Monolithic Power Systems, Inc.
MONOLITHIC POWER SYSTEMS INC (Form: 10-Q, Received: 11/03/2016 17:12:25)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

(Mark One)

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

 

For the quarterly period ended September 30, 2016

 

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 40,673,857 shares of the registrant’s common stock issued and outstanding as of October 28, 2016.

 



 

 
 

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

TABLE OF CONTENTS

PAGE

PART I. FINANCIAL INFORMATION

2

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

20

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

27

ITEM 4.

CONTROLS AND PROCEDURES

27

PART II. OTHER INFORMATION

27

ITEM 1.

LEGAL PROCEEDINGS

27

ITEM 1A.

RISK FACTORS

28

ITEM 6.

EXHIBITS

43

 

 
2

 

 

  PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 109,479     $ 90,860  

Short-term investments

    149,584       144,103  

Accounts receivable, net

    33,335       30,830  

Inventories

    70,692       63,209  

Other current assets

    3,720       2,926  

Total current assets

    366,810       331,928  

Property and equipment, net

    82,097       65,359  

Long-term investments

    5,382       5,361  

Goodwill

    6,571       6,571  

Acquisition-related intangible assets, net

    3,515       5,053  

Deferred tax assets, net

    644       672  

Other long-term assets

    29,837       16,341  

Total assets

  $ 494,856     $ 431,285  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 17,332     $ 13,487  

Accrued compensation and related benefits

    16,311       9,812  

Accrued liabilities

    21,873       19,984  

Total current liabilities

    55,516       43,283  

Income tax liabilities

    3,594       2,941  

Other long-term liabilities

    19,448       16,545  

Total liabilities

    78,558       62,769  

Commitments and contingencies

               

Stockholders' equity:

               

Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 40,661 and 39,689 as of September 30, 2016 and December 31, 2015, respectively

    304,700       265,763  

Retained earnings

    111,535       101,287  

Accumulated other comprehensive income

    63       1,466  

Total stockholders’ equity

    416,298       368,516  

Total liabilities and stockholders’ equity

  $ 494,856     $ 431,285  

 

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 September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Revenue

  $ 106,456     $ 91,194     $ 285,047     $ 246,148  

Cost of revenue

    48,531       41,754       130,686       112,896  

Gross profit

    57,925       49,440       154,361       133,252  

Operating expenses:

                               

Research and development

    20,472       17,272       55,669       49,053  

Selling, general and administrative

    22,397       18,722       61,696       54,204  

Litigation expense, net

    55       136       92       717  

Total operating expenses

    42,924       36,130       117,457       103,974  

Income from operations

    15,001       13,310       36,904       29,278  

Interest and other income (expense), net

    780       (6 )     1,920       871  

Income before income taxes

    15,781       13,304       38,824       30,149  

Income tax provision

    1,408       2,103       2,678       5,086  

Net income

  $ 14,373     $ 11,201     $ 36,146     $ 25,063  
                                 

Net income per share:

                               

Basic

  $ 0.35     $ 0.28     $ 0.90     $ 0.64  

Diluted

  $ 0.34     $ 0.28     $ 0.87     $ 0.62  

Weighted-average shares outstanding:

                               

Basic

    40,590       39,592       40,335       39,422  

Diluted

    41,895       40,689       41,752       40,676  
                                 

Cash dividends declared per common share

  $ 0.20     $ 0.20     $ 0.60     $ 0.60  

 

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 September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Net income

  $ 14,373     $ 11,201     $ 36,146     $ 25,063  

Other comprehensive loss, net of tax:

                               

Change in unrealized gains (losses) on auction-rate securities, net of $0 tax in 2016 and 2015

    88       (11 )     21       (25 )

Change in unrealized gains (losses) on other available-for-sale securities, net of $0 tax in 2016 and 2015

    (101 )     41       169       76  

Foreign currency translation adjustments

    (52 )     (3,132 )     (1,593 )     (2,778 )

