MARVELL TECHNOLOGY GROUP LTD 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "projects," "believes," "seeks," "estimates," "forecasts," "targets," "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: • the impact of the COVID-19 pandemic or other future pandemics, on the global economy and on our customers, suppliers, employees and business; • our ability to successfully integrate and to realize anticipated synergies, on a timely basis or at all, in connection with the Inphi merger; • our ability to define, design and develop products for the Cloud, infrastructure and 5G markets and to market and sell these products to our customers; • extension of lead time due to supply chain disruption, component shortages that impact the production of our products and constrained availability from other electronic suppliers impacting our customers' ability to ship their products, which in turn may adversely impact our sales to those customers; • the impact of international conflict, trade relations between theU.S. and other countries, and continued economic volatility in either domestic or foreign markets; • the impact and costs associated with changes in international financial and regulatory conditions such as the addition of new trade restrictions, tariffs or embargos; • our ability and the ability of our customers to successfully compete in the markets in which we serve; • our ability and our customers' ability to develop new and enhanced products and the adoption of those products in the market; • risks related to our debt obligations; • our ability to scale our operations in response to changes in demand for existing or new products and services; • our reliance on our manufacturing partners 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 ofthe United States ; • the effects of transitioning to smaller geometry process technologies; • the impact of any change in our application ofthe United States federal income tax laws and the loss of any beneficial tax treatment that we currently enjoy; • our ability to execute on changes in strategy and realize the expected benefits from restructuring activities; • our ability to implement our plans, forecasts and other expectations with respect to our strategic investments, divestitures, mergers, or joint ventures (such as our proposed acquisition ofInnovium, Inc. ) and to fully realize the anticipated synergies and cost savings in the time frame anticipated; • our ability to limit costs related to defective products; • our ability to recruit and retain experienced executive management as well as highly-skilled personnel; • our ability to mitigate risks related to our information technology systems; • our ability to protect our intellectual property, particularly outside of theU.S. ; • our ability to estimate customer demand and future sales accurately; • our reliance on third-party distributors and manufacturers' representatives to sell our products; • our maintenance of an effective system of internal controls; • the impact of the highly cyclical and intensely competitive nature of the markets for our products; • our dependence on a small number of customers; • our ability to accurately categorize our products by end markets; • severe financial hardship or bankruptcy of one or more of our major customers; • risks associated with acquisition and consolidation activity in the semiconductor industry; • decreases in our gross margin and results of operations in the future due to a number of factors; • the impact of natural disasters and other catastrophic events; and • the outcome of pending or future litigation and legal proceedings. Additional factors which could cause actual results to differ materially include those set forth in the following discussion, as well as the risks discussed in Part II, Item 1A, "Risk Factors," and other sections of this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date hereof. We undertake no obligation to update any forward-looking statements. 29
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Table of Contents
Overview
We are a leading supplier of infrastructure semiconductor solutions, spanning the data center core to network edge. We are a fabless semiconductor supplier of high-performance standard and semi-custom products with core strengths in developing and scaling complex System-on-a-Chip architectures, integrating analog, mixed-signal and digital signal processing functionality. Leveraging leading intellectual property and deep system-level expertise, as well as highly innovative security firmware, our solutions are empowering the data economy and enabling the data center, carrier infrastructure, enterprise networking, consumer, and automotive/industrial end markets. Historically, we have reported revenue from three product groups: networking, storage, and other. Beginning with the second quarter of fiscal 2022, we are changing our reporting to present revenue from five end markets. Our product solutions serve five large end markets where our technology is essential: (i) data center, (ii) carrier infrastructure, (iii) enterprise networking, (iv) consumer, and (v) automotive/industrial. These markets and their corresponding customer products and applications are noted in the table below: End market Customer products and applications Data center •Cloud and
