Monolithic Power Systems, Inc.
MONOLITHIC POWER SYSTEMS INC (Form: 10-K, Received: 03/01/2017 16:53:06)

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K


(Mark One)

 

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

 

For the fiscal year ended December 31, 2016

 

or

 

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

 

Commission file number: 000-51026

 


 

Monolithic Power Systems, Inc.

(Exact name of registrant as specified in its charter)

 


  

  

Delaware

77-0466789

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

79 Great Oaks Boulevard, San Jose, CA 95119 (408) 826-0600

(Address of principal executive offices, including zip code and telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Common Stock, $0.001 Par Value

The NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.☒   Yes ☐  No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”).☐   Yes ☒ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  ☐

   

 
1

 

 

 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

 

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

 

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

 

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

 

The number of shares of the registrant’s stock outstanding as of June 30, 2016 was 40,479,523.  The closing price of the registrant’s common stock on the Nasdaq Global Select Market on June 30, 2016 was $68.32.  The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of the Common Stock on the Nasdaq Global Select Market on June 30, 2016 was $1.9 billion.*

 

There were 41,171,970 shares of the registrant’s common stock issued and outstanding as of February 20, 2017.

  


 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Proxy Statement for the registrant’s 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K to the extent stated herein.  The Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended December 31, 2016.  


 

*

Excludes 12,062,909 shares of the registrant’s common stock held by executive officers, directors and stockholders whose ownership exceeds 5% (“affiliates”) of the Common Stock outstanding at June 30, 2016.  Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

 

 
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MONOLITHIC POWER SYSTEMS, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

  

PART I

  

     

Item 1.

Business

5

 

Executive Officers of the Registrant

10

Item 1A.

Risk Factors

29

Item 1B.

Unresolved Staff Comments

29

Item 2.

Properties

29

Item 3.

Legal Proceedings

29

Item 4.

Mine Safety Disclosures

29

  

  

  

  

PART II

  

     

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

30

Item 6.

Selected Financial Data

32

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

33

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 8.

Financial Statements and Supplementary Data

44

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

78

Item 9A.

Controls and Procedures

78

Item 9B.

Other Information

80

  

  

  

  

PART III

  

     

Item 10.

Directors, Executive Officers and Corporate Governance

80

Item 11.

Executive Compensation

80

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

80

Item 13.

Certain Relationships and Related Transactions, and Director Independence

80

Item 14.

Principal Accounting Fees and Services

80

  

  

  

  

PART IV

  

     

Item 15.

Exhibits and Financial Statement Schedules

81

  

Signatures

84

 

 
3

 

   

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K 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, industrial, computing and storage, and communications  markets,

 

 

 

  

estimates of our future liquidity requirements,

 

 

 

  

the cyclical nature of the semiconductor industry,

 

 

 

  

protection of our proprietary technology,

 

 

 

  

business outlook for 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 continue our stock repurchase program and pay future cash dividends, and,

 

 

 

  

the factors that differentiate us from our competitors.

 

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

 

Except as the context otherwise requires, the terms “Monolithic Power Systems”, “MPS”, “Registrant”, “Company”, “we”, “us”, or “our” as used herein are references to Monolithic Power Systems, Inc. and its consolidated subsidiaries.

 

 
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PART I

 

ITEM 1.    BUSINESS

 

General

 

Monolithic Power Systems (“MPS”) is 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 innovative proprietary process technologies. 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. MPS's mission is to reduce total energy consumption in its customers' systems with green, practical and compact solutions.

 

MPS is headquartered in San Jose, California and has over 1,400 employees worldwide, with locations in China, India, Japan, Korea, Singapore, Taiwan, the United States and Europe.

 

Industry Overview

 

Semiconductors comprise the basic building blocks of electronic systems and equipment. Within the semiconductor industry, components can be classified either as discrete devices, such as individual transistors or integrated circuits (“ICs”), in which a number of transistors and other elements are combined to form a more complicated electronic circuit. ICs can be further divided into three primary categories: digital, analog, and mixed-signal. Digital ICs, such as memory devices and microprocessors, can store or perform arithmetic functions on data that is represented by a series of ones and zeroes. Analog ICs, in contrast, handle real world signals such as temperature, pressure, light, sound, or speed. In addition, analog ICs also perform power management functions, such as regulating or converting voltages, for electronic devices. Mixed-signal ICs combine digital and analog functions onto a single chip and play an important role in bridging real world to digital systems.

 

Analog and Mixed-Signal Markets.   We focus on the market for high performance analog and mixed-signal ICs. High performance products generally are differentiated by functionality and performance factors which include integration of higher levels of functionality onto a single chip, greater precision, higher speed and lower heat and noise. There are several key factors that distinguish analog and mixed-signal IC markets, and in particular the high performance portion of the analog and mixed signal IC market, from digital IC markets. These factors include longer product life cycles, numerous market segments, technology that is difficult to replicate, relative complexity of design and process technology, importance of experienced design engineers, lower capital requirements and diversity of end markets.  We have, however, targeted product and market areas that we believe have the ability to offer above-average growth over the long term, compared to the semiconductor industry as a whole.

 

Market Segments and Applications

 

We currently target our products at the communications, computing and storage, consumer and industrial markets, with the consumer market representing the largest portion of our revenue. The following is a brief summary of the various applications in each market segment and each market segment’s contribution as a percentage of our total revenue:

 

           

Percentage of Total Revenue

 

Market Segments

   

Applications

 

2016

 

2015

 

2014

Consumer

 

Set-top boxes, monitors, gaming, lighting, chargers, home appliances, cellular handsets, digital video players, GPS, televisions, stereos and cameras.

 

39.5%

 

43.6%

 

43.4%

Industrial   Automotive, power sources, security, point-of-sale systems, smart meters and other industrial equipment.   

23.1%

 

19.9%

 

17.4%

Computing and storage   Storage networks, computers and notebooks, printers, servers and workstations.  

20.7%

 

17.0%

 

16.3%

Communications   Networking and telecommunication infrastructure, routers and modems, wireless access points and voice over IP.   16.7%   19.5%   22.9%

 

 
5

 

 

Produc t Families

 

Our proprietary process technologies enable us to design and deliver smaller, single-chip power management ICs. These technologies simplify the design process, and are applicable across a wide range of analog applications within the consumer, industrial, computing and storage, and communications markets. O ur product families are differentiated with respect to their high degree of integration and strong levels of accuracy and efficiency, making them cost-effective relative to many competing solutions. Our key product families include the following:

 

Direct Current (DC) to DC Products.   DC to DC ICs are used to convert and control voltages within a broad range of electronic systems, such as portable electronic devices, wireless LAN access points, computers, and monitors, automobiles and medical equipment. We believe that our DC to DC products are differentiated in the market, particularly with respect to their high degree of integration, high voltage operation, high load current, high switching speed and small footprint. These features are important to our customers as they result in fewer components, a smaller form factor, more accurate regulation of voltages, and, ultimately, lower system cost and increased reliability through the elimination of many discrete components and power devices. The DC to DC product family accounted for approximately 90% of our total revenue in 2016, 2015 and 2014.  

  

Lighting Control Products.   Lighting control ICs are used in backlighting and general illumination products. Lighting control ICs for backlighting are used in systems that provide the light source for LCD panels typically found in notebook computers, monitors, car navigation systems and televisions. Backlighting solutions are typically either white light emitting diode lighting sources or cold cathode fluorescent lamps. In addition to AC/DC offline solutions for lighting illumination applications, we also offer AC/DC power conversion solutions for a diverse number of end products that plug into a wall outlet. The Lighting Control product family accounted for approximately 10% of our total revenue in 2016, 2015 and 2014.

 

In the future, we will continue to introduce additional new products within our existing product families, as well as expand our newer product families. Our ability to achieve revenue growth will depend in part upon our ability to enter new market segments, gain market share, grow in regions outside of China, Taiwan and other Asian markets, expand our customer base and successfully secure manufacturing capacity.

 

Customers, Sales and Marketing

 

We sell our products through third party distributors, value-added resellers and directly to original equipment manufacturers (OEMs), original design manufacturers (ODMs), and electronic manufacturing service (EMS) providers. Our third party distributors are subject to distribution agreements with us which allow the distributor to sell our products to end customers and other resellers.  Distributors distribute our products to end customers which include OEMs, ODMs or EMS providers.  Our value-added resellers may second source our products and provide other services to customers. ODMs typically design and manufacture electronic products on behalf of OEMs, and EMS providers typically provide manufacturing services for OEMs and other electronic product suppliers.  

 

Sales to our largest distributor accounted for approximately 22% of revenue in 2016, 24% of revenue in 2015 and 26% of revenue in 2014. No other distributors or end customers accounted for more than 10% of revenue in any of the periods presented.

 

Current distribution agreements with several of our major distributors provide that each distributor has the non-exclusive right to sell and use its best efforts to promote and develop a market for our products. These agreements provide that payment for purchases from us will generally occur within 30 to 45 days from the date of invoice.  In addition, we allow for limited stock rotation in certain agreements.

 

 
6

 

 

We have sales offices located in China, Japan, Korea, Taiwan and the United States, and have marketing representatives in India, Singapore and Europe. Our products typically require a highly technical sales and applications engineering effort where we assist our customers in the design and use of our products in their application.  We maintain a staff of applications engineers who work directly with our customers’ engineers in the development of their systems’ electronics containing our products.

 

Because our sales are primarily billed and payable in United States dollars, our sales are generally not subject to fluctuating currency exchange rates. However, because a majority of our revenue is attributable to direct or indirect sales to customers in Asia, changes in the relative value of the dollar may create pricing pressures for our products. For each of the years ended December 31, 2016, 2015 and 2014, 91% of our revenue was from customers in Asia.

