Monolithic Power Systems, Inc.
MONOLITHIC POWER SYSTEMS INC (Form: 10-Q, Received: 08/03/2015 06:15:26)



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, 2015

 

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 39,601,382 shares of the registrant’s common stock issued and outstanding as of July 27, 2015.

 



 
 

 

 

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

21

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

28

ITEM 4.

CONTROLS AND PROCEDURES

28

PART II. OTHER INFORMATION

28

ITEM 1.

LEGAL PROCEEDINGS

28

ITEM 1A.

RISK FACTORS

29

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

44

ITEM 6.

EXHIBITS

44

 

 
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,

   

December 31,

 
   

2015

   

2014

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 80,868     $ 126,266  

Short-term investments

    150,166       112,452  

Accounts receivable, net

    26,765       25,630  

Inventories

    64,964       40,918  

Prepaid expenses and other current assets

    2,554       2,880  

Total current assets

    325,317       308,146  

Property and equipment, net

    62,163       62,942  

Long-term investments

    5,375       5,389  

Goodwill

    6,571       6,571  

Acquisition-related intangible assets, net

    6,078       6,812  

Deferred tax assets, net

    1,053       1,049  

Other long-term assets

    11,066       8,457  

Total assets

  $ 417,623     $ 399,366  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 16,596     $ 13,138  

Accrued compensation and related benefits

    11,236       9,020  

Accrued liabilities

    18,402       14,703  

Total current liabilities

    46,234       36,861  

Deferred tax and other tax liabilities

    3,018       5,876  

Other long-term liabilities

    13,609       10,204  

Total liabilities

    62,861       52,941  

Stockholders' equity:

               

Common stock, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 39,617 and 38,832 as of June 30, 2015 and December 31, 2014, respectively

    251,553       240,500  

Retained earnings

    97,023       100,114  

Accumulated other comprehensive income

    6,186       5,811  

Total stockholders’ equity

    354,762       346,425  

Total liabilities and stockholders’ equity

  $ 417,623     $ 399,366  

 

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,

 
   

2015

   

2014

   

2015

   

2014

 

Revenue

  $ 81,416     $ 68,436     $ 154,954     $ 128,497  

Cost of revenue

    37,287       31,337       71,142       59,301  

Gross profit

    44,129       37,099       83,812       69,196  

Operating expenses:

                               

Research and development

    15,743       13,368       31,781       28,971  

Selling, general and administrative

    17,964       16,853       35,482       32,962  

Litigation expense (benefit), net

    311       274       581       (8,426 )

Total operating expenses

    34,018       30,495       67,844       53,507  

Income from operations

    10,111       6,604       15,968       15,689  

Interest and other income, net

    235       295       877       485  

Income before income taxes

    10,346       6,899       16,845       16,174  

Income tax provision

    2,447       502       2,983       759  

Net income

  $ 7,899     $ 6,397     $ 13,862     $ 15,415  
                                 

Net income per share:

                               

Basic

  $ 0.20     $ 0.17     $ 0.35     $ 0.40  

Diluted

  $ 0.19     $ 0.16     $ 0.34     $ 0.39  

Weighted-average shares outstanding:

                               

Basic

    39,570       38,684       39,337       38,577  

Diluted

    40,745       39,608       40,670       39,563  
                                 

Cash dividends declared per common share

  $ 0.20     $ 0.15     $ 0.40     $ 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,

 
   

2015

   

2014

   

2015

   

2014

 

Net income

  $ 7,899     $ 6,397     $ 13,862     $ 15,415  

Other comprehensive income (loss), net of tax:

                               

Change in unrealized losses on auction-rate securities, net of $0 tax in 2015 and 2014

    (19 )     5       (14 )     (12 )

Change in unrealized gains/losses on other available-for-sale securities, net of $0 tax in 2015 and 2014

    4       7       35       12  

Foreign currency translation adjustments

    105       176       354       (420 )

Total other comprehensive income (loss), net of tax

    90       188       375       (420 )

Comprehensive income

  $ 7,989     $ 6,585     $ 14,237     $ 14,995  

 

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,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 13,862     $ 15,415  

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

               

Depreciation and amortization

    7,092       6,300  

Premium amortization and (gains) losses on investments

    256       134  

Stock-based compensation

    18,716       16,013  

Excess tax benefit from equity awards

    (2,648 )     -  

Changes in operating assets and liabilities:

               

Accounts receivable

    (1,134 )     2,310  

Inventories

    (24,029 )     (1,457 )

Prepaid expenses and other assets

    405       (1,447 )

Accounts payable

    4,687       2,968  

Accrued liabilities

    2,807       (4,955 )

Income tax liabilities

    1,122       134  

Accrued compensation and related benefits

    2,213       2,173  

Net cash provided by operating activities

    23,349       37,588  

Cash flows from investing activities:

               

Property and equipment purchases

    (6,655 )     (5,958 )

Purchases of short-term investments

    (129,663 )     (86,558 )

Proceeds from sale of short-term investments

    91,962       78,502  

Premiums paid on deferred compensation plan, net

    (2,775 )     (2,396 )

Net cash used in investing activities

    (47,131 )     (16,410 )

Cash flows from financing activities:

               

Property and equipment purchased on extended payment terms

    (150 )     (250 )

Proceeds from exercise of stock options

    6,680       8,623  

Proceeds from shares issued under the employee stock purchase plan

    1,121       1,053  

Repurchases of common shares

    (18,129 )     (23,796 )

Dividends and dividend equivalents paid

    (13,842 )     -  

Excess tax benefit from equity awards

    2,648       -  

Net cash used in financing activities

    (21,672 )     (14,370 )

Effect of change in exchange rates

    56       (158 )

Net increase (decrease) in cash and cash equivalents

    (45,398 )     6,650  

Cash and cash equivalents, beginning of period

    126,266       101,213  

Cash and cash equivalents, end of period

  $ 80,868     $ 107,863  
                 

Supplemental disclosures for cash flow information:

               

Cash paid for taxes

  $ 1,755     $ 633  

Supplemental disclosures of non-cash investing and financing activities:

               

Liability accrued for property and equipment purchases

  $ 681     $ 611  

Liability accrued for dividends and dividend equivalents

  $ 9,121     $ 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, 2014, filed with the SEC on March 2, 2015.

 

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, 2015 or for any other future periods.

 

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, 2015 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, 2014.

 

Recent Accounting Pronouncement

  

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 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 satisfies a performance obligation

 

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

 

2. STOCK-BASED COMPENSATION

 

Stock Plan

 

The Board of Directors adopted the 2014 Equity Incentive Plan (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 became effective on November 13, 2014. The 2014 Plan provides for the issuance of up to 5.5 million shares and will expire on November 13, 2024. As of June 30, 2015, 5.4 million shares remained available for future issuance. 

 

 
7

 

 

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,

 
   

2015

   

2014

   

2015

   

2014

 

Cost of revenue

  $ 284     $ 219     $ 526     $ 424  

Research and development

    2,503       2,245       5,123       4,250  

Selling, general and administrative

    6,710       5,951       13,067       11,339  

Total

  $ 9,497     $ 8,415     $ 18,716     $ 16,013  

 

Restricted Stock

 

The Company’s restricted stock units (“RSUs”) include time-based RSUs, performance-based RSUs (“PSUs”) and market-based RSUs (“MSUs”). Time-based RSUs generally vest over one to four years, subject to continued employment with the Company. PSUs vest over four years and MSUs vest over ten years, subject to the achievement of pre-determined performance goals and continued employment with the Company. 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

 
   

(in thousands)

           

(in thousands)

           

(in thousands)

           

(in thousands)

         

Outstanding at January 1, 2015

    589     $ 28.48       1,659     $ 28.11       1,800     $ 23.57       4,048     $ 26.14  

Granted (1)

    252     $ 49.63       659     $ 48.53       -     $ -       911     $ 48.83  

Performance adjustment (2)

    -     $ -       (130 )   $ 43.45       -     $ -       (130 )   $ 43.45  

Released

    (199 )   $ 24.52       (481 )   $ 23.77       -     $ -       (680 )   $ 23.99  

Forfeited

    (38 )   $ 34.91       (25 )   $ 28.27       -     $ -       (63 )   $ 32.32  

Outstanding at June 30, 2015

    604     $ 38.24       1,682     $ 36.17       1,800     $ 23.57       4,086     $ 30.92  

(1)

Amount for PSUs reflects the maximum number of shares that can be earned assuming the achievement of the highest level of performance conditions.

(2)

Amount for PSUs reflects the number of shares that have not been earned or may not be earned based on management’s probability assessment.

