mpwr20190331_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, 2019

 

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)

 

4040 Lake Washington Blvd. NE, Suite 201, Kirkland, Washington 98033

(Address of principal executive offices)(Zip code)

 

  (425) 296-9956

(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 every Interactive Data File required to be submitted 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 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  ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

MPWR

 

The NASDAQ Global Select Market

 

There were 43,057,000 shares of the registrant’s common stock issued and outstanding as of May 3, 2019.

 



 

 

 

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 STOCKHOLDERS’ EQUITY

6

  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 7

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8

ITEM 2.

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

21

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

27

ITEM 4.

CONTROLS AND PROCEDURES

27

PART II. OTHER INFORMATION

27

ITEM 1.

LEGAL PROCEEDINGS

27

ITEM 1A.

RISK FACTORS

27

ITEM 6.

EXHIBITS

43

 

 

 

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,

 
   

2019

   

2018

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 181,769     $ 172,704  

Short-term investments

    177,255       204,577  

Accounts receivable, net

    58,889       55,214  

Inventories

    142,543       136,384  

Other current assets

    13,629       11,931  

Total current assets

    574,085       580,810  

Property and equipment, net

    205,497       150,001  

Long-term investments

    3,290       3,241  

Goodwill

    6,571       6,571  

Deferred tax assets, net

    16,779       16,830  

Other long-term assets

    41,987       35,979  

Total assets

  $ 848,209     $ 793,432  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 27,259     $ 22,678  

Accrued compensation and related benefits

    18,969       18,799  

Other accrued liabilities

    45,348       38,962  

Total current liabilities

    91,576       80,439  

Income tax liabilities

    34,375       34,375  

Other long-term liabilities

    42,007       38,525  

Total liabilities

    167,958       153,339  

Commitments and contingencies

               

Stockholders' equity:

               

Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 43,033 and 42,505, respectively

    478,913       450,908  

Retained earnings

    202,378       194,728  

Accumulated other comprehensive loss

    (1,040 )     (5,543 )

Total stockholders’ equity

    680,251       640,093  

Total liabilities and stockholders’ equity

  $ 848,209     $ 793,432  

 

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,

 
   

2019

   

2018

 

Revenue

  $ 141,363     $ 129,150  

Cost of revenue

    63,357       57,655  

Gross profit

    78,006       71,495  

Operating expenses:

               

Research and development

    25,458       21,609  

Selling, general and administrative

    30,553       27,318  

Litigation expense

    278       531  

Total operating expenses

    56,289       49,458  

Income from operations

    21,717       22,037  

Interest and other income, net

    3,341       440  

Income before income taxes

    25,058       22,477  

Income tax expense (benefit)

    (1,123 )     621  

Net income

  $ 26,181     $ 21,856  
                 

Net income per share:

               

Basic

  $ 0.61     $ 0.52  

Diluted

  $ 0.58     $ 0.49  

Weighted-average shares outstanding:

               

Basic

    42,749       41,922  

Diluted

    45,232       44,282  

 

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,

 
   

2019

   

2018

 

Net income

  $ 26,181     $ 21,856  

Other comprehensive income, net of tax:

               

Foreign currency translation adjustments

    3,677       4,389  

Change in unrealized gain (loss) on available-for-sale securities, net of tax of $(98) and $0, respectively

    826       (1,160 )

Total other comprehensive income, net of tax

    4,503       3,229  

Comprehensive income

  $ 30,684     $ 25,085  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

                           

Accumulated

         
   

Common Stock and

           

Other

   

Total

 
   

Additional Paid-in Capital

   

Retained

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Earnings

   

Income (Loss)

   

Equity

 

Balance as of January 1, 2019

    42,505     $ 450,908     $ 194,728     $ (5,543 )   $ 640,093  

Net income

    -       -       26,181       -       26,181  

Other comprehensive income

    -       -       -       4,503       4,503  

Dividends and dividend equivalents declared ($0.40 per share)

    -       -       (18,531 )     -       (18,531 )

Vesting of restricted stock units

    514       10,383       -       -       10,383  

Shares issued under the employee stock purchase plan

    14       1,627       -       -       1,627  

Stock-based compensation expense

    -       15,995       -       -       15,995  

Balance as of March 31, 2019

    43,033     $ 478,913     $ 202,378     $ (1,040 )   $ 680,251  
                                         

Balance as of January 1, 2018

    41,614     $ 376,586     $ 143,608     $ 1,813     $ 522,007  

Net income

    -       -       21,856       -       21,856  

Other comprehensive income

    -       -       -       3,229       3,229  

Dividends and dividend equivalents declared ($0.30 per share)

    -       -       (13,586 )     -       (13,586 )

Exercise of stock options

    1       16       -       -       16  

Vesting of restricted stock units

    512       7,793       -       -       7,793  

Shares issued under the employee stock purchase plan

    18       1,563       -       -       1,563  

Stock-based compensation expense

    -       15,049       -       -       15,049  

Cumulative effect of a change in accounting principles

    -       -       379       -       379  

Balance as of March 31, 2018

    42,145     $ 401,007     $ 152,257     $ 5,042     $ 558,306  

 

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,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net income

  $ 26,181     $ 21,856  

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

               

Depreciation and amortization 

    3,255       2,755  

Loss on sales of property and equipment

    14       -  

Amortization of premium on available-for-sale securities

    121       435  

(Gain) loss on deferred compensation plan investments

    (1,935 )     66  

Deferred taxes, net

    (33 )     -  

Stock-based compensation expense

    16,010       15,030  

Changes in operating assets and liabilities:

               

Accounts receivable

    (3,676 )     (11,103 )

Inventories

    (6,171 )     (12,590 )

Other assets

    (1,576 )     (3,954 )

Accounts payable

    4,778       3,856  

Accrued compensation and related benefits

    4       (2,821 )

Accrued liabilities

    3,355       4,998  

Income tax liabilities

    (1,491 )     (2,236 )

Net cash provided by operating activities

    38,836       16,292  

Cash flows from investing activities:

               

Purchases of property and equipment

    (58,376 )     (7,400 )

Acquisition of in-place leases

    (981 )     -  

Purchases of short-term investments

    -       (47,565 )

Proceeds from maturities and sales of short-term investments

    28,076       31,063  

Proceeds from sales of property and equipment

    1,456       -  

Contributions to deferred compensation plan, net

    (956 )     (1,300 )

Net cash used in investing activities

    (30,781 )     (25,202 )

Cash flows from financing activities:

               

Property and equipment purchased on extended payment terms

    (10 )     -  

Proceeds from exercise of stock options

    -       16  

Proceeds from vesting of restricted stock units

    10,383       7,793  

Proceeds from shares issued under the employee stock purchase plan

    1,627       1,563  

Dividends and dividend equivalents paid

    (12,761 )     (8,339 )

Net cash provided by (used in) financing activities

    (761 )     1,033  

Effect of change in exchange rates

    1,770       1,137  

Net increase (decrease) in cash, cash equivalents and restricted cash

    9,064       (6,740 )

Cash, cash equivalents and restricted cash, beginning of period

    172,818       82,874  

Cash, cash equivalents and restricted cash, end of period

  $ 181,882     $ 76,134  
                 

Supplemental disclosures for cash flow information:

               

Cash paid for taxes and interest

  $ 393     $ 3,374  

Non-cash investing and financing activities:

               

Liability accrued for property and equipment purchases

  $ 958     $ 2,491  

Liability accrued for dividends and dividend equivalents

  $ 18,534     $ 13,603  

 

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, 2018, filed with the SEC on March 1, 2019.

