our business.
We do not have our own manufacturing or assembly facilities and have very limited in-house testing facilities. Therefore, we currently rely on several third-party foundries to produce our integrated circuit products. We also currently rely on several third-party assembly and test subcontractors to assemble, package and test our products. This exposes us to a variety of risks, including the following:
Regional Concentration
Substantially all of our products are manufactured by third-party foundries located in Taiwan, and other sources are located in China, Germany, South Korea, Singapore and the United States. In addition, substantially all of our third-party assembly and testing facilities are located in China, Malaysia, Singapore and Taiwan. Because of the geographic concentration of these third-party foundries, as well as our assembly and test subcontractors, we are exposed to the risk that their operations may be disrupted by regional disasters including, for example, earthquakes (particularly in Taiwan and elsewhere in the Pacific Rim close to fault lines), tsunamis or typhoons, or by political, social or economic instability. In the case of such an event, our revenue, cost of goods sold and results of operations would be negatively impacted. In addition, there are limited numbers of alternative foundries and identifying and implementing alternative manufacturing facilities would be time consuming. As a result, if we needed to implement alternate manufacturing facilities, we could experience significant expenses and delays in product shipments, which could harm our results of operations.

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No Guarantee of Capacity or Supply
The ability of each foundry to provide us with semiconductor devices is limited by its available capacity and existing obligations. When demand is strong, availability of foundry capacity may be constrained or not available, and with limited exceptions, our vendors are not obligated to perform services or supply products to us for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular purchase order. We place our orders on the basis of our customers’ purchase orders or our forecast of customer demand, and the foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. It is possible that foundry customers that are larger and better financed than we are or that have long-term agreements with our main foundries may induce our foundries to reallocate capacity to those customers. This reallocation could impair our ability to secure the supply of components that we need. In particular, as we and others in our industry transition to smaller geometries, our manufacturing partners may be supply constrained or may charge premiums for these advanced technologies, which may harm our business or results of operations. See also, “We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.” Moreover, if any of our third-party foundry suppliers are unable to secure necessary raw materials from their suppliers, lose benefits under material agreements, experience power outages, lack sufficient capacity to manufacture our products, encounter financial difficulties or suffer any other disruption or reduction in efficiency, we may encounter supply delays or disruptions, which could harm our business or results of operations.
While we attempt to create multiple sources for our products, most of our products are not manufactured at more than one foundry at any given time, and our products typically are designed to be manufactured in a specific process at only one of these foundries. Accordingly, if one of our foundries is unable to provide us with components as needed, it would be difficult for us to transition the manufacture of our products to other foundries, and we could experience significant delays in securing sufficient supplies of those components. This could result in a material decline in our revenue, net income and cash flow.
In order to secure sufficient foundry capacity when demand is high and to mitigate the risks described in the foregoing paragraph, we may enter into various arrangements with suppliers that could be costly and harm our results of operations, such as nonrefundable deposits with or loans to foundries in exchange for capacity commitments, or contracts that commit us to purchase specified quantities of integrated circuits over extended periods. We may not be able to make any such arrangement in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, and not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to use all of that capacity or incur penalties. These penalties may be expensive and could harm our financial results.
Uncertain Yields and Quality
The fabrication of integrated circuits is a complex and technically demanding process. Our technology is transitioning from planar to FINFET transistors. This transition may result in longer qualification cycles and lower yields. Our foundries have from time to time experienced manufacturing defects and lower manufacturing yields, which are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance. In addition, we may face lower manufacturing yields and reduced quality in the process of ramping up and diversifying our manufacturing partners. Poor yields from our foundries, or defects, integration issues or other performance problems with our products could cause us significant customer relations and business reputation problems, harm our financial performance and result in financial or other damages to our customers. Our customers could also seek damages in connection with product liability claims, which would likely be time consuming and costly to defend. In addition, defects could result in significant costs. See also, “Costs related to defective products could have a material adverse effect on us.
To the extent that we rely on outside suppliers to manufacture or assemble and test our products, we may have a reduced ability to directly control product delivery schedules and quality assurance, which could result in product shortages or quality assurance problems that could delay shipments or increase costs.
Commodity Prices
We are also subject to risk from fluctuating market prices of certain commodity raw materials, including gold and copper, which are incorporated into our end products or used by our suppliers to manufacture our end products. Supplies for such commodities may from time to time become restricted, or general market factors and conditions may affect pricing of such commodities.

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We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.
In order to remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products and to redesign some products. In addition, the cost of developing products with increasingly smaller line width geometries requires significantly higher investment and risk. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.
We are dependent on our relationships with our foundry subcontractors to transition to smaller geometry processes successfully. We cannot ensure that the foundries we use will be able to effectively manage the transition or that we will be able to maintain our existing foundry relationships or develop new ones. If we or any of our foundry subcontractors experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations.
As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, if at all. Moreover, even if we are able to achieve higher levels of design integration, such integration may have a short-term adverse impact on our results of operations, as we may reduce our revenue by integrating the functionality of multiple chips into a single chip.
Our indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financial condition, results of operations and cash flows.
Under Bermuda law, our articles of association and bye-laws and certain indemnification agreements to which we are a party, we have an obligation to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors and officers with respect to past, current and future investigations and litigation. For example, we have incurred significant indemnification expenses in connection with the Audit Committee's independent investigation completed in March 2016 and related shareholder litigation and pending government investigations. In connection with some of these pending matters, we are required to, or we have otherwise agreed to, advance, and have advanced, legal fees and related expenses to certain of our current and former directors and officers and expect to continue to do so while these matters are pending.
Indemnification obligations may not be “covered matters” under our directors’ and officers’ liability insurance, or there may be insufficient coverage available. Further, in the event the directors and officers are ultimately determined not to be entitled to indemnification, we may not be able to recover any amounts we previously advanced to them.
We cannot provide any assurances that future indemnification claims , including the cost of fees, penalties or other expenses, will not exceed the limits of our insurance policies, that such claims are covered by the terms of our insurance policies or that our insurance carrier will be able to cover our claims. Additionally, to the extent there is coverage of these claims, the insurers also may seek to deny or limit coverage in some or all of these matters. Furthermore, the insurers could become insolvent and unable to fulfill their obligation to defend, pay or reimburse us for insured claims. Accordingly, we cannot be sure that claims will not arise that are in excess of the limits of our insurance or that are not covered by the terms of our insurance policy. Due to these coverage limitations, we may incur significant unreimbursed costs to satisfy our indemnification obligations, which may have a material adverse effect on our financial condition, results of operations or cash flows.

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Costs related to defective products could have a material adverse effect on us.
From time to time, we have experienced hardware and software defects and bugs associated with the introduction of our highly complex products. Despite our testing procedures, we cannot ensure that errors will not be found in new products or releases after commencement of commercial shipments in the future. Such errors could result in:
loss of or delay in market acceptance of our products;
material recall and replacement costs;
delay in revenue recognition or loss of revenue;
writing down the inventory of defective products;
the diversion of the attention of our engineering personnel from product development efforts;
our having to defend against litigation related to defective products or related property damage or personal injury; and
damage to our reputation in the industry that could adversely affect our relationships with our customers.
In addition, the process of identifying a recalled product in devices that have been widely distributed may be lengthy and require significant resources. We may have difficulty identifying the end customers of the defective products in the field, which may cause us to incur significant replacement costs, contract damage claims from our customers and further reputational harm. Any of these problems could materially and adversely affect our results of operations.
Despite our best efforts, security vulnerabilities may exist with respect to our products. Mitigation techniques designed to address such security vulnerabilities, including software and firmware updates or other preventative measures, may not operate as intended or effectively resolve such vulnerabilities. Software and firmware updates and/or other mitigation efforts may result in performance issues, system instability, data loss or corruption, unpredictable system behavior, or the theft of data by third parties, any of which could significantly harm our business and reputation. For example, we were made aware of a potential vulnerability (CVE-2019-6496) with regard to our 88W8897 device in fiscal year 2019 and implemented a fix shortly thereafter.
We depend on highly skilled executive, managerial, engineering and sales and marketing personnel to support our business operations. If we are unable to retain and motivate our current personnel or attract additional qualified personnel, our ability to develop and successfully market our products could be harmed.
We believe our future success will depend in large part upon our ability to attract and retain highly skilled executive, managerial, engineering, sales and marketing personnel. The competition for qualified technical personnel with significant experience in the design, development, manufacturing, marketing and sales of integrated circuits is intense, both in the Silicon Valley where our U.S. operations are based and in global markets in which we operate. Our inability to attract qualified personnel, including hardware and software engineers and sales and marketing personnel, could delay the development and introduction of, and harm our ability to sell, our products. Changes to United States immigration policies that restrict our ability to attract and retain technical personnel may negatively affect our research and development efforts.
We typically do not enter into employment agreements with any of our key technical personnel and the loss of such personnel could harm our business, as their knowledge of our business and industry would be extremely difficult to replace. The impact on employee morale experienced in connection with our restructuring efforts in fiscal 2017 and 2018, which eliminated approximately 900 jobs worldwide, could make it more difficult for us to add to our workforce when needed due to speculation regarding our future restructuring activities. In addition, as a result of the Cavium acquisition our current and prospective employees may experience uncertainty about their futures that may impair our ability to retain, recruit or motivate key management, engineering, technical and other personnel.

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Cybersecurity risks could adversely affect our business and disrupt our operations.
We depend heavily on our technology infrastructure and maintain and rely upon certain critical information systems for the effective operation of our business. We routinely collect and store sensitive data in our information systems, including intellectual property and other proprietary information about our business and that of our customers, suppliers and business partners. These information technology systems are subject to damage or interruption from a number of potential sources, including, but not limited to, natural disasters, destructive or inadequate code, malware, power failures, cyber-attacks, internal malfeasance or other events. Cyber-attacks on us may include viruses and worms, phishing attacks, and denial-of-service attacks. In addition, we may be the target of email scams that attempt to acquire personal information or company assets.
We have implemented processes for systems under our control intended to mitigate risks; however, we can provide no guarantee that those risk mitigation measures will be effective. Given the frequency of cyber-attacks and resulting breaches reported by other businesses and governments, it is likely we will experience one or more breaches of some extent in the future. We may incur significant costs in order to implement, maintain and/or update security systems we feel are necessary to protect our information systems, or we may miscalculate the level of investment necessary to protect our systems adequately. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures.
The Company’s business also requires it to share confidential information with suppliers and other third parties. Although the Company takes steps to secure confidential information that is provided to third parties, such measures may not always be effective and data breaches, losses or other unauthorized access to or releases of confidential information may occur and could materially adversely affect the Company’s reputation, financial condition and operating results.
To the extent that any system failure, accident or security breach results in material disruptions or interruptions to our operations or the theft, loss or disclosure of, or damage to our data or confidential information, including our intellectual property, our reputation, business, results of operations and/or financial condition could be materially adversely affected.
We may be unable to protect our intellectual property, which would negatively affect our ability to compete.
We believe one of our key competitive advantages results from the collection of proprietary technologies we have developed and acquired since our inception, and the protection of our intellectual property rights is, and will continue to be, important to the success of our business. If we fail to protect these intellectual property rights, competitors could sell products based on technology that we have developed, which could harm our competitive position and decrease our revenue.
We rely on a combination of patents, copyrights, trademarks, trade secret laws, contractual provisions, confidentiality agreements, licenses and other methods, to protect our proprietary technologies. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and control access to and distribution of our documentation and other proprietary information. Notwithstanding these agreements, we have experienced disputes with employees and third parties regarding ownership of intellectual property in the past. To the extent that any third party has a claim to ownership of any relevant technologies used in our products, we may not be able to recognize the full revenue stream from such relevant technologies.
We have been issued a significant number of U.S. and foreign patents and have a significant number of pending U.S. and foreign patent applications. However, a patent may not be issued as a result of any applications or, if issued, claims allowed may not be sufficiently broad to protect our technology. In addition, it is possible that existing or future patents may be challenged, invalidated or circumvented. We may also be required to license some of our patents to others including competitors as a result of our participation in and contribution to development of industry standards. Despite our efforts, unauthorized parties may attempt to copy or otherwise obtain and use our products or proprietary technology. Monitoring unauthorized use of our technology is difficult, and the steps that we have taken may not prevent unauthorized use of our technology, particularly in jurisdictions where the laws may not protect our proprietary rights as fully as in the United States or other developed countries. If our patents do not adequately protect our technology, our competitors may be able to offer products similar to ours, which would adversely impact our business and results of operations.
We have implemented security systems with the intent of maintaining the physical security of our facilities and protecting our confidential information including our intellectual property. Despite our efforts, we may be subject to breach of these security systems and controls which may result in unauthorized access to our facilities and labs and/or unauthorized use or theft of the confidential information and intellectual property we are trying to protect. If we fail to protect these intellectual property rights, competitors could sell products based on technology that we have developed, which could harm our competitive position and decrease our revenue.