Total other comprehensive loss, net of tax

    (65 )     (3,102 )     (1,403 )     (2,727 )

Comprehensive income

  $ 14,308     $ 8,099     $ 34,743     $ 22,336  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
5

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

Nine Months Ended September 30,

 
   

2016

   

2015

 
                 

Cash flows from operating activities:

               

Net income

  $ 36,146     $ 25,063  

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

               

Depreciation and amortization of intangible assets

    10,542       10,478  

Losses on sales of property and equipment

    58       -  

(Gains) losses on investments, net

    (478 )     910  

Deferred taxes, net

    12       -  

Excess tax benefits from equity awards

    (1,078 )     (4,221 )

Stock-based compensation expense

    34,241       29,191  

Changes in operating assets and liabilities:

               

Accounts receivable

    (2,503 )     (4,845 )

Inventories

    (7,522 )     (26,378 )

Other assets

    (10,869 )     141  

Accounts payable

    5,713       3,545  

Accrued liabilities

    4,308       4,154  

Income tax liabilities

    1,668       1,912  

Accrued compensation and related benefits

    6,549       5,449  

Net cash provided by operating activities

    76,787       45,399  

Cash flows from investing activities:

               

Property and equipment purchases

    (29,036 )     (8,410 )

Purchases of short-term investments

    (147,055 )     (172,651 )

Proceeds from sales of short-term investments

    140,733       131,025  

Contributions to employee deferred compensation plan, net

    (2,314 )     (3,455 )

Net cash used in investing activities

    (37,672 )     (53,491 )

Cash flows from financing activities:

               

Property and equipment purchased on extended payment terms

    (150 )     (150 )

Proceeds from exercise of stock options

    1,191       6,876  

Proceeds from shares issued under the employee stock purchase plan

    2,463       2,227  

Repurchases of common shares

    -       (31,735 )

Dividends and dividend equivalents paid

    (24,634 )     (21,853 )

Excess tax benefits from equity awards

    1,078       4,221  

Net cash used in financing activities

    (20,052 )     (40,414 )

Effect of change in exchange rates

    (444 )     (1,144 )

Net increase (decrease) in cash and cash equivalents

    18,619       (49,650 )

Cash and cash equivalents, beginning of period

    90,860       126,266  

Cash and cash equivalents, end of period

  $ 109,479     $ 76,616  

Supplemental disclosures for cash flow information:

               

Cash paid for taxes and interest

  $ 843     $ 3,070  

Supplemental disclosures of non-cash investing and financing activities:

               

Liability accrued for property and equipment purchases

  $ 197     $ 1,003  

Liability accrued for dividends and dividend equivalents

  $ 9,882     $ 9,648  

 

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 accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016.

 

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, 2016 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 nine months ended September 30, 2016 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, 2015.

 

Recent Accounting Pronouncements

  

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments , which amends the current guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard will be effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. Entities will apply the standard retrospectively to all periods presented. The Company is evaluating the impact of the adoption on its cash flows and disclosures.

 

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

 

In March 2016, the FASB issued ASU No. 2016-09,  Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting,  which changes how entities account for certain aspects of share-based payment awards, including the accounting for excess tax benefits and tax deficiencies, forfeitures, statutory tax withholding requirements, as well as classification of excess tax benefits in the statements of cash flows. The standard will be effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. The manner of application varies by the different provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

 

 
7

 

 

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

 

In 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. In July 2015, the FASB approved a one-year deferral of the effective date. The standard will be effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

 

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 and provides for the issuance of up to 5.5 million shares. The 2014 Plan will expire on November 13, 2024. As of September 30, 2016, 3.8 million shares remained available for future issuance. 

 

Stock-Based Compensation Expense

 

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

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Cost of revenue

  $ 403     $ 303     $ 1,217     $ 829  

Research and development

    3,986       2,932       11,001       8,055  

Selling, general and administrative

    9,127       7,240       22,023       20,307  

Total

  $ 13,516     $ 10,475     $ 34,241     $ 29,191  

 

In the first quarter of 2016, the Company’s then Chief Financial Officer retired. As the service or performance conditions for certain of her unvested restricted stock units (“RSUs”) had not been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested shares and recorded the one-time credit in selling, general and administrative expenses for the three months ended March 31, 2016.