 

Our sales are made primarily pursuant to standard individual purchase orders. Our backlog consists of orders that we have received from customers which have not yet shipped. Our manufacturing lead times are generally 8 to 16 weeks and we often build inventory in advance of customer orders based on our forecast of future customer orders. This subjects us to certain risks, most notably the possibility that sales will not meet our forecast, which could lead to inventories in excess of demand. If excess inventory exists, it may be necessary for us to sell it at a substantial discount, take a significant write-down or dispose of it altogether, all of which would negatively affect our profit margins.

 

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

 

Research and Development

 

We have assembled a qualified team of engineers in the United States and China with core competencies in analog and mixed-signal design. Through our research and development efforts, we have developed a collection of intellectual property and know-how that we are able to leverage across our products and markets. These include the development of high efficiency power devices, the design of precision analog circuits, expertise in mixed-signal integration and the development of proprietary semiconductor process technologies.

 

Our research and development efforts are generally targeted at three areas: systems architecture, circuit design and implementation, and process technology. In the area of systems architecture, we are exploring new ways of solving our customers’ system design challenges and are investing in the development of systems expertise in new markets and applications that align well with our core capabilities. In the area of circuit design and implementation, our initiatives include expanding our portfolio of products and adding new features to our products. In the area of process technology, we are investing research and development resources to provide leading-edge analog power processes for our next generation of integrated circuits. Process technology is a key strategic component to our future growth. 

 

Our research and development expenses totaled $73.6 million, $65.8 million and $58.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.

 

Patents and Intellectual Property Matters

 

We rely on our proprietary technologies, which include both our proprietary circuit designs for our products and our proprietary manufacturing process technologies. Our future success and competitive position depend in part upon our ability to obtain and maintain protection of our proprietary technologies.

 

In general, we have elected to pursue patent protection for aspects of our circuit and device designs that we believe are patentable and to protect our manufacturing process technologies by maintaining those process technologies as trade secrets. As of December 31, 2016, we had 1,123 patents/applications issued or pending, of which 319 patents have been issued in the United States. Our issued patents are scheduled to expire at various times through December 2036. Our patents are material to our business, but we do not rely on any one particular patent for our success. We also rely on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our technology, know-how and processes. We also seek to register certain of our trademarks as we deem appropriate. We have not registered any of our copyrights and do not believe registration of copyrights is material to our business. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future technology or products or to obtain and use information that we regard as proprietary. There can be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated or circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in the United States. Our failure to adequately protect our proprietary technologies could materially harm our business.

 

 
7

 

 

The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights. For a more complete description of our legal matters, please read Note 14 to our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Patent infringement is an ongoing risk, in part because other companies in our industry could have patent rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to enforce our intellectual property rights, and we may have to defend ourselves against infringement claims. Any such litigation could be very costly and may divert our management resources. Further, we have agreed to indemnify certain of our customers and suppliers in some circumstances against liability from infringement by our products. In the event any third party were to make an infringement claim against us or our customers, we could be enjoined from selling selected products or could be required to indemnify our customers or suppliers or pay royalties or other damages to third parties. If any of our products is found to infringe and we are unable to obtain necessary licenses or other rights on acceptable terms, we would either have to change our product so that it does not infringe or stop making the infringing product, which could have a material adverse effect on our operating results, financial condition and cash flows.

 

Manufacturing

 

We utilize a fabless business model, working with third parties to manufacture and assemble our ICs. This fabless approach allows us to focus our engineering and design resources on our strengths and to reduce our fixed costs and capital expenditures. In contrast to many fabless semiconductor companies, who utilize standard process technologies and design rules established by their foundry partners, we have developed our own proprietary process technologies and collaborate with our foundry partners to install our technologies on their equipment in their facilities for use solely on our behalf. This close collaboration and control over the manufacturing process has historically resulted in favorable yields and product performance for our ICs.

 

We currently contract with four suppliers to manufacture our wafers in foundries located in China and Korea. Once our silicon wafers have been produced, they are shipped to our facility in Chengdu, China for wafer sort. Our semiconductor products are then assembled and packaged by independent subcontractors in China and Malaysia. The assembled ICs are then sent either for final testing at our Chengdu facility, or to other turnkey providers who perform final testing based on our standards prior to shipping to our customers.

 

In September 2004, we entered into a lease arrangement for a 60,000 square-foot manufacturing facility located in Chengdu, China. In September 2015, we exercised our option to purchase the facility and the transaction was completed in January 2016. The facility has been fully operational since 2006 and we have benefitted from shorter manufacturing cycle times and lower labor and overhead costs compared to our operations prior to the use of the facility. We have expanded our product testing capabilities in this facility and are able to take advantage of the rich pool of local engineering talent to expand our manufacturing support and engineering operations. In addition, we constructed a 150,000 square-foot research and development facility in Chengdu, China, which was put into operation in October 2010.

 

Key Personnel and Employees

 

Our performance is substantially dependent on the performance of our executive officers and key employees. Due to the relative complexity of the design of our analog and mixed-signal ICs, our engineers generally have more years of experience and greater circuit design aptitude than the more prevalent digital circuit design engineer. Analog engineers with advanced skills are limited in number and difficult to replace. The loss of the services of key officers, managers, engineers and other technical personnel would materially harm our business. Our future success will depend, in part, on our ability to attract, train, retain, and motivate highly qualified technical and managerial personnel.  We may not be successful in attracting and retaining such personnel. Our employees are not represented by a collective bargaining organization, and we have never experienced a work stoppage or strike. Our management considers employee relations to be good. As of December 31, 2016, we employed 1,417 employees primarily located in China, India, Japan, Korea, Singapore, Taiwan, the United States and Europe, compared with 1,260 employees as of December 31, 2015.

 

 
8

 

 

Competition

 

The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue. Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit both applications engineering and design engineering personnel, our ability to introduce new products, and our ability to maintain the rate at which we introduce these new products. Our industry is characterized by decreasing unit selling prices over the life of a product. We compete with domestic and international semiconductor companies, many of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. We are in direct and active competition, with respect to one or more of our product lines, with at least 10 manufacturers of such products, of varying size and financial strength. We consider our primary competitors to include Analog Devices, Infineon Technologies, Intersil (recently acquired by Renesas Electronics), Linear Technology (pending acquisition by Analog Devices), Maxim Integrated Products, NXP Semiconductors (pending acquisition by Qualcomm), ON Semiconductor, Power Integrations, ROHM Semiconductor, Semtech and Texas Instruments.

 

We expect continued competition from existing competitors as well as competition from new entrants into the semiconductor market. We believe that we are competitive in the markets in which we sell, particularly because our ICs typically are smaller in size, are highly integrated, possess higher levels of power management functionalities and achieve high performance specifications at lower price points than most of our competition. However, there is no assurance that our products will continue to compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering this market. In addition, there has recently been a high level of consolidation in the semiconductor industry. If these or future acquisitions are successful, competition may intensify, and our competitors may have additional resources to compete against us.

 

Geographical and Segment Information

 

Please refer to the geographical and segment information in Note 17 to our consolidated financial statements in the section entitled “Item 8. Financial Statements and Supplemental Data.”

 

Please refer to the discussion of risks related to our foreign operations in the section entitled “Item 1A: Risk Factors.”

 

Available Information

 

We were incorporated in California in 1997 and reincorporated in Delaware in November 2004. Our executive offices are located at 79 Great Oaks Boulevard, San Jose, California 95119. Our telephone number is (408) 826-0600. Our e-mail address is investors@monolithicpower.com, and our website is www.monolithicpower.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge. They may be obtained from our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or at the SEC website at www.sec.gov. Information contained on our website is not a part of this Annual Report on Form 10-K.

 

 
9

 

 

Executive Officers of the Registrant

 

Information regarding our executive officers as of March 1, 2017 is as follows:

 

Name

 

Age

 

Position

Michael Hsing

 

57

 

President, CEO and Director

Bernie Blegen

 

59

 

Vice President and Chief Financial Officer

Deming Xiao

 

54

 

President of Asia Operations

Maurice Sciammas

 

57

 

Senior Vice President of Worldwide Sales and Marketing

Saria Tseng

 

46

 

Vice President, Strategic Corporate Development, General Counsel and Corporate Secretary

 

Michael Hsing has served on our Board of Directors and has served as our President and Chief Executive Officer since founding MPS in August 1997. Prior to founding MPS, Mr. Hsing was a Senior Silicon Technology Developer at several analog IC companies, where he developed and patented key technologies, which set new standards in the power electronics industry. Mr. Hsing is an inventor on numerous patents related to the process development of bipolar mixed-signal semiconductor manufacturing. Mr. Hsing holds a B.S.E.E. from the University of Florida.

 

Bernie Blegen has served as our Chief Financial Officer since July 2016 and is responsible for finance, accounting, tax, treasury and investor relations. From August 2011 to June 2016, Mr. Blegen served as our Corporate Controller. Prior to joining MPS, Mr. Blegen held a number of executive finance and accounting positions for other publicly traded technology companies, including Xilinx, Inc. and Credence Systems.  Mr. Blegen is a CPA and holds a B.A. from the University of California, Santa Barbara.

 

Deming Xiao has served as our President of Asia Operations since January 2008. Since joining us in May 2001, Mr. Xiao has held several executive positions, including Foundry Manager and Senior Vice President of Operations. Before joining MPS, from June 2000 to May 2001, Mr. Xiao was Engineering Account Manager at Chartered Semiconductor Manufacturing, Inc. Prior to that, Mr. Xiao spent six years as the Manager of Process Integration Engineering at Fairchild Imaging Sensors. Mr. Xiao holds a B.S. in Semiconductor Physics from Sichuan University, Chengdu, China and an M.S.E.E. from Wayne State University.

 

Maurice Sciammas has served as our Senior Vice President of Worldwide Sales and Marketing since 2007. Mr. Sciammas joined MPS in July 1999 and served as Vice President of Products and Vice President of Sales (excluding greater China) until he was appointed to his current position.  Before joining MPS, he was Director of IC Products at Supertex from 1990 to 1999. He has also held positions at Micrel, Inc. He holds a B.S.E.E. degree from San Jose State University.