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Certain of our software, as well as that of our customers, may be derived from so-called “open source” software that is generally made available to the public by its authors and/or other third parties. Open source software is made available under licenses that impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works under a particular type of license, rather than the forms of license we customarily use to protect our intellectual property. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event that the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work if the license is terminated which could adversely impact our business and results of operations.
We are subject to order and shipment uncertainties. If we are unable to accurately predict customer demand, we may hold excess or obsolete inventory, which would reduce our gross margin. Conversely, we may have insufficient inventory, which would result in lost revenue opportunities and potential loss of market share as well as damaged customer relationships.
We typically sell products pursuant to purchase orders rather than long-term purchase commitments. Customers can generally cancel or defer purchase orders on short notice without incurring a significant penalty. Due to their inability to predict demand or other reasons, some of our customers may accumulate excess inventories and, as a consequence, defer purchase of our products. We cannot accurately predict what or how many products our customers will need in the future. Anticipating demand is difficult because our customers face unpredictable demand for their own products and are increasingly focused more on cash preservation and tighter inventory management. In addition, as an increasing number of our chips are being incorporated into consumer products, we anticipate greater fluctuations in demand for our products, which makes it more difficult to forecast customer demand.
We place orders with our suppliers based on forecasts of customer demand and, in some instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are based on multiple assumptions, each of which may introduce error into our estimates. For example, our ability to accurately forecast customer demand may be impaired by the delays inherent in our customer’s product development processes, which may include extensive qualification and testing of components included in their products, including ours. In many cases, they design their products to use components from multiple suppliers. This creates the risk that our customers may decide to cancel or change product plans for products incorporating our integrated circuits prior to completion, which makes it even more difficult to forecast customer demand.
Our products are incorporated into complex devices and systems, which may create supply chain cross-dependencies. Due to such cross dependencies, supply chain disruptions that are unrelated to our products could negatively impact the demand for our products in the short term. We have a limited ability to predict the timing of a supply chain correction. In addition, the market share of our customers could be adversely impacted on a long-term basis due to any continued supply chain disruption, which could negatively affect our results of operations.
If we overestimate customer demand, our excess or obsolete inventory may increase significantly, which would reduce our gross margin and adversely affect our financial results. The risk of obsolescence and/or excess inventory is heightened for devices designed for consumer electronics due to the rapidly changing market for these types of products. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would miss revenue opportunities and potentially lose market share and damage our customer relationships. In addition, any future significant cancellations or deferrals of product orders or the return of previously sold products could materially and adversely affect our profit margins, increase product obsolescence and restrict our ability to fund our operations.
We rely on third-party distributors and manufacturers’ representatives and the failure of these distributors and manufacturers’ representatives to perform as expected could reduce our future sales.
From time to time, we enter into relationships with distributors and manufacturers’ representatives to sell our products, and we are unable to predict the extent to which these partners will be successful in marketing and selling our products. Moreover, many of our distributors and manufacturers’ representatives also market and sell competing products, and may terminate their relationships with us at any time. Our future performance will also depend, in part, on our ability to attract additional distributors or manufacturers’ representatives that will be able to market and support our products effectively, especially in markets in which we have not previously distributed our products. If we cannot retain or attract quality distributors or manufacturers’ representatives, our sales and results of operations will be harmed.

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We face additional risks due to the extent of our global operations since a majority of our products, and those of our customers, are manufactured and sold outside of the United States. The occurrence of any or a combination of the additional risks described below would significantly and negatively impact our business and results of operations.
A substantial portion of our business is conducted outside of the United States and, as a result, we are subject to foreign business, political and economic risks. All of our products are manufactured outside of the United States. Our current qualified integrated circuit foundries are located in the same region within Taiwan, and our primary assembly and test subcontractors are located in the Pacific Rim region. In addition, many of our customers are located outside of the United States, primarily in Asia, which further exposes us to foreign risks. Sales shipped to customers with operations in Asia represented approximately 85% of our net revenue in fiscal 2019, 95% of our net revenue in fiscal 2018 and 94% of net revenue in fiscal 2017.
We also have substantial operations outside of the United States. These operations are directly influenced by the political and economic conditions of the region in which they are located and, with respect to Israel, possible military hostilities periodically affecting the region that could affect our operations there. We anticipate that our manufacturing, assembly, testing and sales outside of the United States will continue to account for a substantial portion of our operations and revenue in future periods.
Accordingly, we are subject to risks associated with international operations, including:
political, social and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions;
volatile global economic conditions, including downturns in which some competitors may become more aggressive in their pricing practices, which would adversely impact our gross margin;
compliance with domestic and foreign export and import regulations, including pending changes thereto, and difficulties in obtaining and complying with domestic and foreign export, import and other governmental approvals, permits and licenses;
local laws and practices that favor local companies, including business practices in which we are prohibited from engaging by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations;
difficulties in staffing and managing foreign operations;
natural disasters, including earthquakes, tsunamis and floods;
trade restrictions, higher tariffs, worsening trade relationship between the United States and China, or changes in cross border taxation, particularly in light of the tariffs announced by the Trump administration;
transportation delays;
difficulties of managing distributors;
less effective protection of intellectual property than is afforded to us in the United States or other developed countries;
inadequate local infrastructure; and
exposure to local banking, currency control and other financial-related risks.
As a result of having global operations, the sudden disruption of the supply chain and/or disruption of the manufacture of our customer’s products caused by events outside of our control could impact our results of operations by impairing our ability to timely and efficiently deliver our products.
Moreover, the international nature of our business subjects us to risk associated with the fluctuation of the U.S. dollar versus foreign currencies. Decreases in the value of the U.S. dollar versus currencies in jurisdictions where we have large fixed costs, or where our third-party manufacturers have significant costs, will increase the cost of such operations which could harm our results of operations.

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We must comply with a variety of existing and future laws and regulations that could impose substantial costs on us and may adversely affect our business.
We are subject to laws and regulations worldwide, which may differ among jurisdictions, affecting our operations in areas including, but not limited to: intellectual property ownership and infringement; tax; import and export requirements; anti-corruption such as the Foreign Corrupt Practices Act and the UK Bribery Act; foreign exchange controls and cash repatriation restrictions; data privacy requirements such as the European Economic Area Privacy Regulation, the General Data Protection Regulation (“GDPR”); competition; advertising; employment; product regulations; health and safety requirements; and consumer laws. For example, government export regulations apply to the encryption or other features contained in some of our products. If we fail to continue to receive licenses or otherwise comply with these regulations, we may be unable to manufacture the affected products at foreign foundries or ship these products to certain customers, or we may incur penalties or fines. In addition, we are subject to various industry requirements restricting the presence of certain substances in electronic products. Although our management systems are designed to maintain compliance, we cannot assure you that we have been or will be at all times in compliance with such laws and regulations. If we violate or fail to comply with any of them, a range of consequences could result, including fines, import/export restrictions, sales limitations, criminal and civil liabilities or other sanctions. The costs of complying with these laws (including the costs of any investigations, auditing and monitoring) could adversely affect our current or future business.
Our product or manufacturing standards could also be impacted by new or revised environmental rules and regulations or other social initiatives. For instance, the SEC requires disclosures relating to the sourcing of certain minerals from the Democratic Republic of Congo and adjoining countries. Those rules, or similar rules that may be adopted in other jurisdictions, could adversely affect our costs, the availability of minerals used in our products and our relationships with customers and suppliers.
In connection with the Cavium acquisition, we have been subject to regulatory conditions imposed by the Committee on Foreign Investment in the United States (CFIUS) pursuant to a Letter of Assurance (LA) where we have agreed to implement certain cyber security, physical security and training measures to protect national security, which may materially and adversely affect our operating results due to the increased cost of compliance with these measures. If we fail to comply with our obligations under the LA, our ability to operate our business may be adversely affected.
Changes in existing taxation benefits, rules or practices may adversely affect our financial results.
Changes in existing taxation benefits, rules or practices may also have a significant effect on our reported results. Both the U.S. Congress and the G-20 (Group of Twenty Finance Ministers and Central Bank Governors) may consider legislation affecting the taxation of foreign corporations and such legislation if enacted might adversely affect our future tax liabilities and have a material impact on our results of operations. For example, the Tax Cuts and Jobs Act ("2017 Tax Act") was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. Please see “Provision for Income Taxes” set forth in Part II, Item 7 of this Annual Report on Form 10-K for more information on the impact of the 2017 Tax Act on the Company.
In addition, in prior years, we have entered into agreements in certain foreign jurisdictions that if certain criteria are met, the foreign jurisdiction will provide a more favorable tax rate than their current statutory rate. For example, we have obtained an undertaking from the Minister of Finance of Bermuda that in the event Bermuda enacts legislation imposing tax computed on profits, income, or capital asset, gain or appreciation, then the imposition of any such taxes will not apply to us until March 31, 2035. Additionally, our Singapore subsidiary qualified for Pioneer status until it expired in June 2014. However, we re-negotiated with the Singapore government and in fiscal 2015, they extended the Development and Expansion Incentive until June 2019. Furthermore, under the Israeli Encouragement law of “approved or benefited enterprise,” our subsidiary in Israel, Marvell Israel (M.I.S.L) Ltd., is entitled to, and has certain existing programs that qualify as, approved and benefited tax programs that include reduced tax rates and exemption of certain income through fiscal 2027. Moreover, receipt of past and future benefits under tax agreements may depend on our ability to fulfill commitments regarding employment of personnel or performance of specified activities in the applicable jurisdiction. Changes in our business plans, including divestitures, could result in termination of an agreement or loss of benefits thereunder. If any of our tax agreements in any of these foreign jurisdictions were terminated, our results of operations would be harmed.




