mpwr20180331_10q.htm
 

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 


 

FORM 10-Q

 


 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-51026

 


 

Monolithic Power Systems, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

77-0466789

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

79 Great Oaks Boulevard, San Jose, CA 95119

(Address of principal executive offices)(Zip code)

 

  (408) 826-0600

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☒     Accelerated filer  ☐           Non-accelerated filer  ☐            Smaller reporting company  ☐
Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

There were 42,187,416 shares of the registrant’s common stock issued and outstanding as of May 3, 2018.

 



 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

TABLE OF CONTENTS

PAGE

PART I. FINANCIAL INFORMATION

3

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

3

 

CONDENSED CONSOLIDATED BALANCE SHEETS

3

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

4

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

5

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

6

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

24

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31

ITEM 4.

CONTROLS AND PROCEDURES

31

PART II. OTHER INFORMATION

31

ITEM 1.

LEGAL PROCEEDINGS

31

ITEM 1A.

RISK FACTORS

31

ITEM 6.

EXHIBITS

48

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 76,016     $ 82,759  

Short-term investments

    231,243       216,331  

Accounts receivable

    48,241       38,037  

Inventories

    111,897       99,281  

Other current assets

    16,707       12,762  

Total current assets

    484,104       449,170  

Property and equipment, net

    153,770       144,636  

Long-term investments

    5,250       5,256  

Goodwill

    6,571       6,571  

Acquisition-related intangible assets, net

    701       951  

Deferred tax assets, net

    15,840       15,917  

Other long-term assets

    31,531       30,068  

Total assets

  $ 697,767     $ 652,569  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 27,511     $ 22,813  

Accrued compensation and related benefits

    13,060       15,597  

Accrued liabilities

    32,730       27,507  

Total current liabilities

    73,301       65,917  

Income tax liabilities

    31,900       31,621  

Other long-term liabilities

    34,260       33,024  

Total liabilities

    139,461       130,562  

Commitments and contingencies

               

Stockholders' equity:

               

Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 42,145 and 41,614 as of March 31, 2018 and December 31, 2017, respectively

    401,007       376,586  

Retained earnings

    152,257       143,608  

Accumulated other comprehensive income

    5,042       1,813  

Total stockholders’ equity

    558,306       522,007  

Total liabilities and stockholders’ equity

  $ 697,767     $ 652,569  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

(unaudited)

   

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Revenue

  $ 129,150     $ 100,362  

Cost of revenue

    57,655       45,520  

Gross profit

    71,495       54,842  

Operating expenses:

               

Research and development

    21,609       18,894  

Selling, general and administrative

    27,318       22,092  

Litigation expense

    531       286  

Total operating expenses

    49,458       41,272  

Income from operations

    22,037       13,570  

Interest and other income, net

    440       1,381  

Income before income taxes

    22,477       14,951  

Income tax provision

    621       474  

Net income

  $ 21,856     $ 14,477  
                 

Net income per share:

               

Basic

  $ 0.52     $ 0.35  

Diluted

  $ 0.49     $ 0.33  

Weighted-average shares outstanding:

               

Basic

    41,922       41,047  

Diluted

    44,282       43,268  
                 

Cash dividends declared per common share

  $ 0.30     $ 0.20  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Net income

  $ 21,856     $ 14,477  

Other comprehensive income, net of tax:

               

Foreign currency translation adjustments, net of $0 tax in 2018 and 2017

    4,389       1,306  

Change in unrealized gain (loss) on available-for-sale securities, net of $0 tax in 2018 and 2017

    (1,160 )     202  

Total other comprehensive income, net of tax

    3,229       1,508  

Comprehensive income

  $ 25,085     $ 15,985  

  

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Cash flows from operating activities:

               

Net income

  $ 21,856     $ 14,477  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization of intangible assets

    2,755       4,044  

Gain on sales of property and equipment

    -       (3 )

Amortization of premium on available-for-sale investments

    435       507  

(Gain) loss on deferred compensation plan investments

    66       (733 )

Stock-based compensation expense

    15,030       11,662  

Changes in operating assets and liabilities:

               

Accounts receivable

    (11,103 )     (3,865 )

Inventories

    (12,590 )     (7,057 )

Other assets

    (3,954 )     (1,465 )

Accounts payable

    3,856       4,927  

Accrued compensation and related benefits

    (2,821 )     (2,251 )

Accrued liabilities

    4,998       2,402  

Income tax liabilities

    (2,236 )     (753 )

Net cash provided by operating activities

    16,292       21,892  

Cash flows from investing activities:

               

Property and equipment purchases

    (7,400 )     (3,424 )

Proceeds from sales of property and equipment

    -       3  

Purchases of short-term investments

    (47,565 )     (71,989 )

Proceeds from maturities and sales of short-term investments

    31,063       25,400  

Contributions to deferred compensation plan, net

    (1,300 )     (1,233 )

Net cash used in investing activities

    (25,202 )     (51,243 )

Cash flows from financing activities:

               

Property and equipment purchased on extended payment terms

    -       (250 )

Proceeds from exercise of stock options

    16       61  

Proceeds from release of restricted stock units

    7,793       -  

Proceeds from shares issued under the employee stock purchase plan

    1,563       1,382  

Dividends and dividend equivalents paid

    (8,339 )     (8,179 )

Net cash provided by (used in) financing activities

    1,033       (6,986 )

Effect of change in exchange rates

    1,137       460  

Net decrease in cash, cash equivalents and restricted cash

    (6,740 )     (35,877 )

Cash, cash equivalents and restricted cash, beginning of period

    82,874       112,813  

Cash, cash equivalents and restricted cash, end of period

  $ 76,134     $ 76,936  
                 

Supplemental disclosures:

               

Cash paid for taxes and interest

  $ 3,374     $ 1,220  

Non-cash investing and financing activities:

               

Liability accrued for property and equipment purchases

  $ 2,491     $ 1,208  

Liability accrued for dividends and dividend equivalents

  $ 13,603     $ 8,902  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 1, 2018.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Form 10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or for any other future periods.