 

Saria Tseng has served as our Vice President, General Counsel and Corporate Secretary since 2004 and additionally as our Vice President, Strategic Corporate Development since 2009. Ms. Tseng joined the Company from MaXXan Systems, Inc., where she was also Vice President and General Counsel from 2001 to 2004. Previously, Ms. Tseng was an attorney at Gray Cary Ware & Freidenrich, LLP and Jones, Day, Reavis & Pogue. Ms. Tseng is a member of the state bar in both California and New York and is a member of the bar association of the Republic of China (Taiwan). Ms. Tseng currently serves on the Board of Directors of Super Micro Computer, Inc., a global leader in high performance server technology. Ms. Tseng holds Masters of Law degrees from the University of California at Berkeley and the Chinese Culture University in Taipei.

 

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 Annual Report on Form 10-K 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.

 

 
10

 

 

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:

 

  

our results of operations and financial performance;

 

 

 

  

general economic, industry and market conditions worldwide;

 

 

 

  

our ability to outperform the market, and outperform at a level that meets or exceeds our investors’ expectations;

 

 

 

  

whether our forward guidance meets the expectations of our investors;

 

 

 

  

the depth and liquidity of the market for our common stock;

  

  

developments generally affecting the semiconductor industry;

 

 

 

  

commencement of or developments relating to our involvement in litigation;

 

 

 

  

investor perceptions of us and our business strategies;

 

 

 

  

changes in securities analysts’ expectations or our failure to meet those expectations;

 

 

 

  

actions by institutional or other large stockholders;

 

 

 

  

terrorist acts or acts of war;

 

 

 

  

actual or anticipated fluctuations in our results of operations;

 

 

 

  

actual or anticipated manufacturing capacity limitations;

 

 

 

  

developments with respect to intellectual property rights;

 

 

 

  

introduction of new products by us or our competitors;

 

 

 

  

our sale of common stock or other securities in the future;

 

 

 

  

conditions and trends in technology industries;

 

 

 

  

our loss of key customers;

 

 

 

  

changes in market valuation or earnings of our competitors;

  

  

any mergers, acquisitions or divestitures of assets undertaken by us;

 

  

government debt default;

     
  government policies and regulations on international trade restrictions and corporate taxes;

 

  

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;

 

 

 

 

our ability to increase our gross margins;

 

 

 

  

market reactions to guidance from other semiconductor companies or third-party research groups;

 

 
11

 

 

  

market reactions to merger and acquisition activities in the semiconductor industry, and rumors or expectations of further consolidation in the industry;

 

 

 

  

investments in sales and marketing resources to enter new markets;

 

 

 

  

costs of increasing wafer capacity and qualifying additional third-party wafer fabrication facilities;

 

 

 

  

our ability to continue the stock repurchase program and pay quarterly cash dividends to stockholders; and,

 

 

 

 

changes in the estimation of the future size and growth rate of our markets.

 

In addition, the stock market often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

 

We expect our operating results to fluctuate from quarter to quarter and year over year, which may make it difficult to predict our future performance and could cause our stock price to decline and be volatile.

 

Our revenue, expenses, and results of operations are difficult to predict, have varied significantly in the past and will continue to fluctuate significantly in the future due to a number of factors, many of which are beyond our control. We expect fluctuations to continue for a number of reasons, including:

 

 

changes in general demand for electronic products as a result of worldwide macroeconomic conditions;

 

 

 

  

changes in business conditions at our distributors, value-added resellers and/or end-customers;

 

 

 

  

changes in general economic conditions in the countries where our products are sold or used;

 

 

 

  

the timing of developments and related expenses in our litigation matters;

 

 

 

  

the loss of key customers or our inability to attract new customers due to customer and prospective customer concerns about being litigation targets;

 

 

 

  

continued dependence on turns business (orders received and shipped within the same fiscal quarter);

 

 

 

  

continued dependence on the Asian markets for our customer base;

 

 

 

  

increases in assembly costs due to commodity price increases, such as the price of gold;

 

 

 

  

the timing of new product introductions by us and our competitors;

 

 

 

  

changes in our revenue mix between original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), distributors and value-added resellers;

 

 

 

 

changes in product mix, product returns, and actual and potential product liability;

 

 

 

  

the acceptance of our new products in the marketplace;

 

  

our ability to develop new process technologies and achieve volume production;

 

  

our ability to meet customer product demand in a timely manner;

 

  

the scheduling, rescheduling, or cancellation of orders by our customers;

 

 

 

  

the cyclical nature of demand for our customers’ products;

 

 
12

 

 

  

fluctuations in our estimate for stock rotation reserves;

 

 

 

  

our ability to manage our inventory levels, including the levels of inventory held by our distributors;

 

 

 

  

product obsolescence;

 

 

 

  

seasonality and variability in the consumer, industrial, computing and storage, and communications markets;

 

 

 

  

the availability of adequate manufacturing capacity from our outside suppliers;

 

 

 

  

increases in prices for finished wafers due to general capacity shortages;

 

 

 

  

the potential loss of future business resulting from capacity issues;

 

 

 

  

changes in manufacturing yields;

 

 

 

  

movements in foreign exchange rates, interest rates or tax rates; and,

 

 

 

  

stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees.

 

Due to the factors noted above and other risks described in this section, many of which are beyond our control, you should not rely on quarter-to-quarter or year-over-year comparisons to predict our future financial performance. Unfavorable changes in any of the above factors may seriously harm our business and results of operations, and may cause our stock price to decline and be volatile.

 

Our business has been and may continue to be significantly impacted by worldwide economic conditions, and uncertainty in the outlook for the global economy makes it more likely that our actual results will differ materially from expectations.

 

In recent years, global credit and financial markets have experienced disruptions, and may continue to experience disruptions in the future, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and continued uncertainty about economic stability. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The continued or further tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. Volatility in the credit markets could severely diminish liquidity and capital availability. Demand for our products is a function of the health of the economies in the United States, Europe, China and the rest of the world. We cannot predict the timing, strength or duration of any economic disruption or subsequent economic recovery worldwide, in the United States, in our industry, or in the different markets that we serve. These and other economic factors have had, and may in the future have, a material adverse effect on demand for our products and on our financial condition and operating results.

 

We may not be profitable on a quarterly or annual basis.

 

Our profitability is dependent on many factors, including:

 

  

our sales, which because of our turns business, are difficult to accurately forecast;

 

 

 

  

the cancellation or rescheduling of our customers’ orders, which may occur without significant penalty to our customers;

 

  

changes in general demand for electronic products as a result of worldwide macroeconomic conditions;

 

 
13

 

 

  

changes in revenue mix between OEMs, ODMs, distributors and value-added resellers;

 

 

 

  

changes in product mix, and actual and potential product liability;

 

 

 

  

changes in revenue mix between end market segments (i.e. consumer, industrial, computing and storage, and communications);

 

 

 

  

our competition, which could adversely impact our selling prices and our potential sales;

 

 

 

  

our manufacturing costs, including our ability to negotiate with our vendors and our ability to efficiently run our test facility in China;

 

 

 

  

manufacturing capacity constraints;

     
  level of activity in our legal proceedings, which could result in significant legal expenses;

 

 

 

  

stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees; and,

 

 

 

  

our operating expenses, including general and administrative expenses, selling and marketing expenses, and research and development expenses relating to products that will not be introduced and will not generate revenue until later periods, if at all.

 

We may not achieve profitability on a quarterly or annual basis in the future. Unfavorable changes in our operations, including any of the factors noted above, may have a material adverse effect on our quarterly or annual profitability.

  

We may not experience growth rates comparable to past years.

 

In the past, our revenue increased significantly in certain years due to increased sales of certain of our products. Due to various factors, including increased competition, loss of certain of our customers, unfavorable changes in our operations, reduced global electronics demand, end-customer market downturn, market acceptance and penetration of our current and future products and ongoing litigation, we may not experience growth rates comparable to past periods, which could materially and adversely affect our stock price and results of operations.

 

There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts.

 

In June 2014, the Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. We anticipate the cash used for future dividends 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 the payment of dividends, we may be required to accrue and pay U.S. taxes to repatriate these funds, which may have a material adverse effect on our financial condition and results of operations.

 

The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other things, our 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 our Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of our stockholders. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on the price of our common stock.

 

We may be unsuccessful in developing and selling new products with margins similar to or better than what we have experienced in the past, which would impact our overall gross margin and financial performance.

 

Our success depends on products that are differentiated in the market, which result in gross margins that have historically been above industry averages. Should we fail to improve our gross margin in the future, and accordingly develop and introduce sufficiently differentiated products that result in higher gross margins than industry averages, our financial condition and results of operations could be materially and adversely affected. 

 

 
14

 

 

The highly cyclical nature of the semiconductor industry, which has produced significant and sometimes prolonged downturns, could materially adversely affect our operating results, financial condition and cash flows.

 

Historically, the semiconductor industry has been highly cyclical and, at various times, has experienced significant downturns and wide fluctuations in supply and demand. These conditions have caused significant variances in product demand and production capacity, as well as rapid erosion of average selling prices. The industry may experience severe or prolonged downturns in the future, which could result in downward pressure on the price of our products as well as lower demand for our products. Because significant portions of our expenses are fixed in the short term or incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any sales shortfall. These conditions could have a material adverse effect on our operating results, financial condition and cash flows.

   

Industry consolidation may lead to increased competition and may harm our operating results.

 

In recent years, there has been a trend toward semiconductor industry consolidation. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry, or become unable to continue operations unless they find an acquirer or consolidate with another company. In addition, companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that semiconductor industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.

 

If demand for our products declines in the major end markets that we serve, our revenue will decrease and our results of operations and financial condition would be materially and adversely affected.

