This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.Act. Such statements include certain information in “Part I, Item 1. Business” and “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and other information regarding our current beliefs, plans and expectations, including, without limitation, the matters set forth below. Words such as "believe," “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” “believe,” “could,” “would,” “should,” “if,” “may,” “might,” “future,” “target,” “goal,” “trend,” “seek"goal," "could," "would," "should," "if," "may," "might," "future," "target," "trend," "seek to,” “will" "will continue,” “predict,” “likely,” “in" "predict," "likely," "in the event,”" variations of any such words or similar expressions contained herein are intended to identify such forward-looking statements. Forward-looking statements in this Annual Reportare made on Form 10-K include, without limitation, statements regarding:
You should carefully consider these factors as well as the risks and uncertainties outlined in greater detail in Part I, Item 1A, inof this Form 10-K before making any investment decision with respect to our common stock. These factors, individually or in the aggregate, may cause our actual results to differ materially from our expected and historical results. You should understand that it is not possible to predict or identify all such factors. In addition, you should not place undue reliance on the forward-looking statements contained herein, which are made only as of the date of this Form 10-K. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.
Cash and cash equivalents and available-for-sale securities are recorded at fair value.
agreement with the related foreign governments that will result in a partial refund of foreign taxes paid with a related reduction in our foreign tax credits. Due to foreign currency fluctuations, any such agreement could result in foreign currency gain or loss.
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Item 8.
| FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
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CONSOLIDATED FINANCIAL STATEMENTS: | |
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SCHEDULES: | |
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All other schedules are omitted because they are either not required or applicable or equivalent information has been included in the financial statements and notes thereto.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of InterDigital, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of InterDigital, Inc. and its subsidiaries (the “Company”) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of income, of comprehensive income, shareholders’of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the related notes and financial statementsstatement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 20192022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control -Control- Integrated Framework (2013)issued by the COSO.COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leasesconvertible instruments in 2019 and the manner in which it accounts for revenue in 2018.
2021.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Overover Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition -– Determination of the Value of Revenue from Non-Financial Sources and of Standalone Selling Prices of Identified Performance Obligations in Dynamic Fixed-Fee License Agreements
As described in Notes 2 and 3 to the consolidated financial statements, dynamic fixed-fee license agreements include fixed, non-refundable royalty payments that fulfill the licensee’s obligations to the Company under a patent license agreement for a specified time period or for the term of the agreement. Additionally, certain patent license agreements contain revenue from non-financial sources in the form of patents received from the customer. Total fixed-fee royalty revenue and non-currentnoncurrent patent royalties were $257.2$364.0 million and $19.8$53.9 million, respectively, for the year ended December 31, 2019,2022, of which a significant portion relates to dynamic fixed-fee agreements. As disclosed by management, management’sthe process for determining the value of the standalone selling prices of identified performance obligations in dynamic fixed-fee license agreements requires the exercise of significant judgment when evaluating the valuation methods and assumptions, including the assumed royalty rates, projected sales volumes, discount rate, andidentification of comparable market transactions which are not directly observable and other relevant factors. Management’s process for determining the value of revenue from non-financial sources requires estimating the fair value of patents received using one of, or a combination of, an analysis of comparable market transactions (the market approach), a discounted cash flow analysis (the income approach), and/or by quantifying the amount of money required to replace the future service capability of the assets (the cost approach). The development of a number of these inputs and assumptions requires a significant amount of management judgment and is based upon a number of factors, including identification of comparable market transactions, assumed royalty rates, projected sales volumes, economic lives of the patents and other relevant factors.
The principal considerations for our determination that performing procedures relating to the determination of the value of revenue from non-financial sources and of standalone selling prices of identified performance obligations in dynamic fixed-fee license agreements is a critical audit matter are there was(i) the significant judgment by management inwhen determining the value of the revenue from non-financial sources and of standalone selling prices. This in turn led toprices; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence obtained relating to management’s significant assumptions related to (a) assumed royalty rates, projected sales volumes and identification of comparable market transactions used to estimate the significant assumptions made by managementvalue of revenue from standalone selling prices and (b) identification of comparable market transactions used to establishestimate the value of revenue from non-financial sourcessources; and standalone selling prices, including the assumed royalty rates, projected sales volumes, discount rate and comparable market transactions.In addition,(iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of the value of revenue from non-financial sources and of standalone selling prices of identified performance obligations in dynamic fixed-fee license agreements.These procedures alsoincluded, among others (i) obtaining and reading a selection ofcertain new dynamic fixed-fee license agreements entered into during the year andyear; (ii) testing management’s process for determining the value of revenue from non-financial sources and of standalone selling prices of identified performance obligations in dynamic fixed-fee license agreements and (ii)agreements; (iii) evaluating the appropriateness of the valuation methods andused; (iv) evaluating the reasonableness of management’s significant assumptions used in determining the value of revenue from non-financialnon- financial sources and developing the standalone selling prices includingrelated to assumed royalty rates, projected sales volumes discount rate and identification of comparable market transactions.transactions; and (v) testing the completeness and accuracy of data used by management in the valuation methods. Evaluating the reasonableness of management’s significant assumptions related to assumed royalty rates discount rate and identification of comparable market transactions involved considering prospective third-party market data and previous license agreements entered into by the Company andCompany. Evaluating the consistencyreasonableness of themanagement’s significant assumptions related to projected sales volumevolumes involved considering consistency with historical sales data. Professionals with specialized skill and knowledge were used to assist in the
evaluation of the valuation methods and certainthe significant assumptions, includingassumption related to the identification of comparable market transactionsused to estimate the value of revenue from non-financial sources.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 20, 202015, 2023
We have served as the Company’s auditor since 2002.
INTERDIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| | | | | | | | | | | |
| DECEMBER 31, 2022 | | DECEMBER 31, 2021 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 693,479 | | | $ | 706,282 | |
Short-term investments | 508,298 | | | 235,345 | |
Accounts receivable, less allowances of $0 and $322 | 53,182 | | | 31,113 | |
Prepaid and other current assets | 89,716 | | | 77,545 | |
Total current assets | 1,344,675 | | | 1,050,285 | |
PROPERTY AND EQUIPMENT, NET | 11,338 | | | 13,377 | |
PATENTS, NET | 353,999 | | | 363,585 | |
DEFERRED TAX ASSETS | 94,373 | | | 98,408 | |
OTHER NON-CURRENT ASSETS, NET | 95,720 | | | 102,501 | |
| 555,430 | | | 577,871 | |
TOTAL ASSETS | $ | 1,900,105 | | | $ | 1,628,156 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
| | | |
Accounts payable | $ | 9,997 | | | $ | 7,155 | |
Accrued compensation and related expenses | 38,400 | | | 32,638 | |
Deferred revenue | 189,059 | | | 291,673 | |
| | | |
Dividend payable | 10,384 | | | 10,741 | |
Other accrued expenses | 23,506 | | | 29,354 | |
Total current liabilities | 271,346 | | | 371,561 | |
LONG-TERM DEBT | 607,066 | | | 422,745 | |
LONG-TERM DEFERRED REVENUE | 237,580 | | | 19,463 | |
OTHER LONG-TERM LIABILITIES | 53,600 | | | 61,470 | |
TOTAL LIABILITIES | 1,169,592 | | | 875,239 | |
COMMITMENTS AND CONTINGENCIES | | | |
SHAREHOLDERS’ EQUITY: | | | |
Preferred stock, $0.10 par value, 14,399 shares authorized, 0 shares issued and outstanding | — | | | — | |
Common stock, $0.01 par value, 100,000 shares authorized, 71,923 and 71,720 shares issued and 29,668 and 30,689 shares outstanding | 719 | | | 717 | |
Additional paid-in capital | 717,102 | | | 713,599 | |
Retained earnings | 1,492,046 | | | 1,441,105 | |
Accumulated other comprehensive loss | (916) | | | (571) | |
| 2,208,951 | | | 2,154,850 | |
Treasury stock, 42,255 and 41,031 shares of common held at cost | 1,484,056 | | | 1,409,611 | |
Total InterDigital, Inc. shareholders’ equity | 724,895 | | | 745,239 | |
Noncontrolling interest | 5,618 | | | 7,678 | |
Total equity | 730,513 | | | 752,917 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,900,105 | | | $ | 1,628,156 | |
|
| | | | | | | |
| DECEMBER 31, 2019 | | DECEMBER 31, 2018 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 745,491 |
| | $ | 475,056 |
|
Short-term investments | 179,204 |
| | 470,724 |
|
Accounts receivable, less allowances of $537 and $693 | 28,272 |
| | 35,032 |
|
Prepaid and other current assets | 63,365 |
| | 43,438 |
|
Total current assets | 1,016,332 |
| | 1,024,250 |
|
PROPERTY AND EQUIPMENT, NET | 10,217 |
| | 10,051 |
|
PATENTS, NET | 436,339 |
| | 454,567 |
|
DEFERRED TAX ASSETS | 73,168 |
| | 77,225 |
|
OTHER NON-CURRENT ASSETS | 76,026 |
| | 60,465 |
|
| 595,750 |
| | 602,308 |
|
TOTAL ASSETS | $ | 1,612,082 |
| | $ | 1,626,558 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| | |
CURRENT LIABILITIES: | | | |
Current portion of long-term debt | $ | 94,170 |
| | $ | — |
|
Accounts payable | 13,393 |
| | 19,367 |
|
Accrued compensation and related expenses | 29,162 |
| | 26,838 |
|
Deferred revenue | 146,654 |
| | 111,672 |
|
Taxes payable | 51 |
| | 1,508 |
|
Dividend payable | 10,746 |
| | 11,627 |
|
Other accrued expenses | 11,382 |
| | 8,383 |
|
Total current liabilities | 305,558 |
| | 179,395 |
|
LONG-TERM DEBT | 350,588 |
| | 317,377 |
|
LONG-TERM DEFERRED REVENUE | 123,653 |
| | 157,634 |
|
OTHER LONG-TERM LIABILITIES | 46,002 |
| | 34,139 |
|
| | | |
TOTAL LIABILITIES | 825,801 |
| | 688,545 |
|
| | | |
COMMITMENTS AND CONTINGENCIES |
| |
|
| | | |
SHAREHOLDERS’ EQUITY: | | | |
Preferred Stock, $0.10 par value, 14,399 shares authorized, 0 shares issued and outstanding | — |
| | — |
|
Common Stock, $0.01 par value, 100,000 shares authorized, 71,268 and 71,134 shares issued and 30,701 and 33,529 shares outstanding | 712 |
| | 711 |
|
Additional paid-in capital | 727,402 |
| | 685,512 |
|
Retained earnings | 1,412,779 |
| | 1,435,970 |
|
Accumulated other comprehensive loss | (74 | ) | | (2,471 | ) |
| 2,140,819 |
| | 2,119,722 |
|
Treasury stock, 40,567 and 37,605 shares of common held at cost | 1,379,262 |
| | 1,182,993 |
|
Total InterDigital, Inc. shareholders’ equity | 761,557 |
| | 936,729 |
|
Noncontrolling interest | 24,724 |
| | 1,284 |
|
Total equity | 786,281 |
| | 938,013 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,612,082 |
| | $ | 1,626,558 |
|
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
REVENUES | $ | 457,794 | | | $ | 425,409 | | | $ | 358,991 | |
OPERATING EXPENSES: | | | | | |
Research and portfolio development | 185,202 | | | 200,484 | | | 204,360 | |
Licensing | 71,419 | | | 64,625 | | | 50,464 | |
General and administrative | 47,377 | | | 61,217 | | | 48,999 | |
Restructuring activities | 3,280 | | | 27,877 | | | — | |
Total Operating expenses | 307,278 | | | 354,203 | | | 303,823 | |
| | | | | |
Income from operations | 150,516 | | | 71,206 | | | 55,168 | |
| | | | | |
INTEREST EXPENSE | (29,496) | | | (25,225) | | | (40,799) | |
OTHER (EXPENSE) INCOME, NET | (3,457) | | | 11,575 | | | 16,924 | |
Income before income taxes | 117,563 | | | 57,556 | | | 31,293 | |
INCOME TAX (PROVISION) BENEFIT | (25,502) | | | (15,368) | | | 6,648 | |
NET INCOME | $ | 92,061 | | | $ | 42,188 | | | $ | 37,941 | |
Net loss attributable to noncontrolling interest | (1,632) | | | (13,107) | | | (6,860) | |
NET INCOME ATTRIBUTABLE TO INTERDIGITAL, INC. | $ | 93,693 | | | $ | 55,295 | | | $ | 44,801 | |
NET INCOME PER COMMON SHARE — BASIC | $ | 3.11 | | | $ | 1.80 | | | $ | 1.46 | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC | 30,106 | | | 30,764 | | | 30,776 | |
NET INCOME PER COMMON SHARE — DILUTED | $ | 3.07 | | | $ | 1.77 | | | $ | 1.44 | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED | 30,485 | | | 31,253 | | | 31,058 | |
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 1.40 | | | $ | 1.40 | | | $ | 1.40 | |
|
| | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, |
| 2019 | | 2018 | | 2017 |
REVENUES: | | | | | |
Patent licensing royalties | $ | 307,431 |
| | $ | 302,060 |
| | $ | 512,358 |
|
Patent sales | 975 |
| | 750 |
| | — |
|
Technology solutions | 10,518 |
| | 4,594 |
| | 20,580 |
|
Total Revenue | 318,924 |
| | 307,404 |
| | 532,938 |
|
OPERATING EXPENSES: | | | | | |
Patent administration and licensing | 154,940 |
| | 124,081 |
| | 102,651 |
|
Development | 74,860 |
| | 69,698 |
| | 75,724 |
|
Selling, general and administrative | 51,289 |
| | 51,030 |
| | 53,068 |
|
Total Operating Expenses | 281,089 |
| | 244,809 |
| | 231,443 |
|
Income from operations | 37,835 |
| | 62,595 |
| | 301,495 |
|
Interest expense | (40,955 | ) | | (35,956 | ) | | (17,845 | ) |
OTHER INCOME (EXPENSE), NET | 29,062 |
| | 5,419 |
| | 8,740 |
|
Income before income taxes | 25,942 |
| | 32,058 |
| | 292,390 |
|
INCOME TAX BENEFIT (PROVISION) | (10,991 | ) | | 27,417 |
| | (121,676 | ) |
NET INCOME | $ | 14,951 |
| | $ | 59,475 |
| | $ | 170,714 |
|
Net loss attributable to noncontrolling interest | (5,977 | ) |
| (5,556 | ) |
| (5,506 | ) |
NET INCOME ATTRIBUTABLE TO INTERDIGITAL, INC. | $ | 20,928 |
| | $ | 65,031 |
| | $ | 176,220 |
|
NET INCOME PER COMMON SHARE — BASIC | $ | 0.66 |
| | $ | 1.89 |
| | $ | 5.09 |
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC | 31,546 |
| | 34,491 |
| | 34,605 |
|
NET INCOME PER COMMON SHARE — DILUTED | $ | 0.66 |
| | $ | 1.84 |
| | $ | 4.93 |
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED | 31,785 |
| | 35,307 |
| | 35,779 |
|
CASH DIVIDENDS DECLARED PER COMMON SHARE | $ | 1.40 |
| | $ | 1.40 |
| | $ | 1.30 |
|
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income | $ | 92,061 | | | $ | 42,188 | | | $ | 37,941 | |
Unrealized loss on investments, net of tax | (345) | | | (387) | | | (110) | |
Comprehensive income | $ | 91,716 | | | $ | 41,801 | | | $ | 37,831 | |
Comprehensive loss attributable to noncontrolling interest | (1,632) | | | (13,107) | | | (6,860) | |
Total comprehensive income attributable to InterDigital, Inc. | $ | 93,348 | | | $ | 54,908 | | | $ | 44,691 | |
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Net income | $ | 14,951 |
| | $ | 59,475 |
| | $ | 170,714 |
|
Unrealized gain (loss) on investments, net of tax | 2,397 |
| | 61 |
| | (1,569 | ) |
Comprehensive income | $ | 17,348 |
| | $ | 59,536 |
| | $ | 169,145 |
|
Comprehensive loss attributable to noncontrolling interest | (5,977 | ) | | (5,556 | ) | | (5,506 | ) |
Total comprehensive income attributable to InterDigital, Inc. | $ | 23,325 |
| | $ | 65,092 |
| | $ | 174,651 |
|
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated Other Comprehensive Loss | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | | Treasury Stock | | Non-Controlling Interest | | Total Shareholders' Equity |
| Shares | | Amount | | | | | Shares | | Amount | |
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BALANCE, DECEMBER 31, 2019 | 71,268 | | | $ | 712 | | | $ | 727,402 | | | $ | 1,412,779 | | | $ | (74) | | | 40,567 | | | $ | (1,379,262) | | | $ | 24,724 | | | $ | 786,281 | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 44,801 | | | — | | | — | | | — | | | — | | | 44,801 | |
Proceeds from and increases in noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,333 | | | 5,333 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,860) | | | (6,860) | |
Net change in unrealized loss on short-term investments | — | | | — | | | — | | | — | | | (110) | | | — | | | — | | | — | | | (110) | |
Dividends declared ($1.40 per share) | — | | | — | | | 498 | | | (43,611) | | | — | | | — | | | — | | | — | | | (43,113) | |
Exercise of common stock options | 49 | | | 1 | | | 1,891 | | | — | | | — | | | — | | | — | | | — | | | 1,892 | |
Issuance of common stock, net | 72 | | | 1 | | | (1,752) | | | — | | | — | | | — | | | — | | | — | | | (1,751) | |
Amortization of unearned compensation | — | | | — | | | 10,442 | | | — | | | — | | | — | | | — | | | — | | | 10,442 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | 6 | | | (349) | | | — | | | (349) | |
BALANCE, DECEMBER 31, 2020 | 71,389 | | | $ | 714 | | | $ | 738,481 | | | $ | 1,413,969 | | | $ | (184) | | | 40,573 | | | $ | (1,379,611) | | | $ | 23,197 | | | $ | 796,566 | |
Adjustment related to the adoption of ASU 2020-06 | — | | | — | | | (55,349) | | | 15,587 | | | — | | | — | | | — | | | — | | | (39,762) | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 55,295 | | | — | | | — | | | — | | | — | | | 55,295 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,107) | | | (13,107) | |
Proceeds from and increases in noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 100 | | | 100 | |
Noncontrolling interest distribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,512) | | | (2,512) | |
Net change in unrealized loss on short-term investments | — | | | — | | | — | | | — | | | (387) | | | — | | | — | | | — | | | (387) | |
Dividends declared ($1.40 per share) | — | | | — | | | 734 | | | (43,746) | | | — | | | — | | | — | | | — | | | (43,012) | |
Exercise of common stock options | 157 | | | 1 | | | 7,949 | | | — | | | — | | | — | | | — | | | — | | | 7,950 | |
Issuance of common stock, net | 174 | | | 2 | | | (6,952) | | | — | | | — | | | — | | | — | | | — | | | (6,950) | |
Amortization of unearned compensation | — | | | — | | | 28,736 | | | — | | | — | | | — | | | — | | | — | | | 28,736 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | 458 | | | (30,000) | | | — | | | (30,000) | |
BALANCE, DECEMBER 31, 2021 | 71,720 | | | $ | 717 | | | $ | 713,599 | | | $ | 1,441,105 | | | $ | (571) | | | 41,031 | | | $ | (1,409,611) | | | $ | 7,678 | | | $ | 752,917 | |
Net income attributable to InterDigital, Inc. | — | | | — | | | — | | | 93,693 | | | — | | | — | | | — | | | — | | | 93,693 | |
Net loss attributable to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,632) | | | (1,632) | |
Noncontrolling interest distribution | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,928) | | | (1,928) | |
Non-controlling interest contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,500 | | | 1,500 | |
Net change in unrealized loss on short-term investments | — | | | — | | | — | | | — | | | (345) | | | — | | | — | | | — | | | (345) | |
Dividends declared ($1.40 per share) | — | | | — | | | 803 | | | (42,752) | | | — | | | — | | | — | | | — | | | (41,949) | |
Exercise of common stock options | 24 | | | — | | | 1,226 | | | — | | | — | | | — | | | — | | | — | | | 1,226 | |
Issuance of common stock, net | 179 | | | 2 | | | (6,259) | | | — | | | — | | | — | | | — | | | — | | | (6,257) | |
Amortization of unearned compensation | — | | | — | | | 22,127 | | | — | | | — | | | — | | | — | | | — | | | 22,127 | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | 1,224 | | | (74,445) | | | — | | | (74,445) | |
Net convertible note hedge transactions, net of tax | — | | | — | | | (54,257) | | | — | | | — | | | — | | | — | | | — | | | (54,257) | |
Net warrant transactions | — | | | — | | | 39,863 | | | — | | | — | | | — | | | — | | | — | | | 39,863 | |
BALANCE, DECEMBER 31, 2022 | 71,923 | | | $ | 719 | | | $ | 717,102 | | | $ | 1,492,046 | | | $ | (916) | | | 42,255 | | | $ | (1,484,056) | | | $ | 5,618 | | | $ | 730,513 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | | Treasury Stock | | Non-Controlling Interest | | Total Shareholders' Equity |
| Shares | | Amount | | | | | Shares | | Amount | |
BALANCE, DECEMBER 31, 2016 | 70,318 |
| | $ | 703 |
| | $ | 683,549 |
| | $ | 1,127,380 |
| | $ | (514 | ) | | 36,020 |
| | $ | (1,064,795 | ) | | $ | 8,045 |
| | $ | 754,368 |
|
Net income attributable to InterDigital, Inc. | — |
| | — |
| | — |
| | 176,220 |
| | — |
| | — |
| | — |
| | — |
| | 176,220 |
|
Proceeds from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,801 |
| | 6,801 |
|
Net (loss) income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,506 | ) | | (5,506 | ) |
Net change in unrealized gain (loss) on short-term investments | — |
| | — |
| | — |
| | — |
| | (1,569 | ) | | — |
| | — |
| | — |
| | (1,569 | ) |
Dividends Declared ($1.30 per share) | — |
| | — |
| | 846 |
| | (45,968 | ) | | — |
| | — |
| | — |
| | — |
| | (45,122 | ) |
Exercise of Common Stock options | 9 |
| | 1 |
| | 381 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 382 |
|
Issuance of Common Stock, net | 422 |
| | 3 |
| | (22,798 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (22,795 | ) |
Amortization of unearned compensation | — |
| | — |
| | 18,062 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 18,062 |
|
Repurchase of Common Stock | — |
| | — |
| | — |
| | — |
| | — |
| | 107 |
| | (7,693 | ) | | — |
| | (7,693 | ) |
BALANCE, DECEMBER 31, 2017 | 70,749 |
| | $ | 707 |
| | $ | 680,040 |
| | $ | 1,257,632 |
| | $ | (2,083 | ) | | 36,127 |
| | $ | (1,072,488 | ) | | $ | 9,340 |
| | $ | 873,148 |
|
Cumulative effect of change in accounting principle | — |
| | — |
| | — |
| | 161,701 |
| | (449 | ) | | — |
| | — |
| | — |
| | 161,252 |
|
Net income attributable to InterDigital, Inc. | — |
| | — |
| | — |
| | 65,031 |
| | — |
| | — |
| | — |
| | — |
| | 65,031 |
|
Distribution preference | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,500 | ) | | (2,500 | ) |
Net (loss) income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,556 | ) | | (5,556 | ) |
Net change in unrealized gain (loss) on short-term investments | — |
| | — |
| | — |
| | — |
| | 61 |
| | — |
| | — |
| | — |
| | 61 |
|
Dividends Declared ($1.40 per share) | — |
| | — |
| | 472 |
| | (48,394 | ) | | — |
| | — |
| | — |
| | — |
| | (47,922 | ) |
Exercise of Common Stock options and warrants | 153 |
| | 2 |
| | 6,721 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,723 |
|
Issuance of Common Stock, net | 232 |
| | 2 |
| | (8,810 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8,808 | ) |
Amortization of unearned compensation | — |
| | — |
| | 7,089 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,089 |
|
Repurchase of Common Stock | — |
| | — |
| | — |
| | — |
| | — |
| | 1,478 |
| | (110,505 | ) | | — |
| | (110,505 | ) |
BALANCE, DECEMBER 31, 2018 | 71,134 |
| | $ | 711 |
| | $ | 685,512 |
| | $ | 1,435,970 |
| | $ | (2,471 | ) | | 37,605 |
| | $ | (1,182,993 | ) | | $ | 1,284 |
| | $ | 938,013 |
|
Net income attributable to InterDigital, Inc. | — |
| | — |
| | — |
| | 20,928 |
| | — |
| | — |
| | — |
| | — |
| | 20,928 |
|
Proceeds from and increases in noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 29,417 |
| | 29,417 |
|
Net (loss) income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,977 | ) | | (5,977 | ) |
Net change in unrealized gain (loss) on short-term investments | — |
| | — |
| | — |
| | — |
| | 2,397 |
| | — |
| | — |
| | — |
| | 2,397 |
|
Dividends Declared ($1.40 per share) | — |
| | — |
| | 401 |
| | (44,119 | ) | | — |
| | — |
| | — |
| | — |
| | (43,718 | ) |
Exercise of common stock options | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Issuance of Common Stock, net | 134 |
| | 1 |
| | (4,368 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,367 | ) |
Amortization of unearned compensation | — |
| | — |
| | 7,603 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,603 |
|
Repurchase of Common Stock | — |
| | — |
| | — |
| | — |
| | — |
| | 2,962 |
| | (196,269 | ) | | — |
| | (196,269 | ) |
Equity component of debt, net of tax | — |
| | — |
| | 56,917 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 56,917 |
|
Net convertible note hedge transactions, net of tax | — |
| | — |
| | (49,740 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (49,740 | ) |
Net warrant transactions | — |
| | — |
| | 43,416 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 43,416 |
|
Deferred financing costs allocated to equity, net of tax | — |
| | — |
| | (1,692 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,692 | ) |
Reacquisition of equity component of debt due to prepayment, net of tax | — |
| | — |
| | (10,649 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (10,649 | ) |
BALANCE, DECEMBER 31, 2019 | 71,268 |
| | $ | 712 |
| | $ | 727,402 |
| | $ | 1,412,779 |
| | $ | (74 | ) | | 40,567 |
| | $ | (1,379,262 | ) | | $ | 24,724 |
| | $ | 786,281 |
|
The accompanying notes are an integral part of these statements
INTERDIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, |
| 2019 | | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income | $ | 14,951 |
| | $ | 59,475 |
| | $ | 170,714 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 77,094 |
| | 66,108 |
| | 57,053 |
|
Non-cash interest expense, net | 18,709 |
| | 13,509 |
| | 13,105 |
|
Non-cash change in fair value | 710 |
| | 3,884 |
| | — |
|
Gain on asset acquisition and sale of business | (22,690 | ) | | — |
| | — |
|
Change in deferred revenue | (7,749 | ) | | 6,966 |
| | (36,892 | ) |
Deferred income taxes | 4,123 |
| | (45,426 | ) | | 64,950 |
|
Share-based compensation | 7,603 |
| | 7,089 |
| | 18,062 |
|
Impairment of long-term investment | 3,312 |
| | 200 |
| | — |
|
Loss on extinguishment of debt | 5,488 |
| | — |
| | — |
|
Loss (gain) on disposal of assets | 119 |
| | 8,323 |
| | — |
|
Other | 623 |
| | (625 | ) | | (2 | ) |
(Increase) decrease in assets: | | | | | |
Receivables | 6,742 |
| | 31,615 |
| | 12,171 |
|
Deferred charges and other assets | (27,206 | ) | | (6,065 | ) | | 19,426 |
|
Increase (decrease) in liabilities: | | | | | |
Accounts payable | (638 | ) | | 6,203 |
| | (3,789 | ) |
Accrued compensation and other expenses | 9,699 |
| | 254 |
| | (3,218 | ) |
Accrued taxes payable and other tax contingencies | (1,457 | ) | | (4,718 | ) | | 4,220 |
|
Net cash provided by operating activities | 89,433 |
| | 146,792 |
| | 315,800 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Purchases of short-term investments | (92,436 | ) | | (142,555 | ) | | (930,016 | ) |
Sales of short-term investments | 389,032 |
| | 399,105 |
| | 751,308 |
|
Purchases of property and equipment | (4,509 | ) | | (2,576 | ) | | (2,071 | ) |
Capitalized patent costs | (33,481 | ) | | (32,069 | ) | | (34,933 | ) |
Acquisition of patents | — |
| | (2,250 | ) | | — |
|
Acquisition of business, net of cash acquired | — |
| | (142,985 | ) | | — |
|
Proceeds from sale of business | 10,000 |
| | — |
| | — |
|
Long-term investments | (350 | ) | | (6,686 | ) | | (4,585 | ) |
Net cash provided by (used in) investing activities | 268,256 |
| | 69,984 |
| | (220,297 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Net proceeds from exercise of stock options | 2 |
| | 6,723 |
| | 382 |
|
Proceeds from issuance of senior convertible notes | 400,000 |
| | — |
| | — |
|
Payments on long-term debt | (221,091 | ) | | — |
| | — |
|
Purchase of convertible bond hedge | (72,000 | ) | | — |
| | — |
|
Payment for warrant unwind | (4,184 | ) | | — |
| | — |
|
Prepayment penalty on long term debt | (10,763 | ) | | — |
| | — |
|
Proceeds from hedge unwind | 9,038 |
| | — |
| | — |
|
Proceeds from issuance of warrants | 47,600 |
| | — |
| | — |
|
Payments of debt issuance costs | (8,375 | ) | | — |
| | — |
|
Proceeds from non-controlling interests | 15,666 |
| | — |
| | 6,801 |
|
Dividends paid | (44,580 | ) | | (48,468 | ) | | (43,255 | ) |
Shares withheld for taxes | (4,368 | ) | | (8,807 | ) | | (22,798 | ) |
Repurchase of common stock | (196,269 | ) | | (110,505 | ) | | (7,693 | ) |
Net cash used in financing activities | (89,324 | ) | | (161,057 | ) | | (66,563 | ) |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 268,365 |
| | 55,719 |
| | 28,940 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 488,733 |
| | 433,014 |
| | 404,074 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 757,098 |
| | $ | 488,733 |
| | $ | 433,014 |
|
______________ | | | | | | | | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, |
| 2022 | | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income | $ | 92,061 | | | $ | 42,188 | | | $ | 37,941 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 78,571 | | | 78,193 | | | 81,041 | |
Non-cash interest expense, net | 1,645 | | | 6,867 | | | 18,093 | |
Non-cash change in fair value | 1,686 | | | (7,649) | | | (5,588) | |
| | | | | |
Change in deferred revenue | 85,403 | | | (16,868) | | | 24,397 | |
Deferred income taxes | 18,518 | | | (7,503) | | | (7,182) | |
Share-based compensation | 22,127 | | | 28,736 | | | 10,442 | |
| | | | | |
Loss on extinguishment of debt | 11,190 | | | — | | | — | |
Loss on disposal of assets | — | | | — | | | 7,539 | |
Impairment of assets | 2,427 | | | 13,228 | | | — | |
Other | — | | | — | | | 412 | |
(Increase) decrease in assets: | | | | | |
Receivables | (22,069) | | | (15,103) | | | 11,354 | |
Deferred charges and other assets | (13,453) | | | (9,894) | | | (26,256) | |
Increase (decrease) in liabilities: | | | | | |
Accounts payable | 6,868 | | | (1,803) | | | (2,850) | |
Accrued compensation and other expenses | 1,065 | | | 20,000 | | | 14,124 | |
Net cash provided by operating activities | 286,039 | | | 130,392 | | | 163,467 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Purchases of short-term investments | (532,724) | | | (527,800) | | | (529,559) | |
Sales of short-term investments | 260,771 | | | 744,353 | | | 256,726 | |
Purchases of property and equipment | (3,156) | | | (2,511) | | | (11,793) | |
Capitalized patent costs | (39,597) | | | (33,416) | | | (30,615) | |
Acquisition of patents | — | | | (2,350) | | | — | |
| | | | | |
Proceeds from sale of business | — | | | — | | | 910 | |
Long-term investments | — | | | 1,363 | | | 4,285 | |
Net cash (used in) provided by investing activities | (314,706) | | | 179,639 | | | (310,046) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| | | | | |
Proceeds from issuance of convertible senior notes | 460,000 | | | — | | | — | |
Purchase of convertible bond hedge | (80,500) | | | — | | | — | |
Proceeds from issuance of warrants | 43,700 | | | — | | | — | |
Payments on long-term debt | (282,499) | | | — | | | (94,909) | |
Proceeds from bond hedge unwind | 11,851 | | | — | | | — | |
Payment for warrant unwind | (3,837) | | | — | | | — | |
Payments of debt issuance costs | (9,829) | | | — | | | — | |
Repurchase of common stock | (74,445) | | | (30,000) | | | (349) | |
Net proceeds from exercise of stock options | 1,226 | | | 7,950 | | | 1,892 | |
Non-controlling interest contribution | 1,500 | | | 100 | | | 5,333 | |
Non-controlling interest distribution | — | | | (2,512) | | | — | |
Taxes withheld upon restricted stock unit vestings | (6,257) | | | (6,950) | | | (1,751) | |
Dividends paid | (42,306) | | | (43,058) | | | (43,072) | |
Net cash provided by (used in) financing activities | 18,604 | | | (74,470) | | | (132,856) | |
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (10,063) | | | 235,561 | | | (279,435) | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 713,224 | | | 477,663 | | | 757,098 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 703,161 | | | $ | 713,224 | | | $ | 477,663 | |
____________Refer to Note 1, "Background and Basis of Presentation," for additional supplemental cash flow information. Additionally, refer to Note 6,5, "Cash, Cash Equivalents, Restricted Cash and Marketable Securities" for a reconciliation to the consolidated balance sheets and Note 17, "Leases" for information regarding the impact of our adoption of the new leases accounting standard, ASC 842, on January 1, 2019.sheets.
The accompanying notes are an integral part of these statements.
INTERDIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20192022
1.BACKGROUND AND BASIS OF PRESENTATION | |
1. | BACKGROUND AND BASIS OF PRESENTATION |
InterDigital designs and develops advanced technologies that enable and enhance wireless communications and capabilities. Since our founding in 1972, our engineers have designed and developed a wide range of innovations that are used in digital cellular and wireless products and networks, including 2G, 3G, 4G, 5G and IEEE 802-related products and networks, as well as video processing, coding and display technology. We are a leading contributor of innovation to the wireless communications industry, as well as a leading holder of patents in the video industry.
Principles of Consolidation
The accompanying consolidated financial statements include all of our accounts and all entities in which we have a controlling interest and/or are required to be consolidated in accordance with the Generally Accepted Accounting Principles in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.
In determining whether we are the primary beneficiary of a variable interest entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both the power to direct the economically significant activities of the entity and the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. These considerations impact the way we account for our existing collaborative relationships and other arrangements. We continuously assess whether we are the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in us consolidating or deconsolidating our partner(s) to collaborations and other arrangements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. If different assumptions were made or different conditions had existed, our financial results could have been materially different.
The Company has analyzed the impact of the ongoing Coronavirus pandemic (“COVID-19”) on its financial statements as of December 31, 2022. The Company has determined that the changes to its significant judgments and estimates as a result of COVID-19 did not have a material impact on its financial statements. The potential impact of COVID-19 will continue to be analyzed going forward.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Prior Periods Financial Statement Revision
In connection withDuring 2022, the preparationCompany made reclassifications between the operating expenses lines on the consolidated income statement in order to more clearly reflect the Company’s investments to create and protect the value of our innovations. The Company grouped research and portfolio related costs within the line "Research and portfolio development", previously referred to as "Development", which resulted in reclassifying certain portfolio related costs out of the condensed consolidated financial statements for first quarter 2019, it was identified that we incorrectly attributed tax benefit"Licensing" line, previously referred to the net loss attributable to noncontrolling interest in our presentation of noncontrolling interest.
as "We assessed the materialityPatent administration and licensing", and into "Research and portfolio development." The impact of this misstatement on prior periods’ financial statements in accordance with ASC Topic 250, Accounting Changesreclassification was $110.9 million, $111.1 million, and Error Corrections, (“ASC 250”)$119.7 million for the twelve months ended December 31, 2022, 2021, and concluded it was not material2020, respectively. Additionally, the previous "Selling, general, and administrative" line is now referred to any prior annual or interim periods. In accordance with ASC 250, we have corrected our presentationas "General and administrative".