 

Summary of Significant Accounting Policies

 

Except for the changes related to revenue recognition discussed in “Recently Adopted Accounting Pronouncements” and in Note 2 below, there have been no other changes to the Company’s significant accounting policies during the three months ended March 31, 2018 as compared to the significant accounting policies described in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2017.

 

Recently Adopted Accounting Pronouncements

  

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the standard on January 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior-period amounts have not been retrospectively adjusted and continue to be reported in accordance with Topic 605, Revenue Recognition.

 

The Company recorded a net increase to the opening balance of retained earnings of $0.4 million, net of tax, as of January 1, 2018 due to the cumulative effect of initially applying Topic 606, primarily related to the change in revenue recognition for three U.S.-based distributors. Sales to these distributors are transacted under the terms of agreements providing price adjustment rights. Prior to the adoption of Topic 606, revenue and costs related to these sales were deferred until the Company received notification from the distributors that the products had been sold to the end customers and the amount of price adjustments was fixed and finalized. Upon adoption of Topic 606, the transaction price takes into consideration the effect of variable consideration such as price adjustments, which are estimated and recorded at the time the promised goods are transferred to the distributors. Accordingly, effective January 1, 2018, the Company recognizes revenue at the time of shipment to the distributors, adjusted for an estimate of the price adjustments based on management’s review of historical data and other information available at the time. See Note 2 for further discussion.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows. The Company adopted the standard on January 1, 2018 and applied the guidance retrospectively to all periods presented. See Note 9 for further discussion.

 

Recent Accounting Pronouncements Not Yet Adopted as of March 31, 2018

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires entities to recognize a right-of-use asset and a lease liability on the balance sheets for substantially all leases with a lease term greater than 12 months, including leases currently accounted for as operating leases. In addition, the standard applies to leases embedded in service arrangements. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326)which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. Entities will apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and is effective for annual reporting periods beginning after  December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the adoption on its annual goodwill impairment test.

    

 

2. REVENUE RECOGNITION

 

Revenue from Product Sales

 

The following table presents the Company’s revenue disaggregated by end market (in thousands, except for percentages):

 

   

Three Months Ended March 31,

 
   

2018

   

% of

Revenue

   

2017 (1)

   

% of

Revenue

 

Consumer

  $ 47,144       36.5

%

  $ 35,611       35.5

%

Computing and storage

    30,970       24.0       20,617       20.5  

Industrial

    17,554       13.6       15,354       15.3  

Automotive

    17,732       13.7       12,331       12.3  

Communications

    15,750       12.2       16,449       16.4  

Total

  $ 129,150       100.0

%

  $ 100,362       100.0

%

 

_______________

 

(1)

2017 amounts have not been retrospectively adjusted under the modified retrospective method.

 

The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits and dies in wafer form to the consumer, computing and storage, industrial, automotive and communications markets. The Company also generates royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periods presented.

 

The Company sells its products primarily through third-party distributors, value-added resellers, original equipment manufacturers, original design manufacturers and electronic manufacturing service providers. For both the three months ended March 31, 2018 and 2017, approximately 88% of the Company’s sales were made through distribution arrangements, which contain enforceable rights and obligations specific to those distributors and not the end customers. Purchase orders, which are governed by sales agreements or the Company's standard terms of sale, state the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers purchase orders to be the contracts with customers. The unit price as stated on the purchase orders is considered the observable, stand-alone selling price for the arrangements.

 

Under Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company excludes taxes assessed by government authorities, such as sales taxes, from revenue.

 

 

Product sales consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue from distributors and direct end customers when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. In accordance with the shipping terms specified in the contracts, these criteria are generally met when the products are shipped from the Company’s facilities (such as the “Ex Works” shipping term) or delivered to the customers’ locations (such as the “Delivered Duty Paid” shipping term).

 

Under certain consignment agreements, revenue is not recognized when the products are held at customers’ designated locations because the Company retains ownership and the customers do not have an unconditional obligation to pay. The Company recognizes revenue when the customers pull the products from the locations or after a 60-day period lapses, at which time control transfers to the customers and the Company invoices them for payment.

 

Variable Consideration

 

The Company records variable consideration as a reduction to revenue in the same period the revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell the Company’s products to their end customers at a price that is lower than the distribution price invoiced by the Company. When the Company receives claims from the distributors that products have been sold to the end customers at the lower price, the Company issues the distributors credit memos for the price adjustments. The Company estimates the price adjustments based on analyses of historical claims, at both the distributor and product level, as well as an assessment of any known trends of product sales mix. Other U.S. distributors and non-U.S. distributors, which make up the majority of the Company’s total sales to distributors, do not have price adjustment rights.

 

In addition, certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases. The Company estimates the stock rotation returns based on analyses of historical returns, and the current level of inventory in the distribution channel.  The Company recognizes an asset for product returns which represents the right to recover products from the customers related to stock rotations, with a corresponding reduction to cost of goods sold.

Contract Balances

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of March 31, 2018 and December 31, 2017, accounts receivable totaled $48.2 million and $38.0 million, respectively. To manage credit risk, management performs ongoing credit evaluations of its customers’ financial condition. The Company did not recognize any impairment losses related to its receivables in any of the periods presented.

 

For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current liabilities. As of March 31, 2018 and December 31, 2017, customer prepayments totaled $2.9 million and $4.7 million, respectively. The decrease in the customer prepayment balance for the three months ended March 31, 2018 resulted from a decrease in unfulfilled customer orders for which the Company has received payments. For the three months ended March 31, 2018, the Company recognized $4.6 million of revenue that was included in the customer prepayment balance as of December 31, 2017.

 

 

Contract Costs

 

The Company pays sales commissions based on the achievement of pre-determined product sales targets. As the Company recognizes product sales at a point in time, sales commissions are expensed as incurred.

 

Warranty

 

The Company generally provides one to two-year warranties against defects in materials and workmanship and will either repair the products, provide replacements at no charge to customers or issue a refund. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations. Warranty reserve requirements are based on a specific assessment of the products sold with warranties when a customer asserts a claim for warranty or a product defect. 