on-premise Artificial intelligence (AI)
systems
•Cloud and on-premise ethernet switching
•Cloud and on-premise network-attached storage (NAS)
•Cloud and on-premise servers
•Cloud and on-premise storage area networks
•Cloud and on-premise storage systems
•Data center interconnect (DCI)
Carrier infrastructure •DigitalSubscriber Line Access Multiplexers (DSLAMs)
•Ethernet switches
•Optical transport systems
•Routers
•Wireless radio access network (RAN) systems
Enterprise networking •Campus and small medium enterprise routers
•Campus and smallmedium enterprise ethernet switches
•Campus and small medium enterprise wireless access
points (WAPs)
•Network appliances (firewalls, and load balancers)
•Workstations
Consumer •Broadband gateways and routers
•Gaming consoles
•Home data storage
•Home wireless access points (WAPs)
•Personal Computers (PCs)
•Printers
•Set-top boxes
Automotive/Industrial •Advanceddriver-assistance systems (ADAS)
•Autonomous vehicles (AV)
•In-vehicle networking
•Industrial ethernet switches
•United Statesmilitary and government solutions
•Video surveillance
30-------------------------------------------------------------------------------- Table of Contents This market-focused view provides more information and transparency about the key growth drivers of our business. We believe this presentation provides a better understanding of our business. Accordingly, starting with the third quarter of fiscal 2022, we expect to no longer report revenue by product group. We categorize revenue from our five end markets by using a number of data points, including the type of customer purchasing the product, the function of our product being sold, and our knowledge of the end customer product or application into which our product will be incorporated. The categorization of products by end market is inherently subjective and can vary over time, both as a result of continued improvements in our ability to understand the final usage of our products, as well as changes in how our customers utilize our products. In the second quarter of fiscal 2022, our net revenue increased year over year by 48% from$727.3 million net revenue in the second quarter of fiscal 2021 compared with$1.1 billion in the second quarter of fiscal 2022. This was due to an increase in sales from all our end markets. Revenue increased from the data center end market by 62%, from the carrier infrastructure end market by 38%, from the enterprise networking end market by 41%, from the consumer end market by 23% , and the automotive/industrial end market by 125% compared to the three months endedAugust 1, 2020 . OnApril 20, 2021 , we completed the acquisition of Inphi Corporation ("Inphi"). Inphi is a global leader in high-speed data movement enabled by optical interconnects. Their product portfolio includes laser drivers, trans-impedance amplifiers, PAM (Pulse Amplitude Modulation) and Coherent DSPs (Digital Signal Processors), differentiated silicon photonics, as well as an optical PHY portfolio for interconnect inside and between the data center, as well as interconnect for the carrier market. The combined company has growing positions in carrier and data center, and Inphi's high-speed electro-optics platform is highly complementary to our storage, networking, compute, and security portfolio. Inphi's electro-optics portfolio combined with our copper Ethernet PHY franchise is expected to create a leading high-speed data interconnect platform. The operating results for the year to date second quarter of fiscal 2022 include the operating results of Inphi for the period from the date of acquisition through the Company's second quarter endedJuly 31, 2021 . In conjunction with the acquisition transaction,Marvell Technology Group Ltd. and Inphi became wholly owned subsidiaries of the new parent company,Marvell Technology, Inc. ("MTI") onApril 20, 2021 . The parent company is domiciled in and subject to taxation inthe United States . Subsequent to quarter end, onAugust 3, 2021 , we announced our intent to acquireInnovium, Inc. ("Innovium"), a leading provider of networking solutions for cloud and edge data centers, in an all-stock transaction. The estimated acquisition price of$1.1 billion consists of approximately 19.05 million shares of our common shares and is based on our 10-day volume weighted average price as ofJuly 30, 2021 . The acquisition price includes Innovium cash and exercise proceeds expected at closing of approximately$145 million , resulting in an estimated net cost to us of$955 million . The transaction is expected to close by the end of calendar year 2021, subject to the satisfaction of customary closing conditions, including approval by Innovium's stockholders and applicable regulatory approval. In response to growth in demand from customers for our products, our operations team is continuing to ramp production with our global supply chain partners. However, we are experiencing a number of industry-wide supply constraints affecting the type of high complexity products we provide for data infrastructure. These supply challenges are currently limiting our ability to fully satisfy the increase in demand for some of our products. To secure additional capacity, we entered into capacity reservation arrangements with certain manufacturing or supply partners. See "Note 10 - Commitments and