Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.7.0.1
Business Combinations
 6 Months Ended
Jun. 30, 2017
Business Combinations [Abstract]  
Business Combinations
Business Combinations
Acquisition of Exar Corporation

On May 12, 2017, pursuant to the March 28, 2017 Agreement and Plan of Merger, Eagle Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of MaxLinear, merged with and into Exar Corporation, or Exar, with Exar surviving as a wholly owned subsidiary of MaxLinear. Under this Agreement and Plan of Merger, the Company agreed to acquire all of Exar's outstanding common stock for $13.00 per share in cash. MaxLinear also assumed certain of Exar's stock-based awards in the merger. MaxLinear paid aggregate cash consideration of $688.1 million including $12.7 million of cash paid to settle certain stock-based awards that were not assumed by MaxLinear in the merger. The Company funded the transaction with cash from the balance sheet of the combined companies and the net proceeds of approximately $416.8 million from $425.0 million of new transaction debt.

Exar is a designer and developer of high-performance analog mixed-signal integrated circuits and sub-system solutions. The merger significantly furthers the Company's strategic goals of increasing revenue scale, diversifying revenues by end customers and addressable markets, and expanding its analog and mixed-signal footprint on existing tier-one customer platforms. Exar adds a diverse portfolio of high performance analog and mixed-signal products constituting power management and interface technologies that are ubiquitous functions in wireless and wireline communications infrastructure, broadband access, industrial, enterprise networking, and automotive platforms. The Company intends to leverage combined technological expertise, cross-selling opportunities and distribution channels to significantly expand its serviceable addressable market.

The following table summarizes the fair value of purchase price consideration to acquire Exar (in thousands):
Acquisition Consideration
 
Amount
 
 
 
Cash (1)
 
$
688,114

Fair value of vested stock-based awards assumed (2)
 
4,613

Total
 
$
692,727

__________________
(1) 
Cash consideration paid includes 51,953,635 shares ultimately tendered at $13.00 per share, or an aggregate total of $675.4 million, plus $12.7 million of cash paid to settle certain outstanding stock-based awards which were not assumed by MaxLinear in the merger.

(2)
MaxLinear assumed certain of Exar's outstanding stock-based awards as part of the merger, and estimated the fair value of such assumed stock-based awards. The portion allocated to purchase price consideration represents the vested assumed stock-based awards. The fair value of the MaxLinear equivalent stock options included in stock-based awards assumed was estimated using the Black-Scholes valuation model utilizing the assumptions noted below. The expected volatility of the MaxLinear stock price is based on the average historical volatility over the expected term based on daily closing stock prices. The expected term of the option is based on the remaining vesting period and contractual term of the options, using the simplified method of determining expected term as used by MaxLinear. The stock price volatility and expected term are based on MaxLinear’s best estimates at this time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the total consideration recorded for the acquisition.
The following is an allocation of purchase price as of the May 12, 2017 closing date under the acquisition method of accounting. The purchase price allocation is based upon a preliminary estimate of the fair value of the assets acquired and the liabilities assumed by MaxLinear in the acquisition (in thousands):
Description
Amount
Preliminary purchase price allocation:
 
Cash
$
235,810

Accounts receivable
11,363

Inventory
47,136

Prepaid and other current assets
2,372

Property and equipment
4,358

Identifiable intangible assets
250,700

Deferred tax assets
5,888

Other assets
5,424

Accounts payable
(12,385
)
Accrued expenses and other current liabilities
(10,367
)
Accrued compensation
(5,258
)
Other long-term liabilities
(3,030
)
Identifiable net assets acquired
532,011

Goodwill
160,716

Total purchase price
$
692,727



The fair value of inventories acquired from Exar included an acquisition accounting fair market value step-up of $21.8 million. The Company recognized $4.4 million amortization of inventory step-up in cost of sales in the consolidated statements of income for the three and six months ended June 30, 2017. Included in other assets in the Exar purchase price allocation is $5.0 million held in escrow pertaining to indemnification obligations under the purchase agreement associated with the November 9, 2016 divestiture of a business unit by Exar (Note 12).
The following table presents details of the identified intangible assets acquired of Exar:
 
 
Estimated Useful Life (in years)
 
Fair Value (in thousands)
Developed technology
 
7.0
 
$
120,400

Trademarks and tradenames
 
6.0
 
12,100

Customer-related intangible
 
5.0
 
97,200

Product backlog
 
0.5
 
4,100

Finite-lived intangible assets
 
 
 
