Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2018
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: 001-34666
MaxLinear, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
14-1896129
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
5966 La Place Court, Suite 100
Carlsbad, California
 
92008
(Address of principal executive offices)
 
(Zip Code)
(760) 692-0711
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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  þ    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  þ    No  ¨
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
 
þ 
 
Accelerated filer
 
¨ 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨ 
 
 
 
 
Emerging growth company
 
¨ 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of August 1, 2018, the registrant had 68,609,278 shares of common stock, par value $0.0001, outstanding.


Table of Contents

MAXLINEAR, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 
 
Page
Part I
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 




2

Table of Contents

PART I — FINANCIAL INFORMATION


3

Table of Contents

ITEM 1.
FINANCIAL STATEMENTS

MAXLINEAR, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands, except par value amounts)
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,059

 
$
71,872

Short-term restricted cash
345

 
1,476

Accounts receivable, net
83,648

 
66,099

Inventory
44,338

 
53,434

Prepaid expenses and other current assets
7,305

 
8,423

Total current assets
209,695

 
201,304

Long-term restricted cash
711

 
1,064

Property and equipment, net
20,886

 
22,658

Intangible assets, net
281,017

 
315,045

Goodwill
238,330

 
237,992

Deferred tax assets
42,995

 
39,878

Other long-term assets
4,732

 
6,921

Total assets
$
798,366

 
$
824,862

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,894

 
$
16,939

Deferred revenue and deferred profit

 
4,362

Accrued price protection liability
20,080

 
21,571

Accrued expenses and other current liabilities
38,165

 
20,306

Accrued compensation
10,021

 
13,208

Total current liabilities
80,160

 
76,386

Deferred rent
4,538

 
4,885

Long-term debt
305,183

 
347,609

Other long-term liabilities
8,564

 
8,558

Total liabilities
398,445

 
437,438

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value; 25,000 shares authorized, no shares issued or outstanding

 

Common stock, $0.0001 par value; 550,000 shares authorized, 68,608 shares issued and outstanding at June 30, 2018 and 550,000 shares authorized, 67,400 shares issued and outstanding December 31, 2017, respectively
7

 
7

Additional paid-in capital
478,453

 
455,497

Accumulated other comprehensive income
1,624

 
1,039

Accumulated deficit
(80,163
)
 
(69,119
)
Total stockholders’ equity
399,921

 
387,424

Total liabilities and stockholders’ equity
$
798,366

 
$
824,862

See accompanying notes.

4

Table of Contents

MAXLINEAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net revenue
$
101,533

 
$
104,175

 
$
212,360

 
$
193,016

Cost of net revenue
45,203

 
53,071

 
93,362

 
88,988

Gross profit
56,330

 
51,104

 
118,998

 
104,028

Operating expenses:
 
 
 
 
 
 
 
Research and development
30,211

 
29,015

 
61,332

 
52,893

Selling, general and administrative
24,501

 
31,338

 
51,618

 
49,951

Restructuring charges
1,865

 
6,546

 
1,865

 
6,546

Total operating expenses
56,577

 
66,899

 
114,815

 
109,390

Income (loss) from operations
(247
)
 
(15,795
)
 
4,183

 
(5,362
)
Interest income
19

 
64

 
37

 
259

Interest expense
(3,694
)
 
(2,201
)
 
(7,588
)
 
(2,201
)
Other income (expense), net
725

 
(618
)
 
154

 
(762
)
Total interest and other income (expense), net
(2,950
)
 
(2,755
)
 
(7,397
)
 
(2,704
)
Loss before income taxes
(3,197
)
 
(18,550
)
 
(3,214
)
 
(8,066
)
Income tax provision (benefit)
11,225

 
(29,515
)
 
9,361

 
(27,494
)
Net income (loss)
$
(14,422
)
 
$
10,965

 
$
(12,575
)
 
$
19,428

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.21
)
 
$
0.17

 
$
(0.18
)
 
$
0.30

Diluted
$
(0.21
)
 
$
0.16

 
$
(0.18
)
 
$
0.28

Shares used to compute net income (loss) per share:
 
 
 
 
 
 
 
Basic
68,335

 
65,889

 
68,008

 
65,564

Diluted
68,335

 
69,645

 
68,008

 
69,398


See accompanying notes.

5

Table of Contents

MAXLINEAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited; in thousands)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(14,422
)
 
$
10,965

 
$
(12,575
)
 
$
19,428

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on investments, net of tax of $0 for the three and six months ended June 30, 2018 and 2017

 
(38
)
 

 
(55
)
Less: Reclassification adjustments of unrealized gain (loss), net of tax of $0 for the three and six months ended June 30, 2018 and 2017

 
55

 

 
55

Unrealized gain on investments, net of tax

 
17

 

 

Foreign currency translation adjustments, net of tax benefit of $128 and $157 for the three and six months ended June 30, 2018 and $55 for the three and six months ended June 30, 2017, respectively
(1,173
)
 
554

 
(780
)
 
924

Unrealized gain on interest rate swap, net of tax of $175 and $363 for the three months and six months ended June 30, 2018, respectively and $0 for the three and six months ended June 30, 2017
169

 

 
1,365

 

Other comprehensive income (loss)
(1,004
)
 
571

 
585

 
924

Total comprehensive income (loss)
$
(15,426
)
 
$
11,536

 
$
(11,990
)
 
$
20,352




See accompanying notes.

6

Table of Contents

MAXLINEAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
 
Six Months Ended June 30,
2018
 
2017
Operating Activities
 
 
 
Net income (loss)
$
(12,575
)
 
$
19,428

Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Amortization and depreciation
40,135

 
25,160

Provision for losses on accounts receivable

 
87

Accretion of investment discount

 
(60
)
Amortization of inventory step-up

 
5,635

Amortization of debt issuance costs and discount
574

 
175

Stock-based compensation
15,782

 
17,102

Deferred income taxes
(3,621
)
 
(53,142
)
Gain on disposal of property and equipment

 
(85
)
Loss on sale of available-for-sale securities

 
38

(Gain) loss on foreign currency
(357
)
 
682

Excess tax benefits on stock-based awards
(1,115
)
 
(3,290
)
Impairment of leasehold improvements
700

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(17,554
)
 
(20,932
)
Inventory
9,096

 
(7,391
)
Prepaid expenses and other assets
3,216

 
5,210

Accounts payable, accrued expenses and other current liabilities
11,119

 
15,562

Accrued compensation
3,903

 
(1,282
)
Deferred revenue and deferred profit
(138
)
 
7,326

Accrued price protection liability
(1,491
)
 
9,447

Other long-term liabilities
121

 
(4,088
)
Net cash provided by operating activities
47,795

 
15,582

 
 
 
 
Investing Activities
 
 
 
Purchases of property and equipment
(4,804
)
 
(1,898
)
Purchases of intangible assets

 
(5,325
)
Cash used in acquisitions, net of cash acquired

 
(473,304
)
Purchases of available-for-sale securities

 
(30,577
)
Maturities of available-for-sale securities

 
84,546

Net cash used in investing activities
(4,804
)
 
(426,558
)
 
 
 
 
Financing Activities
 
 
 
Net proceeds from the issuance of debt

 
416,846

Repayment of debt
(43,000
)
 

Repurchases of common stock

 
(334
)
Net proceeds from issuance of common stock
4,016

 
8,018

Minimum tax withholding paid on behalf of employees for restricted stock units
(3,839
)
 
(8,399
)
Net cash provided by (used in) financing activities
(42,823
)
 
416,131

Effect of exchange rate changes on cash and cash equivalents
535

 
2,040

Increase in cash, cash equivalents and restricted cash
703

 
7,195

Cash, cash equivalents and restricted cash at beginning of period
74,412

 
82,896

Cash, cash equivalents and restricted cash at end of period
$
75,115

 
$
90,091

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
7,145

 
$
1,277

Cash paid for income taxes
$
1,093

 
$
4,452

 
 
 
 
Supplemental disclosures of non-cash activities:
 
 
 
Issuance of restricted stock units to Physpeed continuing employees
$

 
$
818

Issuance of accrued share-based bonus plan
$
6,997

 
$
3,314

See accompanying notes.

7

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


1. Organization and Summary of Significant Accounting Policies
Description of Business
MaxLinear, Inc. was incorporated in Delaware in September 2003. MaxLinear, Inc., together with its wholly owned subsidiaries, collectively referred to as MaxLinear, or the Company, is a provider of radio-frequency, or RF, high-performance analog, and mixed-signal communications system-on-chip solutions for the connected home, wired and wireless infrastructure, and industrial and multi-market applications. MaxLinear's customers include electronics distributors, module makers, original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, who incorporate the Company’s products in a wide range of electronic devices, including cable DOCSIS broadband modems and gateways, wireline connectivity devices for in-home networking applications, RF transceivers and modems for wireless carrier access and backhaul infrastructure, fiber-optic modules for data center, metro, and long-haul transport networks, video set-top boxes and gateways, hybrid analog and digital televisions, direct broadcast satellite outdoor and indoor units, and power management and interface products used in these and a range of other markets. The Company is a fabless integrated circuit design company whose products integrate all or a substantial portion of a broadband communication system.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of MaxLinear, Inc. and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. All intercompany transactions and investments have been eliminated in consolidation. In the opinion of management, the Company’s unaudited consolidated interim financial statements contain adjustments, including normal recurring accruals necessary to present fairly the Company’s consolidated financial position, results of operations, comprehensive income and cash flows.

