Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.5.0.2
Business Combinations
 9 Months Ended
Sep. 30, 2016
Business Combinations [Abstract]  
Business Combination Disclosure [Text Block]
Business Combination
Acquisition of Certain Assets and Assumption of Certain Liabilities of the Wireless Infrastructure Backhaul Business of Broadcom Corporation

On July 1, 2016, the Company consummated the transactions contemplated by an asset purchase agreement entered into with Broadcom Corporation. The Company paid cash consideration of $80.0 million for the purchase of certain assets of Broadcom's wireless infrastructure backhaul business, and the assumption of certain liabilities. The assets acquired include, among other things, digital baseband, radio frequency, or RF, and analog/mixed signal patents and other intellectual property, in-production and next-generation digital baseband and RF transceiver integrated circuit and reference platform designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property and equipment. The liabilities assumed include, among other things, product warranty obligations, liabilities related to technologies acquired, and a payable to Broadcom as reimbursement of costs associated with the termination of those employees of the wireless infrastructure backhaul business who were not hired by MaxLinear upon the closing of the acquisition. The acquired assets and assumed liabilities, together with the rehired employees, represent a business as defined in ASC 805, Business Combinations. The Company is currently in the process of integrating the acquired assets and rehired employees into the Company's existing business. The asset purchase agreement also contains customary representations, warranties and covenants, including non-competition, non-solicitation, and indemnification provisions.

The following is a preliminary allocation of purchase price as of the July 1, 2016 closing date based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition (in thousands):
Description
Amount
 
(in thousands)
Fair value of consideration transferred:
 
Cash
$
80,000

 
 
Preliminary purchase price allocation:
 
Inventory
$
8,715

Other current assets
2,181

Property and equipment, net
1,616

Identifiable intangible assets
56,300

Accrued expenses and other current liabilities
(5,690
)
     Accrued compensation
(2,202
)
Identifiable net assets acquired
60,920

Goodwill
19,080

Total purchase price
$
80,000


The estimated fair value of assets acquired and liabilities assumed performed for the purposes of these unaudited consolidated financial statements was primarily limited to the preliminary identification and valuation of intangible assets and inventory by independent valuation specialists. Estimates of fair value require management to make significant estimates and assumptions that are preliminary and subject to change upon finalization of the valuation analysis. Although final determination may result in different asset and liability fair values, it is not expected that such differences will be material to understanding the impact of the transaction on the financial results of MaxLinear. The goodwill recognized is attributable primarily to the acquired workforce, expected synergies, and other benefits that MaxLinear believes will result from integrating the operations of the wireless infrastructure backhaul business with the operations of MaxLinear.
The Company used cash and cash equivalents on hand of $80.0 million to fund the acquisition.
Acquisition of Certain Assets and Assumption of Certain Liabilities of the Wireless Infrastructure Access Business of Microsemi Storage Solutions, Inc. (formerly known as PMC-Sierra, Inc.)
On April 28, 2016, the Company entered into an asset purchase agreement with Microsemi Storage Solutions, Inc., formerly known as PMC-Sierra, Inc., or Microsemi, and consummated the transactions contemplated by the asset purchase agreement. The Company paid cash consideration of $21.0 million for the purchase of certain wireless access assets of Microsemi's wireless infrastructure access business, and assumed certain liabilities. The assets acquired include, among other things, radio frequency and analog/mixed signal patents and other intellectual property, in-production and next-generation RF transceiver designs, a workforce-in-place, and other intangible assets, as well as tangible assets that include but are not limited to production masks and other production related assets, inventory, and other property, plant, and equipment. The liabilities assumed include, product warranty obligations, accrued vacation and severance obligations for employees of the wireless infrastructure access business that were hired by the Company upon close of the acquisition. The acquired assets and assumed liabilities, together with the rehired employees, represent a business as defined in ASC 805, Business Combinations. The Company has integrated the acquired assets and rehired employees into the Company's existing business. The asset purchase agreement also contains customary representations, warranties and covenants, including non-competition, non-solicitation, and indemnification provisions. In connection with the acquisition, the Company entered into a transition services agreement with Microsemi for the purpose of Microsemi providing interim operations and general and administrative support to the Company.
The following allocation of purchase price as of the April 28, 2016 closing date was based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition (in thousands):
Description
Amount
 