 

Practical Expedients

 

The Company’s standard payment terms generally require customers to pay 30 to 60 days after the Company satisfies the performance obligations. For those customers who are required to pay in advance, the Company satisfies the performance obligations typically within one quarter. The Company has elected not to determine whether contacts with customers contain significant financing components.

 

As of March 31, 2018, the Company’s unsatisfied performance obligations primarily included products held in consignment arrangements and customer purchase orders for products that the Company has not yet shipped. Because the Company expects to fulfill these performance obligations within one year, the Company has elected not to disclose the amount of these remaining performance obligations or the timing of recognition.

 

Changes to Financial Statement Line Items

 

The following tables compare the impact on the financial statement line items between the application of Topic 606 and Topic 605 as of March 31, 2018 and for the three months ended March 31, 2018. The significant changes between the two standards are primarily attributable to the following:

 

 

Under Topic 606, the Company recognizes revenue for three U.S.-based distributors upon shipment of the products to them, net of an estimated amount for price adjustments. Under Topic 605, the Company would have deferred the recognition of revenue and related costs for these U.S. distributors until the Company received notification from the distributors that the products had been sold to the end customers and the amount of price adjustments was fixed and finalized.

 

 

Under Topic 606, the Company records assets for product returns which represent the carrying value of inventory it expects to recover from customers related to stock rotation returns. Under Topic 605, such amounts would have been netted against the stock rotation reserve.

 

 

Under Topic 606, the Company recorded a cumulative effect of initially applying the standard to retained earnings. Under Topic 605, the Company would not have recorded this adjustment.

 

Condensed Consolidated Balance Sheets (in thousands):

 

   

March 31, 2018

 
   

Topic 606

                 

Line Item

 

(As Reported)

   

Topic 605

   

Difference

 
Assets:                        

Accounts receivable

  $ 48,241     $ 49,121     $ (880 )

Inventory

  $ 111,897     $ 112,215     $ (318 )

Other current assets

  $ 16,707     $ 14,602     $ 2,105  

Deferred tax assets

  $ 15,840     $ 15,941     $ (101 )
Total assets   $ 697,767     $ 696,961     $ 806  
Liabilities and Stockholders' Equity:                        

Accrued liabilities

  $ 32,730     $ 32,406     $ 324  

Retained earnings

  $ 152,257     $ 151,775     $ 482  
Total liabilities and stockholders' Equity   $ 697,767     $ 696,961     $ 806  

 

 

Condensed Consolidated Statements of Operations (in thousands):

 

   

Three Months Ended March 31, 2018

 
   

Topic 606

                 

Line Item

 

(As Reported)

   

Topic 605

   

Difference

 

Revenue

  $ 129,150     $ 128,959     $ 191  

Cost of revenue

  $ 57,655     $ 57,595     $ 60  

Gross profit

  $ 71,495     $ 71,364     $ 131  

Income from operations

  $ 22,037     $ 21,906     $ 131  

Income before income taxes

  $ 22,477     $ 22,346     $ 131  

Income tax provision

  $ 621     $ 594     $ 27  

Net income

  $ 21,856     $ 21,752     $ 104  

 

Condensed Consolidated Statements of Comprehensive Income (in thousands):

 

   

Three Months Ended March 31, 2018

 
   

Topic 606

                 

Line Item

 

(As Reported)

   

Topic 605

   

Difference

 

Net income

  $ 21,856     $ 21,752     $ 104  

Comprehensive income

  $ 25,085     $ 24,981     $ 104  

 

Condensed Consolidated Statements of Cash Flows (in thousands):

 

   

Three Months Ended March 31, 2018

 
   

Topic 606

                 

Line Item

 

(As Reported)

   

Topic 605

   

Difference

 

Cash flows from operating activities:

                       

Net income

  $ 21,856     $ 21,752     $ 104  
Changes in operating assets and liabilities:                        

Accounts receivable

  $ (11,103 )   $ (11,082 )   $ (21 )

Inventories

  $ (12,590 )   $ (12,908 )   $ 318  

Other assets

  $ (3,954 )   $ (1,940 )   $ (2,014 )

Accrued liabilities

  $ 4,998     $ 3,412     $ 1,586  

Income tax liabilities

  $ (2,236 )   $ (2,263 )   $ 27  

 

 

3. STOCK-BASED COMPENSATION

 

2014 Equity Incentive Plan (the “2014 Plan”)

 

The Board of Directors adopted the 2014 Plan in April 2013, and the stockholders approved it in June 2013. In October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The 2014 Plan, as amended, became effective on November 13, 2014 and provides for the issuance of up to 5.5 million shares. The 2014 Plan will expire on November 13, 2024. As of March 31, 2018, 2.7 million shares remained available for future issuance under the 2014 Plan. 

 

 

Stock-Based Compensation Expense

 

The Company recognized stock-based compensation expenses as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Cost of revenue

  $ 433     $ 358  

Research and development

    3,995       3,498  

Selling, general and administrative

    10,602       7,806  

Total stock-based compensation expense

  $ 15,030     $ 11,662  

Tax benefit related to stock-based compensation

  $ 1,131     $ -  

 

Restricted Stock Units

 

The Company’s restricted stock units (“RSUs”) include time-based RSUs, RSUs with only performance conditions (“PSUs”), RSUs with both market and performance conditions (“MPSUs”), and RSUs with only market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals. A summary of RSU activity is presented in the table below (in thousands, except per-share amounts): 

 

   

Time-Based

RSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

 

 

PSUs and

MPSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

 

 

MSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

 

 

Total

   

Weighted-Average Grant Date Fair Value Per Share

 

Outstanding at January 1, 2018

    258     $ 66.30       2,266     $ 48.59       1,620     $ 23.57       4,144     $ 39.91  

Granted

    53     $ 110.00       622 (1)   $ 81.96       -     $ -       675     $ 84.15  

Released

    (42 )   $ 58.17       (471 )   $ 39.90       -     $ -       (513 )   $ 41.41  

Forfeited

    (5 )   $ 73.96       (3 )   $ 56.69       -     $ -       (8 )   $ 67.94  

Outstanding at March 31, 2018

    264     $ 76.23       2,414     $ 58.88       1,620     $ 23.57       4,298     $ 46.63  

 


 

(1)

Amount reflects the number of PSUs and MPSUs that may ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions.