 

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, 2019 or for any other future periods.

 

Summary of Significant Accounting Policies

 

Except for the changes related to leases discussed in Note 6, there have been no other changes to the Company’s significant accounting policies during the three months ended March 31, 2019 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, 2018.

 

Recently Adopted Accounting Pronouncement

  

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires entities to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheets for leases with terms greater than 12 months. In addition, the standard applies to leases embedded in service or other arrangements. The Company adopted the standard on January 1, 2019 using the modified retrospective method and did not restate comparative periods, as permitted by the standard. In addition, the Company elected the transition practical expedients to not reassess whether its outstanding contracts contained or were leases, classification of its existing leases and lease terms.

 

Upon adoption, the Company recognized ROU assets and lease liabilities of its outstanding operating leases on the Condensed Consolidated Balance Sheets, primarily related to real estate. The adoption did not have a material impact on the Condensed Consolidated Statements of Operations or the Condensed Consolidated Statements of Cash Flows. See Note 6 for further discussion of the impact of the adoption on the Company’s financial statements.

 

Recent Accounting Pronouncements Not Yet Adopted as of March 31, 2019

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which changes certain disclosure requirements, including those related to Level 3 fair value measurements. The standard will be 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 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 will be 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.

 

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, entities will be required to recognize an allowance for credit losses 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.

   

 

 

2. REVENUE RECOGNITION

 

Revenue from Product Sales

  

The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits, as well as dies in wafer form. These product sales were 99% and 97% of the Company’s total revenue for the three months ended March 31, 2019 and 2018, respectively. The remaining revenue primarily includes royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periods presented. See Note 8 for the disaggregation of the Company’s revenue by geographic regions and by product families.

 

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 the three months ended March 31, 2019 and 2018, 84% and 88%, respectively, of the Company’s sales were made through distribution arrangements. These distribution arrangements contain enforceable rights and obligations specific to those distributors and not the end customers. Purchase orders, which are generally governed by sales agreements or the Company's standard terms of sale, set 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.

   

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 shipped and delivered to be held at customers’ designated locations because the Company continues to control the products and retain ownership, and the customers do not have an unconditional obligation to pay. The Company recognizes revenue when the customers consume the products from the consigned inventory locations or, in some cases, after a 60-day period from the delivery date has passed, at which time control transfers to the customers and the Company invoices them for payment.

 

Variable Consideration

 

The Company accounts for price adjustment and stock rotation rights as variable consideration that reduces the transaction price, and recognizes that reduction in the same period the associated 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 an analysis 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. The Company records a credit against accounts receivable for the estimated price adjustments, with a corresponding reduction to revenue.

 

In addition, certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases in accordance with the contract terms. The Company estimates the stock rotation returns based on an analysis of historical returns, and the current level of inventory in the distribution channel. The Company records a liability for the stock rotation reserve, with a corresponding reduction to revenue. In addition, 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 revenue.

 

 

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, 2019 and December 31, 2018, accounts receivable totaled $58.9 million and $55.2 million, respectively. The Company did not record any allowance for doubtful accounts as of March 31, 2019 and December 31, 2018.

 

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 accrued liabilities. As of March 31, 2019 and December 31, 2018, customer prepayments totaled $2.9 million and $2.5 million, respectively. The increase in the customer prepayment balance for the three months ended March 31, 2019 resulted from an increase in unfulfilled customer orders for which the Company has received payments. For the three months ended March 31, 2019, the Company recognized $2.4 million of revenue that was included in the customer prepayment balance as of December 31, 2018.

 

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.

  

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 generally within two weeks. The Company has elected not to determine whether contacts with customers contain significant financing components.

 

As of March 31, 2019, 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.

 

 

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, 2019, 1.6 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,

 
   

2019

   

2018

 

Cost of revenue

  $ 531     $ 433  

Research and development

    4,429       3,995  

Selling, general and administrative

    11,050       10,602  

Total stock-based compensation expense

  $ 16,010     $ 15,030  

Tax benefit related to stock-based compensation

  $ 838     $ 1,131  

 

Restricted Stock Units (“RSUs”)

 

The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company.

 

 

A summary of RSU activity is presented in the table below (in thousands, except per-share amounts): 

 

   

Time-Based RSUs

   

PSUs and MPSUs

   

MSUs

   

Total

 
   

Number of Shares

   

Weighted-

Average Grant

Date Fair

Value Per

Share

   

Number of Shares

   

Weighted-

Average Grant

Date Fair

Value Per

Share

   

Number of Shares

   

Weighted-

Average Grant

Date Fair

Value Per

Share

   

Number of Shares

   

Weighted-

Average Grant

Date Fair

Value Per

Share

 

Outstanding at January 1, 2019

    240     $ 95.38       2,174     $ 61.61       2,219     $ 35.69       4,633     $ 50.94  

Granted

    26     $ 130.67       311  (1)   $ 107.14       -     $ -       337     $ 108.93  

Vested

    (33 )   $ 77.83       (400 )   $ 56.71       (81 )   $ 23.57       (514 )   $ 52.86  

Forfeited

    (2 )   $ 89.22       -     $ -       (1 )   $ 68.48       (3 )   $ 83.26  

Outstanding at March 31, 2019

    231     $ 101.91       2,085     $ 69.34       2,137     $ 36.14       4,453     $ 55.09  

_____________

 

(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 vested RSUs was $57.7 million and $49.5 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the total intrinsic value of all outstanding RSUs was $559.8 million, based on the closing stock price of $135.49. As of March 31, 2019, unamortized compensation expense related to all outstanding RSUs was $145.2 million with a weighted-average remaining recognition period of approximately 3.5 years. 

 

Cash proceeds from vested PSUs with a purchase price totaled $10.4 million and $7.8 million for the three months ended March 31, 2019 and 2018, respectively. 

 

Time-Based RSUs:

 

For the three months ended March 31, 2019, the Compensation Committee granted 26,000 RSUs with service conditions to non-executive 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.  

 

2019 PSUs:

 

In February 2019, the Compensation Committee granted 151,000 PSUs to the executive officers, which represent a target number of shares to be earned based on the Company’s average two-year (2019 and 2020) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2019 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2019 Executive PSUs. 50% of the 2019 Executive PSUs will vest in the first quarter of 2021 if the pre-determined performance goals are met during the performance period. The remaining 2019 Executive PSUs will vest over the following two years on a quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2019 Executive PSUs is $46.6 million.

 

The 2019 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 2019 Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $130.67, expected term of 2.6 years, expected volatility of 29.0% and risk-free interest rate of 2.5%.