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The Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Sharing Project, and issued in 2015, and is expected to continue to issue, guidelines and proposals that may change various aspects of the existing framework under which our tax obligations are determined in some of the countries in which we do business. We can provide no assurance that changes in tax laws and additional investigations as a result of this project would not have an adverse tax impact on our international operations. In addition, the European Union (“EU”) has initiated its own measures along similar lines. In December 2017, the EU identified certain jurisdictions (including Bermuda and Cayman Islands) which it considered had a tax system that facilitated offshore structuring by attracting profits without commensurate economic activity. In order to avoid EU “blacklisting”, both Bermuda and Cayman Islands introduced new legislation in December 2018, which came into force on January 1, 2019. These new laws require Bermuda and Cayman companies carrying on one or more “relevant activity” (including: banking, insurance, fund management, financing, leasing, headquarters, shipping, distribution and service center, intellectual property or holding company) to maintain a substantial economic presence in Bermuda in order to comply with the economic substance requirements. There is no experience yet as to how the Bermuda and Cayman Islands authorities will interpret and enforce these new rules and, accordingly, we are not able to predict their impact on our operations and net income. In addition, to the extent that we are required to maintain more of a presence in Bermuda or the Cayman Islands, such requirements will increase our costs either directly in those locations or indirectly as a result of increased costs related to moving our operations to other jurisdictions.
Matters relating to or arising from our Audit Committee investigation, including regulatory proceedings, litigation matters and potential additional expenses, may adversely affect our business and results of operations.
As previously disclosed in our public filings, in March 2016, the Audit Committee of our Board of Directors completed an investigation that generally included a review of certain revenue recognized in the first and second quarters of fiscal 2016 and the fourth quarter of fiscal 2015, including transactions that would have, in the normal course of events and but for action by certain Marvell employees, been completed and recognized in a subsequent quarter (referred to internally as “pull-ins”), the accrual of a litigation reserve in the second quarter of fiscal 2016, and the stated belief by Marvell’s former Chairman and Chief Executive Officer of ownership of certain patent rights related to the Final-Level Cache invention and his later assignment of associated patent rights to Marvell. We are also the subject of investigations by the Securities and Exchange Commission and the U.S. Attorney related to these matters. We are fully cooperating with the SEC and the U.S. Attorney with respect to those investigations.
We incurred significant expenses related to legal, accounting, and other professional services in connection with the investigations and related matters and related remediation efforts. In addition, we incurred significant legal expenses in connection with the litigation and settlement of securities class actions or other lawsuits that were filed against us, our directors and officers. The expenses incurred, the impact of our delay in fiscal 2016 and the beginning of fiscal 2017 in meeting our periodic reports on the confidence of investors, employees and customers, and the diversion of the attention of the management team that occurred adversely affected our business, financial condition and results of operations or cash flows.
The pending investigations or any future additional lawsuits could also result in significant expenses, distraction and may adversely affect our business, financial condition, results of operations and cash flows.
We have been named as a party to several legal proceedings and may be named in additional ones in the future, including litigation involving our patents and other intellectual property, which could subject us to liability, require us to indemnify our customers, require us to obtain or renew licenses, require us to stop selling our products or force us to redesign our products.
We have been named as a party to several lawsuits, government inquiries or investigations and other legal proceedings (referred to as “litigation”), and we may be named in additional ones in the future. Please see “Note 13 - Commitments and Contingencies” of our Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K for a more detailed description of material litigation matters in which we are currently engaged. In particular, litigation involving patents and other intellectual property is widespread in the high-technology industry and is particularly prevalent in the semiconductor industry, where a number of companies and other entities aggressively bring numerous infringement claims to assert their patent portfolios. The amount of damages alleged in intellectual property infringement claims can often be very significant. See also, “We may be unable to protect our intellectual property, which would negatively affect our ability to compete.”
From time to time, our subsidiaries and customers receive, and may continue to receive in the future, standards-based infringement claims, as well as claims against us and our subsidiaries’ proprietary technologies. Our subsidiaries and customers could face claims of infringement for certain patent licenses that have not been renewed. These claims could result in litigation and/or claims for indemnification, which, in turn, could subject us to significant liability for damages, attorneys’ fees and costs. Any potential intellectual property litigation also could force us to do one or more of the following:

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stop selling, offering for sale, making, having made or exporting products or using technology that contains the allegedly infringing intellectual property;
limit or restrict the type of work that employees involved in such litigation may perform for us;
pay substantial damages and/or license fees and/or royalties to the party claiming infringement or other license violations that could adversely impact our liquidity or operating results;
attempt to obtain or renew licenses to the relevant intellectual property, which licenses may not be available on reasonable terms or at all; and
attempt to redesign those products that contain the allegedly infringing intellectual property.
Under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses for current and former directors and officers. Additionally, from time to time, we have agreed to indemnify select customers for claims alleging infringement of third-party intellectual property rights, including, but not limited to, patents, registered trademarks and/or copyrights. If we are required to make a significant payment under any of our indemnification obligations, our results of operations may be harmed.
The ultimate outcome of litigation could have a material adverse effect on our business and the trading price for our securities. Litigation may be time consuming, expensive, and disruptive to normal business operations, and the outcome of litigation is difficult to predict. Litigation, regardless of the outcome, may result in significant expenditures, diversion of our management’s time and attention from the operation of our business and damage to our reputation or relationship with third parties, which could materially and adversely affect our business, financial condition, results of operations, cash flows and stock price.
We are exposed to potential impairment charges on certain assets.
We had approximately $5.5 billion of goodwill and $2.6 billion of acquired intangible assets on our consolidated balance sheet as of February 2, 2019. Under generally accepted accounting principles in the United States, we are required to review our long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. We perform an assessment of goodwill for impairment annually on the last business day of our fiscal fourth quarter and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.
We have identified that our business operates as a single operating segment with two primary components (Storage, and Networking), which we have concluded can be aggregated into a single reporting unit for purposes of testing goodwill impairment. The fair value of the reporting unit is determined by taking our market capitalization as determined through quoted market prices and as adjusted for a control premium and other relevant factors. If our fair value declines to below our carrying value, we could incur significant goodwill impairment charges, which could negatively impact our financial results. If in the future a change in our organizational structure results in more than one reporting unit, we will be required to allocate our goodwill and perform an assessment of goodwill for impairment in each reporting unit. As a result, we could have an impairment of goodwill in one or more of such future reporting units.
In addition, from time to time, we have made investments in private companies. If the companies that we invest in are unable to execute their plans and succeed in their respective markets, we may not benefit from such investments, and we could potentially lose the amounts we invest. We evaluate our investment portfolio on a regular basis to determine if impairments have occurred. If the operations of any businesses that we have acquired declines significantly, we could incur significant intangible asset impairment charges. Impairment charges could have a material impact on our results of operations in any period.
If we were classified as a passive foreign investment company, there would be adverse tax consequences to U.S. holders of our ordinary shares.
If we were classified as a “passive foreign investment company” or “PFIC” under section 1297 of the Internal Revenue Code, of 1986, as amended (the “Code”), for any taxable year during which a U.S. holder holds ordinary shares, such U.S. holder generally would be taxed at ordinary income tax rates on any gain realized on the sale or exchange of the ordinary shares and on any “excess distributions” (including constructive distributions) received on the ordinary shares. Such U.S. holder could also be subject to a special interest charge with respect to any such gain or excess distribution.

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We would be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of our gross income is passive income or (ii) on average, the percentage of our assets that produce passive income or are held for the production of passive income is at least 50% (determined on an average gross value basis). We were not classified as a PFIC for fiscal year 2019 or in any prior taxable year. Whether we will, in fact, be classified as a PFIC for any subsequent taxable year depends on our assets and income over the course of the relevant taxable year and, as a result, cannot be predicted with certainty. In particular, because the total value of our assets for purposes of the asset test will be calculated based upon the market price of our ordinary shares, a significant and sustained decline in the market price of our ordinary shares and corresponding market capitalization relative to our passive assets could result in our being classified as a PFIC. There can be no assurance that we will not be classified as a PFIC in the future or the Internal Revenue Service will not challenge our determination concerning PFIC status for any prior period.
As we carry only limited insurance coverage, any incurred liability resulting from uncovered claims could adversely affect our financial condition and results of operations.
Our insurance policies may not be adequate to fully offset losses from covered incidents, and we do not have coverage for certain losses. For example, there is very limited coverage available with respect to the services provided by our third-party foundries and assembly and test subcontractors. In the event of a natural disaster (such as an earthquake or tsunami), political or military turmoil, widespread health issues or other significant disruptions to their operations, insurance may not adequately protect us from this exposure. We believe our existing insurance coverage is consistent with common practice, economic considerations and availability considerations. If our insurance coverage is insufficient to protect us against unforeseen catastrophic losses, any uncovered losses could adversely affect our financial condition and results of operations.
We are subject to the risks of owning real property.
Our buildings in Santa Clara, California and Shanghai, China subject us to the risks of owning real property, which include, but are not limited to:
the possibility of environmental contamination and the costs associated with remediating any environmental problems;
adverse changes in the value of these properties due to interest rate changes, changes in the neighborhood in which the property is located, or other factors;
the possible need for structural improvements in order to comply with zoning, seismic and other legal or regulatory requirements;
the potential disruption of our business and operations arising from or connected with a relocation due to moving to or renovating the facility;
increased cash commitments for improvements to the buildings or the property, or both;
increased operating expenses for the buildings or the property, or both;
possible disputes with tenants or other third parties related to the buildings or the property, or both;
failure to achieve expected cost savings due to extended non-occupancy of a vacated property intended to be leased; and
the risk of financial loss in excess of amounts covered by insurance, or uninsured risks, such as the loss caused by damage to the buildings as a result of earthquakes, floods and/or other natural disasters.
Risks Related to Owning Marvell Common Shares
There can be no assurance that we will continue to declare cash dividends or effect share repurchases in any particular amount or at all, and statutory requirements under Bermuda Law may require us to defer payment of declared dividends or suspend share repurchases.
In May 2012, we declared our first quarterly cash dividend. On November 17, 2016, we announced a $1 billion share repurchase plan. On October 16, 2018, we announced a $700 million addition to the balance of our existing share repurchase plan. Our existing share repurchase program had approximately $304 million of repurchase authority remaining as of October 16, 2018 prior to the approved addition. An aggregate of $746 million of shares have been repurchased under that program as of February 2, 2019. Future payment of a regular quarterly cash dividend on our common shares and future share repurchases will be subject to, among other things: the best interests of our company and our shareholders; our results of operations, cash balances and future cash requirements; financial condition; developments in ongoing litigation; statutory requirements under Bermuda law; market conditions; and other factors that the board of directors may deem relevant. Our dividend payments or share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares in any particular amounts or at all. A reduction in, a delay of, or elimination of our dividend payments or share repurchases could have a negative effect on our share price.