 

RSUs

 

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

 

   

Time-Based RSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

PSUs and MPSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

MSUs

   

Weighted-Average Grant Date Fair Value Per Share

   

Total

   

Weighted-Average Grant Date Fair Value Per Share

 

Outstanding at January 1, 2016

    499     $ 40.75       1,933     $ 38.99       1,800     $ 23.57       4,232     $ 32.64  

Granted

    129     $ 62.54       1,288  (1)   $ 41.07       -     $ -       1,417     $ 43.03  

Performance adjustment

    -     $ -       (23 )(2)   $ 40.05       -     $ -       (23 )   $ 40.05  

Released

    (202 )   $ 35.88       (649 )   $ 29.86       -     $ -       (851 )   $ 31.29  

Forfeited

    (23 )   $ 43.83       (129 )   $ 36.82       (180 )   $ 23.57       (332 )   $ 30.14  

Outstanding at September 30, 2016

    403     $ 50.05       2,420     $ 42.65       1,620     $ 23.57       4,443     $ 36.36  


(1)

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

(2)

Amount reflects the net adjustment to the number of awards that have not been earned or may not be earned based on  management’s probability assessment at each reporting period.

 

 
8

 

 

The intrinsic value related to awards released for the three months ended September 30, 2016 and 2015 was $10.6 million and $6.6 million, respectively. The intrinsic value related to awards released for the nine months ended September 30, 2016 and 2015 was $53.2 million and $40.6 million, respectively. As of September 30, 2016, the total intrinsic value of all outstanding awards was $341.2 million, based on the closing stock price of $80.50 . As of September 30, 2016, unamortized compensation expense related to all outstanding awards was approximately $101.7 million with a weighted-average remaining recognition period of approximately four years. 

 

2016 Time-Based RSUs:

 

For the nine months ended September 30, 2016, the Board of Directors granted 129,000 RSUs with service conditions to employees and non-employee directors. The RSUs generally vest over one year for non-employee directors and four years for employees, subject to continued employment with the Company.

 

2016 PSUs:

 

In February 2016, the Board of Directors granted 285,000 PSUs to the executive officers, which represent a target number of shares to be awarded based on the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2016 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2016 Executive PSUs. 50% of the 2016 Executive PSUs will vest in the first quarter of 2018 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee of the Board of Directors. The remaining 2016 Executive PSUs will vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In March 2016, the Company cancelled 32,000 2016 Executive PSUs as a result of the departure of its then Chief Financial Officer.  In July 2016, the Board of Directors granted 12,000 2016 Executive PSUs to the Company’s new Chief Financial Officer. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2016 Executive PSUs is approximately $31.8 million.

 

In February 2016, the Board of Directors granted 64,000 PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s 2017 revenue goals for certain regions or product line divisions, or the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2016 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2016 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2016 Non-Executive PSUs will vest in the first quarter of 2018 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining 2016 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2016 Non-Executive PSUs is approximately $6.2 million.

 

The 2016 Executive PSUs and the 2016 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $20 per share upon vesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 2016 Executive PSUs and the 2016 Non-Executive PSUs granted in February 2016 using the Black-Scholes model with the following assumptions: stock price of $58.98, expected term of 2.6 years, expected volatility of 31.1% and risk-free interest rate of 0.9%. For the 2016 Executive PSUs granted in July 2016, the Company used the following assumptions: stock price of $70.98, expected term of 2.3 years, expected volatility of 29.6% and risk-free interest rate of 0.7%.