  

Employee Stock Purchase Plan (“ESPP”)

  

For the three months ended March 31, 2019 and 2018, 14,000 and 18,000 shares, respectively, were issued under the ESPP. As of March 31, 2019, 4.5 million shares were available for future issuance.

 

The intrinsic value of the shares issued was $0.3 million and $0.5 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the unamortized expense was $0.4 million, which will be recognized through the third quarter of 2019. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Expected term (in years)

    0.5       0.5  

Expected volatility

    37.3 %     28.2 %

Risk-free interest rate

    2.5 %     1.8 %

Dividend yield

    1.2 %     1.0 %

 

Cash proceeds from the shares issued under the ESPP were $1.6 million for both the three months ended March 31, 2019 and 2018.  

 

 

 

4. BALANCE SHEET COMPONENTS

 

Inventories 

 

Inventories consist of the following (in thousands): 

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Raw materials

  $ 43,142     $ 43,017  

Work in process

    39,402       38,674  

Finished goods

    59,999       54,693  

Total

  $ 142,543     $ 136,384  

 

Other Current Assets

 

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

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

RSU tax withholding proceeds receivable

  $ 4,331     $ 39  

Prepaid expense

    3,298       3,425  

Assets for product returns

    2,225       1,602  

Interest receivable

    1,457       1,441  

Value-added tax receivable

    505       423  

Prepaid wafer refund receivable

    -       4,297  

Other

    1,813       704  

Total

  $ 13,629     $ 11,931  

 

Other Long-Term Assets

 

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

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Deferred compensation plan assets

  $ 34,861     $ 31,970  

Prepaid expense

    2,775       2,713  

Operating lease ROU assets

    2,770       -  

Other

    1,581       1,296  

Total

  $ 41,987     $ 35,979  

 

 

Other Accrued Liabilities

 

Other accrued liabilities consist of the following (in thousands): 

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Dividends and dividend equivalents

  $ 21,289     $ 15,044  

Stock rotation and sales returns

    7,580       5,363  

Income tax payable

    5,527       7,018  

Customer prepayments

    2,927       2,520  

Warranty

    2,045       4,564  

Commissions

    1,661       1,369  

Operating lease liabilities

    1,158       -  

Other

    3,161       3,084  

Total

  $ 45,348     $ 38,962  

 

Other Long-Term Liabilities

 

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

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Deferred compensation plan liabilities

  $ 35,310     $ 32,283  

Dividend equivalents

    5,670       6,145  

Operating lease liabilities

    996       -  

Other

    31       97  

Total

  $ 42,007     $ 38,525  

 

 

5. REAL ESTATE TRANSACTION

 

In March 2019, the Company completed the purchase of an office building and land located in Kirkland, Washington for $52.9 million in cash. The property also has in-place leases which were assumed by the Company. The Company accounted for the purchase as an asset acquisition and capitalized $0.4 million of transaction costs. The consideration paid was allocated to the individual assets based on their relative fair values as follows (in thousands):

 

Building

  $ 30,078  

Land

    22,254  

In-place leases 

    981  

Total

  $ 53,313  

 

The fair value of the building was determined based on the income approach, which considered the discounted cash flows and direct capitalization analysis, and the sales comparison approach. The fair value of land was determined based on the sales comparison approach. The fair value of the in-place leases was determined primarily based on the analysis of the economic benefits of certain cost savings to acquire new tenants.

 

The building is depreciated over a useful life of 40 years and the in-place leases are amortized over the average remaining lease terms of 3.5 years. Land is not depreciated.

 

 

 

6. LEASES

 

The Company has operating leases for administrative and sales and marketing offices, manufacturing operations and research and development facilities, employee housing units, and certain equipment. The leases have remaining lease terms from one to four years. Some of the leases include renewal options which can extend the lease term for up to five years or on a month-to-month basis. The Company does not have finance lease arrangements.

 

As permitted by Topic 842, the Company does not recognize leases with a term of 12 months or less on the Condensed Consolidated Balance Sheets. For all lease arrangements that contain lease and nonlease components, the Company has elected the practical expedient to combine them as single lease components. As of March 31, 2019, operating lease ROU assets totaled $2.8 million and operating lease liabilities totaled $2.2 million. The Company recognizes operating lease costs on a straight-line basis over the lease term.

 

Because the implicit rate in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the remaining lease payments. 

 

The following tables summarize certain information related to the leases (in thousands, except years and percentages):

 

   

Three Months Ended

 
   

March 31, 2019

 

Lease costs:

       

Operating lease costs

  $ 305  

Short-term lease costs

    98  

Total lease costs

  $ 403  
         

Other information:

       

Cash paid for amounts included in the measurement of lease liabilities:

       
Operating cash flows from operating leases   $ 304  

ROU assets obtained in exchange for operating lease liabilities (1)

  $ 2,264  

 

 

   

March 31, 2019

 

Weighted-average remaining lease term (in years)

    2.3  

Weighted-average discount rate

    4.1 %

____________

(1) Includes $2.2 million for operating leases existing on January 1, 2019 and $0.1 million for new operating leases that commenced during the three months ended March 31, 2019.

 

As of March 31, 2019, the maturities of the lease liabilities are as follows (in thousands):

 

2019 (remaining nine months)

  $ 957  

2020

    859  

2021

    254  

2022

    193  

2023

    58  

Total remaining lease payments

    2,321  

Less: imputed interest

    (167 )

Total lease liabilities

  $ 2,154  

Reported as:

       

Current liabilities

  $ 1,158  

Long-term liabilities

  $ 996  

 

 

 

7. 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,

 
   

2019

   

2018

 

Numerator:

               

Net income

  $ 26,181     $ 21,856  
                 

Denominator:

               

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

    42,749       41,922  

Effect of dilutive securities

    2,483       2,360  

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

    45,232       44,282  
                 

Net income per share:

               

Basic

  $ 0.61     $ 0.52  

Diluted

  $ 0.58     $ 0.49  

 

 

8. 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 computing and storage, automotive, industrial, communications and consumer 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

 

2019

   

2018

   

2019

   

2018

 

A (distributor)

    23 %     20 %     22 %     25 %

B (distributor)

    *       10 %     17 %     16 %

___________

* Represents less than 10%.