25






We are incorporated in Bermuda and, as a result, it may not be possible for our shareholders to enforce civil liability provisions of the securities laws of the United States. In addition, our Bye-Laws contain a waiver of claims or rights of action by our shareholders against our officers and directors, which will severely limit our shareholders’ right to assert a claim against our officers and directors under Bermuda law.
We are organized under the laws of Bermuda. As a result, it may not be possible for our shareholders to affect service of process within the United States upon us, or to enforce against us in U.S. courts judgments based on the civil liability provisions of the securities laws of the United States. There is significant doubt as to whether the courts of Bermuda would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liability provisions of the securities laws of the United States or any state, or hear actions brought in Bermuda against us or those persons based on those laws. The United States and Bermuda do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not be automatically enforceable in Bermuda.
Our Bye-Laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers and directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties with or for us, other than with respect to any matter involving any fraud or dishonesty on the part of the officer or director or to any matter arising under U.S. federal securities laws. This waiver will limit the rights of our shareholders to assert claims against our officers and directors unless the act complained of involves fraud or dishonesty or arises as a result of a breach of U.S. federal securities laws. Therefore, so long as acts of business judgment do not involve fraud or dishonesty or arise as a result of a breach of U.S. federal securities laws, they will not be subject to shareholder claims under Bermuda law. For example, shareholders will not have claims against officers and directors for a breach of trust, unless the breach rises to the level of fraud or dishonesty, or arises as a result of a breach of U.S. federal securities laws.
Our Bye-Laws contain provisions that could delay or prevent a change in corporate control, even if the change in corporate control would benefit our shareholders.
Our Bye-Laws contain change in corporate control provisions, which include authorizing the issuance of preferred shares without shareholder approval. This provision could make it more difficult for a third party to acquire us, even if doing so would benefit our shareholders.

Item 1B.
Unresolved Staff Comments
None.


26






Item 2.
Properties
The following table presents the approximate square footage of our significant owned and leased facilities as of February 2, 2019:
 
 
 
 
(Square feet)
Locations
 
Primary Use
 
Owned Facilities
 
Leased Facilities (1)
United States
 
Headquarters in Santa Clara, California: Research and design, sales and marketing, administration and operations
 
993,000

 
280,000

China
 
Research and design, and sales and marketing
 
115,000

 
46,000

Singapore
 
Operations, and research and design
 

 
55,000

India
 
Research and design
 

 
252,000

Israel
 
Research and design
 

 
212,000

 
 
Total
 
1,108,000

 
845,000

 
(1)Lease terms expire in various years from 2019 through 2025. The square footage of leased facilities does not include leased facilities that have been impacted by our restructuring actions and we have ceased use. Leased facilities impacted by our restructuring actions and we have ceased use include approximately 400,000 square feet of leased facilities in the United States, 11,000 square feet of leased facilities in China, 9,000 square feet of leased facilities in Singapore and 37,000 square feet of leased facilities in India.
We also lease smaller facilities in Denmark, Germany, India, Indonesia, Japan, Singapore, South Korea, Taiwan, the Netherlands and Vietnam, which are occupied by administrative, sales, design and field application personnel. Based upon our estimates of future hiring, we believe that our current facilities in most locations will be adequate to meet our requirements at least through the next fiscal year.

Item 3.
Legal Proceedings
The information set forth under “Note 13 — Commitments and Contingencies” in our Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K is incorporated herein by reference. For a discussion of certain risks associated with legal proceedings, please see Part I, Item 1A, “Risk Factors” above.

Item 4.
Mine Safety Disclosures
Not Applicable.


27






PART II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are traded on the NASDAQ Global Select Market under the symbol “MRVL.” Our common shares began trading on June 27, 2000, upon completion of our initial public offering.
As of March 21, 2019, the approximate number of record holders of our common shares was 467 (not including beneficial owners of stock held in street name).
Stock Price Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filings under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The graph below compares the cumulative total shareholder return of our common shares with the cumulative total return of the S&P 500 Index and the Philadelphia Semiconductor Index since February 1, 2014 through February 2, 2019. The graph compares a $100 investment on February 1, 2014 in our common shares with a $100 investment on February 2, 2019 in each index and assumes that any dividends were reinvested. Shareholder returns over the indicated periods should not be considered indicative of future stock prices or shareholder returns.
totalstockreturngraph.jpg
 
2/1/2014
 
1/31/2015
 
1/30/2016
 
1/28/2017
 
2/3/2018
 
2/2/2019
Marvell Technology Group Ltd.
100.00

 
105.44

 
61.56

 
107.18

 
161.50

 
134.28

S&P 500
100.00

 
114.22

 
113.46

 
137.14

 
168.46

 
168.36

PHLX Semiconductor
100.00

 
125.55

 
120.19

 
192.16

 
267.60

 
266.43


28






Dividends
Our board of directors declared quarterly cash dividends of $0.06 per share payable to holders of our common shares in each quarter of fiscal 2019, 2018 and 2017. As a result, we paid total cash dividends of $148.1 million in fiscal 2019, $119.3 million in fiscal 2018, and $122.3 million in fiscal 2017.
Future payment of a regular quarterly cash dividend on the Company’s common shares will be subject to, among other things, the best interests of the Company and its shareholders, the Company’s results of operations, cash balances and future cash requirements, financial condition, developments in ongoing litigation, statutory requirements under Bermuda law and other factors that the Company’s board of directors may deem relevant. The Company’s dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table presents details of our share repurchases during the three months ended February 2, 2019 (in thousands, except per share data):
 
Period (1)
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced Plans or
Programs
 
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plans or
Programs (2)
November 4 – December 1, 2018

 
$

 

 
$
1,003,987

December 2 – December 29, 2018
1,617

 
$
15.46

 
1,617

 
$
978,978

December 30 – February 2, 2019
1,529

 
$
16.35

 
1,529

 
$
953,982

Total
3,146

 
$
15.89

 
3,146

 
$
953,982

 
(1)
The monthly periods presented above for the three months ended February 2, 2019, are based on our fiscal accounting periods which follow a quarterly 4-4-5 week fiscal accounting period.
(2)
On November 17, 2016, we announced that our Board of Directors had authorized a $1 billion share repurchase plan. On October 16, 2018, we announced that our Board of Directors authorized a $700 million addition to the balance of our existing share repurchase plan. Our existing share repurchase program had approximately $304 million of repurchase authority remaining as of October 16, 2018 prior to the approved addition. We intend to effect share repurchases in accordance with the conditions of Rule 10b-18 under the Exchange Act, but may also make repurchases in the open market outside of Rule 10b-18 or in privately negotiated transactions. The share repurchase program will be subject to market conditions and other factors and does not obligate us to repurchase any dollar amount or number of our common shares and the repurchase program may be extended, modified, suspended or discontinued at any time.
From August 2010 when our Board of Directors initially authorized a share repurchase program through February 2, 2019, a total of 292.4 million shares have been repurchased to date under the Company’s share repurchase program for a total $3.9 billion in cash and $954.0 million was available for future share repurchases.

Item 6.
Selected Financial Data
The following selected consolidated financial data should be read together with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8, “Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K. In connection with the November 2016 announcement of our plan to restructure our operations to refocus our research and development, increase operational efficiency and improve profitability, we had divested three businesses during fiscal 2018. As required, we have retrospectively recast our consolidated statements of operations and balance sheets for all periods presented to reflect these businesses as discontinued operations.

29






 
February 2,
2019 (1)
 
February 3,
2018 (2)
 
January 28,
2017 (3)
 
January 30,
2016 (4)
 
January 31,
2015
 
(in thousands, except per share amounts and number of employees)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Net revenue
$
2,865,791

 
$
2,409,170

 
$
2,300,992

 
$
2,602,497

 
$
3,585,226

Cost of goods sold
$
1,407,399

 
$
947,230

 
$
1,017,564

 
$
1,406,121

 
$
1,766,126

Research and development
$
914,009

 
$
714,444

 
$
805,029

 
$
954,653

 
$
1,040,838

Operating income (loss) from continuing operations
$
43,270

 
$
429,695

 
$
130,407

 
$
(745,410
)
 
$
488,745

Income (loss) from continuing operations, net of tax
$
(179,094
)
 
$
433,142

 
$
74,821

 
$
(738,441
)
 
$
516,801

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

 
$
87,689

 
$
(53,670
)
 
$
(72,959
)
 
$
(81,455
)
Net income (loss)
$
(179,094
)
 
$
520,831

 
$
21,151

 
$
(811,400
)
 
$
435,346

Income (loss) from continuing operations per share:
 
 
 
 
 
 
 
 
 
     Basic
$
(0.30
)
 
$
0.87

 
$
0.15

 
$
(1.45
)
 
$
1.01

     Diluted
$
(0.30
)
 
$
0.85

 
$
0.14

 
$
(1.45
)
 
$
1.00

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

 
$
0.18

 
$
(0.11
)
 
$
(0.14
)
 
$
(0.16
)
     Diluted
$

 
$
0.17

 
$
(0.10
)
 
$
(0.14
)
 
$
(0.16
)
Net income (loss) per share:
 
 
 
 
 
 
 
 
 
     Basic
$
(0.30
)
 
$
1.05

 
$
0.04

 
$
(1.59
)
 
$
0.85

     Diluted
$
(0.30
)
 
$
1.02

 
$
0.04

 
$
(1.59
)
 
$
0.84

Weighted average shares:
 
 
 
 
 
 
 
 
 
     Basic
591,232

 
498,008

 
509,738

 
510,945

 
511,089

     Diluted
591,232

 
509,667

 
517,513

 
510,945

 
520,760

Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
582,410

 
$
1,841,272

 
$
1,668,360

 
$
2,282,749

 
$
2,529,555

Working capital
$
758,462

 
$
1,942,813

 
$
1,794,018

 
$
1,751,295

 
$
2,765,908

Total assets
$
10,016,752

 
$
4,708,287

 
$
4,648,650

 
$
5,442,127

 
$
5,884,387

Long-term debt
$
1,732,699

 
$

 
$

 
$

 
$

Total shareholders’ equity
$
7,306,410

 
$
4,141,413

 
$
4,027,651

 
$
4,140,123

 
$
5,146,089

Other Data:
 
 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.24

 
$
0.24

 
$
0.24

 
$
0.24

 
$
0.24

Number of employees
5,275

 
3,749

 
4,617

 
5,437

 
7,163

(1)
Fiscal 2019 financial data includes the effect of the adoption of the new revenue recognition standard, restructuring related charges from our July 2018 restructuring plan, and from the acquisition of Cavium, including its effect on income taxes. Refer to “Note 3 — Revenue”, “Note 4 — Restructuring and Other Related Charges”, “Note 5 — Business Combination,” and “Note 16 — Income Taxes” respectively, in our Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K for further details.
(2)
Fiscal 2018 includes a $74.4 million charge related to the Luna litigation settlement and related costs.
(3)
Fiscal 2017 includes $96.8 million of restructuring and other related charges that include $52.6 million for impairment of a nonrefundable deposit due to the non-utilization of the related contract and for impairment of certain equipment and technology licenses. Fiscal 2017 also included $68.0 million of tax expense related to restructuring actions taken.
(4)
Fiscal 2016 includes $751.4 million of charges for litigation matters recognized by the Company including a $736.0 million charge related to the $750 million settlement reached with CMU, as well as certain other pending litigation. In addition, fiscal 2016 included $63.5 million of restructuring and other related charges that include $8.0 million for impairment of certain equipment and technology licenses, and $8.0 million for the write down of inventory due to the restructuring of the mobile platform business, a charge for a cash payment authorized by our Board of Directors of $15.4 million to our former CEO Dr. Sehat Sutardja and $11.4 million of costs for the surety bonds related to the litigation with CMU.