 

 
9

 

 

2015 MPSUs:

 

On December 31, 2015, the Board of Directors granted 127,000 MPSUs to the executive officers and certain key employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2015 MPSUs. The 2015 MPSUs consist of four separate tranches with various performance periods ending on December 31, 2019. The first tranche contains market conditions only, which require the achievement of five MPS stock price targets ranging from $71.36 to $95.57 over a four-year period. The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of five MPS stock price targets to be measured against a base price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading days immediately before the start of the measurement period for that tranche, or (2) the closing stock price immediately before the start of the measurement period for that tranche. In addition, each of the second, third and fourth tranches requires the achievement of one of following six operating metrics:

 

 

1.

Successful implementation of full digital solutions vs. current analog topology for certain products.

 

2.

Successful implementation and adoption by a key player of an integrated, software-based, field-oriented-control with 3D hall sensor to motor driver.

 

3.

Successful implementation of certain advanced power analog processes.

 

4.

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

 

5.

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

 

6.

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

 

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

 

The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of $61.35, expected volatility of 33.2%, risk-free interest rate of 1.3%, and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. In March 2016, the Company cancelled 13,000 2015 MPSUs as a result of the departure of its then Chief Financial Officer. Assuming the achievement of all of the required performance goals, the total stock-based compensation cost for the 2015 MPSUs is approximately $24.6 million to be recognized as follows: $8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for the third tranche, and $6.6 million for the fourth tranche.

 

For the first tranche, stock-based compensation expense is recognized over the requisite service period even if the market conditions are not satisfied. For the second, third and fourth tranches, stock-based compensation expense for each tranche is recognized depending upon the number of the operating metrics management deems probable of achievement in each reporting period. As of March 31, 2016 and June 30, 2016, based on management’s assessment, two of the six operating metrics were considered probable of being achieved during the performance period. As of September 30, 2016, three of the six operating metrics were considered probable of being achieved during the performance period. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranches over the requisite service period.

 

Stock Options

 

As of September 30, 2016, outstanding and vested options totaled 22,000 shares, with a weighted-average exercise price of $17.08, a weighted-average remaining contractual term of one year, and an aggregate intrinsic value of $1.4 million.

 

Total intrinsic value of options exercised was $0.7 million and $0.4 million for the three months ended September 30, 2016 and 2015, respectively. Total intrinsic value of options exercised was $3.2 million and $15.8 million for the nine months ended September 30, 2016 and 2015, respectively. The net cash proceeds from the exercise of stock options were $1.2 million and $6.9 million for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was no unamortized compensation expense.

 

Employee Stock Purchase Plan (“ESPP”)

  

For the three months ended September 30, 2016 and 2015, 24,000 and 26,000 shares, respectively, were issued under the ESPP. For the nine months ended September 30, 2016 and 2015, 53,000 and 56,000 shares, respectively, were issued under the ESPP. As of September 30, 2016, 4.6 million shares were available for future issuance.

 

 
10

 

 

The intrinsic value of shares issued was $0.6 million and $0.2 million for the three months ended September 30, 2016 and 2015, respectively. The intrinsic value of shares issued was $1.0 million and $0.6 million for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, the unamortized expense was $0.3 million, which will be recognized through the first quarter of 2017. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Expected term (years)

    0.5       0.5       0.5       0.5  

Expected volatility

    27.5 %     24.8 %     28.6 %     30.3 %

Risk-free interest rate

    0.5 %     0.2 %     0.4 %     0.2 %

Dividend yield

    1.1 %     1.6 %     1.2 %     1.4 %

 

Cash proceeds from the shares issued under the ESPP were $2.5 million and $2.2 million for the nine months ended September 30, 2016 and 2015, respectively.  

  

3. BALANCE SHEET COMPONENTS

 

Inventories 

 

Inventories consist of the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Raw materials

  $ 13,521     $ 14,907  

Work in process

    24,850       21,177  

Finished goods

    32,321       27,125  

Total

  $ 70,692     $ 63,209  

 

When the Company records a write-down on inventory, it establishes a new, lower cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis.