 

The intrinsic value related to RSUs released was $49.5 million and $37.4 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, the total intrinsic value of all outstanding RSUs was $451.7 million, based on the closing stock price of $115.77. As of March 31, 2018, unamortized compensation expense related to all outstanding RSUs was $117.2 million with a weighted-average remaining recognition period of approximately 3.5 years. 

 

Cash proceeds from the release of PSUs with a purchase price feature totaled $7.8 million for the three months ended March 31, 2018. There were no proceeds for the three months ended March 31, 2017.

 

Time-Based RSUs:

 

For the three months ended March 31, 2018, the Compensation Committee of the Board of Directors (the "Compensation Committee") granted 53,000 RSUs, respectively, with time-based vesting conditions to employees and non-employee directors. The RSUs vest over four years for employees and one year for directors, subject to continued service with the Company.

  

2018 PSUs:

 

In February 2018, the Compensation Committee granted 188,000 PSUs to the executive officers, which represent a target number of shares to be awarded based on the Company’s average two-year (2018 and 2019) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2018 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2018 Executive PSUs. 50% of the 2018 Executive PSUs will vest in the first quarter of 2020 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining 2018 Executive PSUs will vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2018 Executive PSUs is $46.1 million.

 

 

In February 2018, the Compensation Committee granted 44,000 PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s 2019 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2018 and 2019) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2018 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2018 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2018 Non-Executive PSUs will vest in the first quarter of 2020 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining 2018 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2018 Non-Executive PSUs, excluding cancelled shares, is $8.9 million.

 

The 2018 Executive PSUs and the 2018 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 2018 Executive PSUs and the 2018 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $110.00, expected term of 2.6 years, expected volatility of 27.5% and risk-free interest rate of 2.3%. 

 

2015 MPSUs:

 

On December 31, 2015, the Compensation Committee granted 86,000 MPSUs to the executive officers and 41,000 MPSUs to certain non-executive employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2015 MPSUs. The 2015 MPSUs consist of four separate tranches with various performance periods ending on December 31, 2019. The first tranche contains market conditions only, which require the achievement of five stock price targets ranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. As of September 30, 2017, all five price targets for the first tranche have been achieved and approved by the Compensation Committee.

 

The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of five stock price targets measured against a base price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading days immediately before the start of the performance period for that tranche, or (2) the closing stock price immediately before the start of the performance period for that tranche. The stock price targets for the second tranche range from $89.56 to $106.81 with a performance period from January 1, 2017 to December 31, 2019. As of December 31, 2017, all five price targets for the second tranche have been achieved and approved by the Compensation Committee. The stock price targets for the third tranche range from $120.80 to $135.48 with a performance period from January 1, 2018 to December 31, 2019. As of March 31, 2018, none of the stock price targets for the third tranche have been achieved and approved by the Compensation Committee. The stock price targets for the fourth tranche will be determined on December 31, 2018 with a performance period from January 1, 2019 to December 31, 2019.

 

In addition, each of the second, third and fourth tranches requires the achievement of one of following six operating metrics:

 

 

1.

Successful implementation of full digital solutions for certain power products.

 

2.

Successful implementation, and adoption by a key customer, of an integrated, software-based field-oriented control with sensors to motor drivers.

 

3.

Successful implementation of certain advanced power analog processes.

 

4.

Successful design wins and achievement of a specific level of revenue with a global networking customer.

 

5.

Achievement of a specific level of revenue with a global electronics manufacturer.

 

6.

Achievement of a specific level of market share with certain core power products.

  

As of March 31, 2018, none of the operating metrics have been achieved.

 

Subject to the employees’ continued employment with the Company, the 2015 MPSUs will fully vest on January 1, 2020 if the pre-determined individual market and performance goals in each tranche are met during the performance periods and approved by the Compensation Committee. In addition, the 2015 MPSUs contain sales restrictions on the vested shares by employees for up to two years.

 

The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of $61.35, expected volatility of 33.2%, risk-free interest rate of 1.3%, and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. Assuming the achievement of all of the required market and performance goals, the total stock-based compensation cost for the 2015 MPSUs, excluding cancelled shares, is $24.6 million ($8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for the third tranche, and $6.6 million for the fourth tranche).

 

 

For the first tranche, stock-based compensation expense is being recognized over the requisite service period. For the second, third and fourth tranches, stock-based compensation expense for each tranche is recognized depending upon the number of the operating metrics management deems probable of being achieved during the performance periods in each reporting period. As of March 31, 2018, based on management’s quarterly assessment, three of the six operating metrics were considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranches over the requisite service period.

 

Employee Stock Purchase Plan (“ESPP”)

  

For the three months ended March 31, 2018 and 2017, 18,000 and 22,000 shares, respectively, were issued under the ESPP. As of March 31, 2018, 4.6 million shares were available for future issuance.

 

The intrinsic value of the shares issued was $0.5 million for both the three months ended March 31, 2018 and 2017. As of March 31, 2018, the unamortized expense was $0.3 million, which will be recognized through the third quarter of 2018. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Expected term (years)

    0.5       0.5  

Expected volatility

    28.2 %     23.4 %

Risk-free interest rate

    1.8 %     0.7 %

Dividend yield

    1.0 %     0.9 %

 

Cash proceeds from the shares issued under the ESPP were $1.6 million and $1.4 million for the three months ended March 31, 2018 and 2017, respectively. 

