Monolithic Power Systems, Inc.
MONOLITHIC POWER SYSTEMS INC (Form: 10-Q, Received: 07/29/2014 15:16:32)



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 June 30, 2014

 

OR

 

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

 

Commission file number: 000-51026

 


Monolithic Power Systems, Inc.

(Exact name of registrant as specified in its charter)


 

Delaware

77-0466789

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

79 Great Oaks Boulevard, San Jose, CA 95119

(Address of principal executive offices)(Zip code)

 

   (408) 826-0600

(Registrant’s telephone number, including area code)


  

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

 

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

 

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

 

Large accelerated filer  ☐

Accelerated filer  ☒           

Non-accelerated filer  ☐    Smaller reporting company  ☐

 

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 38,724,657 shares of the registrant’s common stock issued and outstanding as of July 24, 2014.

 



 
 

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

TABLE OF CONTENTS

PAGE

PART I. FINANCIAL INFORMATION

3

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

3

 

CONDENSED CONSOLIDATED BALANCE SHEETS

3

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

4

 

    CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

5

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

6

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7

ITEM 2.

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

18

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

24

ITEM 4.

CONTROLS AND PROCEDURES

24

PART II. OTHER INFORMATION

26

ITEM 1.

LEGAL PROCEEDINGS

26

ITEM 1A.

RISK FACTORS

26

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

41

ITEM 6.

EXHIBITS

41

 

 
2

 

 

  PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

 

   

June 30,

2014

   

December 31,

2013

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 107,863     $ 101,213  

Short-term investments

    133,012       125,126  

Accounts receivable, net of allowances of $0 as of June 30, 2014 and December 31, 2013

    21,420       23,730  

Inventories

    41,198       39,737  

Deferred income tax assets, net

    295       294  

Prepaid expenses and other current assets

    2,509       1,986  

Total current assets

    306,297       292,086  

Property and equipment, net

    64,447       64,837  

Long-term investments

    9,848       9,860  

Deferred income tax assets, net

    476       481  

Other long-term assets

    5,586       1,644  

Total assets

  $ 386,654     $ 368,908  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 13,759     $ 10,694  

Accrued compensation and related benefits

    12,606       10,419  

Accrued liabilities

    15,605       17,376  

Total current liabilities

    41,970       38,489  

Income tax liabilities

    5,758       5,542  

Other long-term liabilities

    4,298       1,478  

Total liabilities

    52,026       45,509  

Commitments and contingencies (Notes 6 and 8)

               

Stockholders' equity:

               

Common stock, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 38,774 and 38,291 as of June 30, 2014 and December 31, 2013, respectively

    236,519       234,201  

Retained earnings

    92,269       82,938  

Accumulated other comprehensive income

    5,840       6,260  

Total stockholders’ equity

    334,628       323,399  

Total liabilities and stockholders’ equity

  $ 386,654     $ 368,908  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
3

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

  

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Revenue

  $ 68,436     $ 57,714     $ 128,497     $ 109,184  

Cost of revenue

    31,337       26,786       59,301       50,871  

Gross profit

    37,099       30,928       69,196       58,313  

Operating expenses:

                               

Research and development

    13,368       12,478       28,971       24,601  

Selling, general and administrative

    16,853       13,793       32,962       27,051  

Litigation expense (benefit), net

    274       (257 )     (8,426 )     (558 )

Total operating expenses

    30,495       26,014       53,507       51,094  

Income from operations

    6,604       4,914       15,689       7,219  

Interest and other income, net

    295       218       485       208  

Income before income taxes

    6,899       5,132       16,174       7,427  

Income tax provision (benefit)

    502       (357 )     759       (562 )

Net income

  $ 6,397     $ 5,489     $ 15,415     $ 7,989  
                                 

Net income per share:

                               

Basic

  $ 0.17     $ 0.15     $ 0.40     $ 0.22  

Diluted

  $ 0.16     $ 0.14     $ 0.39     $ 0.21  

Weighted-average shares outstanding:

                               

Basic

    38,684       37,053       38,577       36,657  

Diluted

    39,608       38,239       39,563       38,019  
                                 

Cash dividends declared per common share

  $ 0.15     $ -     $ 0.15     $ -  

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
4

 

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Net income

  $ 6,397     $ 5,489     $ 15,415     $ 7,989  

Other comprehensive income (loss), net of tax:

                               

Change in unrealized losses on auction-rate securities, net of $0 tax for the three and six months ended June 30, 2014 and 2013

    5       (17 )     (12     (32 )

Change in unrealized gains on other available-for-sale securities, net of $0 tax for the three and six months ended June 30, 2014 and 2013

    7       (15 )     12       (22 )

Foreign currency translation adjustments

    176       862       (420 )     1,164  

Total other comprehensive income (loss), net of tax

    188       830       (420 )     1,110  

Comprehensive income

  $ 6,585     $ 6,319     $ 14,995     $ 9,099  

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
5

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2014

   

2013

 
                 

Cash flows from operating activities:

               

Net income

  $ 15,415     $ 7,989  

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

               

Depreciation and amortization

    6,300       5,711  

Amortization and realized loss (gain) on investments

    134       204  

Stock-based compensation

    16,013       9,850  

Changes in operating assets and liabilities:

               

Accounts receivable

    2,310       (936 )

Inventories

    (1,457 )     (8,140 )

Prepaid expenses and other current assets

    (1,447 )     452  

Accounts payable

    2,968       4,057  

Accrued liabilities

    (4,955 )     1,775  

Accrued income taxes payable and noncurrent tax liabilities

    134       (1,137 )

Accrued compensation and related benefits

    2,173       2,392  

Net cash provided by operating activities

    37,588       22,217  
                 

Cash flows from investing activities:

               

Property and equipment purchases

    (5,958 )     (10,801 )

Investments related to deferred compensation plan

    (2,396 )     -  

Purchases of short-term investments

    (86,558 )     (40,385 )

Proceeds from sale of short-term investments

    78,502       37,800  

Proceeds from sale of long-term investments

    -       25  

Net cash used in investing activities

    (16,410 )     (13,361 )
                 

Cash flows from financing activities:

               

Property and equipment purchased on extended payment terms

    (250 )     -  

Proceeds from issuance of common shares

    8,623       16,184  

Proceeds from employee stock purchase plan

    1,053       1,167  

Repurchases of common shares

    (23,796 )     -  

Net cash provided by (used in) financing activities

    (14,370 )     17,351  

Effect of change in exchange rates

    (158 )     424  

Net increase in cash and cash equivalents

    6,650       26,631  

Cash and cash equivalents, beginning of period

    101,213       75,104  

Cash and cash equivalents, end of period

  $ 107,863     $ 101,735  

Supplemental disclosures for cash flow information:

               

Cash paid for taxes

  $ 633     $ 581  

Supplemental disclosures of non-cash investing and financing activities:

               

Liability accrued for property and equipment purchases

  $ 611     $ 3,744  

Dividends and dividend equivalents payable

  $ 6,083     $ -  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
6

 

 

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 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, 2013, filed with the SEC on March 10, 2014.

 

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, 2014 or for any other future period.

 

Summary of Significant Accounting Policies

 

There have been no changes to the Company’s significant accounting policies during the three and six months ended June 30, 2014 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, 2013.

 

Recent Accounting Pronouncements

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . The standard gives guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists, with the purpose of reducing diversity in practice. This new standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. The Company adopted this standard in the first quarter of 2014 prospectively and the adoption did not have an impact on its consolidated financial position, results of operations or cash flows.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under the new standard, entities will apply the following five-step model when evaluating revenue contracts with customers:

 

 

Identify the contract with a customer

 

Identify the performance obligations in the contract

 

Determine the transaction price

 

Allocate the transaction price to the performance obligations in the contract

 

Recognize revenue when the entity satisfy a performance obligation

 

The new standard is effective for annual and interim reporting periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective application in the adoption of this standard. The Company will adopt the standard in the first quarter of 2017 and is evaluating the transition method and the impact of the adoption on its consolidated financial position, results of operations and cash flows.

 

 
7

 

 

2. Stock-Based Compensation

 

Stock Plans

 

As of June 30, 2014, approximately 2.7 million shares were available for future issuance under the 2004 Equity Incentive Plan (as amended, the “2004 Plan”). The 2004 Plan will expire on November 12, 2014. Once the 2004 Plan expires, the Company will no longer be able to grant equity awards under the 2004 Plan, and any shares otherwise remaining available for future grants under the 2004 Plan will no longer be available for issuance.

 

The Company’s Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”) in April 2013, and the Company’s stockholders approved it in June 2013. The 2014 Plan will become effective on November 13, 2014, the day after the 2004 Plan expires. The 2014 Plan provides for the issuance of up to 5,500,000 shares and will expire on November 13, 2024.

 

Stock-Based Compensation Expense

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Cost of revenue

  $ 219     $ 146     $ 424     $ 302  

Research and development

    2,245       1,693       4,250       3,066  

Selling, general and administrative

    5,951       3,351       11,339       6,482  

Tax benefit

    -       (48 )     -       (95 )

Total

  $ 8,415     $ 5,142     $ 16,013     $ 9,755  

 

Restricted Stock

 

The Company’s restricted stock units (“RSUs”) include time-based RSUs, performance-based RSUs (“PSUs”) and market-based RSUs (“MSUs”). A summary of the RSUs is presented in the table below:

 

   

Time-Based RSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

PSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

MSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

Total

   

Weighted-Average Grant Date Fair Value Per Share

 

Outstanding at January 1, 2014

    754,306     $ 19.41       1,027,782     $ 23.02       1,800,000     $ 23.57       3,582,088     $ 22.53  

Awards granted

    236,858       34.54       880,578 (1)      32.36       -       -       1,117,436       32.82  

Performance adjustment

    -       -       (140,524 )(2)     29.49       -       -       (140,524 )     29.49  

Awards released

    (281,602 )     19.44       (249,134 )     18.12       -       -       (530,736 )     18.82  

Awards forfeited

    (7,412 )     17.68       (14,899 )     19.18       -       -       (22,311 )     18.68  

Outstanding at June 30, 2014

    702,150       24.52       1,503,803       28.73       1,800,000       23.57       4,005,953       25.67  

    


(1)

The number of PSUs granted reflects the maximum number of shares that can ultimately be earned assuming the achievement of the highest level of performance conditions under the programs.