 

Other Long-Term Assets

 

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

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Deferred compensation plan assets

  $ 17,396     $ 13,985  

Prepaid wafer purchase

    10,000       -  

Other prepaid expense

    1,269       1,257  

Other

    1,172       1,099  

Total

  $ 29,837     $ 16,341  

 

 
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Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands): 

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Dividends and dividend equivalents

  $ 9,043     $ 8,675  

Deferred revenue and customer prepayments

    5,571       5,236  

Stock rotation reserve

    2,991       2,372  

Warranty

    991       289  

Commissions

    990       763  

Sales rebate

    395       268  

Income tax payable

    418       465  

Other

    1,474       1,916  

Total

  $ 21,873     $ 19,984  

  

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Balance at beginning of period

  $ 950     $ 205     $ 289     $ 240  

Warranty provision for product sales

    107       91       926       246  

Settlement made

    (25 )     -       (67 )     (153 )

Unused warranty provision

    (41 )     (28 )     (157 )     (65 )

Balance at end of period

  $ 991     $ 268     $ 991     $ 268  

 

Other Long-Term Liabilities

 

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

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Deferred compensation plan liabilities

  $ 16,422     $ 14,147  

Dividend equivalents

    2,915       2,019  

Other

    111       379  

Total

  $ 19,448     $ 16,545  

 

4. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET

 

There have been no changes in the balance of goodwill during the three and nine months ended September 30, 2016.

 

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

 

   

September 30, 2016

 
   

Gross Amount

   

Accumulated Amortization

   

Net Amount

 

Know-how

  $ 1,018     $ (449 )   $ 569  

Developed technologies

    6,466       (3,520 )     2,946  

Total

  $ 7,484     $ (3,969 )   $ 3,515  

 

 
12

 

 

   

December 31, 2015

 
   

Gross Amount

   

Accumulated Amortization

   

Net Amount

 

Know-how

  $ 1,018     $ (297 )   $ 721  

Developed technologies

    6,466       (2,134 )     4,332  

Total

  $ 7,484     $ (2,431 )   $ 5,053  

 

Amortization expense is recorded in cost of revenue in the Condensed Consolidated Statements of Operations. For both the three months ended September 30, 2016 and 2015, amortization expense totaled $0.5 million. For the nine months ended September 30, 2016 and 2015, amortization expense totaled $1.5 million and $1.2 million, respectively.

 

As of September 30, 2016, the estimated future amortization expense was as follows (in thousands):

 

2016 (remaining three months)

  $ 513  

2017

    2,051  

2018

    841  

2019

    110  

Total

  $ 3,515  

 

5. 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. Contingently issuable shares, including equity awards with performance conditions or market conditions, are considered outstanding common shares and included in the basic net income per share as of the date that all necessary conditions to earn the awards have been satisfied. Prior to the end of the contingency period, the number of contingently issuable shares included in the diluted net income per share is based on the number of shares, if any, that would be issuable under the terms of the arrangement at the end of the reporting period.

 

The Company’s outstanding RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and payable to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement 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 September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Numerator:

                               

Net income

  $ 14,373     $ 11,201     $ 36,146     $ 25,063  
                                 

Denominator:

                               

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

    40,590       39,592       40,335       39,422  

Effect of dilutive securities

    1,305       1,097       1,417       1,254  

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

    41,895       40,689       41,752       40,676  
                                 

Net income per share:

                               

Basic

  $ 0.35     $ 0.28     $ 0.90     $ 0.64  

Diluted

  $ 0.34     $ 0.28     $ 0.87     $ 0.62  

 

Anti-dilutive common stock equivalents were not material in any of the periods presented.

 

 
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6. 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 communications, storage and computing, consumer and industrial markets. The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company derives a majority of its revenue from sales to customers located outside North America, with geographic revenue based on the customers’ ship-to locations.