  

 

4. BALANCE SHEET COMPONENTS

 

Inventories 

 

Inventories consist of the following (in thousands): 

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Raw materials

  $ 25,934     $ 20,573  

Work in process

    45,087       40,030  

Finished goods

    40,876       38,678  

Total

  $ 111,897     $ 99,281  

 

Other Current Assets

 

Other current assets consist of the following (in thousands):

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Prepaid wafer purchase

  $ 6,217     $ 6,217  

Other prepaid expense

    4,699       2,742  

Assets for product returns

    2,105       -  

Interest receivable

    1,426       1,352  

Value-added tax receivable

    1,325       1,235  

Other

    935       1,216  

Total

  $ 16,707     $ 12,762  

 

 

Under Topic 606, assets for product returns represent the carrying value of inventory the Company expects to recover from customers related to stock rotation returns. Prior to the adoption of Topic 606, such amounts were netted against the stock rotation reserve.

 

Other Long-Term Assets

 

Other long-term assets consist of the following (in thousands):

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Deferred compensation plan assets

  $ 29,314     $ 28,080  

Other prepaid expense

    1,057       897  

Other

    1,160       1,091  

Total

  $ 31,531     $ 30,068  

 

Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands): 

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Dividends and dividend equivalents

  $ 14,169     $ 9,248  

Stock rotation and other returns

    6,747       2,647  

Warranty

    3,740       2,416  

Customer prepayments

    2,915       4,742  

Commissions

    1,386       938  

Sales rebate

    1,287       1,036  

Income tax payable

    360       2,861  

Deferred income

    -       1,845  

Other

    2,126       1,774  

Total

  $ 32,730     $ 27,507  

  

A roll-forward of the warranty reserve is as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Balance at beginning of period

  $ 2,416     $ 1,030  

Warranty provision for product sales

    1,479       791  

Settlements made

    (55 )     (296 )

Unused warranty provision

    (100 )     (179 )

Balance at end of period

  $ 3,740     $ 1,346  

 

Other Long-Term Liabilities

 

Other long-term liabilities consist of the following (in thousands):

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Deferred compensation plan liabilities

  $ 28,959     $ 28,087  

Dividend equivalents

    5,215       4,881  

Other

    86       56  

Total

  $ 34,260     $ 33,024  

 

 

 

5. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET

 

There have been no changes in the balance of goodwill during the three months ended March 31, 2018.

 

Acquisition-related intangible assets consist of the following (in thousands):

 

   

March 31, 2018

 
   

Gross Amount

   

Accumulated

Amortization

   

Net Amount

 

Know-how

  $ 1,018     $ (755 )   $ 263  

Developed technologies

    6,466       (6,028 )     438  

Total

  $ 7,484     $ (6,783 )   $ 701  

 

   

December 31, 2017

 
   

Gross Amount

   

Accumulated

Amortization

   

Net Amount

 

Know-how

  $ 1,018     $ (704 )   $ 314  

Developed technologies

    6,466       (5,829 )     637  

Total

  $ 7,484     $ (6,533 )   $ 951  

 

Amortization expense is recorded in cost of revenue in the Condensed Consolidated Statements of Operations. For the three months ended March 31, 2018 and 2017, amortization expense totaled $0.3 million and $0.5 million, respectively.

 

As of March 31, 2018, the estimated future amortization expense was as follows (in thousands):

 

2018 (remaining nine months)

  $ 591  

2019

    110  

Total

  $ 701  

 

 

6. NET INCOME PER SHARE

 

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common shares, and calculated using the treasury stock method. Contingently issuable shares, including equity awards with performance conditions or market conditions, are considered outstanding common shares and included in the basic net income per share as of the date that all necessary conditions to earn the awards have been satisfied. Prior to the end of the contingency period, the number of contingently issuable shares included in the diluted net income per share is based on the number of shares, if any, that would be issuable under the terms of the arrangement at the end of the reporting period.

 

The Company’s outstanding RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. Accordingly, these awards are not treated as participating securities in the net income per share calculation. 

 

 

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per-share amounts):

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Numerator:

               

Net income

  $ 21,856     $ 14,477  
                 

Denominator:

               

Weighted-average outstanding shares used to compute basic net income per share

    41,922       41,047  

Effect of dilutive securities

    2,360       2,221  

Weighted-average outstanding shares used to compute diluted net income per share

    44,282       43,268  
                 

Net income per share:

               

Basic

  $ 0.52     $ 0.35  

Diluted

  $ 0.49     $ 0.33  

   

 

7. SEGMENT AND GEOGRAPHIC INFORMATION

 

The Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance analog solutions for the consumer, computing and storage, industrial, automotive and communications markets. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company derives a majority of its revenue from sales to customers located outside North America, with geographic revenue based on the customers’ ship-to locations. 

 

The Company sells its products primarily through third-party distributors and value-added resellers, and directly to original equipment manufacturers, original design manufacturers and electronic manufacturing service providers. The following table summarizes those customers with sales equal to or greater than 10% of the Company's total revenue or with accounts receivable balances greater than 10% of the Company’s total accounts receivable:

 

   

Revenue

   

Accounts Receivable

 
   

Three Months Ended March 31,

   

March 31,

   

December 31,

 

Customer

 

2018

   

2017

   

2018

   

2017

 

A (distributor)

    20 %     18 %     20 %     16 %

B (distributor)

    10 %     10 %     14 %     *  

C (value-added reseller)

    *       *       *       15 %

__________________

* Represents less than 10%.

 

The Company’s agreements with these third-party distributors and value-added reseller were made in the ordinary course of business and may be terminated with or without cause by these customers with advance notice. Although the Company may experience a short-term disruption in the distribution of its products and a short-term decline in revenue if its agreement with any of these customers was terminated, the Company believes that such termination would not have a material adverse effect on its financial statements because it would be able to engage alternative distributors, resellers and other distribution channels to deliver its products to end customers within a short period following the termination of the agreement with the customer. 