233,800

In-process research and development
 
N/A
 
16,900

Total intangible assets
 

 
$
250,700


Acquisition of Certain Assets and Assumption of Certain Liabilities of the G.hn business of Marvell Semiconductor, Inc.
On April 4, 2017, the Company consummated the transactions contemplated by a share and asset acquisition agreement with Marvell Semiconductor, Inc., or Marvell, to purchase certain assets and assume certain liabilities of Marvell’s G.hn business, including its Spain legal entity, for aggregate cash consideration of $21.0 million. The Company also hired certain employees of the G.hn business outside of Spain and assumed employment obligations of the Spanish entity acquired, which is now a subsidiary of MaxLinear. The assets acquired include, among other things, patents and other intellectual property, 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 and accrued vacation and severance obligations for employees of Marvell that were acquired or hired by the Company upon close of the acquisition. The acquired assets and assumed liabilities, together with the employees who joined MaxLinear and its subsidiaries as a result of the transaction, represent a business as defined in ASC 805, Business Combinations. The Company is integrating the acquired assets and employees into the Company's existing business. The acquisition of the G.hn business expands the Company's footprint in existing connected-home markets including the wired whole-home broadband connectivity market.
The following table summarizes the fair value of purchase price consideration to acquire the G.hn business (in thousands):
Acquisition Consideration
 
Amount
 
 
 
Cash
 
$
21,000

Total
 
$
21,000


The following is an allocation of purchase price as of the April 4, 2017 closing date under the acquisition method of accounting. The purchase price allocation is based upon a preliminary estimate of the fair value of the assets acquired and the liabilities assumed by MaxLinear in the acquisition (in thousands):
Description
Amount
Preliminary purchase price allocation:
 
Inventory
$
2,084

Prepaid and other current assets
147

Property and equipment
3,277

Identifiable intangible assets
12,600

Deferred tax assets
875

Other assets
28

Accounts payable
(1
)
     Accrued expenses
(358
)
     Accrued compensation
(2
)
     Other long-term liabilities
(99
)
Identifiable net assets acquired
18,551

Goodwill
2,449

Total purchase price
$
21,000


The fair value of inventories acquired included an acquisition accounting fair market value step-up of $1.2 million. The Company recognized $1.2 million amortization of inventory step-up in cost of sales in the consolidated statements of operations for the three and six months ended June 30, 2017.
The following table presents details of the identified intangible assets acquired of the G.hn business:
 
 
Estimated Useful Life (in years)
 
Fair Value (in thousands)
Developed technology
 
7.0
 
$
7,100

Customer-related intangibles
 
1.8
 
4,800

Covenant not-to-compete
 
3.0
 
200

Product backlog
 
0.8
 
500

  Total identifiable intangible assets
 

 
$
12,600



Assumptions in the Allocations of Purchase Price
Management prepared the purchase price allocations for Exar and the G.hn businesses, and in doing so considered or relied in part upon a report of a third party valuation expert to calculate the fair value of certain acquired assets, which primarily included identifiable intangible assets, inventory, and property and equipment. Estimates of fair value require management to make significant estimates and assumptions which are preliminary and subject to change upon finalization of the valuation analysis. 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 Exar and the G.hn business with the operations of MaxLinear. Certain liabilities and deferred taxes included in the purchase price allocations are based on management's best estimates of the amounts to be paid or settled and based on information available at the time the purchase price allocations were prepared. Updates to and/or completion of the valuations of certain assets acquired and liabilities assumed and our evaluation of certain income tax positions may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill amounts in subsequent periods. We expect to complete these valuations and evaluations and finalize the purchase price allocations within 12 months of the applicable acquisition date.
The fair value of the identified intangible assets acquired from Exar and the G.hn business was estimated using an income approach. Under the income approach, an intangible asset's fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. More specifically, the fair value of the developed technology, IPR&D and backlog assets was determined using the multi-period excess earnings method, or MPEEM. MPEEM is an income approach to fair value measurement attributable to a specific intangible asset being valued from the asset grouping’s overall cash-flow stream. MPEEM isolates the expected future discounted cash-flow stream to its net present value. Significant factors considered in the calculation of the developed technology and IPR&D intangible assets were the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility and the complexity, cost, and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration, and growth rates. Developed technology will begin amortization immediately and IPR&D will begin amortization upon the completion of each project. If any of the projects are abandoned, the Company will be required to impair the related IPR&D asset.
In connection with the acquisitions of Exar and the G.hn business, the Company has assumed liabilities related to product quality issues, warranty claims and contract obligations which are included in accrued expenses and other current liabilities in the purchase price allocations above. The Company has also assumed a purchase agreement that includes an indemnification clause from Exar related to a November 9, 2016 business unit divestiture by Exar. The amount of the indemnification could be up to the full purchase price received for breaches of representations and warranties, covenants and other matters under the applicable purchase agreement (Note 12).
Goodwill recorded in connection with the acquisitions of Exar and the G.hn business was $160.7 million and $2.4 million, respectively. The Company does not expect to deduct any of the acquired goodwill for tax purposes.

