mpwr20190930_10q.htm
0001280452MONOLITHIC POWER SYSTEMS INCfalse--12-31Q3201900224122452550.7For the nine months ended September 30, 2019, the amount includes $2.2 million for operating leases existing on January 1, 2019.Amount reflects the number of PSUs that may ultimately be earned based on managements probability assessment of the achievement of performance conditions at each reporting period.Represents less than 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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 September 30, 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)

 

  (425296-9956

(Registrant’s telephone number, including area code)

 


 

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

 

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  ☒

  

There were 43,439,000 shares of the registrant’s common stock issued and outstanding as of October 28, 2019.

 



 

1

 

 

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

22

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29

ITEM 4.

CONTROLS AND PROCEDURES

29

PART II. OTHER INFORMATION

29

ITEM 1.

LEGAL PROCEEDINGS

29

ITEM1A.

RISK FACTORS

29

ITEM 6.

EXHIBITS

46

 

2

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 205,229     $ 172,704  

Short-term investments

    213,511       204,577  

Accounts receivable, net

    58,261       55,214  

Inventories

    135,634       136,384  

Other current assets

    16,660       11,931  

Total current assets

    629,295       580,810  

Property and equipment, net

    217,043       150,001  

Long-term investments

    3,264       3,241  

Goodwill

    6,571       6,571  

Deferred tax assets, net

    16,619       16,830  

Other long-term assets

    43,343       35,979  

Total assets

  $ 916,135     $ 793,432  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 30,318     $ 22,678  

Accrued compensation and related benefits

    28,724       18,799  

Other accrued liabilities

    45,984       38,962  

Total current liabilities

    105,026       80,439  

Income tax liabilities

    32,402       34,375  

Other long-term liabilities

    44,279       38,525  

Total liabilities

    181,707       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: 43,435 and 42,505, respectively

    528,775       450,908  

Retained earnings

    215,692       194,728  

Accumulated other comprehensive loss

    (10,039 )     (5,543 )

Total stockholders’ equity

    734,428       640,093  

Total liabilities and stockholders’ equity

  $ 916,135     $ 793,432  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

Table of Contents

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

(unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenue

  $ 168,813     $ 159,975     $ 461,183     $ 428,885  

Cost of revenue

    75,655       70,957       206,794       190,810  

Gross profit

    93,158       89,018       254,389       238,075  

Operating expenses:

                               

Research and development

    27,742       25,630       80,746       70,720  

Selling, general and administrative

    34,692       29,552       100,302       85,431  

Litigation expense

    692       343       1,473       1,513  

Total operating expenses

    63,126       55,525       182,521       157,664  

Income from operations

    30,032       33,493       71,868       80,411  

Interest and other income, net

    2,257       2,714       7,827       5,387  

Income before income taxes

    32,289       36,207       79,695       85,798  

Income tax expense

    2,761       4,639       3,293       8,168  

Net income

  $ 29,528     $ 31,568     $ 76,402     $ 77,630  
                                 

Net income per share:

                               

Basic

  $ 0.68     $ 0.75     $ 1.77     $ 1.84  

Diluted

  $ 0.64     $ 0.71     $ 1.68     $ 1.75  

Weighted-average shares outstanding:

                               

Basic

    43,308       42,362       43,055       42,173  

Diluted

    45,833       44,669       45,516       44,450  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

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MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net income

  $ 29,528     $ 31,568     $ 76,402     $ 77,630  

Other comprehensive loss, net of tax:

                               

Foreign currency translation adjustments

    (6,135 )     (4,526 )     (6,167 )     (6,999 )

Change in unrealized gain (loss) on available-for-sale securities, net of tax of $(38), $241, $(200) and $241, respectively

    234       491       1,671       (554 )

Other comprehensive loss, net of tax

    (5,901 )     (4,035 )     (4,496 )     (7,553 )

Comprehensive income

  $ 23,627     $ 27,533     $ 71,906     $ 70,077  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

Table of Contents

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per-share amounts)

(unaudited)

 

                           

Accumulated

         
   

Common Stock and

           

Other

   

Total

 
   

Additional Paid-in Capital

   

Retained

   

Comprehensive

   

Stockholders’

 

Three Months Ended September 30, 2019

 

Shares

   

Amount

   

Earnings

   

Loss

   

Equity

 

Balance as of July 1, 2019

    43,234     $ 503,759     $ 204,533     $ (4,138 )   $ 704,154  

Net income

    -       -       29,528       -       29,528  

Other comprehensive loss

    -       -       -       (5,901 )     (5,901 )

Dividends and dividend equivalents declared ($0.40 per share)

