Monolithic Power Systems, Inc.
MONOLITHIC POWER SYSTEMS INC (Form: 10-Q, Received: 11/06/2017 06:04:34)

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 , 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “ large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☒      Accelerated filer               Non-accelerated filer  ☐             Smaller reporting company  ☐          Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

In dicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

 

There were 41,516,913 shares of the registrant’s common stock issued and outstanding as of October 30, 2017.

 



 

 

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

28

ITEM 6.

EXHIBITS

45

 

2

 

  PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(u naudited)

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 104,424     $ 112,703  

Short-term investments

    195,174       155,521  

Accounts receivable, net

    50,757       34,248  

Inventories

    99,887       71,469  

Other current assets

    13,560       9,043  

Total current assets

    463,802       382,984  

Property and equipment, net

    100,629       85,171  

Long-term investments

    5,368       5,354  

Goodwill

    6,571       6,571  

Acquisition-related intangible assets, net

    1,464       3,002  

Deferred tax assets, net

    661       633  

Other long-term assets

    26,518       27,411  

Total assets

  $ 605,013     $ 511,126  
                 

LIABILITIES AND STOCKHOLDERS ’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 21,831     $ 17,427  

Accrued compensation and related benefits

    17,458       12,578  

Accrued liabilities

    26,879       22,916  

Total current liabilities

    66,168       52,921  

Income tax liabilities

    4,627       3,870  

Other long-term liabilities

    28,695       23,219  

Total liabilities

    99,490       80,010  

Commitments and contingencies

               

Stockholders' equity:

               

Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 41,508 and 40,793
as of September 30, 2017 and December 31, 2016, respectively

    364,726       315,969  

Retained earnings

    140,455       119,362  

Accumulated other comprehensive income (loss)

    342       (4,215 )

Total stockholders ’ equity

    505,523       431,116  

Total liabilities and stockholders ’ equity

  $ 605,013     $ 511,126  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per- share amounts)

(u naudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Revenue

  $ 128,939     $ 106,456     $ 341,499     $ 285,047  

Cost of revenue

    58,083       48,531       154,377       130,686  

Gross profit

    70,856       57,925       187,122       154,361  

Operating expenses:

                               

Research and development

    21,442       20,472       60,629       55,669  

Selling, general and administrative

    25,255       22,397       73,219       61,696  

Litigation expense, net

    327       55       903       92  

Total operating expenses

    47,024       42,924       134,751       117,457  

Income from operations

    23,832       15,001       52,371       36,904  

Interest and other income, net

    1,255       780       3,873       1,920  

Income before income taxes

    25,087       15,781       56,244       38,824  

Income tax provision

    1,445       1,408       3,112       2,678  

Net income

  $ 23,642     $ 14,373     $ 53,132     $ 36,146  
                                 

Net income per share:

                               

Basic

  $ 0.57     $ 0.35     $ 1.29     $ 0.90  

Diluted

  $ 0.54     $ 0.34     $ 1.22     $ 0.87  

Weighted-average shares outstanding:

                               

Basic

    41,458       40,590       41,276       40,335  

Diluted

    43,486       41,895       43,384       41,752  
                                 

Cash dividends declared per common share

  $ 0.20     $ 0.20     $ 0.60     $ 0.60  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(u naudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Net income

  $ 23,642     $ 14,373     $ 53,132     $ 36,146  

Other comprehensive income (loss), net of tax:

                               

Foreign currency translation adjustments, net of $0 tax in 2017 and 2016

    1,500       (52 )     3,992       (1,593 )

Change in unrealized gain (loss) on available-for-sale securities, net of $0 tax in 2017 and 2016

    222       (13 )     565       190  

Total other comprehensive income (loss), net of tax

    1,722       (65 )     4,557       (1,403 )

Comprehensive income

  $ 25,364     $ 14,308     $ 57,689     $ 34,743  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(u naudited)

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 

Cash flows from operating activities:

               

Net income

  $ 53,132     $ 36,146  

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

               

Depreciation and amortization of intangible assets

    12,092       10,542  

Loss on sales or write-off of property and equipment

    -       58  

Amortization of premium on available-for-sale investments

    1,494       619  

Gain on deferred compensation plan investments

    (1,902 )     (1,097 )

Deferred taxes, net

    -       12  

Excess tax benefits from equity awards

    -       (1,078 )

Stock-based compensation expense

    40,759       34,241  

Changes in operating assets and liabilities:

               

Accounts receivable

    (16,505 )     (2,503 )

Inventories

    (28,384 )     (7,522 )

Other assets

    1,696       (10,869 )

Accounts payable

    4,999       5,713  

Accrued compensation and related benefits

    4,542       6,549  

Accrued liabilities

    7,276       4,308  

Income tax liabilities

    1,249       1,668  

Net cash provided by operating activities

    80,448       76,787  

Cash flows from investing activities:

               

Property and equipment purchases

    (25,108 )     (29,036 )

Purchases of short-term investments

    (102,274 )     (147,055 )

Proceeds from maturities and sales of short-term investments

    61,678       140,733  

Contributions to deferred compensation plan, net

    (2,124 )     (2,314 )

Net cash used in investing activities

    (67,828 )     (37,672 )

Cash flows from financing activities:

               

Property and equipment purchased on extended payment terms

    (250 )     (150 )

Proceeds from exercise of stock options

    129       1,191  

Proceeds from shares issued under the employee stock purchase plan

    2,701       2,463  

Dividends and dividend equivalents paid

    (25,264 )     (24,634 )

Excess tax benefits from equity awards

    -       1,078  

Net cash used in financing activities

    (22,684 )     (20,052 )

Effect of change in exchange rates

    1,785       (444 )

Net increase (decrease) in cash and cash equivalents

    (8,279 )     18,619  

Cash and cash equivalents, beginning of period

    112,703       90,860  

Cash and cash equivalents, end of period

  $ 104,424     $ 109,479  
                 

Supplemental disclosures for cash flow information:

               

Cash paid for taxes and interest

  $ 1,855     $ 843  

Supplemental disclosures of non-cash investing and financing activities:

               

Liability accrued for property and equipment purchases

  $ 284     $ 197  

Liability accrued for dividends and dividend equivalents

  $ 10,131     $ 9,882  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company ’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017.

 

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, 2017 or for any other future periods.

 

Summary of Significant Accounting Policies

 

Other than those discussed in “Recent Accounting Pronouncements” below, there have been no changes to the Company ’s significant accounting policies during the three or nine months ended September 30, 2017 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, 2016.