 

The Company’s agreements with these third-party distributors 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

 

2019

   

2018

 

China

  $ 76,198     $ 72,865  

Taiwan

    21,347       16,391  

Europe

    12,984       11,465  

Korea

    9,611       9,787  

Southeast Asia

    8,672       9,024  

Japan

    6,642       5,613  

United States

    5,806       3,755  

Other

    103       250  

Total

  $ 141,363     $ 129,150  

 

 

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

  

   

Three Months Ended March 31,

 

Product Family

 

2019

   

2018

 

DC to DC

  $ 132,711     $ 119,268  

Lighting Control

    8,652       9,882  

Total

  $ 141,363     $ 129,150  

 

The following is a summary of property and equipment, net by geographic regions (in thousands):

 

   

March 31,

   

December 31,

 

Country

 

2019

   

2018

 

China

  $ 98,117     $ 93,096  

United States

    89,720       39,054  

Taiwan

    16,854       16,972  

Other

    806       879  

Total

  $ 205,497     $ 150,001  

 

 

9. COMMITMENTS AND CONTINGENCIES

 

Product Warranties

 

The following table presents changes in the warranty reserve (in thousands):

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Balance at beginning of period

  $ 4,564     $ 2,416  

Warranty provision for product sales

    268       1,479  

Settlements made

    (2,271 )     (55 )

Unused warranty provision

    (516 )     (100 )

Balance at end of period

  $ 2,045     $ 3,740  

 

Purchase Commitments

 

The Company has outstanding purchase commitments with its suppliers and other parties that require the future purchase of goods or services, which primarily consist of wafer purchases, assembly and other manufacturing services, construction services and license arrangements. As of March 31, 2019, the Company’s outstanding purchase obligations totaled approximately $79.1 million.

 

Litigation

 

The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its stockholders, 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, 2019, there were no material pending legal proceedings to which the Company was a party.

   

 

10. 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,

 
   

2019

   

2018

 

Cash, cash equivalents and investments:

               

Cash

  $ 125,687     $ 131,569  

Money market funds

    56,082       41,135  

Corporate debt securities

    143,453       170,909  

U.S. treasuries and government agency bonds

    32,202       32,068  

Certificates of deposit

    1,600       1,600  

Auction-rate securities backed by student-loan notes

    3,290       3,241  

Total

  $ 362,314     $ 380,522  

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Reported as:

               

Cash and cash equivalents

  $ 181,769     $ 172,704  

Short-term investments

    177,255       204,577  

Long-term investments

    3,290       3,241  

Total

  $ 362,314     $ 380,522  

 

 

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,

 
   

2019

   

2018

 

Due in less than 1 year

  $ 119,617     $ 125,845  

Due in 1 - 5 years

    57,638       78,732  

Due in greater than 5 years

    3,290       3,241  

Total

  $ 180,545     $ 207,818  

 

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

 

   

March 31, 2019

 
   

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized

Loss Position

 

Money market funds

  $ 56,082     $ -     $ -     $ 56,082     $ -  

Corporate debt securities

    144,041       44       (632 )     143,453       123,828  

U.S. treasuries and government agency bonds

    32,257       10       (65 )     32,202       22,879  

Certificates of deposit

    1,600       -       -       1,600       -  

Auction-rate securities backed by student-loan notes

    3,570       -       (280 )     3,290       3,290  

Total

  $ 237,550     $ 54     $ (977 )   $ 236,627     $ 149,997  

 

   

December 31, 2018

 
   

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized

Loss Position

 

Money market funds

  $ 41,135     $ -     $ -     $ 41,135     $ -  

Corporate debt securities

    172,288       7       (1,386 )     170,909       166,204  

U.S. treasuries and government agency bonds

    32,207       2       (141 )     32,068       28,507  

Certificates of deposit

    1,600       -       -       1,600       -  

Auction-rate securities backed by student-loan notes

    3,570       -       (329 )     3,241       3,241  

Total

  $ 250,800     $ 9     $ (1,856 )   $ 248,953     $ 197,952  

 

Restricted Cash

 

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

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Cash and cash equivalents

  $ 181,769     $ 172,704  

Restricted cash included in other long-term assets

    113       114  

Total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Statements of Cash Flows

  $ 181,882     $ 172,818  

 

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.  

 

 

 

11. FAIR VALUE MEASUREMENTS  

 

The following tables summarize the fair value measurement of the financial assets (in thousands):

 

 

   

Fair Value Measurement at March 31, 2019

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

  $ 56,082     $ 56,082     $ -     $ -  

Corporate debt securities

    143,453       -       143,453       -  

U.S. treasuries and government agency bonds

    32,202       -       32,202       -  

Certificates of deposit

    1,600               1,600          

Auction-rate securities backed by student-loan notes

    3,290       -       -       3,290  

Mutual funds and money market funds under deferred compensation plan

    20,873       20,873       -       -  

Total

  $ 257,500     $ 76,955     $ 177,255     $ 3,290  

 

   

Fair Value Measurement at December 31, 2018

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

  $ 41,135     $ 41,135     $ -     $ -  

Corporate debt securities

    170,909       -       170,909       -  

U.S. treasuries and government agency bonds

    32,068       -       32,068       -  

Certificates of deposit

    1,600               1,600          

Auction-rate securities backed by student-loan notes

    3,241       -       -       3,241  

Mutual funds and money market funds under deferred compensation plan

    18,867       18,867       -       -  

Total

  $ 267,820     $ 60,002     $ 204,577     $ 3,241  

 

__________ 

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. The following table provides a rollforward of the fair value of the auction-rate securities (in thousands): 

 

Balance at January 1, 2019

  $ 3,241  

Change in unrealized gain included in other comprehensive income

    49  

Balance at March 31, 2019

  $ 3,290  

 

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,

 
   

2019

   

2018

 

Time-to-liquidity (in years)

  2 - 3     2 - 3  

Discount rate

  4.6% - 9.9%     4.9% - 10.1%  

 

 

 

12. DEFERRED COMPENSATION PLAN

 

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

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Deferred compensation plan asset components:

               

Cash surrender value of corporate-owned life insurance policies

  $ 13,988     $ 13,103  

Fair value of mutual funds and money market funds

    20,873       18,867  

Total

  $ 34,861     $ 31,970  
                 

Deferred compensation plan assets reported in:

               

Other long-term assets

  $ 34,861     $ 31,970  
                 

Deferred compensation plan liabilities reported in:

               

Accrued compensation and related benefits (short-term)

  $ 425     $ 447  

Other long-term liabilities

    35,310       32,283  

Total

  $ 35,735     $ 32,730  

 

 

13. INTEREST AND OTHER INCOME, NET

 

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

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Interest income

  $ 1,696     $ 1,460  

Amortization of premium on available-for-sale securities

    (121 )     (435 )

Gain (loss) on deferred compensation plan investments

    1,935       (186 )

Foreign currency exchange loss

    (201 )     (399 )

Other

    32       -  

Total

  $ 3,341     $ 440  

 

 

14. INCOME TAXES

  

The income tax provision for interim periods is generally determined using an estimate of the Company’s annual effective tax rate and adjusted for discrete items, if any, in the relevant period. Each quarter the estimate of the annual effective tax rate is updated, and if the Company’s estimated tax rate changes, a cumulative adjustment is made.

 

 The income tax benefit for the three months ended March 31, 2019 was $1.1 million, or 4.5% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily due to foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and the benefit obtained from certain discrete items recognized in the period, including excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the global intangible low-taxed income ("GILTI") tax.

 

 The income tax expense 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 due to foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and the benefit obtained from certain discrete items recognized in the period, including excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax.

 

 For the three months ended March 31, 2019 and 2018, the Company’s effective tax rate included the estimated impact of $15.5 million and $12.4 million, respectively, related to the GILTI provisions that was included as additional subpart F income, which was accounted for as a period cost.