The consolidated balance sheet as of December 31, 2017 was derived from the Company’s audited consolidated financial statements at that date. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission, or the SEC, on February 20, 2018, or the Annual Report. Interim results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes to unaudited consolidated financial statements. Actual results could differ from those estimates.
Summary of Significant Accounting Policies
Refer to the Company’s Annual Report for a summary of significant accounting policies. On January 1, 2018, the Company adopted Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, or ASC 606 and accordingly, modified its policy on revenue recognition as stated below. The primary impact of adopting ASC 606 for the Company was to accelerate the timing of the Company’s revenue and related cost recognition on products sold via some of its distributors, which changed from recognition upon the sale to the distributors' end customers, or the sell-through method, to recognition upon the Company's sale to the distributor, or the sell-in method. The Company is now also required to estimate the effects of pricing credits to its distributors from contractual price protection and unit rebate provisions, as well as stock rotation rights and record such estimated credits upon the Company's sale to the distributor.
There have been no other material changes to our significant accounting policies during the six months ended June 30, 2018.

8

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Revenue Recognition

Substantially all of the Company's revenue is generated from sales of the Company’s integrated circuits to electronics distributors, module makers, OEMs, and ODMs under individual customer purchase orders, some of which have underlying master sales agreements that specify terms governing the product sales. Effective January 1, 2018, the Company adopted ASC 606 and recognizes revenue at the point in time when control of the products is transferred to the customer at the estimated net consideration for which collection is probable, taking into account the customer's rights to price protection, other pricing credits, unit rebates, and rights to return unsold product. Transfer of control occurs either when products are shipped to or received by the distributor or direct customer, based on the terms of the specific agreement with the customer, if the Company has a present right to payment and transfer of legal title and the risks and rewards of ownership to the customer has occurred. For most of the Company's product sales, transfer of control occurs upon shipment to the distributor or direct customer. In assessing whether collection of consideration from a customer is probable, the Company considers the customer's ability and intention to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Since payment terms are less than a year, the Company has elected the practical expedient and does not assess whether a customer contract has a significant financing component.
A five-step approach is applied in the recognition of revenue under ASC 606: (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 the Company satisfies a performance obligation. The Company applied ASC 606 to its customer contracts that were not completed before the January 1, 2018 adoption date. Customer purchase orders plus the underlying master sales agreements are considered to be contracts with the customer for purposes of applying the five-step approach under ASC 606.
Pricing adjustments and estimates of returns under contractual stock rotation rights are treated as variable consideration for purposes of determining the transaction price, and are estimated at the time of control transfers using the expected value method based on the Company's analysis of actual price adjustment claims by distributors and historical product return rates, and then reassessed at the end of each reporting period. The Company also considers whether any variable consideration is constrained, since such amounts for which it is probable that a significant reversal will occur when the contingency is subsequently resolved are required to be excluded from revenues. Price adjustments are finalized at the time the products are sold through to the end customer and the distributor or end customer submits a claim to reduce the sale price to a pre-approved net price. Stock rotation allowances are capped at a fixed percentage of the Company's sales to a distributor for a period of time, up to six months, as specified in the individual distributor contract. If the Company's current estimates of such credits and rights are materially inaccurate, it may result in adjustments that affect future revenues and gross profits. Returns under the Company's general assurance warranty of products for a period of one to three years have not been material and warranty-related services are not considered a separate performance obligation under the customer contracts. Most of the Company's customers resell our product as part of their product and thus are tax-exempt; however, to the extent the Company collects and remits taxes on product sales form customers, it has elected to exclude from the measurement of transaction price such taxes.
Each distinct promise to transfer products is considered to be an identified performance obligation for which revenue is recognized upon transfer of control of the products to the customer. Although customers may place orders for products to be delivered on multiple dates that may be in different quarterly reporting periods, all of the orders are scheduled within 1 year from the order date. The Company has opted to not disclose the portion of revenues allocated to partially unsatisfied performance obligations, which represent products to be shipped within 12 months under open customer purchase orders, at the end of the current reporting period as allowed under ASC 606. The Company has also elected to record sales commissions when incurred, pursuant to the practical expedient under ASC 340, as the period over which the sales commission asset that would have been recognized is less than one year.
Customer contract liabilities consist of obligations to deliver rebates to customers in the form of units of products which are included in accrued expenses and other current liabilities in the consolidated balance sheets. Other obligations to customers consist of estimates of price protection rights offered to the Company's end customers, which are included in accrued price protection liability in the consolidated balance sheets, as well as price adjustments expected to be claimed by the distributor upon sell-through of the products to their customers, and amounts expected to be returned by distributors under stock rotation rights, which are included in accrued expenses and other current liabilities in the consolidated balance sheets. The Company also records a right of return asset, consisting of amounts representing the products the Company expects to receive from customers in returns, which is included in inventory in the consolidated balance sheets, and is typically settled within six months of transfer of control to the customer, or the period over which stock rotation rights are based. Upon lapse of the time

9

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

period for stock rotations, or the contractual end to price protection and rebate programs, which is approximately one to two years, and when the Company believes unclaimed amounts are no longer subject to payment and will not be paid, any remaining asset or liability is derecognized by an offsetting entry to cost of net revenue and net revenue. For additional disclosures regarding contract liabilities and other obligations to customers, see Note 12.
The Company assesses customer accounts receivable for impairment in accordance with ASC 310-10-35.
The following tables present the amounts by which each financial statement line item was affected as a result of applying ASC 606:
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
Amounts under Legacy GAAP
 
Impact of Adoption
 
As reported
 
Amounts under Legacy GAAP
 
Impact of Adoption
 
As reported
 
 
(in thousands, except per share amounts)
Consolidated statements of operations:
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue
 
$
103,888

 
$
(2,355
)
 
$
101,533

 
$
201,369

 
$
10,991

 
$
212,360

Cost of net revenue
 
46,608

 
(1,405
)
 
45,203

 
89,600

 
3,762

 
93,362

Gross profit
 
57,280

 
(950
)
 
56,330

 
111,769

 
7,229

 
118,998

Income (loss) from operations
 
703

 
(950
)
 
(247
)
 
(3,046
)
 
7,229

 
4,183

Loss before income taxes
 
(2,247
)
 
(950
)
 
(3,197
)
 
(10,443
)
 
7,229

 
(3,214
)
Income tax provision
 
11,425

 
(200
)
 
11,225

 
7,843

 
1,518

 
9,361

Net loss
 
(13,672
)
 
(750
)
 
(14,422
)
 
(18,286
)
 
5,711

 
(12,575
)
Basic loss per share
 
(0.20
)
 
(0.01
)
 
(0.21
)
 
(0.27
)
 
0.09

 
(0.18
)
Diluted loss per share
 
(0.20
)
 
(0.01
)
 
(0.21
)
 
(0.27
)
 
0.09

 
(0.18
)
 
 
June 30, 2018
 
 
Amounts under Legacy GAAP
 
Impact of Adoption
 
As reported
 
 
(in thousands)
Consolidated balance sheet:
 
 
 
 
 
 
Accounts receivable
 
$
83,648

 
$

 
$
83,648

Inventory
 
44,072

 
266

 
44,338

Total current assets
 
209,429

 
266

 
209,695

Total assets
 
798,100

 
266

 
798,366

Deferred revenue and deferred profit
 
15,869

 
(15,869
)
 

Accrued expenses and other current liabilities
 
29,375

 
8,790

 
38,165

Total current liabilities
 
87,239

 
(7,079
)
 
80,160

Total liabilities
 
405,524

 
(7,079
)
 
398,445

Accumulated deficit
 
(87,508
)
 
7,345

 
(80,163
)
Total stockholders' equity
 
392,576

 
7,345

 
399,921

Total liabilities and stockholders' equity

798,100

 
266

 
798,366

The impacts of adopting ASC 606 as shown above were primarily related to the acceleration of the timing of the Company’s revenue and related cost recognition on products sold via some of its distributors, which changed from sale to the distributors' end customers, or the sell-through method, to recognition upon the Company's sale to the distributor, or the sell-in method.
Revenues from sales through the Company’s distributors accounted for 38% and 20% of net revenue for the three months ended June 30, 2018 and 2017, respectively. Revenues from sales through the Company’s distributors accounted for 39% and 24% of net revenue for the six months ended June 30, 2018 and 2017, respectively.