Supplemental Cash Flow Information
The following table presents additional supplemental cash flow information for the year ended December 31, 2019, 20182022, 2021 and 20172020 (in thousands):
| | | | | | | | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, |
SUPPLEMENTAL CASH FLOW INFORMATION: | 2022 | | 2021 | | 2020 |
Interest paid | $ | 13,429 | | | $ | 8,000 | | | $ | 8,712 | |
Income taxes paid, including foreign withholding taxes | 6,805 | | | 23,091 | | | 26,233 | |
Non-cash investing and financing activities: | | | | | |
Dividend payable | 10,384 | | | 10,741 | | | 10,786 | |
| | | | | |
Accrued debt issuance costs | 100 | | | — | | | — | |
Non-cash acquisition of patents | 30,100 | | | — | | | 33,300 | |
Non-cash distribution of patents | 1,928 | | | — | | | — | |
Right-of-use assets obtained in exchange of operating lease liabilities | 6,644 | | | 739 | | | 2,524 | |
Accrued capitalized patent costs and property and equipment | 4,026 | | | 2,021 | | | (436) | |
|
| | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, |
SUPPLEMENTAL CASH FLOW INFORMATION: | 2019 | | 2018 | | 2017 |
Interest paid | $ | 7,886 |
| | $ | 4,740 |
| | $ | 4,740 |
|
Income taxes paid, including foreign withholding taxes | 24,229 |
| | 33,904 |
| | 66,793 |
|
Non-cash investing and financing activities: | | | | | |
Dividend payable | 10,746 |
| | 11,627 |
| | 12,156 |
|
Increases in noncontrolling interests | 13,750 |
| | — |
| | — |
|
Non-cash acquisition of patents | 22,500 |
| | — |
| | 32,500 |
|
Accrued capitalized patent costs and property and equipment | 1,619 |
| | (2,789 | ) | | 1 |
|
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING GUIDANCE | |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING GUIDANCE |
Foreign Currency Translation
The functional currency of substantially all of the Company's wholly-owned subsidiaries is the U.S. dollar. Certain subsidiaries have monetary assets and liabilities that are denominated in a currency that is different than the functional currency. The gains and losses resulting from this remeasurement and translation of monetary assets denominated in a currency that is different than the functional currency are reflected in the determination of net income (loss).income.
Cash, Cash Equivalents, Restricted Cash and Marketable Securities
We classify all highly liquid investment securities with original maturities of three months or less at date of purchase as cash equivalents. Cash that is held for a specific purpose and therefore not available to the Company for immediate or general business use is classified as restricted cash. Our investments are comprised of mutual and exchange traded funds, commercial paper, United States and municipal government obligations and corporate securities. Management determines the appropriate classification of our investments at the time of acquisition and re-evaluates such determination at each balance sheet date.
As of December 31, 20192022 and 2018,2021, the majority of our marketable securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported net-of-tax as a separate component of shareholders’ equity. Substantially all of our investments are investment grade government and corporate debt securities that have maturities of less than 2two years, and we have both the ability and intent to hold the investments until maturity.
Other-than-Temporary Impairments
We review our investment portfolio during each reporting period to determine whether there are identified events or circumstances that would indicate there is a decline in the fair value that is considered to be other-than-temporary. For non-public investments, if there are no identified events or circumstances that would have a significant adverse effect on the fair value of the investment, then the fair value is not estimated. If an investment is deemed to have experienced an other-than-temporary decline below its cost basis, we reduce the carrying amount of the investment to its quoted or estimated fair value, as applicable, and establish a new cost basis for the investment. We charge the impairment to the "Other Income (Expense), Net"(expense) income, net" line of our consolidated statements of income.
Intangible Assets
Patents
We capitalize external costs, such as filing fees and associated attorney fees, incurred to obtain issued patents and patent license rights. We expense costs associated with maintaining and defending patents subsequent to their issuance in the period incurred. We amortize capitalized patent costs for internally generated patents on a straight-line basis over 10 years, which represents the estimated useful lives of the patents. The ten-year estimated useful life for internally generated patents is based on our assessment of such factors as: the integrated nature of the portfolios being licensed, the overall makeup of the portfolio over time, and the length of license agreements for such patents. The estimated useful lives of acquired patents and patent rights, however, have been and will continue to be based on a separate analysis related to each acquisition and may differ from the estimated useful lives of internally generated patents. The average estimated useful life of acquired patents is 9.69.7 years. We assess the potential impairment to all capitalized net patent costs when events or changes in circumstances indicate that the carrying amount of our patent portfolio may not be recoverable.
Goodwill
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination. We review impairment of goodwill annually on the first day of the fourth quarter.quarter or if circumstances indicate a triggering event has occurred. We first assess qualitative factors to determine whether it is more likely than not that the fair value of aour one reporting unit is less than its carrying amount as a basis for determining whether a quantitative goodwill impairment test is necessary. If we conclude it is more likely than not that the fair value of athe reporting unit exceeds its carrying amount, we need not perform the quantitative assessment.
If based on the qualitative assessment we believe it is more likely than not that the fair value of athe reporting unit is less than its carrying value, a quantitative assessment test is required to be performed. This assessment requires us to compare the fair value of eachour reporting unit to its carrying value including allocated goodwill. We determine the fair value of our reporting units generally using a combination of the income and market approaches. The income approach is estimated through the discounted cash flow method based on assumptions about future conditions such as future revenue growth rates, new product and technology introductions, gross margins, operating expenses, discount rates, future economic and market conditions, and other assumptions. The market approach estimates the fair value of our equity by utilizing the market comparable method which is based on revenue multiples from comparable companies in similar lines of business. If the carrying value of aour reporting unit exceeds the reporting unit’s fair value, a goodwill impairment charge will be recorded for the difference up to the carrying value of goodwill.
The Company acquired goodwill from our acquisition of the patent licensing business of Technicolor (the "Technicolor Patent Acquisition") in 2018 and from our acquisition of Hillcrest Laboratories, Inc. (the "Hillcrest product business") in 2016. Refer to Note 5, "Business Combinations and Other Transactions," for more information regarding these transactions.
The carrying value of goodwill was $22.4 million as of December 31, 20192022 and 2018 was $22.4 million, respectively,December 31, 2021, which was included within "Other Non-Current Assetsnon-current assets, net" in the consolidated balance sheets. NaNNo impairments were recorded during 2019, 20182022, 2021 or 20172020 as a result of our annual goodwill impairment assessment.
Other Intangible Assets
We capitalize the cost of technology solutions and platforms we acquire or license from third parties when they have a future benefit and the development of these solutions and platforms is substantially complete at the time they are acquired or licensed.
Intangible assets consist of acquired patents, existing technology, and trade names. Refer to the above Patents section for more information on acquired patents and existing technology. Our intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 9 to 10 years. We make judgments about the recoverability of purchased finite-lived intangible assets whenever facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we would accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.
Property and Equipment
Property and equipment are stated at cost.cost, less depreciation, amortization and impairments. Depreciation and amortization of property and equipment are provided using the straight-line method. The estimated useful lives for computer equipment, computer software, engineering and test equipment and furniture and fixtures are generally three to five years. Leasehold improvements are amortized over the lesser of their estimated useful lives or their respective lease terms, which are generally five to ten years. Buildings are being depreciated over twenty-five years. Expenditures for major improvements and betterments are capitalized, while minor repairs and maintenance are charged to expense as incurred. Upon the retirement or disposition of property, plant and equipment, the related cost and accumulated depreciation or amortization are removed, and a gain or loss is recorded.
Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases (Topic 842)" or ("ASC 842"), which outlinesWe determine if an arrangement is a comprehensive change to the lease accounting model and supersedes priorat inception. Operating lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months, and also changes the definition of a lease and expands the disclosure requirements of lease arrangements.
The Company adopted this guidance on January 1, 2019 using the modified retrospective transition effective date method. As part of that adoption, we have elected the package of three practical expedients, which includes the following:represent our right to use an entity may elect not to reassess whether expired or existing contracts contain a lease under the revised definition of a lease; an entity may elect not to reassess the lease classificationunderlying asset for expired or existing leases; and an entity may elect not to reassess whether previously capitalized initial direct costs would qualify for capitalization. The Company has elected not to utilize the hindsight expedient in determining the lease term and lease liabilities represent our obligation to not recordmake lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date, except short-term leases with an initialoriginal term of 12 months or less, based on the present value of lease payments over the lease term. As most of our balance sheet. Additionally,leases do not provide an implicit rate, we generally use an incremental borrowing rate based on the Company has elected to accountestimated rate of interest for collateralized borrowing over a similar term of the lease componentspayments at commencement date. The operating lease right-of-use assets also includes any lease payments made and non-lease components as a singleexcludes lease component for all asset classes.incentives. Lease expense is recognized over the expected term on a straight-line basis. Leases with a lease term of 12 months or less are accounted for using the practical expedient which allows for straight-line rent expense over the remaining term of the lease.
Internal-Use Software Costs
We capitalize costs associated with software developed for internal use that are incurred during the software development stage. Such costs are limited to expenses incurred after management authorizes and commits to a computer software project, believes that it is more likely than not that the project will be completed, the software will be used to perform the intended function with an estimated service life of two years or more, and the completion of conceptual formulation, design and testing of possible software project alternatives (the preliminary design stage). Costs incurred after final acceptance testing has been successfully completed are expensed. Capitalized computer software costs are amortized over their estimated useful life of three years.
All computer software costs capitalized to date relate to the purchase, development and implementation of engineering, accounting and other enterprise software.
Impairment of Long-Lived Assets
We evaluate long-lived assets for impairment when factors indicate that the carrying value of an asset may not be recoverable. When factors indicate that such assets should be evaluated for possible impairment, we review whether we will be able to realize our long-lived assets by analyzing the projected undiscounted cash flows in measuring whether the asset is recoverable. In 2022, we recognized a $2.4 million impairment, comprised of $0.4 million of property and equipment and $2.0 million of right of use assets, related to the abandonment of portions of three of our leased properties, which was included within “Restructuring activities” in the consolidated statement of income. In 2021, a non-controlled subsidiary that we consolidate for financial statement purposes approved a plan to sell certain patents, which resulted in the Company recognizing a $13.2 million impairment, as discussed further in Note 20, "Restructuring Activities". In 2020, we recognized a $1.1 million impairment, comprised of $0.8 million of Property, Plant, and Equipment, and $0.3 million of Operating lease right-of-use asset related to the abandonment of one of our leased properties, which was included within “Operating Expenses” in the consolidated statement of income.
Revenue Recognition
We didderive the vast majority of our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depend upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements are often complex and include multiple performance obligations. These agreements can include, without limitation, performance obligations related to the settlement of past patent infringement liabilities, patent and/or know-how licensing royalties on covered products sold by licensees, access to a portfolio of technology as it exists at a point in time, and access to a portfolio of technology at a point in time along with promises to provide any technology updates to the portfolio during the term.
In accordance with US GAAP, we use a five-step model to achieve the core underlying principle that an entity should recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. These steps include (1) identifying the contract with the customer, (2) identifying the performance obligations, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue as the entity satisfies the performance obligation(s). Additionally, we have elected to utilize certain practical expedients in the application of ASC 606. In evaluating the presence of a significant financing component in our agreements, we utilize the practical expedient to exclude any contracts wherein the gap between payment by our customers and the delivery of our performance obligation is less than one year.We have also elected to utilize the practical expedient related to costs of obtaining a contract where an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. Timing of revenue recognition may differ significantly from the timing of invoicing to customers. Contract assets are included in accounts receivable and represent unbilled amounts expected to be received from customers in future periods, where the revenue recognized to date exceeds the amount billed, and right to payment is subject to the underlying contractual terms. Contract assets are classified as long-term assets if the payments are expected to be received more than one year from the reporting date. Contract assets due within less than twelve months of the balance sheet date are included within accounts receivable in our consolidated balance sheets. Contract assets due more than twelve months after the balance sheet date are included within other non-current assets.
For certain patent license agreements or other contractual arrangements, the amount of consideration that we will receive is uncertain.In such cases, we estimate and recognize licensing revenues only when we have a contract, as defined in the revenue recognition guidance. Such estimates are only recognized to the extent it is probable that a significant reversal of cumulative revenues recognized will not occur. We analyze the risk of a significant revenue reversal considering both the likelihood and magnitude of the reversal and, if necessary, constrain the amount of estimated revenues recognized in order to mitigate this risk, which may result in recognizing revenues less than amounts we expect we are most likely to receive. These aforementioned estimates may require significant judgment.
Patent License Agreements
Upon signing a patent license agreement, we provide the licensee permission to use our patented inventions in specific applications. We account for patent license agreements in accordance with the guidance indicated above.
Certain patent license agreements contain revenue from non-financial sources in the form of patents received from the customer. Under our patent license agreements, we typically receive one or a combination of the following forms of payment as consideration for permitting our licensees to use our patented inventions in their applications and products
Consideration for Past Patent Royalties
Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with a licensee that utilized our patented inventions prior to signing a patent license agreement with us or from the resolution of a disagreement or arbitration with a licensee over the specific terms of an existing license agreement. We may also receive consideration for past patent royalties in connection with the settlement of patent litigation where there was no prior patent license agreement. In each of these cases, we record the consideration as revenue as prescribed by the five-step model.
Fixed-Fee Agreements
Fixed-fee license agreements include fixed, non-refundable royalty payments that fulfill the licensee’s obligations to us under a patent license agreement for a specified time period or for the term of the agreement for specified products, under certain patents or patent claims, for sales in certain countries, or a combination thereof - in each case for a specified time period (including for the life of the patents licensed under the agreement).
Dynamic fixed-fee license agreements contain a single performance obligation that represents ongoing access to a portfolio of technology over the license term, since our promise to transfer to the licensee access to the portfolio as it exists at inception of the license, along with promises to provide any technology updates to the portfolio during the term, are not separately identifiable. Upon entering a new agreement, we allocate the transaction price to the performance obligations delivered at signing (e.g. our existing patent portfolio) and future performance obligations (e.g. the technology updates). We use a time-based input method of progress to determine the timing of revenue recognition, and as such we recognize the future deliverables on a straight-line basis over the term of the agreement. We utilize the straight-line method as we believe that it best depicts efforts expended to develop and transfer updates to the customer evenly throughout the term of the agreement.
Static fixed-fee license agreements are fixed-price contracts that generally do not include updates to technology we create after the inception of the license agreement or in which the customer does not stand to substantively benefit from those updates during the term. Although we have any long-livedfew static fixed-fee license agreements, we generally satisfy our performance obligations under such agreements at contract signing, and, as such, revenue is recognized at that time.
Variable Agreements
Upon entering a new variable patent license agreement, the licensee typically agrees to pay royalties or license fees on licensed products sold during the term of the agreement. We utilize the sales- or usage- based royalty exception for these agreements and recognize revenues during the contract term when the underlying sale or usage occurs. Our licensees under variable agreements provide us with quarterly royalty reports that summarize their sales of covered products and their related royalty obligations to us. We typically receive these royalty reports subsequent to the period in which our licensees’ underlying sales occurred. As a result, we are required to estimate revenues and recognize sales-based royalties on such licensed products in the period in which the associated sales occur, considering all relevant information (historical, current and forecasted) that is reasonably available to us. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires us to make assumptions and judgments related to forecasted trends and growth rates used to estimate our licensees’ sales, which could have an impact on the amount of revenue we report on a quarterly basis. As a result of recognizing revenues in the period in which the licensees’ sales occur using estimates, adjustments to revenues are required in subsequent periods to reflect changes in estimates as new information becomes available, primarily resulting from actual amounts reported by our licensees.
Technology Solutions
Technology solutions revenue consists primarily of revenue from royalty payments, software licenses, and engineering services. The nature of these contracts and timing of payments vary. We recognize revenue from royalty payments and license agreements using the same methods described above under our policy for recognizing revenue from patent license agreements. We recognize revenue from engineering services using the percentage of completion method.
Patent Sales
During 2022, we determined patent sales are no longer a part of the company’s on-going central operations and therefore will no longer be accounted for as revenue.
Accounts Receivable
Accounts receivable is presented net of allowance for doubtful accounts. Our accounts receivable consists mainly of trade receivables derived from fixed-fee license arrangements with contractual payment terms. The remaining material amounts of our accounts receivable are from variable patent license agreements, which primarily are paid on a quarterly basis. The provision for doubtful accounts reflects the current estimate of credit losses expected to be incurred over the life of the financial asset, impairments in 2019, 2018 or 2017.based on historical experience, current conditions and reasonable forecasts of future economic conditions. Further, we evaluate the collectability of our accounts receivable and if there is doubt that we will collect the full amount, we will record a reserve specific to that customer’s receivable balance. Our provision for doubtful accounts was $0.0 million and $0.3 million as of December 31, 2022 and 2021, respectively.
Investments in Other Entities
We may make strategic investments in companies that have developed or are developing technologies that are complementary to our business. We made an accounting policy election for a measurement alternative for our equity investments that do not have readily determinable fair values, specifically related to our strategic investments in other entities. Under the alternative, our strategic investments in other entities without readily determinable fair values are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, if any. On a quarterly basis, we monitor items such as our investment’s financial position and liquidity, performance targets, business plans, and cost trends to assess whether there are any triggering events or indicators present that would be indicative of an impairment, or any other observable price changes as indicated above. We do not adjust our investment balance when the investee reports profit or loss.
Additionally, other investments may be accounted for under the equity method of accounting. Under this method, we initially record our investment in the stock of an investee at cost, and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the
determination of net income, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between our cost and underlying equity in net assets of the investee at the date of investment. The investment is also adjusted to reflect our share of changes in the investee’s capital. Dividends received from an investee reduce the carrying amount of the investment. When there are a series of operating losses by the investee or when other factors indicate that a decrease in value of the investment has occurred which is other than temporary, we recognize an impairment equal to the difference between the fair value and the carrying amount of our investment.
The carrying value of our investments in other entities areis included within "Other Non-Current Assetsnon-current assets, net" on our consolidated balance sheets. During 2019, 20182022, 2021 and 2017,2020, we made investments in other entities of 0.4$0.0 million, 6.7$1.1 million and 4.6$0.2 million, respectively. The carrying value of our investments in other entities as of December 31, 20192022 and 20182021 was $14.2$19.6 million and $17.4$21.3 million, respectively, the majority of which are accounted for under the measurement alternative for equity investments described above.
Revenue Recognition
Refer to Note 3, "Revenue Recognition," for further information regarding our adoption of ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", which we refer to as ASC 606, effective January 1, 2018. The discussion that follows below is a description of our revenue recognition practices which were in effect beginning January 1, 2018 under ASC 606.
We derive the vast majority of our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements are often complex and include multiple performance obligations. These agreements can include, without limitation, performance obligations related to the settlement of past patent infringement liabilities, patent and/or know-how licensing royalties on covered products sold by licensees, access to a portfolio of technology as it exists at a point in time, and access to a portfolio of technology at a point in time along with a promises to provide any technology updates to the portfolio during the term.
In accordance with US GAAP, we use a five-step model to achieve the core underlying principle that an entity should recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. These steps include (1) identifying the contract with the customer, (2) identifying the performance obligations, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue as the entity satisfies the performance obligation(s). Additionally, we have elected to utilize certain practical expedients in the application of ASC 606. In evaluating the presence of a significant financing component in our agreements, we utilize the practical expedient to exclude any contracts wherein the gap between payment by our customers and the delivery of our performance obligation is less than one year. We have also elected to utilize the practical expedient related to costs of obtaining a contract where an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. Timing of revenue recognition may differ significantly from the timing of invoicing to customers. Contract assets are included in accounts receivable and represent unbilled amounts expected to be received from customers in future periods, where the revenue recognized to date exceeds the amount billed, and right to payment is subject to the underlying contractual terms. Contract assets are classified as long-term assets if the payments are expected to be received more than one year from the reporting date. Contract assets due within less than twelve months of the balance sheet date are included within accounts receivable in our consolidated balance sheets. Contract assets due more than twelve months after the balance sheet date are included within other non-current assets.
Patent License Agreements
Upon signing a patent license agreement, we provide the licensee permission to use our patented inventions in specific applications. We account for patent license agreements in accordance with the guidance indicated above. Certain patent license agreements contain revenue from non-financial sources in the form of patents received from the customer. Under our patent license agreements, we typically receive one or a combination of the following forms of payment as consideration for permitting our licensees to use our patented inventions in their applications and products:
Consideration for Past Patent Royalties
Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with a licensee that utilized our patented inventions prior to signing a patent license agreement with us or from the resolution of a disagreement or arbitration with a licensee over the specific terms of an existing license agreement. We may also receive consideration for past patent royalties in connection with the settlement of patent litigation where there was no prior patent license agreement. In each of these cases, we record the consideration as revenue as prescribed by the five-step model.
Fixed-Fee Agreements
Fixed-fee license agreements include fixed, non-refundable royalty payments that fulfill the licensee’s obligations to us under a patent license agreement for a specified time period or for the term of the agreement for specified products, under certain patents or patent claims, for sales in certain countries, or a combination thereof - in each case for a specified time period (including for the life of the patents licensed under the agreement).
Dynamic fixed-fee license agreements contain a single performance obligation that represents ongoing access to a portfolio of technology over the license term, since our promise to transfer to the licensee access to the portfolio as it exists at inception of the license, along with promises to provide any technology updates to the portfolio during the term, are not separately identifiable. Upon entering a new agreement, we allocate the transaction price to the performance obligations delivered at signing (e.g. our existing patent portfolio) and future performance obligations (e.g. the technology updates). We use a time-based input method of progress to determine the timing of revenue recognition, and as such we recognize the future deliverables on a straight-line basis over the term of the agreement. We utilize the straight-line method as we believe that it best depicts efforts expended to develop and transfer updates to the customer evenly throughout the term of the agreement.
Static fixed-fee license agreements are fixed-price contracts that generally do not include updates to technology we create after the inception of the license agreement or in which the customer does not stand to substantively benefit from those updates during the term. Although we have few static fixed-fee license agreements, we generally satisfy our performance obligations under such agreements at contract signing, and as such revenue is recognized at that time.
Variable Agreements
Upon entering a new variable patent license agreement, the licensee typically agrees to pay royalties or license fees on licensed products sold during the term of the agreement. We utilize the sales- or usage- based royalty exception for these agreements and recognize revenues during the contract term when the underlying sale or usage occurs. Our licensees under variable agreements provide us with quarterly royalty reports that summarize their sales of covered products and their related royalty obligations to us. We typically receive these royalty reports subsequent to the period in which our licensees’ underlying sales occurred. As a result, we are required to estimate revenues, subject to the constraint on our ability to estimate such amounts.
Technology Solutions
Technology solutions revenue consists of revenue from royalty payments, software licenses, engineering services and product sales. The nature of these contracts and timing of payments vary. We recognize revenue from royalty payments and license agreements using the same methods described above under our policy for recognizing revenue from patent license agreements. We recognize revenue from engineering services using percentage of completion method.
Patent Sales
Our business strategy of monetizing our intellectual property includes the sale of select patent assets. As patent sales executed under this strategy represent a component of our ongoing major or central operations and activities, we will record the related proceeds as revenue. We will recognize the revenue in accordance with the five-step model, generally upon closing of the patent sale transaction.
Collaborative Arrangements
We record the elements of our collaboration agreements that represent joint operating activities in accordance with ASC 808, Collaborative Arrangements (“ASC 808”). Accordingly, the elements of our collaboration agreements that represent activities in which both parties are active participants, and to which both parties are exposed to the significant risks and rewards that are dependent on the commercial success of the activities, are recorded as collaborative arrangements. Generally, the classification of a transaction under a collaborative arrangement is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. For transactions that are deemed to be a collaborative arrangement under ASC 808, costs incurred and revenues generated on sales to third parties will be reported in our consolidated statement of operations on a gross basis if the Company is deemed to be the principal in the transaction, or on a net basis if the Company is instead deemed to be the agent in the transaction, consistent with the guidance in ASC 606-10-55-36, Revenue From Contracts with Customers - Principal Agent Considerations.
Deferred Charges
Direct costs of obtaining a contract or fulfilling a contract in a transaction that results in the deferral of revenue may be either expensed as incurred or capitalized, depending on certain criteria. In conjunction with our adoption of ASC 606 effective January 1, 2018, we made a policy election to utilize the practical expedient related to costs of obtaining a contract where an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. If the amortization period is greater than one year, we capitalize direct costs incurred for the acquisition or fulfillment of a contract through the date of signing if they are directly related to a particular revenue arrangement and are expected to be recovered. The costs are amortized on a straight-line basis over the life of the patent license agreement.
For example, from time to time, we use sales agents to assist us in our licensing and/or patent sale activities. In such cases, we may pay a commission. The commission rate varies from agreement to agreement. Commissions are normally paid shortly after our receipt of cash payments associated with the patent license or patent sale agreements. We defer recognition of commission expense and amortize these expenses in proportion to our recognition of the related revenue. Commission expense is included within the "Patent administration and licensing"Licensing" line of our consolidated statements of income and was immaterial for the years presented. There were $0.7 million of new direct contract costs in 2022 and no new direct contract costs incurred during 2019, 20182021 or 2017.2020.
Incremental direct costs incurred related to a debt financing transaction may be capitalized. In connection with our offering of the 2027 Notes, 2024 Notes, and 2020 Notes, defined and discussed in detail within Note 10,9, "Obligations", we incurred directly related costs. The initial purchasers' transaction fees and related offering expenses were allocated to the liability and equity components of the debt in proportion to the allocation of proceeds and accounted for as debt issuance costs. The debt issuance costs allocated to the liability component of the debt were capitalized as deferred financing costs and recorded as a direct reduction of the debt. These costs are being amortized over the term of the debt using the effective interest method and are included within the "Interest expense" line of our consolidated statements of income. The costs allocated to the equity component of the debt were recorded as a reduction of the equity component of the debt. The balance of unamortized deferred financing costs as of December 31, 20192022 and 20182021 was $5.9$9.8 million and $1.6$4.4 million, respectively. The Company incurred $6.4$9.9 million of new debt issuances costs in 2022 in conjunction with the issuance costs during 2019of the 2027 Notes, $6.4 million in 2020 in conjunction with the issuance of the 2024 Notes, notingand no new debt issuance costs were incurred in 2018 or 2017.2021. Deferred financing expense was $1.5$2.0 million, $1.4$1.6 million and $1.4$1.2 million in 2019, 20182022, 2021 and 2017,2020, respectively.
Research and Portfolio Development
Research and portfolio development expenditures are expensed in the period incurred, except certain software development costs that are capitalized between the point in time that technological feasibility of the software is established and when the product is available for general release to customers. We did not have any capitalized software costs related to research and development in any period presented. Research development and other relatedportfolio development costs were approximately $74.9$185.2 million, $69.7$200.5 million and $75.7$204.4 million in 2019, 20182022, 2021 and 2017,2020, respectively.
Compensation Programs
We use a variety of compensation programs to attract, retain and motivate our employees, and to more closely align employee compensation more closely with company performance. These programs include, but are not limited to, short-term incentives tied to performance goals, cash awards to inventors for filed patent applications and patent issuances, and long-term incentives in the form of stock option awards, time-based restricted stock unit (“RSU”) awards, performance-based RSU awards and cash awards, noting equity awards are granted pursuant to the terms and conditions of our Equity Plans (as defined in Note 13,12, "Compensation Plans and Programs"). Our long-term incentives, including equity awards, typically include annual equity and cash award grants with three-three to five-yearfive year vesting periods; as a result, in any one year, we are typically accounting for at least three active cycles.
We account for compensation costs associated with share-based compensation based on the fair value of the instruments issued. The estimated value of stock options includes assumptions around expected life, stock volatility and dividends. TheFor stock options considered to be “plain vanilla” options, the Company estimates the expected life of our stock option awards isterm based on the simplified method as prescribed by Staff Accounting Bulletin Topic 14. The simplified method was used because the Company does not believe it has sufficient historical exercise data to provide a reasonable basis for the expected term of its grants. In all periods, our policy has been to set the value of RSUs and restricted stock awards equal to the value of our underlying common stock on the date of measurement. For grants with graded vesting, we amortize the associated unrecognized compensation cost using an accelerated method. For grants that cliff vest, we amortize the associated unrecognized compensation cost on a straight-line basis over their vesting term.
In the event of canceled awards, we adjust compensation expense recognized to date as they occur. Tax windfalls and shortfalls related to the tax effects of employee share-based compensation are included in our tax provision. On the consolidated statements of cash flows, tax windfalls and shortfalls related to employee share-based compensation awards are
included within operating activities and cash paid to tax authorities for shares withheld are included within financing activities. The inclusion of windfalls and shortfalls in the tax provision could increase our earnings volatility between periods. Tax windfalls and shortfalls related to share-based compensation was shortfalls of $0.4 million for the year ended 2022, and windfalls for the years ended 2019, 20182021 and 2017 were2020 of $0.8 million and $0.2 million, $1.8 millionrespectively.
Restructuring
Restructuring activities include, but are not limited to, costs associated with termination benefits such as severance costs and $12.1 million, respectively.retention bonuses, contract termination costs, and other costs associated with an exit or disposal activity. The termination benefits included within restructuring activities are recognized in accordance with either ASC 420, Exit or Disposal Cost Obligations ("ASC 420") or ASC 712, Compensation – Nonretirement Postemployment Benefits ("ASC 712"), as applicable. Liabilities are recognized in accordance with ASC 420 when management commits to a plan of termination, the employees to be terminated are identified, the terms of the benefit arrangement are established, it was determined that either changes to the plan or withdrawal are unlikely, and the arrangements were communicated to employees. Liabilities that fall under ASC 712 are recognized when the liability was determined to be probable of being paid and reasonably estimable. The current liabilities are recorded within "Other accrued expenses" and long-term liabilities are included in "Other long-term liabilities" in the consolidated balance sheets. The restructuring expenses are included in "Restructuring activities" in the consolidated statements of income.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statementconsolidated statement of Incomeincome in the period in which the change was enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if management has determined that it is more likely than not that such assets will not be realized.
In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. We are subject to examinations by the U.S. IRS and other taxing jurisdictions on various tax matters, including challenges to various positions we assert in our filings. In the event that the IRS or another taxing jurisdiction levies an assessment in the future, it is possible the assessment could have a material adverse effect on our consolidated financial condition or results of operations.
The financial statement recognition of the benefit for aan uncertain tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable tax authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. In the event that the IRS or another taxing jurisdiction levies an assessment in the future, it is possible the assessment could have a material adverse effect on our consolidated financial condition or results of operations.
Treasury Stock
We record the repurchase of our shares of common stock at cost based on the settlement date of the transaction. These shares are classified as treasury stock, which is a reduction to shareholders’ equity. Treasury shares are included in authorized and issued shares, but excluded from outstanding shares.
In August 2022, the Inflation Reduction Act was enacted in the United States, which included, among other items, a 1% excise tax on certain net stock repurchases after December 31, 2022. Any such excise tax on our stock repurchases will be recorded as a component of stockholders’ equity, as Treasury Stock.
New Accounting Guidance
Accounting Standards Update: Leases
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)",Issuer’s Accounting for Certain Modifications or ASC 842, which outlines a comprehensive change to the lease accounting model and supersedes prior lease guidance. Refer to Note 17, "Leases," for information regarding our adoptionExchanges of this guidance effective January 1, 2019 and a discussion of the impact to information presented herein, as well as additional required disclosures under the new guidance.
Accounting Standards Update: Improvements to Nonemployee Share-Based Payment AccountingFreestanding Equity Classified Written Call Options
In June 2018,May 2021, the FASB issued ASU No. 2018-07, "Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which is2021-04. The amendments in this ASU are intended to clarify and reduce cost and complexity and to improve financial reportingdiversity in an issuer’s accounting for share-based payments issued to nonemployees. The guidancemodifications or exchanges of freestanding equity-classified written call options, including warrants, that remain equity classified after modification or exchange. ASU 2021-04 is effective for fiscal years beginning after December 15, 2018 and2021, with early adoption is permitted.allowed. We adopted this guidance in first quarter 2019as of January 1, 2022 and itthe adoption did not have a material impact on our consolidated financial statements.
Accounting Standards Update: Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses". This ASU introduces a new accounting model for recognizing credit losses on certain financial instruments and financial assets, including trade receivables, based upon an estimate of current expected credit losses, otherwise known as CECL. The new guidance requires the recognition of an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset, based not only on historical experience and current conditions, but also on reasonable forecasts. Additionally, ASU No. 2016-13 made several changes to the available-for-sale impairment model. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We have concluded that this guidance will not have a material impact on our consolidated financial statements.
Accounting Standards Update: Cloud Computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract”. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years, and early adoption is permitted. While we are still completing our accounting assessment, we do not expect this guidance to have a material impact on our consolidated financial statements.
Accounting Standards Update: Collaborative Arrangements
In November 2018, the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606". The amendments in this ASU provide guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted for entities who have previously adopted the new revenue recognition guidance. We have concluded that this guidance will not have a material impact on our consolidated financial statements.
Accounting Standards Update: Simplifying the Accounting for Income TaxesConvertible Instruments
In December 2019,August 2020, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740)2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Simplifying the Accounting for Income Taxes" ("Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2019-12"2020-06”). The amendments in this ASU are intended to simplify various aspects related to accounting for income taxes.convertible debt instruments and convertible preferred stock by removing certain accounting models which separate the embedded conversion features from the host contract. ASU 2019-12 removes2020-06 also amends certain exceptions toguidance in ASC 260 on the general principles in Topic 740computation of earnings per share for convertible instruments and also clarifies and amends existing guidance to improve consistent application.contracts on an entity’s own equity. ASU 2019-122020-06 is effective for fiscal years beginning after December 15, 2020 with2021, including interim periods within those fiscal years, and early adoption allowed.was permitted for fiscal years beginning after December 15, 2020. The Company is currently evaluatingASU permits the impactuse of either the modified retrospective or fully retrospective methods of transition. We elected to early adopt this standard on a modified retrospective approach as of January 1, 2021, which resulted in a $10.4 million, $50.2 million and $15.6 million increase to net deferred tax assets, long-term debt and retained earnings, respectively, and a $55.4 million decrease to additional paid-in capital. This $50.2 million increase to long-term debt, net was comprised of $51.6 million of unamortized interest discount partially offset by a net increase of $1.4 million in unamortized debt issuance costs following the reversal of the initially established equity component of deferred financing costs. This was due to the standard no longer requiring bifurcation of the embedded conversion feature from the host contract on the 2024 Notes, as defined in Note 9, "Obligations". This adoption also reduced non-cash interest expense starting in 2021 due to the removal of ASU 2019-12the accretion of the debt discount on its consolidated financial statements.the 2024 Notes. In addition, the adoption requires the use of the if-converted method of calculating diluted earnings per share rather than the treasury stock method for convertible instruments and requires the inclusion of the potential effect of shares settled in cash or shares in the diluted earnings per share calculation.
3. REVENUE RECOGNITION
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606") which superseded most prior revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. We adopted the requirements of the new standard as of January 1, 2018 using the modified retrospective transition method applied to those contracts that were not completed as of January 1, 2018. Accordingly, all periods prior to January 1, 2018 are presented in accordance with ASC Topic 605, "Revenue Recognition" (“ASC 605”). Periods beginning January 1, 2018 are presented in accordance with ASC 606. See Note 2 "Summary of Significant Accounting Policies and New Accounting Guidance" for our revised revenue recognition accounting policy upon adoption of the new guidance.