 

The Company’s uncertain tax positions relate to the allocation of income and deductions between 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.

 

 

In July 2018, the U.S. Ninth Circuit Court of Appeals overturned the U.S. Tax Court’s unanimous 2015 decision in Altera v. Commissioner, holding that the Internal Revenue Service ("IRS") did not violate the rule-making procedures required by the Administrative Procedures Act. In the casethe taxpayer challenged IRS regulations that required participants in qualified cost sharing arrangements to share stock based compensation costs. The Tax Court had invalidated those regulations, in part because the Treasury Department failed to adequately consider significant taxpayer comments when adopting them. In August 2018, the U.S. Ninth Circuit Court of Appeals withdrew its July 2018 opinion. At this time, the Treasury Department 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, 2019. The Company will continue to monitor developments related to this case and the potential impact on its financial statements. 

 

 

15. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

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

 

   

Unrealized Losses

on Available-for-

Sale Securities

   

Foreign Currency Translation

Adjustments

   

Total

 

Balance as of January 1, 2019

  $ (1,638 )   $ (3,905 )   $ (5,543 )

Other comprehensive income before reclassifications

    924       3,677       4,601  

Tax effect

    (98 )     -       (98 )

Net current period other comprehensive income

    826       3,677       4,503  

Balance as of March 31, 2019

  $ (812 )   $ (228 )   $ (1,040 )

 

 

16. 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,

 
   

2019

   

2018

 

Dividend declared per share

  $ 0.40     $ 0.30  

Total amount

  $ 17,180     $ 12,644  

 

As of March 31, 2019 and December 31, 2018, accrued dividends totaled $17.2 million and $12.8 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, 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, cash generated from ongoing U.S. operations, and cash repatriated from its Bermuda subsidiary. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested.

 

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 requisite service requirement and the awards do not vest. As of March 31, 2019 and December 31, 2018, accrued dividend equivalents totaled $9.8 million and $8.4 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 others, 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 computing and storage, automotive, industrial, communications and consumer 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 2019 and beyond,

 

 

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

 

 

the percentage of our total revenue from various end markets,

 

 

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, financial position and cash flows,

 

 

our plan to repatriate cash from our international subsidiaries,

 

 

our intention and ability to pay future cash dividends and dividend equivalents, 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. Incorporated 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 computing and storage, automotive, industrial, communications and consumer 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, 2019 and 2018, our revenue from sales to customers in Asia was 87% and 88%, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the computing and storage, automotive, industrial, communications and consumer 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

 

There have been no significant changes in our critical accounting policies and estimates used in the preparation of our financial statements during the three months ended March 31, 2019, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.

 

Results of Operations

 

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

  

   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(in thousands, except percentages)

 

Revenue

  $ 141,363       100.0

%

  $ 129,150       100.0

%

Cost of revenue

    63,357       44.8       57,655       44.6  

Gross profit

    78,006       55.2       71,495       55.4  

Operating expenses:

                               

Research and development

    25,458       18.0       21,609       16.7  

Selling, general and administrative

    30,553       21.6       27,318       21.2  

Litigation expense

    278       0.2       531       0.4  

Total operating expenses

    56,289       39.8       49,458       38.3  

Income from operations

    21,717       15.4       22,037       17.1  

Interest and other income, net

    3,341       2.3       440       0.3  

Income before income taxes

    25,058       17.7       22,477       17.4  

Income tax expense (benefit)

    (1,123 )     (0.8 )     621       0.5  

Net income

  $ 26,181       18.5

%

  $ 21,856       16.9

%

 

 

Revenue

 

The following table summarizes our revenue by end market:

 

   

Three Months Ended March 31,

         

End Market

 

2019

   

% of

Revenue

   

2018

   

% of

Revenue

   

Change

 
   

(in thousands, except percentages)

 

Computing and storage

  $ 39,188       27.7

%

  $ 30,970       24.0

%

    26.5 %

Automotive

    20,517       14.5       17,732       13.7       15.7 %

Industrial

    21,340       15.1       17,554       13.6       21.6 %

Communications

    22,182       15.7       15,750       12.2       40.8 %

Consumer

    38,136       27.0       47,144       36.5       (19.1 )%

Total

  $ 141,363       100.0

%

  $ 129,150       100.0

%

    9.5 %

 

Revenue for the three months ended March 31, 2019 was $141.4 million, an increase of $12.2 million, or 9.5%, from $129.2 million for the three months ended March 31, 2018. This increase was driven by higher sales in all of our end markets except for the consumer market. Overall unit shipments increased by 13% due to higher market demand, and average sales prices decreased by approximately 2% from the same period in 2018.

  

Revenue from the computing and storage market for the three months ended March 31, 2019 increased $8.2 million, or 26.5%, from the same period in 2018. This increase was primarily driven by strength in the high-performance notebook market. Revenue from the automotive market increased $2.8 million, or 15.7%, from the same period in 2018. This increase was primarily driven by higher sales of products for infotainment, safety and connectivity applications. Revenue from the industrial market increased $3.8 million, or 21.6%, from the same period in 2018. This increase was primarily driven by higher sales in power source and security products. Revenue from the communications market increased $6.4 million, or 40.8%, from the same period in 2018. This increase was primarily driven by higher demand in networking applications. Revenue from the consumer market decreased $9.0 million, or 19.1%, from the same period in 2018. This decrease was primarily due to softness in demand for high volume consumer-related products, particularly those sold in the greater China region, as well as lower sales from chargers and gaming products. This decrease was partially offset by higher demand for home appliance products. 

 

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.

 

   

Three Months Ended March 31,

         
   

2019

   

2018

   

Change

 
   

(in thousands, except percentages)

 

Cost of revenue

  $ 63,357     $ 57,655       9.9 %

As a percentage of revenue

    44.8 %     44.6 %        

Gross profit

  $ 78,006     $ 71,495       9.1 %

Gross margin

    55.2 %     55.4 %        

 

Cost of revenue was $63.4 million, or 44.8% of revenue, for the three months ended March 31, 2019, and $57.7 million, or 44.6% of revenue, for the three months ended March 31, 2018. The $5.7 million increase in cost of revenue was primarily due to a 13% increase in overall unit shipments and a 6% increase in the average direct cost of units shipped. The increase in cost of revenue was partially offset by a $1.6 million decrease in warranty expense and a $1.1 million decrease in inventory write-downs.

 

Gross margin was 55.2% for the three months ended March 31, 2019, compared with 55.4% for the three months ended March 31, 2018. The decrease in gross margin was primarily due to increased sales of lower margin products, which was partially offset by lower manufacturing overhead costs, warranty expenses and inventory write-downs as a percentage of revenue.

 

 

Research and Development

 

Research and development (“R&D”) expenses primarily consist of salary and benefit expenses, bonuses, stock-based compensation and deferred compensation for design and product engineers, expenses related to new product development and supplies, and facility costs.    