    -       -       (18,369 )     -       (18,369 )

Common stock issued under employee equity incentive plans

    187       2,090       -       -       2,090  

Common stock issued under employee stock purchase plan

    14       1,650       -       -       1,650  

Stock-based compensation expense

    -       21,276       -       -       21,276  

Balance as of September 30, 2019

    43,435     $ 528,775     $ 215,692     $ (10,039 )   $ 734,428  

 

                  Accumulated        
   

Common Stock and

           

Other

   

Total

 
   

Additional Paid-in Capital

   

Retained

   

Comprehensive

   

Stockholders’

 

Three Months Ended September 30, 2018

 

Shares

   

Amount

   

Earnings

   

Loss

   

Equity

 

Balance as of July 1, 2018

    42,285     $ 417,866     $ 162,859     $ (1,705 )   $ 579,020  

Net income

    -       -       31,568       -       31,568  

Other comprehensive loss

    -       -       -       (4,035 )     (4,035 )

Dividends and dividend equivalents declared ($0.30 per share)

    -       -       (13,608 )     -       (13,608 )

Common stock issued under employee equity incentive plans

    108       916       -       -       916  

Common stock issued under employee stock purchase plan

    15       1,465       -       -       1,465  

Stock-based compensation expense

    -       14,838       -       -       14,838  

Balance as of September 30, 2018

    42,408     $ 435,085     $ 180,819     $ (5,740 )   $ 610,164  

 

                  Accumulated        
   

Common Stock and

           

Other

   

Total

 
   

Additional Paid-in Capital

   

Retained

   

Comprehensive

   

Stockholders’

 

Nine Months Ended September 30, 2019

 

Shares

   

Amount

   

Earnings

   

Loss

   

Equity

 

Balance as of January 1, 2019

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

Net income

    -       -       76,402       -       76,402  

Other comprehensive loss

    -       -       -       (4,496 )     (4,496 )

Dividends and dividend equivalents declared ($1.20 per share)

    -       -       (55,438 )     -       (55,438 )

Common stock issued under employee equity incentive plans

    902       14,561       -       -       14,561  

Common stock issued under employee stock purchase plan

    28       3,277       -       -       3,277  

Stock-based compensation expense

    -       60,029       -       -       60,029  

Balance as of September 30, 2019

    43,435     $ 528,775     $ 215,692     $ (10,039 )   $ 734,428  

 

                  Accumulated        
   

Common Stock and

           

Other

   

Total

 
   

Additional Paid-in Capital

   

Retained

   

Comprehensive

   

Stockholders’

 

Nine Months Ended September 30, 2018

 

Shares

   

Amount

   

Earnings

   

Income (Loss)

   

Equity

 

Balance as of January 1, 2018

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

Net income

    -       -       77,630       -       77,630  

Other comprehensive loss

    -       -       -       (7,553 )     (7,553 )

Dividends and dividend equivalents declared ($0.90 per share)

    -       -       (40,798 )     -       (40,798 )

Common stock issued under employee equity incentive plans

    761       9,684       -       -       9,684  

Common stock issued under employee stock purchase plan

    33       3,028       -       -       3,028  

Stock-based compensation expense

    -       45,787       -       -       45,787  

Cumulative effect of a change in accounting principles

    -       -       379       -       379  

Balance as of September 30, 2018

    42,408     $ 435,085     $ 180,819     $ (5,740 )   $ 610,164  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

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MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net income

  $ 76,402     $ 77,630  

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

               

Depreciation and amortization

    10,817       9,058  

Gain on disposal and sale of property and equipment, net

    (282 )     -  

Amortization of premium on available-for-sale securities

    384       1,122  

Gain on deferred compensation plan investments

    (2,630 )     (949 )

Deferred taxes, net

    (18 )     3,169  

Stock-based compensation expense

    60,019       45,765  

Changes in operating assets and liabilities:

               

Accounts receivable

    (3,048 )     (22,752 )

Inventories

    754       (37,496 )

Other assets

    (5,849 )     (665 )

Accounts payable

    7,173       5,978  

Accrued compensation and related benefits

    10,328       7,838  

Other accrued liabilities

    7,453       4,635  

Income tax liabilities

    (6,186 )     528  

Net cash provided by operating activities

    155,317       93,861  

Cash flows from investing activities:

               

Purchases of property and equipment

    (87,129 )     (18,057 )

Acquisition of in-place leases

    (981 )     -  

Purchases of short-term investments

    (106,409 )     (86,021 )