Contingencies" in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information. We continue to monitor the impact of COVID-19 on our business. While many of our offices around the world remain open to enable critical on-site business functions in accordance with local government guidelines, the majority of our employees continue to work from home. We expect COVID-19 to continue to impact our business and for a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, see Part II, Item 1A, "Risk Factors," including but not limited to the risk detailed under the caption "We face risks related to the COVID-19 pandemic which currently has, and may continue in the future to, significantly disrupt our manufacturing, research and development, operations, sales and financial results." We expect that theU.S. government's export restrictions on certain Chinese customers will continue to impact our revenue in fiscal year 2022. Moreover, concerns thatU.S. companies may not be reliable suppliers as a result of these and other actions has caused, and may in the future cause, some of our customers inChina to amass large inventories of our products well in advance of need or cause some of our customers to replace our products in favor of products from other suppliers. Customers inChina may also choose to develop indigenous solutions, as replacements for products that are subject toU.S. export controls. In addition, there may be indirect impacts to our business that we cannot easily quantify such as the fact that some of our other customers' products which use our solutions may also be impacted by export restrictions. 31 -------------------------------------------------------------------------------- Table of Contents Capital Return Program. We remain committed to delivering stockholder value through our share repurchase and dividend programs. OnOctober 16, 2018 , we announced that our Board of Directors authorized a$700 million addition to the balance of our existing share repurchase program. 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 share repurchase program was temporarily suspended in lateMarch 2020 to preserve cash during the COVID-19 pandemic and the program remains suspended as we focus on reducing our debt and de-levering our balance sheet. As a result, we did not repurchase any shares during the six months endedJuly 31, 2021 . We will continue to evaluate business conditions to decide when we can restart the share repurchase program. As ofJuly 31, 2021 , there was$564.5 million remaining available for future share repurchases of the authorization. As ofJuly 31, 2021 , a total of 308.1 million shares have been repurchased to date under our share repurchase programs for a total$4.3 billion in cash. We returned$89.9 million to stockholders in the six months endedJuly 31, 2021 in cash dividends. Cash and Cash Equivalents. Our cash and cash equivalents were$559.6 million atJuly 31, 2021 , which was$188.9 million lower than our balance at our fiscal year endedJanuary 30, 2021 of$748.5 million . Sales and Customer Composition. Historically, a relatively small number of customers have accounted for a significant portion of our net revenue. During the second quarter of fiscal 2022, there was no net revenue attributable to a customer, other than one distributor, whose revenues as a percentage of net revenue was 10% or greater of total net revenues. Net revenue attributable to significant distributors whose revenue as a percentage of net revenue was 10% or greater of total net revenue is presented in the following table: Three Months Ended Six Months Ended July 31, August 1, July 31, August 1, 2021 2020 2021 2020 Distributor: Wintech 15 % 13 % 17 % 12 % We continuously monitor the creditworthiness of our distributors and believe their 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 ofthe United States , primarily inAsia , and majority of our products are manufactured outsidethe United States . Sales shipped to customers with operations inAsia represented approximately 80% of our net revenue in the three and six months endedJuly 31, 2021 , and approximately 79% of net revenue in the three and six months endedAugust 1, 2020 , respectively. Because many manufacturers and manufacturing subcontractors of our customers are located inAsia , we expect that most of our net revenue will continue to be represented by sales to our customers in that region. For risks related to our global operations, see Part II, 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 ofthe 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 II, 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." 32 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates There have been no material changes during the three months endedJuly 31, 2021 to our critical accounting policies and estimates from the information provided in the "Critical Accounting Policies and Estimates" section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 . In the current macroeconomic environment affected by COVID-19, our estimates could require increased judgment and carry a higher degree of variability and volatility. We continue to monitor and assess our estimates in light of developments, and as events continue to evolve and additional information becomes available, our estimates may change materially in future periods.