10

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Recently Adopted Accounting Pronouncements

In May 2014, the FASB, issued Accounting Standards Update, or ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides for new accounting guidance related to revenue recognition. This new standard replaced all prior U.S. GAAP guidance on this topic and eliminated all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance became effective for the Company on January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company applied the guidance prospectively with an adjustment to accumulated deficit for the cumulative effect of adoption. Adoption of the amendments in this guidance accelerated the timing of the Company’s revenue and related cost recognition on products sold via some distributors, which changed from the sell-through method to the sell-in method under this guidance. The Company is also required to estimate the effects of pricing credits to its distributors from contractual price protection and unit rebate provisions, as well as stock rotation rights. The Company has performed an assessment of the impact of adopting this new accounting standard on its consolidated financial position and results of operations. The impact of adoption of this new accounting standard for the year ending December 31, 2018 will vary depending on the level of inventory remaining at December 31, 2018 at distributors for which the Company previously recognized revenue on a sell-through basis, and therefore could have a material impact on the Company's revenues for the year ending December 31, 2018. The impact to accumulated deficit as of January 1, 2018 was not material. As a result of applying the guidance prospectively with an adjustment to accumulated deficit in the Company's consolidated financial statements for the cumulative effect of adoption, revenues that would have been recognized on a sell-through basis for the amount of deferred revenue and profit remaining as of the adoption date will not be recognized in earnings for any period.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update include, among other things, a requirement to (1) measure equity investments (except equity method investments) at fair value with changes in fair value recognized in net income, with an option to measure equity investments that do not have readily determinable fair values at cost minus any impairment plus or minus any changes resulting from observable price changes; previously changes in fair value were recognized in other comprehensive income, and (2) separately present financial assets and liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statement. The amendments in this update were effective for the Company beginning in the first quarter of fiscal year 2018. The adoption of the amendments in this update did not have a material impact on the Company's consolidated financial position and results of operations for the three and six months ended June 30, 2018.

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the revenue recognition implementation guidance on principal versus agent considerations. The amendments in this update clarify that when another party is involved in providing goods or services to a customer, an entity that is the principal has obtained control of a good or service before it is transferred to a customer, and provides indicators to assist an entity in determining whether it controls a specified good or service prior to the transfer to the customer. An entity that is the principal recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer, whereas an agent recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. The amendments in this update were effective for the Company beginning in the first quarter of fiscal year 2018, concurrent with and applied on the same basis as the new revenue recognition standard. The adoption of the amendments in this update did not have a material impact on the Company's consolidated financial position and results of operations for the three and six months ended June 30, 2018.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments to eliminate the diversity in practice regarding the presentation and classification of certain cash receipts and cash payments, including, among other things, contingent consideration payments made following a business combination, proceeds from the settlement of insurance claims in the statement of cash flows, and debt prepayment or debt extinguishment costs. Cash payments not made soon after the acquisition date up to the amount of the contingent consideration liability recognized at the acquisition date, with any excess payments classified as operating activities, whereas cash payments made soon after the acquisition date to settle the contingent consideration should be classified as investing activities and cash payments for debt prepayment or debt extinguishment costs should be classified as financing activities. Cash proceeds received from settlement of insurance claims should be classified on the basis of the nature of the related losses. The amendments in this update should be applied using a retrospective transition method to each period presented, unless impracticable, and if impracticable, would

11

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

be applied prospectively as of the earliest date practicable. The amendments in this update were effective for the Company beginning in the first quarter of fiscal year 2018. The adoption of the amendments in this update did not have a material impact on the Company's consolidated statements of cash flows for the three and six months ended June 30, 2018.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this update require the Company to account for the effects of a modification in a stock-based award unless the fair value, vesting conditions and classification of the modified award is the same as those of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. The amendments in this update were effective for the Company for fiscal years beginning with fiscal year 2018, including interim periods within those years, with early adoption permitted in any interim period. The amendments in this update are applied prospectively to an award modified on or after the adoption date. Since the Company has not had any modifications to stock-based awards that do not affect the inputs into the Black Scholes fair value calculation, the adoption of this guidance did not have a material impact on the Company's consolidated financial position and results of operations for the three and six months ended June 30, 2018.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code. On December 22, 2017, the U.S. Securities and Exchange Commission Staff, or SEC Staff, issued guidance in Staff Accounting Bulletin No. 118, or SAB 118, to address certain fact patterns where the accounting for changes in tax laws or tax rates under ASC Topic 740 is incomplete upon issuance of an entity's financial statements for the reporting period in which the Tax Act is enacted. As permitted in SAB 118, in 2017, the Company took a measurement period approach and reported certain provisional amounts, based on reasonable estimates, for certain tax effects in which the accounting under ASC 740 is incomplete. Such provisional amounts are subject to adjustment during a limited measurement period, not to extend one year beyond the tax law enactment date, until the accounting under ASC 740 is complete. The Company also made required supplemental disclosures in the notes to the 2017 consolidated financial statements to accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis that is needed, and other information relevant to why the Company was not able to complete the accounting required under ASC 740 in a timely manner. For adjustments to previously reported provisional amounts made in the three and six months ended June 30, 2018, refer to Note 10. Additional adjustments to such reported provisional amounts could result in a material adverse impact to the Company's consolidated financial position and results of operations in 2018.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The amendments in this update are effective for the Company beginning in fiscal 2019, including interim periods. Early adoption is permitted. The amendments should be applied either in the period of adoption or retrospectively to each period or periods in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company elected to early adopt this guidance in the three months ended March 31, 2018. The adoption of this guidance did not have a material impact on the Company's consolidated financial position and results of operations for the three and six months ended June 30, 2018.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments in this update amend the SEC paragraphs included in Topic 740 to be consistent with the guidance in SAB 118, which the Company adopted in the three months ended December 31, 2017, as described above.
Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update require a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term for all leases with terms greater than twelve months. For leases less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company intends to make this election. The amendments in this

12

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

update are effective for the Company for fiscal years beginning with fiscal year 2019, including interim periods within those years, with early adoption permitted. The Company’s leases primarily consist of facilities and information technology server leases. The Company is currently in the process of completing its assessment of the impact of the adoption of the amendments in this update on the Company’s consolidated financial position and results of operations. However, based on the Company’s preliminary assessment, given that the present value of future lease payments will now be captured on the Company’s balance sheets, adoption of the amendments in this update is expected to have a material impact on the Company's consolidated financial position. In addition, the Company will complete an inventory of its leases, address lease accounting and operational application matters, and finalize its transition approach upon adoption.
 
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this update are effective for the Company beginning with fiscal year 2020, including interim periods, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the amendments in this update is not expected to have a material impact on the Company's consolidated financial position and results of operations.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, the accounting for share-based payment awards to nonemployees and employees will be substantially aligned by eliminating the need to measure nonemployee share-based awards at fair value on the earlier of performance commitment date or date performance is complete. Both employee and nonemployee share-based awards will now be measured at grant-date fair value. The amendments in this update are effective for the Company beginning with fiscal year 2019, including interim periods, with early adoption permitted, but no earlier than the Company's adoption of Topic 606. The adoption of the amendments in this update is not expected to have a material impact on the Company's consolidated financial position and results of operations.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, to clarify the Codification and prevent unintended application of the guidance. An amendment to ASC 718-740, Compensation - Stock Compensation - Income Taxes, clarifies that excess tax benefits should be recognized in the period in which the amount of the deduction is determined. The transition and effective date guidance is based on the facts and circumstances of each amendment. The amendment identified above will be effective for the Company beginning with fiscal year 2019. The adoption of the amendments in this update is not expected to have a material impact on the Company's consolidated financial position and results of operations.

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, to clarify on how to apply certain aspects of the new lease accounting standard. The amendments in this update, among other things, better articulates the requirement for a lessee's reassessment of lease classification as of the effective date of a modification, clarifies that a change to an index or rate for variable lease payments does not constitute a resolution of a contingency that would result in the remeasurement of lease payments, and requires entities that apply Topic 842 retrospectively to each reporting period and do not adopt the practical expedients to write off any prior unamortized initial direct costs that do not meet the definition under Topic 842 to equity. The amendments in this update have the same effective date and transition requirements as the new lease standard summarized above. The Company is currently in the process of evaluating the impact of adoption of Topic 842 on the Company’s consolidated financial position and results of operations as stated above.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, to provide an additional transition method. An entity can now elect not to present comparative financial information under Topic 842 if it recognizes a cumulative-effect adjustment to retained earnings upon adoption. The amendments in this update have the same effective date as the new lease standard summarized above. The Company plans to elect this transition option in its adoption of Topic 842. The Company is currently in the process of evaluating the impact of adoption of Topic 842 on the Company’s consolidated financial position and results of operations as stated above.