Proceeds from maturities and sales of short-term investments

    98,814       83,679  

Proceeds from sales of long-term investments

    125       -  

Proceeds from sales of property and equipment

    9,268       -  

Contributions to deferred compensation plan, net

    (1,797 )     (1,396 )

Net cash used in investing activities

    (88,109 )     (21,795 )

Cash flows from financing activities:

               

Property and equipment purchased on extended payment terms

    (204 )     -  

Proceeds from common stock issued under employee equity incentive plans

    14,561       9,684  

Proceeds from common stock issued under employee stock purchase plan

    3,277       3,028  

Dividends and dividend equivalents paid

    (48,641 )     (34,381 )

Net cash used in financing activities

    (31,007 )     (21,669 )

Effect of change in exchange rates

    (2,516 )     (2,062 )

Net increase in cash, cash equivalents and restricted cash

    33,685       48,335  

Cash, cash equivalents and restricted cash, beginning of period

    172,818       82,874  

Cash, cash equivalents and restricted cash, end of period

  $ 206,503     $ 131,209  

Supplemental disclosures for cash flow information:

               

Cash paid for taxes

  $ 9,472     $ 6,388  

Non-cash investing and financing activities:

               

Liability accrued for property and equipment purchases

  $ 4,969     $ 1,563  

Liability accrued for dividends and dividend equivalents

  $ 20,866     $ 15,397  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7

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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 and nine months ended  September 30, 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 its contracts that existed prior to January 1, 2019.

 

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.

 

Recent Accounting Pronouncements Not Yet Adopted as of September 30, 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 standard and does not expect the adoption to have a material impact 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 standard and does not expect the adoption to have a material impact 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, the standard eliminates the concept of other-than-temporary impairment and 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. Based on its preliminary assessment, the Company does not expect the standard to have a material impact on its financial statements upon adoption.

    

 

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 98% of the Company’s total revenue for the three months ended September 30, 2019 and 2018, respectively, and 99% and 98% of the Company’s total revenue for the nine months ended September 30, 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 September 30, 2019 and 2018, 88% and 87%, respectively, of the Company’s product sales were made through distribution arrangements. For the nine months ended September 30, 2019 and 2018, 83% and 87%, respectively, of the Company’s product 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 using the expected value method 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.

 

 

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 using the expected value method 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  September 30, 2019 and December 31, 2018, accounts receivable totaled $58.3 million and $55.2 million, respectively. The Company did not record any allowance for doubtful accounts as of September 30, 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  September 30, 2019 and December 31, 2018, customer prepayments totaled $4.2 million and $2.5 million, respectively. The increase in the customer prepayment balance for the nine months ended September 30, 2019 resulted from an increase in unfulfilled customer orders for which the Company has received payments. For the nine months ended  September 30, 2019, the Company recognized $2.5 million of revenue that was included in the customer prepayment balance as of  December 31, 2018.

 

Practical Expedients

 

The Company has elected the practical expedient to expense sales commissions as incurred because the amortization period would have been one year or less. 

 

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.

 

The Company’s unsatisfied performance obligations primarily include 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 (as amended, 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  September 30, 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 September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Cost of revenue

  $ 641     $ 471     $ 1,834     $ 1,384  

Research and development

    4,960       3,979       14,801       12,168  

Selling, general and administrative

    15,699       10,393       43,384       32,213  

Total stock-based compensation expense

  $ 21,300     $ 14,843     $ 60,019     $ 45,765  

Tax benefit related to stock-based compensation

  $ 595     $ 764     $ 2,139     $ 2,723  

 

 

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

    47     $ 141.03       535 (1)    $ 98.45       -     $ -       582     $ 101.89  

Vested

    (88 )   $ 79.91       (571 )   $ 54.41       (243 )   $ 23.57       (902 )   $ 48.61  

Forfeited

    (6 )   $ 110.23       (43 )   $ 42.72       (7 )   $ 68.48       (56 )   $ 53.06  

Outstanding at September 30, 2019

    193     $ 113.22       2,095     $ 73.37       1,969     $ 37.08       4,257     $ 58.38  

 


 

(1)

Amount reflects the number of PSUs that  may ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period.

 

The intrinsic value related to vested RSUs was $26.1 million and $13.9 million for the three months ended September 30, 2019 and 2018, respectively. The intrinsic value related to vested RSUs was $110.1 million and $79.0 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the total intrinsic value of all outstanding RSUs was $617.6 million, based on the closing stock price of $155.63. As of September 30, 2019, unamortized compensation expense related to all outstanding RSUs was $120.5 million with a weighted-average remaining recognition period of approximately 3.4 years. 