Results of Operations
The following table sets forth information derived from our Unaudited Condensed
Consolidated Statements of Operations expressed as a percentage of net revenue:
Three Months Ended Six Months Ended
July 31, August 1, July 31, August 1,
2021 2020 2021 2020
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 65.4 50.6 58.6 51.7
Gross profit 34.6 49.4 41.4 48.3
Operating expenses:
Research and development 34.1 38.1 34.2 39.2
Selling, general and administrative 24.1 15.5 24.1 16.5
Restructuring related charges 1.1 16.6 1.3 10.0
Total operating expenses 59.3 70.2 59.6 65.7
Operating loss (24.7) (20.8) (18.2) (17.4)
Interest income - 0.1 - 0.1
Interest expense (3.1) (2.1) (3.6) (2.3)
Other income (loss), net (0.2) (0.1) - 0.2
Loss before income taxes (28.0) (22.9) (21.8) (19.4)
Provision for income taxes (2.4) (1.2) (2.8) (0.3)
Net loss (25.6) % (21.7) % (19.0) % (19.1) %
33-------------------------------------------------------------------------------- Table of Contents Three and six months endedJuly 31, 2021 andAugust 1, 2020 Net Revenue Three Months Ended Six Months Ended July 31, August 1, % July 31, August 1, % 2021 2020 Change 2021 2020 Change (in thousands, except percentage) Net revenue$ 1,075,881 $ 727,297 47.9%$ 1,908,160 $ 1,420,938 34.3% Our net revenue for the three months endedJuly 31, 2021 increased by$348.6 million compared to net revenue for the three months endedAugust 1, 2020 . This was due to an increase in sales from all our end markets. Revenue increased from the data center end market by 62%, from the carrier infrastructure end market by 38%, from the enterprise networking end market by 41%, from the consumer end market by 23%, and from the automotive/industrial end market by 125% compared to the three months endedAugust 1, 2020 . The increase in revenue from the data center end market was primarily due to the acquisition of Inphi and increase in demand for our embedded processors and nearline HDD controllers and preamplifiers. The increase in revenue from the carrier infrastructure end market was primarily due to the acquisition of Inphi and increase in demand from 5G base stations for our embedded processors and ethernet products. The increase in revenue from the enterprise networking end market was primarily due to the increase in demand for our ethernet products. The increase in revenue from the consumer end market was primarily due to the increase in demand for our custom SSD controllers. The increase in revenue from the automotive/industrial end market was primarily due to the increase in demand for our automotive ethernet connectivity products. Our net revenue for the six months endedJuly 31, 2021 increased by$487.2 million compared to net revenue for the six months endedAugust 1, 2020 . This was due to an increase in sales from all our end markets. Revenue increased from the data center end market by 34%, from the carrier infrastructure end market by 38%, from the enterprise networking end market by 26%, from the consumer end market by 30% , and from the automotive/industrial end market by 96% compared to the six months endedAugust 1, 2020 . The increase in revenue from the data center end market was primarily due to the acquisition of Inphi and increase in demand for our embedded processors and nearline HDD controllers and preamplifiers. The increase in revenue from the carrier infrastructure end market was primarily due to the acquisition of Inphi and increase in demand from 5G base stations for our embedded processors and ethernet products. The increase in revenue from the enterprise networking end market was primarily due to the increase in demand for our ethernet products. The increase in revenue from the consumer end market was primarily due to the increase in demand for our custom SSD controllers. The increase in revenue from the automotive/industrial end market was primarily due to the increase in demand for our automotive ethernet connectivity products. In the three months endedJuly 31, 2021 , unit shipments were 30% higher and average selling prices increased 18% compared to the three months endedAugust 1, 2020 , for an overall increase in net revenue of 48%. In the six months endedJuly 31, 2021 unit shipment were 18% higher and average selling prices increased 16% compared to the six months endedAugust 1, 2020 . This was primarily driven by our recent portfolio changes, including the acquisition of Inphi.