(2)

The performance adjustment reflects the number of PSUs that have not been earned or may not ultimately be earned based on management’s probability assessment.

 

The intrinsic value related to awards released for the three months ended June 30, 2014 and 2013 was $8.3 million and $2.9 million, respectively. The intrinsic value related to awards released for the six months ended June 30, 2014 and 2013 was $18.5 million and $11.5 million, respectively. As of June 30, 2014, the total intrinsic value of outstanding awards was $169.7 million, based on the closing stock price of $42.35. As of June 30, 2014, unamortized compensation expense related to outstanding awards was approximately $63.0 million with a weighted-average remaining recognition period of approximately six years.

 

 
8

 

 

2014 Time-Based RSUs and PSUs:

 

Executive Officers:

 

In February 2014, the Board of Directors granted 336,000 shares to the Company’s executive officers. These grants included 25% time-based RSUs which vest over two years on a quarterly basis, and 75% PSUs which represent a target number of RSUs to be awarded based on the Company’s achievement of an average two-year (2014 and 2015) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2014 Executive PSUs”). The maximum number of 2014 Executive PSUs that an executive officer can ultimately earn is 300% of the target shares. Half of the 2014 Executive PSUs will vest in February 2016 if the pre-determined performance goals are met and approved by the Compensation Committee and the executive officer is employed by the Company. The remaining shares will vest over the following two years on a quarterly basis, subject to continued employment.

 

Non-Executive Employees:

 

In April 2014, the Board of Directors granted 139,000 shares to the Company’s non-executive employees. These grants included 78,000 shares of time-based RSUs which vest over four years on an annual or quarterly basis, and 61,000 shares of PSUs which represent a target number of RSUs to be awarded based on the Company’s achievement of revenue goals for certain regions or product line divisions, or the Company’s achievement of an average two-year (2014 and 2015) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2014 Non-Executive PSUs”). The maximum number of 2014 Non-Executive PSUs that an employee can ultimately earn is either 200% or 300% of the target shares, depending on the job classifications of the employees. Half of the 2014 Non-Executive PSUs will vest in the second quarter of 2016 if the pre-determined performance goals are met and approved by the Compensation Committee and the employee is employed by the Company. The remaining shares will vest over the following two years on an annual or quarterly basis, subject to continued employment.

 

Stock Options

 

A summary of the stock options activities is presented in the table below:

 

   

Stock Options

   

Weighted-Average Exercise Price

   

Weighted-Average Remaining Contractual Term (Years)

   

Aggregate Intrinsic Value

 

Outstanding at January 1, 2014

    1,356,446     $ 15.86       1.9     $ 25,505,753  

Options exercised

    (555,147 )   $ 16.29                  

Options forfeited and expired

    (7,641 )   $ 10.78                  

Outstanding at June 30, 2014

    793,658     $ 15.60       1.6     $ 21,230,524  

Options exercisable at June 30, 2014 and expected to vest

    792,359     $ 15.61       1.6     $ 21,188,533  

Options exercisable at June 30, 2014

    749,481     $ 15.74       1.4     $ 19,943,748  

 

Total intrinsic value of options exercised was $4.9 million and $5.4 million for the three months ended June 30, 2014 and 2013, respectively. Total intrinsic value of options exercised was $11.8 million and $10.9 million for the six months ended June 30, 2014 and 2013, respectively. The net cash proceeds from the exercise of stock options were $8.6 million and $16.2 million for the six months ended June 30, 2014 and 2013, respectively. At June 30, 2014, unamortized compensation expense related to unvested options was approximately $0.3 million with a weighted-average remaining recognition period of approximately one year.

 

Employee Stock Purchase Plan (“ESPP”)

  

No shares were issued under the ESPP for the three months ended June 30, 2014 and 2013. For the six months ended June 30, 2014 and 2013, 43,000 and 65,000 shares, respectively, were issued under the ESPP. As of June 30, 2014, 4.8 million shares were available for future issuance.

 

 
9

 

 

The intrinsic value of stock purchased was $0.5 million for both the six months ended June 30, 2014 and 2013. As of June 30, 2014, the unamortized expense was $75,000, which will be recognized through the third quarter of 2014. The Black-Scholes model was used to value the employee stock purchase rights with the following assumptions:

 

   

Six Months Ended June 30,

 
   

2014

   

2013

 

Expected term (years)

    0.5       0.5  

Expected volatility

    33.9 %     28.5 %

Risk-free interest rate

    0.1 %     0.1 %

Dividend yield

    -       -  

 

Cash proceeds from employee stock purchases for the six months ended June 30, 2014 and 2013 were $1.1 million and $1.2 million, respectively. 