For accounting purposes under ASC 606, we separate our fixed-fee license agreements into two categories: (i) those agreements that provide rights, over the term of the license, to future technologies that are highly interdependent or highly interrelated to the technologies provided at the inception of the agreement (“Dynamic Fixed-Fee Agreements”) and (ii) those agreements that do not provide for rights to such future technologies (“Static Fixed-Fee Agreements”). After the fair value allocation between the past and future components of the agreement, we recognize the future components of revenue from Dynamic Fixed-Fee Agreements on a straight-line basis over the term of the related license agreement, while we recognize most or all of the revenue from Static Fixed-Fee Agreements in the quarter the license agreement is signed. We did not recognize any ongoing revenue from Static Fixed-Fee Agreements already in existence at the time the guidance was adopted. Additionally, in the event a significant financing component is determined to exist in any of our agreements, we recognize more or less revenue and corresponding interest expense or income, as appropriate.
In addition, we record per-unit royalty revenue in the same period in which the licensee’s underlying sales occur. Because we generally do not receive the per-unit licensee royalty reports for sales during a given quarter within the time frame necessary to adequately review the reports and include the actual amounts in our quarterly results for such quarter, we accrue the related revenue based on estimates of our licensees’ underlying sales, subject to certain constraints on our ability to estimate such amounts. As a result of accruing revenue for the quarter based on such estimates, adjustments are required in the following quarter to true-up revenue to the actual amounts reported by our licensees. In addition, to the extent we receive non-refundable prepayments related to per-unit license agreements that do not provide rights over the term of the license to future technologies that are highly interdependent or highly interrelated to the technologies provided at the inception of the agreement, we recognize such prepayments as revenue in the period in which all remaining revenue recognition criteria have been met.
Finally, under ASC 606, we recognize a receivable, and any related deferred tax asset for foreign withholding taxes, for payments as they become due.
Timing of revenue recognition may differ significantly from the timing of invoicing to customers. Contract assets are included in accounts receivable and represent unbilled amounts expected to be received from customers in future periods, where the revenue recognized to date exceeds the amount billed, and right to payment is subject to the underlying contractual terms. Contract assets are classified as long-term assets if the payments are expected to be received more than one year from the reporting date.
Disaggregated Revenue
We recently experienced significant growth in licensing our horizontal technologies from our foundational research across new vertical markets. Accordingly, we have disaggregated revenue between Smartphone and Consumer Electronics ("CE"), IoT/Auto. We believe this better reflects both our current revenue sources and our growth opportunities across these vertical markets.
The following table presents the disaggregation of our revenue for the year ended December 31, 20192022, 2021 and 2018 under ASC 606. Revenue for the year ended December 31, 2017 is presented in accordance with ASC 605. Amounts are in thousands.2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Recurring revenues: | | | | | |
Smartphone | $ | 351,064 | | | $ | 315,098 | | | $ | 302,097 | |
CE, IoT/Auto | 51,717 | | | 31,721 | | | 22,951 | |
Other | 1,107 | | | 4,881 | | | 11,761 | |
Total recurring revenues | 403,888 | | | 351,700 | | | 336,809 | |
Non-recurring revenues a | 53,906 | | | 73,709 | | | 22,182 | |
Total revenues | $ | 457,794 | | | $ | 425,409 | | | $ | 358,991 | |
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Variable patent royalty revenue | $ | 30,428 |
| | $ | 36,384 |
| | $ | 47,840 |
|
Fixed-fee royalty revenue | 257,221 |
| | 239,347 |
| | 301,628 |
|
Current patent royalties a | 287,649 |
| | 275,731 |
| | 349,468 |
|
Non-current patent royalties b | 19,782 |
| | 26,329 |
| | 162,890 |
|
Total patent royalties | 307,431 |
| | 302,060 |
| | 512,358 |
|
Current technology solutions revenue a | 10,518 |
| | 4,594 |
| | 20,580 |
|
Patent sales | 975 |
| | 750 |
| | — |
|
Total revenue | $ | 318,924 |
| | $ | 307,404 |
| | $ | 532,938 |
|
a. RecurringNon-recurring revenues consistare comprised of currentpast patent royalties inclusiveand revenues from static agreements.
revenue.
| |
b. | Non-current patent royalties for the year ended December 31, 2019 and 2018 consist of past patent royalties and royalties from static agreements. For the year ended December 31, 2017, non-current patent royalties consist of past patent royalties. |
During the year ended December 31, 2019,2022, we recognized $214.0$291.5 million of revenue that had been included in deferred revenue as of the beginning of the period. As of December 31, 2019,2022, we had contract assets of $16.2$32.9 million and $10.2$2.5 million included within "Accounts receivable, net" and "Other non-current assets, net" in the consolidated balance sheet, respectively. As of December 31, 2018,2021, we had contract assets of $19.7$18.9 million and $5.5$8.3 million included within "Accounts receivable, net" and "Other non-current assets, net" in the consolidated balance sheet, respectively.
Impact of Adoption of ASC 606
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our current period consolidated income statement and balance sheet is presented below. We believe this additional information is vital to allow readers of our financial statements to compare financial results from the preceding financial years given the absence of restatement of the prior period. The adoption of ASC 606 did not affect our reported total amounts of cash flows from operating, investing and financing activities. Amounts contained in the tables below are in thousands, except per share data.
|
| | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| As Reported ASC 606 | | As Reported ASC 606 | | Adjustment | | ASC 605 | | As Reported ASC 605 |
REVENUES: | | | | | | | | | |
Variable patent royalty revenue | $ | 30,428 |
| | $ | 36,384 |
| | $ | 461 |
| | $ | 36,845 |
| | $ | 47,840 |
|
Fixed-fee royalty revenue | 257,221 |
| | 239,347 |
| | 79,341 |
| | 318,688 |
| | 301,628 |
|
Current patent royalties | 287,649 |
| | 275,731 |
| | 79,802 |
| | 355,533 |
| | 349,468 |
|
Non-current patent royalties | 19,782 |
| | 26,329 |
| | (10,000 | ) | | 16,329 |
| | 162,890 |
|
Total patent royalties | 307,431 |
| | 302,060 |
| | 69,802 |
| | 371,862 |
| | 512,358 |
|
Patent sales | 975 |
| | 750 |
| | — |
| | 750 |
| | — |
|
Current technology solutions revenue | 10,518 |
| | 4,594 |
| | 4,907 |
| | 9,501 |
| | 20,580 |
|
| $ | 318,924 |
| | $ | 307,404 |
| | $ | 74,709 |
| | $ | 382,113 |
| | $ | 532,938 |
|
OPERATING EXPENSES: | 281,089 |
| | 244,809 |
| | — |
| | 244,809 |
| | 231,443 |
|
Income from operations | 37,835 |
| | 62,595 |
| | 74,709 |
| | 137,304 |
| | 301,495 |
|
Interest expense | (40,955 | ) | | (35,956 | ) | | 16,655 |
| | (19,301 | ) | | (17,845 | ) |
OTHER INCOME (EXPENSE), NET | 29,062 |
| | 5,419 |
| | — |
| | 5,419 |
| | 8,740 |
|
Income before income taxes | 25,942 |
| | 32,058 |
| | 91,364 |
| | 123,422 |
| | 292,390 |
|
INCOME TAX BENEFIT (PROVISION) | (10,991 | ) | | 27,417 |
| | (6,686 | ) | | 20,731 |
| | (121,676 | ) |
NET INCOME | $ | 14,951 |
| | $ | 59,475 |
| | $ | 84,678 |
| | $ | 144,153 |
| | $ | 170,714 |
|
Net loss attributable to noncontrolling interest | (5,977 | ) | | (5,556 | ) | | — |
| | (5,556 | ) | | (5,506 | ) |
NET INCOME ATTRIBUTABLE TO INTERDIGITAL, INC. | $ | 20,928 |
| | $ | 65,031 |
| | $ | 84,678 |
| | $ | 149,709 |
| | $ | 176,220 |
|
NET INCOME PER COMMON SHARE — BASIC | $ | 0.66 |
| | $ | 1.89 |
| | $ | 2.45 |
| | $ | 4.34 |
| | $ | 5.09 |
|
NET INCOME PER COMMON SHARE — DILUTED | $ | 0.66 |
| | $ | 1.84 |
| | $ | 2.40 |
| | $ | 4.24 |
| | $ | 4.93 |
|
Contracted Revenue
Based on contracts signed and committed Dynamic Fixed-Fee Agreement paymentsAgreements as of December 31, 2019,2022, we expect to recognize the following amounts of revenue over the term of such contracts (in thousands):
|
| | | |
| Revenue |
2020 | $ | 260,813 |
|
2021 | 191,146 |
|
2022 | 86,728 |
|
2023 | — |
|
2024 | — |
|
Thereafter | — |
|
| $ | 538,687 |
|
| | | | | |
| Revenue (a) |
2023 | $ | 267,053 | |
2024 | 217,173 | |
2025 | 204,418 | |
2026 | 137,196 | |
2027 | 134,963 | |
Thereafter | 237,815 | |
| $ | 1,198,618 | |
| |
(a) This table does not include any revenue that we expect to recognize under our arbitration or resulting patent license agreement with Samsung.
4. GEOGRAPHIC / CUSTOMER CONCENTRATION
WeThe Company’s chief operating decision maker assesses company-wide performance and allocates resources based on consolidated financial information. As such, we have 1one reportable segment. During 2019, 20182022, 2021 and 2017,2020, the majority of our revenue was derived from a limited number of licensees based outside of the United States, primarily in Asia. Substantially all of these revenues were paid in U.S. dollars and were not subject to any substantial foreign exchange transaction risk. The table below lists the countries of the headquarters of our licensees and customers and the total revenue derived from each country or region for the periods indicated (in thousands):
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
United States | $ | 139,162 |
| | $ | 119,159 |
| | $ | 194,184 |
|
South Korea | 113,189 |
| | 112,291 |
| | 113,059 |
|
Japan | 35,614 |
| | 29,525 |
| | 25,210 |
|
China | 11,103 |
| | 309 |
| | 77,087 |
|
Sweden | 6,934 |
| | 6,933 |
| | 6,935 |
|
France | 5,895 |
| | 277 |
| | — |
|
Other Europe | 5,810 |
| | 5,116 |
| | 6,305 |
|
Taiwan | 938 |
| | 23,326 |
| | 36,051 |
|
Other Asia | 279 |
| | 468 |
| | — |
|
Finland | — |
| | 10,000 |
| | — |
|
Canada | — |
| | — |
| | 74,107 |
|
Total | $ | 318,924 |
| | $ | 307,404 |
| | $ | 532,938 |
|
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
United States | $ | 219,744 | | | $ | 169,044 | | | $ | 128,238 | |
China | 103,922 | | | 118,197 | | | 63,172 | |
South Korea | 90,018 | | | 86,677 | | | 111,634 | |
Japan | 21,946 | | | 24,689 | | | 23,694 | |
Taiwan | 11,621 | | | 11,040 | | | 10,059 | |
| | | | | |
| | | | | |
Europe | 10,543 | | | 15,762 | | | 22,194 | |
| | | | | |
| | | | | |
Total revenue | $ | 457,794 | | | $ | 425,409 | | | $ | 358,991 | |
During 2019, 20182022, 2021 and 2017,2020, the following licensees or customers accounted for 10% or more of total revenues:
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Apple | 35 | % | | 36 | % | | 21 | % |
Samsung | 25 | % | | 25 | % | | 13 | % |
LG | 10 | % | | 10 | % | | < 10% |
|
Blackberry (a) | — | % | | — | % | | 13 | % |
Huawei (b) | — | % | | — | % | | 14 | % |
(a) 2017 revenue include $70.7 million of non-current patent royalties.
(b) 2017 revenue include $8.4 million of non-current patent royalties.
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Customer A | 30% | | 28% | | 31% |
Customer B | 17% | | 18% | | 22% |
Customer C | 13% | | 14% | | —% |
Customer D | <10% | | 10% | | 15% |
As of December 31, 2019, 20182022, and 2017,2021, we held $446.6 million, $464.6$365.3 million and $336.1$377.0 million respectively, of our property, equipment and patents, net of accumulated depreciation and amortization, respectively, of which greater than 97%93% of the total was within the United States in each of the years presented. As of December 31, 2019,2022 and 2021, we held $1.7$27.2 million and $25.9 million of property, equipment and equipment,patents, net of accumulated depreciation and amortization, collectively, in Canada Europe and Asia.Europe.
| |
5. | BUSINESS COMBINATIONS AND OTHER TRANSACTIONS |
AcquisitionTable of Technicolor's Patent Licensing BusinessContents
On July 30, 2018, we completed our acquisition5. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND MARKETABLE SECURITIES
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash as of December 31, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Money market and demand accounts | $ | 643,825 | | | $ | 705,725 | |
Commercial paper | 26,741 | | | 7,499 | |
U.S. government securities | 15,707 | | | — | |
Corporate bonds, asset backed and other securities | 16,888 | | | — | |
Total cash, cash equivalents and restricted cash | $ | 703,161 | | | $ | 713,224 | |
The following table provides a reconciliation of total cash, cash equivalents and restricted cash as of December 31, 2022 and 2021 within the consolidated balance sheets (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Cash and cash equivalents | $ | 693,479 | | | $ | 706,282 | |
Restricted cash included within prepaid and other current assets | 9,682 | | | 5,861 | |
Restricted cash included within other non-current assets | — | | | 1,081 | |
Total cash, cash equivalents and restricted cash | $ | 703,161 | | | $ | 713,224 | |
Marketable Securities
As of December 31, 2022 and 2021, the majority of our marketable securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported net-of-tax as a separate component of shareholders’ equity. Substantially all of our investments are investment-grade government and corporate debt securities that have maturities of less than two years, and we have both the ability and intent to hold the investments until maturity. We recorded no other-than-temporary impairments during 2022, 2021 or 2020. The gross realized gains and losses on sales of marketable securities were not significant during the years ended December 31, 2022, 2021 and 2020.
Marketable securities as of December 31, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available-for-sale securities | | | | | | | |
Commercial paper | $ | 210,146 | | | $ | 30 | | | $ | (220) | | | $ | 209,956 | |
U.S. government securities | 244,174 | | | 19 | | | (353) | | | 243,840 | |
Corporate bonds, asset backed and other securities | 113,921 | | | 33 | | | (116) | | | 113,838 | |
Total available-for-sale securities | $ | 568,241 | | | $ | 82 | | | $ | (689) | | | $ | 567,634 | |
Reported in: | | | | | | | |
Cash and cash equivalents | | | | | | | $ | 59,336 | |
Short-term investments | | | | | | | 508,298 | |
Total marketable securities | | | | | | | $ | 567,634 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available-for-sale securities | | | | | | | |
Commercial paper | $ | 158,468 | | | $ | 2 | | | $ | (18) | | | $ | 158,452 | |
U.S. government securities | 51,444 | | | — | | | (143) | | | 51,301 | |
Corporate bonds, asset backed and other securities | 33,086 | | | 6 | | | (1) | | | 33,091 | |
Total available-for-sale securities | $ | 242,998 | | | $ | 8 | | | $ | (162) | | | $ | 242,844 | |
Reported in: | | | | | | | |
Cash and cash equivalents | | | | | | | $ | 7,499 | |
Short-term investments | | | | | | | 235,345 | |
Total marketable securities | | | | | | | $ | 242,844 | |
As of December 31, 2022 and 2021, $557.7 million and $210.8 million, respectively, of our short-term investments had contractual maturities within one year. The remaining portions of our short-term investments had contractual maturities within one to two years.
6. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable. We primarily place our cash equivalents and short-term investments in highly rated financial instruments and in United States government instruments.
Our accounts receivable are derived principally from patent licensing businesslicense and technology solutions agreements. As of Technicolor SA ("Technicolor")December 31, 2022, four licensees comprised 76%, a worldwide technology leaderand as of December 31, 2021 four licensees comprised 66%, of our accounts receivable balance. We perform ongoing credit evaluations of our licensees, who generally include large, multinational, wireless telecommunications equipment manufacturers. We believe that the book values of our financial instruments approximate their fair values.
Fair Value Measurements
We use various valuation techniques and assumptions when measuring the fair value of our assets and liabilities. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the mediainputs to the valuation technique. This guidance established a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and entertainment sector,cost approach). The levels of the hierarchy are described below:
Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates.
Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. We use quoted market prices for similar assets to estimate the fair value of our Level 2 investments.
Recurring Fair Value Measurements
Our financial assets are included within short-term investments on our consolidated balance sheets, unless otherwise indicated. Our financial assets and liabilities that are accounted for at fair value on a recurring basis are presented in the tables below as of December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 643,825 | | | $ | — | | | $ | — | | | $ | 643,825 | |
Commercial paper (b) | — | | | 209,956 | | | — | | | 209,956 | |
U.S. government securities (c) | — | | | 243,840 | | | — | | | 243,840 | |
Corporate bonds, asset backed and other securities (d) | — | | | 113,838 | | | — | | | 113,838 | |
| $ | 643,825 | | | $ | 567,634 | | | $ | — | | | $ | 1,211,459 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 705,725 | | | $ | — | | | $ | — | | | $ | 705,725 | |
Commercial paper (b) | — | | | 158,452 | | | — | | | 158,452 | |
U.S. government securities | — | | | 51,301 | | | — | | | 51,301 | |
Corporate bonds and asset backed securities | — | | | 33,091 | | | — | | | 33,091 | |
| $ | 705,725 | | | $ | 242,844 | | | $ | — | | | $ | 948,569 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
_______________
(a)Included within cash and cash equivalents.
(b)As of December 31, 2022 and 2021, $26.7 million and $7.5 million of commercial paper was included within cash and cash equivalents, respectively.
(c)As of December 31, 2022, $15.7 million of U.S. government securities was included within cash and cash equivalents.
(d)As of December 31, 2022, $16.9 million of corporate bonds, asset backed and other securities was included within cash and cash equivalents.
Fair Value of Long-Term Debt
Senior Convertible Notes
The principal amount, carrying value and related estimated fair value of the Company's senior convertible debt reported in the consolidated balance sheets as of December 31, 2022 and December 31, 2021 was as follows (in thousands). The aggregate fair value of the principal amount of the senior convertible long-term debt is a Level 2 fair value measurement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Principal Amount | | Carrying Value | | Fair Value | | Principal Amount | | Carrying Value | | Fair Value |
2027 Senior Convertible Long-Term Debt | $ | 460,000 | | | $ | 451,062 | | | $ | 441,485 | | | $ | — | | | $ | — | | | $ | — | |
2024 Senior Convertible Long-Term Debt | $ | 126,174 | | | $ | 125,342 | | | $ | 119,941 | | | $ | 400,000 | | | $ | 395,632 | | | $ | 437,760 | |
Technicolor Patent Acquisition Long-term Debt
As more fully disclosed in Note 9, "Obligations," we refer to asrecognized long-term debt in conjunction with the Technicolor Patent Acquisition. The carrying value and related estimated fair value of the Technicolor Patent Acquisition long-term debt reported in the consolidated balance sheet as of December 31, 2022 and December 31, 2021 was as follows (in thousands). The aggregate fair value of the Technicolor Patent Acquisition long-term debt is a Level 3 fair value measurement.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Technicolor Patent Acquisition Long-Term Debt | $ | 30,662 | | | $ | 28,048 | | | $ | 27,113 | | | $ | 28,569 | |
Non-recurring Fair Value Measurements
Investments in Other Entities
As disclosed in Note 2, "Summary of Significant Accounting Policies and New Accounting Guidance", we made an accounting policy election to utilize a measurement alternative for equity investments that do not have readily determinable fair values, which applies to our long-term strategic investments in other entities. Under the alternative, our long-term strategic investments in other entities that do not have readily determinable fair values are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any adjustments to the carrying value of those investments are considered non-recurring fair value measurements.
During year ended December 31, 2022, we recognized a net loss of $1.3 million and during year ended 2021 and 2020 we recognized gains of $7.6 million, and $5.6 million, respectively, resulting from observable price changes of our long-term strategic investments, which were included within “Other (expense) income, net” in the acquisitionconsolidated statement of income. Certain of our investments in other entities may be seeking additional financing in the next twelve months or potential exit strategies. We will continue to review and monitor our investments in other entities for any indications of an increase in fair value or impairment.
Lease Assets
During 2020, we recognized a $1.1 million impairment, comprised of $0.8 million of Property and Equipment, and $0.3 million of Operating lease right-of-use asset related to the abandonment of one of our leased properties, which was included within “Operating Expenses” in the consolidated statement of income.
Patents
During 2021, we recognized a $13.2 million impairment, resulting from our restructuring activities as described in Note 20, "Restructuring Activities", which was included within “Restructuring activities” expenses in the consolidated statement of income. The Patents held for sale are recorded at fair value on December 31, 2022 and 2021 and are included within "Prepaid and other current assets" in the consolidated balance sheet.
Also during 2021, we renewed our multi-year, worldwide, non-exclusive patent license agreement with Sony and a portion of the future consideration for the agreement was in the form of patents. These patents transferred during 2022 and we have determined the estimated fair value of the patents for determining the transaction price for revenue recognition purposes, which was estimated to be $30.1 million utilizing the income and market approach. The value will be amortized as a non-cash expense over the patents' estimated useful lives.
During 2020, we entered into a patent license agreement with Huawei and a portion of the future consideration for the agreement was in the form of patents. We have determined the estimated fair value of the patents for determining the transaction price for revenue recognition purposes, which was estimated to be $19.3 million utilizing the market approach. The value is amortized as a non-cash expense over the patents' estimated useful lives.
As noted above, we estimated the fair value of the patents in these transactions using one of, or a combination of, an analysis of comparable market transactions (the market approach), a discounted cash flow analysis (the income approach) and/or by InterDigitalquantifying the amount of money required to replace the future service capability of the assets (the cost approach). For the market approach, judgment was applied as to which market transactions were most comparable to the transaction. For the income approach, the inputs and assumptions used to develop these estimates were based on a market participant perspective and included estimates of projected royalties, discount rates, economic lives and income tax rates, among others. For the cost approach, we utilized the historical cost of assets of similar technologies to determine the estimated replacement cost, including research, development, testing and patent application fees.
7. PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Computer equipment and software | $ | 15,144 | | | $ | 14,787 | |
Leasehold improvements | 12,636 | | | 11,743 | |
Building and improvements | 3,517 | | | 3,574 | |
Engineering and test equipment | 1,317 | | | 1,470 | |
| | | |
| | | |
Furniture and fixtures | 670 | | | 799 | |
Property and equipment, gross | 33,284 | | | 32,373 | |
Less: accumulated depreciation | (21,946) | | | (18,996) | |
Property and equipment, net | $ | 11,338 | | | $ | 13,377 | |
Depreciation expense was $4.9 million, $5.6 million and $5.3 million in 2022, 2021 and 2020, respectively.
8. PATENTS, GOODWILL AND OTHER INTANGIBLE ASSETS
Patents
As of December 31, 2022 and 2021, patents consisted of the following (in thousands, except for useful life data):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Weighted average estimated useful life (years) | 10.0 | | 9.9 |
Gross patents | $ | 1,018,957 | | | $ | 956,387 | |
Accumulated amortization | (664,958) | | | (592,802) | |
Patents, net | $ | 353,999 | | | $ | 363,585 | |
Amortization expense related to capitalized patent costs was $73.4 million, $71.5 million and $74.9 million in 2022, 2021 and 2020, respectively. These amounts are recorded within the "Licensing" line of our consolidated statements of income.
The estimated aggregate amortization expense for the next five years related to our patents balance as of December 31, 2022 is as follows (in thousands):
| | | | | |
2023 | $ | 71,443 | |
2024 | 60,983 | |
2025 | 57,417 | |
2026 | 49,000 | |
2027 | $ | 44,027 | |
Goodwill
The following table shows the change in the carrying amount of our goodwill balance from December 31, 2020 to December 31, 2022, all of which is allocated to our one reportable segment (in thousands):
| | | | | |
Goodwill balance as of December 31, 2020 | $ | 22,421 | |
Activity | — | |
Goodwill balance as of December 31, 2021 | $ | 22,421 | |
Activity | — | |
Goodwill balance as of December 31, 2022 | $ | 22,421 | |
9. OBLIGATIONS
Long-term debt obligations, excluding the long-term debt resulting from the Technicolor Patent Acquisition, are comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| 2027 Notes | | 2024 Notes | | Total | | 2024 Notes |
Principal | $ | 460,000 | | | $ | 126,174 | | | $ | 586,174 | | | $ | 400,000 | |
Less: | | | | | | | |
Deferred financing costs | (8,938) | | | (832) | | | (9,770) | | | (4,368) | |
Net carrying amount of the Convertible Notes | $ | 451,062 | | | $ | 125,342 | | | $ | 576,404 | | | $ | 395,632 | |
| | | | | | | |
| | | | | | | |
There were no finance leases as of December 31, 2022 or December 31, 2021.
Maturities of principal of the long-term debt obligations of the Company as of December 31, 2022, excluding the long-term debt resulting from the Technicolor Patent Acquisition, are as follows (in thousands): | | | | | |
2023 | $ | — | |
2024 | 126,174 | |
2025 | — | |
2026 | — | |
2027 | 460,000 | |
Thereafter | — | |
| $ | 586,174 | |
2027 Notes, and Related Note Hedge and Warrant Transactions
On May 27, 2022 we issued $460.0 million in aggregate principal amount of 3.50% Senior Convertible Notes due 2027 (the "2027 Notes"). The net proceeds from the issuance of the 2027 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $450.0 million. The 2027 Notes bear interest at a rate of 3.50% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2022, and mature on June 1, 2027, unless earlier redeemed, converted or repurchased.
The 2027 Notes will be convertible into cash up to the aggregate principal amount of the notes to be converted and in respect of the remainder, if any, of the Company’s obligation in excess of the aggregate principal amount of the notes being converted, pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s election, at an initial conversion rate of 12.9041 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately 18,000 patents$77.49 per share). The conversion rate, and applications, across a broad range of technologies,thus the conversion price, may be adjusted under certain circumstances, including approximately 3,000 worldwide video coding patentsin connection with conversions made following fundamental changes and applications. The acquisition of Technicolor’s portfolio greatly expanded InterDigital’s technology footprintunder other circumstances as set forth in the mobile industry,indenture governing the 2027 Notes.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding March 1, 2027, the notes will be convertible only under the following circumstances: (1) on any date during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2022 if the closing sale price of the Common Stock was more than 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter; (2) if the Company distributes to all or substantially all holders of the Common Stock any rights, options or warrants (other than in connection with a stockholder rights plan prior to separation of such rights from the shares of the Common Stock) entitling them to purchase, for a period of 45 calendar days or less from the issuance date for such distribution, shares of Common Stock at a price per share less than the average closing sale price for the ten consecutive trading day period ending on, and opens new marketsincluding, the trading day immediately preceding the declaration date for such distribution; (3) if the Company distributes to all or substantially all holders of the Common Stock any cash or other assets, debt securities or rights to purchase the Company’s securities (other than pursuant to a rights plan), which distribution has a per share value exceeding 10% of the closing sale price of the Common Stock on the trading day immediately preceding the declaration date for such distribution; (4) if the Company engages in consumer home electronics, display technologycertain corporate transactions as described in the indenture governing the 2027 Notes; (5) if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; (6) during a specified period if a fundamental change (as defined in the indenture governing the 2027 Notes) occurs; or (7) during the five consecutive business day period following any five consecutive trading day period in which the trading price for the notes for each day during such five trading day period was less than 98% of the closing sale price of the Common Stock multiplied by the applicable conversion rate on each such trading day. Commencing on March 1, 2027, the notes will be convertible in multiples of $1,000 principal amount, at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the notes.
The Company may not redeem the notes prior to June 5, 2025. The Company may redeem for cash all or any portion of the notes, at the Company’s option, on or after June 5, 2025, if the last reported sale price of the Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on and video. Underincluding the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding the redemption date.
If a fundamental change (as defined in the indenture governing the 2027 Notes) occurs, holders may require the Company to purchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 2027 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with any of the Company’s current and any future senior unsecured indebtedness, including its 2.00% senior convertible notes due 2024 (the “2024 Notes” and together with the 2027 Notes, the "Convertible Notes"). The 2027 Notes are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the related collateral, and the 2027 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries.
On May 24 and May 25, 2022, in connection with the offering of the 2027 Notes, we entered into convertible note hedge transactions (collectively, the “2027 Note Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2027 Notes, subject to adjustment, and are exercisable upon any conversion of the 2027 Notes. The aggregate cost of the 2027 Note Hedge Transactions was $80.5 million.
Also on May 24 and May 25, 2022, we also entered into privately negotiated warrant transactions (collectively, the “2027 Warrant Transactions” and, together with the 2027 Note Hedge Transactions, the “2027 Call Spread Transactions”), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock at an initial strike price of $106.37 per share, subject to adjustment. As consideration for the 2027 Warrant Transactions, we received aggregate proceeds of $43.7 million. The net cost of the 2027 Call Spread Transactions was $36.8 million, which was funded out of the net proceeds from the offering of the 2027 Notes.
Accounting Treatment of the 2027 Notes and Related Convertible Note Hedge and Warrant Transactions
The 2027 Call Spread Transactions were classified as equity and the 2027 Notes were classified as long-term debt. The effective interest rate is approximately 4.02%.
In connection with the above-noted transactions, the Company incurred approximately $9.9 million of directly related costs, which were capitalized as deferred financing costs and as a reduction of long-term debt. These costs are being amortized as interest expense over the term of the debt using the effective interest method.
2024 Senior Convertible Notes, and Related Note Hedge and Warrant Transactions
On June 3, 2019 we issued $400.0 million in aggregate principal amount of 2.00% Senior Convertible Notes due 2024 (the "2024 Notes"). The net proceeds from the issuance of the 2024 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $391.6 million. The 2024 Notes bear interest at a rate of 2.00% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2019, and mature on June 1, 2024, unless earlier converted or repurchased.
The 2024 Notes were initially convertible into cash, shares of our common stock or a combination thereof, at our election, at an initial conversion rate of 12.3018 shares of common stock per $1,000 principal amount of 2024 Notes (which is equivalent to an initial conversion price of approximately $81.29 per share), as adjusted pursuant to the terms of the original agreement,indenture governing the portfolio2024 Notes (the "Indenture"). The conversion rate of the 2024 Notes, and thus the conversion price, may be adjusted in certain circumstances, including in connection with a conversion of the 2024 Notes made following certain fundamental changes and under other circumstances set forth in the Indenture. As of December 31, 2020, we made the irrevocable election to settle all conversions of the 2024 Notes through combination settlements of cash and shares of common stock, with a specified dollar amount of $1,000 per $1,000 principal amount of 2024 Notes and any remaining amounts in shares of common stock.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding March 1, 2024, the 2024 Notes will be convertible only under certain circumstances as set forth in the Indenture, including on any date during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2019 if the closing sale price of the common stock was more than 130% of the applicable conversion price (approximately $105.68 based on the current conversion price of the 2024 Notes) on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter.
Commencing on March 1, 2024, the 2024 Notes will be convertible at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the 2024 Notes.
The Company may not redeem the 2024 Notes prior to their maturity date.
If a fundamental change (as defined in the Indenture) occurs, holders may require the Company to purchase all or a portion of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be supplementedrepurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The 2024 Notes are our senior unsecured obligations and rank equally in right of payment with any of our current and any future senior unsecured indebtedness. The 2024 Notes are effectively subordinated to all of our future secured indebtedness to the extent of the value of the related collateral, and the 2024 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of our subsidiaries.
On May 29 and May 31, 2019, in connection with the offering of the 2024 Notes, we entered into convertible note hedge transactions (collectively, the “2024 Note Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2024 Notes, subject to adjustment, and are exercisable upon any conversion of the 2024 Notes. The aggregate cost of the 2024 Note Hedge Transactions was $72.0 million.
On May 29 and May 31, 2019, we also entered into privately negotiated warrant transactions (collectively, the “2024 Warrant Transactions” and, together with the 2024 Note Hedge Transactions, the “2024 Call Spread Transactions”), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock at an initial strike price of $109.43 per share, subject to adjustment. As consideration for the 2024 Warrant Transactions, we received aggregate proceeds of $47.6 million. The net cost of the 2024 Call Spread Transactions was $24.4 million.
The net proceeds from the issuance of the 2024 Notes, after deducting fees and offering expenses, were used for the following: (i) $232.7 million was used to repurchase $221.1 million in aggregate principal amount of the 2020 Notes (as defined below) in privately negotiated transactions concurrently with the offering of the 2024 Notes, (ii) $19.6 million was used to repurchase shares of common stock at $62.53 per share, the closing price of the stock on May 29, 2019; and (iii) $24.4 million, in addition to the proceeds from the 2024 Warrant Transactions discussed above, was used to fund the cost of the 2024 Call Spread Transactions.
In 2022, the Company repurchased $273.8 million in aggregate principal amount of the 2024 Notes in privately negotiated transactions concurrently with the offering of the 2027 Notes. We specifically negotiated the repurchase of the 2024 Notes with investors who concurrently purchased the 2027 Notes, such that their purchase of the 2027 Notes funded our repurchase of the 2024 Notes. As a result of the partial repurchase of the 2024 Notes, $126.2 million in aggregate principal amount of the 2024 Notes remained outstanding as of December 31, 2022. Additionally, in connection with the partial repurchase of the 2024 Notes, the Company entered into partial unwind agreements that amend the terms of the 2024 Note Hedge Transactions to reduce the number of options corresponding to the principal amount of the repurchased 2024 Notes. The unwind agreements also reduce the number of warrants exercisable under the 2024 Warrant Transactions. As a result of the partial unwind transactions, approximately 1.6 million shares of common stock in the aggregate were covered under each of the 2024 Note Hedge Transactions and the 2024 Warrant Transactions as of December 31, 2022. As of December 31, 2022, the warrants under the 2024 Warrant Transactions had a strike price of approximately $109.43 per share, as adjusted. Proceeds received from the unwind of the 2024 Note Hedge Transactions were $11.9 million, and consideration paid for the unwind of the 2024 Warrant Transactions was $3.8 million, resulting in net proceeds received of $8.0 million for the combined unwind transactions.
Because the concurrent redemption of the 2024 Notes and a portion of issuance of the 2027 Notes were executed with the same investors, we evaluated the transaction as a debt restructuring, on a creditor by creditor basis. The accounting conclusion was based on whether the exchange was a jointly funded R&D collaboration. This jointly funded R&D collaborationcontemporaneous exchange of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor and if it was terminateddetermined to have substantially different terms. All creditors involved in the repurchase transaction also purchased 2027 Notes in approximately the same or greater amount as the 2024 Notes principal repurchased. Additionally, the repurchase of the 2024 Notes and issuance of the 2027 Notes were deemed to have substantially different terms on the basis that the fair value of the conversion feature increased by more than 10% of the carrying value of the 2024 Notes, and therefore, the repurchase of the 2024 Notes was accounted for as a debt extinguishment. We recognized a $11.2 million loss on extinguishment of debt during 2022 in connection with this repurchase, which is included within "Other (expense) income, net" in the consolidated statement of income. The loss on extinguishment represents the difference between the fair value of consideration paid to reacquire the 2024 Notes and the carrying amount of the debt, including any unamortized debt issuance costs attributable to the 2024 Notes redeemed. The remaining unamortized debt issuance costs of $1.2 million will continue to be amortized throughout the remaining life of the 2024 Notes.
2020 Senior Convertible Notes, and Related Note Hedge and Warrant Transactions
During second quarter 2019, the Company used $232.7 million from the offering of the 2024 Notes to repurchase $221.1 million in aggregate principal amount of the 1.50% Senior Convertible Notes due 2020 (the "2020 Notes") in privately negotiated transactions concurrently with the offering of the 2024 Notes. On March 1, 2020, the maturity date of the 2020 Notes, the Company repaid in full the remaining $94.9 million of outstanding principal.