Cost of Goods Sold and Gross Profit
Three Months Ended Six Months Ended
July 31, August 1, % July 31, August 1, %
2021 2020 Change 2021 2020 Change
(in thousands, except percentage)
Cost of goods sold
58.6 % 51.7 %
Gross profit $ 371,830 $ 359,256 3.5% $ 789,971 $ 686,158 15.1%
% of net revenue 34.6 % 49.4 % 41.4 % 48.3 %
Cost of goods sold as a percentage of net revenue increased for the three and
six months ended July 31, 2021 compared to the three and six months ended
August 1, 2020 , which is primarily due to increased costs associated with the
Inphi acquisition including amortization of inventory fair value adjustment and
amortization of acquired intangible assets, as well as the increased product
sales. As a result, gross margin for the three and six months ended July 31,
2021 decreased 14.8% and 6.9% percentage points compared to the three and six
months ended August 1, 2020 .
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Research and Development
Three Months Ended Six Months Ended
July 31, August 1, % July 31, August 1, %
2021 2020 Change 2021 2020 Change
(in thousands, except percentage)
Research and development $ 367,043 $ 277,139 32.4% $ 653,143 $ 556,723 17.3%
% of net revenue 34.1 % 38.1 % 34.2 % 39.2 %
Research and development expense increased by $89.9 million in the three months
ended July 31, 2021 compared to the three months ended August 1, 2020 . The
increase was primarily due to additional costs from our acquisition of Inphi,
including $62.5 million of higher employee personnel-related costs,
$13.5 million of higher engineering design and supplies costs, and $12.5 million
of higher preproduction costs.
Research and development expense increased by $96.4 million in the six months
ended July 31, 2021 compared to the six months ended August 1, 2020 . The
increase was primarily due to additional costs from our acquisition of Inphi,
including $63.4 million of higher employee personnel-related costs,
$12.9 million of higher computer-aided design software related costs,
$11.8 million of higher engineering design and supplies costs, and $6.6 million
of higher information technology costs.
Selling, general and administrative
Three Months Ended Six Months Ended
July 31, August 1, % July 31, August 1, %
2021 2020 Change 2021 2020 Change
(in thousands, except percentage)
Selling, general and
administrative $ 259,161 $ 112,794 129.8% $ 460,627 $ 234,821 96.2%
% of net revenue 24.1 % 15.5 % 24.1 % 16.5 %
Selling, general and administrative expense increased by $146.4 million in the
three months ended July 31, 2021 compared to the three months ended August 1,
2020 . The increase was primarily due to additional costs from our acquisition of
Inphi, including $83.1 million of higher intangibles amortization expense,
$33.9 million of higher employee personnel-related costs and $30.7 million of
higher integration costs.
Selling, general and administrative expense increased by $225.8 million in the
six months ended July 31, 2021 compared to the six months ended August 1, 2020 .
The increase was primarily due to additional costs from our acquisition of
Inphi, including $91.5 million of higher intangibles amortization expense,
$82.1 million of higher employee personnel-related costs and $66.3 million of
higher integration costs.
Restructuring Related Charges
Three Months Ended Six Months Ended
July 31, August 1, % July 31, August 1, %
2021 2020 Change 2021 2020 Change
(in thousands, except percentage)
Restructuring related
charges $ 12,294 $ 120,590 (89.8)% $ 25,180 $ 141,877 (82.3)%
% of net revenue 1.1 % 16.6 % 1.3 % 10.0 %
We recognized $12.3 million and $25.2 million of total restructuring related
charges in the three and six months ended July 31, 2021 as we continue to
evaluate our existing operations to increase operational efficiency, decrease
costs, and increase profitability. See "Note 7 - Restructuring" in the Notes to
the Unaudited Condensed Consolidated Financial Statements for further
information.