 

The intrinsic value related to awards released for the three months ended June 30, 2015 and 2014 was $8.4 million and $8.3 million, respectively. The intrinsic value related to awards released for the six months ended June 30, 2015 and 2014 was $33.9 million and $18.5 million, respectively. As of June 30, 2015, the total intrinsic value of outstanding awards, including RSUs, PSUs and MSUs, was $207.2 million, based on the closing stock price of $50.71. As of June 30, 2015, unamortized compensation expense related to outstanding awards, including RSUs, PSUs and MSUs, was approximately $89.6 million with a weighted-average remaining recognition period of approximately five years.

 

2015 PSUs:

 

In February 2015, the Board of Directors granted to executive officers 172,000 shares of PSUs which represent a target number of RSUs to be awarded based on the Company’s average two-year (2015 and 2016) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2015 Executive PSUs”). The maximum number of 2015 Executive PSUs that an executive officer can ultimately earn is 300% of the target shares. 50% of the 2015 Executive PSUs will vest in February 2017 if the pre-determined performance goals are met and approved by the Compensation Committee. The remaining shares will vest over the following two years on a quarterly basis. The vesting is subject to the employees’ continued employment with the Company.

 

In February 2015, the Board of Directors granted to non-executive employees 58,000 shares of PSUs which represent a target number of RSUs to be awarded based on the Company’s 2016 revenue goals for certain regions or product line divisions, or the Company’s average two-year (2015 and 2016) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2015 Non-Executive PSUs”). The maximum number of 2015 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. 50% of the 2015 Non-Executive PSUs will vest in the first quarter of 2017 if the pre-determined performance goals are met and approved by the Compensation Committee. The remaining shares will vest over the following two years on an annual or quarterly basis. The vesting is subject to the employees’ continued employment with the Company.

 

 
8

 

 

Stock Options

 

A summary of stock option activity  is presented in the table below:

 

   

Shares

   

Weighted-Average Exercise Price

   

Weighted-Average Remaining Contractual Term

   

Aggregate Intrinsic Value

 
   

(in thousands)

           

(in years)

   

(in thousands)

 

Outstanding at January 1, 2015

    590     $ 15.80       1.2     $ 20,039  

Exercised

    (425 )   $ 15.71                  

Forfeited and expired

    (1 )   $ 15.96                  

Outstanding at June 30, 2015

    165     $ 16.05       1.5     $ 5,683  

Options exercisable at June 30, 2015 and expected to vest

    164     $ 16.05       1.5     $ 5,681  

Options exercisable at June 30, 2015

    159     $ 16.18       1.5     $ 5,481  

 

Total intrinsic value of options exercised was $12.9 million and $4.9 million for the three months ended June 30, 2015 and 2014, respectively. Total intrinsic value of options exercised was $15.4 million and $11.8 million for the six months ended June 30, 2015 and 2014, respectively. The net cash proceeds from the exercise of stock options were $6.7 million and $8.6 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, unamortized compensation expense related to unvested options was not material.

 

Employee Stock Purchase Plan (“ESPP”)

  

No shares were issued under the ESPP for the three months ended June 30, 2015 and 2014. For the six months ended June 30, 2015 and 2014, 30,000 and 43,000 shares, respectively, were issued under the ESPP. As of June 30, 2015, 4.7 million shares were available for future issuance.

 

The intrinsic value of shares issued was $0.4 million and $0.5 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, the unamortized expense was $0.1 million, which will be recognized through the third quarter of 2015. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

 

   

Six Months Ended June 30,

 
   

2015

   

2014

 

Expected term (years)

    0.5       0.5  

Expected volatility

    35.7 %     33.9 %

Risk-free interest rate

    0.1 %     0.1 %

Dividend yield

    1.2 %     -  

 

Cash proceeds from the shares issued under the ESPP were $1.1 million for both the six months ended June 30, 2015 and 2014. 

  

3. ACQUISITION

 

On July 22, 2014 (the “Acquisition Date”), the Company acquired 100% of the outstanding capital stock of Sensima Technology SA (“Sensima”), a company based in Switzerland that develops magnetic sensor technologies for angle measurements as well as three-dimensional magnetic field sensing. The acquisition creates new opportunities with customers by offering enhanced solutions in power management for key industries such as automotive, industrial and cloud computing. As a result of the acquisition, Sensima became a subsidiary of the Company and its results of operations have been included in the Company’s consolidated financial statements subsequent to the acquisition.