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Customer

 

2016

   

2015

   

2016

   

2015

 

Distributor A

    22 %     24 %     22 %     24 %

 

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

 

   

September 30,

   

December 31,

 

Customer

 

2016

   

2015

 

Distributor A

    23 %     28 %

Distributor B

    13 %     17 %

 

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 September 30,

   

Nine Months Ended September 30,

 

Country or Region

 

2016

   

2015

   

2016

   

2015

 

China

  $ 67,372     $ 58,716     $ 180,689     $ 157,968  

Taiwan

    12,786       10,352       31,801       31,524  

Korea

    7,405       6,019       21,522       15,373  

Europe

    7,193       5,956       21,232       16,388  

Southeast Asia

    5,370       5,764       13,210       12,839  

Japan

    4,084       2,633       9,771       6,930  

United States

    2,164       1,673       6,613       4,932  

Other

    82       81       209       194  

Total

  $ 106,456     $ 91,194     $ 285,047     $ 246,148  

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Product Family

 

2016

   

2015

   

2016

   

2015

 

DC to DC products

  $ 95,615     $ 82,718     $ 256,953     $ 222,210  

Lighting control products

    10,841       8,476       28,094       23,938  

Total

  $ 106,456     $ 91,194     $ 285,047     $ 246,148  

 

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

 

   

September 30,

   

December 31,

 

Country

 

2016

   

2015

 

China

  $ 49,574     $ 40,738  

United States

    42,752       40,405  

Bermuda

    20,185       11,624  

Taiwan

    8,617       126  

Other

    892       431  

Total

  $ 122,020     $ 93,324  

 

7. LITIGATION

 

The Company is a party 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.

 

As of September 30, 2016, there were no material pending legal proceedings to which the Company was a party.

  

8. CASH, CASH EQUIVALENTS AND INVESTMENTS

 

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

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Cash, cash equivalents and investments:

               

Cash

  $ 62,218     $ 58,217  

Money market funds

    47,261       31,640  

Certificates of deposit

    7,495       21,574  

Corporate debt securities

    20,665       -  

U.S. treasuries and government agency bonds

    121,424       123,532  

Auction-rate securities backed by student-loan notes

    5,382       5,361  

Total

  $ 264,445     $ 240,324  

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Reported as:

               

Cash and cash equivalents

  $ 109,479     $ 90,860  

Short-term investments

    149,584       144,103  

Long-term investments

    5,382       5,361  

Total

  $ 264,445     $ 240,324  

  

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

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Due in less than 1 year

  $ 112,135     $ 110,898  

Due in 1 - 5 years

    37,449       33,205  

Due in greater than 5 years

    5,382       5,361  

Total

  $ 154,966     $ 149,464  

 

 
15

 

 

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

 

   

September 30, 2016

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized Loss Position

 

Money market funds

  $ 47,261     $ -     $ -     $ 47,261     $ -  

Certificates of deposit

    7,495       -       -       7,495       -  

Corporate debt securities

    20,703       4       (42 )     20,665       17,894  

U.S. treasuries and government agency bonds

    121,383       48       (7 )     121,424       26,037  

Auction-rate securities backed by student-loan notes

    5,570       -       (188 )     5,382       5,382  

Total

  $ 202,412     $ 52     $ (237 )   $ 202,227     $ 49,313  

 

   

December 31, 2015

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized Loss Position

 

Money market funds

  $ 31,640     $ -     $ -     $ 31,640     $ -  

Certificates of deposit

    21,574       -       -       21,574       -  

U.S. treasuries and government agency bonds

    123,698       4       (170 )     123,532       110,720  

Auction-rate securities backed by student-loan notes

    5,570       -       (209 )     5,361       5,361  

Total

  $ 182,482     $ 4     $ (379 )   $ 182,107     $ 116,081  

 

9. FAIR VALUE MEASUREMENTS  

 

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

 

   

Fair Value Measurement at September 30, 2016

 
           

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

  $ 47,261     $ 47,261     $ -     $ -  

Certificates of deposit

    7,495       -       7,495       -  

Corporate debt securities

    20,665       -       20,665       -  

U.S. treasuries and government agency bonds

    121,424       -       121,424       -  

Auction-rate securities backed by student-loan notes

    5,382       -       -       5,382  

Mutual funds under deferred compensation plan

    9,304       9,304       -       -  

Total

  $ 211,531     $ 56,565     $ 149,584     $ 5,382  

 