Proforma Combined Financial Information

The following table presents unaudited pro forma combined financial information for each of the periods presented, as if the acquisitions of Exar and the G.hn business had occurred at the beginning of fiscal year 2016:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net revenues – proforma combined
$
111,832

 
$
129,449

 
$
229,520

 
$
259,160

Net income (loss) – proforma combined
$
15,594

 
$
(1,332
)
 
$
10,714

 
$
(19,537
)


The following adjustments were included in the unaudited pro forma combined net income (loss):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net income
$
10,965

 
$
22,584

 
$
19,428

 
$
43,265

Add: Results of operations – acquired business
(9,048
)
 
4,151

 
(8,916
)
 
1,642

Less: Proforma adjustments
 
 
 
 
 
 
 
Depreciation of property, plant and equipment
476

 
1,179

 
(37
)
 
724

Amortization of intangible assets
(3,470
)
 
(12,114
)
 
(15,434
)
 
(24,220
)
Amortization of inventory step-up
6,018

 
(9,543
)
 
6,018

 
(20,332
)
Impairment of intangible assets
—

 
1,519

 
—

 
1,519

Acquisition and integration expenses
11,692

 
(5,289
)
 
14,484

 
(14,484
)
Interest expense
(1,598
)
 
(3,819
)
 
(5,388
)
 
(7,651
)
Income tax benefit
559

 
—

 
559

 
—

Net income (loss) – proforma combined
$
15,594

 
$
(1,332
)
 
$
10,714

 
$
(19,537
)
 
 
 
 
 
 
 
 
Net income (loss) per share - proforma combined:
 
 
 
 
 
 
 
Basic
$
0.24

 
$
(0.02
)
 
$
0.16

 
$
(0.31
)
Diluted
$
0.22

 
$
(0.02
)
 
$
0.15

 
$
(0.31
)
Shares used to compute net income (loss) per share - proforma combined
 
 
 
 
 
 
 
Basic
65,889

 
63,470

 
65,564

 
63,056

Diluted
69,645

 
63,470

 
69,398

 
63,056


The pro forma combined financial information for the three months ended June 30, 2016 includes aggregate non-recurring adjustments of $12.2 million consisting of aggregate amortization of inventory step-up of $10.0 million and amortization of intangible assets of $2.2 million from the Exar and G.hn businesses, for which the related assets have useful lives of less than one year, and excludes impairment of intangible assets of $1.5 million included in Exar's historical results of operations. The pro forma combined financial information for the six months ended June 30, 2016 includes aggregate non-recurring adjustments of $23.1 million consisting of aggregate amortization of inventory step-up of $18.7 million and amortization of intangible assets of $4.4 million from the Exar and G.hn businesses, for which the related assets have useful lives of less than one year, and excludes impairment of intangible assets of $1.5 million included in Exar's historical results of operations.

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 of Exar and the G.hn business actually occurred at the beginning of fiscal year 2016 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 income.

For the three and six months ended June 30, 2017, $13.9 million of revenue and $8.0 million of gross profit, excluding $8.7 million of amortization of acquired intangible assets and the inventory fair-value step-up of Exar and the G.hn business since the acquisition date, are included in the Company's consolidated statements of income. Such amounts exclude revenue of $5.2 million and gross profit of $3.9 million that would have been recorded by Exar on a sell-through basis had deferred revenue and deferred profit as of the May 12, 2017 acquisition date not been eliminated in the purchase price allocation for Exar as a result of acquisition accounting.

Acquisition and integration-related costs of $5.5 million and $9.0 million related to the acquisitions of Exar and the G.hn business were included in selling, general, and administrative expenses in the Company's statements of income for the three and six months ended June 30, 2017, respectively.

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 acquired assets and assumed liabilities, together with employees who joined MaxLinear and its subsidiaries as a result of the transaction, represent a business as defined in ASC 805, Business Combinations. The Company has integrated the acquired assets and employees into the Company's existing business. In the six months ended June 30, 2017, the Company recorded an adjustment to decrease certain assumed liabilities and a corresponding decrease to goodwill of $0.3 million (Note 5). The Company has completed its purchase price allocation accounting associated with this 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 acquired assets and assumed liabilities, together with employees who joined MaxLinear and its subsidiaries as a result of the transaction, represent a business as defined in ASC 805, Business Combinations. The Company has integrated the acquired assets and employees into the Company's existing business.

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 six months ended June 30, 2017 and 2016.
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.
The following disclosures regarding this acquisition are for the six months ended June 30, 2017 and 2016.
Earn-Out
The definitive merger agreement also provided 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 was determined by multiplying $0.375 million by a 2015 revenue percentage that was defined in the definitive merger agreement. The 2016 earn-out amount was determined by multiplying $0.375 million by a 2016 revenue percentage that was defined in the definitive merger agreement and was fully earned as of December 31, 2016. During the six months ended June 30, 2017, the Company paid $0.375 million for the 2016 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 2016 revenue targets were met contingent upon continued employment. Qualifying revenues were 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. In February 2017, the Company settled the remaining obligations of $1.6 million related to the 2016 revenue period by issuing $0.86 million in RSUs and through payment of $0.76 million in cash.