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Interest Income
Three Months Ended Six Months Ended
July 31, August 1, % July 31, August 1, %
2021 2020 Change 2021 2020 Change
(in thousands, except percentage)
Interest income $ 150 $ 577 (74.0)% $ 372 $ 1,635 (77.2)%
% of net revenue - % 0.1 % - % 0.1 %
Interest income decreased by $0.4 million and $1.3 million in the three and six
months ended July 31, 2021 compared to the three and six months ended August 1,
2020 due to lower interest rates on our invested cash.
Interest Expense
Three Months Ended Six Months Ended
July 31, August 1, % July 31, August 1, %
2021 2020 Change 2021 2020 Change
(in thousands, except percentage)
Interest expense
$ (32,465) 112.4% % of net revenue (3.1) % (2.1) % (3.6) % (2.3) % Interest expense increased by$18.2 million in the three months endedJuly 31, 2021 compared to the three months endedAugust 1, 2020 . The increase was primarily due to the interest expense on the 2020 term loans in addition to the new 2026, 2028, and 2031 senior unsecured notes issued in the first quarter of fiscal 2022. Interest expense increased by$36.5 million in the six months endedJuly 31, 2021 compared to the six months endedAugust 1, 2020 . The increase was primarily due to the interest expense on the 2020 term loans in addition to the new 2026, 2028, and 2031 senior unsecured notes issued in the first quarter of fiscal 2022, as well as the write-off of issuance costs related to the bridge loan when the loan was terminated in the first quarter of fiscal 2022.
Other Income (loss), Net
Three Months Ended Six Months Ended
July 31, August 1, % July 31, August 1, %
2021 2020 Change 2021 2020 Change
(in thousands, exceptpercentage)
Other income (loss), net$ (1,654) $ (440) 275.9%$ (431) $ 3,314 (113.0)% % of net revenue (0.2) % (0.1) % - % 0.2 %
Other income (loss), net, changed by
Other income (loss), net, changed by$3.7 million in the six months endedJuly 31, 2021 compared to the six months endedAugust 1, 2020 . The higher loss in the six months endedAugust 1, 2020 was primarily due to the impairment recognized on a certain equity investment during the second quarter of fiscal 2022, as well as foreign currency rate fluctuations. 36 --------------------------------------------------------------------------------
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Benefit for Income Taxes
Three Months Ended Six Months Ended
July 31, August 1, % July 31, August 1, %
2021 2020 Change 2021 2020 Change
(in thousands, except percentage)
Benefit for income taxes $ (25,558) $ (8,872) 188.1% $ (53,323) $ (3,853) 1,283.9%
Our income tax benefit for the three months ended July 31, 2021 was $25.6
million compared to a tax benefit of $8.9 million for the three months ended
August 1, 2020 . Our income tax benefit for the three months ended July 31, 2021
differs from the tax benefit recorded in the same period in the prior year
primarily due to the tax impact of an intra-entity transfer of certain
intellectual property to a subsidiary in Singapore , which resulted in a tax
benefit of $10.0 million in the current period. This amount, combined with
discrete tax benefits from stock based compensation deductions versus prior
periods, tax rate differentials on foreign income/(losses), as well as the
recognition of tax benefits related to the expirations on the statutes of
limitations for the assessment of taxes in certain jurisdictions were the
primary drivers of the income tax benefits for the three months ended July 31,
2021 and the differences between the federal statutory tax rates of 21% and our
effective income tax rates for these periods.
Our income tax benefit for the six months ended July 31, 2021 was $53.3 million
compared to a tax benefit of $3.9 million for the six months ended August 1,
2020 . Our income tax benefit for the six months ended July 31, 2021 differs from
the same period in the prior year primarily due to the tax impact of an
intra-entity transfer of certain intellectual property to a subsidiary in
Singapore , which resulted in a tax benefit of $10.0 million during the period.
This amount, combined with discrete tax benefits from stock based compensation
deductions versus prior periods, tax rate differentials on foreign
income/(losses), as well as the recognition of tax benefits related to the
expirations on the statutes of limitations for the assessment of taxes in
certain jurisdictions were the primary drivers of the income tax benefits for
the six months ended July 31, 2021 and the differences between the federal
statutory tax rates of 21% and our effective income tax rates for these periods.