 

We believe that the application of our products in the communications, computing and storage, consumer and industrial markets will continue to account for the majority of our revenue. If the demand for our products declines in the major end markets that we serve, our revenue will decrease and our results of operations and financial condition would be materially and adversely affected. In addition, as technology evolves, the ability to integrate the functionalities of various components, including our discrete semiconductor products, onto a single chip and/or onto other components of systems containing our products increases. Should our customers require integrated solutions that we do not offer, demand for our products could decrease, and our business and results of operations would be materially and adversely affected.

  

We may be unsuccessful in developing and selling new products or in penetrating new markets required to maintain or expand our business.

 

Our competitiveness and future success depend on our ability to design, develop, manufacture, assemble, test, market, and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our product markets could have a material adverse effect on our competitive position within these markets. Our failure to timely develop new technologies or to react quickly to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenue, and/or a loss of market share to competitors.

 

As we develop new product lines, we must adapt to market conditions that are unfamiliar to us, such as competitors and distribution channels that are different from those we have known in the past. Some of our new product lines require us to re-equip our labs to test parameters we have not tested in the past. If we are unable to adapt rapidly to these new and additional conditions, we may not be able to successfully penetrate new markets.

 

 
15

 

 

The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:

 

  

timely and efficient completion of process design and device structure improvements;

 

 

 

  

timely and efficient implementation of manufacturing, assembly, and test processes;

 

 

 

  

the ability to secure and effectively utilize fabrication capacity in different geometries;

 

 

 

  

product performance;

 

 

 

  

product availability;

 

 

 

  

product quality and reliability; and,

 

 

 

  

effective marketing, sales and service.

 

To the extent that we fail to timely introduce new products or to quickly penetrate new markets, our revenue and financial condition could be materially adversely affected.

 

We may face competition from customers developing products internally.

 

Our customers generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop their own products internally. The future prospects for our products in these markets are dependent in part upon our customers' acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. Customers may in the future continue to use internally developed components. They also may decide to develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations could be materially and adversely affected.

 

We derive most of our revenue from direct or indirect sales to customers in Asia and have significant operations in Asia, which may expose us to political, cultural, regulatory, economic, foreign exchange, and operational risks.

 

We derive most of our revenue from customers located in Asia through direct sales or indirect sales through distribution arrangements and value-added reseller agreements with parties located in Asia. As a result, we are subject to increased risks due to this geographic concentration of business and operations. For the year ended December 31, 2016, 91% of our revenue was from customers in Asia. There are risks inherent in doing business in Asia, and internationally in general, including:

 

  

changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States and in the countries in which we manufacture or sell our products;

 

 

 

  

trade restrictions, including restrictions imposed by the United States on trading with parties in foreign countries;

 

 

 

  

currency exchange rate fluctuations impacting intra-company transactions;

 

 

 

  

the fluctuations in the value of the U.S. Dollar relative to other foreign currencies, which could affect the competitiveness of our products;

 

 

 

  

transportation delays;

 

 

 

  

changes in tax regulations in China that may impact our tax status in Chengdu and other regions where we have significant operations;

 

 
16

 

 

  

multi-tiered distribution channels that lack visibility to end customer pricing and purchase patterns;

 

 

 

  

international political relationships and threats of war;

 

 

 

  

terrorism and threats of terrorism;

 

 

 

  

epidemics and illnesses;

 

 

 

  

work stoppages and infrastructure problems due to adverse weather conditions or natural disasters;

 

 

 

  

work stoppages related to employee dissatisfaction;

 

 

 

  

economic, social and political instability;

 

 

 

  

longer accounts receivable collection cycles and difficulties in collecting accounts receivables;

 

 

 

  

enforcing contracts generally; and,

 

 

 

  

less effective protection of intellectual property and contractual arrangements.

 

If we fail to expand our customer base and significantly reduce the geographic concentration of our customers, we will continue to be subject to the foregoing risks, which could materially and adversely affect our revenue and financial condition.

  

We depend on a limited number of customers, including distributors, for a significant percentage of our revenue.

 

Historically, we have generated most of our revenue from a limited number of customers, including distributors. For example, sales to our largest distributor accounted for approximately 22% of our total revenue for the year ended December 31, 2016. We continue to rely on a limited number of customers for a significant portion of our revenue. Because we rely on a limited number of customers for significant percentages of our revenue, a decrease in demand or significant pricing pressure for our products from any of our major customers for any reason (including due to competitions, market conditions, catastrophic events or otherwise) could have a materially adverse impact on our financial conditions and results of operations.

 

We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act, or the FCPA. Our failure to comply with these laws could result in penalties which could harm our reputation and have a material adverse effect on our business, results of operations and financial condition.

 

We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. Although we have implemented policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. We have significant operations in Asia, which places us in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance with the FCPA and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by the U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financial condition and results of operations.

 

 
17

 

 

New regulations   related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

 

In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to conduct diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have undertaken the necessary diligence to determine whether such minerals are used in the manufacture of our products. However, the implementation of these new requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, regardless of our findings, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.

 

We receive a significant portion of our revenue from distribution arrangements, value-added resellers and direct customers, and the loss of any one of these distributors, value-added resellers or direct customers or failure to collect a receivable from them could adversely affect our operations and financial position.

 

We market our products through distribution arrangements and value-added resellers and through our direct sales and applications support organization to customers that include OEMs, ODMs and electronic manufacturing service providers (“EMSs”). Receivables from our customers are generally not secured by any type of collateral and are subject to the risk of being uncollectible. Sales to our largest distributor accounted for approximately 22% of our total revenue for the year ended December 31, 2016. Significant deterioration in the liquidity or financial condition of any of our major customers or any group of our customers could have a material adverse impact on the collectability of our accounts receivable and our future operating results. We primarily conduct our sales on a purchase order basis, and we do not have any long-term supply commitments. 

   

Moreover, we believe a high percentage of our products are eventually sold to a number of OEMs. Although we communicate with OEMs in an attempt to achieve “design wins,” which are decisions by OEMs and/or ODMs to incorporate our products, we do not have purchase commitments from these end users. Therefore, there can be no assurance that the OEMs and/or ODMs will continue to incorporate our ICs into their products. OEM technical specifications and requirements can change rapidly, and we may not have products that fit new specifications from an end-customer for whom we have had previous design wins. We cannot be certain that we will continue to achieve design wins from large OEMs, that our direct customers will continue to be successful in selling to the OEMs, or that the OEMs will be successful in selling products which incorporate our ICs. The loss of any significant customer, any material reduction in orders by any of our significant customers or by their OEM customers, the cancellation of a significant customer order, or the cancellation or delay of a customer’s or an OEM’s significant program or product could reduce our revenue and adversely affect our results of operations and financial condition. 

   

Due to the nature of our business as a component supplier, we may have difficulty both in accurately predicting our future revenue and appropriately managing our expenses.

 

Because we provide components for end products and systems, demand for our products is influenced by our customers’ end product demand. As a result, we may have difficulty in accurately forecasting our revenue and expenses. Our revenue depends on the timing, size, and speed of commercial introductions of end products and systems that incorporate our products, all of which are inherently difficult to forecast, as well as the ongoing demand for previously introduced end products and systems. In addition, demand for our products is influenced by our customers’ ability to manage their inventory. Our sales to distributors are subject to higher volatility because they service demand from multiple levels of the supply chain which, in itself, is inherently difficult to forecast. If our customers, including distributors, do not manage their inventory correctly or misjudge their customers’ demand, our shipments to and orders from our customers may vary significantly on a quarterly basis.

 

 
18

 

 

Our ability to increase product sales and revenue may be constrained by the manufacturing capacity of our suppliers.

 

Although we provide our suppliers with rolling forecasts of our production requirements, their ability to provide wafers to us is limited by the available capacity, particularly capacity in the geometries we require, at the facilities in which they manufacture wafers for us As a result, this lack of capacity has at times constrained our product sales and revenue growth. In addition, an increased need for capacity to meet internal demands or demands of other customers could cause our suppliers to reduce capacity available to us. Our suppliers may also require us to pay amounts in excess of contracted or anticipated amounts for wafer deliveries or require us to make other concessions in order to acquire the wafer supply necessary to meet our customer requirements. If our suppliers extend lead times, limit supplies or the types of capacity we require, or increase prices due to capacity constraints or other factors, our revenue and gross margin may materially decline. In addition, if we experience supply delays or limitations, our customers may reduce their purchase levels with us and/or seek alternative solutions to meet their demand, which could materially and adversely impact our business and results of operations. Delays in increasing third-party manufacturing capacity may also limit our ability to meet customer demand.

 

We currently depend on third-party suppliers to provide us with wafers for our products. If any of our wafer suppliers become insolvent or capacity constrained and are unable and/or fail to provide us sufficient wafers at acceptable yields and at anticipated costs, our revenue and gross margin may decline or we may not be able to fulfill our customer orders.

 

We have a supply arrangement with certain suppliers for the production of wafers. Should any of our suppliers become insolvent or capacity constrained, we may not be able to fulfill our customer orders, which would likely cause a decline in our revenue.

 

While certain aspects of our relationship with these suppliers are contractual, many important aspects of this relationship depend on our suppliers’ continued cooperation and our management of the supplier relationships. In addition, the fabrication of ICs is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous ICs on each wafer to be non-functional. This could potentially reduce yields. The failure of our suppliers to supply us wafers at acceptable yields could prevent us from fulfilling our customer orders for our products and would likely cause a decline in our revenue.  

 

Further, as is common in the semiconductor industry, our customers may reschedule or cancel orders on relatively short notice. If our customers cancel orders after we submit a committed forecast to our suppliers for the corresponding wafers, we may be required to purchase wafers that we may not be able to resell, which would adversely affect our operating results, financial condition and cash flows.

   

We might not be able to deliver our products on a timely basis if our relationships with our assembly and test subcontractors are disrupted or terminated.