 

 
9

 

 

Purchase Consideration

 

The fair value of the purchase consideration consists of the following (in thousands):

  

Cash paid at the Acquisition Date

  $ 11,735  

Contingent consideration

    2,507  

Total

  $ 14,242  

 

Cash paid at the Acquisition Date included $1.2 million that was held in an escrow account for a one-year period, which was subject to Sensima’s satisfaction of certain representations and warranties. The full amount was released from the escrow account on July 22, 2015.

 

The contingent consideration arrangement requires the Company to pay up to an additional $8.9 million to former Sensima shareholders if Sensima achieves a new product introduction as well as certain product revenue and direct margin targets in 2016. The fair value of the contingent consideration at the Acquisition Date was $2.5 million, which was estimated based on a probability-weighted analysis of possible future cash flow outcomes. The fair value of the contingent consideration is recorded in other long-term liabilities in the Condensed Consolidated Balance Sheets and is remeasured at the end of each reporting period, with any changes in fair value recorded in operating expense in the Condensed Consolidated Statements of Operations. Actual amounts that will ultimately be paid may differ from the obligations recorded.

 

The Company incurred $0.6 million of transaction costs that were expensed as incurred to selling, general and administrative expenses.

   

Purchase Consideration Allocation

 

The estimated fair value of assets acquired and liabilities assumed is as follows (in thousands):

 

Cash

  $ 145  

Other tangible assets acquired, net of liabilities assumed

    42  

Intangible assets:

       

Know-how

    1,018  

Developed technologies

    4,421  

IPR&D

    2,045  

Total identifiable net assets acquired

    7,671  

Goodwill

    6,571  

Total net assets acquired

  $ 14,242  

 

Intangible assets with finite lives include know-how and developed technologies with estimated useful lives of three to five years. The fair value of know-how was determined using the relief from royalty method, and the fair value of the developed technologies was determined using the income approach. Intangible assets with indefinite lives include IPR&D, which consists of incomplete R&D projects that had not reached technological feasibility as of the Acquisition Date. The fair value of the IPR&D assets was determined using the income approach.

 

The goodwill arising from the acquisition was primarily attributed to synergies which will enable the Company to develop advanced solutions in power management by combining with Sensima’s magnetic sensor technologies. The goodwill is not expected to be deductible for tax purposes.

 

Equity Awards

 

On the Acquisition Date, the Board of Directors granted $1.7 million of time-based RSUs (or 40,000 shares) to key Sensima employees who became employees of the Company. These awards vest over four years. In addition, the Board of Directors granted $2.0 million of PSUs (or 47,000 shares) to these employees, with the right to earn up to a maximum of $8.0 million based on the achievement of certain cumulative Sensima product revenue targets during the performance period from the Acquisition Date to July 22, 2019. 50% of the awards subject to each revenue goal will vest immediately when the pre-determined revenue goal is met and approved by the Compensation Committee, and the remaining shares will vest over the following two years. The vesting is subject to the employees’ continued employment with the Company. These equity awards are considered arrangements for post-acquisition services and the related compensation expense is being recognized over the requisite service period.

 

 
10

 

 

Pro Forma Information (Unaudited)

 

Supplemental information of the Company’s results of operations on a pro forma basis, as if the Sensima acquisition had been consummated on January 1, 2014, is presented as follows (in thousands, except per-share amounts):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30, 2014

   

June 30, 2014

 

Revenue

  $ 68,461     $ 128,545  

Net income

  $ 5,605     $ 13,914  

Diluted net income per share

  $ 0.14     $ 0.35  

 

These pro forma results are not necessarily indicative of the Company’s consolidated results of operations in future periods or the results that would have been realized had the Company acquired Sensima during the periods presented. The pro forma results include adjustments primarily related to Sensima’s results of operations, amortization of intangible assets, stock-based compensation expense and the related tax effects.