Our provision for income 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, discrete items, intra-entity transfers of
intellectual property, 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 and regulations. It is also possible that significant
negative evidence may become available that causes us to conclude that a
valuation allowance is needed on certain of our deferred tax assets, which would
adversely affect our income tax provision in the period of such change in
judgment.
We also continuously evaluate potential changes to our legal structure in response to guidelines and requirements in various international tax jurisdictions where we conduct business. 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."
Liquidity and Capital Resources
Our principal source of liquidity as ofJuly 31, 2021 consisted of approximately$559.6 million of cash and cash equivalents, of which approximately$431.8 million was held by subsidiaries outside ofthe United States . We manage our worldwide cash requirements by, among other things, reviewing available funds held by our foreign subsidiaries and the cost effectiveness by which those funds can be accessed inthe United States . See "Note 11 - Income Taxes" in the Notes to the Unaudited Condensed Consolidated Financial Statements for further information. InApril 2021 , we assumed$15.7 million in principal of Inphi's 0.75% convertible senior notes due 2021 and$506 million in principal of Inphi's 0.75% convertible senior notes due 2025 from Inphi. We also acquired capped call assets in relation to the convertible debt. See "Note 5 - Debt" in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information. InDecember 2020 , to fund the Inphi acquisition, we executed a debt agreement to obtain a$875 million 3-year term loan and a$875 million 5-year term loan. We also executed a debt agreement to obtain a$750 million revolving credit facility ("2020 Revolving Credit Facility"). InApril 2021 , we completed an offering and issued (i)$500 million of senior notes with a 5 year term due in 2026, (ii)$750 million of senior notes with a 7 year term due in 2028, and (iii)$750 million of senior notes with a 10 year term due in 2031. In addition, inMay 2021 , in conjunction with theU.S. domiciliation, we exchanged certain of our existing senior notes due in 2023 ("MTG 2023 Notes") and 2028 ("MTG 2028 Notes") that were previously issued by the formerBermuda -based parent with like notes that are now issued by the new parent domiciled inDelaware . See "Note 5 - Debt" in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information. 37
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We believe that our existing cash, cash equivalents, together with cash generated from operations, and funds from our 2020 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, all of which are subject to uncertainty. To the extent that our existing cash and cash equivalents, together with cash generated by operations, and funds available under our 2020 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 stockholders. 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. 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 us and our stockholders, our results of operations, cash balances and future cash requirements, financial condition, developments in ongoing litigation, statutory requirements underDelaware 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. Our share repurchase program was temporarily suspended in lateMarch 2020 to preserve cash during the COVID-19 pandemic and the program remains suspended as we focus on reducing our debt and de-levering our balance sheet. We will continue to evaluate business conditions to decide when we can restart the share repurchase program.
Cash Flows from Operating Activities
Net cash flow provided by operating activities for the six months endedJuly 31, 2021 was$208.4 million . We had a net loss of$364.7 million adjusted for the following non-cash items: amortization of acquired intangible assets of$405.3 million , share-based compensation expense of$206.8 million , amortization of inventory fair value adjustment associated with the Inphi acquisition of$169.6 million , depreciation and amortization of$118.1 million , deferred income tax benefit of$51.6 million , and$61.9 million net loss from other non-cash items. Cash outflow from working capital of$341.2 million for the six months endedJuly 31, 2021 was primarily driven by an increase in accounts receivable and inventory and a decrease in accrued employee compensation. The increase in accounts receivable is primarily due to increased sales, as well as the timing of shipments due to ongoing supply chain challenges. The increase in inventory is due to increased procurement to support our future growth. The decrease in accrued employee compensation is due to our annual bonus payment. Net cash flow provided by operating activities for the six months endedAugust 1, 2020 was$401.5 million . We had a net loss of$270.9 million adjusted for the following non-cash items: amortization of acquired intangible assets of$224.5 million , share-based compensation expense of$122.3 million , depreciation and amortization of$102.1 million , amortization of inventory fair value adjustment associated with theAquantia and Avera acquisition of$17.3 million , deferred income tax expense of$0.4 million , and$14.9 million net loss from other non-cash items. Cash inflow from working capital of$74.2 million for the six months endedAugust 1, 2020 was primarily driven by a decrease in inventories an increase in accounts payable as well as an increase in accrued liabilities and other non-current liabilities, partially offset by a decrease in accrued employee compensation. The decrease in inventory is due to improved supply chain management. The increase in accounts payable was mainly due to timing of payment. The increase in accrued liabilities is due to an increase in ship and debit reserve and non-recurring engineering credits accrual. The decrease in accrued employee compensation is due to our annual bonus payment.