 

   

Three Months Ended March 31,

         
   

2019

   

2018

   

Change

 
   

(in thousands, except percentages)

 

R&D expenses

  $ 25,458     $ 21,609       17.8 %

As a percentage of revenue

    18.0 %     16.7 %        

 

R&D expenses were $25.5 million, or 18.0% of revenue, for the three months ended March 31, 2019, and $21.6 million, or 16.7% of revenue, for the three months ended March 31, 2018. The $3.9 million increase in R&D expenses was primarily due to an increase of $1.5 million in new product development expenses, an increase of $0.8 million in expenses related to changes in the value of the deferred compensation plan liabilities, an increase of $0.6 million in compensation expenses, which include salary, benefits and bonuses, an increase of $0.5 million in depreciation, and an increase of $0.4 million in stock-based compensation expenses mainly associated with performance-based equity awards. Our R&D headcount was 708 employees as of March 31, 2019, compared with 644 employees as of March 31, 2018. 

 

Selling, General and Administrative

 

Selling, general and administrative (“SG&A”) expenses primarily include salary and benefit expenses, bonuses, stock-based compensation and deferred compensation for sales, marketing and administrative personnel, sales commissions, travel expenses, facilities costs, and professional service fees.

 

   

Three Months Ended March 31,

         
   

2019

   

2018

   

Change

 
   

(in thousands, except percentages)

 

SG&A expenses

  $ 30,553     $ 27,318       11.8 %

As a percentage of revenue

    21.6 %     21.2 %        

 

SG&A expenses were $30.6 million, or 21.6% of revenue, for the three months ended March 31, 2019, and $27.3 million, or 21.2% of revenue, for the three months ended March 31, 2018. The $3.3 million increase in SG&A expenses was primarily due to an increase of $1.2 million in expenses related to changes in the value of the deferred compensation plan liabilities, an increase of $0.5 million in compensation expenses, which include salary, benefits and bonuses, an increase of $0.5 million in professional service fees, an increase of $0.4 million in stock-based compensation expenses mainly associated with performance-based equity awards, and an increase of $0.2 million in commission expenses driven by higher revenue. Our SG&A headcount was 454 employees as of March 31, 2019, compared with 386 employees as of March 31, 2018.  

 

Litigation Expense

 

Litigation expense was $0.3 million for the three months ended March 31, 2019, compared with $0.5 million for the three months ended March 31, 2018. The decrease was primarily due to lower expenses incurred on an ongoing lawsuit in which we are the plaintiff.

 

Interest and Other Income, Net

 

Interest and other income, net, was $3.3 million for the three months ended March 31, 2019, compared with $0.4 million for the three months ended March 31, 2018. The increase was primarily due to an increase of $2.1 million in income related to changes in the value of the deferred compensation plan investments, a decrease of $0.3 million in amortization of premium on available-for-sale securities, an increase of $0.2 million in interest income as a result of higher investment balances and yields, and a decrease of $0.2 million in foreign currency exchange loss.

  

Income Tax Expense (Benefit)

  

The income tax provision for interim periods is generally determined using an estimate of our annual effective tax rate and adjusted for discrete items, if any, in the relevant period. Each quarter the estimate of the annual effective tax rate is updated, and if our estimated tax rate changes, a cumulative adjustment is made.

 

The income tax benefit for the three months ended March 31, 2019 was $1.1 million, or 4.5% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily due to foreign income from our subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and the benefit obtained from certain discrete items recognized in the period, including excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the global intangible low-taxed income ("GILTI") tax.

 

 

 

 The income tax expense 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 due to foreign income from our subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and the benefit obtained from certain discrete items recognized in the period, including excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax.

 

 For the three months ended March 31, 2019 and 2018, our effective tax rate included the estimated impact of $15.5 million and $12.4 million, respectively, related to the GILTI provisions that was included as additional subpart F income, which was accounted for as a period cost.

 

Liquidity and Capital Resources

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
   

(in thousands, except percentages)

 

Cash and cash equivalents

  $ 181,769     $ 172,704  

Short-term investments

    177,255       204,577  

Total cash, cash equivalents and short-term investments

  $ 359,024     $ 377,281  

Percentage of total assets

    42.3 %     47.6 %
                 

Total current assets

  $ 574,085     $ 580,810  

Total current liabilities

    (91,576 )     (80,439 )

Working capital

  $ 482,509     $ 500,371  

 

As of March 31, 2019, we had cash and cash equivalents of $181.8 million and short-term investments of $177.3 million, compared with cash and cash equivalents of $172.7 million and short-term investments of $204.6 million as of December 31, 2018. As of March 31, 2019, $114.4 million of cash and cash equivalents and $82.2 million of short-term investments were held by our international subsidiaries. For the three months ended March 31, 2019, we repatriated $75 million of cash from our Bermuda subsidiary to the U.S. The proceeds are primarily used to fund our cash dividend payments and real estate purchases. We may repatriate additional cash from our Bermuda subsidiary to fund our future expenditures. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested.

  

The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of March 31, 2019, we had working capital of $482.5 million, compared with working capital of $500.4 million as of December 31, 2018. The $17.9 million decrease in working capital was due to an $11.2 million increase in current liabilities, coupled with a $6.7 million decrease in current assets. The increase in current liabilities was primarily due to an increase in accounts payable and other accrued liabilities. The decrease in current assets was primarily due to a decrease in short-term investments, which was partially offset by an increase in cash and cash equivalents, accounts receivable, inventories and other current assets. As of March 31, 2019, total cash, cash equivalents and short investments decreased $18.3 million compared to the balance as of December 31, 2018, primarily due to the purchase of a building and land in Kirkland, Washington, which was partially offset by additional cash generated from operations.

 

Summary of Cash Flows

 

The following table summarizes our cash flow activities:

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

(in thousands)

 

Net cash provided by operating activities

  $ 38,836     $ 16,292  

Net cash used in investing activities

    (30,781 )     (25,202 )

Net cash provided by (used in) financing activities

    (761 )     1,033  

Effect of change in exchange rates

    1,770       1,137  

Net increase (decrease) in cash, cash equivalents and restricted cash

  $ 9,064     $ (6,740 )

 

 

For the three months ended March 31, 2019, net cash provided by operating activities was $38.8 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $4.8 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily driven by timing of shipments in the last month of the quarter and sales to customers with longer payment terms. The increase in inventories was primarily driven by an increase in finished goods to meet current demand and future growth. The increase in accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensation plan.  For the three months ended March 31, 2018, net cash provided by operating activities was $16.3 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $23.9 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily driven by timing of shipments in the last month of the quarter. The increase in inventories was primarily driven by an increase in strategic wafer and die inventories as well as an increase in finished goods to meet current demand and future growth. 

 

 For the three months ended March 31, 2019, net cash used in investing activities was $30.8 million, primarily due to purchases of property and equipment of $58.4 million, which included the purchase of a building and land in Kirkland, Washington for $52.3 million, and net contributions to the deferred compensation plan of $1.0 million.  Cash used in investing activities was partially offset by proceeds from maturities and sales of investments of $28.1 million and sales of property and equipment of $1.5 million. For the three months ended March 31, 2018, net cash used in investing activities was $25.2 million, primarily due to purchases of property and equipment of $7.4 million, net purchases of short-term investments of $16.5 million, and net contributions to the deferred compensation plan of $1.3 million. 