 

Recent Accounting Pronouncements

   

Stock-Based  Compensation:

 

In  March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,  Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,  which changed 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 Company adopted the standard on January 1, 2017 and the primary impact of the adoption was as follows:

 

 

The  Company elected to account for forfeitures of equity awards when they occur. The change was applied on a modified retrospective basis and the Company recorded a cumulative-effect adjustment of $5.1 million  to retained earnings on January 1, 2017 (with a corresponding offset to additional paid-in capital).  

 

 

Excess tax benefits are recognized in the income tax provision in the Condensed Consolidated Statements of Operations prospectively, rather than in additional paid-in capital in the Condensed Consolidated Balance Sheets. The Company applied the modified retrospective method and there was no net cumulative-effect adjustment to retained earnings on January 1, 2017, as the increase in deferred tax assets was fully offset by a valuation allowance.

 

 

The Company is presenting excess tax benefits as an operating activity in the Condensed Consolidated Statements of Cash  Flows on a prospective basis.

 

Revenue Recognition:

 

In May 2014, the FASB issued ASU No. 2014-09,   Revenue from Contracts with Customers (Topic 606),  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. 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 Company does not plan to early adopt, and accordingly, the Company will adopt the new standard effective January 1, 2018.

 

 

T he primary effects of the new standard for the Company relate to the timing of revenue recognition with three U.S.-based distributors. Sales to these distributors are transacted under the terms of agreements providing price adjustment and other rights. The Company determines that uncertainties on the sales price exist under these arrangements primarily because the amount of price adjustments to be claimed by the distributors is not fixed or determinable. As a result, revenue and costs related to these sales are deferred until the Company receives notification from the distributors that products have been sold to the end customers and the amount of price adjustments is finalized. Under the new standard, the transaction price takes into consideration the effect of variable consideration such as price adjustments, which are estimated and recorded at the time the promised goods are transferred to the customers. Accordingly, the Company will be required to recognize revenue at the time of shipment to the distributors, adjusted for an estimate of the price adjustments based on historical data and other information available at the time. For the three and nine months ended September 30, 2017, the Company recognized $2.2 million and $5.9 million of revenue net of the final price adjustments, respectively, from the U.S.-based distributors for products that have been sold to the end customers. As of September 30, 2017, the deferred revenue balance, before the final price adjustments, was $2.7 million for products held by the U.S.-based distributors that have not been sold to the end customers.

 

Revenue from non-U.S. distributors, which make up the majority of the Compa ny’s total sales to distributors, is currently recognized at the time of shipment to the distributors because these arrangements do not contain price adjustments, or other amounts that are not fixed or determinable. Accordingly, revenue recognition on arrangements with non-U.S. distributors will remain substantially unchanged upon adoption of the new standard.

 

While the Company continues to assess the impact of the new standard, it currently does not expect the adoption of the new standard to have a material impact on its financial statements.  The new standard will require the Company to include expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used by management.

 

The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company  currently plans to adopt the new standard using the modified retrospective method.

   

Other:

 

In February 2016, the FASB issued ASU  No. 2016-02,  Leases (Topic 842),  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 June 2016, the FASB issued ASU No. 2016-13,   Financial Instruments – Credit Losses (Topic 326): 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 January 2017, the FASB issued ASU No. 2017-04,   Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment,  which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted after January 1, 2017. The Company is evaluating the impact of the adoption on its annual goodwill impairment test.

      

 

2. STOCK-BASED COMPENSATION

 

2014 Equity Incentive Plan (the “ 2014 Plan”)

 

The Board of Directors adopted the 2014 Plan in April 2013, and the stockholders approved it in June 2013. In October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The 2014 Plan, as amended, became effective on November 13, 2014 and provides for the issuance of up to 5.5 million shares. The 2014 Plan will expire on November 13, 2024. As of September 30, 2017, 3.2 million shares remained available for future issuance under the 2014 Plan. 

 

Stock-Based Compensation Expense

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Cost of revenue

  $ 453     $ 403     $ 1,264     $ 1,217  

Research and development

    3,838       3,986       11,297       11,001  

Selling, general and administrative

    9,678       9,127       28,198       22,023  

Total

  $ 13,969     $ 13,516     $ 40,759     $ 34,241  

 

In the first quarter of 2016, the Company ’s then Chief Financial Officer retired. As the service or performance conditions for her outstanding 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 RSUs and this credit was reflected in selling, general and administrative expenses for the nine months ended September 30, 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, 2017

    366     $ 51.35       2,284     $ 43.24       1,620     $ 23.57       4,270     $ 36.47  

Granted

    75     $ 92.53       645 (1)   $ 61.08       -     $ -       720     $ 64.35  

Released

    (148 )   $ 47.93       (520 )   $ 42.34       -     $ -       (668 )   $ 43.57  

Forfeited

    (14 )   $ 62.01       (5 )   $ 49.82       -     $ -       (19 )   $ 58.43  

Outstanding at September 30, 2017

    279     $ 63.68       2,404     $ 48.20       1,620     $ 23.57       4,303     $ 39.93  

 


(1)

Amount re flects the number of PSUs and MPSUs that may ultimately be earned based on management’s probability assessment  of the performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions.

 

The intrinsic value related to RSUs released was $12.5 million and $10.6 million for the three months ended September 30, 2017 and 2016, respectively. The intrinsic value related to RSUs released was $61.3 million and $53.2 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, the total intrinsic value of all outstanding RSUs was $422.1 million, based on the closing stock price of $106.55. As of September 30, 2017, unamortized compensation expense related to all outstanding RSUs was approximately $89.6 million with a weighted-average remaining recognition period of approximately three  years. 

 

Time-Based RSUs:

 

For the nine months ended September 30, 2017, the Board of Directors granted 75,000  RSUs with time-based vesting conditions to non-executive employees and non-employee directors. The RSUs generally vest over four years for employees and one year for directors, subject to continued service with the Company.

   

 

2017 PSUs:

 

In February 2017, the Board of Directors granted 200,000  PSUs to the executive officers, which represent a target number of shares to be awarded based on the Company’s average two-year (2017 and 2018) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2017 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2017 Executive PSUs. 50% of the 2017 Executive PSUs will vest in the first quarter of 2019 if the pre-determined performance goals are met during the performance period and approved by the Board of Directors. The remaining 2017 Executive PSUs will vest over the following two years on a 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 2017 Executive PSUs is approximately $36.3 million.

 

In February 2017, the Board of Directors granted 48,000  PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s 2018 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2017 and 2018) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2017 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2017 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2017 Non-Executive PSUs will vest in the first quarter of 2019 if the pre-determined performance goals are met during the performance period and approved by the Board of Directors. The remaining 2017 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 2017 Non-Executive PSUs is approximately $7.1 million.

 

The 2017 Executive PSUs and the 2017 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares.  Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 2017 Executive PSUs and the 2017 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $89.37, expected term of 2.6 years, expected volatility of 28.6% and risk-free interest rate of 1.3%. 