30







Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties, including those discussed under Part I, Item 1A, “Risk Factors.” These risks and uncertainties may cause actual results to differ materially from those discussed in the forward-looking statements.
Overview
On July 6, 2018, we completed our acquisition of Cavium. Cavium is a provider of highly integrated semiconductor processors that enable intelligent processing for wired and wireless infrastructure and cloud for networking, communications, storage and security applications. Cavium designs, develops and markets semiconductor processors for intelligent and secure networks. Cavium's operating results from the acquisition date through our year ended February 2, 2019 have been included in our consolidated financial statements. See “Note 5 - Business Combination” in the Notes to Consolidated Financial Statements set forth in Part II, Item 8 of the Annual Report on Form 10-K for further information regarding our acquisition of Cavium.
Net revenue in fiscal 2019 was $2.9 billion and was 19% higher than net revenue of $2.4 billion in fiscal 2018. The increase was primarily due to a 37% increase in sales of our networking products and 10% increase in sales of our storage products, mainly due to the addition to revenue from our Cavium businesses, offset by a 9% decrease in sales of our other products.
Our 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 2018 was a 53-week year. Fiscal 2019 and 2017 each had a 52-week period.
Restructuring. We continuously evaluate our existing operations to increase operational efficiency, decrease costs and increase profitability. In July 2018, as part of the integration of the acquired Cavium business, we initiated a restructuring plan intended to achieve these goals. As part of this restructuring plan, revenue from our former Networking and Connectivity product groups were combined into one group named Networking.
During fiscal 2019, we recorded restructuring and other related charges of $76.8 million. See “Note 4 - Restructuring and Other Related Charges” in the Notes to the Consolidated Financial Statements for further information.
In November 2016, we announced a restructuring plan intended to refocus our research and development, increase operational efficiency and improve profitability. In connection with this restructuring plan, we divested three businesses during fiscal 2018. During the year ended February 3, 2018, we received cash proceeds of $165.9 million and recognized a gain on sale of $88.4 million from the sale of our Multimedia, LTE thin-modem, and Broadband businesses. These businesses are classified as discontinued operations for all periods presented in our accompanying consolidated financial statements. See “Note 4 - Restructuring and Other Related Charges” and “Note 6 - Discontinued Operations” in the Notes to the Consolidated Financial Statements for further information. Unless noted otherwise, our discussion under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations refers to our continuing operations.
Capital Return Program. We remain committed to delivering shareholder value through our share repurchase and dividend programs. On October 16, 2018, we announced that our Board of Directors authorized a $700 million addition to the balance of our existing share repurchase plan. Under the program authorized by our Board of Directors, we may repurchase shares in the open-market or through privately negotiated transactions. The extent to which we repurchase our shares and the timing of such repurchases will depend upon market conditions and other corporate considerations, as determined by our management team. The repurchase program may be suspended or discontinued at any time.
We returned $252.1 million to stockholders in fiscal 2019, including $104.0 million through repurchases of common stock and $148.1 million of cash dividends.
Cash and Short Term Investments. Our cash, cash equivalents and short-term investments were $582.4 million at February 2, 2019. We had cash flow provided by operations of $596.7 million during fiscal 2019.


31






Sales and Customer Composition.
Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. See the table in our discussion of “Customers, Sales and Marketing” in Item 1 of this Annual Report on Form 10-K for further information. We continuously monitor the creditworthiness of our distributors and believe these distributors’ sales to diverse end customers and geographies further serve to mitigate our exposure to credit risk.
Most of our sales are made to customers located outside of the United States, primarily in Asia, and substantially all of our products are manufactured outside the United States. Sales shipped to customers with operations in Asia represented approximately 85% of our net revenues in fiscal 2019, 95% of our net revenue in fiscal 2018 and 94% of our net revenue in fiscal 2017. Because many manufacturers and manufacturing subcontractors of our customers are located in Asia, we expect that most of our net revenue will continue to be represented by sales to our customers in that region. However, the end customers for either our products or for the end products into which our products are incorporated, are frequently located in countries throughout the world and are not limited to Asia. As a result, we believe that a substantially smaller percentage of our net revenue is ultimately dependent on sales of either our product or our customers' product incorporating our product, to end customers located in Asia. For risks related to our global operations, see Part I, Item 1A, "Risk Factors," including but not limited to the risk detailed under the caption "We face additional risks due to the extent of our global operations since a majority of our products, and those of our customers, are manufactured and sold outside of the United States. The occurrence of any or a combination of the additional risks described below would significantly and negatively impact our business and results of operations."
Historically, a relatively large portion of our sales have been made on the basis of purchase orders rather than long-term agreements. Customers can generally cancel or defer purchase orders on short notice without incurring a significant penalty. In addition, the development process for our products is long, which may cause us to experience a delay between the time we incur expenses and the time revenue is generated from these expenditures. We anticipate that the rate of new orders may vary significantly from quarter to quarter. For risks related to our sales cycle, see Part I, Item 1A, "Risk Factors," including but not limited to the risk detailed under the caption, "We are subject to order and shipment uncertainties. If we are unable to accurately predict customer demand, we may hold excess or obsolete inventory, which would reduce our gross margin. Conversely, we may have insufficient inventory, which would result in lost revenue opportunities and potential loss of market share as well as damaged customer relationships."
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, income taxes, goodwill and other intangible assets, and business combinations. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances when these carrying values are not readily available from other sources. Actual results could differ from these estimates, and such differences could affect the results of operations reported in future periods. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For further information on our significant accounting policies, see “Note 2 - Significant Accounting Policies” in the Notes to Consolidated Financial Statements.
Revenue Recognition.    Through the fiscal year ended February 3, 2018, in accordance with ASC 605, Revenue Recognition, we recognized revenue when there was persuasive evidence of an arrangement, delivery had occurred, the fee was fixed or determinable, and collection was reasonably assured. If we granted extended payment terms greater than its standard terms for a customer such that collectability was not assured, the revenue was deferred upon shipment and would be recognized when the payment became due provided all other revenue recognition criteria had been satisfied.

Product revenue was generally recognized upon shipment of product to customers, net of accruals for estimated sales returns and rebates. However, some of our sales were made through distributors under agreements allowing for price protection and limited rights of stock rotation on products unsold by the distributors. Product revenue on sales made through distributors were deferred until the distributors sold the product to end customers. Deferred revenue less the related cost of the inventories was reported as deferred income. We do not believe that there was any significant exposure related to impairment of deferred cost of sales, as our historical returns had been minimal and inventory turnover for our distributors generally ranged from 60 to 90 days. Our sales to direct customers were made primarily pursuant to standard purchase orders for delivery of products.


32






As a result of the adoption of the new revenue standard on February 4, 2018, at the beginning of the first quarter of fiscal year 2019, we revised our revenue recognition policy. We now recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Under the new revenue recognition standard, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

We enter into contracts that may include various combinations of products and services that are capable of being distinct and accounted for as separate performance obligations. To date, the majority of the revenue has been generated by sales associated with storage and networking products. Revenue from services has been insignificant. Performance obligations associated with product sales transactions are generally satisfied when control passes to customers upon shipment. Accordingly, product revenue is recognized at a point in time when control of the asset is transferred to the customer. We recognize revenue when we satisfy a performance obligation by transferring control of a product to a customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. For product revenue, the performance obligation is deemed to be the delivery of the product and therefore, the revenue is generally recognized upon shipment to customers, net of accruals for estimated sales returns and rebates. These estimates are based on historical returns, analysis of credit memo data and other known factors. Actual returns could differ from these estimates. We account for rebates by recording reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms agreed to with the customer. Some of our sales are made to distributors under agreements allowing for price protection, price discounts and limited rights of stock rotation on products unsold by the distributors. Control passes to the distributor upon shipment, and terms and payment by our distributors is not contingent on resale of the product. Product revenue on sales made to distributors with price protection and stock rotation rights is recognized upon shipment to distributors, with an accrual for the variable consideration aspect of sales to distributors, estimated based on historical experience, including estimates for price discounts, price protection, rebates, and stock rotation programs. Actual variable consideration could differ from these estimates.
A portion of our net revenue is derived from sales through third-party logistics providers who maintain warehouses in close proximity to our customer’s facilities. Revenue from sales through these third-party logistics providers is not recognized until the product is pulled from stock by the customer.
Our products are generally subject to warranty, which provides for the estimated future costs of replacement upon shipment of the product. Our products carry a standard one-year warranty, with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements. The warranty accrual is estimated primarily based on historical claims compared to historical revenues and assumes that we will have to replace products subject to a claim. From time to time, we become aware of specific warranty situations, and we record specific accruals to cover these exposures. Warranty expenses were not material for the periods presented.
Accounting for Income Taxes.    We estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax return and financial statement purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.
We recognize income taxes using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated.
Evaluating the need for an amount of a valuation allowance for deferred tax assets often requires judgment and analysis of all the positive and negative evidence available, including cumulative losses in recent years and projected future taxable income, to determine whether all or some portion of the deferred tax assets will not be realized. Using available evidence and judgment, we establish a valuation allowance for deferred tax assets, when it is determined that it is more likely than not that they will not be realized. Valuation allowances have been provided primarily against the U.S. research and development credits. Valuation allowances have also been provided against certain acquired operating losses and the deferred tax assets of foreign subsidiaries. A change in the assessment of the realization of deferred tax assets may materially impact our tax provision in the period in which a change of assessment occurs.

33






As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of various and sometimes conflicting tax laws and regulations as well as multinational tax conventions. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, the availability of tax credits and carryforwards, and the effectiveness of our tax planning strategies. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.
We are subject to income tax audits by the respective tax authorities in all of the jurisdictions in which we operate. We recognize the effect of income tax positions only if these positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is more than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense. The calculation of our tax liabilities involves the inherent uncertainty associated with the application of GAAP and complex tax laws. We believe we have adequately provided for in our financial statements additional taxes that we estimate may be required to be paid as a result of such examinations. While we believe that we have adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. These tax liabilities, including the interest and penalties, are released pursuant to a settlement with tax authorities, completion of audit or expiration of various statutes of limitation. The material jurisdictions in which we may be subject to potential examination by tax authorities throughout the world include China, Israel, Singapore, Switzerland and the United States.
The recognition and measurement of current taxes payable or refundable, and deferred tax assets and liabilities require that we make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period.
Long-lived Assets and Intangible Assets.    We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Circumstances which could trigger a review include, but are not limited to the following:
significant decreases in the market price of the asset;
significant adverse changes in the business climate or legal factors;
accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset;
current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and
current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.
Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets and intangible assets may not be recoverable, we estimate the future cash flows expected to be generated by the asset from its use or eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. These significant judgments may include future expected revenue, expenses, capital expenditures and other costs, and discount rates.
Goodwill.    We record goodwill when the consideration paid for a business acquisition exceeds the fair value of net tangible and intangible assets acquired. We review goodwill for impairment annually on the last business day of our fiscal fourth quarter, and more frequently, if an event occurs or circumstances change that indicate the fair value of the reporting unit may be below its carrying amount. We have identified that our business operates as a single operating segment which can further be divided into two components; Storage and Networking. Management concluded that goodwill is recoverable from these two components working jointly due to a fact pattern demonstrating significant sharing of assets, corporate resources, and benefits from common research and development. The two components also exhibit similar economic characteristics. Accordingly, management concluded that these two components should be aggregated into a single reporting unit for purposes of testing goodwill impairment. As part of our restructuring announced in November 2016, our former Smart Networked Devices and Solutions product group was changed to Networking and Connectivity. As part of our restructuring initiated in July 2018, our former Networking and Connectivity product group was combined and named Networking.