 

For the three months ended March 31, 2019, net cash used in financing activities was $0.8 million, primarily reflecting $12.8 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, which was partially offset by $12.0 million of cash proceeds from vesting of RSUs and issuance of shares through our employee stock purchase plan. For the three months ended March 31, 2018, net cash provided by financing activities was $1.0 million, primarily reflecting $9.4 million of cash proceeds from vesting of RSUs and issuance of shares through our employee stock purchase plan, partially offset by $8.3 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs. 

 

We have a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. In addition, outstanding RSU awards contain rights to receive 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. 

  

We anticipate that cash used for future dividends and dividend equivalent payments, as well as payments for the one-time deemed repatriation transition tax and other expenditures, will come from our current domestic cash, cash generated from ongoing U.S. operations, and cash repatriated from our Bermuda subsidiary. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested.

  

Although cash requirements will fluctuate based on the timing and extent of many factors such as those discussed above, we believe that cash generated from operations, together with the liquidity provided by existing cash balances and short-term investments, will be sufficient to satisfy our liquidity requirements for the next 12 months. 

 

In the future, in order to strengthen our financial position, respond to changes in our circumstance or unforeseen events or conditions, or fund our growth, we may need to discontinue paying dividends and dividend equivalents, and may need to raise additional funds by any one or a combination of the following: issuing equity securities, issuing debt or convertible debt securities, incurring indebtedness secured by our assets, or selling certain product lines and/or portions of our business. Accordingly, we cannot ensure that we will continue to pay dividends and dividend equivalents in the future, and there can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.

 

From time to time, we have engaged in discussions with third parties concerning potential acquisitions of product lines, technologies, businesses and companies, and we continue to consider potential acquisition candidates. Any such transactions could involve the issuance of a significant number of new equity securities, assumptions of debt, and/or payment of cash consideration. We may also be required to raise additional funds to complete any such acquisitions, through either the issuance of equity and debt securities or incurring indebtedness secured by our assets. If we raise additional funds or acquire businesses or technologies through the issuance of equity securities or convertible debt securities, our existing stockholders may experience significant dilution. 

 

 

Contractual Obligations

 

Our outstanding purchase commitments primarily consist of wafer purchases, assembly and other manufacturing services, construction services and license arrangements. As of March 31, 2019, the outstanding balance under our purchase commitments was $79.1 million, compared with $61.4 million as of December 31, 2018.

  

Under the 2017 Tax Act, we have a transition tax liability which represents a one-time, mandatory deemed repatriation tax imposed on previously deferred foreign earnings. As permitted by the 2017 Tax Act, we elected to pay the tax liability in installments on an interest-free basis through 2025. As of March 31, 2019, the outstanding liability was $22.1 million.

 

Other long-term obligations include long-term liabilities reflected on our Condensed Consolidated Balance Sheets, which primarily consist of the deferred compensation plan liabilities and accrued dividend equivalents. As of March 31, 2019, the outstanding obligations were $42.0 million, compared with $38.5 million as of December 31, 2018.

  

Our other contractual obligations have not changed significantly from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2019, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For a discussion of market risks, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2018. During the three months ended March 31, 2019, there were no material changes or developments that would materially alter the market risk assessment performed as of December 31, 2018.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. 

 

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2019, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information 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.

 

Changes in Internal Control over Financial Reporting

 

Effective January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). We have implemented additional business processes and control activities, primarily related to the analysis of lease contracts, recognition of the right-of-use assets and lease liabilities, and presentation and disclosure, in order to monitor and maintain appropriate controls over financial reporting. There were no other changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

 We are a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by our stockholders, challenges to the enforceability or validity of our intellectual property, claims that our 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. We defend ourselves vigorously against any such claims. As of March 31, 2019, there were no material pending legal proceedings to which we were a party.

 

ITEM 1A. RISK FACTORS

 

 Our business involves numerous risks and uncertainties. You should carefully consider the risks described below, together with all of the other information in this Quarterly Report on Form 10-Q and other   filings with the Securities and Exchange Commission in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results, and growth prospects would   likely be materially and adversely affected. In such an event, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock. Our past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. These risks involve forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.

 

  

 

The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.

  

The future trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, many of which are beyond our control, including:

 

actual or anticipated results of operations and financial performance;

 

general economic, industry and market conditions worldwide;

 

 

our ability to outperform the market, and outperform at a level that meets or exceeds our investors’ expectations;

 

 

whether our guidance meets the expectations of our investors;

 

 

the breath and liquidity of the market for our common stock;

 

 

developments generally affecting the semiconductor industry;

 

 

commencement of or developments relating to our involvement in litigation;

 

 

investor perceptions of us and our business strategies;

 

 

changes in securities analysts’ expectations or our failure to meet those expectations;

 

 

actions by institutional or other large stockholders;

 

 

terrorist acts or acts of war;

 

 

actual or anticipated manufacturing capacity limitations;

 

 

developments with respect to intellectual property rights;

 

 

introduction of new products by us or our competitors;

 

 

our sale of common stock or other securities in the future;

 

 

conditions and trends in technology industries;

 

 

our loss of key customers;

 

 

changes in market valuation or earnings of our competitors;

 

 

any mergers, acquisitions or divestitures of assets undertaken by us;

 

 

government debt default;

 

 

government policies and regulations on corporate taxes, including the impact of the 2017 Tax Act;

 

government policies and regulations on international trade policies and restrictions, including tariffs on imports of foreign goods;

 

 

our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfully secure manufacturing capacity;

 

 

our ability to increase our gross margins;

 

 

market reactions to guidance from other semiconductor companies or third-party research groups;

 

 

market reactions to merger and acquisition activities in the semiconductor industry, and rumors or expectations of further consolidation in the industry;

 

 

investments in sales and marketing resources to enter new markets;

 

 

costs of increasing wafer capacity and qualifying additional third-party wafer fabrication facilities;

 

 

our ability to pay quarterly cash dividends to stockholders; and

 

 

changes in the estimation of the future size and growth rate of our markets.

  

In addition, the stock market often experiences substantial volatility that may be unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

 

We expect our operating results to fluctuate from quarter to quarter and year over year, which may make it difficult to predict our future performance and could cause our stock price to decline and be volatile.