 

  4. BALANCE SHEET COMPONENTS

 

Inventories  

 

Inventories consist of the following (in thousands):  

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 

Raw materials

  $ 12,562     $ 7,298  

Work in process

    24,242       18,950  

Finished goods

    28,160       14,670  

Total

  $ 64,964     $ 40,918  

 

Other Long-Term Assets

 

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

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 

Deferred compensation plan assets

  $ 8,770     $ 6,084  

Prepaid expense

    1,277       1,418  

Other

    1,019       955  

Total

  $ 11,066     $ 8,457  

 

 
11

 

 

Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands): 

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 

Dividends and dividend equivalents

  $ 8,389     $ 6,080  

Deferred revenue and customer prepayments

    3,849       3,908  

Stock rotation reserve

    1,691       1,757  

Other

    4,473       2,958  

Total

  $ 18,402     $ 14,703  

  

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Balance at beginning of period

  $ 296     $ 334     $ 240     $ 451  

Warranty provision for product sales

    81       68       155       128  

Settlements made

    (154 )     -       (154 )     (74 )

Unused warranty provision

    (18 )     (112 )     (36 )     (215 )

Balance at end of period

  $ 205     $ 290     $ 205     $ 290  

 

Other Long-Term Liabilities

 

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

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 

Deferred compensation plan liabilities

  $ 8,878     $ 6,177  

Contingent consideration

    2,507       2,507  

Dividend equivalents

    1,380       580  

Other

    844       940  

Total

  $ 13,609     $ 10,204  

 

5. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET

 

There have been no changes in the balance of goodwill during the three and six months ended June 30, 2015.

 

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

 

   

As of June 30, 2015

 
   

Gross

Amount

   

Accumulated

Amortization

   

Net Amount

 

Subject to amortization:

                       

Know-how

  $ 1,018     $ (195 )   $ 823  

Developed technologies

    4,421       (1,211 )     3,210  

Not subject to amortization:

                       

IPR&D

    2,045       -       2,045  

Total

  $ 7,484     $ (1,406 )   $ 6,078  

 

 
12

 

 

   

As of December 31, 2014

 
   

Gross

Amount

   

Accumulated

Amortization

   

Net Amount

 

Subject to amortization:

                       

Know-how

  $ 1,018     $ (93 )   $ 925  

Developed technologies

    4,421       (579 )     3,842  

Not subject to amortization:

                       

IPR&D

    2,045       -       2,045  

Total

  $ 7,484     $ (672 )   $ 6,812  

 

Amortization expense was recorded in cost of revenue in the Condensed Consolidated Statements of Operations and totaled $0.4 million and $0.7 million for the three and six months ended June 30, 2015, respectively. No amortization expense was recorded for the three and six months ended June 30, 2014.

 

Management currently expects the IPR&D will be completed in the next few quarters. Upon completion, the intangible assets will be subject to amortization over their useful lives.

 

As of June 30, 2015, the estimated future amortization expense of intangible assets subject to amortization is as follows (in thousands):

 

2015 (remaining six months)

  $ 733  

2016

    1,467  

2017

    1,467  

2018 and thereafter

    366  

Total

  $ 4,033  

 

6. NET INCOME PER SHARE

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common 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 are payable 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,

 
   

2015

   

2014

   

2015

   

2014

 

Numerator:

                               

Net income

  $ 7,899     $ 6,397     $ 13,862     $ 15,415  
                                 

Denominator:

                               

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

    39,570       38,684       39,337       38,577  

Effect of dilutive securities

    1,175       924       1,333       986  

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

    40,745       39,608       40,670       39,563  
                                 

Net income per share:

                               

Basic

  $ 0.20     $ 0.17     $ 0.35     $ 0.40  

Diluted

  $ 0.19     $ 0.16     $ 0.34     $ 0.39  

 

 
13

 

   

For the three and six months ended June 30, 2015, approximately 8,000 and 16,000 common stock equivalents, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.  For the three and six months ended June 30, 2014, there were no anti-dilutive common stock equivalents.

 

7. SEGMENT AND GEOGRAPHIC INFORMATION

 

The Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance power solutions for the cloud computing, telecommunications, industrial and automotive, and consumer markets. The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis. 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, 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 greater than 10% of the Company's total revenue:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Customers

 

2015

   

2014

   

2015

   

2014

 

Distributor A

    23 %     26 %     24 %     26 %

Distributor B

    *       *       *       10 %

* Represents less than 10%. 

 

The following table summarizes those customers with accounts receivable balances greater than 10% of the Company’s total accounts receivable:

 

   

June 30,

   

December 31,

 

Customers

 

2015

   

2014

 

Distributor A

    23 %     31 %

Distributor B

    10 %     10 %

 

Both of the customers are third-party distributors. The Company’s agreements with these distributors were made in the ordinary course of business and may be terminated with or without cause by these distributors 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 either of these distributors 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 few quarters following the termination of an agreement with the distributor.