  

3 . Balance Sheet Components 

 

Inventories 

 

Inventories consist of the following (in thousands):

 

   

June 30,

2014

   

December 31,

2013

 

Work in process

  $ 25,156     $ 26,605  

Finished goods

    16,042       13,132  

Total inventories

  $ 41,198     $ 39,737  

 

Other Long-Term Assets

 

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

 

   

June 30,

2014

   

December 31,

2013

 

Deferred compensation plan assets

  $ 3,053     $ 607  

Prepaid expense

    1,561       57  

Other

    972       980  

Total other long-term assets

  $ 5,586     $ 1,644  

 

Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

   

June 30,

2014

   

December 31,

2013

 

Deferred proceeds from litigation

  $ -     $ 9,489  

Dividends and dividend equivalents

    5,893       -  

Deferred revenue and customer prepayments

    4,204       2,523  

Commissions

    1,234       931  

Stock rotation reserve

    1,224       1,459  

Sales rebate

    1,154       900  

Warranty

    290       451  

Other

    1,606       1,623  

Total accrued liabilities

  $ 15,605     $ 17,376  

 

 
10

 

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Balance at beginning of period

  $ 334     $ 275     $ 451     $ 331  

Warranty provision for product sales

    68       113       128       215  

Settlements made

    -       (3 )     (74 )     (95 )

Unused warranty provision

    (112 )     (51 )     (215 )     (117 )

Balance at end of period

  $ 290     $ 334     $ 290     $ 334  

 

Other Long-Term Liabilities

 

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

 

   

June 30,

2014

   

December 31,

2013

 

Deferred compensation plan liabilities

  $ 3,078     $ 628  

Other

    1,220       850  

Total other long-term liabilities

  $ 4,298     $ 1,478  

 

4. 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 stock, and calculated using the treasury stock method. 

 

The Company’s outstanding RSUs contain forfeitable rights to receive dividend equivalents, which are accrued quarterly during the vesting periods of the RSUs and paid to the employees when the awards vest. Dividend equivalents accrued on the RSUs are forfeited if the employees do not fulfill their service requirement during the vesting periods. 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 June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Numerator:

                               

Net income

  $ 6,397     $ 5,489     $ 15,415     $ 7,989  
                                 

Denominator:

                               

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

    38,684       37,053       38,577       36,657  

Effect of dilutive securities

    924       1,186       986       1,362  

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

    39,608       38,239       39,563       38,019  
                                 

Net income per share - basic

  $ 0.17     $ 0.15     $ 0.40     $ 0.22  

Net income per share - diluted

  $ 0.16     $ 0.14     $ 0.39     $ 0.21  

 

For the three and six months ended June 30, 2014, there were no anti-dilutive common stock equivalents. For the three and six months ended June 30, 2013, approximately 123,000 and 115,000 common stock equivalents, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.  

 

5. Segment Information

 

As defined by the requirements of ASC 280-10-55, Segment Reporting – Overall – Implementation , the Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance, mixed-signal analog semiconductors for the communications, storage and computing, consumer and industrial markets. The Company’s chief operating decision maker is its chief executive officer. 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.

 

 
11

 

 

The following table summarizes two customers (both distributors) with sales greater than 10% of the Company's total revenue:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30

 

Customer

 

2014

   

2013

   

2014

   

2013

 

A

    26 %     31 %     26 %     32 %

B

    *       11 %     10 %     *  

 

*Represents less than 10%.

 

The following table summarizes two customers (both distributors) with accounts receivable balances greater than 10% of the Company’s total accounts receivable:

 

Customer

 

June 30,

2014

   

December 31,

2013

 

A

    33 %     32 %

B

    11 %     17 %

 

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

  

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Country and Region

 

2014

   

2013

   

2014

   

2013

 

China

  $ 43,931     $ 34,743     $ 80,789     $ 61,522  

Taiwan

    9,638       8,321       18,701       15,840  

Europe

    4,574       3,327       9,165       7,277  

Korea

    3,890       2,408       6,626       4,826  

United States

    3,231       1,839       5,834       3,740  

Japan

    1,713       1,640       3,854       3,161  

Southeast Asia

    1,407       5,385       3,421       12,714  

Other

    52       51       107       104  

Total

  $ 68,436     $ 57,714     $ 128,497     $ 109,184  

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Product Family

 

2014

   

2013

   

2014

   

2013

 

DC to DC products

  $ 61,173     $ 50,536     $ 115,108     $ 96,978  

Lighting control products

    7,263       7,178       13,389       12,206  

Total

  $ 68,436     $ 57,714     $ 128,497     $ 109,184  

  

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

 

Country

 

June 30,

2014

   

December 31,

2013

 

China

  $ 38,248     $ 41,557  

United States

    31,578       24,719  

Other

    207       205  

Total

  $ 70,033     $ 66,481  

 

 
12

 

 

6. Litigation

 

The Company and certain of its subsidiaries are parties to actions and proceedings in the ordinary course of business, including litigation regarding its shareholders and its intellectual property, challenges to the enforceability or validity of its intellectual property and claims that the Company’s products infringe on the intellectual property rights of others. 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.

 

O2 Micro

 

In May 2012, the United States District Court for the Northern District of California (the “District Court”) issued an order finding O2 Micro International, Ltd. (“O2 Micro”) liable for approximately $9.1 million in attorneys’ fees and non-taxable costs, plus interest, in connection with the patent litigation that the Company won in 2010.  This award was in addition to the approximately $0.3 million in taxable costs that the District Court had earlier ordered O2 Micro to pay to the Company in connection with the same lawsuit.  In October 2012, O2 Micro appealed the District Court’s judgment to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”). In August 2013, the Federal Circuit affirmed O2 Micro’s liability for the full amount of the award.  In September 2013, O2 Micro filed a petition for rehearing of that ruling, but the Federal Circuit denied O2 Micro’s petition for rehearing on October 16, 2013. 