Cash Flows from Investing Activities
For the six months endedJuly 31, 2021 , net cash used in investing activities of$3.7 billion was primarily driven by net cash paid to acquire Inphi of$3.6 billion , purchases of property and equipment of$53.7 million , and purchases of technology licenses of$6.6 million . For the six months endedAugust 1, 2020 , net cash used in investing activities of$58.9 million was primarily driven by purchases of property and equipment of$52.9 million and purchases of technology licenses of$6.8 million . 38 -------------------------------------------------------------------------------- Table of Contents Cash Flows from Financing Activities For the six months endedJuly 31, 2021 , net cash provided by financing activities of$3.3 billion was primarily attributable to proceeds from issuance of debt of$3.8 billion , proceeds from capped calls of$160.3 million partially offset by$275.0 million repayment of debt principal,$180.9 million of repurchase and settlement of convertible notes,$116.2 million tax withholding payments on behalf of employees for net share settlements,$89.9 million for payment of our quarterly dividends and$67.3 million payments on technology license obligations. For the six months endedAugust 1, 2020 , net cash used in financing activities of$158.6 million was primarily attributable to$79.9 million for payment of our quarterly dividends,$56.7 million tax withholding payments on behalf of employees for net share settlements,$42.5 million payments for technology license obligations and$25.2 million for repurchases of our common stock. These outflows were partially offset by proceeds of$48.2 million from employee stock plans.
Contractual Obligations and Commitments
Under the Company's manufacturing relationships with its foundry partners, cancellation of outstanding purchase orders is allowed but requires payment of all costs and expenses incurred through the date of cancellation. AtJuly 31, 2021 , the Company had approximately$775.6 million in outstanding purchase orders with foundries. The following table summarizes our contractual obligation as ofJuly 31, 2021 and the effect that such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
Contractual Obligations by Fiscal Year
Remainder of
2022 2023 2024 2025 2026 Thereafter Total
Contractual obligations:
Principal payments on debt
$ 4,750,292 Interest obligations on debt 59,459 118,340 106,170 84,978 80,608 216,797
666,352
Facilities operating leases (1) 23,019 38,077 32,947 23,843 20,164 59,362
197,412
Purchase commitments to foundries (2) 775,625 216,333 212,033 185,157 156,232 -
1,545,380
Capital purchase obligations 74,611 - - - - - 74,611 Technology license obligations (3) 59,749 85,735 67,795 43,359 309 - 256,947 Other contractual commitments - 7,292 564 503 350 4,709
13,418
Total contractual obligations
$ 7,504,412 (1)Amounts exclude contractual sublease proceeds of$39.4 million to be received through fiscal 2031. (2)Amounts include contractual obligations from capacity reservation agreements, see "Note 10 - Commitments and Contingencies" for details. (3)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 ofJuly 31, 2021 , we have$29.6 million of unrecognized tax benefits as liabilities. We also have a liability for potential interest and penalties of$3.6 million as ofJuly 31, 2021 . 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 theU.S. dollar as compared to foreign currencies within the next 12 months. Excluding these factors, uncertain tax positions may decrease by as much as$2.1 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.
Indemnification Obligations
See "Note 10 - Commitments and Contingencies" in the Notes to the Unaudited Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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