 

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

  

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Country or Region

 

2015

   

2014

   

2015

   

2014

 

China

  $ 53,450     $ 43,931     $ 99,252     $ 80,789  

Taiwan

    10,143       9,638       21,172       18,701  

Europe

    5,317       4,574       10,432       9,165  

Korea

    5,109       3,890       9,354       6,626  

Southeast Asia

    3,336       1,407       7,075       3,421  

Japan

    2,412       1,713       4,297       3,854  

United States

    1,566       3,231       3,259       5,834  

Other

    83       52       113       107  

Total

  $ 81,416     $ 68,436     $ 154,954     $ 128,497  

 

 
14

 

   

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Product Family

 

2015

   

2014

   

2015

   

2014

 

DC to DC products

  $ 73,195     $ 61,173     $ 139,492     $ 115,108  

Lighting control products

    8,221       7,263       15,462       13,389  

Total

  $ 81,416     $ 68,436     $ 154,954     $ 128,497  

 

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

 

   

June 30,

   

December 31,

 

Country

 

2015

   

2014

 

China

  $ 36,828     $ 37,147  

United States

    36,047       33,913  

Bermuda

    12,650       13,383  

Other

    353       339  

Total

  $ 85,878     $ 84,782  

 

8. 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, 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.

 

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 in October 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 award as a litigation benefit in the Condensed Consolidated Statements 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.

  

 
15

 

 

9. 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):

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 

Cash, cash equivalents and investments:

               

Cash

  $ 46,179     $ 66,188  

Money market funds

    34,689       60,078  

Certificates of deposit

    23,093       22,778  

U.S. treasuries and government agency bonds

    127,073       89,674  

Auction-rate securities backed by student-loan notes

    5,375       5,389  

Total

  $ 236,409     $ 244,107  

 

   

June 30,

   

December 31,

 

Reported as:

 

2015

   

2014

 

Cash and cash equivalents

  $ 80,868     $ 126,266  

Short-term investments

    150,166       112,452  

Long-term investments

    5,375       5,389  

Total

  $ 236,409     $ 244,107  

  

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

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 

Due in less than 1 year

  $ 118,344     $ 91,335  

Due in 1 - 5 years

    31,822       21,117  

Due in greater than 5 years

    5,375       5,389  

Total

  $ 155,541     $ 117,841  

 

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, 2015

 
   

Adjusted   Cost

   

Unrealized Gains

   

Unrealized

Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized Loss Position

 

Money market funds

  $ 34,689     $ -     $ -     $ 34,689     $ -  

Certificates of deposit

    23,093       -       -       23,093       -  

U.S. treasuries and government agency bonds

    127,053       39       (19 )     127,073       45,644  

Auction-rate securities backed by student-loan notes

    5,570       -       (195 )     5,375       5,375  

Total

  $ 190,405     $ 39     $ (214 )   $ 190,230     $ 51,019  
 
   

As of December 31, 2014

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized Loss Position

 

Money market funds

  $ 60,078     $ -     $ -     $ 60,078     $ -  

Certificates of deposit

    22,778       -       -       22,778       -  

U.S. treasuries and government agency bonds

    89,689       14       (29 )     89,674       35,062  

Auction-rate securities backed by student-loan notes

    5,570       -       (181 )     5,389       5,389  

Total

  $ 178,115     $ 14     $ (210 )   $ 177,919     $ 40,451  

 

 
16

 

 

10. FAIR VALUE MEASUREMENTS  

 

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

 

   

Fair Value Measurement at June 30, 2015

 
           

Quoted Prices in Active Markets for Identical Assets

   

Significant Other Observable Inputs

   

Significant Unobservable Inputs

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Money market funds

  $ 34,689     $ 34,689     $ -     $ -  

Certificates of deposit

    23,093       -       23,093       -  

U.S. treasuries and government agency bonds

    127,073       -       127,073       -  

Auction-rate securities backed by student-loan notes

    5,375       -       -       5,375  

Mutual funds under deferred compensation plan

    4,846       4,846       -       -  

Total

  $ 195,076     $ 39,535     $ 150,166     $ 5,375  
                                 

Liabilities:

                               