 

 

The following is a summary of revenue by geographic regions (in thousands):

  

   

Three Months Ended March 31,

 

Country or Region

 

2018

   

2017

 

China

  $ 72,865     $ 56,084  

Taiwan

    16,391       14,875  

Europe

    11,465       7,907  

Korea

    9,787       8,161  

Southeast Asia

    9,024       6,372  

Japan

    5,613       4,825  

United States

    3,755       2,042  

Other

    250       96  

Total

  $ 129,150     $ 100,362  

 

 

The following is a summary of revenue by product family (in thousands):

 

   

Three Months Ended March 31,

 

Product Family

 

2018

   

2017

 

DC to DC

  $ 119,268     $ 91,424  

Lighting Control

    9,882       8,938  

Total

  $ 129,150     $ 100,362  

 

The following is a summary of long-lived assets by geographic regions (in thousands):

 

   

March 31,

   

December 31,

 

Country

 

2018

   

2017

 

China

  $ 97,258     $ 89,472  

United States

    67,434       65,618  

Taiwan

    17,769       17,238  

Bermuda

    7,272       7,522  

Other

    623       388  

Total

  $ 190,356     $ 180,238  

 

 

8. LITIGATION

 

The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its shareholders, challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The Company defends itself vigorously against any such claims. As of March 31, 2018, there were no material pending legal proceedings to which the Company was a party.

  

 

 

9. CASH, CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH

 

The following is a summary of the Company’s cash, cash equivalents and short-term and long-term investments (in thousands): 

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Cash, cash equivalents and investments:

               

Cash

  $ 66,896     $ 75,125  

Money market funds

    8,621       7,134  

Corporate debt securities

    208,261       203,807  

Commercial paper

    499       -  

U.S. treasuries and government agency bonds

    22,982       13,024  

Auction-rate securities backed by student-loan notes

    5,250       5,256  

Total

  $ 312,509     $ 304,346  

 

    

March 31,

   

December 31,

 
   

2018

   

2017

 

Reported as:

               

Cash and cash equivalents

  $ 76,016     $ 82,759  

Short-term investments

    231,243       216,331  

Long-term investments

    5,250       5,256  

Total

  $ 312,509     $ 304,346  

  

The contractual maturities of the Company’s short-term and long-term available-for-sale investments are as follows (in thousands):

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Due in less than 1 year

  $ 94,820     $ 89,399  

Due in 1 - 5 years

    136,423       126,932  

Due in greater than 5 years

    5,250       5,256  

Total

  $ 236,493     $ 221,587  

 

The following tables summarize the unrealized gain and loss positions related to the Company’s available-for sale investments (in thousands): 

 

   

March 31, 2018

 
   

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of

Investments in Unrealized

Loss Position

 

Money market funds

  $ 8,621     $ -     $ -     $ 8,621     $ -  

Corporate debt securities

    210,341       7       (2,087 )     208,261       205,953  

Commercial paper

    499       -       -       499       -  

U.S. treasuries and government agency bonds

    23,106       -       (124 )     22,982       22,982  

Auction-rate securities backed by student-loan notes

    5,570       -       (320 )     5,250       5,250  

Total

  $ 248,137     $ 7     $ (2,531 )   $ 245,613     $ 234,185  

 

   

December 31, 2017

 
   

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of

Investments in Unrealized

Loss Position

 

Money market funds

  $ 7,134     $ -     $ -     $ 7,134     $ -  

Corporate debt securities

    204,789       17       (999 )     203,807       197,564  

U.S. treasuries and government agency bonds

    13,092       -       (68 )     13,024       13,024  

Auction-rate securities backed by student-loan notes

    5,570       -       (314 )     5,256       5,256  

Total

  $ 230,585     $ 17     $ (1,381 )   $ 229,221     $ 215,844  

 

 

Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows:

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Cash and cash equivalents

  $ 76,016     $ 82,759  

Restricted cash included in other long-term assets

    118       115  

Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows

  $ 76,134     $ 82,874  

 

Restricted cash includes a security deposit that is set aside in a bank account and cannot be withdrawn by the Company under the terms of a lease agreement. The restriction will end and any unused amount will be returned to the Company upon the expiration of the lease.

 

 

10. FAIR VALUE MEASUREMENTS  

 

The following table details the fair value measurement of the financial assets (in thousands):

 

   

Fair Value Measurement at March 31, 2018

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

  $ 8,621     $ 8,621     $ -     $ -  

Corporate debt securities

    208,261       -       208,261       -  

Commercial paper

    499       -       499       -  

U.S. treasuries and government agency bonds

    22,982       -       22,982       -  

Auction-rate securities backed by student-loan notes

    5,250       -       -       5,250  

Mutual and money market funds under deferred compensation plan

    17,979       17,979       -       -  

Total

  $ 263,592     $ 26,600     $ 231,742     $ 5,250  

 

   

Fair Value Measurement at December 31, 2017

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

  $ 7,134     $ 7,134     $ -     $ -  

Corporate debt securities

    203,807       -       203,807       -  

U.S. treasuries and government agency bonds

    13,024       -       13,024       -  

Auction-rate securities backed by student-loan notes

    5,256       -       -       5,256  

Mutual and money market funds under deferred compensation plan

    16,625       16,625       -       -  

Total

  $ 245,846     $ 23,759     $ 216,831     $ 5,256  

_________________

Level 1—includes instruments with quoted prices in active markets for identical assets.

Level 2—includes instruments for which the valuations are based upon quoted market prices in active markets involving similar assets or inputs other than quoted prices that are observable for the assets. The market inputs used to value these instruments generally consist of market yields, recently executed transactions, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources may include industry standard data providers, security master files from large financial institutions, and other third-party sources used to determine a daily market value.

Level 3—includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement.