13

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

2. Net Income (Loss) Per Share
Basic earnings per share, or EPS, is calculated by dividing net income by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period and the weighted-average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock options, restricted stock units and restricted stock awards are considered to be common stock equivalents and are only included in the calculation of diluted EPS when their effect is dilutive. In periods in which the Company has a net loss, dilutive common stock equivalents are excluded from the calculation of diluted EPS.
The table below presents the computation of basic and diluted EPS:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
(14,422
)
 
$
10,965

 
$
(12,575
)
 
$
19,428

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
68,335

 
65,889

 
68,008

 
65,564

Dilutive common stock equivalents

 
3,756

 

 
3,834

Weighted average common shares outstanding—diluted
68,335

 
69,645

 
68,008

 
69,398

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.21
)
 
$
0.17

 
$
(0.18
)
 
$
0.30

Diluted
$
(0.21
)
 
$
0.16

 
$
(0.18
)
 
$
0.28

The Company excluded 3.6 million and 1.3 million common stock equivalents for outstanding stock-based awards for the three months ended June 30, 2018 and 2017, respectively, from the calculation of diluted net income (loss) per share due to their anti-dilutive nature.
The Company excluded 3.7 million and 0.9 million common stock equivalents for outstanding stock-based awards for the six months ended June 30, 2018 and 2017, respectively, from the calculation of diluted net income (loss) per share due to their anti-dilutive nature.
3. 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, including $235.8 million of cash from Exar, and the net proceeds of approximately $416.8 million from $425.0 million of new transaction debt (Note 8).

Exar is a designer and developer of high-performance analog mixed-signal integrated circuits and sub-system solutions. The Company believes that 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.


14

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Acquisition Consideration

The following table summarizes the fair value of purchase price consideration to acquire Exar (in thousands):
 
 
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 certain assumptions. Such assumptions are based on MaxLinear’s best estimates, which impact the fair value of the options calculated under the Black-Scholes methodology and, ultimately, the total consideration recorded for the acquisition.
Purchase Price Allocation
The following is the 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 an estimate of the fair value of the assets acquired and the liabilities assumed by MaxLinear in the acquisition (in thousands):
Description
Amount
Purchase price allocation:
 
Cash
$
235,810

Accounts receivable
11,363

Inventory
48,536

Prepaid and other current assets
2,288

Property and equipment
3,442

Identifiable intangible assets
249,500

Deferred tax assets
7,955

Other assets
5,434

Accounts payable
(12,385
)
Accrued expenses and other current liabilities
(11,264
)
Accrued compensation
(5,253
)
Other long-term liabilities
(3,030
)
Identifiable net assets acquired
532,396

Goodwill
160,331

Total purchase price
$
692,727


The fair value of inventories acquired from Exar included an acquisition accounting fair market value step-up of $24.3 million, which was fully amortized in 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 13).

15

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

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
 
$
120,900

Trademarks and tradenames
 
6.0
 
12,100

Customer-related intangible
 
5.0
 
96,300

Product backlog
 
0.5
 
3,600

Finite-lived intangible assets
 
6.0
 
232,900

In-process research and development
 
N/A
 
16,600

Total intangible assets
 
 
 
$
249,500

Assumptions in the Allocation of Purchase Price
Management prepared the purchase price allocation for Exar and, in doing so, considered or relied in part upon reports 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 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. Adjustments between the preliminary purchase price allocations initially recorded as reflected in the Company's interim condensed consolidated financial statements as of June 30, 2017 and the amounts reflected as of June 30, 2018 were not material.
The fair value of the identified intangible assets acquired from Exar 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. As of June 30, 2018, remaining IPR&D, or indefinite-lived intangible assets, were $4.4 million (Note 5).
In connection with the acquisition of Exar, 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 allocation above. The Company also assumed a purchase agreement that includes an indemnification obligation from Exar related to a November 9, 2016 business unit divestiture by Exar (Note 13).
Goodwill recorded in connection with the acquisition of Exar was $160.3 million. The Company does not expect to deduct any of the acquired goodwill for tax purposes.
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 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 has integrated the acquired assets and employees into its existing business.

16

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


4. Restructuring Activity

From time to time, the Company approves and implements restructuring plans as a result of acquisitions, internal resource alignment, and cost saving measures. Such restructuring plans include vacating certain leased facilities, terminating employees, and cancellation of contracts.

The following table presents the activity related to the restructuring plans, which is included in restructuring charges in the consolidated statements of operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Employee separation expenses
$
271

 
$
5,996

 
$
271

 
$
5,996

Lease related charges
1,594

 
550

 
1,594

 
550

 
$
1,865

 
$
6,546

 
$
1,865

 
$
6,546


Included in employee separation expenses for the three and six months ended June 30, 2017 is $4.4 million of incremental stock-based compensation from the acceleration of certain stock-based awards we assumed from Exar due to change in control provisions upon termination or diminution of authority of former Exar executives and other severance-related charges of $1.6 million for the same periods.

Lease related charges related to exiting certain facilities. Lease related charges for the three and six months ended June 30, 2018 included impairment of leasehold improvements of $0.7 million. Total sublease income related to leased facilities the Company ceased using was approximately $0.6 million and $0.9 million for the three and six months ended June 30, 2018, respectively. Sublease income for such facilities was approximately $0.5 million and $1.0 million for the three and six months ended June 30, 2017, respectively. The Company does not expect to incur additional material costs related to current restructuring plans.
The following table presents a roll-forward of the Company's restructuring liability for the six months ended June 30, 2018. The restructuring liability is included in accrued expenses and other current liabilities in the consolidated balance sheets.
 
Employee Separation Expenses
 
Lease Related Charges
 
Other
 
Total
 
(in thousands)
Balance as of December 31, 2017
$
239

 
$
2,693

 
$
107

 
$
3,039

Restructuring charges
271

 
1,594

 

 
1,865

Cash payments
(420
)
 
(1,033
)
 

 
(1,453
)
Non-cash items
(16
)
 
(762
)
 
(70
)
 
(848
)
Balance as of June 30, 2018
$
74

 
$
2,492

 
$
37

 
$
2,603



17

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

5. Goodwill and Intangible Assets

Goodwill

Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. The fair values of net tangible assets and intangible assets acquired are based upon preliminary valuations and the Company's estimates and assumptions are subject to change within the measurement period (potentially up to one year from the acquisition date). During the six months ended June 30, 2018, the Company adjusted its allocation of purchase price for the acquisition of Exar related to updates to estimates of certain tax-related assets acquired and liabilities assumed with a corresponding increase in goodwill of $0.3 million.

The following table presents the changes in the carrying amount of goodwill:
 
Carrying Amount
 
(in thousands)
Balance as of December 31, 2017
$
237,992

Adjustments
338

Balance as of June 30, 2018
$
238,330


The Company performs an annual goodwill impairment assessment on October 31st each year, using a two-step quantitative assessment. Step one is the identification of potential impairment. This involves comparing the fair value of each reporting unit, which the Company has determined to be the entity itself, with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds the carrying amount, the goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any.

In addition to its annual review, the Company performs a test of impairment when indicators of impairment are present. During the six months ended June 30, 2018 and 2017, no indications of impairment of the Company's goodwill balances were identified and, as a result, no goodwill impairment was recognized.
Acquired Intangibles
Finite-lived Intangible Assets
The following table sets forth the Company’s finite-lived intangible assets resulting from business acquisitions and other purchases, which continue to be amortized:
 
 
 
June 30, 2018
 
December 31, 2017
 
Weighted
Average
Useful Life
(in Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
 
 
(in thousands)
Licensed technology
3.7
 
$
2,070

 
$
(860
)
 
$
1,210

 
$
2,070

 
$
(575
)
 
$
1,495

Developed technology
6.9
 
241,561

 
(57,189
)
 
184,372

 
241,561

 
(39,252
)
 
202,309

Trademarks and trade names
6.1
 
13,800

 
(3,122
)
 
10,678

 
13,800

 
(1,992
)
 
11,808

Customer relationships
4.6
 
121,100

 
(41,154
)
 
79,946

 
121,100

 
(26,661
)
 
94,439

Non-compete covenants
3.0
 
1,100

 
(689
)
 
411

 
1,100

 
(506
)
 
594

 
6.1
 
$
379,631

 
$
(103,014
)
 
$
276,617

 
$
379,631

 
$
(68,986
)
 
$
310,645


18

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

The following table sets forth amortization expense associated with finite-lived intangible assets, which is included in the consolidated statements of operations as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
Cost of net revenue
$
8,978

 
$
6,260

 
$
17,956

 
$
8,944

Research and development
42

 
138

 
84

 
275

Selling, general and administrative
7,994

 
8,262

 
15,988

 
10,143

 
$
17,014

 
$
14,660


$
34,028


$
19,362


Amortization of finite-lived intangible assets in cost of net revenue in the consolidated statements of operations results primarily from acquired developed technology.

The following table sets forth the activity during the six months ended June 30, 2018 related to finite-lived intangible assets resulting from amortization:
 
Carrying Amount
 
(in thousands)
Balance as of December 31, 2017
$
310,645

Amortization
(34,028
)
Balance as of June 30, 2018
$
276,617


The Company regularly reviews the carrying amount of its long-lived assets subject to depreciation and amortization, as well as the related useful lives, to determine whether indicators of impairment may exist that warrant adjustments to carrying values or estimated useful lives. An impairment loss is recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset. Should impairment exist, the impairment loss is measured based on the excess of the carrying amount of the asset over the asset’s fair value. During the six months ended June 30, 2018 and 2017, no impairment losses related to finite-lived intangible assets were recognized.