34






When testing goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value or we may determine to proceed directly to the quantitative impairment test.
Factors we consider important in the qualitative assessment which could trigger a goodwill impairment review include;
significant underperformance relative to historical or projected future operating results;
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
significant negative industry or economic trends;
a significant decline in our stock price for a sustained period; and
a significant change in our market capitalization relative to our net book value.
If we assess qualitative factors and conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we determine not to use qualitative assessment, then a quantitative impairment test is performed. The quantitative impairment test requires comparing the fair value of the reporting unit to its carrying value, including goodwill. An impairment exists if the fair value of the reporting unit is lower than its carrying value. We would record an impairment loss in the fiscal quarter in which an impairment determination is made. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.
In connection with the restructuring plan we announced in November 2016 (see “Note 4 - Restructuring and Other Related Charges”), our Board of Directors approved a plan to sell certain businesses that are classified and reported in the consolidated statement of operations as discontinued operations. As a result, goodwill was allocated to these businesses based on relative fair value since each represents a portion of our reporting unit. We obtained an independent valuation to determine the fair value of these businesses for purposes of allocating the goodwill. Although we engaged an independent valuation specialist to provide the fair value calculations, management provided the necessary estimates used in the specialists calculations. Significant management judgment is required in determining the estimations of future cash flows, which is dependent on internal forecasts, the long-term rate of growth for our business, the life over which cash flows will occur, and the weighted average cost of capital. Management assumes full responsibility for the valuation results and the accuracy and completeness of the underlying financial data and corresponding assumptions.
As of the last day of the fourth quarter of fiscal 2019, we performed our annual impairment assessment for testing goodwill. A step one assessment was performed. Based on our assessment, we determined there was no goodwill impairment.
Business Combination. We allocate the fair value of the purchase consideration of a business acquisition to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life. Our valuation of acquired assets and assumed liabilities requires significant estimates, especially with respect to intangible assets. The valuation of intangible assets, in particular, requires that we use valuation techniques such as the income approach. The income approach includes the use of a discounted cash flow model, which includes discounted cash flow scenarios and requires the following significant estimates: future expected revenue, expenses, capital expenditures and other costs, and discount rates. We estimate the fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Acquisition-related expenses and related restructuring costs are recognized separately from the business combination and are expensed as incurred.


35







Results of Operations - Continuing Operations
The following table sets forth information derived from our consolidated statements of operations expressed as a percentage of net revenue:
 
Year Ended
 
February 2,
2019
 
February 3,
2018
 
January 28,
2017
Net revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
49.1

 
39.3

 
44.2

Gross profit
50.9

 
60.7

 
55.8

Operating expenses:
 
 
 
 
 
Research and development
31.9

 
29.7


35.0

Selling, general and administrative
14.8

 
9.9


10.9

Litigation settlement

 
3.1

 

Restructuring related charges
2.7

 
0.2

 
4.2

Total operating expenses
49.4

 
42.9

 
50.1

Operating income from continuing operations
1.5

 
17.8

 
5.7

Interest income
0.4

 
0.7

 
0.6

Interest expense
(2.1
)
 

 

Other income, net

 
0.2

 
0.1

Income (loss) from continuing operations before income taxes
(0.2
)
 
18.7

 
6.4

Provision for income taxes
6.0

 
0.7

 
3.1

Income (loss) from continuing operations, net of tax
(6.2
)%
 
18.0
 %
 
3.3
 %
Years Ended February 2, 2019 and February 3, 2018
Net Revenue
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentage)
Net revenue
$
2,865,791

 
$
2,409,170

 
19.0
%

At the beginning of fiscal 2019, we adopted the new revenue recognition standard using the modified retrospective method. Refer to “Note 3 - Revenue” in the Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Our net revenue for fiscal 2019 increased by $456.6 million compared to net revenue for fiscal 2018. This increase was primarily due to increased sales of our networking products by 37% and higher sales of our storage products by 10%, with sales benefiting from our acquisition of Cavium, which occurred in the second quarter of fiscal 2019. This increase was partially offset by decreased sales of our other products, which were down 9% compared to fiscal 2018. Average selling prices increased 23% compared to fiscal 2018, and unit shipments were 5% lower compared to fiscal 2018, for an overall increase in net revenue of 19%.


36






Cost of Goods Sold and Gross Profit
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentages)
Cost of goods sold
$
1,407,399

 
$
947,230

 
48.6
 %
% of net revenue
49.1
%
 
39.3
%
 
 
Gross profit
$
1,458,392

 
$
1,461,940

 
(0.2
)%
% of net revenue
50.9
%
 
60.7
%
 
 
The cost of goods sold as a percentage of net revenue was higher for fiscal 2019 due primarily to increase in inventory acquisition costs and amortization expenses related to acquired intangible assets. The increase was partially offset by lower costs due to improved product mix. As a result, gross margin for fiscal 2019 decreased 9.8 percentage points compared to fiscal 2018.
Share-Based Compensation Expense
 
Year Ended
 
February 2,
2019
 
February 3,
2018
 
(in thousands)
Continuing operations:
 
 
 
      Cost of goods sold
$
12,024

 
$
6,646

      Research and development
108,762

 
52,127

      Selling, general and administrative
77,309

 
26,349

Share-based compensation - continuing operations
198,095

 
85,122

Discontinued operations:
 
 
 
      Cost of goods sold

 
(11
)
      Research and development

 
1,458

      Selling, general and administrative

 
120

Share-based compensation - discontinued operations

 
1,567

Total share-based compensation
$
198,095

 
$
86,689

Share-based compensation expense for continuing operations increased by $111.4 million in fiscal 2019 compared to fiscal 2018. The increase was mainly due to additional equity awards assumed upon the Cavium acquisition as described in “Note 15 - Employee Benefit Plans" in the Notes to the Consolidated Financial Statements.
Restructuring and Other Related Charges
 
Year Ended
 
February 2,
2019
 
February 3,
2018
 
(in thousands)
Restructuring related charges
$
76,753

 
$
5,250


We recorded total restructuring charges and other related charges of $76.8 million in fiscal 2019, which primarily arose from activities related to the restructuring plan in connection with the Cavium acquisition to increase operational efficiency, decrease costs and improve profitability. See “Note 4 - Restructuring and Other Related Charges” in the Notes to the Consolidated Financial Statements for further information.


37






Research and Development
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentages)
Research and development
$
914,009

 
$
714,444

 
27.9
%
% of net revenue
31.9
%
 
29.7
%
 
 
Research and development expense increased by $199.6 million in fiscal 2019 compared to fiscal 2018. The increase was due primarily to additional costs from our acquisition of Cavium, including $157.6 million of higher employee personnel-related costs, $11.0 million of higher other personnel-related costs and $10.2 million of higher depreciation and amortization expense.

Selling, General and Administrative
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentages)
Selling, general and administrative
$
424,360

 
$
238,166

 
78.2
%
% of net revenue
14.8
%
 
9.9
%
 
 
Selling, general and administrative expense increased by $186.2 million in fiscal 2019 compared to fiscal 2018. The increase was due primarily to additional costs from our acquisition of Cavium, including $65.8 million of higher employee personnel-related costs, $50.9 million of merger-related costs, $45.6 million of intangibles amortization expense and $15.1 million of higher facility-related expenses.

Litigation Settlement
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentages)
Litigation settlement
$

 
$
74,385

 
nm
% of net revenue
%
 
3.1
%
 
 
nm - not meaningful
In connection with the Luna legal settlement, the Company recorded $74.4 million of litigation settlement charges and related costs in fiscal 2018. Refer to “Note 13 - Commitments and Contingencies” in the Notes to the Consolidated Financial Statements for a discussion of such settlement.

Interest Income
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentages)
Interest income
$
11,926

 
$
17,381

 
(31.4
)%
% of net revenue
0.4
%
 
0.7
%
 
 
Interest income decreased by $5.5 million in fiscal 2019 compared to fiscal 2018. The decrease in fiscal 2019 is primarily due to the sale of investments during the first half of the year in connection with the Cavium acquisition.


38






Interest Expense
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentages)
Interest expense
$
(60,362
)
 
$
(685
)
 
8,712.0
%
% of net revenue
(2.1
)%
 
 %
 
 
Interest expense increased by $59.7 million in fiscal 2019 compared to fiscal 2018. The increase in fiscal 2019 is primarily due to incurring debt in connection with the Cavium acquisition as described in “Note 12 - Debt” in the Notes to the Consolidated Financial Statements.

Other Income, net
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentages)
Other income, net
$
519

 
$
4,813

 
(89.2
)%
% of net revenue
%
 
0.2
%
 
 
Other income decreased by $4.3 million in fiscal 2019 compared to fiscal 2018. The decrease in fiscal 2019 is primarily due to approximately $4.8 million gain recorded in fiscal 2018 as a result of sales of a business and private equity investment, partially offset by $0.5 million related to gain from sale of a patent in fiscal 2019.

Provision for Income Taxes
 
Year Ended
 
 
 
February 2,
2019
 
February 3,
2018
 
% Change
in 2019
 
(in thousands, except percentages)
Provision for income taxes
$
174,447

 
$
18,062

 
865.8
%

The increase in income tax expense for fiscal 2019 compared to fiscal 2018 was primarily due to approximately $227.1 million recorded in the current year as a result of corporate restructurings we effectuated that included the restructuring of our U.S. and non-U.S. assets and subsidiaries. The restructurings involved the transfer of certain assets and intellectual property used in the business among various subsidiaries. The transfer of the intellectual property resulted in the recognition of tax expense representing the estimated U.S. tax to be paid currently and in future years on income generated from the intellectual property transfer. This amount was offset by a tax benefit to recognize pre-tax losses in the U.S. for the current fiscal year for which an income tax benefit is realized at the U.S. statutory rate of 21%, as well as a net reduction in unrecognized tax benefits of $11.4 million and other discrete items. In fiscal 2018, we recorded $20.1 million of current expense, offset by a net reduction in unrecognized tax benefits of $10.0 million, which was further offset by other discrete items.
The Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. We have completed our determination of the accounting implications of the 2017 Tax Act on our tax accruals under Staff Accounting Bulletin 118 (“SAB118”) measurement period and recorded amounts in our financial statements as of February 2, 2019. There are immaterial adjustments for income taxes between the final amounts and the provisional estimates we recorded previously. In addition, the Company has made a policy election to treat the Global Intangible Low-Taxes Income (“GILTI”) inclusion as period costs.