 

We do not have direct control over product delivery schedules or product quality because all of our products are assembled by third-party subcontractors and a portion of our testing is currently performed by third-party subcontractors. Also, due to the amount of time typically required to qualify assembly and test subcontractors, we could experience delays in the shipment of our products if we were forced to find alternate third parties to assemble or test our products. In addition, events such as global economic crises may materially impact our assembly suppliers’ ability to operate. Any future product delivery delays or disruptions in our relationships with our subcontractors could have a material adverse effect on our operating results, financial condition and cash flows. 

  

 
19

 

 

There may be unanticipated costs associated with adding to or supplementing our third-party suppliers’ manufacturing capacity.

 

We anticipate that future growth of our business will require increased manufacturing capacity on the part of third-party supply foundries, assembly shops, and testing facilities for our products. In order to facilitate such growth, we may need to enter into strategic transactions, investments and other activities. Such activities are subject to a number of risks, including:

 

  

the costs and expense associated with such activities;

 

 

 

  

the availability of modern foundries to be developed, acquired, leased or otherwise made available to us or our third-party suppliers;

 

 

 

  

the ability of foundries and our third-party suppliers to obtain the advanced equipment used in the production of our products;

 

  

delays in bringing new foundry operations online to meet increased product demand; and,

 

 

 

  

unforeseen environmental, engineering or manufacturing qualification problems relating to existing or new foundry facilities, including delays in qualification of new foundries by our customers.

 

These and other risks may affect the ultimate cost and timing of any expansion of our third-party suppliers’ capacity.

  

We purchase inventory in advance based on expected demand for our products, and if demand is not as expected, we may have insufficient or excess inventory, which could adversely impact our financial position.

 

As a fabless semiconductor company, we purchase our inventory from third-party manufacturers in advance of selling our products. We place orders with our manufacturers based on existing and expected orders from our customers for particular products. While most of our contracts with our customers and distributors include lead time requirements and cancellation penalties that are designed to protect us from misalignment between customer orders and inventory levels, we must nonetheless make some predictions when we place orders with our manufacturers. In the event that our predictions are inaccurate due to unexpected increases in orders or unavailability of product within the timeframe that is required, we may have insufficient inventory to meet our customer demands. In the event that we order products that we are unable to sell due to a decrease in orders, unexpected order cancellations, injunctions due to patent litigation, or product returns, we may have excess inventory which, if not sold, may need to be disposed of or would result in a decrease in our revenue in future periods as the excess inventory at our distributors is sold. If any of these situations were to arise, it could have a material impact on our business and financial position.

 

Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

 

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof and discrete items such as future exercises or dispositions of stock options and restricted stock releases. In addition, we are subject to potential future examinations of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. For example, our U.S. federal income tax returns for the years ended December 31, 2005 through December 31, 2007 were examined by the IRS. We reached a resolution on the audits in April 2015 and recorded a one-time net charge of $2.7 million to our income tax provision in the second quarter of 2015. In addition, our U.S. federal income tax return for the year ended December 31, 2014 was under examination by the IRS. No adjustments were made by the IRS upon conclusion of the examination. We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from any examinations will not have an adverse effect on our operating results and financial condition.

   

The complexity of calculating our tax provision may result in errors that could result in restatements of our financial statements.

 

Due to the complexity associated with the calculation of our tax provision, we have hired third-party tax advisors to assist us in the calculation. If we or our independent tax advisors fail to resolve or fully understand certain issues that we may have had in the past and issues that may arise in the future, we could be subject to errors, which, if material, would result in us having to restate our financial statements. Restatements are generally costly and could adversely impact our results of operations and/or have a negative impact on the trading price of our common stock.  

   

 
20

 

 

System security risks, data protection or privacy breaches, cyber attacks and systems integration issues could disrupt our internal operations and/or harm our reputation, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price.

 

Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, create system disruptions or cause shutdowns. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution or other critical functions.

 

In the ordinary course of business, we store sensitive data on our internal systems, network and servers, such as proprietary business and financial information, and confidential data pertaining to our customers, suppliers and business partners. The secure maintenance of sensitive information on our networks and the protection features of our solutions are both critical to our operations and business strategy. We devote significant resources to network security, data encryption, and other security measures to protect our systems and data. However, these security measures cannot provide absolute security.  Although we make significant efforts to maintain the security and integrity of our systems and solutions, any destructive or intrusive breach could compromise our networks, creating system disruptions or slowdowns, and the information stored on our networks could be accessed, publicly disclosed, lost or stolen. If any of these types of security breaches were to occur and we were unable to protect sensitive data, our relationships with our business partners and customers could be materially damaged, our reputation could be materially harmed, and we could be exposed to a risk of litigation and possible significant liability.

 

Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.

 

If we are unsuccessful in legal proceedings brought against us or any of our customers, we could be prevented from selling many of our products and/or be required to pay substantial damages. An unfavorable outcome or an additional award of damages, attorneys’ fees or an injunction could cause our revenue to decline significantly and could severely harm our business and operating results.

 

From time to time we are a party to various legal proceedings. If we are not successful in litigation that could be brought against us or our customers, we could be ordered to pay monetary fines and/or damages. If we are found liable for willful patent infringement, damages could be significant. We and/or our customers could also be prevented from selling some or all of our products. Moreover, our customers and end-users could decide not to use our products, and our products and our customers’ accounts payable to us could be seized. Finally, interim developments in these proceedings could increase the volatility in our stock price as the market assesses the impact of such developments on the likelihood that we will or will not ultimately prevail in these proceedings.

 

Given our inability to control the timing and nature of significant events in our legal proceedings that either have arisen or may arise, our legal expenses are difficult to forecast and may vary substantially from our publicly disclosed forecasts with respect to any given quarter, which could contribute to increased volatility in our stock price and financial condition.

 

Historically, we have incurred significant expenses in connection with various legal proceedings that vary with the level of activity in the proceeding. It is difficult for us to forecast our legal expenses for any given quarter, which adversely affects our ability to forecast our expected results of operations in general. We may also be subject to unanticipated legal proceedings, which would result in us incurring unexpected legal expenses. If we fail to meet the expectations of securities or industry analysts as a result of unexpected changes in our legal expenses, our stock price could be materially impacted.

    

 
21

 

 

Future legal proceedings may divert our financial and management resources.

 

The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights. Patent infringement is an ongoing risk, in part because other companies in our industry could have patent rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to enforce our intellectual property rights, and we may have to defend ourselves against additional infringement claims. Such litigation is very costly. In the event any third party makes a new infringement claim against us or our customers, we could incur additional ongoing legal expenses. In addition, in connection with these legal proceedings, we may be required to post bonds to defend our intellectual property rights in certain countries for an indefinite period of time, until such dispute is resolved. If our legal expenses materially increase or exceed anticipated amounts, our capital resources and financial condition could be adversely affected. Further, if we are not successful in any of our intellectual property defenses, our financial condition could be adversely affected and our business could be harmed. Our management team may also be required to devote a great deal of time, effort and energy to these legal proceedings, which could divert management’s attention from focusing on our operations and adversely affect our business.

     

Failure to protect our proprietary technologies or maintain the right to certain technologies may negatively affect our ability to compete.

 

We rely heavily on our proprietary technologies. Our future success and competitive position depend in part upon our ability to obtain and maintain protection of certain proprietary technologies used in our products. We pursue patents for some of our new products and unique technologies, and we also rely on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our technology, know-how and processes. Despite the precautions we take, it may be possible for unauthorized third parties to copy aspects of our current or future technologies or products, or to obtain and use information that we regard as proprietary. We intend to continue to protect our proprietary technologies, including through patents. However, there can be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated or circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in the United States. Our failure to adequately protect our proprietary technologies could materially harm our business. 

 

The market for government-backed student loan auction-rate securities has suffered a decline in liquidity which may impact the liquidity and potential value of our investment portfolio.

 

The market for government-backed student loan auction-rate securities with interest rates that reset through a Dutch auction every 7 to 35 days became illiquid in 2008. We experienced our first failed auction in mid-February 2008. Since 2008, we have redeemed 87% of the original portfolio at par. At December 31, 2016, $5.6 million of our auction-rate securities have failed to reset through successful auctions and it is unclear as to when these investments will regain their liquidity. The underlying maturity of these auction-rate securities is up to 31 years. 

 

We have historically recorded temporary and other-than-temporary impairment charges on these investments. The valuation is subject to fluctuations in the future, which will depend on many factors, including the quality of underlying collateral, estimated time for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, among others.

 

Should there be further deterioration in the market for auction-rate securities, the value of our portfolio may decline, which may have an adverse impact on our cash position and our earnings. If the accounting rules for these securities change, there may be an adverse impact on our earnings.  

   

We face risks in connection with our internal control over financial reporting.

 

Effective internal control over financial reporting is necessary for us to provide reliable and accurate financial reports. If we cannot provide reliable financial reports or prevent fraud or other financial misconduct, our business and operating results could be harmed. Our failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our results of operations and/or have a negative impact on the trading price of our common stock, and could subject us to stockholder litigation. In addition, we cannot assure you that we will not in the future identify material weaknesses in our internal control over financial reporting that we have not discovered to date, which may impact the reliability of our financial reporting and financial statements. 

 

 
22

 

 

Our products must meet specifications, and undetected defects and failures may occur, which may cause customers to return or stop buying our products and may expose us to product liability risk.

 

Our customers generally establish demanding specifications for quality, performance, and reliability that our products must meet. Integrated circuits as complex as ours often encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments, which might require product replacement or recall. Further, our third-party manufacturing processes or changes thereof, or raw material used in the manufacturing processes may cause our products to fail. We have from time to time in the past experienced product quality, performance or reliability problems. Our standard warranty period is generally one to two years, which exposes us to significant risks of claims for defects and failures. If defects and failures occur in our products, we could experience lost revenue, increased costs, including warranty expense and costs associated with customer support, cancellations or rescheduling of orders or shipments, and product returns or discounts, any of which would harm our operating results.