 

The Company’s level 3 assets consist of government-backed student loan auction-rate securities, which became illiquid in 2008. The following table provides a rollforward of the fair value of the auction-rate securities (in thousands): 

 

Balance at January 1, 2018

  $ 5,256  

Change in unrealized loss included in other comprehensive income

    (6 )

Balance at March 31, 2018

  $ 5,250  

 

 

The Company determined the fair value of the auction-rate securities using a discounted cash flow model with the following assumptions:

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Time-to-liquidity (years)

   2 - 3      2 - 3  

Discount rate

   5.0% - 10.1%      4.5% - 9.6%  

 

 

11. DEFERRED COMPENSATION PLAN

 

The following table summarizes the deferred compensation plan balances in the Condensed Consolidated Balance Sheets (in thousands):

 

   

March 31,

   

December 31,

 
   

2018

   

2017

 

Deferred compensation plan asset components:

               

Cash surrender value of corporate-owned life insurance policies

  $ 11,335     $ 11,455  

Fair value of mutual and money market funds

    17,979       16,625  

Total

  $ 29,314     $ 28,080  
                 

Deferred compensation plan assets reported in:

               

Other long-term assets

  $ 29,314     $ 28,080  
                 

Deferred compensation plan liabilities reported in:

               

Accrued compensation and related benefits (short-term)

  $ 389     $ 356  

Other long-term liabilities

    28,959       28,087  

Total

  $ 29,348     $ 28,443  

 

 

 

12. INTEREST AND OTHER INCOME, NET

 

The components of interest and other income, net are as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Interest income

  $ 1,460     $ 1,264  

Amortization of premium on available-for-sale investments

    (435 )     (507 )

Gain (loss) on deferred compensation plan investments

    (186 )     733  

Foreign currency exchange loss

    (399 )     (109 )

Total

  $ 440     $ 1,381  

 

 

13. INCOME TAXES

 

The Company has not adjusted its provisional tax estimates related to the U.S. Tax Cuts and Jobs Act enacted in December 2017 (the “2017 Tax Act”) that were recorded in the fourth quarter of 2017. These amounts remained as estimates as of March 31, 2018 and, as permitted by Staff Accounting Bulletin No. 118, they will be refined through December 2018 based on the Company’s ongoing analysis of data and tax positions along with new guidance from regulators and interpretation of the law.

 

The income tax provision for the three months ended March 31, 2018 was $0.6 million, or 2.8% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by the Company’s subsidiaries in Bermuda and China was taxed at lower rates, and because of certain stock-based compensation deductions. In addition, the effective tax rate was impacted by the effects of the inclusion of the global intangible low-taxed income ("GILTI") under the 2017 Tax Act.

 

For the three months ended March 31, 2018, the Company’s effective tax rate included the estimated impact of $12.4 million related to the GILTI provisions that was included as additional subpart F income, which was accounted for as a period cost. In addition, for the three months ended March 31, 2018, the Company paid the 2018 installment of $1.9 million related to the deemed repatriation transition tax liability. As of March 31, 2018, the remaining $22.0 million transition tax liability was recorded in long-term income tax liabilities on the Condensed Consolidated Balance Sheet.

 

 

The income tax provision for the three months ended March 31, 2017 was $0.5 million, or 3.2% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by the Company’s subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation.

 

As of March 31, 2018, the Company had $18.8 million of unrecognized tax benefits, $9.9 million of which would affect its effective tax rate if recognized after considering the valuation allowance. At December 31, 2017, the Company had $16.3 million of unrecognized tax benefits, $9.1 million of which would affect its effective tax rate if recognized after considering the valuation allowance. 

 

Uncertain tax positions relate to the allocation of income and deductions among the Company’s global entities and to the determination of the research and development tax credit. It is reasonably possible that over the next twelve-month period, the Company may experience increases or decreases in its unrecognized tax benefits. However, it is not possible to determine either the magnitude or the range of increases or decreases at this time.

 

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of March 31, 2018 and December 31, 2017, the Company has $0.6 million and $0.5 million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities in the Consolidated Balance Sheets.

 

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued in December 2015, and the IRS appealed the decision in February 2016. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in the cost pool to be shared under a cost-sharing arrangement. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any adjustments as of March 31, 2018. The Company will continue to monitor developments related to this opinion and the potential impact on its financial statements.

 

 

14. ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table summarizes the changes in accumulated other comprehensive income (in thousands):

 

   

Unrealized Losses

on Available-for-

Sale Securities

   

Foreign Currency

Translation

Adjustments

   

Total

 

Balance as of January 1, 2018

  $ (1,364 )   $ 3,177     $ 1,813  

Other comprehensive income (loss) before reclassifications

    (1,185 )     4,389       3,204  

Amounts reclassified from accumulated other comprehensive income

    25       -       25  

Net current period other comprehensive income (loss)

    (1,160 )     4,389       3,229  

Balance as of March 31, 2018

  $ (2,524 )   $ 7,566     $ 5,042  

 

The amounts reclassified from accumulated other comprehensive income were recorded in interest and other income, net, in the Condensed Consolidated Statements of Operations.

  

 

15. DIVIDENDS AND DIVIDEND EQUIVALENTS

 

Cash Dividend Program

 

In June 2014, the Board of Directors approved a dividend program pursuant to which the Company intends to pay quarterly cash dividends on its common stock. Based on the Company’s historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared by the Board of Directors, which are payable to the stockholders in the following month. The Board of Directors declared the following cash dividends (in thousands, except per-share amounts): 

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 

Dividend declared per share

  $ 0.30     $ 0.20  

Total amount

  $ 12,644     $ 8,248  

 

 

As of March 31, 2018 and December 31, 2017, accrued dividends totaled $12.6 million and $8.3 million, respectively.

 

The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other things, the Company’s financial condition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, and other factors that the Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of the stockholders.

 

The Company anticipates that cash used for future dividend payments will come from its current domestic cash and cash generated from ongoing U.S. operations. In addition, the Company currently plans to repatriate cash from its Bermuda subsidiary to fund future dividends and continue to indefinitely reinvest its earnings from other foreign subsidiaries. 

 

Cash Dividend Equivalent Rights

 

Under the Company’s stock plans, outstanding RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. As of March 31, 2018 and December 31, 2017, accrued dividend equivalents totaled $6.7 million and $5.8 million, respectively.