   

Fair Value Measurement at December 31, 2015

 
           

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

  $ 31,640     $ 31,640     $ -     $ -  

Certificates of deposit

    21,574       -       21,574       -  

U.S. treasuries and government agency bonds

    123,532       -       123,532       -  

Auction-rate securities backed by student-loan notes

    5,361       -       -       5,361  

Mutual funds under deferred compensation plan

    8,279       8,279       -       -  

Total

  $ 190,386     $ 39,919     $ 145,106     $ 5,361  

 

 
16

 

 

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, 2016

  $ 5,361  

Change in unrealized gain included in other comprehensive income

    21  

Balance at September 30, 2016

  $ 5,382  

 

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

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Time-to-liquidity (months)

    24         24    

Expected return

    2.5%         2.9%    

Discount rate

  3.7% - 6.7%     4.3% - 7.3%  

 

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

 

   

September 30,

   

December 31,

 
   

2016

   

2015

 

Deferred compensation plan assets reported in:

               

Other long-term assets

  $ 17,396     $ 13,985  

Deferred compensation plan liabilities reported in:

               

Accrued compensation and related benefits (short-term)

  $ 952     $ -  

Other long-term liabilities

    16,422       14,147  

Total

  $ 17,374     $ 14,147  

 

11. INCOME TAXES

 

The income tax provision for the three and nine months ended September 30, 2016 was $1.4 million, or 8.9% of the pre-tax income, and $2.7 million, or 6.9% of the pre-tax income, respectively. The effective tax rate differed from the federal statutory rate primarily because foreign income was taxed at lower rates, and because of the benefit that the Company realized from the release of RSUs. In addition, the effective tax rate was impacted by changes in the valuation allowance.

 

The income tax provision for the three months ended September 30, 2015 was $2.1 million, or 15.8% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily because 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. In addition, the effective tax rate was impacted by changes in the valuation allowance and true-up adjustments.

 

The income tax provision for the nine months ended September 30, 2015 was $5.1 million, or 16.9% of pre-tax income. 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. In addition to the impact of this charge, the effective tax rate differed from the federal statutory rate primarily because 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 and true-up adjustments.

 

 
17

 

 

On July 27, 2015, in  Altera Corp. v. Commissioner , the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued in December 2015, and the Internal Revenue Service (“IRS”) appealed the decision in February 2016. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in an intercompany cost-sharing arrangement. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any adjustments as of September 30, 2016. The Company will continue to monitor developments related to this opinion and the potential impact on its financial statements.

 

Unrecognized Tax Benefits  

 

As of September 30, 2016, the Company had $14.2 million of unrecognized tax benefits, $3.8 million of which would affect its effective tax rate if recognized after considering the valuation allowance. At December 31, 2015, the Company had $12.1 million of unrecognized tax benefits, $2.7 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 September 30, 2016 and December 31, 2015, the Company has approximately $0.3 million and $0.2 million of accrued interest related to uncertain tax positions, respectively, which were recorded in long-term income tax liabilities in the Condensed Consolidated Balance Sheets. 

 

Income Tax Examination

 

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. In May 2016, the IRS notified the Company that its federal income tax return for the year ended December 31, 2014 is under examination. The examination is ongoing and as of September 30, 2016, no adjustments have been proposed by the IRS.