The following table presents the amount of interest cost recognized for the years ended December 31, 2022, 2021 and 2020 related to the contractual interest coupon, accretion of the debt discount and the amortization of financing costs (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | 2027 Notes | 2024 Notes | Total | | 2024 Notes | | 2024 Notes | 2020 Notes | Total |
Contractual coupon interest | | $ | 9,526 | | $ | 4,760 | | $ | 14,286 | | | $ | 8,000 | | | $ | 8,000 | | $ | 237 | | $ | 8,237 | |
Accretion of debt discount (a) | | — | | — | | — | | | — | | | 13,157 | | 669 | | 13,826 | |
Amortization of financing costs | | 990 | | 1,018 | | 2,008 | | | 1,627 | | | 1,176 | | 70 | | 1,246 | |
Total | | $ | 10,516 | | $ | 5,778 | | $ | 16,294 | | | $ | 9,627 | | | $ | 22,333 | | $ | 976 | | $ | 23,309 | |
a. Due to the adoption of ASU 2020-06 on January 1, 2021, the unamortized interest discount was reclassified back to the carrying value of the 2024 Notes.
Madison Arrangement
In conjunction with the acquisition of Technicolor's Research & Innovation unit (the "R&I Acquisition"), which is discussed below. Members of Technicolor’s licensing, legal and other support teams in offices in Rennes and Paris, France; Princeton, New Jersey, USA; and other locations joined InterDigital’s team of more than 300 R&D and other staff in locations around the world. In addition,Technicolor Patent Acquisition, we have assumed Technicolor’s rights and obligations under a joint licensing program withthe Madison Arrangement, which commenced in 2015. The Madison Arrangement falls under the scope of ASC 808, Collaborative Arrangements.
Under the Madison Arrangement, Technicolor and Sony Corporationcombined portions of their respective digital TV (“Sony”DTV”) relating to digital televisions and standalone computer display monitors (the “Madison Arrangement”monitor (“CDM”), including Technicolor's role patent portfolios and created a combined licensing opportunity to DTV and CDM manufacturers. Per an Agency and Management Services Agreement (“AMSA”) entered into upon the creation of the Madison Arrangement, Technicolor was initially appointed as sole licensing agent of the arrangement, and InterDigital has now assumed that role. As licensing agent, we are responsible for making decisions regarding the prosecution and maintenance of the combined patent portfolio and the licensing and enforcement of the combined patent portfolio in the field of use of DTVs and CDMs on an exclusive basis during the term of the AMSA in exchange for an agent fee.
We were deemed to be the principal in this collaborative arrangement under ASC 808, and, as such, in accordance with ASC 606-10-55-36, Revenue From Contracts with Customers - Principal Agent Considerations, we record revenues generated on sales to third parties and costs incurred on a gross basis in the consolidated statements of income. Therefore, we recognize all royalties from customers as revenue and payments to Sony for its royalty share as operating expenses within the consolidated statements of income. Cost reimbursements for expenses incurred resulting from fulfilling the duties of the licensing agent are recorded as contra expenses. During the years ended December 31, 2022, 2021, and 2020, gross revenues recorded related to the Madison Arrangement were $14.5 million, $26.1 million, and $5.5 million, respectively. Net operating expenses related to the Madison Arrangement during the years ended December 31, 2022, 2021, and 2020 were $7.9 million, $18.9 million and $8.4 million, including $5.3 million, $11.9 million, and $2.5 million related to revenue sharing, respectively, and are reflected primarily within "Licensing" expenses in the consolidated statement of income.
Long-term debt
An affiliate of CPPIB Credit Investments Inc. ("CPPIB Credit"), a wholly owned subsidiary of Canada Pension Plan Investment Board, is a third-party investor in the Madison Arrangement. We accountCPPIB Credit has made certain payments to Technicolor and Sony and has agreed to contribute cash to fund certain capital reserve obligations under the arrangement in exchange for a percentage of future revenues, specifically through September 11, 2030 in regard to the Technicolor patents.
Upon our assumption of Technicolor’s rights and obligations under the Madison Arrangement, as a collaborative arrangement. As part of this transaction, we also granted back to Technicolor a perpetual license for patents acquired in the transaction.
The Technicolor Patent Acquisitionour relationship with CPPIB Credit met the definitioncriteria in ASC 470-10-25, Sales of Future Revenues or Various Other Measures of Income (“ASC 470”), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business combination and, as such, was accountedsegment, trademark, patent, or contractual right for usinga defined period. Under this guidance, we recognized the acquisition methodfair value of accounting. Under the terms of the agreement, in third quarter 2018, we paid Technicolor $158.9 million in cash, inclusive of $15.9 million of cash acquired, yielding net cash consideration of $143.0 million. We funded this
payment with cash on hand. Under the terms of the original agreement, Technicolor wasour contingent obligation to receive 42.5% of all of InterDigital's future cash receipts (net of estimated operating expenses) from InterDigital’s new licensing efforts in the consumer electronics field; there was no revenue sharing associated with InterDigital’s mobile industry licensing efforts. As such, we accounted for the portion of the future cash receipts owed to Technicolor relating to patents existing as of the date of the acquisition as a contingent consideration liability, which was valued at $18.6 million as of the acquisition date. This revenue-sharing arrangement and associated contingent consideration liability were modified in conjunction with the R&I Acquisition, which closed during second quarter 2019. Refer to the discussion below. Additionally,CPPIB Credit, as of the acquisition date, we estimated we would receive payments totaling 20.2 million relating to the transaction from Technicolor.
We allocated the fair value of consideration transferred to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. We recorded the excess of the fair value of consideration transferred over the net values of these assets and liabilities as goodwill. We estimated the fair value of the intangible assetslong-term debt in this transaction through a combination of a discounted cash flow analysis (the income approach) and an analysis of comparable market transactions (the market approach). For the income approach, we based the inputs and assumptions used to develop these estimates on a market participant perspective and included estimates of projected revenues, discount rates, economic lives and income tax rates, among others, and all of these estimates require significant management judgment. For the market approach, we applied judgment to identify the most comparable market transactions to this transaction. Refer to Note 7 for discussion regarding the valuation methodologies used for the contingent consideration liability.
The following table summarizes the fair value of consideration transferred and our allocation of that consideration based on the fair values of the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
| | | | |
| | As of July 30, 2018 | |
Cash | $ | 158,898 |
| |
Contingent consideration liability | | 18,616 |
| |
| $ | 177,514 |
| ` |
Less: Transaction-related receivable | | (20,200 | ) | |
Net fair value of consideration transferred | $ | 157,314 |
| |
| | | |
Allocation: | | | Estimated useful life (Years) |
Net tangible assets and liabilities: | | | |
Restricted cash | $ | 15,913 |
| |
Other current assets | | 5,600 |
| |
Other non-current assets | | 3,116 |
| |
Current liabilities | | (6,219 | ) | |
Long-term debt | | (17,717 | ) | |
Other long-term liabilities | | (3,767 | ) | |
Total net tangible assets and liabilities | $ | (3,074 | ) | |
| | | |
Identified intangible assets: | | | |
Patents | $ | 154,000 |
| 9 - 10 |
Goodwill(1) | | 6,388 |
| |
Total identified intangible assets | $ | 160,388 |
| |
| | | |
Total fair value of consideration transferred | $ | 157,314 |
| |
(1) Goodwill consists of expected synergies resulting from the combination of our and Technicolor’s patent licensing businesses in the increasingly complementary areas of mobile and video technology. We expect almost all of the goodwill resulting from the Technicolor Patent Acquisition will be deductible for income tax purposes.
The amount of revenue and earnings that would have been included in the Company’s consolidated statements of income for the years ended December 31, 2018 and 2017 had the acquisition date been January 1, 2017 are reflected in the
table below. These amounts have been calculated after applying the Company's accounting policies and adjusting the results to reflect additional interest expense as well as amortization that would have been charged assuming the fair value adjustments to amortizable intangible assets had been recorded as of January 1, 2017. In addition, pro forma adjustments have been made to reflect the impact of the transaction-related costs discussed below. These unaudited pro forma combined results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated, or that may result in the future. The amounts in the table are unaudited (in thousands, except per share data):
|
| | | | | | |
| For the Year Ended |
| December 31, |
| 2018 | 2017 |
| (Unaudited) |
Actual revenue | $ | 307,404 |
| $ | 532,938 |
|
Supplemental pro forma revenue | $ | 314,096 |
| $ | 541,921 |
|
Actual earnings | $ | 65,031 |
| $ | 176,220 |
|
Supplemental pro forma earnings | $ | 52,754 |
| $ | 107,531 |
|
Actual diluted earnings per share | $ | 1.84 |
| $ | 4.93 |
|
Supplemental pro forma diluted earnings per share | $ | 1.49 |
| $ | 3.01 |
|
Acquisition of Technicolor's Research & Innovation Unit
On May 31, 2019, we completed the acquisition of the Research & Innovation unit of Technicolor SA, which we refer to as the R&I Acquisition. The R&I Acquisition expanded the Company’s research capabilities in video coding, Internet of Things (IoT) and smart home, imaging sciences, augmented reality and virtual reality, and artificial intelligence and machine learning technologies. The Technicolor R&I unit was the driving creative force behind the patent portfolio that was acquired in the Technicolor Patent Acquisition discussed above.
The R&I Acquisition unit met the definition of an asset acquisition and was accounted for using the cost accumulation and allocation model. There was 0 cash consideration for the R&I Acquisition. As consideration for the R&I Acquisition, the jointly funded R&D collaboration that was entered into as part of the Technicolor Patent Acquisition was terminated. Technicolor will continue to fund research to be performed by the R&I unit for certain limited projects for a specified time period, subject to renewal. The Company also assumed certain employee-related liabilities, including obligations for certain defined benefit post-retirement plans for the acquired R&I unit employees, which are further discussed below. Additionally, Technicolor agreed to reduce its rights under the revenue-sharing arrangement entered into as part of the Technicolor Patent Acquisition, as further discussed below.
The R&I Acquisition resulted in a net gain of approximately $14.2 million, inclusive of the $20.5 million gain from the derecognition of the contingent consideration liability described below, all of which is included within “Other Income (Expense), Net” in the consolidated statement of income for the year ended December 31, 2019.
Contingent Consideration
As discussed above, in conjunction with the initial Technicolor Patent Acquisition, Technicolor was to receive 42.5% of all of InterDigital's future cash receipts (net of estimated operating expenses) from InterDigital's new licensing efforts in the consumer electronics field; there was no revenue sharing associated with InterDigital’s mobile industry licensing efforts. The portion of the future cash receipts relating to patents existing as of the date of the acquisition was originally accounted for as a contingent consideration liability in accordance with ASC 805-30-25, Business Combinations - Contingent Consideration. There are no minimum or maximum payments under the revenue sharing arrangement, and, except in certain circumstances, the arrangement continues through December 31, 2038.
The estimated acquisition date fair value of the contingent consideration liability of $18.6 million was determined utilizing a Monte Carlo simulation model.balance sheet. This initial fair value measurement was based on the perspective of a market participant and includedincludes significant unobservable inputs thatwhich are classified as Level 3 inputs within the fair value hierarchy and are discussed furtherhierarchy. The fair value of the long-term debt as of December 31, 2022 is disclosed within Note 7.
6, "As a resultConcentration of the R&I Acquisition in second quarter 2019, uCredit Risk and Fair Value of Financial Assets and Financial Liabilities"nder the amended revenue-sharing arrangement described above, Technicolor will now receive 42.5% of. Our repayment obligations are contingent upon future cash receipts from new licensing effortsroyalty revenues generated from the Madison Arrangement only, subjectand there are no minimum or maximum payments under the arrangement.
Under ASC 470, amounts recorded as debt shall be amortized under the interest method. At each reporting period, we will review the discounted expected future cash flows over the life of the obligation. The Company made an accounting policy election to certain conditions and hurdles, but will no longer receive revenue-sharing from other licensing effortsutilize the catch-up method when there is a change in the consumer electronics field outsideestimated future cash flows, whereby we will adjust the carrying amount of the debt to the present value of the revised estimated future cash flows, discounted at the original effective interest rate, with a corresponding adjustment recognized as interest expense within “Interest expense” in the consolidated statements of income. The effective interest rate as of the acquisition date was approximately 14.5%. This rate represents the discount rate that equates the estimated future cash flows with the fair value of the debt as of the acquisition date, and is used to compute the amount of interest to be recognized each period based on the estimated life of the future revenue streams. During the years ended December 31, 2022, 2021 and 2020, we recognized $3.6 million, $2.9 million, and $3.1 million, respectively, of interest expense related to this debt which is included within “Interest expense” in the consolidated statements of income. Any future payments made to CPPIB Credit, or additional proceeds received from CPPIB Credit, will decrease or increase the long-term debt balance accordingly.
Restricted cash
Under the Madison Arrangement, the parties reserve cash in bank accounts to fund our activities to manage the portfolios. These accounts are custodial accounts for which the funds are restricted for this purpose. As of December 31, 2022 and 2021, the Company had $9.7 million and $5.9 million, respectively, of restricted cash included within the consolidated balance sheet attributable to the Madison Arrangement. We determinedRefer to Note 5, "Cash, Cash Equivalents, Restricted Cash and Marketable Securities", for a reconciliation of cash, cash equivalents and restricted cash within the consolidated balance sheets.
Technicolor Contingent Consideration
As part of the Technicolor Acquisitions, we entered into a revenue-sharing arrangement with Technicolor that the initialcreated a contingent consideration liability, from the Technicolor Patent Acquisition was significantly modified in conjunction with the R&I Acquisition, and, aswhich is
such, the contingent consideration liability will now be accounted for under ASC 450 - Contingencies under the asset acquisition framework when the liability is deemed probable and estimable. Since Under the contingent consideration liability arisingrevenue-sharing arrangement, Technicolor receives 42.5% of future cash receipts from new licensing efforts from the amended revenue-sharing arrangement was not probableMadison Arrangement only, subject to certain conditions and estimable as of the R&I Acquisition date, the carrying value of the previous contingent consideration liability was derecognized, which resulted in a $20.5 million gain during the year ended December 31, 2019 and is included within "Other Income (Expense), Net" in the consolidated statement of income for the period.hurdles. As of December 31, 2019,2022 and 2021, the contingent consideration liability from the amended revenue-sharing arrangement was deemed not probable and estimable and is therefore not reflected within the consolidated financial statements.
10. COMMITMENTS
Minimum future payments for accounts payable and other purchase commitments, excluding long-term operating leases for office space, as of December 31, 2022 were as follows (in thousands):
| | | | | |
2023 | $ | 12,000 | |
2024 | 21 | |
2025 | — | |
2026 | — | |
2027 | — | |
Thereafter | $ | — | |
Refer to Note 9, "Obligations," for details of the Company's long-term debt obligations and the revenue-sharing arrangement with Technicolor resulting from the Technicolor Patent Acquisition and the R&I Acquisition. Refer to Note 16, "Leases," for maturities of the Company's operating lease liabilities as of December 31, 2022.
Defined Benefit PlansFair Value Measurements
In connection withWe use various valuation techniques and assumptions when measuring the Technicolor Patent Acquisitionfair value of our assets and liabilities. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the R&I Acquisition, we assumedrisks inherent in the inputs to the valuation technique. This guidance established a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:
Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates.
Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain defined benefit plans whichinstances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. We use quoted market prices for similar assets to estimate the fair value of our Level 2 investments.
Recurring Fair Value Measurements
Our financial assets are included within short-term investments on our consolidated balance sheets, unless otherwise indicated. Our financial assets and liabilities that are accounted for at fair value on a recurring basis are presented in accordance with the tables below as of December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 643,825 | | | $ | — | | | $ | — | | | $ | 643,825 | |
Commercial paper (b) | — | | | 209,956 | | | — | | | 209,956 | |
U.S. government securities (c) | — | | | 243,840 | | | — | | | 243,840 | |
Corporate bonds, asset backed and other securities (d) | — | | | 113,838 | | | — | | | 113,838 | |
| $ | 643,825 | | | $ | 567,634 | | | $ | — | | | $ | 1,211,459 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 705,725 | | | $ | — | | | $ | — | | | $ | 705,725 | |
Commercial paper (b) | — | | | 158,452 | | | — | | | 158,452 | |
U.S. government securities | — | | | 51,301 | | | — | | | 51,301 | |
Corporate bonds and asset backed securities | — | | | 33,091 | | | — | | | 33,091 | |
| $ | 705,725 | | | $ | 242,844 | | | $ | — | | | $ | 948,569 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
_______________
(a)ASC 715 - Compensation - Retirement Benefits. These plans include a retirement lump sum indemnity planIncluded within cash and jubilee plan, both of which provide benefit payments to employees based upon years of service and compensation levels.cash equivalents.
(b)As of December 31, 2019, the combined accumulated projected benefit obligation related to these plans totaled $6.2 million. Service cost2022 and interest cost for the combined plans totaled less than $0.12021, $26.7 million for the year endedand $7.5 million of commercial paper was included within cash and cash equivalents, respectively.
(c)As of December 31, 2019. 2022, $15.7 million of U.S. government securities was included within cash and cash equivalents.
(d)As of December 31, 2022, $16.9 million of corporate bonds, asset backed and other securities was included within cash and cash equivalents.
Fair Value of Long-Term Debt
Senior Convertible Notes
The weighted average discount rateprincipal amount, carrying value and assumed salary increase rate for these plans were 0.7% and 3.0%, respectively. These plans are not required to be funded and were not fundedrelated estimated fair value of the Company's senior convertible debt reported in the consolidated balance sheets as of December 31, 2019. Expected future benefit payments under these plans as of2022 and December 31, 2019 were2021 was as follows (in thousands):. The aggregate fair value of the principal amount of the senior convertible long-term debt is a Level 2 fair value measurement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Principal Amount | | Carrying Value | | Fair Value | | Principal Amount | | Carrying Value | | Fair Value |
2027 Senior Convertible Long-Term Debt | $ | 460,000 | | | $ | 451,062 | | | $ | 441,485 | | | $ | — | | | $ | — | | | $ | — | |
2024 Senior Convertible Long-Term Debt | $ | 126,174 | | | $ | 125,342 | | | $ | 119,941 | | | $ | 400,000 | | | $ | 395,632 | | | $ | 437,760 | |
|
| | | |
2020 | $ | 94 |
|
2021 | 177 |
|
2022 | 239 |
|
2023 | 568 |
|
2024 | 248 |
|
2025 - 2029 | 1,935 |
|
73
Madison ArrangementTechnicolor Patent Acquisition Long-term Debt
As discussed above,more fully disclosed in Note 9, "Obligations," we recognized long-term debt in conjunction with the Technicolor Patent Acquisition. The carrying value and related estimated fair value of the Technicolor Patent Acquisition long-term debt reported in the consolidated balance sheet as of December 31, 2022 and December 31, 2021 was as follows (in thousands). The aggregate fair value of the Technicolor Patent Acquisition long-term debt is a Level 3 fair value measurement.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Technicolor Patent Acquisition Long-Term Debt | $ | 30,662 | | | $ | 28,048 | | | $ | 27,113 | | | $ | 28,569 | |
Non-recurring Fair Value Measurements
Investments in Other Entities
As disclosed in Note 2, "Summary of Significant Accounting Policies and New Accounting Guidance", we made an accounting policy election to utilize a measurement alternative for equity investments that do not have readily determinable fair values, which applies to our long-term strategic investments in other entities. Under the alternative, our long-term strategic investments in other entities that do not have readily determinable fair values are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any adjustments to the carrying value of those investments are considered non-recurring fair value measurements.
During year ended December 31, 2022, we recognized a net loss of $1.3 million and during year ended 2021 and 2020 we recognized gains of $7.6 million, and $5.6 million, respectively, resulting from observable price changes of our long-term strategic investments, which were included within “Other (expense) income, net” in the consolidated statement of income. Certain of our investments in other entities may be seeking additional financing in the next twelve months or potential exit strategies. We will continue to review and monitor our investments in other entities for any indications of an increase in fair value or impairment.
Lease Assets
During 2020, we recognized a $1.1 million impairment, comprised of $0.8 million of Property and Equipment, and $0.3 million of Operating lease right-of-use asset related to the abandonment of one of our leased properties, which was included within “Operating Expenses” in the consolidated statement of income.
Patents
During 2021, we recognized a $13.2 million impairment, resulting from our restructuring activities as described in Note 20, "Restructuring Activities", which was included within “Restructuring activities” expenses in the consolidated statement of income. The Patents held for sale are recorded at fair value on December 31, 2022 and 2021 and are included within "Prepaid and other current assets" in the consolidated balance sheet.
Also during 2021, we renewed our multi-year, worldwide, non-exclusive patent license agreement with Sony and a portion of the future consideration for the agreement was in the form of patents. These patents transferred during 2022 and we have determined the estimated fair value of the patents for determining the transaction price for revenue recognition purposes, which was estimated to be $30.1 million utilizing the income and market approach. The value will be amortized as a non-cash expense over the patents' estimated useful lives.
During 2020, we entered into a patent license agreement with Huawei and a portion of the future consideration for the agreement was in the form of patents. We have determined the estimated fair value of the patents for determining the transaction price for revenue recognition purposes, which was estimated to be $19.3 million utilizing the market approach. The value is amortized as a non-cash expense over the patents' estimated useful lives.
As noted above, we estimated the fair value of the patents in these transactions using one of, or a combination of, an analysis of comparable market transactions (the market approach), a discounted cash flow analysis (the income approach) and/or by quantifying the amount of money required to replace the future service capability of the assets (the cost approach). For the market approach, judgment was applied as to which market transactions were most comparable to the transaction. For the income approach, the inputs and assumptions used to develop these estimates were based on a market participant perspective and included estimates of projected royalties, discount rates, economic lives and income tax rates, among others. For the cost approach, we utilized the historical cost of assets of similar technologies to determine the estimated replacement cost, including research, development, testing and patent application fees.
7. PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Computer equipment and software | $ | 15,144 | | | $ | 14,787 | |
Leasehold improvements | 12,636 | | | 11,743 | |
Building and improvements | 3,517 | | | 3,574 | |
Engineering and test equipment | 1,317 | | | 1,470 | |
| | | |
| | | |
Furniture and fixtures | 670 | | | 799 | |
Property and equipment, gross | 33,284 | | | 32,373 | |
Less: accumulated depreciation | (21,946) | | | (18,996) | |
Property and equipment, net | $ | 11,338 | | | $ | 13,377 | |
Depreciation expense was $4.9 million, $5.6 million and $5.3 million in 2022, 2021 and 2020, respectively.
8. PATENTS, GOODWILL AND OTHER INTANGIBLE ASSETS
Patents
As of December 31, 2022 and 2021, patents consisted of the following (in thousands, except for useful life data):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Weighted average estimated useful life (years) | 10.0 | | 9.9 |
Gross patents | $ | 1,018,957 | | | $ | 956,387 | |
Accumulated amortization | (664,958) | | | (592,802) | |
Patents, net | $ | 353,999 | | | $ | 363,585 | |
Amortization expense related to capitalized patent costs was $73.4 million, $71.5 million and $74.9 million in 2022, 2021 and 2020, respectively. These amounts are recorded within the "Licensing" line of our consolidated statements of income.
The estimated aggregate amortization expense for the next five years related to our patents balance as of December 31, 2022 is as follows (in thousands):
| | | | | |
2023 | $ | 71,443 | |
2024 | 60,983 | |
2025 | 57,417 | |
2026 | 49,000 | |
2027 | $ | 44,027 | |
Goodwill
The following table shows the change in the carrying amount of our goodwill balance from December 31, 2020 to December 31, 2022, all of which is allocated to our one reportable segment (in thousands):
| | | | | |
Goodwill balance as of December 31, 2020 | $ | 22,421 | |
Activity | — | |
Goodwill balance as of December 31, 2021 | $ | 22,421 | |
Activity | — | |
Goodwill balance as of December 31, 2022 | $ | 22,421 | |
9. OBLIGATIONS
Long-term debt obligations, excluding the long-term debt resulting from the Technicolor Patent Acquisition, are comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| 2027 Notes | | 2024 Notes | | Total | | 2024 Notes |
Principal | $ | 460,000 | | | $ | 126,174 | | | $ | 586,174 | | | $ | 400,000 | |
Less: | | | | | | | |
Deferred financing costs | (8,938) | | | (832) | | | (9,770) | | | (4,368) | |
Net carrying amount of the Convertible Notes | $ | 451,062 | | | $ | 125,342 | | | $ | 576,404 | | | $ | 395,632 | |
| | | | | | | |
| | | | | | | |
There were no finance leases as of December 31, 2022 or December 31, 2021.
Maturities of principal of the long-term debt obligations of the Company as of December 31, 2022, excluding the long-term debt resulting from the Technicolor Patent Acquisition, are as follows (in thousands): | | | | | |
2023 | $ | — | |
2024 | 126,174 | |
2025 | — | |
2026 | — | |
2027 | 460,000 | |
Thereafter | — | |
| $ | 586,174 | |
2027 Notes, and Related Note Hedge and Warrant Transactions
On May 27, 2022 we issued $460.0 million in aggregate principal amount of 3.50% Senior Convertible Notes due 2027 (the "2027 Notes"). The net proceeds from the issuance of the 2027 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $450.0 million. The 2027 Notes bear interest at a rate of 3.50% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2022, and mature on June 1, 2027, unless earlier redeemed, converted or repurchased.
The 2027 Notes will be convertible into cash up to the aggregate principal amount of the notes to be converted and in respect of the remainder, if any, of the Company’s obligation in excess of the aggregate principal amount of the notes being converted, pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s election, at an initial conversion rate of 12.9041 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $77.49 per share). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances, including in connection with conversions made following fundamental changes and under other circumstances as set forth in the indenture governing the 2027 Notes.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding March 1, 2027, the notes will be convertible only under the following circumstances: (1) on any date during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2022 if the closing sale price of the Common Stock was more than 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter; (2) if the Company distributes to all or substantially all holders of the Common Stock any rights, options or warrants (other than in connection with a stockholder rights plan prior to separation of such rights from the shares of the Common Stock) entitling them to purchase, for a period of 45 calendar days or less from the issuance date for such distribution, shares of Common Stock at a price per share less than the average closing sale price for the ten consecutive trading day period ending on, and including, the trading day immediately preceding the declaration date for such distribution; (3) if the Company distributes to all or substantially all holders of the Common Stock any cash or other assets, debt securities or rights to purchase the Company’s securities (other than pursuant to a rights plan), which distribution has a per share value exceeding 10% of the closing sale price of the Common Stock on the trading day immediately preceding the declaration date for such distribution; (4) if the Company engages in certain corporate transactions as described in the indenture governing the 2027 Notes; (5) if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; (6) during a specified period if a fundamental change (as defined in the indenture governing the 2027 Notes) occurs; or (7) during the five consecutive business day period following any five consecutive trading day period in which the trading price for the notes for each day during such five trading day period was less than 98% of the closing sale price of the Common Stock multiplied by the applicable conversion rate on each such trading day. Commencing on March 1, 2027, the notes will be convertible in multiples of $1,000 principal amount, at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the notes.
The Company may not redeem the notes prior to June 5, 2025. The Company may redeem for cash all or any portion of the notes, at the Company’s option, on or after June 5, 2025, if the last reported sale price of the Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on and including the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding the redemption date.
If a fundamental change (as defined in the indenture governing the 2027 Notes) occurs, holders may require the Company to purchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 2027 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with any of the Company’s current and any future senior unsecured indebtedness, including its 2.00% senior convertible notes due 2024 (the “2024 Notes” and together with the 2027 Notes, the "Convertible Notes"). The 2027 Notes are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the related collateral, and the 2027 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries.
On May 24 and May 25, 2022, in connection with the offering of the 2027 Notes, we entered into convertible note hedge transactions (collectively, the “2027 Note Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2027 Notes, subject to adjustment, and are exercisable upon any conversion of the 2027 Notes. The aggregate cost of the 2027 Note Hedge Transactions was $80.5 million.
Also on May 24 and May 25, 2022, we also entered into privately negotiated warrant transactions (collectively, the “2027 Warrant Transactions” and, together with the 2027 Note Hedge Transactions, the “2027 Call Spread Transactions”), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock at an initial strike price of $106.37 per share, subject to adjustment. As consideration for the 2027 Warrant Transactions, we received aggregate proceeds of $43.7 million. The net cost of the 2027 Call Spread Transactions was $36.8 million, which was funded out of the net proceeds from the offering of the 2027 Notes.
Accounting Treatment of the 2027 Notes and Related Convertible Note Hedge and Warrant Transactions
The 2027 Call Spread Transactions were classified as equity and the 2027 Notes were classified as long-term debt. The effective Julyinterest rate is approximately 4.02%.
In connection with the above-noted transactions, the Company incurred approximately $9.9 million of directly related costs, which were capitalized as deferred financing costs and as a reduction of long-term debt. These costs are being amortized as interest expense over the term of the debt using the effective interest method.
2024 Senior Convertible Notes, and Related Note Hedge and Warrant Transactions
On June 3, 2019 we issued $400.0 million in aggregate principal amount of 2.00% Senior Convertible Notes due 2024 (the "2024 Notes"). The net proceeds from the issuance of the 2024 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $391.6 million. The 2024 Notes bear interest at a rate of 2.00% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2019, and mature on June 1, 2024, unless earlier converted or repurchased.
The 2024 Notes were initially convertible into cash, shares of our common stock or a combination thereof, at our election, at an initial conversion rate of 12.3018 shares of common stock per $1,000 principal amount of 2024 Notes (which is equivalent to an initial conversion price of approximately $81.29 per share), as adjusted pursuant to the terms of the indenture governing the 2024 Notes (the "Indenture"). The conversion rate of the 2024 Notes, and thus the conversion price, may be adjusted in certain circumstances, including in connection with a conversion of the 2024 Notes made following certain fundamental changes and under other circumstances set forth in the Indenture. As of December 31, 2020, we made the irrevocable election to settle all conversions of the 2024 Notes through combination settlements of cash and shares of common stock, with a specified dollar amount of $1,000 per $1,000 principal amount of 2024 Notes and any remaining amounts in shares of common stock.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding March 1, 2024, the 2024 Notes will be convertible only under certain circumstances as set forth in the Indenture, including on any date during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2018,2019 if the closing sale price of the common stock was more than 130% of the applicable conversion price (approximately $105.68 based on the current conversion price of the 2024 Notes) on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter.
Commencing on March 1, 2024, the 2024 Notes will be convertible at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the 2024 Notes.
The Company may not redeem the 2024 Notes prior to their maturity date.
If a fundamental change (as defined in the Indenture) occurs, holders may require the Company to purchase all or a portion of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The 2024 Notes are our senior unsecured obligations and rank equally in right of payment with any of our current and any future senior unsecured indebtedness. The 2024 Notes are effectively subordinated to all of our future secured indebtedness to the extent of the value of the related collateral, and the 2024 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of our subsidiaries.
On May 29 and May 31, 2019, in connection with the offering of the 2024 Notes, we entered into convertible note hedge transactions (collectively, the “2024 Note Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2024 Notes, subject to adjustment, and are exercisable upon any conversion of the 2024 Notes. The aggregate cost of the 2024 Note Hedge Transactions was $72.0 million.
On May 29 and May 31, 2019, we also entered into privately negotiated warrant transactions (collectively, the “2024 Warrant Transactions” and, together with the 2024 Note Hedge Transactions, the “2024 Call Spread Transactions”), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock at an initial strike price of $109.43 per share, subject to adjustment. As consideration for the 2024 Warrant Transactions, we received aggregate proceeds of $47.6 million. The net cost of the 2024 Call Spread Transactions was $24.4 million.
The net proceeds from the issuance of the 2024 Notes, after deducting fees and offering expenses, were used for the following: (i) $232.7 million was used to repurchase $221.1 million in aggregate principal amount of the 2020 Notes (as defined below) in privately negotiated transactions concurrently with the offering of the 2024 Notes, (ii) $19.6 million was used to repurchase shares of common stock at $62.53 per share, the closing price of the stock on May 29, 2019; and (iii) $24.4 million, in addition to the proceeds from the 2024 Warrant Transactions discussed above, was used to fund the cost of the 2024 Call Spread Transactions.
In 2022, the Company repurchased $273.8 million in aggregate principal amount of the 2024 Notes in privately negotiated transactions concurrently with the offering of the 2027 Notes. We specifically negotiated the repurchase of the 2024 Notes with investors who concurrently purchased the 2027 Notes, such that their purchase of the 2027 Notes funded our repurchase of the 2024 Notes. As a result of the partial repurchase of the 2024 Notes, $126.2 million in aggregate principal amount of the 2024 Notes remained outstanding as of December 31, 2022. Additionally, in connection with the partial repurchase of the 2024 Notes, the Company entered into partial unwind agreements that amend the terms of the 2024 Note Hedge Transactions to reduce the number of options corresponding to the principal amount of the repurchased 2024 Notes. The unwind agreements also reduce the number of warrants exercisable under the 2024 Warrant Transactions. As a result of the partial unwind transactions, approximately 1.6 million shares of common stock in the aggregate were covered under each of the 2024 Note Hedge Transactions and the 2024 Warrant Transactions as of December 31, 2022. As of December 31, 2022, the warrants under the 2024 Warrant Transactions had a strike price of approximately $109.43 per share, as adjusted. Proceeds received from the unwind of the 2024 Note Hedge Transactions were $11.9 million, and consideration paid for the unwind of the 2024 Warrant Transactions was $3.8 million, resulting in net proceeds received of $8.0 million for the combined unwind transactions.
Because the concurrent redemption of the 2024 Notes and a portion of issuance of the 2027 Notes were executed with the same investors, we evaluated the transaction as a debt restructuring, on a creditor by creditor basis. The accounting conclusion was based on whether the exchange was a contemporaneous exchange of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor and if it was determined to have substantially different terms. All creditors involved in the repurchase transaction also purchased 2027 Notes in approximately the same or greater amount as the 2024 Notes principal repurchased. Additionally, the repurchase of the 2024 Notes and issuance of the 2027 Notes were deemed to have substantially different terms on the basis that the fair value of the conversion feature increased by more than 10% of the carrying value of the 2024 Notes, and therefore, the repurchase of the 2024 Notes was accounted for as a debt extinguishment. We recognized a $11.2 million loss on extinguishment of debt during 2022 in connection with this repurchase, which is included within "Other (expense) income, net" in the consolidated statement of income. The loss on extinguishment represents the difference between the fair value of consideration paid to reacquire the 2024 Notes and the carrying amount of the debt, including any unamortized debt issuance costs attributable to the 2024 Notes redeemed. The remaining unamortized debt issuance costs of $1.2 million will continue to be amortized throughout the remaining life of the 2024 Notes.
2020 Senior Convertible Notes, and Related Note Hedge and Warrant Transactions
During second quarter 2019, the Company used $232.7 million from the offering of the 2024 Notes to repurchase $221.1 million in aggregate principal amount of the 1.50% Senior Convertible Notes due 2020 (the "2020 Notes") in privately negotiated transactions concurrently with the offering of the 2024 Notes. On March 1, 2020, the maturity date of the 2020 Notes, the Company repaid in full the remaining $94.9 million of outstanding principal.
The following table presents the amount of interest cost recognized for the years ended December 31, 2022, 2021 and 2020 related to the contractual interest coupon, accretion of the debt discount and the amortization of financing costs (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | 2027 Notes | 2024 Notes | Total | | 2024 Notes | | 2024 Notes | 2020 Notes | Total |
Contractual coupon interest | | $ | 9,526 | | $ | 4,760 | | $ | 14,286 | | | $ | 8,000 | | | $ | 8,000 | | $ | 237 | | $ | 8,237 | |
Accretion of debt discount (a) | | — | | — | | — | | | — | | | 13,157 | | 669 | | 13,826 | |
Amortization of financing costs | | 990 | | 1,018 | | 2,008 | | | 1,627 | | | 1,176 | | 70 | | 1,246 | |
Total | | $ | 10,516 | | $ | 5,778 | | $ | 16,294 | | | $ | 9,627 | | | $ | 22,333 | | $ | 976 | | $ | 23,309 | |
a. Due to the adoption of ASU 2020-06 on January 1, 2021, the unamortized interest discount was reclassified back to the carrying value of the 2024 Notes.