 

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 stock price targets ranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. As of September 30, 2017, all five price targets for the first tranche have been achieved.

 

The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of five stock price targets 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. The stock price targets for the second tranche range from $89.56 to $106.81 with a performance period from January 1, 2017 to December 31, 2019. As of September 30, 2017, four price targets for the second tranche have been achieved. The stock price targets for the third tranche will be determined on December 31, 2017 with a performance period from January 1, 2018 to December 31, 2019. The stock price targets for the fourth tranche will be determined on December 31, 2018 with a performance period from January 1, 2019 to December 31, 2019.

 

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 anal og topology for certain power products.

 

2.

Successful implementation, and adoption by a key customer, of an integrated, software-based field-oriented-control  with sensors to motor drivers.

 

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.

   

As of September 30, 2017, none of the operating metrics have been achieved.

 

 

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 Board of Directors. In addition, the 2015 MPSUs contain post-vesting sales restrictions on 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 market and 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  being recognized over the requisite service period. 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 being achieved during the performance periods in each reporting period. As of September 30, 2017, based on management’s quarterly assessment, three of the six operating metrics were considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranches over the requisite service period.

 

Stock Options

 

No options were granted for the three and nine months ended September 30, 2017 and 2016. No options were exercised for the three months ended September 30, 2017. Total intrinsic value of options exercised was $0.7 million for the three months ended September 30, 2016. Total intrinsic value of options exercised was $0.6 million and $3.2 million for the nine months ended September 30, 2017 and 2016, respectively. Cash proceeds from the exercise of stock options were $0.1 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was no unamortized compensation expense and outstanding options were not material.

 

Employee Stock Purchase Plan (“ ESPP”)

   

For the three months ended September 30, 2017 and 2016, 18,000 and 24,000 shares, respectively, were issued under the ESPP. For the nine months ended September 30, 2017 and 2016, 40,000 and 53,000 shares, respectively, were issued under the ESPP. As of September 30, 2017, 4.6 million shares were available for future issuance.

 

The intrinsic  value of the shares issued was $0.5 million and $0.6 million for the three months ended September 30, 2017 and 2016, respectively. The intrinsic value of the shares issued was $1.0 million for both the nine months ended September 30, 2017 and 2016. As of September 30, 2017, the unamortized expense was $0.3 million, which will be recognized through the first quarter of 2018. 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,

 
   

2017

   

2016

   

2017

   

2016

 

Expected term (years)

    0.5       0.5       0.5       0.5  

Expected volatility

    23.5 %     27.5 %     23.5 %     28.6 %

Risk-free interest rate

    1.2 %     0.5 %     0.9 %     0.4 %

Dividend yield

    0.8 %     1.1 %     0.9 %     1.2 %

 

Cash proceeds  from the shares issued under the ESPP were $2.7 million and $2.5 million for the nine months ended September 30, 2017 and 2016, respectively. 

   

 

3 . BALANCE SHEET COMPONENTS

 

Inventories  

 

Inventories consist of the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

Raw materials

  $ 18,861     $ 14,599  

Work in process

    43,462       26,048  

Finished goods

    37,564       30,822  

Total

  $ 99,887     $ 71,469  

 

Other Current Assets

 

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

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

Prepaid wafer purchase

  $ 7,642     $ 5,000  

Other prepaid expense

    3,334       2,249  

Interest receivable

    1,268       966  

Other

    1,316       828  

Total

  $ 13,560     $ 9,043  

 

Other Long-Term Assets

 

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

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

Deferred compensation plan assets

  $ 24,315     $ 20,288  

Prepaid wafer purchase

    -       5,000  

Other prepaid expense

    1,010       1,117  

Other

    1,193       1,006  

Total

  $ 26,518     $ 27,411  

 

Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

Dividends and dividend equivalents

  $ 9,390     $ 8,946  

Deferred revenue and customer prepayments

    6,527       6,799  

Stock rotation reserve

    3,358       1,937  

Warranty

    2,507       1,030  

Income tax payable

    1,750       1,239  

Commissions

    1,035       1,008  

Other

    2,312       1,957  

Total

  $ 26,879     $ 22,916  

 

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Balance at beginning of period

  $ 2,627     $ 950     $ 1,030     $ 289  

Warranty provision for product sales

    129       107       2,431       926  

Settlements made

    (161 )     (25 )     (710 )     (67 )

Unused warranty provision

    (88 )     (41 )     (244 )     (157 )

Balance at end of period

  $ 2,507     $ 991     $ 2,507     $ 991  

 

Other Long-Term Liabilities

 

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

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

Deferred compensation plan liabilities

  $ 24,146     $ 19,836  

Dividend equivalents

    4,482       3,294  

Other

    67       89  

Total

  $ 28,695     $ 23,219  

 

4 . GOODWILL AND ACQUISITION-RELATED INTAN GIBLE ASSETS , NET

 

There have been no changes in the bal ance of goodwill during the three and nine months ended September 30, 2017 .

 

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

 

   

September 30, 2017

 
   

Gross Amount

   

Accumulated Amortization

   

Net Amount

 

Know-how

  $ 1,018     $ (653 )   $ 365  

Developed technologies

    6,466       (5,367 )     1,099  

Total

  $ 7,484     $ (6,020 )   $ 1,464  

 

   

December 31, 2016

 
   

Gross Amount

   

Accumulated Amortization

   

Net Amount

 

Know-how

  $ 1,018     $ (500 )   $ 518  

Developed technologies

    6,466       (3,982 )     2,484  

Total

  $ 7,484     $ (4,482 )   $ 3,002  

 

 

Amortization expense is recorded in cost of revenue in the Condensed Consolidated Statements of Operations. For both the three months ended September 30, 2017 and 2016, amortization expense totaled $0.5 million. For both the nine months ended September 30, 2017 and 2016, amortization expense totaled $1.5 million.

 

As of September 30, 2017, the estimated future amortization expense was as follows (in thousands):

 

2017 (remaining three months)

  $ 513  

2018

    841  

2019

    110  

Total

  $ 1,464  

 

 

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 paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. Accordingly, these awards are not treated as participating securities in the net income per share calculation. 