  

In addition, product liability claims may be asserted with respect to our technology or products. Although we currently have insurance, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, or that we will have sufficient resources to satisfy any asserted claims.

 

The price and availability of commodities (e.g., gold, copper and silicon) may adversely impact our ability to deliver our products in a timely and cost-effective manner, and may adversely affect our business and results of operations.

 

Our products incorporate commodities such as gold, copper and silicon. An increase in the price or a decrease in the availability of these commodities and similar commodities that we use could negatively impact our business and results of operations.

    

Fluctuations in the value of the U.S. Dollar relative to other foreign currencies, including the   Renminbi, may adversely affect results of operations.

 

Our manufacturing and packaging suppliers are and will continue to be primarily located in China for the foreseeable future. If the value of the Renminbi rises against the U.S. Dollar, there could be an increase in our manufacturing costs relative to competitors who have manufacturing facilities located in the U.S., which could adversely affect our operations. In addition, our sales are primarily denominated in the U.S. Dollar. If the value of the U.S Dollar rises against other currencies, it may adversely affect the demand for our products in international markets, which could negatively impact our business and results of operations.

 

We incur foreign currency exchange gains or losses related to the timing of payments for transactions between the U.S. and our foreign subsidiaries, which are reported in interest and other income in the statements of operations. Fluctuations in the value of the U.S. Dollar relative to the foreign currencies could increase the amount of foreign currency exchange losses we record, which could have an adverse impact on our results of operations.

 

 
23

 

 

Our business is subject to various governmental laws and regulations, and compliance with   these regulations may impact our revenue and cause us to incur significant expense. If we fail to maintain   compliance with applicable regulations, we may be forced to recall products and cease   their distribution, and we could be subject to civil or criminal   penalties.

 

Our business is subject to various significant laws and other legal requirements imposed by the U.S. and other countries we conduct business with, including export control laws such as the U.S. Export Administration Regulations. These laws and regulations are complex, change frequently and have generally become more stringent over time. We may be required to incur significant expense to comply with these regulations or to remedy violations of these regulations. In addition, if our customers fail to comply with these regulations, we may be required to suspend sales to these customers, which could negatively impact our results of operations. For example, on March 8, 2016, the U.S. Department of Commerce added ZTE Corporation, one of our customers, to its "Entity List" and placed certain export restrictions on ZTE and its suppliers. These restrictions are temporarily lifted until March 29, 2017. We must conform the manufacture and distribution of our products to various laws and adapt to regulatory requirements in many countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, we could be required to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products commercially until the products are brought into compliance.

 

Environmental laws and regulations could cause a disruption in our business and operations.

 

We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Union member countries and countries in Asia. There can be no assurance that similar laws and regulations will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive.

 

We and our manufacturing partners are or will be subject to extensive Chinese government regulation, and the benefit of various incentives from Chinese governments that we and our manufacturing partners receive may be reduced or eliminated, which could increase our costs or limit our ability to sell products and conduct activities in China.

 

Most of our manufacturing partners are located in China. In addition, we have established manufacturing and testing facilities in China. The Chinese government has broad discretion and authority to regulate the technology industry in China. China’s government has implemented policies from time to time to regulate economic expansion in China. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. New regulations or the readjustment of previously implemented regulations could require us and our manufacturing partners to change our business plans, increase our costs, or limit our ability to sell products and conduct activities in China, which could adversely affect our business and operating results. 

  

In addition, the Chinese government and provincial and local governments have provided, and continue to provide, various incentives to encourage the development of the semiconductor industry in China. Such incentives include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to our manufacturing partners and to us with respect to our facilities in China. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any such reduction or elimination of incentives currently provided to our manufacturing partners could adversely affect our business and operating results. 

 

There are inherent risks associated with the operation of our manufacturing and testing facilities in China, which could increase product costs or cause a delay in product shipments.

 

We have manufacturing and testing facilities in China that began operations in 2006. We face the following risks, among others, with respect to our operations in China:

 

  

inability to hire and maintain a qualified workforce;

 

 

 

  

inability to maintain appropriate and acceptable manufacturing controls; and,

 

 

 

  

higher than anticipated overhead and other costs of operation.

 

 
24

 

 

If we are unable to maintain our facilities in China at fully operational status with qualified workers, appropriate manufacturing controls and reasonable cost levels, we may incur higher costs than our current expense levels, which would affect our gross margins. In addition, if capacity restraints result in significant delays in product shipments, our business and results of operations would be adversely affected.

 

The average selling prices of products in our markets have historically decreased over time and will likely do so in the future, which could harm our revenue and gross profits.

 

Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our gross profits and financial results will suffer if we are unable to offset any reductions in our average selling prices by reducing our costs, developing new or enhanced products on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own wafer manufacturing or assembly facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our profit margins. 

 

Because of the lengthy sales cycles for our products and the fixed nature of a significant portion of our expenses, we may incur substantial expenses before we earn associated revenue and may not ultimately achieve our forecasted sales for our products.

 

The introduction of new products presents significant business challenges because product development plans and expenditures may be made up to two years or more in advance of any sales. It generally takes us up to 12 months or more to design and manufacture a new product prototype. Only after we have a prototype do we introduce the product to the market and begin selling efforts in an attempt to achieve design wins. This sales process requires us to expend significant sales and marketing resources without any assurance of success. Volume production of products that use our ICs, if any, may not be achieved for an additional period of time after an initial sale. Sales cycles for our products are lengthy for a number of reasons, including:

 

  

our customers usually complete an in-depth technical evaluation of our products before they place a purchase order;

 

 

 

  

the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of their product to evaluate product performance and consumer demand;

 

 

 

  

our products must be designed into our customers’ products or systems; and,

 

 

 

  

the development and commercial introduction of our customers’ products incorporating new technologies frequently are delayed.

 

As a result of our lengthy sales cycles, we may incur substantial expenses before we earn associated revenue because a significant portion of our operating expenses is relatively fixed and based on expected revenue. The lengthy sales cycles of our products also make forecasting the volume and timing of orders difficult. In addition, the delays inherent in lengthy sales cycles raise additional risks that customers may cancel or change their orders. Our sales are made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog is not always a good indicator of our future sales. If customer cancellations or product changes occur, we could lose anticipated sales and not have sufficient time to reduce our inventory and operating expenses.   

 

Our success depends on our investment of significant resources in research and development. We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.

 

Our success depends on us investing significant amounts of resources into research and development. We expect to have to continue to invest heavily in research and development in the future in order to continue to innovate and introduce new products in a timely manner and increase our revenue and profitability. If we have to invest more resources in research and development than we anticipate, we could see an increase in our operating expenses which may negatively impact our operating results. Also, if we are unable to properly manage and effectively utilize our research and development resources, we could see material adverse effects on our business, financial condition and operating results.

   

 
25

 

 

In addition, if new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue, which could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development.

 

The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could affect our operations or impair our ability to grow our business.

 

Our future success depends upon our ability to attract and retain highly qualified technical and managerial personnel. We are particularly dependent on the continued services of our key executives, including Michael Hsing, our President and Chief Executive Officer, who founded our company and developed our proprietary process technology. In addition, personnel with highly skilled analog and mixed-signal design engineering expertise are scarce and competition for personnel with these skills is intense. There can be no assurance that we will be able to retain existing key employees or that we will be successful in attracting, integrating or retaining other highly qualified personnel with critical capabilities in the future. If we are unable to retain the services of existing key employees or are unsuccessful in attracting new highly qualified employees quickly enough to meet the demands of our business, including design cycles, our business could be harmed. Furthermore, if we lose key personnel, the search for a qualified replacement and the transition could interrupt our operations as the search could take us longer than expected and divert management resources, and the newly hired employee could take longer than expected to integrate into the team.

   

If we fail to retain key employees in our sales, applications, finance and legal staff or to make continued improvements to our internal systems, particularly in the accounting and finance area, our business may suffer.

 

If we fail to continue to adequately staff our sales, applications, financial and legal staff, maintain or upgrade our business systems and maintain internal control that meet the demands of our business, our ability to operate effectively will suffer. The operation of our business also depends upon our ability to retain these employees, as these employees hold a significant amount of institutional knowledge about us and our products, and, if they were to terminate their employment, our sales and internal control over financial reporting could be adversely affected.

 

We intend to continue to expand our operations, which may strain our resources and increase our operating expenses.

 

We plan to continue to expand our domestic and foreign operations through internal growth, strategic relationships, and/or acquisitions. We expect that any such expansion will strain our systems and operational and financial controls. In addition, we are likely to incur significantly higher operating costs. To manage our growth effectively, we must continue to improve and expand our systems and controls, as well as hire experienced administrative and financial personnel. If we fail to do so, our growth will be limited. If we fail to effectively manage our planned expansion of operations, our business and operating results may be harmed.

 

 
26

 

 

We may   not realize the anticipated benefits of any company or business that we acquire. In addition,   acquisitions   could result in diluting   the ownership interests of our stockholders, reduce our cash balances,   and cause us to incur debt or to assume contingent liabilities, which   could adversely affect our business.

 

As a part of our business strategy, from time to time we review acquisition prospects that would complement our current product offerings, enhance our design capability or offer other competitive opportunities. For example, we completed our acquisition of Sensima Technology SA (“Sensima”) in July 2014 to further our diversification strategy and create new opportunities with key customers. As a result of completing acquisitions, we could use a significant portion of our available cash, cash equivalents and short-term investments, issue equity securities that would dilute current stockholders’ percentage ownership, incur substantial debt or contingent liabilities, or incur impairment charges related to goodwill or other acquisition-related intangibles. Such actions could impact our operating results and the price of our common stock. 