Madison Arrangement
In conjunction with the Technicolor Patent Acquisition, we assumed Technicolor’s rights and obligations under the Madison Arrangement, which commenced in 2015. The Madison Arrangement falls under the scope of ASC 808, Collaborative Arrangements.
Under the Madison Arrangement, Technicolor and Sony combined portions of their respective digital TV (“DTV”) and computer display monitor (“CDM”) patent portfolios and created a combined licensing opportunity to DTV and CDM manufacturers. Per an Agency and Management Services Agreement (“AMSA”) entered into upon the creation of the Madison Arrangement, Technicolor was initially appointed as sole licensing agent of the arrangement, and InterDigital has now assumed that role. As licensing agent, we are responsible for making decisions regarding the prosecution and maintenance of the combined patent portfolio and the licensing and enforcement of the combined patent portfolio in the field of use of DTVs and CDMs on an exclusive basis during the term of the AMSA in exchange for an agent fee.
We were deemed to be the principal in this collaborative arrangement under ASC 808, and, as such, in accordance with ASC 606-10-55-36, Revenue From Contracts with Customers - Principal Agent Considerations, we record revenues generated on sales to third parties and costs incurred on a gross basis in the consolidated statements of income. Therefore, we recognize all royalties from customers as revenue and payments to Sony for its royalty share as operating expenses within the consolidated statements of income. Cost reimbursements for expenses incurred resulting from fulfilling the duties of the licensing agent are recorded as contra expenses. During the yearyears ended December 31, 2019,2022, 2021, and 2020, gross revenues recorded related to the Madison Arrangement were $13.5$14.5 million, $26.1 million, and are reflected within "Patent licensing royalties" in the consolidated statement of income.$5.5 million, respectively. Net operating expenses related to the Madison Arrangement during the yearyears ended December 31, 20192022, 2021, and 2020 were approximately $12.0$7.9 million, $18.9 million and $8.4 million, including $6.3$5.3 million, $11.9 million, and $2.5 million related to revenue sharing, respectively, and are reflected primarily within "Patent administration and licensingLicensing" expenses in the consolidated statement of income.
Long-term debt
An affiliate of CPPIB Credit Investments Inc. ("CPPIB Credit"), a wholly owned subsidiary of Canada Pension Plan Investment Board, is a third-party investor in the Madison Arrangement. CPPIB Credit has made certain payments to Technicolor and Sony and has agreed to contribute cash to fund certain capital reserve obligations under the arrangement in exchange for a percentage of future revenues, specifically through September 11, 2030 in regard to the Technicolor patents.
Upon our assumption of Technicolor’s rights and obligations under the Madison Arrangement, our relationship with CPPIB Credit met the criteria in ASC 470-10-25, Sales of Future Revenues or Various Other Measures of Income (“ASC 470”), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business segment, trademark, patent, or contractual right for a defined period. Under this guidance, we recognized the fair value of our contingent obligation to CPPIB Credit, as of the acquisition date, as long-term debt in our consolidated balance sheet. This initial fair value measurement was based on the perspective of a market participant and includes significant unobservable inputs which are classified as Level 3 inputs within the fair value hierarchy. The fair value of the long-term debt as of December 31, 20192022 is disclosed within Note 7.6, "Concentration of Credit Risk and Fair Value of Financial Assets and Financial Liabilities". Our repayment obligations are contingent upon future royalty revenues generated from the Madison Arrangement and there are no minimum or maximum payments under the arrangement.
Under ASC 470, amounts recorded as debt shall be amortized under the interest method. At each reporting period, we will review the discounted expected future cash flows over the life of the obligation. The Company made an accounting policy election to utilize the catch-up method when there is a change in the estimated future cash flows, whereby we will adjust the carrying amount of the debt to the present value of the revised estimated future cash flows, discounted at the original effective interest rate, with a corresponding adjustment recognized as interest expense within “Interest expense” in the consolidated statements of income. The effective interest rate as of the acquisition date was approximately 14.5%. This rate represents the discount rate that equates the estimated future cash flows with the fair value of the debt as of the acquisition date, and is used to compute the amount of interest to be recognized each period based on the estimated life of the future revenue streams. During the yearyears ended December 31, 20192022, 2021 and 2018,2020, we recognized $2.7$3.6 million, $2.9 million, and $0.7$3.1 million, respectively, of interest expense related to this debt which is included within “Interest expense” in the consolidated statements of income. Any future payments made to CPPIB Credit, or additional proceeds received from CPPIB Credit, will decrease or increase the long-term debt balance accordingly.
Restricted cash
Under the Madison Arrangement, the parties reserve cash in bank accounts to fund our activities to manage the portfolios. These accounts are custodial accounts for which the funds are restricted for this purpose. As of December 31, 20192022 and 2018,2021, the Company had $9.5$9.7 million and $13.7$5.9 million, respectively, of restricted cash included within the consolidated balance sheet attributable to the Madison Arrangement. Refer to Note 65, "Cash, Cash Equivalents, Restricted Cash and Marketable Securities", for a reconciliation of cash, cash equivalents and restricted cash within the consolidated balance sheets.
To receive consentTechnicolor Contingent Consideration
As part of the Technicolor Acquisitions, we entered into a revenue-sharing arrangement with Technicolor that created a contingent consideration liability, which is accounted for under ASC 450 - Contingencies under the asset acquisition framework when the liability is deemed probable and estimable. Under the revenue-sharing arrangement, Technicolor receives 42.5% of future cash receipts from both Sony and CPPIB Credit to assume the rights and responsibilities of Technicolor undernew licensing efforts from the Madison Arrangement we committedonly, subject to contributing cash to fund shortfalls in the Madison Arrangement, up to a maximum of $25.0 million, through 2020. A shortfall funding is only required in the scenario in which the restricted cash is not sufficient to fund current obligations. In the event that we fund a shortfall, any surplus cash resulting from subsequent royalty receipts would be used to repay our shortfall funding plus 25% interest in advance of distributions of royalties to either Sony or CPPIB Credit, assuming they have not participated in the funding of the shortfall.certain conditions and hurdles. As of December 31, 2019, we have2022 and 2021, the contingent consideration liability from the revenue-sharing arrangement was deemed not contributed any shortfall funding.
Transaction Costs
Transactionprobable and integration related costs related to the above transactions for the years ended December 31, 2019 and 2018 were $8.4 million and $17.8 million, respectively. The majority of these costs were recordedis therefore not reflected within “Patent administration and licensing” and “Selling, general and administrative” expenses in the consolidated statements of income.financial statements.
Hillcrest Product Business
On December 20, 2016, we acquired Hillcrest Laboratories, Inc. ("Hillcrest"), a pioneer in sensor processing technology,10. COMMITMENTS
Minimum future payments for approximately $48.0 million in cash, net of $0.4 million cash acquired. The business combination transaction was accountedaccounts payable and other purchase commitments, excluding long-term operating leases for using the acquisition method of accounting.
On July 19, 2019, we completed the sale of Hillcrest's product business to a subsidiary of CEVA, Inc. In connection with the sale, we received initial proceeds of $10.0 million, with a customary portion of the purchase price placed in escrow to secure potential indemnification claims. As part of the transaction, we retained substantially all of the Hillcrest patent assets that we acquired in 2016. As a result of this transaction, we recorded an $8.5 million gain on sale which is included within "Other Income (Expense), Net" in the consolidated statements of income for the year ended December 31, 2019.
6. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND MARKETABLE SECURITIES
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cashoffice space, as of December 31, 2019 and 2018 consisted of the following2022 were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
Money market and demand accounts | $ | 757,098 |
| | $ | 488,733 |
|
Commercial paper | — |
| | — |
|
| $ | 757,098 |
| | $ | 488,733 |
|
| | | | | |
2023 | $ | 12,000 | |
2024 | 21 | |
2025 | — | |
2026 | — | |
2027 | — | |
Thereafter | $ | — | |
The following table provides a reconciliationRefer to Note 9, "Obligations," for details of total cash, cash equivalentsthe Company's long-term debt obligations and restricted cashthe revenue-sharing arrangement with Technicolor resulting from the Technicolor Patent Acquisition and the R&I Acquisition. Refer to Note 16, "Leases," for maturities of the Company's operating lease liabilities as of December 31, 2019 and 2018 within the consolidated balance sheets (in thousands). The Company had no restricted cash prior to 2018.
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
Cash and cash equivalents | $ | 745,491 |
| | $ | 475,056 |
|
Restricted cash included within prepaid and other current assets | | 10,526 |
| | | 13,677 |
|
Restricted cash included within other non-current assets | | 1,081 |
| | | — |
|
Total cash, cash equivalents and restricted cash | $ | 757,098 |
| | $ | 488,733 |
|
2022.Marketable Securities
As of December 31, 2019 and 2018, the majority of our marketable securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported net-of-tax as a separate component of shareholders’ equity. Substantially all of our investments are investment-grade government and corporate debt securities that have maturities of less than 2 years, and we have both the ability and intent to hold the investments until maturity. We recorded 0 other-than-temporary impairments recorded during 2019, 2018 or 2017. The gross realized gains and losses on sales of marketable securities were not significant during the years ended December 31, 2019, 2018 and 2017.
Marketable securities as of December 31, 2019 and 2018 consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| December 31, 2019 |
| Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available-for-sale securities | | | | | | | |
U.S. government securities | $ | 105,453 |
| | $ | 249 |
| | $ | — |
| | $ | 105,702 |
|
Corporate bonds, asset backed and other securities | 73,276 |
| | 226 |
| | — |
| | 73,502 |
|
Total available-for-sale securities | $ | 178,729 |
| | $ | 475 |
| | $ | — |
| | $ | 179,204 |
|
Reported in: | | | | | | | |
Cash and cash equivalents | | | | | | | $ | — |
|
Short-term investments | | | | | | | 179,204 |
|
Total marketable securities | | | | | | | $ | 179,204 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available-for-sale securities | | | | | | | |
Commercial paper | $ | 14,548 |
| | $ | — |
| | $ | — |
| | $ | 14,548 |
|
U.S. government securities | 291,157 |
| | — |
| | (1,581 | ) | | 289,576 |
|
Corporate bonds, asset backed and other securities | 167,579 |
| | 5 |
| | (984 | ) | | 166,600 |
|
Total available-for-sale securities | $ | 473,284 |
| | $ | 5 |
| | $ | (2,565 | ) | | $ | 470,724 |
|
Reported in: | | | | | | | |
Cash and cash equivalents | | | | | | | $ | — |
|
Short-term investments | | | | | | | 470,724 |
|
Total marketable securities | | | | | | | $ | 470,724 |
|
As of December 31, 2019 and 2018, $163.1 million and $390.9 million, respectively, of our short-term investments had contractual maturities within one year. The remaining portions of our short-term investments had contractual maturities within one to two years.
7. CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments and accounts receivable. We primarily place our cash equivalents and short-term investments in highly rated financial instruments and in United States government instruments.
Our accounts receivable are derived principally from patent license and technology solutions agreements. As of December 31, 2019 and 2018, seven and five licensees comprised 73% and 76%, respectively, of our accounts receivable balance. We perform ongoing credit evaluations of our licensees, who generally include large, multinational, wireless telecommunications equipment manufacturers. We believe that the book values of our financial instruments approximate their fair values.
Fair Value Measurements
We use various valuation techniques and assumptions when measuring the fair value of our assets and liabilities. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. This guidance established a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:
Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets.
Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates.
Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. We use quoted market prices for similar assets to estimate the fair value of our Level 2 investments.
Recurring Fair Value Measurements
Our financial assets are included within short-term investments on our consolidated balance sheets, unless otherwise indicated. Our financial assets and liabilities that are accounted for at fair value on a recurring basis are presented in the tables below as of December 31, 20192022 and December 31, 20182021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value as of December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 643,825 | | | $ | — | | | $ | — | | | $ | 643,825 | |
Commercial paper (b) | — | | | 209,956 | | | — | | | 209,956 | |
U.S. government securities (c) | — | | | 243,840 | | | — | | | 243,840 | |
Corporate bonds, asset backed and other securities (d) | — | | | 113,838 | | | — | | | 113,838 | |
| $ | 643,825 | | | $ | 567,634 | | | $ | — | | | $ | 1,211,459 | |
|
| | | | | | | | | | | | | | | |
| Fair Value as of December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 757,098 |
| | $ | — |
| | $ | — |
| | $ | 757,098 |
|
U.S. government securities | — |
| | 105,702 |
| | — |
| | 105,702 |
|
Corporate bonds, asset backed and other securities | — |
| | 73,502 |
| | — |
| | 73,502 |
|
| $ | 757,098 |
| | $ | 179,204 |
| | $ | — |
| | $ | 936,302 |
|
| | | Fair Value as of December 31, 2018 | | Fair Value as of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 488,733 |
| | $ | — |
| | $ | — |
| | $ | 488,733 |
| Money market and demand accounts (a) | $ | 705,725 | | | $ | — | | | $ | — | | | $ | 705,725 | |
Commercial paper | — |
| | 14,548 |
| | — |
| | 14,548 |
| |
Commercial paper (b) | | Commercial paper (b) | — | | | 158,452 | | | — | | | 158,452 | |
U.S. government securities | — |
| | 289,576 |
| | — |
| | 289,576 |
| U.S. government securities | — | | | 51,301 | | | — | | | 51,301 | |
Corporate bonds and asset backed securities | — |
| | 166,600 |
| | — |
| | 166,600 |
| Corporate bonds and asset backed securities | — | | | 33,091 | | | — | | | 33,091 | |
| $ | 488,733 |
| | $ | 470,724 |
| | $ | — |
| | $ | 959,457 |
| | $ | 705,725 | | | $ | 242,844 | | | $ | — | | | $ | 948,569 | |
Liabilities: | | | | | | | | |
Contingent consideration resulting from the Technicolor Patent Acquisition | $ | — |
| | $ | — |
| | $ | 19,800 |
| | $ | 19,800 |
| |
| $ | — |
| | $ | — |
| | $ | 19,800 |
| | $ | 19,800 |
| |
|
_______________
| |
(a) | (a)Included within cash and cash equivalents. |
Level 3 Fair Value Measurements
Contingent Consideration
As discussed further in Note 5, we completed the Technicolor Patent Acquisition during third quarter 2018. In conjunction with the Technicolor Patent Acquisition, we initially recognized a contingent consideration liability which was measured at fair value on a recurring basis using significant unobservable inputs classified as Level 3 measurements within the fair value hierarchy. We utilized a Monte Carlo simulation model to determine the estimated fair value of the contingent consideration liability through first quarter 2019. A Monte Carlo simulation uses random numbers together with volatility assumptions to generate individual paths, or trials, for variables of interest governed by a Geometric Brownian Motion in a risk-neutral framework.cash and cash equivalents.
During second quarter 2019, we completed the R&I Acquisition. The transaction met the definition of an asset acquisition and was accounted for using the cost accumulation and allocation model. As discussed in Note 5, "Business Combinations and Other Transactions," as part of this acquisition, Technicolor reduced its rights to the revenue-sharing arrangement that created the initial contingent consideration liability from the Technicolor Patent Acquisition. We determined that the initial contingent consideration liability from the Technicolor Patent Acquisition was significantly modified in conjunction with the R&I Acquisition, and, as such, the contingent consideration liability will now be accounted for under ASC 450 - Contingencies under the asset acquisition framework when the liability is deemed probable and estimable. Since the contingent consideration liability arising from the amended revenue-sharing arrangement was not probable and estimable as of the acquisition date, the carrying value of the previous contingent consideration liability was derecognized, which resulted in a $20.5 million gain which is included within "Other Income (Expense), Net" in the consolidated statement of income for the
year ended December 31, 2019. Therefore, effective as of the acquisition date of May 31, 2019, the contingent consideration liability was no longer a Level 3 fair value recurring measurement. (b)As of December 31, 2019, the contingent consideration liability from the amended revenue-sharing arrangement2022 and 2021, $26.7 million and $7.5 million of commercial paper was deemed not probableincluded within cash and estimable and is therefore not reflected within the consolidated financial statements.cash equivalents, respectively.
Level 3 significant unobservable inputs used in the(c)As of December 31, 2018 valuation2022, $15.7 million of the contingent consideration liabilityU.S. government securities was included the following:
|
| | |
Significant Unobservable Input | Ranges | Weighted Average |
Risk-adjusted discount rate for revenue | 13.5% - 14.2% | 13.9% |
Credit risk discount rate | 6.2% - 8.0% | 7.1% |
Revenue volatility | 35.0% | 35.0% |
Projected years of earn out | 2019 - 2030 | N/A |
within cash and cash equivalents.Significant increases or decreases in any(d)As of those inputs in isolation could have resulted in a significantly lower or higher fair value measurement. Adjustments to the fair value of contingent consideration were reflected in operating expenses within our consolidated statements of income through first quarter 2019.
The following table provides a reconciliation of the beginning and ending balances of our Level 3 fair value measurements from December 31, 2018 to December 31, 2019, which includes the contingent consideration liability resulting from the Technicolor Patent Acquisition discussed further above2022, $16.9 million of corporate bonds, asset backed and within Note 5 (in thousands). The Level 3 contingent consideration liabilityother securities was historically included within "cash and cash equivalents.Other long-term liabilities" in the consolidated balance sheet prior to its derecognition in second quarter 2019.
|
| | | |
Level 3 Fair Value Measurements | Contingent Consideration Liability |
Balance as of December 31, 2018 | $ | 19,800 |
|
Changes in fair value recognized in the consolidated statements of income | | 710 |
|
Derecognition of contingent consideration liability as a Level 3 fair value measurement | | (20,510 | ) |
Balance as of December 31, 2019 | $ | — |
|
Fair Value of Long-Term Debt
2024 and 2020 Senior Convertible Notes
The principal amount, carrying value and related estimated fair value of the Company's senior convertible debt reported in the consolidated balance sheets as of December 31, 20192022 and December 31, 20182021 was as follows (in thousands). The aggregate fair value of the principal amount of the senior convertible long-term debt is a Level 2 fair value measurement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Principal Amount | | Carrying Value | | Fair Value | | Principal Amount | | Carrying Value | | Fair Value |
2027 Senior Convertible Long-Term Debt | $ | 460,000 | | | $ | 451,062 | | | $ | 441,485 | | | $ | — | | | $ | — | | | $ | — | |
2024 Senior Convertible Long-Term Debt | $ | 126,174 | | | $ | 125,342 | | | $ | 119,941 | | | $ | 400,000 | | | $ | 395,632 | | | $ | 437,760 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| Principal Amount | | Carrying Value | | Fair Value | | Principal Amount | | Carrying Value | | Fair Value |
Senior Convertible Long-Term Debt | $ | 494,909 |
| | $ | 423,657 |
| | $ | 492,969 |
| | $ | 316,000 |
| | $ | 298,951 |
| | $ | 331,595 |
|
Technicolor Patent Acquisition Long-term Debt
As more fully disclosed in Note 5,9, "Obligations," we recognized long-term debt in conjunction with the Technicolor Patent Acquisition. The carrying value and related estimated fair value of the Technicolor Patent Acquisition long-term debt reported in the consolidated balance sheet as of December 31, 20192022 and December 31, 20182021 was as follows (in thousands). The aggregate fair value of the Technicolor Patent Acquisition long-term debt is a Level 3 fair value measurement.
|
| | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Technicolor Patent Acquisition Long-Term Debt | $ | 21,101 |
| | $ | 23,305 |
| | $ | 18,428 |
| | $ | 19,100 |
|
Non-Recurring | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Technicolor Patent Acquisition Long-Term Debt | $ | 30,662 | | | $ | 28,048 | | | $ | 27,113 | | | $ | 28,569 | |
Non-recurring Fair Value Measurements
Investments in Other Entities
As disclosed in Note 2, "Summary of Significant Accounting Policies and New Accounting Guidance", we made an accounting policy election to utilize a measurement alternative for equity investments that do not have readily determinable fair values, which applies to our long-term strategic investments in other entities. Under the alternative, our long-term strategic investments in other entities that do not have readily determinable fair values are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any adjustments to the carrying value of those investments are considered non-recurring fair value measurements.
During the year ended December 31, 2019,2022, we recognized a net loss of $2.6$1.3 million and during year ended 2021 and 2020 we recognized gains of $7.6 million, and $5.6 million, respectively, resulting from the partial impairment of oneobservable price changes of our long-term strategic investments, partially offset by a gain on sale of a separate strategic investment, which iswere included within "“Other Income (Expense), Net(expense) income, net"” in the consolidated statement of income. During the year ended December 31, 2018, we recognized an aggregate $8.4 million loss resulting from the sale of our entire ownership interest in one of our strategic investments and the impairment of a separate strategic investment. Certain of our investments in other entities may be seeking additional financing in the next twelve months or potential exit strategies. We will continue to review and monitor our investments in other entities for any indications of an increase in fair value or impairment.
Lease Assets
During 2020, we recognized a $1.1 million impairment, comprised of $0.8 million of Property and Equipment, and $0.3 million of Operating lease right-of-use asset related to the abandonment of one of our leased properties, which was included within “Operating Expenses” in the consolidated statement of income.
Patents
During fourth quarter 2019,2021, we entered intorecognized a $13.2 million impairment, resulting from our restructuring activities as described in Note 20, "Restructuring Activities", which was included within “Restructuring activities” expenses in the consolidated statement of income. The Patents held for sale are recorded at fair value on December 31, 2022 and 2021 and are included within "Prepaid and other current assets" in the consolidated balance sheet.
Also during 2021, we renewed our multi-year, worldwide, non-exclusive royalty-bearing patent license and settlement agreement with ZTE Corporation. ASony and a portion of the future consideration for the agreement was in the form of patents. We have yet to record theseThese patents on our balance sheet as of December 31, 2019 as they have not yet been transferred. However,transferred during 2022 and we have determined the estimated fair value of the patents for determining the transaction price for revenue recognition purposes, which was estimated to be $14.0$30.1 million utilizing the income and market approach. The value will be amortized as a non-cash expense over the patents' estimated useful lives once transferred. Additionally, as previously disclosed, during 2018 and 2017,lives.
During 2020, we entered into a patent license agreementsagreement with SonyHuawei and LG, respectively, for which a portion of the future consideration for the agreement was in the form of patents. The estimated fair value of the Sony patents was $22.5 million, andWe have determined the estimated fair value of the LG patents for determining the transaction price for revenue recognition purposes, which was $19.7estimated to be $19.3 million which are beingutilizing the market approach. The value is amortized as a non-cash expense over theirthe patents' estimated useful lives. We estimated the fair value of the patents in the Sony and LG transactions through a combination of the income approach, the market approach, and the cost approach.
As noted above, we estimated the fair value of the patents in these transactions using one of, or a combination of, an analysis of comparable market transactions (the market approach), a discounted cash flow analysis (the income approach) and/or by quantifying the amount of money required to replace the future service capability of the assets (the cost approach). For the market approach, judgment was applied as to which market transactions were most comparable to the transaction. For the income approach, the inputs and assumptions used to develop these estimates were based on a market participant perspective and included estimates of projected royalties, discount rates, economic lives and income tax rates, among others. For the cost approach, we utilized the historical cost of assets of similar technologies to determine the estimated replacement cost, including research, development, testing and patent application fees.
8.
7. PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Computer equipment and software | $ | 15,144 | | | $ | 14,787 | |
Leasehold improvements | 12,636 | | | 11,743 | |
Building and improvements | 3,517 | | | 3,574 | |
Engineering and test equipment | 1,317 | | | 1,470 | |
| | | |
| | | |
Furniture and fixtures | 670 | | | 799 | |
Property and equipment, gross | 33,284 | | | 32,373 | |
Less: accumulated depreciation | (21,946) | | | (18,996) | |
Property and equipment, net | $ | 11,338 | | | $ | 13,377 | |
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
Computer equipment and software | $ | 11,320 |
| | $ | 20,876 |
|
Engineering and test equipment | 1,333 |
| | 4,168 |
|
Building and improvements | 3,702 |
| | 3,711 |
|
Leasehold improvements | 11,315 |
| | 11,364 |
|
Furniture and fixtures | 1,121 |
| | 1,549 |
|
Property and equipment, gross | 28,791 |
| | 41,668 |
|
Less: accumulated depreciation | (18,574 | ) | | (31,617 | ) |
Property and equipment, net | $ | 10,217 |
| | $ | 10,051 |
|
Depreciation expense was $3.9$4.9 million, $3.7 million and $3.9 million in 2019, 2018 and 2017, respectively. Depreciation expense included depreciation of computer software costs of $0.2 million, $0.3 million and $0.5 million in 2019, 2018 and 2017, respectively. Accumulated depreciation related to computer software costs was $1.1$5.6 million and $9.2$5.3 million as of December 31, 2019 in 2022, 2021 and 2018,2020, respectively. The net book value of our computer software was $0.2 million and $0.3 million as of December 31, 2019 and 2018, respectively.
9.8. PATENTS, GOODWILL AND OTHER INTANGIBLE ASSETS
Patents
As of December 31, 20192022 and 2018,2021, patents consisted of the following (in thousands, except for useful life data):
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
Weighted average estimated useful life (years) | 9.9 |
| | 10 |
|
Gross patents | $ | 905,814 |
| | $ | 851,846 |
|
Accumulated amortization | (469,475 | ) | | (397,279 | ) |
Patents, net | $ | 436,339 |
| | $ | 454,567 |
|
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Weighted average estimated useful life (years) | 10.0 | | 9.9 |
Gross patents | $ | 1,018,957 | | | $ | 956,387 | |
Accumulated amortization | (664,958) | | | (592,802) | |
Patents, net | $ | 353,999 | | | $ | 363,585 | |
Amortization expense related to capitalized patent costs was $72.3$73.4 million, $61.8$71.5 million and $52.9$74.9 million in 2019, 20182022, 2021 and 2017,2020, respectively. These amounts are recorded within the "Patent administration and licensing"Licensing" line of our Consolidated Statementsconsolidated statements of Income.income.
The estimated aggregate amortization expense for the next five years related to our patents balance as of December 31, 20192022 is as follows (in thousands):
|
| | | |
2020 | $ | 71,572 |
|
2021 | 66,962 |
|
2022 | 62,673 |
|
2023 | 56,748 |
|
2024 | 48,135 |
|
| | | | | |
2023 | $ | 71,443 | |
2024 | 60,983 | |
2025 | 57,417 | |
2026 | 49,000 | |
2027 | $ | 44,027 | |
Goodwill
The following table shows the change in the carrying amount of our goodwill balance from December 31, 20172020 to December 31, 2019,2022, all of which is allocated to our 1one reportable segment (in thousands):
|
| | | | |
Goodwill balance as of December 31, 2017 | | $ | 16,033 |
|
Technicolor Patent Acquisition | | | 6,388 |
|
Goodwill balance as of December 31, 2018 | | $ | 22,421 |
|
Activity | | | — |
|
Goodwill balance as of December 31, 2019 | | $ | 22,421 |
|
Other Intangible Assets
During the year ended December 31, 2019, our other intangible assets were sold in conjunction with the sale of our Hillcrest product business which is discussed further in Note 5, "Business Combinations and Other Transactions". As of December 31, 2018, intangible assets excluding patents were included in "Other Non-Current Assets" on the consolidated balance sheet and consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | December 31, 2018 |
| Average Life (Years) | Gross Assets | | Accumulated Amortization | | Net |
Trade Names | 9 | $ | 600 |
| | $ | (133 | ) | | $ | 467 |
|
Customer Relationships | 10 | 1,700 |
| | (340 | ) | | 1,360 |
|
| | $ | 2,300 |
| | $ | (473 | ) | | $ | 1,827 |
|
| | | | | |
10.Goodwill balance as of December 31, 2020 | OBLIGATIONS$ | 22,421 | |
Activity | — | |
Goodwill balance as of December 31, 2021 | $ | 22,421 | |
Activity | — | |
Goodwill balance as of December 31, 2022 | $ | 22,421 | |
Refer to Note 5, "
Business Combinations and Other Transactions," and Note 7, "Concentration of Credit Risk and Fair Value of Financial Assets and Financial Liabilities," for information regarding the long-term debt initially recognized during 2018 resulting from the Technicolor Patent Acquisition.
9. OBLIGATIONS
Long-term debt obligations, excluding the long-term debt resulting from the Technicolor Patent Acquisition, are comprised of the following (in thousands):
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
2.00% Senior Convertible Notes due 2024 | $ | 400,000 |
| | $ | — |
|
1.50% Senior Convertible Notes due 2020 | 94,909 |
| | 316,000 |
|
Less: | | | |
Unamortized interest discount | (65,393 | ) | | (15,428 | ) |
Deferred financing costs | (5,859 | ) | | (1,621 | ) |
Total net carrying amount of Senior Convertible Notes | 423,657 |
| | 298,951 |
|
Less: Current portion of long-term debt | 94,170 |
| | — |
|
Long-term net carrying amount of Senior Convertible Notes | $ | 329,487 |
| | $ | 298,951 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| 2027 Notes | | 2024 Notes | | Total | | 2024 Notes |
Principal | $ | 460,000 | | | $ | 126,174 | | | $ | 586,174 | | | $ | 400,000 | |
Less: | | | | | | | |
Deferred financing costs | (8,938) | | | (832) | | | (9,770) | | | (4,368) | |
Net carrying amount of the Convertible Notes | $ | 451,062 | | | $ | 125,342 | | | $ | 576,404 | | | $ | 395,632 | |
| | | | | | | |
| | | | | | | |
There were no finance leases as of December 31, 20192022 or December 31, 2018.2021.
Maturities of principal of the long-term debt obligations of the Company as of December 31, 2019,2022, excluding the long-term debt resulting from the Technicolor Patent Acquisition, are as follows (in thousands): | | | | | |
2023 | $ | — | |
2024 | 126,174 | |
2025 | — | |
2026 | — | |
2027 | 460,000 | |
Thereafter | — | |
| $ | 586,174 | |
|
| | | |
2020 | $ | 94,909 |
|
2021 | — |
|
2022 | — |
|
2023 | — |
|
2024 | 400,000 |
|
Thereafter | — |
|
| $ | 494,909 |
|
2027 Notes, and Related Note Hedge and Warrant TransactionsOn May 27, 2022 we issued $460.0 million in aggregate principal amount of 3.50% Senior Convertible Notes due 2027 (the "2027 Notes"). The net proceeds from the issuance of the 2027 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $450.0 million. The 2027 Notes bear interest at a rate of 3.50% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2022, and mature on June 1, 2027, unless earlier redeemed, converted or repurchased.
The 2027 Notes will be convertible into cash up to the aggregate principal amount of the notes to be converted and in respect of the remainder, if any, of the Company’s obligation in excess of the aggregate principal amount of the notes being converted, pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s election, at an initial conversion rate of 12.9041 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $77.49 per share). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances, including in connection with conversions made following fundamental changes and under other circumstances as set forth in the indenture governing the 2027 Notes.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding March 1, 2027, the notes will be convertible only under the following circumstances: (1) on any date during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2022 if the closing sale price of the Common Stock was more than 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter; (2) if the Company distributes to all or substantially all holders of the Common Stock any rights, options or warrants (other than in connection with a stockholder rights plan prior to separation of such rights from the shares of the Common Stock) entitling them to purchase, for a period of 45 calendar days or less from the issuance date for such distribution, shares of Common Stock at a price per share less than the average closing sale price for the ten consecutive trading day period ending on, and including, the trading day immediately preceding the declaration date for such distribution; (3) if the Company distributes to all or substantially all holders of the Common Stock any cash or other assets, debt securities or rights to purchase the Company’s securities (other than pursuant to a rights plan), which distribution has a per share value exceeding 10% of the closing sale price of the Common Stock on the trading day immediately preceding the declaration date for such distribution; (4) if the Company engages in certain corporate transactions as described in the indenture governing the 2027 Notes; (5) if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; (6) during a specified period if a fundamental change (as defined in the indenture governing the 2027 Notes) occurs; or (7) during the five consecutive business day period following any five consecutive trading day period in which the trading price for the notes for each day during such five trading day period was less than 98% of the closing sale price of the Common Stock multiplied by the applicable conversion rate on each such trading day. Commencing on March 1, 2027, the notes will be convertible in multiples of $1,000 principal amount, at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the notes.
The Company may not redeem the notes prior to June 5, 2025. The Company may redeem for cash all or any portion of the notes, at the Company’s option, on or after June 5, 2025, if the last reported sale price of the Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on and including the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding the redemption date.
If a fundamental change (as defined in the indenture governing the 2027 Notes) occurs, holders may require the Company to purchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The 2027 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with any of the Company’s current and any future senior unsecured indebtedness, including its 2.00% senior convertible notes due 2024 (the “2024 Notes” and together with the 2027 Notes, the "Convertible Notes"). The 2027 Notes are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the related collateral, and the 2027 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries.
On May 24 and May 25, 2022, in connection with the offering of the 2027 Notes, we entered into convertible note hedge transactions (collectively, the “2027 Note Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2027 Notes, subject to adjustment, and are exercisable upon any conversion of the 2027 Notes. The aggregate cost of the 2027 Note Hedge Transactions was $80.5 million.
Also on May 24 and May 25, 2022, we also entered into privately negotiated warrant transactions (collectively, the “2027 Warrant Transactions” and, together with the 2027 Note Hedge Transactions, the “2027 Call Spread Transactions”), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock at an initial strike price of $106.37 per share, subject to adjustment. As consideration for the 2027 Warrant Transactions, we received aggregate proceeds of $43.7 million. The net cost of the 2027 Call Spread Transactions was $36.8 million, which was funded out of the net proceeds from the offering of the 2027 Notes.
Accounting Treatment of the 2027 Notes and Related Convertible Note Hedge and Warrant Transactions
The 2027 Call Spread Transactions were classified as equity and the 2027 Notes were classified as long-term debt. The effective interest rate is approximately 4.02%.
In connection with the above-noted transactions, the Company incurred approximately $9.9 million of directly related costs, which were capitalized as deferred financing costs and as a reduction of long-term debt. These costs are being amortized as interest expense over the term of the debt using the effective interest method.
2024 Senior Convertible Notes, and Related Note Hedge and Warrant Transactions
On June 3, 2019 we issued $400.0 million in aggregate principal amount of 2.00% Senior Convertible Notes due 2024 (the "2024 Notes"). The net proceeds from the issuance of the 2024 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $391.6 million. The 2024 Notes bear interest at a rate of 2.00% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2019, and mature on June 1, 2024, unless earlier converted or repurchased.
The 2024 Notes will bewere initially convertible into cash, shares of our common stock or a combination thereof, at our election, at an initial conversion rate of 12.3018 shares of common stock per $1,000 principal amount of 2024 Notes (which is equivalent to an initial conversion price of approximately $81.29 per share), as adjusted pursuant to the terms of the indenture governing the 2024 Notes (the "Indenture"). The conversion rate of the 2024 Notes, and thus the conversion price, may be adjusted in certain circumstances, including in connection with a conversion of the 2024 Notes made following certain fundamental changes and under other circumstances set forth in the Indenture. It is our current intent and policyAs of December 31, 2020, we made the irrevocable election to settle all conversions of the 2024 Notes through combination settlements of cash and shares of common stock, with a specified dollar amount of $1,000 per $1,000 principal amount of 2024 Notes and any remaining amounts in shares of common stock.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding March 1, 2024, the 2024 Notes will be convertible only under certain circumstances as set forth in the Indenture, including on any date during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2019 if the closing sale price of the common stock was more than 130% of the applicable conversion price (approximately $105.68 based on the current conversion price of the 2024 Notes) on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter.