 

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per-share amounts):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Numerator:

                               

Net income

  $ 23,642     $ 14,373     $ 53,132     $ 36,146  
                                 

Denominator:

                               

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

    41,458       40,590       41,276       40,335  

Effect of dilutive securities

    2,028       1,305       2,108       1,417  

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

    43,486       41,895       43,384       41,752  
                                 

Net income per share:

                               

Basic

  $ 0.57     $ 0.35     $ 1.29     $ 0.90  

Diluted

  $ 0.54     $ 0.34     $ 1.22     $ 0.87  

 

6 . SEGMENT AND GEOGRAPHIC INFORMATION

 

The Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance analog solutions for the consumer, computing and storage, industrial, automotive and communications 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  two customers who are distributors with sales greater than 10% of the Company's total revenue: 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Customer

 

2017

   

2016

   

2017

   

2016

 

Distributor A

    17 %     22 %     17 %     22 %

Distributor B

    15 %     *       *       *  

 

Th e following table summarizes three customers who are distributors with accounts receivable balances greater than 10% of the Company’s total accounts receivable:

 

   

September 30,

   

December 31,

 

Customer

 

2017

   

2016

 

Distributor A

    17 %     19 %

Distributor B

    16 %     *  

Distributor C

    12 %     17 %

 

__________________

* Represents less than 10%.

 

 

The Company ’s agreements with these third-party distributors were made in the ordinary course of business and may be terminated with or without cause by these 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 any 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 short period following the termination of the agreement with the distributor. 

 

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

   

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Country or Region

 

2017

   

2016

   

2017

   

2016

 

China

  $ 66,645     $ 67,372     $ 185,054     $ 180,689  

Taiwan

    27,387       12,786       59,548       31,801  

Europe

    10,726       7,193       28,227       21,232  

Korea

    9,279       7,405       25,594       21,522  

Southeast Asia

    7,179       5,370       20,476       13,210  

Japan

    4,813       4,084       14,584       9,771  

United States

    2,781       2,164       7,711       6,613  

Other

    129       82       305       209  

Total

  $ 128,939     $ 106,456     $ 341,499     $ 285,047  

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Product Family

 

2017

   

2016

   

2017

   

2016

 

DC to DC

  $ 119,089     $ 95,615     $ 312,700     $ 256,953  

Lighting Control

    9,850       10,841       28,799       28,094  

Total

  $ 128,939     $ 106,456     $ 341,499     $ 285,047  

 

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

 

   

September 30,

   

December 31,

 

Country

 

2017

   

2016

 

United States

  $ 61,447     $ 50,242  

China

    46,175       45,728  

Taiwan

    16,908       8,919  

Bermuda

    8,035       9,573  

Other

    413       571  

Total

  $ 132,978     $ 115,033  

 

7 . LITIGATION

 

The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its shareholders, 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, 2017, 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,

 
   

2017

   

2016

 

Cash, cash equivalents and investments:

               

Cash

  $ 91,674     $ 87,747  

Money market funds

    11,250       24,956  

Corporate debt securities

    180,551       109,644  

U.S. treasuries and government agency bonds

    16,123       45,877  

Auction-rate securities backed by student-loan notes

    5,368       5,354  

Total

  $ 304,966     $ 273,578  

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

Reported as:

               

Cash and cash equivalents

  $ 104,424     $ 112,703  

Short-term investments

    195,174       155,521  

Long-term investments

    5,368       5,354  

Total

  $ 304,966     $ 273,578  

 

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,

 
   

2017

   

2016

 

Due in less than 1 year

  $ 70,798     $ 47,568  

Due in 1 - 5 years

    124,376       107,953  

Due in greater than 5 years

    5,368       5,354  

Total

  $ 200,542     $ 160,875  

 

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

 

   

September 30, 2017

 
   

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized

Loss Position

 

Money market funds

  $ 11,250     $ -     $ -     $ 11,250     $ -  

Corporate debt securities

    180,791       122       (362 )     180,551       122,780  

U.S. treasuries and government agency bonds

    16,139       -       (16 )     16,123       13,873  

Auction-rate securities backed by student-loan notes

    5,570       -       (202 )     5,368       5,368  

Total

  $ 213,750     $ 122     $ (580 )   $ 213,292     $ 142,021  

 

   

December 31, 2016

 
   

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Total Fair Value

   

Fair Value of Investments in Unrealized

Loss Position

 

Money market funds

  $ 24,956     $ -     $ -     $ 24,956     $ -  

Corporate debt securities

    110,429       65       (850 )     109,644       91,938  

U.S. treasuries and government agency bonds

    45,899       -       (22 )     45,877       39,275  

Auction-rate securities backed by student-loan notes

    5,570       -       (216 )     5,354       5,354  

Total

  $ 186,854     $ 65     $ (1,088 )   $ 185,831     $ 136,567  

 

 

9 . FAIR VALUE MEASUR E MENTS   

 

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

 

   

Fair Value Measurement at September 30, 2017

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

  $ 11,250     $ 11,250     $ -     $ -  

Corporate debt securities

    180,551       -       180,551       -  

U.S. treasuries and government agency bonds

    16,123       -       16,123       -  

Auction-rate securities backed by student-loan notes

    5,368       -       -       5,368  

Mutual funds under deferred compensation plan

    13,097       13,097       -       -  

Total

  $ 226,389     $ 24,347     $ 196,674     $ 5,368  

 

   

Fair Value Measurement at December 31, 2016

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Money market funds

  $ 24,956     $ 24,956     $ -     $ -  

Corporate debt securities

    109,644       -       109,644       -  

U.S. treasuries and government agency bonds

    45,877       -       45,877       -  

Auction-rate securities backed by student-loan notes

    5,354       -       -       5,354  

Mutual funds under deferred compensation plan

    12,108       12,108       -       -  

Total

  $ 197,939     $ 37,064     $ 155,521     $ 5,354  

_________________

Level 1 —includes instruments with quoted prices in active markets for identical assets.

Level 2 —includes instruments for which the valuations are based upon quoted market prices in active markets involving similar assets or inputs other than quoted prices that are observable for the assets. The market inputs used to value these instruments generally consist of market yields, recently executed transactions, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources may include industry standard data providers, security master files from large financial institutions, and other third party sources used to determine a daily market value.

Level 3 —includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement.