The following table presents future amortization of the Company’s finite-lived intangible assets at June 30, 2018:
 
Amount
 
(in thousands)
2018 (6 months)
$
34,013

2019
57,191

2020
56,325

2021
55,542

2022
38,012

Thereafter
35,534

Total
$
276,617

Indefinite-lived Intangible Assets
As of June 30, 2018 and December 31, 2017, total indefinite-lived intangible assets, which consist of acquired in-process research and development, were $4.4 million.

The Company performs its annual assessment of indefinite-lived intangible assets on October 31 each year or more frequently if events or changes in circumstances indicate that the asset might be impaired utilizing a qualitative test as a precursor to the quantitative test comparing the fair value of the assets with their carrying amount. Based on the qualitative test, if it is more likely than not that indicators of impairment exists, the Company proceeds to perform a quantitative analysis. In the year ended December 31, 2017, the Company recognized IPR&D impairment losses of $2.0 million related principally to acquired Exar assets and in the year ended December 31, 2016, the Company recognized IPR&D impairment losses of $1.3

19

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

million related principally to acquired wireless infrastructure access assets. During the six months ended June 30, 2018 and 2017, no indicators of impairment were identified and, as a result, no IPR&D impairment losses were recorded.

6. Financial Instruments
The composition of financial instruments is as follows:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Assets
 
 
 
Interest rate swap
$
2,462

 
$
734

The fair value of the Company’s financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants and is recorded using a hierarchical disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The levels are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
The Company classifies its financial instrument within Level 2 of the fair value hierarchy on the basis of models utilizing market observable inputs. The interest rate swap has been valued on the basis of valuations provided by third-party pricing services, as derived from standard valuation or pricing models. The pricing services may use market-based observable inputs for the interest rate swap over the term of the swap, including one month LIBOR-based yield curves and have been classified as Level 2. The Company reviews Level 2 inputs and fair value for reasonableness and the values may be further validated by comparison to independent pricing sources. In addition, the Company reviews third-party pricing provider models, key inputs and assumptions and understands the pricing processes at its third-party providers in determining the overall reasonableness of the fair value of its Level 2 financial instruments. The Company also considers the risk of nonperformance by assessing the swap counterparty's credit risk in the estimate of fair value of the interest rate swap. As of June 30, 2018 and December 31, 2017, the Company has not made any adjustments to the valuations obtained from its third-party pricing providers. 
The following table presents a summary of the Company’s financial instruments that were measured at fair value on a recurring basis and the related level of the fair value hierarchy:
 
 
 
Fair Value Measurements
 
Balance
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Interest rate swap, June 30, 2018
$
2,462

 
$

 
$
2,462

 
$

Interest rate swap, December 31, 2017
$
734

 
$

 
$
734

 
$


20

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


The following table summarizes activity for the interest rate swap:
 
Six Months Ended
 
June 30,
2018
 
June 30,
2017
 
(in thousands)
Interest rate swap asset
 
 
 
Beginning balance
$
734

 
$

Unrealized gain included in other comprehensive income
1,728

 

Ending balance
$
2,462

 
$

There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the six months ended June 30, 2018 and 2017.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis

Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include: cash and cash equivalents, restricted cash, net receivables, certain other assets, accounts payable, accrued price protection liability, accrued expenses, accrued compensation costs, and other current liabilities.

The Company’s long-term debt is not recorded at fair value on a recurring basis, but is measured at fair value for disclosure purposes (Note 8).
7. Balance Sheet Details
Cash, cash equivalents and restricted cash consist of the following:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Cash and cash equivalents
$
74,059

 
$
71,872

Short-term restricted cash
345

 
1,476

Long-term restricted cash
711

 
1,064

Total cash, cash equivalents and restricted cash
$
75,115

 
$
74,412

As of June 30, 2018 and December 31, 2017, the Company has restricted cash of $1.1 million and $2.5 million, respectively. The cash is restricted in connection with guarantees for certain import duties and office leases.
Inventory consists of the following:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Work-in-process
$
17,497

 
$
21,823

Finished goods
26,841

 
31,611

 
$
44,338

 
$
53,434


21

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Property and equipment, net consists of the following:
 
Useful Life
(in Years)
 
June 30, 2018
 
December 31, 2017
 
 
 
(in thousands)
Furniture and fixtures
5
 
$
2,265

 
$
2,105

Machinery and equipment
3-5
 
34,975

 
33,462

Masks and production equipment
2
 
11,822

 
11,470

Software
3
 
4,854

 
4,695

Leasehold improvements
1-5
 
15,716

 
14,340

Construction in progress
N/A
 
1,061

 
639

 
 
 
70,693

 
66,711

Less accumulated depreciation and amortization
 
 
(49,807
)
 
(44,053
)
 
 
 
$
20,886

 
$
22,658


Depreciation expense for the three months ended June 30, 2018 and 2017 was $3.0 million and $3.6 million, respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 was $6.1 million and $5.8 million, respectively.
Deferred revenue and deferred profit consist of the following:
 
June 30, 2018
 
December 31, 2017(1)
 
(in thousands)
Deferred revenue—rebates
$

 
$
156

Deferred revenue—distributor transactions

 
5,341

Deferred cost of net revenue—distributor transactions

 
(1,135
)
 
$

 
$
4,362

__________
(1) Due to the adoption of ASC 606 using the modified retrospective method, prior period amounts have not been adjusted to reflect the change to recognize certain distributor sales upon sale to the distributor, or the sell-in method, from recognition upon the Company's sale to the distributors' end customers, or the sell-through method, which required the deferral of revenue and profit on such distributor sales.
Accrued price protection liability consists of the following activity:
 
Six Months Ended June 30,
 
2018
 
2017
 
(in thousands)
Beginning balance
$
21,571

 
$
15,176

Charged as a reduction of revenue
20,136

 
23,445

Reversal of unclaimed rebates
(2,408
)
 
(40
)
Payments
(19,219
)
 
(13,958
)
Ending balance
$
20,080

 
$
24,623


22

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Accrued expenses and other current liabilities consist of the following:
 
June 30, 2018
 
December 31, 2017(1)
 
(in thousands)
Accrued technology license payments
$
4,500

 
$
4,500

Accrued professional fees
1,166

 
1,497

Accrued engineering and production costs
626

 
2,378

Accrued restructuring
2,603

 
3,039

Accrued royalty
1,075

 
1,206

Accrued leases—other
1,153

 
1,105

Accrued customer credits
3,108

 
2,667

Income tax liability
9,100

 

Customer contract liabilities
145

 

Accrued obligations to customers for price adjustments
8,331

 

Accrued obligations to customers for stock rotation rights
1,573

 

Other
4,785

 
3,914

 
$
38,165

 
$
20,306

___________
(1) Due to the adoption of ASC 606 using the modified retrospective method, prior period amounts have not been adjusted to include customer contract liabilities and accrued obligations to customers for price adjustments and stock rotation rights, which are now required to be estimated and disclosed at the time of sale.

8. Debt and Interest Rate Swap

Debt
The carrying amount of the Company's long-term debt consists of the following:
 
June 30,
2018
 
December 31,
2017
 
(in thousands)
 
 
 
 
Principal
$
312,000

 
$
355,000

Less:
 
 
 
     Unamortized debt discount
(1,780
)
 
(1,930
)
     Unamortized debt issuance costs
(5,037
)
 
(5,461
)
Net carrying amount of long-term debt
305,183

 
347,609

Less: current portion of long-term debt

 

Long-term debt, non-current portion
$
305,183

 
$
347,609

On May 12, 2017, the Company entered into a credit agreement with certain lenders and a collateral agent in connection with the acquisition of Exar (Note 3). The credit agreement provides for an initial secured term B loan facility, or the “Initial Term Loan,” in an aggregate principal amount of $425.0 million. The credit agreement permits the Company to request incremental loans in an aggregate principal amount not to exceed the sum of $160.0 million (subject to adjustments for any voluntary prepayments), plus an unlimited amount that is subject to pro forma compliance with certain secured leverage ratio and total leverage ratio tests. Incremental loans are subject to certain additional conditions, including obtaining additional commitments from the lenders then party to the credit agreement or new lenders.