39






Our provision for incomes taxes may be affected by changes in the geographic mix of earnings with different applicable tax rates, changes in the realizability of deferred tax assets and liabilities, accruals related to contingent tax liabilities and period-to-period changes in such accruals, the results of income tax audits, the expiration of statutes of limitations, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities and changes in tax laws. Additionally, please see the information in "Item 1A: Risk Factors" under the caption "Changes in existing taxation benefits, rules or practices may adversely affect our financial results.”


Years Ended February 3, 2018 and January 28, 2017
Net Revenue
 
Year Ended
 
 
 
February 3,
2018
 
January 28,
2017
 
% Change
in 2018
 
(in thousands, except percentage)
Net revenue
$
2,409,170

 
$
2,300,992

 
4.7
%

Our net revenue for fiscal 2018 increased by $108.2 million compared to net revenue for fiscal 2017. This increase was primarily due to increased sales of our storage products, which were up 8%, and increased sales of our networking products, which were up by 6%. These increases were driven by growth in sales of SSD products and Wi-Fi products. These increases were partially offset by a decline of 18% in our other products. Unit shipments were 4% higher and weighted average selling prices increased 1% compared to fiscal 2017, for an overall increase in net revenue of 5%.

Cost of Goods Sold and Gross Profit
 
Year Ended
 
 
 
February 3,
2018
 
January 28,
2017
 
% Change
in 2018
 
(in thousands, except percentages)
Cost of goods sold
$
947,230

 
$
1,017,564

 
(6.9
)%
% of net revenue
39.3
%
 
44.2
%
 
 
Gross profit
$
1,461,940

 
$
1,283,428

 
13.9
 %
% of net revenue
60.7
%
 
55.8
%
 
 
The cost of goods sold as a percentage of net revenue was lower for fiscal 2018 due primarily to improved product mix, combined with lower manufacturing costs and lower inventory reserves. As a result, gross margin for fiscal 2018 increased 5 percentage points compared to fiscal 2017.

40






Share-Based Compensation Expense
 
Year Ended
 
February 3,
2018
 
January 28,
2017
 
(in thousands)
Continuing operations:
 
 
 
     Cost of goods sold
$
6,646

 
$
8,334

     Research and development
52,127

 
74,809

     Selling, general and administrative
26,349

 
18,257

Share-based compensation - continuing operations
85,122

 
101,400

Discontinued operations:
 
 
 
      Cost of goods sold
(11
)
 
187

      Research and development
1,458

 
11,633

      Selling, general and administrative
120

 
750

Share-based compensation - discontinued operations
1,567

 
12,570

Total share-based compensation
$
86,689

 
$
113,970

Share-based compensation expense for continuing operations decreased by $16.3 million in fiscal 2018 compared to fiscal 2017. The decrease was mainly due to lower headcount from restructuring actions.

Restructuring and Other Related Charges
 
Year Ended
 
February 3,
2018
 
January 28,
2017
 
(in thousands)
Restructuring related charges
$
5,250

 
$
96,801

We recorded total restructuring charges and other related charges of $5.3 million in fiscal 2018, which primarily arose from activities related to the restructuring plan we announced in November 2016 to restructure our operations to refocus our research and development, increase operational efficiency and improve profitability. See “Note 4 - Restructuring and Other Related Charges” in the Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Research and Development
 
Year Ended
 
 
 
February 3, 2018
 
January 28, 2017
 
% Change
in 2018
 
(in thousands, except percentages)
Research and development
$
714,444

 
$
805,029

 
(11.3
)%
% of net revenue
29.7
%
 
35.0
%
 
 
Research and development expense decreased by $90.6 million in fiscal 2018 compared to fiscal 2017. The decrease was primarily attributable to $70.0 million of lower personnel-related costs, and reduction in depreciation and amortization expense of $13.6 million. These reductions were driven by the restructuring actions announced in November 2016.


41






Selling, general and administrative
 
Year Ended
 
 
 
February 3, 2018
 
January 28, 2017
 
% Change
in 2018
 
(in thousands, except percentages)
Selling, general, and administrative
$
238,166

 
$
251,191

 
(5.2
)%
% of net revenue
9.9
%
 
10.9
%
 
 
Selling, general and administrative expense decreased by $13.0 million in fiscal 2018 compared to fiscal 2017. The decrease was primarily attributable to $14.8 million of lower legal expenses and $13.2 million of lower audit and tax fees. The decrease was partially offset by $10.3 million of merger-related costs.
    
Litigation Settlement
 
Year Ended
 
 
 
February 3, 2018
 
January 28, 2017
 
% Change
in 2018
 
(in thousands, except percentages)
Litigation settlement
$
74,385

 
$

 
nm
% of net revenue
3.1
%
 
%
 
 
nm - not meaningful
 
 
 
 
 
In connection with the Luna legal settlement, the Company recorded $74.4 million of litigation settlement charges and related costs. Refer to “Note 13 - Commitments and Contingencies” for a discussion of such settlement.


Interest Income
 
Year Ended
 
 
 
February 3, 2018
 
January 28, 2017
 
% Change
in 2018
 
(in thousands, except percentages)
Interest income
$
17,381

 
$
13,198

 
31.7
%
% of net revenue
0.7
%
 
0.6
%
 
 
Interest income increased by $4.2 million in fiscal 2018 compared to fiscal 2017. The increase in fiscal 2018 reflects higher interest rates offset by lower average cash and investment balances.

Interest Expense
 
Year Ended
 
 
 
February 3, 2018
 
January 28, 2017
 
% Change
in 2018
 
(in thousands, except percentages)
Interest expense
$
(685
)
 
$
(368
)
 
86.1
%
% of net revenue
 %
 
 %
 
 
Interest expense increased by $0.3 million in fiscal 2018 compared to fiscal 2017. The increase in fiscal 2018 was mainly due to higher imputed interest expense on technology license obligations.


42






Other Income, net
 
Year Ended
 
 
 
February 3, 2018
 
January 28, 2017
 
% Change
in 2018
 
(in thousands, except percentages)
Other income, net
$
4,813

 
$
4,192

 
14.8
%
% of net revenue
0.2
%
 
0.1
%
 
 
Other income increased by $0.6 million in fiscal 2018 compared to fiscal 2017. Other income, net in fiscal 2018 was due to $4.8 million gain as a result of sales of a business and private equity investment. Other income, net in fiscal 2017 was due to $4.2 million gain primarily associated with realized gains on investments as well as foreign currency measurement.

Provision (benefit) for Income Taxes
 
Year Ended
 
 
 
February 3, 2018
 
January 28, 2017
 
% Change
in 2018
 
(in thousands, except percentages)
Provision for income taxes
$
18,062

 
$
72,608

 
(75.1
)%

The decrease in income tax expense for fiscal 2018 compared to fiscal 2017 was primarily due to approximately $66.9 million recorded in the prior year as a result of restructuring actions taken in the fourth quarter of fiscal 2017, offset by additional tax expense of $2.1 million attributable to a building sale incurred in the current year. The prior year amount consisted of $50.1 million of foreign withholding taxes on undistributed earnings of certain subsidiaries that were no longer considered to be indefinitely reinvested as a result of those restructuring actions and $16.8 million of additional foreign tax expense which also arose as a result of such restructuring. Those amounts were one time in nature and were not expected to recur in the future.

Liquidity and Capital Resources
The Company's principal source of liquidity as of February 2, 2019 consisted of approximately $582 million of cash, cash equivalents and short-term investments, of which approximately $550 million was held by subsidiaries outside of Bermuda.  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.
In June 2018, we executed debt agreements to obtain a $900 million term loan and $1.0 billion of senior unsecured notes in order to fund the Cavium acquisition. In addition, we executed a debt agreement in June 2018 to obtain a $500 million Revolving Credit Facility, which was undrawn as of February 2, 2019. See “Note 12 - Debt” for further information.
We believe that our existing cash, cash equivalents, together with cash generated from operations, and funds from our Revolving Credit Facility will be sufficient to cover our working capital needs, capital expenditures, investment requirements and any declared dividends, repurchase of our common stock and commitments for at least the next twelve months. Our capital requirements will depend on many factors, including our rate of sales growth, market acceptance of our products, costs of securing access to adequate manufacturing capacity, the timing and extent of research and development projects and increases in operating expenses, which are all subject to uncertainty. For a discussion of litigation related risks, see Part I, Item 1A, "Risk Factors," including the risk detailed under the caption “We have been named as a party to several legal proceedings and may be named in additional ones in the future, including litigation involving our patents and other intellectual property, which could subject us to liability, require us to indemnify our customers, require us to obtain or renew licenses, require us to stop selling our products or force us to redesign our products.”
To the extent that our existing cash, cash equivalents and short-term investments together with cash generated by operations, and funds available under our Revolving Credit Facility are insufficient to fund our future activities, we may need to raise additional funds through public or private debt or equity financing. We may also acquire additional businesses, purchase assets or enter into other strategic arrangements in the future, which could also require us to seek debt or equity financing. Additional equity financing or convertible debt financing may be dilutive to our current shareholders. If we elect to raise additional funds, we may not be able to obtain such funds on a timely basis or on acceptable terms, if at all. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to our common shares.

43






Future payment of a regular quarterly cash dividend on our common shares and our planned repurchases of common stock will be subject to, among other things, the best interests of the Company and our shareholders, our results of operations, cash balances and future cash requirements, financial condition, developments in ongoing litigation, statutory requirements under Bermuda law, market conditions and other factors that our board of directors may deem relevant. Our dividend payments and repurchases of common stock may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares at all or in any particular amounts.