 

In addition, we may be unable to identify or complete prospective acquisitions for various reasons, including competition from other companies in the semiconductor industry, the valuation expectations of acquisition candidates and applicable antitrust laws or related regulations. If we are unable to identify and complete acquisitions, we may not be able to successfully expand our business and product offerings.

  

We cannot guarantee that the Sensima acquisition or any future acquisitions will improve our results of operations or that we will otherwise realize the anticipated benefits of any acquisitions. In addition, if we are unsuccessful in integrating any acquired company or business into our operations or if integration is more difficult than anticipated, we may experience disruptions that could harm our business and result in our failure to realize the anticipated benefits of the acquisitions. Some of the risks that may adversely affect our ability to integrate or realize any anticipated benefits from the acquired companies, businesses or assets include those associated with:

 

  

unexpected losses of key employees or customers of the acquired companies or businesses;

 

 

 

  

conforming the acquired company’s standards, processes, procedures and controls with our operations;

  

  

coordinating new product and process development;

 

 

 

  

hiring additional management and other critical personnel;

 

 

 

  

increasing the scope, geographic diversity and complexity of our operations;

 

 

 

  

difficulties in consolidating facilities and transferring processes and know-how;

 

 

 

  

difficulties in the assimilation of acquired operations, technologies or products;

 

 

 

  

the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or stockholders of acquired companies;

 

 

 

  

our inability to commercialize acquired technologies;

 

 

 

  

the risk that the future business potential as projected is not realized and as a result, we may be required to take a charge to earnings that would impact our profitability;

 

 

 

  

the need to take impairment charges or write-downs with respect to acquired assets and technologies;

 

 

 

  

difficulties in assessing the fair value of earn-out arrangements;

 

 

 

  

diversion of management’s attention from other business concerns; and,

 

 

 

  

adverse effects on existing business relationships with customers.

 

If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders.

 

We may issue additional shares of common stock in the future in order to raise additional capital to fund our global operations or in connection with an acquisition. We also issue restricted stock units to employees, which convert into shares of common stock upon vesting. Any issuance of our common stock may result in immediate dilution of our stockholders. In addition, the issuance of a significant amount of our common stock may result in additional regulatory requirements, such as stockholder approval.

 

 
27

 

 

We compete against many companies with substantially greater financial and other resources, and our market share may be reduced if we are unable to respond to our competitors effectively.

 

The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue. Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit applications and design talent, our ability to introduce new products, and our ability to maintain the rate at which we introduce these new products. We compete with domestic and non-domestic semiconductor companies, many of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. We are in direct and active competition, with respect to one or more of our product lines, with many manufacturers of such products, of varying size and financial strength. The number of our competitors has grown due to the expansion of the market segments in which we participate. 

 

We cannot assure you that our products will continue to compete favorably, or that we will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering this market, which would materially and adversely affect our results of operations and our financial condition.

 

If securities or industry analysts downgrade our stock or do not continue to publish research or reports about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend, in part, on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Major earthquakes or other natural disasters and resulting systems outages may cause us significant losses.

 

Our corporate headquarters, the production facilities of our third-party wafer suppliers, our IC testing and manufacturing facilities, a portion of our assembly and research and development activities, and certain other critical business operations are located in or near seismically active regions and are subject to periodic earthquakes. We do not maintain earthquake insurance and could be materially and adversely affected in the event of a major earthquake. Much of our revenue, as well as our manufacturers and assemblers, are concentrated in Asia, particularly in China. Such concentration increases the risk that other natural disasters, labor strikes, terrorism, war, political unrest, epidemics, and/or health advisories could disrupt our operations. In addition, we rely heavily on our internal information and communications systems and on systems or support services from third parties to manage our operations efficiently and effectively. Any of these are subject to failure due to a natural disaster or other disruption. System-wide or local failures that affect our information processing could have material adverse effects on our business, financial condition, operating results and cash flows. 

 

 
28

 

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

None.

 

 

ITEM 2.    PROPERTIES

 

Our main operations are located in San Jose, California, China and Taiwan. The following table summarizes our primary properties as of December 31, 2016:

 

Location

 

Approximate

Square Footage

 

Primary Use

Owned:        

San Jose, California

 

106,000

 

Corporate headquarters, research and development, sales and marketing

Chengdu, China

 

150,000

 

Research and development, administrative offices

Chengdu, China

 

60,000

 

Testing and manufacturing

Shanghai, China

 

7,000

 

Sales and marketing

Shenzhen, China

 

8,000

 

Sales and marketing

Taipei, Taiwan  

15,000

  Sales and marketing
Leased:        

Chengdu, China

 

42,000

 

Inventory storage

Hangzhou, China  

34,000

  Research and development

 

We also lease other sales and research and development offices in China, Japan, Korea, the United States and Europe. We believe that our existing facilities are adequate for our current operations.

 

ITEM 3.    LEGAL PROCEEDINGS

 

We are a party to actions and proceedings in the ordinary course of business, including potential litigation regarding our shareholders and our intellectual property, 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 potential claims.

  

Silergy

 

In December 2016, we settled a patent infringement lawsuit with Silergy Corp. and were awarded a total of $3.0 million pursuant to a settlement and license agreement. Under the agreement, the parties agreed to a mutual release of past claims and covenant not to sue provisions, and grant of certain patent licenses for future use. Based on their relative fair values, we allocated approximately $0.6 million to the settlement which was recorded as a credit to litigation expense in the Consolidated Statement of Operations for the year ended December 31, 2016. The remaining $2.4 million was allocated to the grant of the patent licenses for future use and will be recognized ratably over five years.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
29

 

 

PART II

 

ITEM 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Price of Our Common Stock

 

Our common stock is traded on the Nasdaq Global Select Market under the symbol “MPWR.” The following table sets forth the high and low closing sales price per share of our common stock: 

 

   

High

   

Low

 

2016:

               

First quarter

  $ 63.64     $ 56.21  

Second quarter

  $ 70.75     $ 60.93  

Third quarter

  $ 80.50     $ 66.11  

Fourth quarter

  $ 85.43     $ 76.44  
                 

2015:

               

First quarter

  $ 56.12     $ 45.80  

Second quarter

  $ 54.95     $ 49.96  

Third quarter

  $ 52.12     $ 45.28  

Fourth quarter

  $ 68.88     $ 50.42  

 

Holders of Our Common Stock

 

As of February 20, 2017, there were 37 registered holders of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions.

 

Dividend Policy

 

In June 2014, our Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. Based on our 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. Our Board of Directors declared the following cash dividends:

 

   

Dividend Declared

   

Total

 
   

per Share

   

Amount

 
           

(in thousands)

 

2016:

               

First quarter

  $ 0.20     $ 8,047  

Second quarter

  $ 0.20     $ 8,096  

Third quarter

  $ 0.20     $ 8,132  

Fourth quarter

  $ 0.20     $ 8,159  
                 

2015:

               

First quarter

  $ 0.20     $ 7,854  

Second quarter

  $ 0.20     $ 7,925  

Third quarter

  $ 0.20     $ 7,901  

Fourth quarter

  $ 0.20     $ 7,938  

 

The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other things, our 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 our Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of our stockholders. We anticipate that the cash used for future dividends 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 the payment of dividends, we may be required to accrue and pay U.S. taxes to repatriate the funds. 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.

 

 
30

 

 

Stock Performance Graph

 

The following graph compares the cumulative five-year total return on our common stock relative to the cumulative total returns of the Nasdaq Composite Index and the PHLX Semiconductor Sector Index. An investment of $100 is assumed to have been made in our common stock on December 31, 2011 and its relative performance is tracked through December 31, 2016. Historic stock performance is not indicative of future performance.

 

 

 

The information contained in this stock performance graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

In February 2016, the Board of Directors approved a stock repurchase program that authorized us to repurchase up to $50 million in the aggregate of our common stock through December 31, 2016. In December 2016, the Board of Directors approved an extension of the program through December 31, 2017. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934 . Shares are retired upon repurchase.

 

For the three months and year ended December 31, 2016, we did not repurchase any shares under the program. As of December 31, 2016, $50 million remained available for future repurchases under the program.

 

 
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ITEM 6.    SELECTED FINANCIAL DATA

 

The following selected consolidated financial data should be read in conjunction with ''Management's Discussion and Analysis of Financial Condition and Results of Operations'' and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. We derived the selected consolidated balance sheet data as of December 31, 2016 and 2015, and the consolidated statement of operations data for the years ended December 31, 2016, 2015 and 2014 from our audited consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K. The consolidated balance sheet data as of December 31, 2014, 2013 and 2012, and the consolidated statement of operations data for each of the years ended December 31, 2013 and 2012 are derived from our audited consolidated financial statements which are not included in this report. Operating results for any year are not necessarily indicative of results to be expected for any future periods.