Commencing on March 1, 2024, the 2024 Notes will be convertible at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the 2024 Notes.
The Company may not redeem the 2024 Notes prior to their maturity date.
If a fundamental change (as defined in the Indenture) occurs, holders may require the Company to purchase all or a portion of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The 2024 Notes are our senior unsecured obligations and rank equally in right of payment with any of our current and any future senior unsecured indebtedness, including our 1.50% senior convertible notes due 2020 (the “2020 Notes”) discussed below.indebtedness. The 2024 Notes are effectively subordinated to all of our future secured indebtedness to the extent of the value of the related collateral, and the 2024 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of our subsidiaries.
On May 29 and May 31, 2019, in connection with the offering of the 2024 Notes, we entered into convertible note hedge transactions (collectively, the “2024 Note Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2024 Notes, subject to adjustment, and are exercisable upon any conversion of the 2024 Notes. The aggregate cost of the 2024 Note Hedge Transactions was $72.0 million.
On May 29 and May 31, 2019, we also entered into privately negotiated warrant transactions (collectively, the “2024 Warrant Transactions” and, together with the 2024 Note Hedge Transactions, the “2024 Call Spread Transactions”), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock at an initial strike price of approximately $109.43 per share, subject to adjustment. As consideration for the 2024 Warrant Transactions, we received aggregate proceeds of $47.6 million. The net cost of the 2024 Call Spread Transactions was $24.4 million.
The net proceeds from the issuance of the 2024 Notes, after deducting fees and offering expenses, were used for the following: (i) $232.7 million was used to repurchase $221.1 million in aggregate principal amount of the 2020 Notes (as defined below) in privately negotiated transactions concurrently with the offering of the 2024 Notes, (ii) $19.6 million was used to repurchase shares of common stock at $62.53 per share, the closing price of the stock on May 29, 2019; and (iii) $24.4 million, in addition to the proceeds from the 2024 Warrant Transactions discussed above, was used to fund the cost of the 2024 Call Spread Transactions.
In 2022, the Company repurchased $273.8 million in aggregate principal amount of the 2024 Notes in privately negotiated transactions concurrently with the offering of the 2027 Notes. We specifically negotiated the repurchase of the 2024 Notes with investors who concurrently purchased the 2027 Notes, such that their purchase of the 2027 Notes funded our repurchase of the 2024 Notes. As a result of the partial repurchase of the 2024 Notes, $126.2 million in aggregate principal amount of the 2024 Notes remained outstanding as of December 31, 2022. Additionally, in connection with the partial repurchase of the 2024 Notes, the Company entered into partial unwind agreements that amend the terms of the 2024 Note Hedge Transactions to reduce the number of options corresponding to the principal amount of the repurchased 2024 Notes. The unwind agreements also reduce the number of warrants exercisable under the 2024 Warrant Transactions. As a result of the partial unwind transactions, approximately 1.6 million shares of common stock in the aggregate were covered under each of the 2024 Note Hedge Transactions and the 2024 Warrant Transactions as of December 31, 2022. As of December 31, 2022, the warrants under the 2024 Warrant Transactions had a strike price of approximately $109.43 per share, as adjusted. Proceeds received from the unwind of the 2024 Note Hedge Transactions were $11.9 million, and consideration paid for the unwind of the 2024 Warrant Transactions was $3.8 million, resulting in net proceeds received of $8.0 million for the combined unwind transactions.
Because the concurrent redemption of the 2024 Notes and Related Convertible Note Hedgea portion of issuance of the 2027 Notes were executed with the same investors, we evaluated the transaction as a debt restructuring, on a creditor by creditor basis. The accounting conclusion was based on whether the exchange was a contemporaneous exchange of cash between the same debtor and Warrant Transactions
Thecreditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor and if it was determined to have substantially different terms. All creditors involved in the repurchase transaction also purchased 2027 Notes in approximately the same or greater amount as the 2024 Call Spread Transactions were classified as equity. The Company bifurcatedNotes principal repurchased. Additionally, the proceeds from the offeringrepurchase of the 2024 Notes between liability and equity components. Onissuance of the date of issuance,2027 Notes were deemed to have substantially different terms on the liability and equity components were calculated to be approximately $328.0 million and $72.0 million, respectively. The initial $328.0 million liability component was determined based onbasis that the fair value of similar debt instruments excluding the conversion feature.feature increased by more than 10% of the carrying value of the 2024 Notes, and therefore, the repurchase of the 2024 Notes was accounted for as a debt extinguishment. We recognized a $11.2 million loss on extinguishment of debt during 2022 in connection with this repurchase, which is included within "Other (expense) income, net" in the consolidated statement of income. The initial $72.0 million ($56.9 million net of tax) equity componentloss on extinguishment represents the difference between the fair value of consideration paid to reacquire the initial $328.0 million in debt2024 Notes and the $400.0carrying amount of the debt, including any unamortized debt issuance costs attributable to the 2024 Notes redeemed. The remaining unamortized debt issuance costs of $1.2 million gross proceeds. The related initial debt discount of $72.0 million is beingwill continue to be amortized overthroughout the remaining life of the 2024 Notes using the effective interest method. An effective interest rate of 6.25% was used to calculate the debt discount on the 2024 Notes.
In connection with the above-noted transactions, the Company incurred approximately $8.4 million of directly related costs. The initial purchasers' transaction fees and related offering expenses were allocated to the liability and equity
components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively. We allocated $6.4 million of debt issuance costs to the liability component, which were capitalized as deferred financing costs. These costs are being amortized as interest expense over the term of the debt using the effective interest method. The remaining $1.9 million of costs ($1.7 million net of tax) allocated to the equity component were recorded as a reduction of the equity component.
2020 Senior Convertible Notes, and Related Note Hedge and Warrant Transactions
On March 11, 2015, we issued $316.0 million in aggregate principal amount of 1.50% Senior Convertible Notes due 2020 (the “2020 Notes”). The 2020 Notes bear interest at a rate of 1.50% per year, payable in cash on March 1 and September 1 of each year, commencing September 1, 2015, and mature on March 1, 2020, unless earlier converted or repurchased. In connection with the initial offering of the 2020 Notes, on March 5 and March 9, 2015, we entered into convertible note hedge transactions (the “2020 Note Hedge Transactions”) that initially covered approximately 4.4 million shares of common stock at a strike price that initially corresponded to the initial conversion price of the 2020 Notes and are exercisable upon any conversion of the 2020 Notes. On March 5 and March 9, 2015, we also entered into warrant transactions (collectively, the "2020 Warrant Transactions" and, together with the 2020 Note Hedge Transactions, the "2020 Call Spread Transactions") to initially acquire, subject to customary anti-dilution adjustments, approximately 4.4 million shares of common stock. The warrants become exercisable and expire in daily tranches over a three and a half month period starting in June 2020.
As noted above, duringDuring second quarter 2019, the Company used $232.7 million from the offering of the 2024 Notes to repurchase $221.1 million in aggregate principal amount of the 1.50% Senior Convertible Notes due 2020 Notes(the "2020 Notes") in privately negotiated transactions concurrently with the offering of the 2024 Notes. As a result ofOn March 1, 2020, the partial repurchase of the 2020 Notes, $94.9 million in aggregate principal amount of the 2020 Notes remain outstanding as of December 31, 2019. Additionally, on May 29, 2019, in connection with the partial repurchasematurity date of the 2020 Notes, the Company entered into partial unwind agreements that amend the terms of the 2020 Note Hedge Transactions to reduce the number of options corresponding to the principal amount of the repurchased 2020 Notes. The unwind agreements also reduce the number of warrants exercisable under the 2020 Warrant Transactions. As a result of the partial unwind transactions, approximately 1.3 million shares of common stockrepaid in the aggregate were covered under each of the 2020 Note Hedge Transactions and the 2020 Warrant Transactions as of December 31, 2019. As of December 31, 2019, the warrants under the 2020 Warrant Transactions had a strike price of approximately $86.34 per share, as adjusted. Proceeds received from the unwind of the 2020 Note Hedge Transactions were $9.0 million, and consideration paid for the unwind of the 2020 Warrant Transactions was $4.2 million, resulting in net proceeds received of $4.9 million for the combined unwind transactions which was recorded to equity during the year ended December 31, 2019.
We recognized a $5.5 million loss on extinguishment of debt during the year ended December 31, 2019 in connection with this repurchase, which was included within "Other Income (Expense), Net" in the consolidated statement of income for the period. The loss on extinguishment represents the difference between the calculated fair value of the debt immediately prior to its derecognition and the carrying amount of the debt component, including any unamortized debt discount and issuance costs. The remaining consideration paid for the partial repurchase of the 2020 Notes was allocated to the reacquisition of the equity component, which equaled $13.0 million ($10.6 million net of tax) and was recorded as a reduction of equity during the year ended December 31, 2019. The remaining unamortized debt discount and issuance costs of $3.3 million will continue to be amortized throughoutfull the remaining life$94.9 million of the 2020 Notes, which are set to mature in March 2020.
The remaining 2020 Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election, at a current conversion rate of 14.1559 shares of common stock per $1,000 principal amount of 2020 Notes as of December 31, 2019 (which is equivalent to a conversion price of approximately $70.64 per share), as adjusted pursuant to the terms of the indenture governing the 2020 Notes (the "2020 Notes Indenture"). The conversion rate of the 2020 Notes, and thus the conversion price, may be adjusted in certain circumstances, including in connection with a conversion of the 2020 Notes made following certain fundamental changes and under other circumstances set forth in the 2020 Notes Indenture. It is our current intent and policy to settle all conversions of the 2020 Notes through combination settlements of cash and shares of common stock, with a specified dollar amount of $1,000 per $1,000 principal amount of the 2020 Notes and any remaining amounts in shares of common stock.
Prior to 5:00 p.m., New York City time, on the business day immediately preceding December 1, 2019, the 2020 Notes will be convertible only under certain circumstances as set forth in the 2020 Notes Indenture, including on any date during any calendar quarter (and only during such calendar quarter) if the closing sale price of our common stock was more than 130% of the applicable conversion price (approximately $91.83 based on the current conversion price of the 2020 Notes) on each applicable trading day for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter.
Commencing on December 1, 2019, the 2020 Notes will be convertible at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the 2020 Notes.
The Company may not redeem the 2020 Notes prior to their maturity date.
On April 3, 2018, in connection with the reorganization of the Company’s holding company structure, the predecessor company (now known as InterDigital Wireless, Inc., the "Predecessor Company") and the successor company (now known as InterDigital, Inc., the "Successor Company") entered into a First Supplemental Indenture (the “2020 Notes Supplemental Indenture”) to the 2020 Notes Indenture with the trustee. The 2020 Notes Supplemental Indenture effected certain amendments to the 2020 Notes Indenture in connection with the Reorganization, which, among other things, amended the conversion right of the 2020 Notes so that at the effective time of the Reorganization, the holder of each Note outstanding as of the effective time of the Reorganization will have the right to convert, subject to the terms of the 2020 Notes Indenture, each $1,000 principal amount of such 2020 Note into the number of shares of the Successor Company’s common stock that a holder of a number of shares of the Predecessor Company’s common stock equal to the conversion rate immediately prior to the effective time of the Reorganization would have been entitled to receive upon the Reorganization. In addition, pursuant to the 2020 Notes Supplemental Indenture, the Successor Company guaranteed the Predecessor Company’s obligations under the 2020 Notes and the 2020 Notes Indenture.
Accounting Treatment of the 2020 Notes and Related Convertible Note Hedge and Warrant Transactions
The offering of the 2020 Notes on March 5, 2015 was for $275.0 million and included an overallotment option that allowed the initial purchasers to purchase up to an additional $41.0 million aggregate principal amount of 2020 Notes. The initial purchasers exercised their overallotment option on March 9, 2015, bringing the total amount of 2020 Notes issued on March 11, 2015 to $316.0 million. The Company bifurcated the proceeds from the offering of the 2020 Notes between liability and equity components. On the date of issuance, the liability and equity components were calculated to be approximately $256.7 million and $59.3 million ($38.6 million net of tax), respectively. The related initial debt discount of $59.3 million is being amortized using the effective interest method over the life of the 2020 Notes. An effective interest rate of 5.89% was used to calculate the debt discount on the 2020 Notes. Directly related costs are being amortized to interest expense over the term of the debt using the effective interest method.principal.
The following table presents the amount of interest cost recognized for the years ended December 31, 2019, 20182022, 2021 and 20172020 related to the contractual interest coupon, accretion of the debt discount and the amortization of financing costs (in thousands).:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | 2027 Notes | 2024 Notes | Total | | 2024 Notes | | 2024 Notes | 2020 Notes | Total |
Contractual coupon interest | | $ | 9,526 | | $ | 4,760 | | $ | 14,286 | | | $ | 8,000 | | | $ | 8,000 | | $ | 237 | | $ | 8,237 | |
Accretion of debt discount (a) | | — | | — | | — | | | — | | | 13,157 | | 669 | | 13,826 | |
Amortization of financing costs | | 990 | | 1,018 | | 2,008 | | | 1,627 | | | 1,176 | | 70 | | 1,246 | |
Total | | $ | 10,516 | | $ | 5,778 | | $ | 16,294 | | | $ | 9,627 | | | $ | 22,333 | | $ | 976 | | $ | 23,309 | |
a. Due to the adoption of ASU 2020-06 on January 1, 2021, the unamortized interest discount was reclassified back to the carrying value of the 2024 Notes.
Madison Arrangement
In conjunction with the Technicolor Patent Acquisition, we assumed Technicolor’s rights and obligations under the Madison Arrangement, which commenced in 2015. The Madison Arrangement falls under the scope of ASC 808, Collaborative Arrangements.
|
| | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | 2024 Notes | 2020 Notes | Total | | 2020 Notes | | 2020 Notes |
Contractual coupon interest | | $ | 4,600 |
| $ | 2,824 |
| $ | 7,424 |
| | $ | 4,740 |
| | $ | 4,740 |
|
Accretion of debt discount | | 7,322 |
| 7,743 |
| 15,065 |
| | 12,434 |
| | 11,715 |
|
Amortization of financing costs | | 654 |
| 821 |
| 1,475 |
| | 1,390 |
| | 1,390 |
|
Total | | $ | 12,576 |
| $ | 11,388 |
| $ | 23,964 |
| | $ | 18,564 |
| | $ | 17,845 |
|
79
Under the Madison Arrangement, Technicolor and Sony combined portions of their respective digital TV (“DTV”) and computer display monitor (“CDM”) patent portfolios and created a combined licensing opportunity to DTV and CDM manufacturers. Per an Agency and Management Services Agreement (“AMSA”) entered into upon the creation of the Madison Arrangement, Technicolor was initially appointed as sole licensing agent of the arrangement, and InterDigital has now assumed that role. As licensing agent, we are responsible for making decisions regarding the prosecution and maintenance of the combined patent portfolio and the licensing and enforcement of the combined patent portfolio in the field of use of DTVs and CDMs on an exclusive basis during the term of the AMSA in exchange for an agent fee. We were deemed to be the principal in this collaborative arrangement under ASC 808, and, as such, in accordance with ASC 606-10-55-36, Revenue From Contracts with Customers - Principal Agent Considerations, we record revenues generated on sales to third parties and costs incurred on a gross basis in the consolidated statements of income. Therefore, we recognize all royalties from customers as revenue and payments to Sony for its royalty share as operating expenses within the consolidated statements of income. Cost reimbursements for expenses incurred resulting from fulfilling the duties of the licensing agent are recorded as contra expenses. During the years ended December 31, 2022, 2021, and 2020, gross revenues recorded related to the Madison Arrangement were $14.5 million, $26.1 million, and $5.5 million, respectively. Net operating expenses related to the Madison Arrangement during the years ended December 31, 2022, 2021, and 2020 were $7.9 million, $18.9 million and $8.4 million, including $5.3 million, $11.9 million, and $2.5 million related to revenue sharing, respectively, and are reflected primarily within "Licensing" expenses in the consolidated statement of income.
Long-term debt
An affiliate of CPPIB Credit Investments Inc. ("CPPIB Credit"), a wholly owned subsidiary of Canada Pension Plan Investment Board, is a third-party investor in the Madison Arrangement. CPPIB Credit has made certain payments to Technicolor and Sony and has agreed to contribute cash to fund certain capital reserve obligations under the arrangement in exchange for a percentage of future revenues, specifically through September 11, 2030 in regard to the Technicolor patents.
Upon our assumption of Technicolor’s rights and obligations under the Madison Arrangement, our relationship with CPPIB Credit met the criteria in ASC 470-10-25, Sales of Future Revenues or Various Other Measures of Income (“ASC 470”), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business segment, trademark, patent, or contractual right for a defined period. Under this guidance, we recognized the fair value of our contingent obligation to CPPIB Credit, as of the acquisition date, as long-term debt in our consolidated balance sheet. This initial fair value measurement was based on the perspective of a market participant and includes significant unobservable inputs which are classified as Level 3 inputs within the fair value hierarchy. The fair value of the long-term debt as of December 31, 2022 is disclosed within Note 6, "Concentration of Credit Risk and Fair Value of Financial Assets and Financial Liabilities". Our repayment obligations are contingent upon future royalty revenues generated from the Madison Arrangement and there are no minimum or maximum payments under the arrangement.
Under ASC 470, amounts recorded as debt shall be amortized under the interest method. At each reporting period, we will review the discounted expected future cash flows over the life of the obligation. The Company made an accounting policy election to utilize the catch-up method when there is a change in the estimated future cash flows, whereby we will adjust the carrying amount of the debt to the present value of the revised estimated future cash flows, discounted at the original effective interest rate, with a corresponding adjustment recognized as interest expense within “Interest expense” in the consolidated statements of income. The effective interest rate as of the acquisition date was approximately 14.5%. This rate represents the discount rate that equates the estimated future cash flows with the fair value of the debt as of the acquisition date, and is used to compute the amount of interest to be recognized each period based on the estimated life of the future revenue streams. During the years ended December 31, 2022, 2021 and 2020, we recognized $3.6 million, $2.9 million, and $3.1 million, respectively, of interest expense related to this debt which is included within “Interest expense” in the consolidated statements of income. Any future payments made to CPPIB Credit, or additional proceeds received from CPPIB Credit, will decrease or increase the long-term debt balance accordingly.
Restricted cash
Under the Madison Arrangement, the parties reserve cash in bank accounts to fund our activities to manage the portfolios. These accounts are custodial accounts for which the funds are restricted for this purpose. As of December 31, 2022 and 2021, the Company had $9.7 million and $5.9 million, respectively, of restricted cash included within the consolidated balance sheet attributable to the Madison Arrangement. Refer to Note 5, "Cash, Cash Equivalents, Restricted Cash and Marketable Securities", for a reconciliation of cash, cash equivalents and restricted cash within the consolidated balance sheets.
Technicolor Contingent Consideration
As part of the Technicolor Acquisitions, we entered into a revenue-sharing arrangement with Technicolor that created a contingent consideration liability, which is accounted for under ASC 450 - Contingencies under the asset acquisition framework when the liability is deemed probable and estimable. Under the revenue-sharing arrangement, Technicolor receives 42.5% of future cash receipts from new licensing efforts from the Madison Arrangement only, subject to certain conditions and hurdles. As of December 31, 2022 and 2021, the contingent consideration liability from the revenue-sharing arrangement was deemed not probable and is therefore not reflected within the consolidated financial statements.
10. COMMITMENTS
Minimum future payments for accounts payable and other purchase commitments, excluding long-term operating leases for office space, as of December 31, 20192022 were as follows (in thousands):
|
| | | |
2020 | $ | 16,664 |
|
2021 | — |
|
2022 | — |
|
2023 | — |
|
2024 | — |
|
Thereafter | — |
|
As part of the Technicolor Patent Acquisition, we committed to contributing cash, subject to certain requirements, of up to a maximum of $25.0 million to fund a collaborative arrangement related to the transaction. Additionally, we are subject to a revenue-sharing arrangement with Technicolor resulting from the Technicolor Patent Acquisition and the R&I Acquisition. We also assumed certain defined benefit plan liabilities in conjunction with these transactions. Refer to Note 5, "Business Combinations and Other Transactions," for further information.
| | | | | |
2023 | $ | 12,000 | |
2024 | 21 | |
2025 | — | |
2026 | — | |
2027 | — | |
Thereafter | $ | — | |
Refer to Note 10,9, "Obligations," for details of the Company's long-term debt obligations.obligations and the revenue-sharing arrangement with Technicolor resulting from the Technicolor Patent Acquisition and the R&I Acquisition. Refer to Note 17,16, "Leases," for maturities of the Company's operating lease liabilities as of December 31, 2019.2022.
12.In connection with the Technicolor Patent Acquisition and the R&I Acquisition, we assumed certain defined benefit plans which are accounted for in accordance with ASC 715 - Compensation - Retirement Benefits. These plans include a retirement lump sum indemnity plan and jubilee plan, both of which provide benefit payments to employees based upon years of service and compensation levels. As part of the Company's announced restructuring plan, as discussed below in Note 20, "Restructuring Activities", the number of employees under the Company's plan was significantly reduced. The Company revalued the projected benefit obligation and recognized a $2.3 million gain on curtailment during 2021, which was included within "Other (expense) income, net" in the consolidated statement of income.
As of December 31, 2022 and 2021, the combined accumulated projected benefit obligation related to these plans totaled $3.4 million and $4.8 million, respectively. Service cost and interest cost for the combined plans totaled $0.3 million, $0.4 million and $0.6 million for the years ended December 31, 2022, 2021 and 2020, respectively. The weighted average discount rate and assumed salary increase rate for these plans were 3.8% and 3.0%, respectively. These plans are not required to be funded and were not funded as of December 31, 2022.
Expected future benefit payments under these plans as of December 31, 2022 were as follows (in thousands):
| | | | | |
2023 | $ | 254 | |
2024 | 75 | |
2025 | 71 | |
2026 | 132 | |
2027 | 259 | |
2027-2031 | $ | 2,320 | |
11. LITIGATION AND LEGAL PROCEEDINGS
ARBITRATIONS AND COURT PROCEEDINGS
HuaweiLenovo
ChinaUK Proceedings
On January 3,August 27, 2019, InterDigital was notified that a civil complaint was filed on January 2, 2019 by Huawei Technologies Co., Ltd. and certain of its subsidiaries against InterDigital, Inc. and certain of its subsidiaries in the Shenzhen Intermediate People’s Court (the "Shenzhen Court"). The complaint seeks a ruling that the InterDigital defendants have violated an obligation to license their patents that are essential to 3G, 4G and 5G wireless telecommunication standards on fair, reasonable and non-discriminatory ("FRAND") terms and conditions. The complaint also seeks a determination of the terms for licensing all of the InterDigital defendants’ Chinese patents that are essential to 3G, 4G and 5G wireless telecommunication standards to the Huawei plaintiffs for the plaintiffs’ wireless terminal unit products made and/or sold in China from 2019 to 2023. On September 17, 2019, InterDigital filed a petition challenging the jurisdiction of the Shenzhen Court to hear the action. On December 25, 2019, InterDigital was notified that the Shenzhen Court rejected InterDigital's jurisdictional challenge. On January 23, 2020, InterDigital filed an appeal of the Shenzhen Court's decision to deny InterDigital's jurisdictional challenge with the IP Tribunal of the China Supreme People's Court. InterDigital's appeal is pending.
U.K. Proceedings
On December 3, 2019, InterDigital, Inc.Company and certain of its subsidiaries filed a claim in the High Court of Justice, Business and Property Courts of England and Wales, Intellectual Property List (Chancery Division), Patents Court (the "High Court") against Huawei Technologies Co., Ltd. and Huawei Technologies (UK) Co., Ltd. ("Huawei UK"). The claim alleges infringement of 5 of InterDigital's patents relating to 3G, 4G/LTE and/or 5G standards: European Patent (U.K.) Nos. 2,363,008; 2,421,318; 2,485,558; 2,557,714; and 3,355,537.
In these proceedings, InterDigital is seeking a declaration that the terms offered by InterDigital to Huawei for a worldwide license are consistent with InterDigital's FRAND commitments, or, alternatively, a determination of FRAND terms for a license to the litigated patents. InterDigital is also seeking a 'FRAND injunction' of the type previously awarded by the High Court in Unwired Planet v. Huawei (such injunction, a "FRAND Injunction"), preventing further infringement of the litigated patents where the court has settled the terms of a worldwide FRAND license and the defendant does not enter into a license on those terms, along with other relief concerning declarations, damages and costs.
On December 20, 2019, Huawei UK filed an application seeking an extension of time to challenge the jurisdiction of the High Court to hear the action against it until the later of January 17, 2020 or fourteen days following the Supreme Court of the United Kingdom's (the "U.K. Supreme Court") decision in Unwired Planet v. Huawei and Conversant v. Huawei and ZTE (together, the "Unwired Planet and Conversant Cases"). On January 17, 2020, the parties filed a consent order directing that Huawei UK's challenge to the jurisdiction of the High Court be heard before July 31, 2020, and setting the deadline for Huawei UK to file its application challenging jurisdiction to be fourteen days following the Supreme Court's decision in the Unwired Planet and Conversant Cases, which the court entered into with minor amendments. On January 24, 2020, the High Court listed Huawei UK's application challenging jurisdiction to be heard between July 1 and July 3, 2020.
Lenovo
U.K. Proceedings
On August 27, 2019, InterDigital, Inc. and certain of its subsidiaries filed a claim in the High Court against Lenovo Group Limited and certain of its subsidiaries. The claim, as amended, alleges infringement of 5five of InterDigital'sthe Company's patents relating to 3G and/or 4G/LTE standards: European Patent (U.K.)(UK) Nos. 2,363,008 (the "'008 Patent");2,363,008; 2,421,318; 2,485,558; 2,557,714; and 3,355,537.
In these proceedings, InterDigital The Company is seeking, a FRAND Injunction, preventingamong other relief, injunctive relief to prevent further infringement of the litigated patents where the court has settled the termsasserted patents.
On October 3, 2019, Lenovo filed an application challengingJuly 29, 2021, the jurisdiction of theUK High Court issued its decision regarding the first technical trial finding European Patent (UK) No. 2,485,558 valid, infringed, and essential to hearRelease 8 of LTE. Lenovo appealed this decision, and on January 13, 2023, the action, as well asUK Court of Appeal upheld the order which permitted service outside ofUK High Court’s findings that Lenovo is infringing on InterDigital’s valid and essential patent. On January 6, 2022, the United Kingdom with respect to the U.S. and Hong Kong defendants (the "Lenovo Jurisdiction Challenge"). TheUK High Court listedissued its decision regarding the Lenovo Jurisdiction Challenge to be heard over two days between February 24second technical trial finding European Patent (UK) No. 3,355,537 invalid, but essential and February 27, 2020. On February 11, 2020, Lenovo filed an application seeking to adjourn the Lenovo Jurisdiction Challenge to allow timeinfringed but for the U.K. Supremefinding of invalidity. The Company appealed this decision as legally erroneous, and on February 9, 2023, the UK Court to issueof Appeal allowed the appeal, finding that Lenovo is infringing on InterDigital’s valid and essential patent. On January 31, 2023, the UK High Court issued its ruling indecision regarding the Unwired Planetthird technical trial finding European Patent (UK) No. 2,421,318 valid, essential, and Conversant Cases. On February 17, 2020, the parties filed a consent order adjourning the hearing of the Lenovo Jurisdiction Challenge until between May 5, 2020infringed. The FRAND trial commenced on January 11, 2022 and July 30, 2020.
Alsoconcluded on February 11, 2020,2022, and we are awaiting the High Court listed a five-daydecision. The fourth technical trial in relation to the '008 Patent to begin between March 1, 2021commenced on October 5, 2022 and March 5, 2021. On February 17, 2020, the High Court listed a second five-dayconcluded on October 13, 2022. The fifth technical trial to begin on June 21, 2021. The patent in suit to be addressed at such trial, if not previously agreed, will be determined at a case management conferenceis currently scheduled to take place in late May, 2020, with the exact date to be determined. Also at the case management conference, the parties will ask the High Court to determine directions for the remaining trials in the proceedings if they cannot be agreed.April 22, 2024.
District of Delaware Patent Proceedings
On August 28, 2019, InterDigital, Inc.the Company and certain of its subsidiaries filed a complaint in the United States District Court for the District of Delaware (the "Delaware District Court") against Lenovo Holding Company, Inc. and certain of its subsidiaries alleging that Lenovo infringes 8eight of InterDigital'sthe Company's U.S. patents—U.S. Patent Nos. 8,085,665 (the "'665 Patent"); 8,199,726 (the "'726 Patent"); 8,427,954 (the "'954 Patent");8,085,665; 8,199,726; 8,427,954; 8,619,747; 8,675,612 (the "'612 Patent"); 8,797,873 (the "'873 Patent");8,675,612; 8,797,873; 9,203,580; and 9,456,449 (the "'449 Patent")—9,456,449—by making, using, offering for sale, and/or selling Lenovo wireless devices with 3G and/or 4G LTE capabilities. As relief, InterDigital is seeking: (a) a declaration that InterDigitalthe Company is not in breach of its relevant FRAND commitments with respect to Lenovo; (b) to the extent Lenovo does not agree to negotiate a worldwide patent license, does not agree to enter into binding international arbitration to set the terms of a FRAND license, and does not agree to be bound by the FRAND terms to be set by the UK High Court in the separately filed U.K. ProceedingsUK proceedings described above, an injunction prohibiting Lenovo from continued infringement; (c) damages, including enhanced damages for willful infringement and supplemental damages; and (d) attorneys’ fees and costs.
On November 4, 2019,September 16, 2020, the Delaware District Court entered a schedule for the case, setting a patent jury trial. On March 8, 2021, the Delaware District Court held a claim construction hearing, and the court issued its order on May 10, 2021, construing various disputed terms. On March 24, 2021, the Delaware District Court consolidated the antitrust proceeding discussed below with this patent proceeding. Trial for the consolidated proceedings has been rescheduled from March 6, 2023 to July 10, 2023. On April 25, 2022, the parties filed a stipulation to stay only the claims relating to U.S. Patent No. 8,199,726. The stipulation was granted. On January 13, 2023, Lenovo filed a motion to dismiss InterDigital'ssever and stay the Company’s patent infringement claims, for 6requesting that its Sherman Act and breach of FRAND claims proceed to trial. That motion is currently pending.
District of Delaware Antitrust Proceedings
On April 9, 2020, Lenovo (United States) Inc. and Motorola Mobility LLC filed a complaint in the Delaware District Court against the Company and certain of its subsidiaries. The complaint alleges that the Company defendants have violated Sections 1 and 2 of the 8 litigated patents—Sherman Act in connection with, among other things, their licensing of 3G and 4G standards essential patents ("SEPs"). The complaint further alleges that the '873, '665, '954, '726, '449Company defendants have violated their commitment to the ETSI with respect to the licensing of 3G and '612 Patents—4G SEPs on FRAND terms and conditions. The complaint seeks, among other things (i) rulings that the Company defendants have violated Sections 1 and 2 of the Sherman Act and are liable for breach of their ETSI FRAND commitments, (ii) a judgment that the plaintiffs are entitled to a license with respect to the Company's 3G and 4G SEPs on FRAND terms and conditions, and (iii) injunctions against any demand for allegedly excessive royalties or enforcement of the Company defendants' 3G and 4G U.S. SEPs against the plaintiffs or their customers via patent infringement proceedings.
On June 22, 2020, the Company filed a motion to dismiss Lenovo's Sherman Act claims with prejudice, and to dismiss Lenovo's breach of contract claim with leave to re-file as a counterclaim in the Company's legal proceeding against Lenovo in the Delaware District Court discussed above.
On March 24, 2021, the Delaware District Court ruled on the basis that such patents allegedly are not directedCompany’s motion to patent-eligible subject matter. On December 9, 2019, InterDigital amended its complaint and on January 10, 2020, Lenovo filed a reneweddismiss. The Delaware District Court dismissed the Sherman Act Section 1 claim without prejudice, denied the motion to dismiss the sameSherman Act Section 2 claim, and consolidated the Section 2 and breach of contract claims from InterDigital's amendedwith Company’s Delaware patent proceeding discussed above.
China Proceedings
On April 10, 2020, Lenovo (Beijing) Ltd. and certain of its affiliates filed a complaint as they moved to dismiss fromagainst the original complaint. On February 7, 2020, InterDigital filed its opposition to Lenovo's renewed motion to dismiss InterDigital's amended complaint. Lenovo's response to InterDigital's opposition is due on February 21, 2020.
Asustek
Information regarding the legal proceeding that Asustek Computer Incorporated ("Asus") filed against InterDigital, Inc.Company and certain of its subsidiaries in the U.S. DistrictBeijing Intellectual Property Court (the “Beijing IP Court”) seeking a determination of the FRAND royalty rates payable for the Northern DistrictCompany's Chinese 3G, 4G and 5G SEPs. On February 20, 2021, the Company filed an application challenging the jurisdiction of Californiathe Beijing IP Court to take up Lenovo’s complaint. On November 15, 2021, the Beijing IP Court denied the jurisdictional challenge, and the Company filed an appeal with the Supreme People’s Court of the People’s Republic of China (the "CA Northern District Court"“SPC”) on April 15, 2015 can be foundDecember 14, 2021. That appeal was denied by the SPC on September 5, 2022, and the case was sent back to the Beijing IP Court. On November 9, 2022, the Company filed a petition to stay the case. That petition is currently pending.
On November 26, 2021, the Company was informed that Lenovo had purportedly filed an additional complaint against the Company in the descriptionWuhan Intermediate People’s Court (the “Wuhan Court”) seeking a determination of legal proceedings contained in InterDigital's Annual Report on Form 10-Ka global FRAND royalty rate for the fiscal year ended December 31, 2018 asperiod from 2024 to 2029 for the Company’s 3G, 4G, and 5G SEPs. On April 16, 2022, the Company filed withan application challenging, among other things, process of service and the SEC on February 21, 2019 (the "2018 Form 10-K").jurisdiction of the Wuhan Court. The application remains pending.
Germany Proceedings
On March 11, 2019, as a result25, 2022, March 28, 2022, and April 6, 2022, the Company and certain of its subsidiaries filed patent infringement claims in the Munich and Mannheim Regional Courts against Lenovo and certain of its affiliates, alleging infringement of European Patent Nos. 2,449,782; 2,452,498; 3,624,447 and 3,267,684 relating to HEVC standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the CA Northern District Court's ruling onasserted patents. The Mannheim Regional Court has scheduled hearings regarding European Patent Nos. 3,267,684 and 3,624,447 for April 21, 2023 and May 2, 2023, respectively. The Munich Regional Court has scheduled a hearing regarding European Patent No. 2,449,782 for September 14, 2024, and has not yet scheduled the remaining hearing.
Oppo, OnePlus and realme
UK Proceedings
On December 20, 2018 that Asus was judicially estopped from arguing that2021, the parties’ April 2008Company filed a patent license agreement was not entered into on FRAND terms and conditions, Asus revised its damages calculations downward, and updated the calculations to include sales through 2018. Asus was seeking damages for what it called "4G capable products"infringement claim in the amountUK High Court against Guangdong Oppo Mobile Telecommunications Corp., Ltd. (“Oppo”) and certain of $58.3 million for sales through 2018. Any damages attributableits affiliates, OnePlus Technology (Shenzhen) Co., Ltd. (“OnePlus”) and certain of its affiliates, and realme Mobile Telecommunications (Shenzhen) Co., Ltd. (“realme”) and certain of its affiliates, alleging infringement of European Patent (UK) Nos. 2,127,420; 2,421,318; 2,485,558; and 3,355,537 relating to a violation Section 2cellular 3G, 4G/LTE or 5G standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the Sherman Act would have been subject to mandatory trebling, as well as an award of reasonable attorneys' fees.asserted patents.