 

Cash proceeds from vested PSUs with a purchase price totaled $14.6 million and $9.6 million for the nine months ended September 30, 2019 and 2018, respectively. 

 

Time-Based RSUs:

 

For the nine months ended September 30, 2019, the Compensation Committee granted 88,000 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%.

  

2004 Employee Stock Purchase Plan (“ESPP”)

  

For the three months ended September 30, 2019 and 2018, 14,000 and 15,000 shares, respectively, were issued. For the nine months ended September 30, 2019 and 2018, 28,000 and 33,000 shares, respectively, were issued. As of September 30, 2019, 4.5 million shares were available for future issuance under the ESPP.

 

 

 The intrinsic value of the shares issued was $0.4 million and $0.6 million for the three months ended September 30, 2019 and 2018, respectively. The intrinsic value of the shares issued was $0.7 million and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the unamortized expense was $0.4 million, which will be recognized through the first quarter of 2020. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Expected term (in years)

    0.5       0.5       0.5       0.5  

Expected volatility

    36.7 %     30.8 %     37.0 %     29.5 %

Risk-free interest rate

    1.9 %     2.2 %     2.2 %     2.0 %

Dividend yield

    1.1 %     0.9 %     1.1 %     1.0 %

 

Cash proceeds from the shares issued under the ESPP were $3.3 million and $3.0 million for the nine months ended September 30, 2019 and 2018, respectively.  

 

 

4. BALANCE SHEET COMPONENTS

 

Inventories 

 

Inventories consist of the following (in thousands): 

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Raw materials

  $ 27,001     $ 43,017  

Work in process

    43,076       38,674  

Finished goods

    65,557       54,693  

Total

  $ 135,634     $ 136,384  

 

Other Current Assets

 

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

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

RSU tax withholding proceeds receivable

  $ 5,331     $ 39  

Prepaid expense

    4,024       3,425  

Assets for product returns

    2,261       1,602  

Interest receivable

    1,869       1,441  

Value-added tax receivable

    628       423  

Prepaid wafer refund receivable

    -       4,297  

Other

    2,547       704  

Total

  $ 16,660     $ 11,931  

 

Other Long-Term Assets

 

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

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Deferred compensation plan assets

  $ 36,397     $ 31,970  

Operating lease ROU assets

    3,102       -  

Prepaid expense

    2,274       2,713  

Other

    1,570       1,296  

Total

  $ 43,343     $ 35,979  

 

 

Other Accrued Liabilities

 

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

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Dividends and dividend equivalents

  $ 21,895     $ 15,044  

Stock rotation and sales returns

    7,884       5,363  

Customer prepayments

    4,160       2,520  

Income tax payable

    2,778       7,018  

Operating lease liabilities

    1,318       -  

Warranty

    1,267       4,564  

Commissions

    976       1,369  

Other

    5,706       3,084  

Total

  $ 45,984     $ 38,962  

 

Other Long-Term Liabilities

 

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

  

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Deferred compensation plan liabilities

  $ 36,968     $ 32,283  

Dividend equivalents

    6,091       6,145  

Operating lease liabilities

    1,190       -  

Other

    30       97  

Total

  $ 44,279     $ 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 had in-place leases for a portion of the building 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 purchase price allocation was 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 attributable to the leases.

 

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

 

Lessee

 

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

 

 

Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. ROU assets also include any initial direct costs incurred and prepaid lease payments, less lease incentives received. As of September 30, 2019, operating lease ROU assets totaled $3.1 million and operating lease liabilities totaled $2.5 million. The Company recognizes operating lease costs on a straight-line basis over the lease term.

 

As permitted by Topic 842, the Company does not recognize leases with a term of 12 months or less at the commencement date on the Condensed Consolidated Balance Sheets. For those lease arrangements that contain lease and nonlease components, the Company has elected the practical expedient to combine them as single lease components. 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 percentages):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2019

   

September 30, 2019

 

Lease costs:

               

Operating lease costs

  $ 377     $ 1,013  

Short-term and other lease costs

    102       394  

Total lease costs

  $ 479     $ 1,407  

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2019

   

September 30, 2019

 

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

               

Operating cash flows from operating leases

  $ 299     $ 1,026  

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

  $ 869     $ 3,450  

 

   

September 30, 2019

 

Weighted-average remaining lease term (in years)

    2.3  

Weighted-average discount rate

    3.9 %

 


(1)

For the nine months ended September 30, 2019, the amount includes $2.2 million for operating leases existing on January 1, 2019.