 

In November 2013, the Company received a cash payment of $9.5 million from O2 Micro. In January 2014, O2 Micro filed an appeal with the United States Supreme Court. Had O2 Micro been successful in obtaining a favorable ruling against the Company, the Company could have been liable to return a portion or all of the $9.5 million to O2 Micro. Accordingly, the Company recorded the $9.5 million as a current liability as of December 31, 2013.

 

In March 2014, the Supreme Court declined to hear the case. As O2 Micro had no further legal avenues to appeal, the Company released the current liability of $9.5 million and recorded the amount in litigation expense (benefit), net, in the Condensed Consolidated Statement of Operations in the first quarter of 2014. In addition, the Company incurred additional legal fees of $0.5 million in connection with the final resolution of the lawsuit.

 

7. Cash, Cash Equivalents and Investments 

 

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

 

   

Estimated Fair Market Value as of

 
   

June 30,

2014

   

December 31,

2013

 

Cash, cash equivalents and investments:

               

Cash

  $ 76,899     $ 62,625  

Money market funds

    30,964       35,588  

U.S. treasuries and government agency bonds

    133,012       128,126  

Auction-rate securities backed by student-loan notes

    9,848       9,860  

Total cash, cash equivalents and investments

  $ 250,723     $ 236,199  

 

Reported as:

 

June 30,

2014

   

December 31,

2013

 

Cash and cash equivalents

  $ 107,863     $ 101,213  

Short-term investments

    133,012       125,126  

Long-term investments

    9,848       9,860  

Total cash, cash equivalents and investments

  $ 250,723     $ 236,199  

 

 
13

 

 

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

 

   

June 30,

2014

   

December 31,

2013

 

Due in less than 1 year

  $ 86,825     $ 95,509  

Due in 1 - 5 years

    46,187       29,617  

Due in greater than 5 years

    9,848       9,860  
    $ 142,860     $ 134,986  

 

The following tables summarize unrealized gains and losses related to our investments in marketable securities designated as available-for sale (in thousands):

 

   

As of June 30, 2014

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized Loss Position

 
                                         

Money market funds

  $ 30,964     $ -     $ -     $ 30,964     $ -  

U.S. treasuries and government agency bonds

    132,996       31       (15 )     133,012       39,607  

Auction-rate securities backed by student-loan notes

    10,220       -       (372 )     9,848       9,848  
    $ 174,180     $ 31     $ (387 )   $ 173,824     $ 49,455  

 

   

As of December 31, 2013

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized Loss Position

 
                                         

Money market funds

  $ 35,588     $ -     $ -     $ 35,588     $ -  

U.S. treasuries and government agency bonds

    128,123       26       (23 )     128,126       42,880  

Auction-rate securities backed by student-loan notes

    10,220       -       (360 )     9,860       9,860  
    $ 173,931     $ 26     $ (383 )   $ 173,574     $ 52,740  

 

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

 

   

Fair Value Measurement at June 30, 2014

 
           

Quoted Prices in Active Markets for Identical Assets

   

Significant Other Observable Inputs

   

Significant Unobservable Inputs

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

  $ 30,964     $ 30,964     $ -     $ -  

U.S. treasuries and government agency bonds

    133,012       -       133,012       -  

Auction-rate securities backed by student-loan notes

    9,848       -       -       9,848  
    $ 173,824     $ 30,964     $ 133,012     $ 9,848  

 

   

Fair Value Measurement at December 31, 2013

 
           

Quoted Prices in Active Markets for Identical Assets

   

Significant Other Observable Inputs

   

Significant Unobservable Inputs

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

  $ 35,588     $ 35,588     $ -     $ -  

U.S. treasuries and government agency bonds

    128,126       -       128,126       -  

Auction-rate securities backed by student-loan notes

    9,860       -       -       9,860  
    $ 173,574     $ 35,588     $ 128,126     $ 9,860  

 

 
14

 

 

The Company's level 2 assets consist of U.S. treasuries and government agency bonds. These securities generally have market prices available from multiple sources, which are used as inputs into a distribution-curve based algorithm to determine fair value.

 

The Company’s level 3 assets consist of government-backed student loan auction-rate securities, with interest rates that reset through a Dutch auction every 7 to 35 days and which became illiquid in 2008. The following table provides a reconciliation of the Company’s level 3 assets (in thousands):

 

Balance at January 1, 2014

  $ 9,860  

Change in unrealized loss included in other comprehensive income

    (17 )

Ending balance at March 31, 2014

    9,843  

Change in unrealized loss included in other comprehensive income

    5  

Ending balance at June 30, 2014

  $ 9,848  

  

As of June 30, 2014, the Company’s investment portfolio included $9.8 million in government-backed student loan auction-rate securities, net of impairment charges of $402,000, of which $372,000 was temporary and $30,000 was recorded as other-than-temporary. This compares to an investment balance as of December 31, 2013 of $9.9 million, net of impairment charges of $390,000, of which $360,000 was temporary and $30,000 was recorded as other-than-temporary. To determine the fair value of the auction-rate securities, the Company used a discounted cash flow model with the following assumptions:

 

   

June 30,

2014

   

December 31,

2013

 

Time-to-liquidity (months)

    24         24    

Expected return

    2.7%         2.5%    

Discount rate

  3.5% -   8.3%     3.3% - 8.1%  

 

Deferred Compensation Plan:

 

The Company has a non-qualified, unfunded deferred compensation plan, which became effective in July 2013 and provides certain key employees, including our executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax deferred basis. The Company does not make contributions to the plan or guarantee returns on the investments. The Company is responsible for the plan’s administrative expenses. Participant deferrals and investment gains and losses remain as the Company’s liabilities and the underlying assets are subject to claims of general creditors. As of June 30, 2014 and December 31, 2013, the plan assets totaled $3.1 million and $0.6 million, and the plan liabilities totaled $3.1 million and $0.6 million, respectively.

 

8.    Income Taxes

 

The income tax provision for the three and six months ended June 30, 2014 was $0.5 million, or 7.3% of pre-tax income, and $0.8 million, or 4.7% of the pre-tax income, respectively. This differs from the federal statutory rate primarily because the Company’s foreign income was taxed at lower rates, and because of the benefit that the Company realized as a result of stock options exercises and the releases of RSUs and changes in the valuation allowance.

 

The income tax benefit for the three and six months ended June 30, 2013 was $(0.4) million, or (7.0%) of the pre-tax income, and $(0.6) million, or (7.6%) of the pre-tax income, respectively. This differs from the federal statutory rate primarily because the Company’s foreign income was taxed at lower rates, and because of the benefit that the Company realized from the release of an income tax reserve where the statute of limitations expired and from stock option exercises and releases of RSUs.  

 

Unrecognized Tax Benefits

 

As of June 30, 2014 and December 31, 2013, the Company had unrecognized tax benefits of approximately $15.5 million and $14.9 million, respectively. As of June 30, 2014 and December 31, 2013, the Company had unrecognized tax benefits of approximately $5.3 million and $5.0 million, respectively, that would result in an adjustment to the Company’s effective tax rate if recognized after considering the valuation allowance.

 

 
15

 

 

Uncertain tax positions relate to the allocation of income and deductions among the Company’s global entities and to the determination of the research and development tax credit. The Company believes that it is reasonably possible that approximately $1.2 million of its unrecognized tax benefits may be released in 2014 as a result of a lapse of the statute of limitations. In addition, it is reasonably possible that over the next twelve-month period the Company may experience other increases or decreases in its unrecognized tax benefits. However, it is not possible to determine either the magnitude or the range of other increases or decreases at this time.

 

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of June 30, 2014 and December 31, 2013, the Company had $0.9 million and $0.8 million, respectively, of accrued interest related to uncertain tax positions.

 

Income Tax Audits

 

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. The Company’s U.S. Federal income tax returns for the years ended December 31, 2005 through December 31, 2007 are under examination by the IRS. In April 2011, the Company received from the IRS a Notice of Proposed Adjustment ("NOPA") relating to a cost-sharing agreement entered into by the Company and its international subsidiaries on January 1, 2004. In the NOPA, the IRS objected to the Company’s allocation of certain litigation expenses between the Company and its international subsidiaries and the amount of "buy-in payments" made by the international subsidiaries to the Company in connection with the cost-sharing agreement, and proposed to increase the Company’s U.S. taxable income according to a few alternative methodologies. In February 2012, the Company received a revised NOPA from the IRS (“Revised NOPA”). In this Revised NOPA, the IRS raised the same issues as in the NOPA issued in April 2011 but under a different methodology. Under the Revised NOPA, the largest potential federal income tax adjustment, if the IRS were to prevail on all matters in dispute, is $10.5 million, plus interest and penalties, if any. The Company responded to the IRS Revised NOPA in May 2012. In June 2013, the IRS responded and continued to disagree with the Company’s rebuttal. The Company met with the IRS Office of Appeals in March and May 2014. However, no resolutions were reached in those meetings, and both parties are scheduled to meet again in September 2014. Meanwhile, the Company agreed to grant the IRS an extension of the statute of limitations for taxable years 2005 through 2007 to September 30, 2015. 

 

The IRS also audited the research and development credits carried forward into year 2005 and the credits generated in the years 2005 through 2007. The Company received a NOPA from the IRS in February 2011, proposing to reduce the research and development credits generated in year 2005 through 2007 and the carryforwards, which would then reduce the value of such credits carried forward to subsequent tax years.