Contingent consideration

  $ 2,507     $ -     $ -     $ 2,507  

Total

  $ 2,507     $ -     $ -     $ 2,507  

 

   

Fair Value Measurement at December 31, 2014

 
           

Quoted Prices in Active Markets for Identical Assets

   

Significant Other Observable Inputs

   

Significant Unobservable Inputs

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Money market funds

  $ 60,078     $ 60,078     $ -     $ -  

Certificates of deposit

    22,778       -       22,778       -  

U.S. treasuries and government agency bonds

    89,674       -       89,674       -  

Auction-rate securities backed by student-loan notes

    5,389       -       -       5,389  

Mutual funds under deferred compensation plan

    2,236       2,236       -       -  

Total

  $ 180,155     $ 62,314     $ 112,452     $ 5,389  
                                 

Liabilities:

                               

Contingent consideration

  $ 2,507     $ -     $ -     $ 2,507  

Total

  $ 2,507     $ -     $ -     $ 2,507  

 

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 rollforward of the fair value of the auction-rate securities (in thousands):

 

Balance at January 1, 2015

  $ 5,389  

Change in unrealized loss included in other comprehensive income

    (14 )

Ending balance at June 30, 2015

  $ 5,375  

 

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

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 

Time-to-liquidity (months)

   

24

       

24

   

Expected return

   

2.7%

       

2.9%

   

Discount rate

  3.9%

 -

6.9%     4.0%

 -

7.0%  

 

 
17

 

 

The Company’s level 3 liabilities consist of the contingent consideration related to the acquisition of Sensima in July 2014. The arrangement requires the Company to pay up to $8.9 million to Sensima’s former shareholders if Sensima achieves a new product introduction as well as certain product revenue and direct margin targets in 2016. The fair value of the contingent consideration at the Acquisition Date was $2.5 million, which was estimated based on a probability-weighted analysis of possible future cash flow outcomes. Based on management’s assessment, there were no changes in the fair value of the contingent consideration for the three and six months ended June 30, 2015.

 

11. DEFERRED COMPENSATION PLAN

 

The Company has a non-qualified, unfunded deferred compensation plan, which provides certain key employees, including 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. Participants’ 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, 2015 and December 31, 2014, the plan assets totaled $8.8 million and $6.1 million, and the plan liabilities totaled $8.9 million and $6.2 million, respectively.

 

12. INCOME TAXES

 

The income tax provision for the three and six months ended June 30, 2015 was $2.4 million, or 23.7% of the pre-tax income, and $3.0 million, or 17.7% of the pre-tax income, respectively. The Company recorded a one-time net charge of $2.7 million to the income tax provision related to the resolution of the income tax audits in the second quarter of 2015 (see “Income Tax Audits” below for further discussion). In addition to the impact of this charge, the effective tax rate differed from the federal statutory rate primarily because the foreign income was taxed at lower rates, and because of the benefit that the Company realized from stock option exercises and the release of RSUs, and from the release of an income tax reserve where the statute of limitations expired. In addition, the effective tax rate was impacted by changes in the valuation allowance.

 

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. The effective tax rate differed 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 option exercises and the release of RSUs. In addition, the effective tax rate was impacted by changes in the valuation allowance.

 

Unrecognized Tax Benefits

 

As of June 30, 2015, the Company had $11.7 million of unrecognized tax benefits, $2.2 million of which would affect its effective tax rate if recognized after considering the valuation allowance. As of December 31, 2014, the Company had $16.4 million of unrecognized tax benefits, $4.8 million of which would affect its effective tax rate if recognized after considering the valuation allowance.

 

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

 

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of June 30, 2015 and December 31, 2014, the Company has approximately $0.1 million and $0.5 million of accrued interest related to uncertain tax positions, respectively, which were recorded in long-term tax liabilities in the Condensed Consolidated Balance Sheets.

 

 
18

 

 

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 were 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 payment, if the IRS were to prevail on all matters in dispute, was $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 2014 and both parties had been in continuous discussions for a resolution of the matter in the first quarter of 2015. Meanwhile, the Company granted 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 years 2005 through 2007 and the carryforwards, which would then reduce the value of such credits carried forward to subsequent tax years.