Cash Flows from Operating Activities
Net cash provided by operating activities was $596.7 million for fiscal 2019 compared to net cash provided by operating activities of $571.1 million for fiscal 2018, and net cash used in operating activities of $358.4 million for fiscal 2017. The cash inflows from operations for fiscal 2019 were primarily due to $179.1 million of net loss adjusted for $850.3 million of non-cash items, offset by a net decrease in working capital of $74.4 million. The cash outflow from working capital for fiscal 2019 was primarily driven by an increase in accounts receivable, which was primarily due to an increase in the days sales outstanding.
The cash inflows from operations for fiscal 2018 were primarily due to $520.8 million of net income adjusted for $94.4 million of non-cash items and gains on the sales of discontinued operations and businesses, offset by a net decrease in working capital of $44.1 million. The cash outflow from working capital for fiscal 2018 was primarily driven by a decrease in accrued liabilities and other non-current liabilities, which was primarily due to payments on accrued restructuring expenses and rebates.
The cash outflows from operations for fiscal 2017 were primarily due to $21.2 million of net income adjusted for $329.6 million of non-cash items, offset by a net decrease in working capital of $709.2 million. The cash outflow from working capital for fiscal 2017 was primarily driven by the decrease in the CMU accrued litigation settlement that was fully paid in the first quarter of fiscal 2017. The negative effect on working capital was partially offset by an increase in accrued liabilities and other non-current liabilities primarily due to an increase in income taxes payable for fiscal 2017 combined with a decrease in inventories.
Cash Flows from Investing Activities
Net cash used in investing activities of $1.8 billion in fiscal year 2019 was primarily driven by the net cash paid to acquire Cavium of $2.6 billion and purchases of property and equipment of $75.9 million, partially offset by sales and maturities of available-for-sale securities and time deposits of $986.9 million.
For fiscal 2018, net cash provided by investing activities of $39.5 million was primarily generated from the sales and maturities of available-for-sale securities of $733.2 million and net proceeds of $165.9 million from the sale of our discontinued operations, which were partially offset by purchases of available-for-sale securities of $835.5 million and capital expenditures of $38.6 million.
For fiscal 2017, net cash provided by investing activities of $161.6 million was primarily generated from the sales and maturities of available-for-sale securities of $856.3 million less purchases of available-for-sale securities of $489.9 million, which were also partially offset by payments of $150.0 million for net purchases of time deposits, $44.5 million for purchases of property and equipment and $10.3 million for the purchase of technology licenses.
Cash Flows from Financing Activities
Net cash provided by financing activities of $849.7 million in fiscal year 2019 was primarily attributable to $1.9 billion proceeds from issuance of debt and $46.0 million net proceeds from the issuance of our common shares under our share-based plans, less the tax withholding on behalf of employees for net share settlements. This cash inflow was partially offset by $756.1 million payment of debt principal, $148.1 million payment for our quarterly dividends, and $104.0 million payment for repurchases of our common stock.
For fiscal 2018, net cash used in financing activities of $536.2 million in fiscal year 2018 was primarily attributable to repurchases under our share repurchase program of our common shares in the open market for $527.6 million and quarterly cash dividends of $119.3 million. The cash outflow was partially offset by net proceeds of $153.5 million from the issuance of our common shares under our share-based plans, less the tax withholding on behalf of employees for net share settlements.
For fiscal 2017, net cash used in financing activities of $267.2 million was primarily attributable to payments for repurchases under our share repurchase program of our common shares in the open market for $181.6 million and for our quarterly cash dividends of $122.3 million. The cash outflow was partially offset by net proceeds of $57.5 million from the issuance of our common shares under our share-based plans less the minimum tax withholding on behalf of employees for net share settlements.

44






Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities of financial partnerships, such as entities often referred to as structured finance or special purpose entities, or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of February 2, 2019, we did not have any off-balance sheet arrangements.
Contractual Obligations and Commitments
Under our manufacturing relationships with our foundry partners, cancellation of outstanding purchase orders is allowed but requires repayment of all expenses incurred through the date of cancellation. As of February 2, 2019, these foundries had incurred approximately $103.7 million of manufacturing costs and expenses relating to our outstanding purchase orders.
The following table summarizes our contractual obligations as of February 2, 2019 and the effect that such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
 
Payment Obligations by Fiscal Year
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
Total
Contractual obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal payments on debt
$

 
$

 
$
750,000

 
$

 
$
500,000

 
$
500,000

 
$
1,750,000

Interest obligations on debt
75,856

 
75,879

 
59,025

 
46,391

 
34,127

 
111,124

 
402,402

Facilities operating leases, net
33,086

 
29,866

 
26,612

 
21,272

 
13,690

 
40,100

 
164,626

Computer-aided design software
10,200

 

 

 

 

 

 
10,200

Purchase commitments to foundries
103,704

 

 

 

 

 

 
103,704

Capital purchase obligations
43,034

 

 

 

 

 

 
43,034

Technology license obligations (1)
54,846

 
7,829

 

 

 

 

 
62,675

Other contractual commitments
7,689

 
3,424

 
2,845

 
1,246

 
755

 
1,523

 
17,482

Total contractual cash obligations
$
328,415

 
$
116,998

 
$
838,482

 
$
68,909

 
$
548,572

 
$
652,747

 
$
2,554,123

 
(1)
Amounts represent anticipated future cash payments, including anticipated interest payments not recorded in the consolidated balance sheet.
In addition to the above commitments and contingencies, as of February 2, 2019, we have $18.4 million of unrecognized tax benefits as liabilities. We also have a liability for potential interest and penalties of $15.1 million as of February 2, 2019. 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 $14.4 million from the lapse of statutes of limitation in various jurisdictions during the next 12 months. Government tax authorities from several non-U.S. jurisdictions are also examining our tax returns. We believe that we have adequately provided for any reasonably foreseeable outcomes related to these tax audits and that any settlement will not have a material effect on our results at this time.
Recent Accounting Pronouncements
Please see “Note 2 —  Significant Accounting Policies — Recent Accounting Pronouncements” in our Notes to the Consolidated Financial Statements set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Related Party Transactions
None.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. With our outstanding debt following our acquisition of Cavium, we are exposed to various forms of market risk, including the potential losses arising from adverse changes in interest rates on our outstanding Term Loan, including changes that may result from implementation of new benchmark rates that replace LIBOR. See “Note 12 - Debt” for further information. A hypothetical increase or decrease in the interest rate by 1% would result in an increase or decrease in annual interest expense by approximately $3.3 million to $7.6 million.

45






We maintain an investment policy that requires minimum credit ratings, diversification of credit risk and limits the long-term interest rate risk by requiring effective maturities of generally less than five years. We invest our excess cash primarily in highly liquid debt instruments of the U.S. government and its agencies, money market mutual funds, asset backed securities, corporate debt securities and municipal debt securities that are classified as available-for-sale and time deposits. These investments are recorded on our consolidated balance sheets at fair market value with their related unrealized gain or loss reflected as a component of accumulated other comprehensive income (loss) in the consolidated statement of shareholders’ equity. Investments in both fixed rate and floating rate interest earning securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. At February 2, 2019, our investment portfolio balance was $0.
Foreign Currency Exchange Risk. All of our sales and the majority of our expenses are denominated in U.S. dollars. Since we operate in many countries, a percentage of our international operational expenses are denominated in foreign currencies and exchange volatility could positively or negatively impact those operating costs. Increases in the value of the U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Additionally, we may hold certain assets and liabilities, including potential tax liabilities, in local currency on our consolidated balance sheet. These tax liabilities would be settled in local currency. Therefore, foreign exchange gains and losses from remeasuring the tax liabilities are recorded to interest and other income, net. We do not believe that foreign exchange volatility has a material impact on our current business or results of operations. However, fluctuations in currency exchange rates could have a greater effect on our business or results of operations in the future to the extent our expenses increasingly become denominated in foreign currencies.
We may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with certain existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures.
To provide an assessment of the foreign currency exchange risk associated with our foreign currency exposures within operating expense, we performed a sensitivity analysis to determine the impact that an adverse change in exchange rates would have on our financial statements. If the U.S. dollar weakened by 10%, our operating expense could increase by approximately 2%.

46






Item 8.
Financial Statements and Supplementary Data
INDEX
 
Page

47






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Marvell Technology Group Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Marvell Technology Group Ltd. and subsidiaries (the “Company”) as of February 2, 2019, and February 3, 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended February 2, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 2, 2019, and February 3, 2018, and the results of its operations and its cash flows for each of the three years in the period ended February 2, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 2, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 28, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP

San Jose, California
March 28, 2019
We have served as the Company’s auditor since 2016.


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Table of Contents

MARVELL TECHNOLOGY GROUP LTD.

CONSOLIDATED BALANCE SHEETS
(In thousands, except par value per share)

 
February 2,
2019
 
February 3,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
582,410

 
$
888,482

Short-term investments

 
952,790

Accounts receivable, net
493,122

 
280,395

Inventories
276,005

 
170,039

Prepaid expenses and other current assets
43,721

 
41,482

Assets held for sale

 
30,767

Total current assets
1,395,258

 
2,363,955

Property and equipment, net
318,978

 
202,222

Goodwill
5,494,505

 
1,993,310

Acquired intangible assets, net
2,560,682

 

Other non-current assets
247,329

 
148,800

Total assets
$
10,016,752

 
$
4,708,287

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
185,362

 
$
145,236

Accrued liabilities
330,594

 
86,958

Accrued employee compensation
115,925

 
127,711

Deferred income
4,915

 
61,237

Total current liabilities
636,796

 
421,142

Long-term debt
1,732,699

 

Non-current income taxes payable
59,221

 
56,976

Deferred tax liabilities
246,252

 
52,204

Other non-current liabilities
35,374

 
36,552

Total liabilities
2,710,342

 
566,874

Commitments and contingencies (Note 13)

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.002 par value; 8,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.002 par value; 992,000 shares authorized; 658,514 and 495,913 shares issued and outstanding in fiscal 2019 and 2018, respectively
1,317

 
991

Additional paid-in capital
6,188,598

 
2,733,292

Accumulated other comprehensive loss

 
(2,322
)
Retained earnings
1,116,495

 
1,409,452

Total shareholders’ equity
7,306,410

 
4,141,413

Total liabilities and shareholders’ equity
$
10,016,752

 
$
4,708,287

See accompanying Notes to Consolidated Financial Statements.


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Table of Contents

MARVELL TECHNOLOGY GROUP LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

 
Year Ended
 
February 2,
2019
 
February 3,
2018
 
January 28,
2017
Net revenue
$
2,865,791

 
$
2,409,170

 
$
2,300,992

Cost of goods sold
1,407,399

 
947,230

 
1,017,564

Gross profit
1,458,392

 
1,461,940

 
1,283,428

Operating expenses:
 
 
 
 
 
Research and development
914,009

 
714,444

 
805,029

Selling, general and administrative
424,360

 
238,166

 
251,191

Litigation settlement

 
74,385

 

Restructuring related charges
76,753

 
5,250

 
96,801

Total operating expenses
1,415,122

 
1,032,245

 
1,153,021

Operating income from continuing operations
43,270

 
429,695

 
130,407

Interest income
11,926

 
17,381

 
13,198

Interest expense
(60,362
)
 
(685
)
 
(368
)
Other income, net
519

 
4,813

 
4,192

Interest and other income (loss), net
(47,917
)
 
21,509

 
17,022

Income (loss) from continuing operations before income taxes
(4,647
)
 
451,204

 
147,429

Provision for income taxes
174,447

 
18,062

 
72,608

Income (loss) from continuing operations, net of tax
$
(179,094
)
 
$
433,142

 
$
74,821

Income (loss) from discontinued operations, net of tax

 
87,689

 
(53,670
)
Net income (loss)
$
(179,094
)
 
$
520,831

 
$
21,151

Net income (loss) per share - Basic:
 
 
 
 
 
Continuing operations
$
(0.30
)
 
$
0.87

 
$
0.15

Discontinued operations
$

 
$
0.18

 
$
(0.11
)
Net income (loss) per share - Basic
$
(0.30
)
 
$
1.05

 
$
0.04

Net income (loss) per share - Diluted:
 
 
 
 
 
Continuing operations
$
(0.30
)
 
$
0.85

 
$
0.14

       Discontinued operations
$

 
$
0.17

 
$
(0.10
)
Net income (loss) per share - diluted
$
(0.30
)
 
$
1.02

 
$
0.04

Weighted average shares:
 
 
 
 
 
Basic
591,232

 
498,008

 
509,738

Diluted
591,232

 
509,667

 
517,513

See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

MARVELL TECHNOLOGY GROUP LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)

 
Year Ended
 
February 2,
2019
 
February 3,
2018
 
January 28,
2017
Net income (loss)
$
(179,094
)
 
$
520,831

 
$
21,151

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Net change in unrealized gain (loss) on marketable securities
2,322