On April 4, 2019, Asus informedJanuary 19, 2022, Oppo filed a jurisdictional challenge with the courtUK High Court which the parties have agreed to adjourn pending the outcome of Oppo’s jurisdiction challenge before the UK Supreme Court in a case involving Nokia. On December 8, 2022, the Company received confirmation that it would not be proceeding toOppo had dropped its jurisdictional challenge with the UK High Court.
The first technical trial on its waiver and Delaware Consumer Fraud Act claims. A jury trial on Asus’ remaining claims—violation of Section 2 of the Sherman Act and breach of contract resulting from ongoing negotiations—wasis scheduled to commence on May 6, 20198, 2023. The second and third technical trials are scheduled to commence on June 26, 2023, and July 10, 2023, respectively. The willingness trial is expected to commence on October 23, 2023. The FRAND trial is scheduled to commence on February 26, 2024. The fourth technical trial is currently stayed pending the Company’s appeal of the results of the second technical trial in the CA Northern District Court.Lenovo UK Proceeding.
India Proceedings
On April 9, 2019,December 20, 2021 and December 22, 2021, the parties participatedCompany and certain of its subsidiaries filed patent infringement claims in another court-mandated settlement conference. the Delhi High Court in New Delhi, India against Oppo and certain of its affiliates, OnePlus and certain of its affiliates, and realme Mobile Telecommunication (India) Private Limited, alleging infringement of Indian Patent Nos. 262910, 295912, 313036, 320182, 319673, 242248, 299448, and 308108 relating to cellular 3G, 4G/LTE, and/or 5G, and HEVC standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents.
Germany Proceedings
On April 12, 2019,December 20, 2021, a subsidiary of the Company filed three patent infringement claims, two in the Munich Regional Court and one in the Mannheim Regional Court, against Oppo and certain subsidiaries of InterDigital entered intoits affiliates, OnePlus and certain of its affiliates, and realme and certain of its affiliates, alleging infringement of European Patent Nos. 2,485,558; 2,127,420; and 2,421,318 relating to cellular 3G, 4G/LTE and/or 5G standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. The Munich Regional Court held a Settlement Agreementhearing on December 14, 2022 regarding EP318 with a decision expected on March 1, 2023. The Munich Regional Court has also scheduled hearings for March 2, 2023 on EP420, and First Amendment toMarch 24, 2023 on EP558.
China Proceedings
On January 19, 2022, the Patent License Agreement with AsusCompany was informed that Oppo had purportedly filed a complaint against the Company in the Guangzhou Intellectual Property Court (the “Asus Settlement Agreement”“Guangzhou IP Court”), pursuant to which, seeking a determination of a global FRAND royalty rate for the Company’s 3G, 4G, 5G, 802.11 and HEVC SEPs. On May 20, 2022, the Company filed an application challenging, among other things, process of service and the parties agreedjurisdiction of the Guangzhou IP Court. On January 12, 2023, the Guangzhou IP Court denied the application. The Company plans to a multi-year amendment toappeal the 2008 Asus PLA that added coverage for 4G technologies and amended certain other terms. The parties also agreed to dismiss all outstanding litigation and other proceedings among the parties. Accordingly, the action in the CA Northern District Court described herein was dismissed on April 15, 2019, and there are no further proceedings in this matter.decision.
ZTE USITC Proceedings and Related Delaware District CourtSpain Proceedings
Information regarding legal proceedings that InterDigital filed against ZTE Corporation and ZTE (USA) Inc. (collectively, "ZTE") with the United States International Trade Commission ("USITC") and the Delaware District Court can be found in the description of legal proceedings contained in InterDigital's 2018 Form 10-K. With respect to the Delaware District Court proceeding related to the 2013 USITC Proceeding (337-TA-868), on January 23, 2019, InterDigital and ZTE filed a joint status report that informed the Delaware District Court of the Federal Circuit's decision regarding the '966 and '847 patents and that the PTAB proceedings regarding the '244 patent remained pending. The parties jointly requested that the case remain stayed so that the portion of the case related to damages potentially owed by ZTE as to the 3 patents-in-suit could be coordinated. The court granted that request on January 25, 2019.
On October 18, 2019, InterDigital and ZTE entered into a Patent License Agreement (the "ZTE PLA") pursuant to which the parties agreed that, upon the performance of certain obligations by ZTE, the parties would end all legal proceedings initiated by either party or otherwise pending between them. Pursuant to the ZTE PLA, on October 25, 2019, ZTE filed an unopposed motion with the Federal Circuit to withdraw from the appeal of the PTAB’s remand ruling that claim 8 of the ’244 patent is invalid. On November 22, 2019, the Federal Circuit reversed and vacated the PTAB's remand decision. The court's mandate issued on December 30, 2019.
Also on December 30, 2019, InterDigital and ZTE filed a stipulation and proposed order to dismiss the Delaware District Court proceedings related to the 2011 USITC Proceeding (337-TA-800) and 2013 USITC Proceeding (337-TA-868), which was granted by the court on January 2, 2020. There are no further proceedings in either of these matters.
REGULATORY PROCEEDING
Investigation by National Development and Reform Commission of China
On September 23, 2013, counsel for InterDigital was informed by China's National Development and Reform Commission ("NDRC") that the NDRC had initiated a formal investigation into whether InterDigital has violated China's Anti-Monopoly Law ("AML") with respect to practices related to the licensing of InterDigital's standards-essential patents to Chinese companies. Companies found to violate the AML may be subject to a cease and desist order, fines and disgorgement of any illegal gains. On March 3, 2014, the Company submitted to NDRC, pursuant to1, 2022, a procedure set out in the AML, a formal application for suspension of the investigation that included proposed commitments by the Company. On May 22, 2014, NDRC formally suspended its investigationsubsidiary of the Company based onfiled patent infringement claims in the commitments proposed by the Company. The Company's commitments with respect to the licensingBarcelona Commercial Courts against Oppo and certain of its patent portfolio for wireless mobile standardsaffiliates, OnePlus and certain of its affiliates, and realme and certain of its affiliates. The Company filed its amended complaint on April 25, 2022, alleging infringement of European Patent Nos. 3,355,537; 2,485,558; 2,421,318; and 2,557,715 relating to Chinese manufacturerscellular 3G, 4G/LTE and/or 5G standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of cellular terminal units ("Chinese Manufacturers") are as follows:the asserted patents.
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1. | Whenever InterDigital engages with a Chinese Manufacturer to license InterDigital's patent portfolio for 2G, 3G and 4G wireless mobile standards, InterDigital will offer such Chinese Manufacturer the option of taking a worldwide portfolio license of only its standards-essential wireless patents, and comply with F/RAND principles when negotiating and entering into such licensing agreements with Chinese Manufacturers. |
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2. | As part of its licensing offer, InterDigital will not require that a Chinese Manufacturer agree to a royalty-free, reciprocal cross-license of such Chinese Manufacturer's similarly categorized standards-essential wireless patents. |
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3. | Prior to commencing any action against a Chinese Manufacturer in which InterDigital may seek exclusionary or injunctive relief for the infringement of any of its wireless standards-essential patents, InterDigital will offer such Chinese Manufacturer the option to enter into expedited binding arbitration under fair and reasonable procedures to resolve the royalty rate and other terms of a worldwide license under InterDigital's wireless standards-essential patents. If the Chinese Manufacturer accepts InterDigital's binding arbitration offer or otherwise enters into an agreement with InterDigital on a binding arbitration mechanism, InterDigital will, in accordance with the terms of the arbitration agreement and patent license agreement, refrain from seeking exclusionary or injunctive relief against such company. |
Samsung
The commitments contained in item 3 above expired on May 22, 2019. WithCompany reached an agreement with Samsung Electronics Co. Ltd. (“Samsung”) to enter into binding arbitration to determine the consolidationfinal terms of China’s antimonopoly enforcement authorities intoa renewed patent license agreement to certain of the State Administration for Market Regulation ("SAMR") in April 2018, SAMR is now responsible for overseeing InterDigital's commitments.Company’s patents, which will be effective from January 1, 2023. The Company and Samsung have also agreed not to initiate certain claims against the other during the arbitration.
OTHER
We are party to certain other disputes and legal actions in the ordinary course of business, including arbitrations and legal proceedings with licensees regarding the terms of their agreements and the negotiation thereof. We do not currently believe that these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial
condition, results of operations or cash flows. None of the preceding matters have met the requirements for accrual or disclosure of a potential range as of December 31, 2019.2022.
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13. | COMPENSATION PLANS AND PROGRAMS |
12. COMPENSATION PLANS AND PROGRAMS
Compensation Programs
We use a variety of compensation programs to attract, retain and motivate our employees, and to more closely align employee compensation with company performance. These programs include, but are not limited to, short-term incentive awards tied to performance goals, cash awards to inventors for filed patent applications and patent issuances, and long-term incentives in the form of stock option awards, time-based RSU awards, performance-based RSU awards and cash awards.
Our long-term incentives typically include annual time-based RSU grants or cash awards with a three-year vesting period, as well as annual performance-based RSU grants or cash awards with a three to five-year performance period; as a result, in any one year, we are typically accounting for at least three active cycles. Additionally, from time to time, executive officers are awarded long term incentives or new hire grants that may include time-based RSUs, performance-based RSUs or options. We issue new shares of our common stock to satisfy our obligations under the share-based components of these programs. However, our Board of Directors has the right to authorize the issuance of treasury shares to satisfy such obligations in the future.
Equity Incentive Plans
On June 14, 2017, our shareholders adopted and approved the 2017 Equity Incentive Plan (the "2017 Plan"), under which officers, employees, non-employee directors and consultants can receive share-based awards such as RSUs, restricted stock and stock options as well as other stock or cash awards. The plan was amended in order to reserve an additional 1.8 million shares of our common stock for issuance under the 2017 Plan. Such amendment was adopted and approved by our shareholders on June 2, 2021.
From June 2009 through June 14, 2017, we granted suchequity awards pursuant to our 2009 Stock Incentive Plan (the “2009 Plan," and, together with the 2017 Plan, the "Equity Plans"), which was adopted and approved by our shareholders on June 4, 2009, and the material terms of which were re-approved on June 12, 2014. Upon the adoption of the 2017 Plan, in June 2017, the 2009 Plan was terminated and all shares remaining available for grant under the 2009 Plan were canceled. The number of shares available for issuance under the 2017 Plan, as amended, is equal to 2,400,0004.2 million shares plus any shares subject to awards granted under the 2009 Plan that, on or after June 14, 2017, expire or otherwise terminate without having been exercised in full, or that are forfeited to or repurchased by us.
RSUs and Restricted Stock
We may issue RSUs and/or shares of restricted stock to officers, employees, non-employee directors and consultants. Any cancellations of unvested RSUs granted under the Equity Plans will increase the number of shares remaining available for grant under the 2017 Plan. Time-based RSUs vest over periods generally ranging from 1 to 3 years from the date of the grant. Performance-based RSUs generally have a vesting period of between 3 and 5 years. Milestone performance-based RSUs may vest at any time, upon achievement of the milestone goal, during the performance period, which is typically 5 years.
As of December 31, 2019,2022, we had unrecognized compensation cost related to share-based awards of $10.2$24.7 million, at current performance accrual rates. For time-based grants madewith graded vesting, we expect to amortize the associated unrecognized compensation cost using an accelerated method. For time-based grants that cliff vest, we expect to amortize the associated unrecognized compensation cost as of December 31, 2019,2022, on a straight-line basis generally over a three to five-yearthe remaining vesting period.
Vesting of performance-based RSU awards is subject to attainment of specific goals established by the Compensation Committee of the Board of Directors. Depending upon performance achievement against these goals, the number of shares that vest can be anywhere from 0 to 23 times the target number of shares.
Information with respect to current RSU activity is summarized as follows (in thousands, except per share amounts): | | | | | | | | | | | |
| Number of Unvested RSUs | | Weighted Average Per Share Grant Date Fair Value |
Balance at December 31, 2021 | 1,059 | | | $ | 57.43 | |
Granted* | 661 | | | 55.15 | |
Forfeited | (165) | | | 54.97 | |
Vested | (375) | | | 67.29 | |
Balance at December 31, 2022 | 1,180 | | | $ | 53.36 | |
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| | | | | | |
| Number of Unvested RSUs | | Weighted Average Per Share Grant Date Fair Value |
Balance at December 31, 2018 | 915 |
| | $ | 63.70 |
|
Granted* | 512 |
| | 66.19 |
|
Forfeited | (274 | ) | | 76.44 |
|
Vested | (198 | ) | | 58.84 |
|
Balance at December 31, 2019 | 955 |
| | $ | 62.40 |
|
* These numbers include lessfewer than 0.1 million RSUs credited on unvested RSU awards as dividend equivalents. Dividend equivalents accrue with respect to unvested RSUs when and as cash dividends are paid on the Company's common stock, and vest if and when the underlying RSUs vest. Granted amounts include performance-based RSU awards at their maximum potential payout level of 200%.
payout.
During 2019, 20182022, 2021 and 2017,2020, we granted approximately 0.30.7 million, 0.30.5 million and 0.20.4 million RSUs under the Equity Plans, respectively, with weighted-average per share grant date fair values of $66.19, $73.75$55.15, $68.44 and $58.63, respectively.$46.18, respectively, assuming target payout for the performance-based awards. The total vest date fair value of the RSUs that vested in 2019, 20182022, 2021 and 20172020 was $12.7$25.3 million, $25.2$22.6 million and $56.0$6.7 million, respectively. The weighted average per share grant date fair value of the awards that vested in 2019, 20182022, 2021 and 20172020 was $58.84, $54.75$67.29, $62.44 and $35.14,$65.06, respectively.
Other Equity Grants
We may also grant equity awards to non-management Board members and may grant equity awards to certain consultants.
Stock Options
The 2009 Plan allowed, and the 2017 Plan allows, for the granting of incentive and non-qualified stock options, as well as other securities. The administrator of the Equity Plans, the Compensation Committee of the Board of Directors, determines the number of options to be granted, subject to certain limitations set forth in the 2017 Plan. Annually, sinceSince 2013, both incentive and non-qualified stock options have been granted annually as part of our long-term incentive programs, which have generally vested over three years. During the year ended December 31, 2018, performance-based options were granted for the first time. The number of performance-based options which cliff vest, if at all, is anywhere from 0 to 23 times the target number of options subject to the attainment of performance goals measured either during or at the end of the performance period. These performance-basedPerformance-based options typically have a vesting period between three and five years. Milestone performance options may vest at any time, upon achievement of the milestone goal, during the performance period, which is typically 5 years.
Under the terms of the Equity Plans, the exercise price per share of each option, other than in the event of options granted in connection with a merger or other acquisition, cannot be less than 100% of the fair market value of a share of common stock on the date of grant. Options granted under the Equity Plans are generally exercisable for a period of between 7 to 10 years from the date of grant and may vest on the grant date, another specified date, over a period of time and/or dependent upon the attainment of specified performance goals. We also have approximately 0.1 million options outstanding under a prior stock plan that have an indefinite contractual life.do not expire.
The fair value for option awards is computed using the Black-Scholes pricing model, whose inputs and assumptions are determined as of the date of grant and which require considerable judgment. Expected volatility was based upon a combination of implied and historic volatilities. The weighted-average grant date fair value per option award granted during the years ended December 31, 2019, 20182022, 2021 and 20172020 was $13.68, $24.56,$20.28, $23.04, and $19.90,$11.46, respectively, based upon the assumptions included in the table below:
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| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Expected term (in years) | 4.5 |
| | 7.7 |
| | 4.5 |
|
Expected volatility | 25.8 | % | | 30.1 | % | | 28.5 | % |
Risk-free interest rate | 2.4 | % | | 3.0 | % | | 1.9 | % |
Dividend yield | 2.0 | % | | 1.8 | % | | 1.4 | % |
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Expected term (in years) | 8.0 | | 7.7 | | 6.5 |
Expected volatility | 36.3 | % | | 35.7 | % | | 37.5 | % |
Risk-free interest rate | 2.2 | % | | 1.3 | % | | 0.6 | % |
Dividend yield | 2.3 | % | | 1.9 | % | | 3.1 | % |
Information with respect to current year stock option activity is summarized as follows (in thousands, except per share amounts):
| | | | | | | | | | | |
| Outstanding Options | | Weighted Average Exercise Price |
Balance at December 31, 2021 | 571 | | | $ | 59.31 | |
Granted* | 108 | | | 62.19 | |
Forfeited | — | | | — | |
Exercised | (33) | | | 53.69 | |
Balance at December 31, 2022 | 646 | | | $ | 60.08 | |
|
| | | | | | |
| Outstanding Options | | Weighted Average Exercise Price |
Balance at December 31, 2018 | 695 |
| | $ | 57.21 |
|
Granted* | 130 |
| | 67.61 |
|
Forfeited | — |
| | — |
|
Exercised | — |
| | 8.25 |
|
Balance at December 31, 2019 | 825 |
| | $ | 58.83 |
|
* Granted amounts include performance-based option awards at their maximum potential payout.
The weighted average remaining contractual life of our outstanding options was 8.310.4 years as of December 31, 2019. These options2022. Options with an indefinite contractual life, which were granted between 1983 and 1986 under a prior stock plan. For purposes of calculating the weighted average remaining contractual life, these optionsplan, were assigned an original life in excess of 50 years.years for purposes of calculating the weighted average remaining contractual life. The majority of these options have an exercise price between $9.00 and $11.63.
The total intrinsic value of our outstanding options as of December 31, 20192022 was $7.2$4.4 million. Of the 0.80.6 million outstanding options as of December 31, 2019, 0.42022, 0.3 million were exercisable with a weighted-average exercise price of $35.81.$47.19. Options exercisable as of December 31, 20192022, had total intrinsic value of $7.2$4.4 million and a weighted average remaining contractual life of 8.612.8 years. The total intrinsic value of stock options exercised during the years ended December 31, 2019, 20182022, 2021 and 20172020 was less than $0.1$0.3 million, $5.6$3.6 million and $0.3$1.1 million, respectively. In 2019,2022, we recorded cash received from the exercise of options of less than $0.1$1.2 million. Upon option exercise, we issued new shares of stock.
As of December 31, 2019,2022, we had unrecognized compensation cost on our unvested stock options of $0.9$1.8 million, at current performance accrual rates. As of December 31, 20192022 and 2018,2021, we had approximately 0.30.1 million and 0.30.1 million options outstanding, respectively, that had exercise prices less than the fair market value of our stock at the respective balance sheet date. These options would have generated cash proceeds to the Company of $7.6$1.1 million and $11.2$3.5 million, respectively, if they had been fully exercised on those dates.
Defined Contribution Plans
We have a 401(k) plan (“Savings Plan”) wherein employees can elect to defer compensation within federal limits. We match a portion of employee contributions. Our 401(k) contribution expense was approximately $1.1$1.2 million, $1.3 million and $1.4$1.1 million for 2019, 20182022, 2021 and 2017,2020, respectively. At our discretion, we may also make a profit-sharing contribution to our employees’ 401(k) accounts. Additionally, the company contributed $0.2 million, $3.4 million and $0.2 million in 2022, 2021 and $0.3 million in 2019, 2018 and 2017,2020, respectively, to other defined contribution plans.
Under InterDigital’s Deferred Compensation Plan (“Deferred Plan”), eligible US employees may make tax-deferred contributions that cannot be made under the 401(k) Plan due to Internal Revenue Service limitations. We match 50% of a participant’s contributions up to 6% of the participants excess compensation pay. From time to time InterDigital makes discretionary company contributions to the Deferred Plan on behalf of a participant. The company contributed $3.0 million to the Deferred Plan in 2021. No such contributions were made in 2022.
13. TAXES
Our income tax provision (benefit) consists of the following components for 2019, 20182022, 2021 and 20172020 (in thousands):
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| 2019 | | 2018 | | 2017 |
Current | |
| | |
| | |
|
Federal | $ | (11,436 | ) | | $ | (3,148 | ) | | $ | 3,656 |
|
State | 207 |
| | 239 |
| | (1 | ) |
Foreign source withholding tax | 19,850 |
| | 25,187 |
| | 47,592 |
|
| 8,621 |
| | 22,278 |
| | 51,247 |
|
Deferred | |
| | |
| | |
|
Federal | (21,735 | ) | | (63,030 | ) | | 21,671 |
|
State | 2,457 |
| | (1,554 | ) | | (1,074 | ) |
Foreign source withholding tax | 21,648 |
| | 14,889 |
| | 49,832 |
|
| 2,370 |
| | (49,695 | ) | | 70,429 |
|
Total | $ | 10,991 |
| | $ | (27,417 | ) | | $ | 121,676 |
|
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current | | | | | |
Federal | $ | 657 | | | $ | (291) | | | $ | (26,092) | |
State | 931 | | | 797 | | | 89 | |
Foreign source withholding tax | 5,754 | | | 22,415 | | | 26,229 | |
| 7,342 | | | 22,921 | | | 226 | |
Deferred | | | | | |
Federal | (17,022) | | | (43,250) | | | (28,692) | |
State | 527 | | | 792 | | | 119 | |
Foreign source withholding tax | 34,655 | | | 34,905 | | | 21,699 | |
| 18,160 | | | (7,553) | | | (6,874) | |
Total | $ | 25,502 | | | $ | 15,368 | | | $ | (6,648) | |
The deferred tax assets and liabilities were comprised of the following components at December 31, 20192022 and 20182021 (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Net operating losses | $ | 114,975 | | | $ | 143,275 | |
Tax credit carryforward | 27,212 | | | 32,692 | |
Debt amortization | 24,029 | | | 12,659 | |
Amortization and depreciation | 19,608 | | | 19,810 | |
Other employee benefits | 10,542 | | | 10,973 | |
Capitalized research and development | 9,423 | | | — | |
Stock compensation | 4,803 | | | 4,774 | |
Deferred revenue, net | 3,457 | | | 22,875 | |
Lease liability | 3,402 | | | 4,773 | |
Other | 2,504 | | | 1,521 | |
Right of use asset | (3,464) | | | (3,763) | |
| 216,491 | | | 249,589 | |
Less: valuation allowance | (122,218) | | | (151,522) | |
Net deferred tax asset | $ | 94,273 | | | $ | 98,067 | |
|
| | | | | | | |
| 2019 | | 2018 |
| Total | | Total |
Net operating losses | $ | 131,501 |
| | $ | 126,946 |
|
Deferred revenue, net | 33,131 |
| | 39,711 |
|
Tax credit carryforward | 11,744 |
| | — |
|
Stock compensation | 3,307 |
| | 5,037 |
|
Patent amortization | 18,522 |
| | 18,520 |
|
Depreciation | 443 |
| | 246 |
|
Goodwill | (1,933 | ) | | — |
|
Other-than-temporary impairment | 1,138 |
| | 490 |
|
Other accrued liabilities | 785 |
| | 2,981 |
|
Other employee benefits | 7,520 |
| | 6,405 |
|
Right of use asset | (4,913 | ) | | — |
|
Lease liability | 5,760 |
| | — |
|
| 207,005 |
| | 200,336 |
|
Less: valuation allowance | (133,797 | ) | | (125,158 | ) |
Net deferred tax asset | $ | 73,208 |
| | $ | 75,178 |
|
87
Note: Included within the balance sheet, but not reflected in the tables are deferred tax assets primarily related to foreign withholding taxes that are expected to be paid within the next twelve months of $0.1 million and $1.5 million as of December 31, 2019 and December 31, 2018, respectively.
The following is a reconciliation of income taxes at the federal statutory rate with income taxes recorded by the Company for the years ended December 31, 2019, 20182022, 2021 and 2020:2017:
| | | | | | | | | For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
Tax at U.S. statutory rate | 21.0 | % | | 21.0 | % | | 35.0 | % | Tax at U.S. statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State tax provision (a) | 10.2 | % | | (8.9 | )% | | — | % | |
Effects of rates different than statutory | (2.8 | )% | | (1.4 | )% | | — | % | |
Change in valuation allowance | 23.3 | % | | 8.5 | % | | 0.5 | % | Change in valuation allowance | 2.4 | % | | 10.3 | % | | 28.5 | % |
Non-deductible officers' compensation | | Non-deductible officers' compensation | 1.5 | % | | 8.4 | % | | 0.7 | % |
Uncertain tax positions | | Uncertain tax positions | 1.5 | % | | 5.5 | % | | (2.7) | % |
Other permanent differences | | Other permanent differences | 1.2 | % | | 1.9 | % | | (1.9) | % |
State tax provision | | State tax provision | 1.1 | % | | 2.6 | % | | 0.6 | % |
Non-creditable withholding taxes | | Non-creditable withholding taxes | 0.4 | % | | 4.4 | % | | — | % |
Stock compensation | | Stock compensation | 0.3 | % | | (1.2) | % | | 1.1 | % |
Amended return benefit (a) | | Amended return benefit (a) | — | % | | (7.7) | % | | (65.0) | % |
| Effect of rates different than statutory | | Effect of rates different than statutory | (0.1) | % | | (2.2) | % | | (2.0) | % |
Research and development tax credits | (4.5 | )% | | (4.3 | )% | | (0.8 | )% | Research and development tax credits | (1.7) | % | | (1.3) | % | | (1.6) | % |
Uncertain tax positions | (0.8 | )% | | 3.9 | % | | (2.4 | )% | |
Permanent differences | 2.3 | % | | 4.9 | % | | 1.0 | % | |
Domestic production activities deduction | — | % | | — | % | | (2.0 | )% | |
Stock compensation | (0.6 | )% | | (5.0 | )% | | (4.0 | )% | |
Rate change (b) | — | % | | — | % | | 14.6 | % | |
Foreign derived intangible income deduction (c) | — | % | | (56.3 | )% | | — | % | |
Amended return benefit | (8.4 | )% | | (49.4 | )% | | — | % | |
Foreign derived intangible income deduction | | Foreign derived intangible income deduction | (5.3) | % | | (14.7) | % | | — | % |
Other | 2.7 | % | | 1.5 | % | | (0.3 | )% | Other | (0.6) | % | | — | % | | 0.1 | % |
Total tax provision (benefit) | 42.4 | % | | (85.5 | )% | | 41.6 | % | Total tax provision (benefit) | 21.7 | % | | 27.0 | % | | (21.2) | % |
(a) In 2019, we determined2020, a net discrete benefit of $20.9 million was recorded that we would not be ableprimarily relates to the expected amendment of prior year returns to utilize our state deferreda tax assets for our parent companyasset generated in Delaware and Pennsylvania, therefore we put a full valuation allowance on these assets.
(b)the current year. In 2017,2021, when the inclusion of the revaluation of the deferred tax assets attributable to the TCJA signed into law in December 2017 increased the tax provision by 14.6%.
(c) In 2018, the new Foreign Derived Intangible Income ("FDII") deduction thatreturns were filed, there was enacted as part of the TCJA decreased the tax provision by 56.3%.an additional benefit recorded.
Valuation Allowances and Net Operating Losses
We establish a valuation allowance for any portion of our deferred tax assets for which management believes it is more likely than not that we will be unable to utilize the assets to offset future taxes. WeGiven the binary nature of our business, at this time we believe it is more likely than not that the majority of our state net operating losses and net operating losses in certain subsidiaries in France, as well as our non-wholly owned subsidiaries in the United States and the United Kingdom will not be utilized; therefore we have maintained a near full valuation allowance against our state, French and United Kingdom net operating losses as of December 31, 2019. All2022. We also maintain a valuation allowance against certain temporary differences other deferred tax assets are fully benefited.than the net operating losses in these jurisdictions.
Uncertain Income Tax Positions
As of December 31, 2019, 20182022, 2021 and 2017,2020, we had 4.5$16.1 million, 4.4$15.7 million and 3.3$3.8 million, respectively, of unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate. The total amount of unrecognized tax benefits could change within the next twelve months for a number of reasons including audit settlements, tax examination activities and the recognition and measurement considerations under this guidance.
During 2019,2022, we established a reservereserves of $0.3$1.1 million related to an additional deduction relateduncertainty arising from our ability to credit foreign withholding taxes in jurisdictions without a tax treaty with the issuance cost ofUnited States. We also reduced the convertible debt that is recorded through equity.reserve previously established for the amended returns by $1.0 million for the benefit available in the current year had it not been included on the amended returns.
During 2018,2021, after finalizing our amended return position we increased the reserve established a reservein 2020 by $12.8 million. We also reversed reserves of 1.1$1.1 million related to the recognition of the 2006 to 2010 research and development credits and manufacturing deduction credits.
During 2017, we released a reserve of $6.5 million as a result of the IRS Joint Committee issuing a letter ruling in acceptance of the refund claims associated with the domestic production activities deduction and research and development credit. Additionally, we reduced the previously established reserve for the 2016 domestic production activities deduction and research and development credit by 1.6 million. These reductions in reserves were partially offset by the establishment of a 1.0 million reserve related to theon 2017 research and development and manufacturing deduction credit,credits as well an increasea result of the lapsing of stature of limitations for interestthat tax year.
During 2020, we established reserves of $1.1 million related to uncertainty arising from our ability to generate the full benefit of the amended returns that utilize the current year tax asset. We also reversed reserves of $1.8 million previously established on 2016 research and penalty on previously recognized reserves.development and manufacturing deduction credits as a result of the lapsing of the statute of limitations for that tax year.
The following is a roll forward of our total gross unrecognized tax benefits, which if reversed would impact the effective tax rate, for the fiscal years 20172022 through 20192020 (in thousands):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Balance as of January 1 | $ | 4,352 |
| | $ | 3,252 |
| | $ | 10,397 |
|
Tax positions related to current year: | | | | | |
|
Additions | 402 |
| | 73 |
| | 1,009 |
|
Reductions | — |
| | — |
| | — |
|
Tax positions related to prior years: | | | | | |
Additions | 34 |
| | 1,054 |
| | — |
|
Reductions | — |
| | (27 | ) | | (1,610 | ) |
Settlements | — |
| | — |
| | (6,544 | ) |
Lapses in statues of limitations | (332 | ) | | — |
| | — |
|
Balance as of December 31 | $ | 4,456 |
| | $ | 4,352 |
| | $ | 3,252 |
|
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
Balance as of January 1 | $ | 15,694 | | | $ | 3,803 | | | $ | 4,456 | |
Tax positions related to current year: | | | | | |
Additions | 1,264 | | | 46 | | | 1,062 | |
Reductions | — | | | — | | | — | |
Tax positions related to prior years: | | | | | |
Additions | 45 | | | 12,831 | | | 37 | |
Reductions | (951) | | | (4) | | | — | |
| | | | | |
Lapses in statues of limitations | — | | | (982) | | | (1,752) | |
Balance as of December 31 | $ | 16,052 | | | $ | 15,694 | | | $ | 3,803 | |
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. For certain positions that related to years prior to 2019, we have recorded approximately $0.1 million of accrued interest during 2019 and 2018.
The Company and its subsidiaries are subject to United States federal income tax, foreign income and withholding taxes and income taxes from multiple state jurisdictions. Our federal income tax returns for 2006 to the present, with the exception of 2011 and 2012, are currently open and will not close until the respective statutes of limitations have expired. The 2014, 2015 and 2018-2020 Federal income tax returns are currently under audit by the IRS. The statutes of limitations generally expire three years following the filing of the return or in some cases three years following the utilization or expiration of net operating loss carry forwards. The statute of limitations applicable to our open federal returns will expire at the end of 2021.2025. The Company is subject to French corporate income tax on certain subsidiaries. The statute of limitations applicable to our open French returns will expire in 2025. Excluding the Korea Competent Authority Proceeding and the Finland Competent Authority Proceeding described in the section below, specific tax treaty procedures remain open for certain jurisdictions for 2014 to the present. Many of our subsidiaries have filed state income tax returns on a separate company basis. To the extent these subsidiaries have unexpired net operating losses, their related state income tax returns remain open. These returns have been open for varying periods, some exceeding ten years. The total amount of state net operating losses is $1.6$1.5 billion. In November 2018, the Company received notice that its 2016 U.S. Federal income tax return will be subject to audit. In February 2020, the Company received a no change letter from the IRS indicating the audit is closed. In December 2018, the
Company received a notice of proposed assessment related to an ongoing audit of its California tax returns for 2013 through 2015. The Company filed a protest to the California assessment in February 2019.
Foreign Taxes
We pay foreign source withholding taxes on patent license royalties when applicable. We apply foreign source withholding tax payments against our United States federal income tax obligations to the extent we have foreign source income to support these credits. In 2019, 20182022, 2021 and 2017,2020, we paid $18.8$5.5 million, $25.1$21.7 million and $46.7$25.9 million in foreign source withholding taxes, respectively, and applied these payments as credits against our United States federal tax obligation.
Between 20062014 and 2019,2022, we paid approximately $177.4$134.6 million in foreign taxes to foreign governments that have tax treaties with the U.S., for which we have claimed foreign tax credits against our U.S. tax obligations, and for which the tax treaty procedures are still open. It is possible that as a result of tax treaty procedures, the U.S. government may reach an agreement with the related foreign governments that will result in a partial refund of foreign taxes paid with a related reduction in our foreign tax credits. Due to foreign currency fluctuations, any such agreement could result in foreign currency gain or loss.
On November 8, 2019, the Company received notification that its request for competent authority pertaining to Article 25 (Mutual Agreement Procedure) of the United States-Republic of Finland Income Tax Convention had been reviewed by the IRS and an agreement has been reached (the “Finland Competent Authority Proceeding”). As a result of this agreement, the Company does not anticipate any tax consequences.
Basic Earnings Per Share ("EPS") is calculated by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options or other securities with features that could result in the issuance of common stock were exercised or converted to common stock. The following table reconciles the numerator and the denominator of the basic and diluted net income per share computation (in thousands, except for per share data):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| Basic | | Diluted | | Basic | | Diluted | | Basic | | Diluted |
Numerator: | | | | | | | | | | | |
Net income applicable to common shareholders | $ | 20,928 |
| | $ | 20,928 |
| | $ | 65,031 |
| | $ | 65,031 |
| | $ | 176,220 |
| | $ | 176,220 |
|
Denominator: | | | | | | | | | | | |
Weighted-average shares outstanding: Basic | 31,546 |
| | 31,546 |
| | 34,491 |
| | 34,491 |
| | 34,605 |
| | 34,605 |
|
Dilutive effect of stock options, RSUs and convertible securities | | | 239 |
| | | | 816 |
| | | | 1,174 |
|
Weighted-average shares outstanding: Diluted | | | 31,785 |
| | | | 35,307 |
| | | | 35,779 |
|
Earnings Per Share: | | | | | | | | | | | |
Net income: Basic | $ | 0.66 |
| | 0.66 |
| | $ | 1.89 |
| | 1.89 |
| | $ | 5.09 |
| | 5.09 |
|
Dilutive effect of stock options, RSUs and convertible securities | | | — |
| | | | (0.05 | ) | | | | (0.16 | ) |
Net income: Diluted | | | $ | 0.66 |
| | | | $ | 1.84 |
| | | | $ | 4.93 |
|
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Net income applicable to common shareholders | $ | 93,693 | | | $ | 55,295 | | | $ | 44,801 | |
Weighted-average shares outstanding: | | | | | |
Basic | 30,106 | | | 30,764 | | | 30,776 | |
Dilutive effect of stock options, RSUs, convertible securities and warrants | 379 | | | 489 | | | 282 | |
Diluted | 30,485 | | | 31,253 | | | 31,058 | |
Earnings Per Share: | | | | | |
Basic | $ | 3.11 | | | $ | 1.80 | | | $ | 1.46 | |
Dilutive effect of stock options, RSUs, convertible securities and warrants | (0.04) | | | (0.03) | | | (0.02) | |
Diluted | $ | 3.07 | | | $ | 1.77 | | | $ | 1.44 | |
Certain shares of common stock issuable upon the exercise or conversion of certain securities have been excluded from our computation of earnings per share because the strike price or conversion rate, as applicable, of such securities was greater than the average market price of our common stock for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, as
applicable, and, as a result, the effect of such exercise or conversion would have been anti-dilutive. Set forth below are the securities and the weighted average number of shares of common stock underlying such securities that were excluded from our computation of earnings per share for the periods presented (in thousands):
|
| | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Restricted stock units and stock options | | 128 |
| | 25 |
| | 19 |
|
Convertible securities | | 5,495 |
| | — |
| | — |
|
Warrants | | 5,495 |
| | 4,404 |
| | — |
|
Total | | 11,118 |
| | 4,429 |
| | 19 |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Restricted stock units and stock options | | 504 | | | 322 | | | 146 | |
Convertible securities | | — | | | — | | | 5,143 | |
Warrants | | 6,444 | | | 4,921 | | | 5,662 | |
Total | | 6,948 | | | 5,243 | | | 10,951 | |
15. EQUITY TRANSACTIONS
Repurchase of Common Stock
In June 2014, our Board of Directors authorized a $300 million share repurchase program (the “2014“Share Repurchase Program”). In June 2015, September 2017, December 2018, and May 2019,Subsequently our Board of Directors authorized fourfive $100 million increases to the program, respectively, and an additional $333 million in December 2022, bringing the total amount of the 2014Share Repurchase Program to $700 million.$1.1 billion. The Company may repurchase shares under the 2014Share Repurchase Program through open market purchases, pre-arranged trading plans or privately negotiated purchases.