 

The Company reviewed and responded to the above proposed adjustments. The Company regularly assesses the likelihood of an adverse outcome resulting from such examinations to determine the adequacy of its provision for income taxes. As of June 30, 2014, based on the technical merits of its tax return filing positions and the interactions to date with the IRS, the Company believes that it is more-likely-than-not that the resolution of the audits will not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

  

9.   Accumulated Other Comprehensive Income

 

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

 

   

Unrealized Losses on Auction-Rate Securities

   

Unrealized Gains on Other Available-for-Sale Securities

   

Foreign Currency Translation Adjustments

   

Total

 

Balance as of January 1, 2014

  $ (360 )   $ 4     $ 6,616     $ 6,260  

Other comprehensive income (loss) before reclassifications

    (17 )     5       (596 )     (608 )

Amounts reclassified from accumulated other comprehensive income

    -       -       -       -  

Net current period other comprehensive income (loss)

    (17 )     5       (596 )     (608 )

Balance as of March 31, 2014

    (377 )     9       6,020       5,652  

Other comprehensive income before reclassifications

    5       8       176       189  

Amounts reclassified from accumulated other comprehensive income

    -       (1 )     -       (1 )

Net current period other comprehensive income

    5       7       176       188  

Balance as of June 30, 2014

  $ (372 )   $ 16     $ 6,196     $ 5,840  

 

 
16

 

 

10.   Stock Repurchase Program

 

In July 2013, the Board of Directors approved a stock repurchase program that authorizes the Company to repurchase up to $100 million in the aggregate of its common stock through June 30, 2015. All shares are retired upon repurchase. The following table summarizes the repurchase activities under the program:

 

   

Shares Repurchased

   

Average Price Per Share

   

Total Amount

 
                   

(in thousands)

 

Cumulative balance at January 1, 2014

    663,802     $ 31.06     $ 20,615  

Repurchases

    323,789     $ 35.08       11,358  

Cumulative balance at March 31, 2014

    987,591     $ 32.38       31,973  

Repurchases

    321,764     $ 38.65       12,438  

Cumulative balance at June 30, 2014

    1,309,355     $ 33.92     $ 44,411  

 

As of June 30, 2014, $55.6 million remained available for future repurchases under the program.

 

11. Dividends and Dividend Equivalents

 

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. Stockholders of record as of the last day of the quarter are entitled to receive the quarterly cash dividends declared by the Board of Directors, which are payable on the 15 th of the following month. For the second quarter of 2014,  the Board of Directors declared a cash dividend of $0.15 per share for a total of $5.8 million, which was accrued in other current liabilities as of June 30, 2014.

 

The declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on the Company's financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination that cash dividends are in the best interests of the Company's stockholders. The Company anticipates that the cash used for future dividends will come from its current domestic cash and cash generated from ongoing U.S. operations. If cash held by the Company’s international subsidiaries is needed for the payment of dividends, the Company may be required to accrue and pay U.S. taxes to repatriate the funds.

 

Under the 2004 Equity Plan, 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 accrued quarterly during the vesting periods of the RSUs and paid to the employees when the awards vest. Dividend equivalents accrued on the RSUs are forfeited if the employees do not fulfill their service requirement during the vesting periods. As of June 30, 2014, the Company accrued $0.3 million of dividend equivalents.

 

12.   Subsequent Event

 

Acquisition

 

In July 2014, the Company completed the acquisition of Sensima Technology SA (“Sensima”), a company located in Switzerland that develops magnetic sensors for angle measurements as well as three-dimensional magnetic field sensing. The purchase consideration consists of an upfront cash payment of $11.7 million and a cash earn-out payment of up to $8.9 million that is contingent upon Sensima achieving certain new product development and revenue goals through 2016. In addition, key employees are eligible to receive $1.7 million of time-based RSUs and up to $8.0 million of performance-based RSUs in connection with the transaction.

 

The initial accounting for the acquisition is still ongoing as of the date this Quarterly Report on Form 10-Q is issued. It is expected that intangible assets and goodwill will be recorded on the consolidated balance sheets; however, as the initial accounting for the acquisition has not been completed at the time of the issuance of these consolidated financial statements, further details have not yet been disclosed.

 

 
17

 

 

  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 that involve many risks and uncertainties. These statements relate to future events and our future performance and are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. These include statements concerning, among others:

 

 

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 intention to exercise our purchase option with respect to our manufacturing facility in Chengdu, China,

 

  

our belief that we will continue to incur significant legal expenses that vary with the level of activity in each of our legal proceedings,

 

  

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

 

  

the application of our products in the communications, storage and computing, consumer and industrial markets continuing to account for our revenue,

 

  

estimates of our future liquidity requirements,

 

  

the cyclical nature of the semiconductor industry,

 

  

protection of our proprietary technology,

 

  

near term business outlook for 2014 and beyond,

 

  

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

 

  

the outcome of the IRS audit of our tax returns,

 

  

the percentage of our total revenue from various market segments,

     

  

our intention and ability to continue the stock repurchase program and pay future cash dividends, and

 

  

the factors that differentiate us from our competitors.

 

In some cases, words such as “would,” “could,” “may,” “should,” “predict,” “potential,” “targets,” “continue,” “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “will,” the negative of these terms or other variations of such terms and similar expressions relating to the future identify forward-looking statements. All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans or objectives about our business and our industry. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events or results could differ materially and adversely from those expressed in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this Quarterly Report on Form 10-Q and, in particular, in the section entitled “Part II. Other Information, 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.

 

 
18

 

 

The following management’s discussion and analysis should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and six months ended June 30, 2014 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, 2013 included in our Annual Report on Form 10-K.

 

Overview

 

We are a fabless semiconductor company that designs, develops, and markets proprietary, advanced analog and mixed-signal semiconductors. Our products are used extensively in storage and computing products, network communications products, flat panel TVs, set top boxes, lighting products and a wide variety of consumer and portable electronics products, and automotive and industrial markets. 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 and will not be 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.