 

As of September 30, 2019, the maturities of the lease liabilities were as follows (in thousands):

 

2019 (remaining three months)

  $ 364  

2020

    1,241  

2021

    634  

2022

    379  

2023

    22  

Total remaining lease payments

    2,640  

Less: imputed interest

    (132 )

Total lease liabilities

  $ 2,508  

Reported as:

       

Current liabilities

  $ 1,318  

Long-term liabilities

  $ 1,190  

 

 

Lessor 

 

The Company owns certain office buildings and leases a portion of these properties to third parties under arrangements that are classified as operating leases. These leases have remaining lease terms from two years to five years. Some of these leases include options to renew the lease term for up to five years.

 

For the three and nine months ended September 30, 2019, income related to lease payments was $0.5 million and $1.3 million, respectively. As of  September 30, 2019, future income related to lease payments was as follows (in thousands):

 

2019 (remaining three months)

  $ 279  

2020

    1,539  

2021

    1,384  

2022

    1,136  

2023

    602  

2024 and beyond

    597  

Total 

  $ 5,537  

 

 

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 the requisite 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 September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Numerator:

                               

Net income

  $ 29,528     $ 31,568     $ 76,402     $ 77,630  
                                 

Denominator:

                               

Weighted-average outstanding shares - basic

    43,308       42,362       43,055       42,173  

Effect of dilutive securities

    2,525       2,307       2,461       2,277  

Weighted-average outstanding shares - diluted

    45,833       44,669       45,516       44,450  
                                 

Net income per share:

                               

Basic

  $ 0.68     $ 0.75     $ 1.77     $ 1.84  

Diluted

  $ 0.64     $ 0.71     $ 1.68     $ 1.75  

 

 

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 10% or more of the Company's total revenue, or with accounts receivable balances equal to 10% or more of the Company’s total accounts receivable: 

 

   

Revenue

   

Accounts Receivable

 
   

Three Months Ended September 30,

   

Nine Months Ended September 30,

   

September 30,

   

December 31,

 

Customer

 

2019

   

2018

   

2019

   

2018

   

2019

   

2018

 

Company A (distributor)

    24 %     23 %     23 %     21 %     25 %     25 %

Company B (distributor)

    *       10 %     *       10 %     12 %     16 %

Company A (value-added reseller)

    *       *       *       *       10 %     *  

 


* Represents less than 10%.

 

The Company’s agreements with these third-party distributors and value-added resellers 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 September 30,

   

Nine Months Ended September 30,

 

Country or Region

 

2019

   

2018

   

2019

   

2018

 

China

  $ 105,857     $ 91,509     $ 276,892     $ 245,580  

Taiwan

    18,547       20,774       55,912       55,315  

Europe

    12,047       12,579       38,071       36,696  

Korea

    11,990       11,406       31,224       30,046  

Southeast Asia

    7,904       11,259       23,698       28,261  

Japan

    8,150       6,895       21,084       18,994  

United States

    4,225       5,375       14,044       13,404  

Other

    93       178       258       589  

Total

  $ 168,813     $ 159,975     $ 461,183     $ 428,885  

 

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

  

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Product Family

 

2019

   

2018

   

2019

   

2018

 

DC to DC

  $ 159,723     $ 147,727     $ 432,125     $ 394,492  

Lighting Control

    9,090       12,248       29,058       34,393  

Total

  $ 168,813     $ 159,975     $ 461,183     $ 428,885  

 

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

 

   

September 30,

   

December 31,

 

Country

 

2019

   

2018

 

China

  $ 105,030     $ 93,096  

United States

    93,967       39,054  

Taiwan

    16,750       16,972  

Other

    1,296       879  

Total

  $ 217,043     $ 150,001  

 

 

 

9. COMMITMENTS AND CONTINGENCIES

 

Product Warranties

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Balance at beginning of period

  $ 1,748     $ 3,951     $ 4,564     $ 2,416  

Warranty provision for product sales

    92       3,840       671       5,654  

Settlements made

    (326 )     (36 )     (2,625 )     (100 )

Unused warranty provision

    (247 )     (2,821 )     (1,343 )     (3,036 )

Balance at end of period

  $ 1,267     $ 4,934     $ 1,267     $ 4,934  

 

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  September 30, 2019, the Company’s outstanding purchase obligations totaled approximately $70.9 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  September 30, 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 investments (in thousands): 

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Cash, cash equivalents and investments:

               

Cash

  $ 162,741     $ 131,569  

Money market funds

    39,982       41,135  

Corporate debt securities

    195,667       170,909  

U.S. treasuries and government agency bonds

    20,350       32,068  

Certificates of deposit

    -       1,600  

Auction-rate securities backed by student-loan notes

    3,264       3,241  

Total

  $ 422,004     $ 380,522