 

12. 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, 2016

  $ (209 )   $ (166 )   $ 1,841     $ 1,466  

Other comprehensive income (loss) before reclassifications

    (8 )     220       498       710  

Amounts reclassified from accumulated other comprehensive income

    -       (2 )     -       (2 )

Net current period other comprehensive income (loss)

    (8 )     218       498       708  

Balance as of March 31, 2016

    (217 )     52       2,339       2,174  

Other comprehensive income (loss) before reclassifications

    (59 )     53       (2,039 )     (2,045 )

Amounts reclassified from accumulated other comprehensive income

    -       (1 )     -       (1 )

Net current period other comprehensive income (loss)

    (59 )     52       (2,039 )     (2,046 )

Balance as of June 30, 2016

    (276 )     104       300       128  

Other comprehensive income (loss) before reclassifications

    88       (98 )     (52 )     (62 )

Amounts reclassified from accumulated other comprehensive income

    -       (3 )     -       (3 )

Net current period other comprehensive income (loss)

    88       (101 )     (52 )     (65 )

Balance as of September 30, 2016

  $ (188 )   $ 3     $ 248     $ 63  

 

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

 

 
18

 

 

13. STOCK REPURCHASE

 

In July 2013, the Board of Directors approved a stock repurchase program that authorized 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. The stock repurchase program expired as of December 31, 2015 with a remaining unused balance of $5.9 million. Shares were retired upon repurchase under the program.

 

In February 2016, the Board of Directors approved a new stock repurchase program that authorized the Company to repurchase up to $50 million in the aggregate of its common stock through December 31, 2016. Shares are retired upon repurchase under the program.

 

The Company did not repurchase any shares for the three and nine months ended September 30, 2016. For the three months ended September 30, 2015, the Company repurchased 0.3 million shares for $13.6 million at an average price of $47.93 per share. For the nine months ended September 30, 2015, the Company repurchased 0.6 million shares for $31.7 million at an average price of $50.01 per share.

 

14. DIVIDENDS AND DIVIDEND EQUIVALENTS

 

Cash Dividend Program

 

In June 2014, the Board of Directors approved a dividend program pursuant to which the Company intends to pay quarterly cash dividends on its common stock. 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 thousands, except per-share amounts): 

 

   

Dividend Declared

   

Total

 
   

per Share

   

Amount

 

2016:

               

First quarter

  $ 0.20     $ 8,047  

Second quarter

  $ 0.20     $ 8,096  

Third quarter

  $ 0.20     $ 8,132  
                 

2015:

               

First quarter

  $ 0.20     $ 7,854  

Second quarter

  $ 0.20     $ 7,925  

Third quarter

  $ 0.20     $ 7,901  

 

As of September 30, 2016 and December 31, 2015, accrued dividends totaled $8.1 million and $7.9 million, respectively.

 

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

 

Cash Dividend Equivalent Rights

 

Under the Company’s stock plans, outstanding RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and are payable to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement during the vesting periods. As of September 30, 2016 and December 31, 2015, accrued dividend equivalents totaled $3.8 million and $2.8 million, respectively, which will be paid to the employees when the underlying RSUs vest.   

 

 
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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 belief that we may 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 2016 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, in the section entitled “Item 1A. Risk Factors.” Except as required by law, we disclaim any duty to and undertake no obligation to update any forward-looking statements, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that we file from time to time with the Securities and Exchange Commission, such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 

 

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 nine months ended September 30, 2016 included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year ended December 31, 2015 included in our Annual Report on Form 10-K.

 

 
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Overview

 

We are a leading company in high performance power solutions. Founded in 1997, we design and provide small, highly energy efficient, easy-to-use power solutions for systems found in industrial applications, telecommunication infrastructure, 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 92% for the three months ended September 30, 2016 and 2015, and 90% and 91% for the nine months ended September 30, 2016 and 2015, respectively. We derive a majority of our revenue from the sales of our DC to DC converter product family which serves 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 nine months ended September 30, 2016, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2015.

 

Results of Operations

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2016

   

2015

   

2016

   

2015

 
   

(in thousands, except percentages)

 

Revenue

  $ 106,456       100.0

%

  $ 91,194       100.0

%

  $ 285,047       100.0

%

  $ 246,148       100.0

%

Cost of revenue

    48,531       45.6       41,754       45.8       130,686       45.8       112,896       45.9  

Gross profit

    57,925       54.4       49,440