 

Our revenue, expenses, and results of operations are difficult to predict, have varied significantly in the past and will continue to fluctuate significantly in the future due to a number of factors, many of which are beyond our control. We expect fluctuations to continue for a number of reasons, including:

 

changes in general demand for electronic products as a result of worldwide macroeconomic conditions;

 

 

changes in business conditions at our distributors, value-added resellers and/or end-customers;

 

 

changes in general economic conditions in the countries where our products are sold or used;

 

 

the timing of developments and related expenses in our litigation matters;

 

 

the loss of key customers or our inability to attract new customers due to customer and prospective customer concerns about being litigation targets;

 

 

continued dependence on turns business (orders received and shipped within the same fiscal quarter);

 

 

continued dependence on the Asian markets for our customer base;

 

 

increases in assembly costs due to commodity price increases, such as the price of gold;

 

 

the timing of new product introductions by us and our competitors;

 

 

changes in our revenue mix between original equipment manufacturers ("OEMs"), original design manufacturers ("ODMs"), distributors and value-added resellers;

 

 

changes in product mix, product returns, and actual and potential product liability;

 

 

the acceptance of our new products in the marketplace;

  

our ability to develop new process technologies and achieve volume production;

 

 

our ability to meet customer product demand in a timely manner;

 

 

the scheduling, rescheduling, or cancellation of orders by our customers;

 

 

the cyclical nature of demand for our customers’ products;

 

 

fluctuations in our estimate for stock rotation reserves;

 

 

our ability to manage our inventory levels, including the levels of inventory held by our distributors;

 

 

product obsolescence;

 

 

seasonality and variability in the computing and storage, automotive, industrial, communications and consumer markets;

 

 

the availability of adequate manufacturing capacity from our outside suppliers;

 

 

increases in prices for finished wafers due to general capacity shortages;

 

 

the potential loss of future business resulting from capacity issues;

 

 

changes in manufacturing yields;

 

 

movements in foreign exchange rates, interest rates or tax rates;

 

 

the impact of the 2017 Tax Act on our income tax provision and cash flows;

  

the impact of tariffs on imports of foreign goods; and

 

 

stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees.

  

Due to the factors noted above and other risks described in this section, many of which are beyond our control, you should not rely on quarter-to-quarter or year-over-year comparisons to predict our future financial performance. Unfavorable changes in any of the above factors may seriously harm our business and results of operations, and may cause our stock price to decline and be volatile.

 

Our business has been and may be significantly impacted by worldwide economic conditions, in particular changing economic conditions in China.

 

In recent years, global credit and financial markets experienced disruptions, and may experience disruptions in the future, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. Economic uncertainty affects businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. Volatility in the credit markets could severely diminish liquidity and capital availability.

 

Demand for our products is a function of the health of the economies in the United States, Europe, China and the rest of Asia. We cannot predict the timing, strength or duration of any economic disruption or subsequent economic recovery worldwide, in the United States, in our industry, or in the different markets that we serve. These and other economic factors have had, and may in the future have, a material adverse effect on demand for our products and on our financial condition and operating results.

 

In particular, since we have significant operations in China, our business development plans, results of operations and financial condition may be materially adversely affected by significant political, social and economic developments in China. A slowdown in economic growth in China could adversely impact our customers, prospective customers, suppliers, distributors and partners in China, which could have a material adverse effect on our results of the operations and financial condition. There is no guarantee that economic downturns, whether actual or perceived, any further decrease in economic growth rates or an otherwise uncertain economic outlook in China will not occur or persist in the future, that they will not be protracted or that governments will respond adequately to control and reverse such conditions, any of which could materially and adversely affect our business, financial condition and results of operations.

 

The highly cyclical nature of the semiconductor industry, which has produced significant and sometimes prolonged downturns, could materially adversely affect our operating results, financial condition and cash flows.

 

Historically, the semiconductor industry has been highly cyclical and, at various times, has experienced significant downturns and wide fluctuations in supply and demand. These conditions have caused significant variances in product demand and production capacity, as well as rapid erosion of average selling prices. The industry may experience severe or prolonged downturns in the future, which could result in downward pressure on the price of our products as well as lower demand for our products. Because significant portions of our expenses are fixed in the short term or incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any sales shortfall. Any significant or prolonged downturns could have a material adverse effect on our operating results, financial condition and cash flows.

 

Rising concern of international tariffs, including tariffs applied to goods traded between the United States and China, could materially and adversely affect our business and results of operations.

 

Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding tariffs against foreign imports of certain materials. More specifically, there have been several rounds of U.S. tariffs on Chinese goods taking effect in July, August, September 2018, and one round which took effect in May 2019 (some of which prompted retaliatory Chinese tariffs on U.S. goods). The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively affecting China’s overall economic condition, which could have a negative impact on us as we have significant operations in China. Furthermore, imposition of tariffs could cause a decrease in the sales of our products to customers located in China or other customers selling to Chinese end users, which would directly impact our business and operating results.

 

 

We may not be profitable on a quarterly or annual basis.

 

Our profitability is dependent on many factors, including:

 

our sales, which because of our turns business, are difficult to accurately forecast;

 

the cancellation or rescheduling of our customers’ orders, which may occur without significant penalty to our customers;

 

 

changes in general demand for electronic products as a result of worldwide macroeconomic conditions;

 

 

changes in revenue mix between OEMs, ODMs, distributors and value-added resellers;

 

 

changes in product mix, and actual and potential product liability;

 

 

changes in revenue mix between end market segments (i.e. computing and storage, automotive, industrial, communications and consumer);

 

 

our competition, which could adversely impact our selling prices and our potential sales;

 

 

our manufacturing costs, including our ability to negotiate with our vendors and our ability to efficiently run our test facility in China;

 

 

manufacturing capacity constraints;

 

 

level of activity in our legal proceedings, which could result in significant legal expenses;

 

 

the impact of the 2017 Tax Act on our income tax provision, financial condition and cash flows;

 

 

the impact of tariffs on imports between the U.S. and China;

 

 

stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees; and

 

 

our operating expenses, including general and administrative expenses, selling and marketing expenses, and research and development expenses relating to products that will not be introduced and will not generate revenue until later periods, if at all.

 

We may not achieve profitability on a quarterly or annual basis in the future. Unfavorable changes in our operations, including any of the factors noted above, may have a material adverse effect on our quarterly or annual profitability.

  

We may not experience growth rates comparable to past years.

 

In the past, our revenue increased significantly in certain years due to increased sales of certain of our products. We are subject to numerous risks and factors that could cause a decrease in our growth rates compared to past periods, including increased competition, loss of certain of our customers, unfavorable changes in our operations, reduced global electronics demand, a deterioration in market conditions, end-customer market downturn, market acceptance and penetration of our current and future products and litigation. A material decrease in our growth rates could adversely affect our stock price and results of operations.  

 

We may be unsuccessful in developing and selling new products with margins similar to or better than what we have experienced in the past, which would impact our overall gross margin and financial performance.

 

Our success depends on products that are differentiated in the market, which result in gross margins that have historically been above industry averages. Should we fail to improve our gross margin in the future, and accordingly develop and introduce sufficiently differentiated products that result in higher gross margins than industry averages, our financial condition and results of operations could be materially and adversely affected. 

   

 

Industry consolidation may lead to increased competition and may harm our operating results.

 

In recent years, there has been a trend toward semiconductor industry consolidation. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry, or become unable to continue operations unless they find an acquirer or consolidate with another company. In addition, companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that semiconductor industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.

 

If demand for our products declines in the major end markets that we serve, our revenue will decrease and our results of operations and financial condition would be materially and adversely affected.

 

We believe that the application of our products in the computing and storage, automotive, industrial, communications and consumer markets will continue