(in thousands)
Fair value of consideration transferred:
 
Cash
$
21,000

 
 
Purchase price allocation:
 
Inventory
$
912

Property and equipment
21

Identifiable intangible assets
13,600

Warranty obligations
(12
)
     Accrued expenses
(456
)
Identifiable net assets acquired
14,065

Goodwill
6,935

Total purchase price
$
21,000


The fair value of assets acquired and liabilities assumed performed for the purposes of these unaudited consolidated financial statements was primarily limited to the identification and valuation of intangible assets and inventory by independent valuation specialists. The valuation analysis performed by independent valuation specialists was finalized during the period ended September 30, 2016. The goodwill recognized is attributable primarily to the acquired workforce, expected synergies, and other benefits that MaxLinear believes will result from integrating the operations of the wireless infrastructure access business with the operations of MaxLinear.
The Company used cash and cash equivalents on hand of $21.0 million to fund the acquisition.

The total goodwill recorded in connection with the acquisitions of the wireless infrastructure access and backhaul businesses was $6.9 million and $19.1 million, respectively. The Company does not expect to deduct any of the acquired goodwill for tax purposes.

The following table presents unaudited pro forma combined financial information for each of the periods presented, as if the acquisitions had occurred at the beginning of fiscal year 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net revenue – proforma combined
$
96,324

 
$
104,326

 
$
311,709

 
$
227,428

Net income (loss) – proforma combined
$
11,806

 
$
(4,793
)
 
$
42,423

 
$
(70,311
)

The following adjustments were included in the unaudited pro forma combined net revenues:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net revenue
$
96,324

 
$
95,191

 
$
300,696

 
$
201,411

Add: Net revenue – acquired businesses
—

 
9,135

 
11,013

 
26,017

Net revenues – proforma combined
$
96,324

 
$
104,326

 
$
311,709

 
$
227,428



The following adjustments were included in the unaudited pro forma combined net income (loss):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net income (loss)
$
9,679

 
$
1,582

 
$
52,944

 
$
(33,787
)
Add: Results of operations – acquired businesses
—

 
(3,452
)
 
(8,822
)
 
(16,291
)
Less: Proforma adjustments
 
 
 
 
 
 
 
Depreciation of property and equipment
—

 
(221
)
 
(397
)
 
(597
)
Amortization of intangible assets
250

 
(2,552
)
 
(3,993
)
 
(10,125
)
Amortization of inventory step-up
—

 
—

 
—

 
(5,641
)
Impairment of intangible assets
1,300

 
(1,300
)
 
1,300

 
(1,300
)
Acquisition and integration expenses
569

 
—

 
2,010

 
—

Income taxes
8

 
1,150

 
(619
)
 
(2,570
)
Net income (loss) – proforma combined
$
11,806

 
$
(4,793
)
 
$
42,423

 
$
(70,311
)
 
 
 
 
 
 
 
 
Net income (loss) per share – proforma combined:
 
 
 
 
 
 
 
Basic
$
0.18

 
$
(0.08
)
 
$
0.67

 
$
(1.39
)
Diluted
$
0.17

 
$
(0.08
)
 
$
0.63

 
$
(1.39
)
Shares used to compute net income (loss) per share – proforma combined:
 
 
 
 
 
 
 
Basic
64,241

 
60,644

 
63,454

 
50,528

Diluted
67,832

 
60,644

 
67,354

 
50,528



The pro forma combined financial information for the nine months ended September 30, 2015 includes aggregate non-recurring adjustments of $9.3 million consisting of amortization of inventory step-up and intangible assets of $5.6 million and $2.4 million, respectively, for which the related assets have useful lives of less than one year, and impairment of intangible assets of $1.3 million. The pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations of the consolidated business had the acquisitions actually occurred at the beginning of fiscal year 2015 or of the results of future operations of the consolidated business. The unaudited pro forma financial information does not reflect any operating efficiencies and cost saving that may be realized from the integration of the acquisitions in the Company's unaudited consolidated statements of operations.

For the three months ended September 30, 2016, $6.2 million of revenue and $4.6 million of gross profit, excluding $3.6 million of amortization of acquired intangible assets and the inventory fair-value step-up of the wireless infrastructure access business and wireless infrastructure backhaul business since the acquisition date are included in the Company's consolidated statements of operations.