 

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 the products we produce are incorporated into end-user products. Our revenue from direct or indirect sales to customers in Asia was 89% and 88% for the three and six months ended June 30, 2014, respectively. We derive a majority of our revenue from the sales of our DC to DC converter product family which services the communications, storage and computing, consumer and industrial 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 successfully secure manufacturing capacity.

 

In July 2014, we completed the acquisition of Sensima Technology SA (“Sensima”), a company located in Switzerland that develops magnetic sensors for angle measurements as well as three-dimensional magnetic field sensing. The purchase consideration consists of an upfront cash payment of $11.7 million and a cash earn-out payment of up to $8.9 million that is contingent upon Sensima achieving certain new product development and revenue goals through 2016. In addition, key employees are eligible to receive $1.7 million of time-based restricted stock units and up to $8.0 million of performance-based restricted stock units in connection with the transaction. As our acquisition of Sensima closed in July 2014, the results of operations reported in this Quarterly Report on Form 10-Q did not include the results of operations of Sensima.

 

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 and six months ended June 30, 2014, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2013.

 

 
19

 

 

Results of Operations

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(in thousands, except percentages)

   

(in thousands, except percentages)

 

Revenue

  $ 68,436       100.0

%

  $ 57,714       100.0

%

  $ 128,497       100.0

%

  $ 109,184       100.0

%

Cost of revenue

    31,337       45.8       26,786       46.4       59,301       46.1       50,871       46.6  

Gross profit

    37,099       54.2       30,928       53.6       69,196       53.9       58,313       53.4  

Operating expenses:

                                                               

Research and development

    13,368       19.6       12,478       21.6       28,971       22.6       24,601       22.5  

Selling, general and administrative

    16,853       24.6       13,793       23.9       32,962       25.7       27,051       24.8  

Litigation expense (benefit), net

    274       0.4       (257 )     (0.4 )     (8,426 )     (6.6 )     (558 )     (0.5 )

Total operating expenses

    30,495       44.6       26,014       45.1       53,507       41.7       51,094       46.8  

Income from operations

    6,604       9.6       4,914       8.5       15,689       12.2       7,219       6.6  

Interest and other income, net

    295       0.5       218       0.4       485       0.4       208       0.2  

Income before income taxes

    6,899       10.1       5,132       8.9       16,174       12.6       7,427       6.8  

Income tax provision (benefit)

    502       0.8       (357 )     (0.6 )     759       0.6       (562 )     (0.5 )

Net income

  $ 6,397       9.3

%

  $ 5,489       9.5

%

  $ 15,415       12.0

%

  $ 7,989       7.3

%

 

Revenue

 

The following table shows our revenue by product family:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Product Family

 

2014

   

% of

Revenue

   

2013

   

% of

Revenue

   

Change

   

2014

   

% of

Revenue

   

2013

   

% of
 Revenue

   

Change

 
   

(In thousands, except percentages)

   

(In thousands, except percentages)

 

DC to DC products

  $ 61,173       89.4 %   $ 50,536       87.6 %     21.0 %   $ 115,108       89.6 %   $ 96,978       88.8 %     18.7 %

Lighting control products

    7,263       10.6 %     7,178       12.4 %     1.2 %     13,389       10.4 %     12,206       11.2 %     9.7 %

Total

  $ 68,436       100.0 %   $ 57,714       100.0 %     18.6 %   $ 128,497       100.0 %   $ 109,184       100.0 %     17.7 %

 

Revenue for the three months ended June 30, 2014 was $68.4 million, an increase of $10.7 million, or 18.6%, from $57.7 million for the three months ended June 30, 2013. This increase was due to higher sales of both DC to DC and lighting control products, as higher unit shipments were offset in part by lower average selling prices for these products. Revenue from our DC to DC products was $61.2 million for the three months ended June 30, 2014, an increase of $10.6 million, or 21.0%, from the same period in 2013. This increase was primarily due to higher sales of our DC to DC converters and battery charger products, offset in part by lower sales of our Mini-Monsters products. Revenue from our lighting control products was $7.3 million for the three months ended June 30, 2014, an increase of $85,000, or 1.2%, compared with the same period in 2013.

 

Revenue for the six months ended June 30, 2014 was $128.5 million, an increase of $19.3 million, or 17.7%, from $109.2 million for the six months ended June 30, 2013. This increase was due to higher sales of both DC to DC and lighting control products, as higher unit shipments were offset in part by lower average selling prices for these products. Revenue from our DC to DC products was $115.1 million for the six months ended June 30, 2014, an increase of $18.1 million, or 18.7%, from the same period in 2013. This increase was primarily due to higher sales of our DC to DC converters and battery charger products, offset in part by lower sales of our Mini-Monsters products. Revenue from our lighting control products was $13.4 million for the six months ended June 30, 2014, an increase of $1.2 million, or 9.7%, compared with the same period in 2013. This increase was primarily due to higher sales of our LED lighting products.

 

Cost of Revenue and Gross Margin

 

Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, as well as warranty costs, inventory-related expenses and other overhead costs and stock-based compensation expenses.

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

Change

   

2014

   

2013