Loans under the credit agreement bear interest, at the Company’s option, at a rate equal to either (i) a base rate equal to the highest of (x) the federal funds rate, plus 0.50%, (y) the prime rate then in effect and (z) an adjusted LIBOR rate determined on the basis of a one- three- or six-month interest period, plus 1.0% or (ii) an adjusted LIBOR rate, subject to a floor of 0.75%,

23

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

in each case, plus an applicable margin of 2.50% in the case of LIBOR rate loans and 1.50% in the case of base rate loans. Commencing on September 30, 2017, the Initial Term Loan will amortize in equal quarterly installments equal to 0.25% of the original principal amount of the Initial Term Loan, with the balance payable on the maturity date. The Initial Term Loan has a term of seven years and will mature on May 12, 2024, at which time all outstanding principal and accrued and unpaid interest on the Initial Term Loan must be repaid. The Company is also required to pay fees customary for a credit facility of this size and type.
The Company is required to make mandatory prepayments of the outstanding principal amount of term loans under the credit agreement with the net cash proceeds from the disposition of certain assets and the receipt of insurance proceeds upon certain casualty and condemnation events, in each case, to the extent not reinvested within a specified time period, from excess cash flow beyond stated threshold amounts, and from the incurrence of certain indebtedness. The Company has the right to prepay its term loans under the credit agreement, in whole or in part, at any time without premium or penalty, subject to certain limitations and a 1.0% soft call premium applicable during the first six months of the loan term. The Company exercised its right to prepay and made aggregate prepayments of principal of $113.0 million from origination through June 30, 2018.
The Company’s obligations under the credit agreement are required to be guaranteed by certain of its domestic subsidiaries meeting materiality thresholds set forth in the credit agreement. Such obligations, including the guaranties, are secured by substantially all of the assets of the Company and the subsidiary guarantors pursuant to a security agreement with the collateral agent.
The credit agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company and its restricted subsidiaries to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, and sell assets, in each case, subject to limitations and exceptions. As of June 30, 2018, the Company was in compliance with such covenants. The credit agreement also contains customary events of default that include, among other things, certain payment defaults, cross defaults to other indebtedness, covenant defaults, change in control defaults, judgment defaults, and bankruptcy and insolvency defaults. If an event of default exists, the lenders may require immediate payment of all obligations under the credit agreement, and may exercise certain other rights and remedies provided for under the credit agreement, the other loan documents and applicable law.
As of June 30, 2018, the weighted average effective interest rate payable on the long-term debt was 4.2%.
The debt is carried at its principal amount, net of unamortized debt discount and issuance costs, and is not adjusted to fair value each period. The issuance date fair value of the liability component of the debt in the amount of $398.5 million was determined using a discounted cash flow analysis, in which the projected interest and principal payments were discounted back to the issuance date of the term loan at a market interest rate for nonconvertible debt of 4.6%, which represents a Level 3 fair value measurement. The debt discount of $2.1 million and debt issuance costs of $6.0 million are being amortized to interest expense using the effective interest method from the issuance date through the contractual maturity date of the term loan of May 12, 2024. During the three and six months ended June 30, 2018, the Company recognized total amortization of debt discount and debt issuance costs of $0.3 million and $0.6 million, respectively, to interest expense. The approximate fair value of the term loan as of June 30, 2018 was $296.8 million, which was estimated on the basis of inputs that are observable in the market and which is considered a Level 2 measurement method in the fair value hierarchy.
As of June 30, 2018, the remaining principal balance on the term loan of $312.0 million is due on May 12, 2024 at the maturity date on the term loan.
Interest Rate Swap
In November 2017, the Company entered into a fixed-for-floating interest rate swap with an amortizing notional amount to swap a substantial portion of variable rate LIBOR interest payments under its term loans for fixed interest payments bearing an interest rate of 1.74685%. The Company's outstanding debt is still subject to a 2.5% fixed applicable margin during the term of the loan. The interest rate swap is designated as a cash flow hedge of a portion of floating rate interest payments on long-term debt and effectively fixes the interest rate on a substantial portion of the Company’s long-term debt at approximately 4.25%. Accordingly, the Company applies cash flow hedge accounting to the interest rate swap and it is recorded at fair value as an asset or liability and the effective portion of changes in the fair value of the interest rate swap, as measured quarterly, are reported in other comprehensive income (loss). As of June 30, 2018 and December 31, 2017, the fair value of the interest rate swap asset was $2.5 million and $0.7 million (Note 6), respectively, and is included in other long-term assets in the consolidated balance sheets. The increase in fair value related to the interest rate swap asset included in other comprehensive income for the three and six months ended June 30, 2018 was $0.3 million and $1.7 million, respectively. The interest rate swap expires in October 2020 and the total $1.7 million of unrealized gain recorded in accumulated other comprehensive income at June 30, 2018 is not expected to be recorded against interest expense over the next twelve months.

24

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


9. Stock-Based Compensation and Employee Benefit Plans
Employee Stock-Based Benefit Plans
At June 30, 2018, the Company had stock-based compensation awards outstanding under the following plans: the 2004 Stock Plan, the 2010 Equity Incentive Plan, as amended, or 2010 Plan, the 2010 Employee Stock Purchase Plan, or ESPP, and plans under which equity incentive awards were assumed in connection with the acquisitions of Entropic in 2015 and Exar Corporation in 2017. Refer to the Company’s Annual Report for a summary of the Company's stock-based compensation and equity plans as of December 31, 2017. There have been no material changes to the terms of the Company's equity incentive plans during the six months ended June 30, 2018. All current stock awards are issued under the 2010 Plan and ESPP.
As of June 30, 2018, the number of shares of common stock available for future issuance under the 2010 Plan was 13,579,573 shares. As of June 30, 2018, the number of shares of common stock available for future issuance under the ESPP was 2,254,806 shares.
Stock-Based Compensation
The Company recognizes stock-based compensation in the consolidated statements of income, based on the department to which the related employee reports, as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
Cost of net revenue
$
120

 
$
79

 
$
226

 
$
138

Research and development
4,454

 
4,011

 
8,828

 
7,504

Selling, general and administrative
2,735

 
3,024

 
6,728

 
4,946

Restructuring

 
4,514

 

 
4,514

 
$
7,309

 
$
11,628

 
$
15,782

 
$
17,102

The total unrecognized compensation cost related to unvested restricted stock units and restricted stock awards as of June 30, 2018 was $63.6 million, and the weighted average period over which these equity awards are expected to vest is 2.85 years. The total unrecognized compensation cost related to unvested stock options as of June 30, 2018 was $4.2 million, and the weighted average period over which these equity awards are expected to vest is 1.65 years.
Restricted Stock Units and Restricted Stock Awards
The Company calculates the fair value of restricted stock units based on the fair market value of the Company's common stock on the grant date. Stock based compensation is recognized over the vesting period using the straight-line method.
A summary of the Company’s restricted stock unit and restricted stock award activity is as follows:
 
Number of Shares
(in thousands)
 
Weighted-Average Grant-Date Fair Value per Share
Outstanding at December 31, 2017
3,183

 
$
20.13

Granted
1,979

 
19.70

Vested
(987
)
 
18.73

Canceled
(307
)
 
20.86

Outstanding at June 30, 2018
3,868

 
20.23

Employee Stock Purchase Rights and Stock Options
The Company uses the Black-Scholes valuation model to calculate the fair value of employee stock purchase rights and stock options granted to employees. Stock based compensation expense is recognized over the vesting period using the straight-line method.

25

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Employee Stock Purchase Rights
During the six months ended June 30, 2018, there were 151,840 shares of common stock purchased under the ESPP at a weighted average price of $16.14.
The fair values of employee stock purchase rights were estimated using the Black-Scholes option pricing model at their respective grant date using the following assumptions:
 
Six Months Ended
 
June 30, 2018
Weighted-average grant date fair value per share
$
5.37

Risk-free interest rate
2.09
%
Dividend yield
%
Expected life (in years)
0.50

Volatility
46.00
%
The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The expected term is the duration of the offering period for each grant date. In addition, the estimated volatility incorporates the historical volatility over the expected term based on the Company's daily closing stock prices.
Stock Options
A summary of the Company’s stock options activity is as follows:
 
Number of Options
(in thousands)
 
Weighted-Average Exercise Price
 
Weighted-Average Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017
3,069

 
$
8.95

 
 
 
 
Exercised
(272
)
 
7.73

 
 
 
 
Canceled
(33
)
 
14.83

 
 
 
 
Outstanding at June 30, 2018
2,764

 
$
9.00

 
2.09
 
$
19,932

Vested and expected to vest at June 30, 2018
2,738

 
$
8.93

 
2.06
 
$
19,902

Exercisable at June 30, 2018
2,484

 
$
8.25

 
1.79
 
$
19,479


No stock options were granted by the Company during the six months ended June 30, 2018.

The intrinsic value of stock options exercised was $1.8 million and $12.4 million in the three months ended June 30, 2018 and 2017, respectively. The intrinsic value of stock options exercised was $3.9 million and $14.3 million in the six months ended June 30, 2018 and 2017, respectively.

Cash received from exercise of stock options was $0.2 million and $5.6 million during the three months ended June 30, 2018 and 2017, respectively. Cash received from exercise of stock options was $1.2 million and $6.0 million during the six months ended June 30, 2018 and 2017, respectively.

The tax benefit from stock options exercised was $0.4 million and $9.9 million during the three months ended June 30, 2018 and 2017, respectively. The tax benefit from stock options exercised was $2.5 million and $10.3 million during the six months ended June 30, 2018 and 2017, respectively.