 

The Company ’s level 3 assets consist of government-backed student loan auction-rate securities, 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, 2017

  $ 5,354  

Change in unrealized gain included in other comprehensive income

    14  

Balance at September 30, 2017

  $ 5,368  

 

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

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

Time-to-liquidity (months)

    24         24    

Discount rate

   40% - 9.0%      4.3% - 9.3%  

 

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 liabilities for compensation deferred under the plan are recorded at fair value in each reporting period. Changes in the fair value of the liabilities are included in operating expense in the Condensed Consolidated Statements of Operations. The Company manages the risk of changes in the fair value of the liabilities by electing to match the liabilities with investments in corporate-owned life insurance policies and mutual funds that offset a substantial portion of the exposure. The investments are recorded at the cash surrender value of the corporate-owned life insurance policies and at the fair value of the mutual funds, which are classified as trading securities. Changes in the cash surrender value of the corporate-owned life insurance policies and the fair value of mutual fund investments are included in interest and other income, net in the Condensed Consolidated Statements of Operations.   The following table summarizes the deferred compensation plan balances in the Condensed Consolidated Balance Sheets (in thousands):

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

Deferred compensation plan asset components:

               

Cash surrender value of corporate-owned life insurance policies

  $ 11,218     $ 8,180  

Fair value of mutual funds

    13,097       12,108  

Total

  $ 24,315     $ 20,288  
                 

Deferred compensation plan assets reported in:

               

Other long-term assets

  $ 24,315     $ 20,288  
                 

Deferred compensation plan liabilities reported in:

               

Accrued compensation and related benefits (short-term)

  $ 341     $ 479  

Other long-term liabilities

    24,146       19,836  

Total

  $ 24,487     $ 20,315  

 

11. INTEREST AND OTHER INCOME, NET

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Interest income

  $ 1,346     $ 585     $ 3,938     $ 1,595  

Amortization of premium on available-for-sale investments

    (490 )     (252 )     (1,494 )     (619 )

Gain on deferred compensation plan investments

    636       488       1,902       1,097  

Foreign currency exchange loss

    (237 )     (48 )     (473 )     (170 )

Other

    -       7       -       17  

Total

  $ 1,255     $ 780     $ 3,873     $ 1,920  

 

12 . INCOME TAXES

 

The income tax provision for the three and nine months ended September 30, 2017 was $1.4 million, or 5.8% of pre-tax income, and $3.1 million, or 5.5% of pre-tax income, respectively. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by the Company’s subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation.

 

The income tax provision for the three and nine months ended September 30, 2016 was $1.4 million, or 8.9% of pre-tax income, and $2.7 million, or 6.9% of pre-tax income, respectively. The effective tax rate differed from the federal statutory rate primarily because foreign income  generated by the Company’s subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation .

 

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 the cost pool to be shared under a cost-sharing arrangement. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any adjustments as of September 30, 2017. The Company will continue to monitor developments related to this opinion and the potential impact on its financial statements.  

 

 

Adoption of ASU  No. 2016-09

 

Upon adoption of ASU No. 2016-09 on January 1, 2017, excess tax benefits are now recognized in the income tax provision in the Condensed Consolidated Statements of Operations prospectively, rather than in additional paid-in capital in the Condensed Consolidated Balance Sheets. The Company applied the modified retrospective method and there was no net cumulative-effect adjustment to retained earnings on January 1, 2017, as the increase in deferred tax assets for previously unrecognized excess tax benefits was fully offset by a valuation allowance.  

 

Unrecognized Tax Benefits  

 

As of September 30, 2017, the Company had $ 16.1 million of unrecognized tax benefits, $4.5 million of which would affect its effective tax rate if recognized after considering the valuation allowance. As of December 31, 2016, the Company had $14.4 million of unrecognized tax benefits, $3.5 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. The Company expects to release approximately $0.6 million of its unrecognized tax benefits in the fourth quarter of 2017 as a result of a lapse of the statute of limitation. It is reasonably possible that over the next twelve-month period the Company may experience other increases or decreases in its unrecognized tax benefits. However, it is not possible to determine either the magnitude or the range of other increases or decreases at this time.

 

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of September 30, 2017 and December 31, 2016, the Company has approximately $0.5 million and $0.3 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. 

 

13 . ACCUMU LATED OTHER COMPREHENSIVE INCOME ( LOSS )

 

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

 

   

Unrealized Losses

on Available-for-

Sale Securities

   

Foreign Currency Translation

Adjustments

   

Total

 

Balance as of January 1, 2017

  $ (1,023 )   $ (3,192 )   $ (4,215 )

Other comprehensive income before reclassifications

    202       1,306       1,508  

Amounts reclassified from accumulated other comprehensive loss

    -       -       -  

Net current period other comprehensive income

    202       1,306       1,508  

Balance as of March 31, 2017

    (821 )     (1,886 )     (2,707 )

Other comprehensive income before reclassifications

    144       1,186       1,330  

Amounts reclassified from accumulated other comprehensive loss

    (3 )     -       (3 )

Net current period other comprehensive income

    141       1,186       1,327  

Balance as of June 30, 2017

    (680 )     (700 )     (1,380 )

Other comprehensive income before reclassifications

    217       1,500       1,717  

Amounts reclassified from accumulated other comprehensive income

    5       -       5  

Net current period other comprehensive income

    222       1,500       1,722  

Balance as of September 30, 2017

  $ (458 )   $ 800     $ 342  

 

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

 

14 . STOCK REPURCHASE

 

In February 2016, the Board of Directors approved a stock repurchase program (the “2016 Program”) that authorized the Company to repurchase up to $50 million in the aggregate of its common stock through December 31, 2016. In December 2016, the Board of Directors approved an extension of the 2016 Program through December 31, 2017.

   

For the three  and nine months ended September 30, 2017 and 2016, the Company did not repurchase any shares under the 2016 Program. As of September 30, 2017, $50 million remained available for future repurchases. Shares will be retired upon repurchase.

   

 

1 5 . DIVIDENDS AND DIVIDEND EQUIVALENTS

 

Cash Dividend Program

 

In June 2014, the Board of Directors approved a dividend program pursuant to which the Company intends to pay quarterly cash dividends on its common stock. Based on the Company’s historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared by our Board of Directors, which are payable to the stockholders in the following month. The Board of Directors declared the following cash dividends (in thousands, except per-share amounts): 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Dividend declared per share

  $ 0.20     $ 0.20     $ 0.60     $ 0.60  

Total amount declared

  $ 8,301     $ 8,132     $ 24,822     $ 24,275  

 

As of September 30, 2017 and December 31, 2016, accrued dividends totaled $8.3 million and $8.2 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 under the current tax laws.

 

Cash Dividend Equivalent Rights

 

Under the Company ’s stock plans, outstanding RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. As of September 30, 2017 and December 31, 2016, accrued dividend equivalents totaled $5.6 million and $4.1 million, respectively.

 

16 . SUBSEQUENT EVENT

 

In October 2017, the Company entered into agreements to purchase office space in Shanghai, China and Hangzhou, China for approximately $14.4 million and $16.0 million, respectively.  The Company closed both transactions by early November 2017.

 

 

 

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 current  or future  legal proceedings,

 

 

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

 

 

the continuing application of our products in the consumer, computing and storage, industrial, automotive and communications  markets,

 

 

estimates of our future liquidity requirements,

 

 

the cyclical nature of the semiconductor industry,

 

 

protection of our proprietary technology,

 

 

business outlook for the remainder of 2017 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 the companies, businesses and products that we acquire and achieve the  anticipated benefits from such acquisitions,

 

 

our intention and ability to repurchase shares under 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, 2017 included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year ended December 31, 2016 included in our Annual Report on Form 10-K.