The table below sets forth the total number of shares repurchased and the dollar value of shares repurchased under the 2014Share Repurchase Program (in thousands). As of December 31, 2019,2022, there was approximately $71.8$400.0 million remaining under the stockshare repurchase authorization.
|
| | | | | | |
| 2014 Repurchase Program |
| # of Shares | | Value |
2019 | 2,962 |
| | $ | 196,269 |
|
2018 | 1,478 |
| | 110,505 |
|
2017 | 107 |
| | 7,693 |
|
2016 | 1,304 |
| | 64,685 |
|
2015 | 1,836 |
| | 96,410 |
|
2014 | 3,554 |
| | 152,625 |
|
Total | 11,241 |
| | $ | 628,187 |
|
| | | | | | | | | | | |
| Share Repurchase Program |
| # of Shares | | Value |
2022 | 1,224 | | | $ | 74,445 | |
2021 | 458 | | | 30,000 | |
2020 | 6 | | | 349 | |
2019 | 2,962 | | | 196,269 | |
2018 | 1,478 | | | 110,505 | |
2017 | 107 | | | 7,693 | |
2016 | 1,304 | | | 64,685 | |
2015 | 1,836 | | | 96,410 | |
2014 | 3,554 | | | 152,625 | |
Total | 12,929 | | | $ | 732,981 | |
Dividends
Cash dividends on outstanding common stock declared in 20192022 and 20182021 were as follows (in thousands, except per share data):
|
| | | | | | | | | | | |
2019 | Per Share | | Total | | Cumulative by Fiscal Year |
First quarter | $ | 0.35 |
| | $ | 11,180 |
| | $ | 11,180 |
|
Second quarter | 0.35 |
| | 10,895 |
| | 22,075 |
|
Third quarter | 0.35 |
| | 10,897 |
| | 32,972 |
|
Fourth quarter | 0.35 |
| | 10,746 |
| | 43,718 |
|
| $ | 1.40 |
| | $ | 43,718 |
| | |
| | | | | |
2018 | | | | | |
First quarter | $ | 0.35 |
| | $ | 12,124 |
| | $ | 12,124 |
|
Second quarter | 0.35 |
| | 12,192 |
| | 24,316 |
|
Third quarter | 0.35 |
| | 11,996 |
| | 36,312 |
|
Fourth quarter | 0.35 |
| | 11,610 |
| | 47,922 |
|
| $ | 1.40 |
| | $ | 47,922 |
| | |
| | | | | | | | | | | | | | | | | |
2022 | Per Share | | Total | | Cumulative by Fiscal Year |
First quarter | $ | 0.35 | | | $ | 10,803 | | | $ | 10,803 | |
Second quarter | 0.35 | | | 10,380 | | | 21,183 | |
Third quarter | 0.35 | | | 10,382 | | | 31,565 | |
Fourth quarter | 0.35 | | | 10,384 | | | $ | 41,949 | |
| $ | 1.40 | | | $ | 41,949 | | | |
| | | | | |
2021 | | | | | |
First quarter | $ | 0.35 | | | $ | 10,766 | | | $ | 10,766 | |
Second quarter | 0.35 | | | 10,794 | | | 21,560 | |
Third quarter | 0.35 | | | 10,740 | | | 32,300 | |
Fourth quarter | 0.35 | | | 10,741 | | | $ | 43,041 | |
| $ | 1.40 | | | $ | 43,041 | | | |
In September 2017, we announced that our Board of Directors had approved an increase in the Company’s quarterly cash dividend to $0.35 per share. We currently expect to continue to pay dividends comparable to our quarterly $0.35 per share cash dividend in the future; however, continued payment of cash dividends and changes in the Company's dividend policy will depend on the Company's earnings, financial condition, capital resources and capital requirements, alternative uses of capital, restrictions imposed by any existing debt, economic conditions and other factors considered relevant by our Board of Directors.
17.16. LEASES
In February 2016, the FASB issued ASC 842, which outlines a comprehensive change to the lease accounting model and supersedes prior lease guidance ("ASC 840"). The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months, and also changes the definition of a lease and expands the disclosure requirements of lease arrangements.
The Company adopted this guidance on January 1, 2019 using the modified retrospective transition effective date method. As part of that adoption, we have elected the package of three practical expedients, which includes the following: an entity may elect not to reassess whether expired or existing contracts contain a lease under the revised definition of a lease; an entity may elect not to reassess the lease classification for expired or existing leases; and an entity may elect not to reassess whether previously capitalized initial direct costs would qualify for capitalization. The Company has elected not to utilize the hindsight expedient in determining the lease term, and to not record leases with an initial term of 12 months or less on our balance sheet. Additionally, the Company has elected to account for lease components and non-lease components as a single lease component for all asset classes. Lease expense is recognized over the expected term on a straight-line basis. The adoption did not have a material impact on the Company's condensed consolidated statements of income or cash flows.
The Company enters into operating leases primarily for real estate to support research and development ("R&D") sites and general office space in North America, with additional locations in Europe and Asia.Canada. The Company does not currently have any finance leases. Certain of our leases include options to extend the lease at our discretion at the end of the lease term, or terminate the lease early subject to certain conditions and penalties. We do not include any renewal options in our lease terms for calculating our lease liabilities, as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the specific facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable, and, as such, the Company utilizes its incremental borrowing rate as the discount rate based on information available on the lease commencement date. Our incremental borrowing rate represents the rate we would incur to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. We utilized the incremental borrowing rate as of January 1, 2019, our adoption date, for operating leases that commenced prior to that date. Upon our adoption of ASU 2016-02, the Company recorded the following operating lease right-of-use assets and operating lease liabilities as of January 1, 2019. Additionally, theThe table below includes the balances of operating lease right-of-use assets and operating lease liabilities as of December 31, 20192022 and 2021 (in thousands):
|
| | | | | | | | | |
| Balance Sheet Classification | | January 1, 2019 | | December 31, 2019 |
Assets | | | | | |
Operating lease right-of-use assets, net | Other Non-current Assets | | $ | 13,634 |
| | $ | 24,513 |
|
Total Lease Assets | | | $ | 13,634 |
| | $ | 24,513 |
|
| | | | | |
Liabilities | | | | | |
Operating lease liabilities - Current | Other Accrued Expenses | | $ | 3,519 |
| | $ | 3,437 |
|
Operating lease liabilities - Noncurrent | Other Long-Term Liabilities | | 13,652 |
| | 24,142 |
|
Total Lease Liabilities | | | $ | 17,171 |
| | $ | 27,579 |
|
| | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | December 31, 2022 | | December 31, 2021 |
Assets | | | | | |
Operating lease receivable - current | Prepaid and other current assets | | $ | — | | | $ | 51 | |
Operating lease right-of-use assets, net | Other non-current assets, net | | 18,034 | | | 17,851 | |
Total Lease Assets | | | $ | 18,034 | | | $ | 17,902 | |
| | | | | |
Liabilities | | | | | |
Operating lease liabilities - Current | Other accrued expenses | | $ | 3,167 | | | $ | 3,844 | |
Operating lease liabilities - Noncurrent | Other long-term liabilities | | 19,923 | | | 17,780 | |
Total Lease Liabilities | | | $ | 23,090 | | | $ | 21,624 | |
The components of lease costs which were included within operating expenses in our consolidated statement of income were as follows (in thousands):
|
| | | |
| For the Year Ended December 31, |
| 2019 |
Operating lease cost | $ | 4,776 |
|
Short-term lease cost | 925 |
|
Variable lease cost | 1,502 |
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | 2021 | 2020 |
Operating lease cost | $ | 6,243 | | $ | 5,188 | | $ | 5,442 | |
Short-term lease cost | 343 | | 442 | | 726 | |
Variable lease cost | 1,522 | | 1,625 | | 1,764 | |
| | | |
For the yearyears ended December 31, 2019,2022 and 2021, sublease income was insignificant. Cash paid for amounts included in the measurement of operating lease liabilities for the year ended December 31, 20192022 and 2021 was $5.2 million and $4.0 million, respectively, and was included in net cash provided by operating activities in our consolidated statement of cash flows. Operating lease right-of-use assets obtained in exchange for operating lease obligations totaled $14.4 million during the year ended December 31, 2019. As of December 31, 2019,2022, the weighted average remaining operating lease term was 7.16.9 years and the weighted average discount rate used to determine the operating lease liabilities was 5.8%6.1%. As of December 31, 2022, there have been no leases entered into that have not yet commenced.
The maturities of our operating lease liabilities as of December 31, 2019 under ASC 842,2022, excluding short-term leases with terms less than 12 months, were as follows (in thousands):
| | | | | |
Maturity of Operating Lease Liabilities | |
2023 | $ | 4,469 | |
2024 | 3,957 | |
2025 | 4,108 | |
2026 | 3,975 | |
2027 | 3,842 | |
Thereafter | 8,049 | |
Total lease payments | $ | 28,400 | |
Less: Imputed interest | (5,310) | |
Present value of lease liabilities | $ | 23,090 | |
|
| | | |
Maturity of Operating Lease Liabilities | December 31, 2019 |
2020 | $ | 3,296 |
|
2021 | 5,311 |
|
2022 | 5,341 |
|
2023 | 4,605 |
|
2024 | 4,409 |
|
Thereafter | 11,355 |
|
Total lease payments | $ | 34,317 |
|
Less: Imputed interest | (6,738 | ) |
Present value of lease liabilities | $ | 27,579 |
|
The undiscounted maturities of our operating leases as of December 31, 2018 under ASC 840, including short-term leases with terms less than 12 months, were as follows (in thousands):
|
| | | |
Maturity of Operating Leases | December 31, 2018 |
2019 | $ | 5,362 |
|
2020 | 3,386 |
|
2021 | 2,883 |
|
2022 | 2,920 |
|
2023 | 2,184 |
|
Thereafter | 5,582 |
|
17. OTHER (EXPENSE) INCOME, NET | |
18. | OTHER INCOME (EXPENSE), NET |
The amounts included in "Other Income (Expense), Net(expense) income, net" in the consolidated statements of income for the year ended December 31, 2019, 20182022, 2021 and 20172020 were as follows (in thousands):
|
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Interest and investment income | 14,991 |
| | 14,590 |
| | 8,488 |
|
Gain on asset acquisition and sale of business | 22,690 |
| | — |
| | — |
|
Loss on extinguishment of long-term debt | (5,488 | ) | | — |
| | — |
|
Other | (3,131 | ) | | (9,171 | ) | | 252 |
|
Other income (expense), net | $ | 29,062 |
| | $ | 5,419 |
| | $ | 8,740 |
|
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Interest and investment income | $ | 14,452 | | | $ | 1,690 | | | $ | 5,661 | |
| | | | | |
Loss on extinguishment of long-term debt | (11,190) | | | — | | | — | |
Other | (6,719) | | | 9,885 | | | 11,263 | |
Other (expense) income, net | $ | (3,457) | | | $ | 11,575 | | | $ | 16,924 | |
Interest and investment income increased to $14.5 million primarily due to market conditions driving higher yields on the Company's short-term investments. Refer to Note 5, "Business Combinations and Other Transactions," for further information regarding the $14.2 million gain resulting from the R&I Acquisition and the $8.5 million gain on sale of our Hillcrest product business. Refer to Note 10,9, "Obligations," for further information on the $5.5$11.2 million loss on extinguishment of long-term debt recognized during the year ended December 31, 2019.2022.
During the year ended December 31, 2019,The change in Other was primarily due to fair value adjustments of our investments resulting in a $3.7 million net loss in 2022, compared to $9.1 million and $6.9 million net gains in 2021 and 2020, respectively. Other also includes foreign currency translation losses arising from euro translation of our foreign subsidiaries of $3.9 million and $3.0 million in 2022 and 2021, respectively, and a $4.6 million foreign currency translation gain in 2020. Additionally, we recognized a net loss of $2.6$1.9 million resulting from the partial impairment of one of our strategic investments partially offset by a gain on sale of a separate strategic investment. During the year ended December 31, 2018, we recognized an aggregate $8.4 million loss resulting from the sale of our entire ownership interestcontract termination in one of our strategic investments and the impairment of a separate strategic investment. These items are included in the "Other" caption in the table above.2021.
| |
19. | SELECTED QUARTERLY RESULTS (UNAUDITED) |
The table below presents quarterly data for the years ended December 31, 2019 and 2018.
|
| | | | | | | | | | | | | | | |
| (In thousands, except per share amounts, unaudited) |
| First | | Second | | Third | | Fourth |
2019 | |
| | |
| | |
| | |
|
Revenues (a) | $ | 68,631 |
| | $ | 75,609 |
| | $ | 72,523 |
| | $ | 102,161 |
|
Net income applicable to InterDigital, Inc.'s common shareholders | $ | (2,803 | ) | | $ | 7,743 |
| | $ | 2,234 |
| | $ | 13,754 |
|
Net income per common share — basic | $ | (0.09 | ) | | $ | 0.25 |
| | $ | 0.07 |
| | $ | 0.44 |
|
Net income per common share — diluted | $ | (0.09 | ) | | $ | 0.24 |
| | $ | 0.07 |
| | $ | 0.44 |
|
2018 | First | | Second | | Third | | Fourth(c) |
Revenues (b) | $ | 87,444 |
| | $ | 69,555 |
| | $ | 75,079 |
| | $ | 75,326 |
|
Net income applicable to InterDigital, Inc.'s common shareholders | $ | 30,230 |
| | $ | 10,966 |
| | $ | 21,752 |
| | $ | 2,083 |
|
Net income per common share — basic | $ | 0.87 |
| | $ | 0.32 |
| | $ | 0.63 |
| | $ | 0.06 |
|
Net income per common share — diluted | $ | 0.85 |
| | $ | 0.31 |
| | $ | 0.61 |
| | $ | 0.06 |
|
18. VARIABLE INTEREST ENTITIES
| |
(a) | In 2019, we recognized $19.8 million of non-current patent royalties primarily attributable to the Funai, ZTE Corporation, and Innovius LLC patent license agreements, all of which were signed in fourth quarter 2019. |
(b) In 2018, we recognized $26.3 million of non-current patent royalties primarily attributable to the Kyocera and Signal Trust for Wireless Innovation patent license agreements, both signed in first quarter 2018.
(c) Fourth quarter 2018 amounts have been revised due to the revision to noncontrolling interest that is discussed further in Note 21, “Revision to Noncontrolling Interest.” As reported amounts for net income applicable to InterDigital, Inc’s common shareholders, net income per common share - basic, and net income per common share - diluted for fourth quarter 2018 were $1,830, $0.05, and $0.05, respectively.
| |
20. | VARIABLE INTEREST ENTITIES |
As further discussed below, we are the primary beneficiary of 3three variable interest entities. As of December 31, 2019,2022, the combined book values of the assets and liabilities associated with these variable interest entities included in our consolidated balance sheet were $60.6$17.5 million and $5.4$1.8 million, respectively. Assets included $18.5$4.4 million of cash and cash equivalents, $1.7$4.0 million of accounts receivable and prepaid assets, $39.3and $9.1 million of patents, net, and $1.3 million of other non-current assets.net. As of December 31, 2018,2021, the combined book values of the assets and liabilities associated with these variable interest entities included in our consolidated balance sheet were $29.9$27.1 million and $6.1$2.5 million, respectively. Assets included $11.7$5.1 million of cash and cash equivalents, $1.3$4.0 million of accounts receivable $14.4and prepaid assets, and $18.0 million of patents, net, and $2.5 million of other non-current assets.net.
Chordant
On January 31, 2019, we launched the Company’s Chordant™ business as a standalone company. The spinout of the unit, which now includes an affiliate of Sony as an investor along with the Company, gives Chordant added independence and flexibility in driving into its core operator and smart city markets. Chordant is a variable interest entity and we have determined that we are the primary beneficiary for accounting purposes and will consolidate Chordant. For the year ended December 31, 2019, we have allocated approximately $1.5 million of Chordant's net loss to noncontrolling interests held by other parties.
Convida Wireless
Convida Wireless was launched in 2013 and most recently renewed in 20182021 to combine Sony's consumer electronics expertise with our pioneering IoT expertise to drive IoT communications and connectivity. Based on the terms of the agreement, the parties will contribute funding and resources for additional research and platform development, which we will perform. SCP IP Investment LLC, an affiliate of Stephens Inc., is a minority investor in Convida Wireless.
Convida Wireless is a variable interest entity. Based on our provision of research and platform development services to Convida Wireless, we have determined that we areremain the primary beneficiary for accounting purposes and will continue to consolidate Convida Wireless. For the years ended December 31, 2019, 20182022, 2021 and 2017,2020, we have allocated approximately $4.5$1.6 million, $5.6$10.8 million and $5.5$5.7 million, respectively, of Convida Wireless' net loss to noncontrolling interests held by other parties.
During 2021, we recognized a $13.2 million impairment on the patents within the Convida portfolio, resulting from our restructuring activities as described in Note 20, "Restructuring Activities", which is included within “Restructuring activities” expenses in the consolidated statement of income. The patents held for sale are recorded at fair value on December 31, 2022 and are included within "Prepaid and other current assets" in the consolidated balance sheet.
Chordant
On January 31, 2019, we launched the Company’s Chordant™ business as a standalone company. Chordant is a variable interest entity and we have determined that we are the primary beneficiary for accounting purposes and consolidate Chordant. For the years ended December 31, 2022, 2021 and 2020, we have allocated approximately $0.0 million, $2.3 million, and $1.1 million, respectively, of Chordant's net loss to noncontrolling interests held by other parties. Chordant ceased operations in 2021.
Signal Trust for Wireless Innovation
During 2013, we announced the establishment of the Signal Trust for Wireless Innovation (the “Signal Trust”“Trust”), the goal of which iswas to monetize a large InterDigital patent portfolio primarily related to cellular infrastructure.
The more than 500 patents and patent applications transferred from InterDigital to the Signal Trust focus primarily on 3G and LTE technologies,cellular infrastructure. During fourth quarter 2021, the Trust was fully dissolved and all remaining assets were developed by InterDigital's engineers and researchers over more than a decade, with a number of the innovations contributingtransferred to the worldwide standards process.us as majority beneficiary.
InterDigital is the primary beneficiary of the Signal Trust.
The distributions from the Signal Trust will support continued research related to cellular wireless technologies. A small portion of the proceeds from the Signal Trust will be used to fund, through the Signal Foundationwas accounted for Wireless Innovation, scholarly analysis of intellectual property rights and the technological, commercial and creative innovations they facilitate.
The Signal Trust isas a variable interest entity. Based on the terms of the trust agreement, we have determined that we arewere the primary beneficiary for accounting purposes and mustincluded the Trust in our consolidated financial statements up to the date of dissolution. We recorded a $2.4 million charge within the "Licensing" line of our consolidated statements of income in 2020 associated with the wind down of the Trust.
19. OTHER ASSETS
The amounts included in "Prepaid and other current assets" in the consolidated balance sheet as of December 31, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Tax receivables | $ | 64,117 | | | $ | 57,127 | |
Restricted cash | 9,682 | | | 5,861 | |
Prepaid assets | 9,044 | | | 5,479 | |
Patents held for sale | 4,000 | | | 4,000 | |
Other current assets | 2,873 | | | 5,078 | |
Total Prepaid and other current assets | $ | 89,716 | | | $ | 77,545 | |
The amounts included in "Other non-current assets, net" in the consolidated balance sheet as of December 31, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Tax receivables | $ | 29,370 | | | $ | 30,026 | |
Goodwill | 22,421 | | | 22,421 | |
Long-term investments | 19,593 | | | 21,280 | |
Right-of-use assets | 18,034 | | | 17,851 | |
Other non-current assets | 6,302 | | | 10,923 | |
Total Other non-current assets, net | $ | 95,720 | | | $ | 102,501 | |
20. RESTRUCTURING ACTIVITIES
During second quarter 2021, the Company began the process of a strategic review and undertook certain actions in order to increase focus on core technologies and markets.
On June 10, 2021, the Company announced that, as a result of a strategic review of its research and innovation priorities, it commenced the process of a collective economic layoff in which it proposed a reduction in force of its research and innovation unit. All notices of termination have been issued to the impacted employees. This action resulted in a reduction of employees under the benefit plans, and as a result the Company recognized a $2.3 million curtailment gain during 2021. This curtailment gain was included within "Other (expense) income, net" in the consolidated statement of income.
During June 2021, Chordant began the process of ceasing operations. The Company implemented a reduction in workforce action in second quarter 2021.
Additionally, in June 2021, a non-controlled subsidiary that we consolidate for financial statement purposes approved a plan to sell certain patents. The proceeds from the Signal Trust.sale of these patents will contribute to funding Convida's operations. These assets were evaluated as a separate asset group and reclassified as assets held for sale. Upon the reclassification, the patents to be sold are recorded at fair value, which resulted in the Company recognizing a $13.2 million impairment in 2021. We determined the fair value based upon evaluation of market conditions. The patents held for sale are included within "Prepaid and other current assets" in the consolidated balance sheet.
In October 2021, we expanded our restructuring efforts to include general and administrative functions largely centered in the U.S., which resulted in a further reduction in force as well as cuts to our non-labor expenses. These employees were provided notification of termination during fourth quarter 2021. 21. REVISION TO NONCONTROLLING INTEREST
As discussedpart of the Company’s ongoing evaluation of its flexible work policy and the impact of returning to the office, the Company has evaluated its current office space footprint and its expected needs going forward. As the result of this evaluation, during 2022, we recognized a $2.4 million impairment, comprised of $0.4 million of property and equipment and $2.0 million of right of use assets, related to the abandonment of portions of three of our leased properties, which was included within “Restructuring activities” in Note 1,the condensed consolidated statement of income.
Restructuring charges are estimated based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts incurred for such activities may differ from amounts initially estimated. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the reduction in force or other restructuring activities.
The restructuring charges associated with the above activities totaling $3.3 million and $27.9 million in 2022 and 2021, respectively, are presented net of any reimbursement arrangements and include $0.5 million and $1.7 million, respectively, of outside services and other associated costs related to non-recurring consultant and legal fees.
The Company does not anticipate further significant restructuring charges, however these charges are estimated based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts incurred for such activities may differ from amounts initially estimated.
As of December 31, 2022, the Company's restructuring liability was $4.5 million and was included in "BackgroundOther accrued expenses" on our condensed consolidated balance sheet. As of December 31, 2021, the Company's restructuring liability was $18.3 million, of which $12.5 million was included in "Other accrued expenses" and $5.8 million was included in "Other long-term liabilitiesBasis of Presentation," we revisedon our prior period presentation of noncontrolling interest.condensed consolidated balance sheet. The following tables presenttable presents the effect ofchange in our restructuring liability during the revision onperiod (in thousands):
| | | | | |
| |
| |
| |
| |
Balance as of December 31, 2021 | $ | 18,281 | |
Accrual | 852 | |
Cash payments | (13,761) | |
Other | (877) | |
Balance as of December 31, 2022 | $ | 4,495 | |
The restructuring expenses included in "Restructuring activities" in the consolidated statements of income statementsfor the years ending December 31, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2022 | | 2021 |
Asset impairment | $ | 2,427 | | | $ | 13,228 | |
Severance and other benefits | 305 | | | 22,616 | |
Outside services and other associated costs | 548 | | | 1,671 | |
Reimbursement arrangements | — | | | (9,638) | |
Total | $ | 3,280 | | | $ | 27,877 | |
21. SUBSEQUENT EVENTS
On January 23, 2023, the Company commenced a modified “Dutch auction” tender offer (the “Tender Offer”) to purchase for cash up to $200.0 million of comprehensive income, balance sheets and statements of shareholders' equity (in thousands, exceptits common stock at a price per share data).not less than $60.00 and not greater than $69.00 less any applicable withholding taxes and without interest, using available cash on hand. On February 6, 2023, the Company amended the Tender Offer to increase the price range to a price per share not less than $65.25 and not greater than $75.00 less any applicable withholding taxes and without interest. The correctionTender Offer will expire at 11:59 p.m., New York City time, on February 17, 2023, unless extended or terminated. If the Tender Offer is fully subscribed, the Company will purchase between 2.7 million shares and 3.1 million shares. This Annual Report on Form 10-K does not constitute an offer to sell, or a solicitation to purchase, any of this error has no impact to the previously reported consolidated statements of cash flows for any periods.our securities.
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
|
| | |
| Statements of Income and Statements of Comprehensive Income Impact |
| Year Ended |
| December 31, | December 31, |
| 2017 | 2018 |
Net loss attributable to noncontrolling interest - As Reported | $3,579 | $4,393 |
Net loss attributable to noncontrolling interest - As Revised | $5,506 | $5,556 |
| | |
Net income attributable to InterDigital, Inc. - As Reported | $174,293 | $63,868 |
Net income attributable to InterDigital, Inc. - As Revised | $176,220 | $65,031 |
| | |
Net income per common share, Basic - As Reported | $5.04 | $1.85 |
Net income per common share, Basic - As Revised | $5.09 | $1.89 |
| | |
Net income per common share, Diluted - As Reported | $4.87 | $1.81 |
Net income per common share, Diluted - As Revised | $4.93 | $1.84 |
| | |
Total comprehensive income attributable to InterDigital, Inc. - As Reported | $172,724 | $63,929 |
Total comprehensive income attributable to InterDigital, Inc. - As Revised | $174,651 | $65,092 |
|
| | | |
| Balance Sheets and Statements of Shareholders' Equity Impact |
| December 31, | December 31, | December 31, |
| 2016 | 2017 | 2018 |
Retained earnings - As Reported | $1,120,766 | $1,249,091 | $1,426,266 |
Retained earnings - As Revised | $1,127,380 | $1,257,632 | $1,435,970 |
| | | |
Total InterDigital, Inc. shareholders’ equity - As Reported | $739,709 | $855,267 | $927,025 |
Total InterDigital, Inc. shareholders’ equity - As Revised | $746,323 | $863,808 | $936,729 |
| | | |
Noncontrolling interest - As Reported | $14,659 | $17,881 | $10,988 |
Noncontrolling interest - As Revised | $8,045 | $9,340 | $1,284 |
| | | |
Total equity - As Reported | $754,368 | $873,148 | $938,013 |
Total equity - As Revised | $754,368 | $873,148 | $938,013 |
| |
Item 9.Item 9A.CONTROLS AND PROCEDURES.
| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| |
Item 9A.
| CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial Officer, with the assistance of other members of management, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)Act) as of December 31, 2019.2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of internal control over financial reporting as of December 31, 2019.2022. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this assessment, management determined that, as of December 31, 2019,2022, the Company maintained effective internal control over financial reporting at a reasonable assurance level.reporting.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20192022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report that appears under Part II, Item 8, of this Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during fourth quarter 20192022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| |
Item 9B.OTHER INFORMATION. | OTHER INFORMATION. |
None.
Item 9C.DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
PART III
| |
Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The information required by this item is incorporated by reference to the information following the captions "Election of Directors," "EXECUTIVE OFFICERS," "Section 16(a) Beneficial Ownership Reporting Compliance," "Code of Ethics," "Nominating and Corporate Governance Committee" and "Audit Committee" in the definitive proxy statement to be filed pursuant to Regulation 14A in connection with our 20202023 annual meeting of shareholders not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K (the "Proxy Statement").
| |
Item 11. | Item 11. EXECUTIVE COMPENSATION. |
The information required by this item is incorporated by reference to the information following the captions "EXECUTIVE COMPENSATION" and "DIRECTOR COMPENSATION" in the Proxy Statement.
| |
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information required by this item is incorporated by reference to the information following the captions "EQUITY COMPENSATION PLAN INFORMATION" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement.
| |
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The information required by this item is incorporated by reference to the information following the captions "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "Director Independence" in the Proxy Statement.
| |
Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The information required by this item is incorporated by reference to the information following the captions "Fees Paid toof Independent Registered Public Accounting Firm" and "Audit Committee Pre-Approval Policy for Audit and Non-Audit Services of Independent Registered Public Accounting Firm" in the Proxy Statement.
PART IV
| |
Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this Form 10-K:
(1)Financial Statements.
The information required by this item begins on Page 61.
(2)Financial Statement Schedules.
The following financial statement schedule of InterDigital is included herewith and should be read in conjunction with the Financial Statements included in this Item 15.
Valuation and Qualifying Accounts
|
| | | | | | | | | | | | | | | |
| Balance Beginning of Period | | Increase/ (Decrease) | | Reversal of Valuation Allowance | | Balance End of Period |
2019 valuation allowance for deferred tax assets | $ | 125,158 |
| | $ | 8,639 |
| (a) | $ | — |
| | $ | 133,797 |
|
2018 valuation allowance for deferred tax assets | $ | 123,916 |
| | $ | 1,568 |
| (a) | $ | (326 | ) | | $ | 125,158 |
|
2017 valuation allowance for deferred tax assets | $ | 89,815 |
| | $ | 34,430 |
| (b) | $ | (329 | ) | | $ | 123,916 |
|
2019 reserve for uncollectible accounts | $ | 693 |
| | $ | (156 | ) | (c) | $ | — |
| | $ | 537 |
|
2018 reserve for uncollectible accounts | $ | 456 |
| | $ | 237 |
| | $ | — |
| | $ | 693 |
|
2017 reserve for uncollectible accounts | $ | — |
| | $ | 456 |
| | $ | — |
| | $ | 456 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance Beginning of Period | | Increase/ (Decrease) | | Reversal of Valuation Allowance | | Balance End of Period |
2022 valuation allowance for deferred tax assets | $ | 151,522 | | | $ | (29,305) | | (a) | $ | — | | | $ | 122,217 | |
2021 valuation allowance for deferred tax assets | $ | 144,367 | | | $ | 7,155 | | (b) | $ | — | | | $ | 151,522 | |
2020 valuation allowance for deferred tax assets | $ | 133,797 | | | $ | 10,570 | | (b) | $ | — | | | $ | 144,367 | |
2022 reserve for uncollectible accounts | $ | 322 | | | $ | — | | | $ | (322) | | | $ | — | |
2021 reserve for uncollectible accounts | $ | — | | | $ | 322 | | | $ | — | | | $ | 322 | |
2020 reserve for uncollectible accounts | $ | 537 | | | $ | (537) | | (c) | $ | — | | | $ | — | |
| |
(a) | The increase was primarily necessary to maintain a full, or near full, valuation allowance against our state deferred tax assets and deferred tax assets for certain subsidiaries in France as well as a non-wholly owned subsidiary in the United States and the United Kingdom. |
| |
(b) | The increase was primarily a result of the Tax Cut and Jobs Act signed into law in December of 2017. There was also a release of a state VA during the year that was recorded through tax expense. The remainder of the increase was necessary to maintain a full, or near full, valuation allowance against our state deferred tax assets and did not result in additional tax expense. |
| |
(c) | The decrease relates to the write-off of a previously recorded reserve during 2019. |
(a)The decrease was primarily related to the decrease in Pennsylvania state tax rate.
(b)The increase was primarily necessary to maintain a full, or near full, valuation allowance against our state deferred tax assets and deferred tax assets for certain subsidiaries in France as well as a non-wholly owned subsidiary in the United States and the United Kingdom.
(c)The decrease relates to the write-off of a previously recorded reserve during 2019.
(3)Exhibits.
See Item 15(b) below.
(b)
|
| | | | | | | | | | |
| Exhibit Number | | Exhibit Description |
| *3.1 | | |
| *3.2 | | |
| *4.1 | | |
| *4.2 | | |
| *4.3 | | |
| *4.4 | | |
| *4.54.3 | | |
|
| *4.4 | | |
| *4.64.5 | | |
| *4.6 | | Real Estate Leases |
| *10.1 | | |
| | | Benefit Plans |
| | | | | | | | | | | |
| | | Benefit Plans |
| †*10.210.1 | | Non-Qualified Stock Option Plan, as amended (Exhibit 10.4 to InterDigital's Annual Report on Form 10-K for the year ended December 31, 1991). (P) |
| †*10.310.2 | | |
| †*10.410.3 | | |
| †*10.510.4 | | |
| †*10.610.5 | | |
| †*10.710.6 | | |
| †*10.810.7 | | |
| †*10.910.8 | | |
| †*10.1010.9 | | |
| †*10.1110.10 | | |
| †*10.1210.11 | | |
| †*10.1310.12 | | |
| †*10.1410.13 | | |
| †*10.1510.14 | | |
| †*10.1610.15 | | |
| †*10.1710.16 | | |
| †*10.1810.17 | | |
| †*10.1910.18 | | |
| †10.20*10.19 | | |
| †*10.2110.20 | | |
|
| †*10.21 | | |
| †*10.22 | | |
| †*10.2310.22 | | |
| †*10.2410.23 | | |
| | | | | | | | | | | |
| †*10.2510.24 | | |
| †*10.2610.25 | | |
| †*10.2710.26 | | |
| | | Employment-Related Agreements |
| †*10.2810.27 | | |
| †*#10.28 | | |
| †*10.29
| | |
| †*10.30 | | Retirement & Transition Agreement and Release, dated March 16, 2021, by and between InterDigital and Howard E. Goldberg (pursuant to Instruction 2 to Item 601 of Regulation S-K, the Indemnity Agreements, which are substantially identical in all material respects, except as to the parties thereto and the dates, between the Company and the following individuals, were not filed: Jeffrey K. Belk, Richard J. Brezski, Joan H. Gillman, S. Douglas Hutcheson, John A. Kritzmacher, Jannie K. Lau, John D. Markley, Jr., Scott A. McQuilkin, William J. Merritt, James J. Nolan, Kai O. Oistamo, Jean F. Rankin, Lawrence F. Shay, Philip P. Trahanas and Richard L.Gulino)(Exhibit 10.47(Exhibit 10.1 to InterDigital's Quarterly Report on Form 10-Q datedfiled on May 15, 2003)6, 2021). |
| †*10.2910.31 | | AssignmentRetirement & Transition Agreement and Assumption of Indemnity AgreementRelease, dated as of July 2, 2007,October 19, 2021, by and between InterDigital Communications Corporation, InterDigital and Bruce G. Bernstein (pursuantRichard L. Gulino (Exhibit 10.31 to Instruction 2 to Item 601 of Regulation S-K,InterDigital's Annual Report on Form 10-K for the Indemnity Agreements, which are substantially identical in all material respects, except as to the parties thereto,year ended December 31, 2021). |
| †*#10.32 | | |
| †*10.30
| | |
|
†10.31
| | |
| | | Other Material Contracts |
| *10.32
| |
|
| *10.33 | |
|
| *10.34 | | |
| *10.35 | | Other Material Contracts |
| *10.33 | | |
| *10.3610.34 | | |
| *10.3710.35 | | |
| *10.36 | | |
| *10.37 | | |
| *10.38 | | |
| 21 | | |
| 23.1 | | |
| 31.1 | | |