26

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Employee Incentive Bonus
The Company settles a majority of bonus awards for its employees, including executives, in shares of common stock under the 2010 Equity Incentive Plan. When bonus awards are settled in common stock issued under the 2010 Equity Incentive Plan, the number of shares issuable to plan participants is determined based on the closing price of the Company's common stock as determined in trading on the New York Stock Exchange on a date approved by the Board of Directors. In connection with the Company's bonus programs, in February 2018, the Company issued 0.3 million freely-tradable shares of the Company's common stock in settlement of bonus awards to employees, including executives, for the 2017 performance period. At June 30, 2018, the Company has an accrual of $4.0 million for bonus awards for employees for year-to-date achievement in the 2018 performance period. The Company's compensation committee retains discretion to effect payment in cash, stock, or a combination of cash and stock.
10. Income Taxes
The provision for income taxes primarily relates to projected federal, state, and foreign income taxes. To determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is generally based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. In addition, the tax effects of certain significant or unusual items are recognized discretely in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the temporary differences reverse. The Company records a valuation allowance to reduce its deferred taxes to the amount it believes is more likely than not to be realized. In making such determination, the Company considers all available positive and negative evidence quarterly, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.  Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. Based upon the Company's review of all positive and negative evidence, the Company released the valuation allowance against certain of its federal deferred tax assets during the three months ended June 30, 2017. The Company continues to have a valuation allowance on its state deferred taxes, certain of its federal deferred tax assets, and certain foreign deferred tax assets in jurisdictions where the Company has cumulative losses or otherwise is not expected to utilize certain tax attributes. The Company does not incur expense or benefit in certain tax free jurisdictions in which it operates.
The Company recorded an income tax provision of $11.2 million in the three months ended June 30, 2018 and an income tax benefit of $29.5 million for the three months ended June 30, 2017. The Company recorded an income tax provision of $9.4 million for the six months ended June 30, 2018 and an income tax benefit of $27.5 million for the six months ended June 30, 2017.
The income tax provision in the six months ended June 30, 2018 primarily relates to the mix of pre-tax income among jurisdictions (including the effects of certain intercompany royalty payments), excess tax benefits related to stock-based compensation, and release of uncertain tax positions under ASC 740-10.
The income tax benefit in the six months ended June 30, 2017 primarily relates to the release of the federal valuation allowance during the three months ended June 30, 2017.

Income tax positions must meet a more-likely-than-not threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first financial reporting period in which that threshold is no longer met. The Company records potential penalties and interest accrued related to unrecognized tax benefits within the consolidated statements of income as income tax expense. During the six months ended June 30, 2018, the Company’s unrecognized tax benefits increased by $0.5 million. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. Accrued interest and penalties associated with uncertain tax positions as of June 30, 2018 were approximately $0.8 million and $0.2 million, respectively.
The Company is subject to federal and state income tax in the United States and is also subject to income tax in various states and foreign tax jurisdictions. At June 30, 2018, the Company’s tax years for 2013, 2012, and 2009 and forward are subject to examination by federal, state, and foreign tax authorities, respectively. The Company is currently under examination by the California Franchise Tax Board for the 2014 and 2015 tax years.  The Company does not expect the examination to have

27

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

a material effect on the Company's consolidated financial position or results of operations.  However, certain of the Company's state tax attribute carryforwards, which currently have a full valuation allowance, could be reduced.
In April 2017, the Company's subsidiary in Singapore began operating under certain tax incentives in Singapore, which are generally effective through March 2022, and are conditional upon meeting certain employment and investment thresholds in Singapore. Under the incentives, qualifying income derived from certain sales of the Company's integrated circuits is taxed at a concessionary rate over the incentive period, and there are reduced Singapore withholding taxes on certain intercompany royalties during the incentive period. Primarily because of the Company's Singapore net operating losses and a full valuation allowance in Singapore, the incentives did not have a material impact on the Company's income tax provision in the six months ended June 30, 2018.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning in 2018, the transition of U.S international taxation from a worldwide tax system to a territorial system, which includes a new federal tax on global intangible low-taxed income (Global Minimum Tax or GMT), and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. In its 2017 consolidated financial statements, the Company calculated its best estimate of the impact of the Tax Act in its 2017 income tax benefit in accordance with its understanding of the Tax Act and guidance available as of the date of the filing of the Annual Report.
In addition, the SEC Staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The Company was able to make reasonable estimates of certain effects and, therefore, recorded certain provisional adjustments in the 2017 income tax benefit. Refer to Note 10 to the Company's consolidated financial statements included in the Annual Report for further details. During the six months ended June 30, 2018, the Company recognized no adjustments to the provisional amounts recorded at December 31, 2017. Additionally, the Company has provided provisional amounts for the legislative provisions that are effective as of January 1, 2018, including, but not limited to, the creation of the base erosion anti-abuse tax (BEAT), a new global minimum tax, GMT, a new limitation on deductible interest expense, and limitations on the use of net operating losses.
At June 30, 2018, the Company's accounting for certain elements of the Tax Act is incomplete. The provisional amounts recorded are subject to revisions as the Company completes its analysis of the Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, or IRS, FASB, and other standard-setting and regulatory bodies. Adjustments to the provisional amounts may materially impact the Company's consolidated income tax provision (benefit) and effective tax rates in the period(s) in which such adjustments are made. In all cases, the Company will continue to make and refine calculations as additional analysis is completed. The Company's accounting for the tax effects of the Tax Act will be completed during the one-year measurement period.
Under U.S. GAAP, the Company is allowed to make an accounting policy choice with respect to the GMT of either (1) treating taxes due on future U.S. inclusions in taxable income related to GMT as a current-period expense when incurred or (2) as a component of deferred income taxes. The Company will make its accounting policy election for this item when its analysis is complete, during the measurement period. At June 30, 2018, because the Company is still evaluating the GMT provisions and an analysis of future taxable income that is subject to GMT, the Company has included GMT related to current year operations only in the estimated annual effective tax rate and has not provided additional GMT on deferred items.

11. Concentration of Credit Risk, Significant Customers and Revenue by Geographic Region
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. Collateral is generally not required for customer receivables. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions. At times, such deposits may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

28

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


Significant Customers

The Company markets its products and services to manufacturers of a wide range of electronic devices (Note 1). The Company makes periodic evaluations of the credit worthiness of its customers.

Customers comprising greater than 10% of net revenues for each of the periods presented are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Percentage of total net revenue
 
 
 
 
 
 
 
Customer A
28
%
 
26
%
 
27
%
 
29
%
Balances that are 10% or greater of accounts receivable, based on the Company's billings to the contract manufacturer customers, are as follows:
 
June 30,
 
December 31,
 
2018
 
2017
Percentage of gross accounts receivable
 
 
 
Customer A
23
%
 
*

Customer B
*

 
17
%
Customer C
*

 
10
%
____________________________
*
Represents less than 10% of the gross accounts receivable as of the respective period end.

Suppliers comprising greater than 10% of total inventory purchases are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Vendor A
23
%
 
19
%
 
22
%
 
21
%
Vendor B
15
%
 
16
%
 
17
%
 
18
%
Vendor C
*

 
20
%
 
*

 
18
%
Vendor D
15
%
 
15
%
 
16
%
 
13
%
Vendor E
12
%
 
10
%
 
13
%
 
13
%
____________________________
*
Represents less than 10% of the inventory purchases for the respective period.

Geographic Information

The Company's consolidated net revenues by geographic area based on ship-to location are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
Amount
 
% of total net revenue
 
Amount
 
% of total net revenue
 
Amount
 
% of total net revenue
 
Amount
 
% of total net revenue
Asia
$
87,289

 
86
%
 
$
94,823

 
91
%
 
$
172,103

 
81
%
 
$
179,131

 
93
%
United States
4,636

 
5
%
 
2,095

 
2
%
 
9,831

 
5
%
 
2,240

 
1
%
Rest of world
9,608

 
9
%
 
7,257

 
7
%
 
30,426

 
14
%
 
11,645

 
6
%
Total
$
101,533

 
100
%
 
$
104,175

 
100
%
 
$
212,360

 
100
%
 
$
193,016

 
100
%

29

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


The products shipped to individual countries representing greater than 10% of net revenue for each of the periods presented are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Percentage of total net revenue
 
 
 
 
 
 
 
China
65
%
 
73
%
 
63
%
 
75
%
The determination of which country a particular sale is allocated to is based on the destination of the product shipment. No other individual country in Asia Pacific, United States, or the rest of the world accounted for more than 10% of net revenue during these periods.
Long-lived assets, which consists of property and equipment, net, intangible assets, net, and goodwill by geographic area are as follows (in thousands):
 
June 30,
 
December 31,
 
2018
 
2017
 
Amount
 
% of total
 
Amount
 
% of total
United States
$
455,523

 
84
%
 
$
481,638

 
84
%
Singapore
82,023

 
15
%
 
92,414

 
16
%
Rest of world
2,687

 
%
 
1,643

 
%
Total
$
540,233

 
100
%
 
$
575,695

 
100
%

12. Revenue from Contracts with Customers

Revenue by Market
The table below presents disaggregated net revenues by market (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017(1)
 
2018
 
2017
 
 
 
Connected home
$
56,517

 
$
79,214

 
$
122,175

 
$
156,454

% of net revenue
56
%
 
76
%
 
58
%
 
81
%
Infrastructure
19,485

 
15,418

 
39,975

 
26,952

% of net revenue
19
%
 
15
%
 
19
%
 
14
%
Industrial and multi-market
25,531

 
9,543

 
50,210

 
9,610

% of net revenue
25
%
 
9
%
 
24
%
 
5
%
Total net revenue
$
101,533

 
$
104,175

 
$
212,360

 
$
193,016

___________
(1) Due to the adoption of ASC 606 using the modified retrospective method, prior period amounts have not been adjusted to reflect the change to recognize certain distributor sales upon sale to the distributor, or the sell-in method, from recognition upon the Company's sale to the distributors' end customers, or the sell-through method, which required the deferral of revenue and profit on such distributor sales.
Contract Liabilities
As of June 30, 2018, customer contract liabilities consist of estimates of obligations to deliver rebates to customers in the form of units of products and were approximately $0.1 million. Revenue recognized in the three and six months ended June 30, 2018 that was included in the contract liability balance as of January 1, 2018 was immaterial.
There were no material changes in the contract liabilities balance during the three and six months ended June 30, 2018.