 

 

Overview

 

We are a leading company  that designs, develops and markets high-performance power solutions. Founded in 1997, MPS’s core strengths include deep system-level and applications knowledge, strong analog design expertise and an innovative proprietary process technology. These combined strengths enable MPS to deliver highly integrated monolithic products that offer energy efficient, cost-effective, easy-to-use solutions for systems found in industrial applications, telecommunication infrastructures, cloud computing, automotive, and consumer applications. Our mission is to reduce total energy consumption in our customers' systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.

 

We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term.

 

We work with third parties to manufacture and assemble our integrated circuits (“ICs”). This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.

 

Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up. Typical lead time for orders is fewer than 90 days. These factors, combined with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer, make the forecasting of our orders and revenue difficult.

   

We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where the products we produce are incorporated into end-user products.   Our revenue from direct or indirect sales to customers in Asia was 89% and 91% for the three months ended September 30, 2017 and 2016, and 89% and 90% for the nine months ended September 30, 2017 and 2016, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the consumer, computing and storage, industrial, automotive and communications 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

 

Other than those discussed  in “Recent Accounting Pronouncements” in Note 1 to Condensed Consolidated Financial Statements, 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, 2017, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

Results of Operations

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(in thousands, except percentages)

 

Revenue

  $ 128,939       100.0

%

  $ 106,456       100.0

%

  $ 341,499       100.0

%

  $ 285,047       100.0

%

Cost of revenue

    58,083       45.0       48,531       45.6       154,377       45.2       130,686       45.8  

Gross profit

    70,856       55.0       57,925       54.4       187,122       54.8       154,361       54.2  

Operating expenses:

                                                               

Research and development

    21,442       16.6       20,472       19.2       60,629       17.8       55,669       19.5  

Selling, general and administrative

    25,255       19.6       22,397       21.0       73,219       21.4       61,696       21.6  

Litigation expense, net

    327       0.3       55       -       903       0.3       92       0.1  

Total operating expenses

    47,024       36.5       42,924       40.2       134,751       39.5       117,457       41.2  

Income from operations

    23,832       18.5       15,001       14.2       52,371       15.3       36,904       13.0  

Interest and other income, net

    1,255       1.0       780       0.6       3,873       1.2       1,920       0.6  

Income before income taxes

    25,087       19.5       15,781       14.8       56,244       16.5       38,824       13.6  

Income tax provision

    1,445       1.2       1,408       1.3       3,112       0.9       2,678       0.9  

Net income

  $ 23,642       18.3

%

  $ 14,373       13.5

%

  $ 53,132       15.6

%

  $ 36,146       12.7

%

 

 

Revenue

 

The following table summarizes our revenue by end market, based on management’s assessment of available end market data:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

End Market

 

2017

   

% of Revenue

   

2016

   

% of Revenue

   

Change

   

2017

   

% of Revenue

   

2016

   

% of Revenue

   

Change

 
   

(in thousands, except percentages)

 

Consumer

  $ 55,342       42.9 %   $ 43,646       41.0 %     26.8 %   $ 134,870       39.5 %   $ 115,763       40.6 %     16.5 %

Computing and storage

    29,020       22.5 %     23,463       22.1 %     23.7 %     74,103       21.7 %     57,157       20.1 %     29.6 %

Industrial

    16,348       12.7 %     14,519       13.6 %     12.6 %     46,736       13.7 %     40,542       14.2 %     15.3 %

Automotive

    12,857       10.0 %     8,640       8.1 %     48.8 %     38,042       11.1 %     23,906       8.4 %     59.1 %

Communications

    15,372       11.9 %     16,188       15.2 %     (5.0 )%     47,748       14.0 %     47,679       16.7 %     0.1 %

Total

  $ 128,939       100.0 %   $ 106,456       100.0 %     21.1 %   $ 341,499       100.0 %   $ 285,047       100.0 %     19.8 %

 

Revenue for  the three months ended September 30, 2017 was $128.9 million, an increase of $22.4 million, or 21.1%, from $106.5 million for the three months ended September 30, 2016. This increase was driven by higher sales in all of our end markets except for communications. Overall unit shipments increased by approximately 4% due to higher market demand with current customers and design wins with new customers, coupled with a 15% increase in average sales prices. 

 

Revenue from the consumer  market for the three months ended September 30, 2017 increased $11.7 million, or 26.8%, from the same period in 2016. This increase was primarily driven by higher demand in gaming and home appliance products. Revenue from the computing and storage market increased $5.6 million, or 23.7%, from the same period in 2016. This increase was primarily driven by strength in the solid-state drive storage and cloud computing markets. Revenue from the industrial market increased $1.8 million, or 12.6%, from the same period in 2016. This increase was primarily driven by higher sales in power source products. Revenue from the automotive market increased $4.2 million, or 48.8%, from the same period in 2016. This increase was primarily driven by higher sales in products for infotainment, safety and connectivity applications. Revenue from the communications market decreased $0.8 million, or 5.0%, from the same period in 2016. This decrease was primarily driven by lower demand in networking and telecommunication application markets.

 

Revenue for the nine months ended September 30, 2017 was $341.5 million, an increase of $56.5 million, or 19.8%, from $285.0 million for the nine months ended September 30, 2016. This increase was driven by higher sales in all of our end markets. Overall unit shipments increased by 8% due to higher market demand with current customers and design wins with new customers, coupled with an 11% increase in average sales prices. 

 

Revenue from the consumer market for the nine months ended September 30, 2017 increased $19.1 million, or 16.5%, from the same period in 2016. This increase was primarily driven by higher demand in gaming and home appliance products. Revenue from the computing and storage market increased $16.9 million, or 29.6%, from the same period in 2016. This increase was primarily driven by strength in the solid-state drive storage, high-performance notebook and cloud computing markets. Revenue from the industrial market increased $6.2 million, or 15.3%, from the same period in 2016. This increase was primarily driven by higher sales in power source and point of sale system products. Revenue from the automotive market increased $14.1 million, or 59.1%, from the same period in 2016. This increase was primarily driven by higher sales in products for infotainment, safety and connectivity applications. Revenue from the communications market was essentially flat compared to the same period in 2016.

 

Cost of Revenue and Gross Margin

 
Cost of revenue primarily consists of costs incurred to manufacture, assemble and test our products, as well as warranty costs, inventory-related and other overhead costs, and stock-based compensation expenses. In addition, cost of revenue includes amortization for acquisition-related intangible assets.