For the nine months ended September 30, 2016, $7.0 million of revenue and $5.0 million of gross profit, excluding $4.2 million of amortization of acquired intangible assets and the inventory fair-value step-up of the wireless infrastructure access business and wireless infrastructure backhaul business since the acquisition date are included in the Company's consolidated statements of operations.

Acquisition and integration-related costs of $0.6 million and $2.0 million related to the acquisitions of the wireless infrastructure access business and wireless infrastructure backhaul business were included in selling, general, and administrative expenses in the Company's statement of operations for the three and nine months ended September 30, 2016.

Acquisition of Entropic Communications, Inc.

On April 30, 2015, the Company completed its acquisition of Entropic Communications, Inc., or Entropic, for aggregate consideration of $289.4 million, which was comprised of the equity value of shares of the Company's common stock that were issued in the transaction of $173.8 million, the portion of outstanding equity awards deemed to have been earned as of April 30, 2015 of $4.5 million and cash of $111.1 million.
Refer to Note 4 for disclosures following this acquisition for the three and nine months ended September 30, 2016 and 2015.
Acquisition of Physpeed, Co., Ltd.
On October 31, 2014, the Company acquired 100% of the outstanding common shares of Physpeed Co., Ltd., or Physpeed, a privately held developer of high-speed physical layer interconnect products addressing enterprise and telecommunications infrastructure market applications. The Company paid $9.3 million in cash in exchange for all outstanding shares of capital stock and equity of Physpeed. Consideration payable of $1.1 million to the former shareholders of Physpeed was placed into escrow pursuant to the terms of the definitive merger agreement.
The following disclosures regarding this acquisition are for the three and nine months ended September 30, 2016 and 2015.
Compensation Arrangements
In connection with the acquisition of Physpeed, the Company agreed to pay additional consideration in future periods. The definitive merger agreement provided for potential consideration of $1.7 million of held back merger proceeds for the former principal shareholders of Physpeed, which will be paid over a two year period contingent upon continued employment. Quarterly payments of $0.2 million began on January 31, 2015 and ended on October 31, 2016. Certain employees of Physpeed will be paid a total of $0.1 million of which $0.07 million was paid in 2015 and $0.05 million is being paid in 2016. These payments are accounted for as transactions separate from the business combination as the payments are contingent upon continued employment and are being recorded as post-combination compensation expense in the Company's financial statements during the service period.
Earn-Out
The definitive merger agreement also provides for potential earn-out consideration of up to $0.75 million to the former shareholders of Physpeed for the achievement of certain 2015 and 2016 revenue milestones. The contingent earn-out consideration had an estimated fair value of $0.3 million at the date of acquisition. The 2015 earn-out amount is determined by multiplying $0.375 million by a 2015 revenue percentage that is defined in the definitive merger agreement. The 2016 earn-out amount is determined by multiplying $0.375 million by a 2016 revenue percentage that is defined in the definitive merger agreement. Subsequent changes to the fair value are recorded through earnings. The fair value of the earn-out was $0.4 million and $0.4 million at September 30, 2016 and December 31, 2015, respectively. During the nine months ended September 30, 2016, the Company paid $0.2 million for the 2015 earn-out (Note 6).
Restricted Stock Units
The Company agreed to grant restricted stock units, or RSUs, under its equity incentive plan to Physpeed continuing employees if certain 2015 and 2016 revenue targets are met contingent upon continued employment. Qualifying revenues are the net revenues recognized directly attributable to sales of Physpeed products or the Company’s provision of non-recurring engineering services exclusively with respect to the Physpeed products.
The Company recorded compensation expense for the 2015 RSUs over a 14 month service period from October 31, 2014 through December 31, 2015. The Company records compensation expense for the 2016 RSUs over a 26-month service period, which started from October 31, 2014 and runs through December 31, 2016. The Company has recorded an accrual for the stock-based compensation expense for the 2015 and 2016 RSUs of $1.4 million and $1.9 million at September 30, 2016 and December 31, 2015, respectively. The Company issued the 2015 RSUs in February 2016 and no related accrual for the 2015 revenue period was outstanding at September 30, 2016.