30

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Obligations to Customers for Price Adjustments and Returns and Assets for Right-of-Returns
As of June 30, 2018, obligations to customers consisting of estimates of price protection rights offered to the Company's end customers totaled $20.1 million and are included in accrued price protection liability in the consolidated balance sheets. For activity in this account, including amounts included in net revenue, refer to Note 7. Other obligations to customers representing estimates of price adjustments to be claimed by distributors upon sell-through of their inventory to their end customer and estimates of stock rotation returns to be claimed by distributors on products sold as of June 30, 2018 were $8.3 million and $1.6 million, respectively, and are included in accrued expenses and other liabilities in the consolidated balance sheets (Note 7). The increase in revenue from net changes in transaction prices for amounts included in obligations to customers for price adjustments as of January 1, 2018 was not material. As of June 30, 2018, right of return assets under customer contracts representing the estimates of product inventory the Company expects to receive from customers in stock rotation returns were approximately $0.3 million. Right of return assets are included in inventory in the consolidated balance sheets (Note 7).
As of June 30, 2018, there were no impairment losses recorded on customer accounts receivable.

13. Commitments and Contingencies
Lease Commitments and Other Contractual Obligations
The Company leases facilities and certain equipment under operating lease arrangements expiring at various years through 2023. As of June 30, 2018, future minimum payments under non-cancelable operating leases, inventory purchase and other obligations are as follows:
 
Operating Leases
 
Inventory Purchase Obligations
 
Other Obligations
 
Total
 
(in thousands)
2018 (6 months)
$
4,532

 
$
45,140

 
$
3,776

 
$
53,448

2019
9,188

 

 
7,761

 
16,949

2020
9,366

 

 
3,781

 
13,147

2021
9,169

 

 
30

 
9,199

2022
5,037

 

 

 
5,037

Thereafter
786

 

 

 
786

Total minimum payments
$
38,078

 
$
45,140

 
$
15,348

 
$
98,566


Other obligations consist of contractual payments due for software licenses.

The total rental expense for operating leases was $1.1 million and $0.9 million for the three months ended June 30, 2018 and 2017, respectively. The total rental expense for operating leases was $2.3 million and $1.7 million for the six months ended June 30, 2018 and 2017, respectively.

The Company has subleased certain facilities that it ceased using in connection with prior years' restructuring plans (Note 4). Such subleases expire at various years through fiscal 2023. As of June 30, 2018, future minimum rental income under non-cancelable subleases is as follows:
 
Amount
 
(in thousands)
2018 (6 months)
$
1,456

2019
3,604

2020
4,088

2021
4,152

2022
879

Thereafter
352

Total minimum rental income
$
14,531


31

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

Total sublease income related to leased facilities the Company ceased using in connection with a restructuring plan for the three months ended June 30, 2018 and 2017 was approximately $0.6 million and $0.5 million, respectively (Note 4). Total sublease income related to leased facilities the Company ceased using in connection with a restructuring plan for the six months ended June 30, 2018 and 2017 was approximately $0.9 million and $1.0 million, respectively.

Exar iML Divestiture Indemnification

Under the terms of the purchase agreement relating to the November 9, 2016 divestiture of Integrated Memory Logic Limited, or iML, by Exar, Exar agreed to indemnify the purchaser of the business unit for breaches of representations and warranties and covenants and for certain other matters. Exar also agreed to place $5.0 million of the total purchase price into an escrow account for a period of 18 months to partially secure its indemnification obligations under the purchase agreement; of this amount, $0.8 million remains in escrow as of June 30, 2018; $1.3 million has been released to the purchaser of iML and $2.9 million has been released to Exar through June 30, 2018. Exar’s indemnification obligations for breaches of representations and warranties survived for 12 months from the closing of the sale transaction, except for breaches of representations and warranties covering intellectual property, which survived for 18 months, and breaches of representations and warranties of certain fundamental representations, which survive until the expiration of the applicable statute of limitations. Exar’s maximum indemnification obligation for breaches of representations and warranties, other than intellectual property and fundamental representations, was $13.6 million, its maximum indemnification obligation for breaches of intellectual property representations was $34.0 million, and is maximum indemnity obligation for breaches of fundamental representations is the full purchase price amount (approximately $136.0 million). The aggregate amount recovered by the purchaser in accordance with the indemnification provisions with respect to matters that are subject to the intellectual property representations, together with the aggregate amount recovered by the Buyer in accordance with the indemnification provisions with respect to matters that are subject to the general representations and warranties (other than fundamental representations), will in no event exceed $34.0 million. The Company believes it does not have a material indemnification obligation as of June 30, 2018; however, if the Company were required to make payments in satisfaction of these indemnification obligations related to breaches of representations and warranties of certain fundamental obligations which have not yet expired, it could have a material adverse effect on the Company's business, financial condition, results of operations, and cash flows.
CrestaTech Litigation
On January 21, 2014, CrestaTech Technology Corporation, or CrestaTech, filed a complaint for patent infringement against the Company in the United States District Court of Delaware, or the District Court Litigation. In its complaint, CrestaTech alleged that the Company infringed U.S. Patent Nos. 7,075,585, or the ‘585 Patent and 7,265,792, or the ‘792 Patent. In addition to asking for compensatory damages, CrestaTech alleged willful infringement and sought a permanent injunction. CrestaTech also named Sharp Corporation, Sharp Electronics Corp. and VIZIO, Inc. as defendants based upon their alleged use of the Company's television tuners.
On January 28, 2014, CrestaTech filed a complaint with the U.S. International Trade Commission, or ITC, again naming, among others, MaxLinear, Sharp, Sharp Electronics, and VIZIO, or the ITC Investigation. On May 16, 2014, the ITC granted CrestaTech’s motion to file an amended complaint adding six OEM Respondents, namely, SIO International, Inc., Hon Hai Precision Industry Co., Ltd., Wistron Corp., Wistron Infocomm Technology (America) Corp., Top Victory Investments Ltd. and TPV International (USA), Inc. which are collectively referred to with MaxLinear, Sharp and VIZIO as the Company Respondents. CrestaTech’s ITC complaint alleged a violation of 19 U.S.C. § 1337 through the importation into the United States, the sale for importation, or the sale within the United States after importation of MaxLinear's accused products that CrestaTech alleged infringe the same two patents asserted in the Delaware action. Through its ITC complaint, CrestaTech sought an exclusion order preventing entry into the United States of certain of the Company's television tuners and televisions containing such tuners from Sharp, Sharp Electronics, and VIZIO. CrestaTech also sought a cease and desist order prohibiting the Company Respondents from engaging in the importation into, sale for importation into, the sale after importation of, or otherwise transferring within the United States certain of the Company's television tuners or televisions containing such tuners.
On March 10, 2014, the court stayed the District Court Litigation pending resolution of the ITC Investigation.
On December 15, 2014, the ITC held a trial in the ITC Investigation. On February 27, 2015, the Administrative Law Judge, or the ALJ, issued a written Initial Determination, or ID, ruling that the Company Respondents do not violate Section 1337 in connection with CrestaTech’s asserted patents because CrestaTech failed to satisfy the economic prong of the domestic industry requirement pursuant to Section 1337(a)(2). In addition, the ID stated that certain of the Company's television tuners and televisions incorporating those tuners manufactured and sold by certain customers infringe three claims of the ‘585 Patent (claims 10, 12 and 13), and these three claims were not determined to be invalid. On April 30, 2015, the ITC issued a notice

32

MAXLINEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

indicating that it intended to review portions of the ID finding no violation of Section 1337, including the ID’s findings of infringement with respect to, and validity of, the ‘585 Patent, and the ID’s finding that CrestaTech failed to establish the existence of a domestic industry within the meaning of Section 1337.
The ITC subsequently issued its opinion, which terminated its investigation. The opinion affirmed the findings of the ALJ that no violation of Section 1337 had occurred because CrestaTech had failed to establish the economic prong of the domestic industry requirement. The ITC also affirmed the ALJ's finding of infringement with respect to the three claims of the '585 Patent that were not held to be invalid.
On November 30, 2015, CrestaTech filed an appeal of the ITC decision with the United States Court of Appeals for the Federal Circuit, or the Federal Circuit. On March 7, 2016, CrestaTech voluntarily dismissed its appeal, resulting in a final determination of the ITC Investigation in the Company