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. These statements include among other things, statements concerning:
 

 

the above-average industry growth of product and market areas that we have targeted,

 

 

our plan to increase our revenue through the introduction of new products within our existing product families as well as in new product categories and families,

 

 

our belief that we may incur significant legal expenses that vary with the level of activity in each of our current or future legal proceedings,

 

 

the effect that liquidity of our investments has on our capital resources,

 

 

the continuing application of our products in the consumer, computing and storage, industrial, automotive and communications markets,

 

 

estimates of our future liquidity requirements,

 

 

the cyclical nature of the semiconductor industry,

 

 

protection of our proprietary technology,

 

 

business outlook for the remainder of 2018 and beyond,

 

 

the factors that we believe will impact our ability to achieve revenue growth,

 

 

the percentage of our total revenue from various market segments,

 

 

our ability to identify, acquire and integrate the companies, businesses and products that we acquire and achieve the anticipated benefits from such acquisitions,

 

 

 

 

the impact of the U.S. Tax Cuts and Jobs Act enacted in December 2017 (the "2017 Tax Act") on our income tax provision and cash flows,

 

 

our intention and ability to pay future cash dividends, and

 

 

the factors that differentiate us from our competitors.

 

In some cases, words such as “would,” “could,” “may,” “should,” “predict,” “potential,” “targets,” “continue,” “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “will,” the negative of these terms or other variations of such terms and similar expressions relating to the future identify forward-looking statements. All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans or objectives about our business and our industry. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events or results could differ materially and adversely from those expressed in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this Quarterly Report on Form 10-Q and, in particular, in the section entitled “Item 1A. Risk Factors.” Except as required by law, we disclaim any duty to, and undertake no obligation to, update any forward-looking statements, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that we file from time to time with the Securities and Exchange Commission, such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 

 

 

Overview

 

We are a leading semiconductor company that designs, develops and markets high-performance power solutions. Founded in 1997, MPS’s core strengths include deep system-level and applications knowledge, strong analog design expertise and an innovative proprietary process technology. These combined strengths enable MPS to deliver highly integrated monolithic products that offer energy efficient, cost-effective, easy-to-use solutions for systems found in consumer, computing and storage, industrial, automotive and communications applications. Our mission is to reduce total energy consumption in our customers' systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.

 

We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term.

 

We work with third parties to manufacture and assemble our integrated circuits (“ICs”). This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.

 

Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up. Typical lead time for orders is fewer than 90 days. These factors, combined with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer, make the forecasting of our orders and revenue difficult.

  

We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where our products are incorporated into end-user products. For the three months ended March 31, 2018 and 2017, our revenue from sales to customers in Asia was 88% and 90%, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the consumer, computing and storage, industrial, automotive and communications markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and continue to secure manufacturing capacity.

  

Critical Accounting Policies and Estimates

 

Except for the changes related to revenue recognition discussed in Note 1 and Note 2 to Condensed Consolidated Financial Statements, there have been no other significant changes in our critical accounting policies and estimates used in the preparation of our financial statements during the three months ended March 31, 2018, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2017.

 

 

Results of Operations

 

The table below sets forth the data in the Condensed Consolidated Statements of Operations as a percentage of revenue:  

 

   

Three Months Ended March 31,

 
   

2018

   

2017

 
   

(in thousands, except percentages)

 

Revenue

  $ 129,150       100.0

%

  $ 100,362       100.0

%

Cost of revenue

    57,655       44.6       45,520       45.4  

Gross profit

    71,495       55.4       54,842       54.6  

Operating expenses:

                               

Research and development

    21,609       16.7       18,894       18.8  

Selling, general and administrative

    27,318       21.2       22,092       22.0  

Litigation expense

    531       0.4       286       0.3  

Total operating expenses

    49,458       38.3       41,272       41.1  

Income from operations

    22,037       17.1       13,570       13.5  

Interest and other income, net

    440       0.3       1,381       1.4  

Income before income taxes

    22,477       17.4       14,951       14.9  

Income tax provision

    621       0.5       474       0.5  

Net income

  $ 21,856       16.9

%

  $ 14,477       14.4

%

 

Revenue

 

The following table summarizes our revenue by end market:

 

   

Three Months Ended March 31,

         

End Market

 

2018

   

% of

Revenue

   

2017

   

% of

Revenue

   

Change

 
   

(in thousands, except percentages)

 

Consumer

  $ 47,144       36.5

%

  $ 35,611       35.5

%

    32.4 %

Computing and storage

    30,970       24.0       20,617       20.5       50.2 %

Industrial

    17,554       13.6       15,354       15.3       14.3 %

Automotive

    17,732       13.7       12,331       12.3       43.8 %

Communications

    15,750       12.2       16,449       16.4       (4.2 )%

Total

  $ 129,150       100.0

%

  $ 100,362       100.0

%

    28.7 %

 

Revenue for the three months ended March 31, 2018 was $129.2 million, an increase of $28.8 million, or 28.7%, from $100.4 million for the three months ended March 31, 2017. This increase was driven by higher sales in all of our end markets except for communications. Overall unit shipments increased by 18% due to higher market demand, and average sales prices increased by 8%. 

 

Revenue from the consumer market for the three months ended March 31, 2018 increased $11.5 million, or 32.4%, from the same period in 2017. This increase was primarily driven by higher demand in home appliances, set-top boxes, chargers and gaming products. Revenue from the computing and storage market increased $10.4 million, or 50.2%, from the same period in 2017. This increase was primarily driven by strength in the solid-state drive storage, cloud computing and high-performance notebook markets. Revenue from the industrial market increased $2.2 million, or 14.3%, from the same period in 2017. This increase was primarily driven by higher sales in security and meter products. Revenue from the automotive market increased $5.4 million, or 43.8%, from the same period in 2017. This increase was primarily driven by higher sales of products for infotainment, safety and connectivity applications. Revenue from the communications market decreased $0.7 million, or 4.2%, from the same period in 2017. This decrease was primarily driven by lower demand in wireless applications.

 

 

Cost of Revenue and Gross Margin

 
Cost of revenue primarily consists of costs incurred to manufacture, assemble and test our products, as well as warranty costs, inventory-related and other overhead costs, and stock-based compensation expenses. In addition, cost of revenue includes amortization for acquisition-related intangible assets.

 

       

Three Months Ended March 31,

         
       

2018

   

2017

   

Change

 
       

(in thousands, except percentages)

 

Cost of revenue

  $ 57,655     $ 45,520       26.7 %

As a percentage of revenue

    44.6 %     45.4 %