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

Change

   

2017

   

2016

   

Change

 
   

(in thousands, except percentages)

 

Cost of revenue

  $ 58,083     $ 48,531       19.7 %   $ 154,377     $ 130,686       18.1 %

As a percentage of revenue

    45.0 %     45.6 %             45.2 %     45.8 %        

Gross profit

  $ 70,856     $ 57,925       22.3 %   $ 187,122     $ 154,361       21.2 %

Gross margin

    55.0 %     54.4 %             54.8 %     54.2 %        

 

 

Cost of revenue was $58.1 million, or 45.0% of revenue, for the three months ended September 30, 2017, and $48.5 million, or 45.6% of revenue, for the three months ended September 30, 2016. The $9.6 million increase in cost of revenue was primarily due to a 4% increase in overall unit shipments, coupled with an 18% increase in the average direct cost of units shipped.

   

Gross margin was 55.0 % for the three months ended September 30, 2017, compared with 54.4% for the three months ended September 30, 2016. The increase in gross margin was primarily due to lower labor and manufacturing overhead costs as a percentage of revenue, partially offset by increased sales of lower margin products.

 

Cost of revenue was $154.4 million, or 45.2 % of revenue, for the nine months ended September 30, 2017, and $130.7 million, or 45.8% of revenue, for the nine months ended September 30, 2016. The $23.7 million increase in cost of revenue was primarily due to an 8% increase in overall unit shipments, coupled with a 12% increase in the average direct cost of units shipped. The increase in cost of revenue was also driven by an increase of $1.7 million in inventory write-downs.

 

Gross margin was 54.8% for  the nine months ended September 30, 2017, compared with 54.2% for the nine months ended September 30, 2016. The increase in gross margin was primarily due to lower labor and manufacturing overhead costs as a percentage of revenue, partially offset by higher inventory write-downs.

 

Research and Development

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

Change

   

2017

   

2016

   

Change

 
   

(in thousands, except percentages)

 

R&D expenses

  $ 21,442     $ 20,472       4.7 %   $ 60,629     $ 55,669       8.9 %

As a percentage of revenue

    16.6 %     19.2 %             17.8 %     19.5 %        

 

R&D expenses were $21.4  million, or 16.6% of revenue, for the three months ended September 30, 2017 and $20.5 million, or 19.2% of revenue, for the three months ended September 30, 2016. The $0.9 million increase in R&D expenses was primarily due to an increase of $0.9 million in compensation expenses, which include salary, benefits and bonuses. Our R&D headcount was 624 employees as of September 30, 2017, compared with 570 employees as of September 30, 2016.  

 

R&D expen ses were $60.6 million, or 17.8% of revenue, for the nine months ended September 30, 2017 and $55.7 million, or 19.5% of revenue, for the nine months ended September 30, 2016. The $4.9 million increase in R&D expenses was primarily due to an increase of $2.1 million in compensation expenses, which include salary, benefits and bonuses, an increase of $1.2 million in laboratory supplies, an increase of $1.1 million in new product development expenses, and an increase of $0.5 million in expenses related to changes in the value of the deferred compensation plan liabilities.

 

Selling, General and Administrative

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

Change

   

2017

   

2016

   

Change

 
   

(in thousands, except percentages)

 

SG&A expenses

  $ 25,255     $ 22,397       12.8 %   $ 73,219     $ 61,696       18.7 %

As a percentage of revenue

    19.6 %     21.0 %             21.4 %     21.6 %        

 

SG&A expenses were $25.3 million, or 19.6% of revenue, for the three months ended September 30, 2017 and $22.4 million, or 21.0% of revenue, for the three months ended September 30, 2016. The $2.9 million increase in SG&A expenses was primarily due to an increase of $0.8 million in compensation expenses, which include salary, benefits and bonuses, an increase of $0.7 million in commission expenses due to higher revenue, an increase of $0.6 million in stock-based compensation expenses mainly associated with the performance-based equity awards, and an increase of $0.4 million in depreciation expense. Our SG&A headcount was 378 employees as of September 30, 2017, compared with 350 employees as of September 30, 2016.   

   

 

SG&A expenses were $73.2 million, or 21.4% of revenue, for the nine months ended September 30, 2017 and $61.7 million, or 21.6% of revenue, for the nine months ended September 30, 2016. The $11.5 million increase in SG&A expenses was primarily due to an increase of $3.3 million in stock-based compensation expenses mainly associated with the performance-based equity awards, an increase of $2.3 million in compensation expenses, which include salary, benefits and bonuses, an increase of $1.3 million in depreciation expense, an increase of $0.6 million in expenses related to changes in the value of the deferred compensation plan liabilities, and an increase of $0.5 million in commission expenses due to higher revenue. In addition, contributing to the increase in SG&A expenses for the nine months ended September 30, 2017 was a stock-based compensation credit recorded in the nine months ended September 30, 2016 due to the retirement of our then Chief Financial Officer in the first quarter of 2016. As the service or performance conditions for her outstanding restricted stock units had not been satisfied at the time of her departure, we reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested restricted stock units and recorded the credit in SG&A expenses for the nine months ended September 30, 2016.    

 

Litigation Expense , Net

 

Litigation expense was $0.3  million for the three months ended September 30, 2017, compared with $55,000 for the three months ended September 30, 2016. The increase in litigation expense was due to increased litigation activity.

 

Litigation expense was $0.9 million for the nine months ended September 30, 2017, compared with $92,000 for the nine months ended September 30, 2016. The increase in litigation expense was due to increased litigation activity. In addition, contributing to the increase in litigation expense was $0.2 million in proceeds received in connection with a litigation settlement recorded in the nine months ended September 30, 2016.

 

Interest and Other Income, Net

 

Interest  and other income, net, was $1.3 million for the three months ended September 30, 2017, compared with $0.8 million for the three months ended September 30, 2016. The increase was primarily due to an increase of $0.8 million in interest income, partially offset by an increase of $0.2 million in amortization of premium on available-for-sale investments and an increase of $0.2 million in foreign currency exchange loss.

 

Interest and other income, net, was $3.9 million for the nine months ended September 30, 2017, compared with $1.9 million for the nine months ended September 30, 2016. The increase was primarily due to an increase of $2.3 million in interest income and an increase of $0.8 million in income related to changes in the value of the deferred compensation plan investments, partially offset by an increase of $0.9 million in amortization of premium on available-for-sale investments and an increase of $0.3 million in foreign currency exchange loss.

 

Income Tax Provision

 

The income tax provision for the three and nine months ended September 30, 2017 was $1.4 million, or 5.8% of pre-tax income, and $3.1 million, or 5.5% of pre-tax income, respectively. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation.

 

The income tax provision for the three and nine months ended September 30, 2016 was $1.4 million, or 8.9% of pre-tax income, and $2.7 million, or 6.9% of pre-tax income, respectively. The effective tax rate dif fered from the federal statutory rate primarily because foreign income  generated by our subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation.