 

In April 2015, the Company reached a final resolution with the IRS in connection with the income tax audits for the years 2005 through 2007. Under the agreement, the Company made a one-time buy-in payment of $1.2 million for taxes related primarily to the revaluation of a license for certain intellectual property rights of the Company to one of its international subsidiaries.  This buy-in payment is final and no additional payment will be required with respect to the intellectual property license for the years under examination or for a previous or subsequent tax year. In addition, the Company expects to make a $1.1 million related interest payment in the next few months as well as a $0.2 million tax payment for the years 2008 to 2013.  There were no penalties assessed on the Company as a result of the audits.

 

For the second quarter of 2015, the Company's income tax provision included a one-time net charge of approximately $2.7 million reflecting the taxes and interest, partially offset by the reversal of previously accrued tax liabilities and valuation allowances. Of the $2.7 million charge, approximately $1.6 million relates to taxes and $1.1 million to interest.

   

13. 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 (Losses) on Other Available-for-Sale Securities

   

Foreign Currency Translation Adjustments

   

Total

 

Balance as of January 1, 2015

  $ (181 )   $ (15 )   $ 6,007     $ 5,811  

Other comprehensive income before reclassifications

    5       32       249       286  

Amounts reclassified from accumulated other comprehensive income

    -       (1 )     -       (1 )

Net current period other comprehensive income

    5       31       249       285  

Balance as of March 31, 2015

    (176 )     16       6,256       6,096  

Other comprehensive income (loss) before reclassifications

    (19 )     7       105       93  

Amounts reclassified from accumulated other comprehensive income

    -       (3 )     -       (3 )

Net current period other comprehensive income (loss)

    (19 )     4       105       90  

Balance as of June 30, 2015

  $ (195 )   $ 20     $ 6,361     $ 6,186  

 

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

 

 
19

 

 

14. 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. In April 2015, the Board of Directors approved an extension of the program through December 31, 2015. All shares are retired upon repurchase. The following table summarizes the repurchase activities under the program (in thousands, except per-share amounts):

 

   

Shares

Repurchased

   

Average Price

Per Share

   

Total

Amount

 

Cumulative balance at January 1, 2015

    1,715     $ 36.04     $ 61,813  

Repurchases

    203     $ 51.33       10,405  

Cumulative balance at March 31, 2015

    1,918     $ 37.66       72,218  

Repurchases

    148     $ 52.19       7,724  

Cumulative balance at June 30, 2015

    2,066     $ 38.70     $ 79,942  

 

As of June 30, 2015, $20.1 million remained available for future repurchases under the program.

 

15. 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 when and if declared by the Board of Directors, which are generally payable on the 15th of the following month. The Board of Directors declared the following cash dividends in 2015 (in thousands, except per-share amounts):

 

   

Dividend Declared

   

Total

 
   

per Share

   

Amount

 

First quarter

  $ 0.20     $ 7,854  

Second quarter

  $ 0.20     $ 7,925  

 

As of June 30, 2015, accrued dividends totaled $7.9 million, which was paid to stockholders on July 15, 2015.

 

The declaration of any future cash dividends 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 Company’s stock plans, outstanding RSU awards contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accrued quarterly during the vesting periods of the RSUs and are payable to the employees when the awards vest. Dividend equivalents accrued on the outstanding RSUs are forfeited if the employees do not fulfill their service requirement during the vesting periods. As of June 30, 2015 and December 31, 2014, accrued dividend equivalents totaled $1.8 million and $0.8 million, respectively.

 

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

 

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

 

 

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

 

 

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

 

  

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

 

  

the continuing application of our products in the communications, storage and computing, consumer and industrial markets,  which account for a majority of 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 the remainder of 2015 and beyond,

 

  

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

 

  

the percentage of our total revenue from various market segments,

 

  

our ability to identify, acquire and integrate acquisitions and achieve the anticipated benefits from such acquisitions,

 

  

our intention and ability to continue our 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, 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 

 

 
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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, 2015 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, 2014 included in our Annual Report on Form 10-K.

 

Overview

 

We are a leading company in high performance power solutions. Founded in 1997, we provide small, highly energy efficient, easy-to-use power solutions for systems found in industrial applications, telecom infrastructures, cloud computing, automotive, and consumer applications. Our mission is to reduce total energy consumption in our customers' systems with green, practical, compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.

 

We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not 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 91% and 89% for the three months ended June 30, 2015 and 2014, and 91% and 88% for the six months ended June 30, 2015 and 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.

   

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, 2015, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2014.

 

 
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