 

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 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 the cost pool to be shared under a cost-sharing arrangement. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any adjustments as of September 30, 2017. We will continue to monitor developments related to this opinion and the potential impact on our financial statements.

 

 

Liquidity and Capital Resources

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 
   

(in thousands, except percentages)

 

Cash and cash equivalents

  $ 104,424     $ 112,703  

Short-term investments

    195,174       155,521  

Total cash, cash equivalents and short-term investments

  $ 299,598     $ 268,224  

Percentage of total assets

    49.5 %     52.5 %
                 

Total current assets

  $ 463,802     $ 382,984  

Total current liabilities

    (66,168 )     (52,921 )

Working capital

  $ 397,634     $ 330,063  

 

As of September 30, 2017, we had cash and cash equivalents of $104.4 million and short-term investments of $195.2 million, compared with cash and cash equivalents of $112.7 million and short-term investments of $155.5 million as of December 31, 2016. As of September 30, 2017, $74.8 million of cash and cash equivalents and $98.3 million of short-term investments were held by our international subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes to repatriate these funds under the current tax laws. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate these funds  to fund our U.S. operations.

   

The significant components of our working capital are cash and cash equivalents, short-term investm ents, accounts receivable, inventories and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of September 30, 2017, we had working capital of $397.6 million, compared with working capital of $330.1 million as of December 31, 2016. The $67.5 million increase in working capital was due to an $80.8 million increase in current assets, partially offset by a $13.3 million increase in current liabilities. The increase in current assets was primarily due to an increase in short-term investments, accounts receivable, inventories and prepaid expenses, partially offset by a decrease in cash and cash equivalents. The increase in current liabilities was primarily due to an increase in accounts payable, accrued compensation and related benefits and other accrued liabilities.

 

Summary of Cash Flows

 

The following table summarizes our cash flow activities:

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
   

(in thousands)

 

Net cash provided by operating activities

  $ 80,448     $ 76,787  

Net cash used in investing activities

    (67,828 )     (37,672 )

Net cash used in financing activities

    (22,684 )     (20,052 )

Effect of exchange rate changes on cash and cash equivalents

    1,785       (444 )

Net increase (decrease) in cash and cash equivalents

  $ (8,279 )   $ 18,619  

 

For the nine months ended September 30, 2017, net cash provided by operating activities was $80.4 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $25.1 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily driven by higher sales and outstanding balances with certain customers with longer payment terms. The increase in inventories was primarily driven by an increase in strategic wafer and die inventories as well as an increase in finished goods to meet current demand and future growth. The increase in accounts payable was primarily driven by increased inventory and capital asset purchases to meet future demand. The increase in accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensation plan and warranty expenses. For the nine months ended September 30, 2016, net cash provided by operating activities was $76.8 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $2.7 million from the changes in our operating assets and liabilities. The increase in other assets was primarily due to a prepaid wafer purchase agreement we funded in the second quarter of 2016. The increase in inventories was primarily due to an increase in strategic wafer and die inventories as well as an increase in finished goods to meet current demand and future growth . The increase in accounts payable was primarily driven by increased inventory and capital asset purchases to meet future demand

 

 

For  the nine months ended September 30, 2017, net cash used in investing activities was $67.8 million, primarily due to net purchases of short-term investments of $40.6 million, purchases of property and equipment of $25.1 million, and net contributions to the deferred compensation plan of $2.1 million. For the nine months ended September 30, 2016, net cash used in investing activities was $37.7 million, primarily due to purchases of property and equipment of $29.0 million, net purchases of investments of $6.3 million, and net contributions to the deferred compensation plan of $2.3 million.

 

During the first nine months of 2017, we funded the purchases of land in Kirkland, Washington, and land and office space in Taipei, Taiwan for $13.3 million. During the first nine months of 2016, we funded the purchases of a previously leased manufacturing facility in Chengdu, China, office space in Shenzhen, China, and land and office space in Taipei, Taiwan for $17.5 million.

 

For the nine months ended September 30, 2017, net cash used in financing activities was $22.7 million, primarily reflecting $25.3 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $2.8 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan. For the nine months ended September 30, 2016, net cash used in financing activities was $20.1 million, primarily reflecting $24.6 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $3.7 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan.

 

We have a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. In addition, outstanding RSU awards contain rights to receive dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. For the nine months ended September 30, 2017, we paid dividends and dividend equivalents totaling $25.3 million. For the nine months ended September 30, 2016, we paid dividends and dividend equivalents totaling $24.6 million.

 

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

 

We anticipate the cash used for future dividends, dividend equivalents and the stock repurchase program will come from our current domestic cash and cash generated from ongoing U.S. operations. If cash held by our international subsidiaries is needed for these payments, we may be required to accrue and pay U.S. taxes to repatriate these funds under the current tax laws. In the future, in order to strengthen our financial position, respond to changes in our circumstance or unforeseen events or conditions, or fund our growth, we may need to discontinue paying dividends and dividend equivalents or repurchasing shares, and may need to raise additional funds by any one or a combination of the following: issuing equity securities, issuing debt or convertible debt securities, incurring indebtedness secured by our assets, or selling certain product lines and/or portions of our business. Accordingly, we cannot ensure that we will continue to pay dividends and dividend equivalents or repurchase shares in the future, and there can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.

 

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

 

Contractual Obligations

 

In October 2017, we entered into agreements to purchase office space in Shanghai, China and Hangzhou, China for approximately $14.4 million and $16.0 million, respectively.  We closed both transactions by early November 2017.

 

Our outstanding purchase commitments primarily consist of wafer purchases from our foundries, assembly services and license arrangements. As of September 30, 2017, the outstanding balance under our purchase commitments was $52.8 million, compared with $46.3 million as of December 31, 2016.

   

 

Other long-term obligations include long-term liabilities reflected in our Condensed Consolidated Balance Sheets, which primarily consist of the deferred compensation plan liabilities and accrued dividend equivale nts. As of September 30, 2017, the outstanding obligations were $28.7 million, compared with $23.2 million as of December 31, 2016.

 

Our other contractual obligations have not changed significantly from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For a discussion of market risks, refer to Item  7A, “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2016. During the three and nine months ended September 30, 2017, there were no material changes or developments that would materially alter the market risk assessment performed as of December 31, 2016 .

 

ITEM  4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Contro ls and Procedures

 

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

 

Based on  this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred d uring the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

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

 

PART II. OTHER INFORMATION

 

ITEM  1. LEGAL PROCEEDINGS

 

We are a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by our shareholders, challenges to the enforceability or validity of our intellectual property, claims that our products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. We defend ourselves vigorously against any such claims.

 

As of September 30, 2017, there were no material pending legal proceedings to which we were a party.

 

ITEM  1A. RISK FACTORS

 

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

 

 

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

   

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