 

Consolidated Statement of Operations Data:

 

   

Year Ended December 31,

 
   

2016

   

2015

   

2014

   

2013

   

2012

 
   

(in thousands, except per share amounts)

 

Revenue

  $ 388,665     $ 333,067     $ 282,535     $ 238,091     $ 213,813  

Cost of revenue

    177,792       152,898       129,917       110,190       100,665  

Gross profit

    210,873       180,169       152,618       127,901       113,148  

Operating expenses:

                                       

Research and development

    73,643       65,787       58,590       49,733       48,796  

Selling, general and administrative

    83,012       72,312       66,755       54,624       50,018  

Litigation expense (benefit), net

    (229 )     1,000       (8,027 )     (371 )     (2,945 )

Total operating expenses

    156,426       139,099       117,318       103,986       95,869  

Income from operations

    54,447       41,070       35,300       23,915       17,279  

Interest and other income, net

    2,817       1,421       1,092       92       611  

Income before income taxes

    57,264       42,491       36,392       24,007       17,890  

Income tax provision

    4,544       7,319       897       1,109       2,134  

Net income

  $ 52,720     $ 35,172     $ 35,495     $ 22,898     $ 15,756  
                                         

Net income per share:

                                       

Basic

  $ 1.30     $ 0.89     $ 0.92     $ 0.61     $ 0.45  

Diluted

  $ 1.26     $ 0.86     $ 0.89     $ 0.59     $ 0.43  

Weighted-average shares outstanding:

                                       

Basic

    40,436       39,470       38,686       37,387       34,871  

Diluted

    41,915       40,869       39,793       38,620       36,247  
                                         

Cash dividends declared per common share

  $ 0.80     $ 0.80     $ 0.45     $ -     $ 1.00  

 

Consolidated Balance Sheet Data:

 

   

December 31,

 
   

2016

   

2015

   

2014

   

2013

   

2012

 
   

(in thousands)

 

Cash and cash equivalents

  $ 112,703     $ 90,860     $ 126,266     $ 101,213     $ 75,104  

Short-term investments

  $ 155,521     $ 144,103     $ 112,452     $ 125,126     $ 85,521  

Long-term investments

  $ 5,354     $ 5,361     $ 5,389     $ 9,860     $ 11,755  

Total assets

  $ 511,126     $ 431,285     $ 399,366     $ 368,908     $ 287,162  

Common stock and additional paid-in capital

  $ 315,969     $ 265,763     $ 240,500     $ 234,201     $ 194,079  

Total stockholders' equity

  $ 431,116     $ 368,516     $ 346,425     $ 323,399     $ 258,294  

Working capital

  $ 330,063     $ 288,645     $ 271,051     $ 253,304     $ 190,840  

 

 
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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear under Item 8 in this 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.  For each of the years ended December 31, 2016, 2015 and 2014, 91% of our revenue was from customers in Asia. We derive a majority of our revenue from the sales of our DC to DC converter products which serves the consumer, industrial, computing and storage, 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.

 

In July 2014, we completed the acquisition of Sensima Technology SA (“Sensima”), a company located in Switzerland that develops magnetic sensors for angle measurements as well as three-dimensional magnetic field sensing. Sensima became a subsidiary of MPS and changed its name to MPS Tech Switzerland Sarl. The acquisition creates new opportunities with customers by offering enhanced solutions in power management for key industries such as automotive, industrial and cloud computing. The purchase consideration consisted of an upfront cash payment of $11.7 million and additional consideration that was contingent upon Sensima achieving a new product introduction and certain revenue and direct margin goals in 2016, with a fair value of $2.5 million at the date of acquisition. In addition, key employees received $1.7 million of time-based restricted stock units and up to $8.0 million of performance-based restricted stock units in connection with the transaction. These equity awards are considered arrangements for post-acquisition services and the related compensation expense is recognized over the requisite service period if it is probable that the performance goals will be met. The results of operations of Sensima have been included in our consolidated financial statements subsequent to the acquisition date. On December 31, 2016, management concluded that no contingent consideration was earned as the actual product revenue in 2016 did not meet the minimum target.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, inventories, income taxes, valuation of goodwill and intangible assets, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions.  Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates.

 

 
33

 

 

We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

We recognize revenue when the following four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of the fees charged for products delivered and the collectability of those fees. The application of these criteria has resulted in us generally recognizing revenue upon shipment (when title and risk of loss have transferred to customers), including to most of the distributors, original equipment manufacturers and electronic manufacturing service providers.

 

For the years ended December 31, 2016, 2015 and 2014, approximately 88%, 88% and 89% of our sales, respectively, were made through distribution arrangements with third parties. We generally recognize revenue upon shipment of products to the distributors based on the following considerations:

 

 

(1)

The price is fixed or determinable at the date of sale. We do not offer special payment terms (our normal payment terms are 30-45 days for our distributors) or price adjustments to distributors when we recognize revenue upon shipment.

 

(2)

The distributors are obligated to pay us and this obligation is not contingent on the resale of our products.

 

(3)

The distributors’ obligation is unchanged in the event of theft or physical destruction or damage to the products.

 

(4)

The distributors have stand-alone economic substance apart from our relationship.

 

(5)

We do not have any obligations for future performance to directly bring about the resale of our products by the distributors.

 

(6)

The amount of future returns can be reasonably estimated. We have the ability and the information necessary to track inventory sold to and held at our distributors. We maintain a history of returns and have the ability to estimate the stock rotation returns on a quarterly basis.

 

Certain of our large distributors have contracts that include limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases. We maintain a sales reserve for stock rotation rights, which is based on historical experience of actual stock rotation returns on a per distributor basis and information related to products in the distribution channel. This reserve is recorded at the time of sale. As of December 31, 2016 and 2015, the reserve for stock rotation rights was $1.9 million and $2.4 million, respectively.

 

If we enter into arrangements with distributors that have price adjustment or other rights that are not fixed or determinable, we recognize revenue under such arrangements only after the distributors have sold the products to end customers, at which time the price is no longer subject to adjustment and is fixed, and the products are no longer subject to return except pursuant to warranty terms. A small number of our U.S. distributors has such rights and accordingly, we defer revenue recognition on these shipments until the products are sold to the end customers by the distributors. The deferred revenue balance before the final price and other adjustments from these distributors as of December 31, 2016 and 2015 was $3.7 million and $2.8 million, respectively. The deferred costs as of December 31, 2016 and 2015 were $0.3 million and $0.2 million, respectively.

 

Inventory Valuation

 

We value our inventory at the lower of the standard cost (which approximates actual cost on a first-in, first-out basis) or its current estimated market value.  We write down inventory for obsolescence or lack of demand, based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Conversely, if market conditions are more favorable, inventory may be sold that was previously reserved. 

   

Valuation of Goodwill and Acquisition-Related Intangible Assets

 

We evaluate intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that an impairment may exist. We perform an annual impairment assessment for goodwill and intangible assets with indefinite lives in the fourth quarter, or more frequently if indicators of potential impairment exist. Impairment of intangible assets is recognized based on the difference between the fair value of the assets and their carrying value. Impairment for goodwill occurs if the fair value of a reporting unit including goodwill is less than its carrying value and is recognized based on the difference between the implied fair value of the reporting unit’s goodwill and the carrying value of the goodwill. The assumptions and estimates used to determine future value of goodwill and intangible assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and revenue forecasts. If there is a significant adverse change in our business in the future, including macroeconomic and market conditions, we may be required to record impairment charges on our goodwill and acquisition-related intangible assets.

 

 
34

 

 

Accounting for Income Taxes  

 

We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities for our estimate of future tax effects attributable to temporary differences and carryforwards. We record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

 

Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality or uncertainty to an anticipated outcome, changes in accounting or tax laws in the U.S. or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on our tax returns if it has less than a 50% likelihood of being sustained. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements in the period such determination is made. We have calculated our uncertain tax positions which were attributable to certain estimates and judgments primarily related to transfer pricing, cost sharing and our international tax structure exposure.

 

As of December 31, 2016 and 2015, we had a valuation allowance of $27.4 million and $18.6 million, respectively, attributable to management’s determination that it is more likely than not that most of the deferred tax assets in the U.S. will not be realized. Should it be determined that additional amounts of the net deferred tax asset will not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance will be charged to income in the period such determination is made. Likewise, in the event we determine that it is more likely than not that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance for the deferred tax asset would increase income in the period such determination was made.

 

As a result of the cost sharing arrangements with our international subsidiaries (cost share arrangements), relatively small changes in costs that are not subject to sharing under the cost share arrangements can significantly impact the overall profitability of the U.S. entity. Because of the U.S. entity’s inconsistent earnings history and uncertainty of future earnings, we have determined that it is more likely than not that the U.S. deferred tax benefits will not be realized.

 

Contingencies

 

We are a party to actions and proceedings in the ordinary course of business, including potential litigation regarding our shareholders and our intellectual property, 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. The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend. In addition, from time to time, we become aware that we are subject to other contingent liabilities. When this occurs, we will evaluate the appropriate accounting for the potential contingent liabilities to determine whether a contingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the facts and circumstances in each matter, we use our judgment to determine whether it is probable that a contingent loss has occurred and whether the amount of such loss can be estimated. If we determine a loss is probable and estimable, we record a contingent loss. In determining the amount of a contingent loss, we take into account advice received from experts for each specific matter regarding the status of legal proceedings, settlement negotiations, prior case history and other factors. Should the judgments and estimates made by management need to be adjusted as additional information becomes available, we may need to record additional contingent losses that could materially and adversely impact our results of operations. Alternatively, if the judgments and estimates made by management are adjusted, for example, if a particular contingent loss does not occur, the contingent loss recorded would be reversed which could result in a favorable impact on our results of operations.

 

Stock-Based Compensation

 

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.   The fair value of restricted stock units with service conditions or performance conditions is based on the grant date share price. The fair value of restricted stock units with market conditions, as well as restricted stock units with both market conditions and performance conditions, is estimated using a Monte Carlo simulation model.  The fair value of options, shares issued under the employee stock purchase plan and restricted stock units with a purchase price feature is estimated using the Black-Scholes model.

 

 
35

 

 

We recognize compensation expense equal to the grant-date fair value for all share-based payment awards that are expected to vest. This expense is recorded on a straight-line basis over the requisite service period of the entire awards, unless the awards are subject to market conditions or performance conditions, in which case we recognize compensation expense over the requisite service period of each separate vesting tranche. For awards with only market conditions, compensation expense is not reversed if the market conditions are not satisfied. For awards with performance conditions, as well as awards with both market conditions and performance conditions, we recognize compensation expense when it becomes probable that the performance criteria set by the Board of Directors will be achieved. This assessment is performed on a quarterly basis and requires significant assumptions and estimates made by management related to the projected achievement of the performance goals, which can be affected by external factors, such as macroeconomic conditions and the analog industry forecasts, and internal factors, such as our business and operations strategy, product roadmaps and revenue forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. If the projected achievement was revised upward or if the actual achievement was higher than the projected achievement, additional compensation expense may be recorded for the performance-based awards due to the cumulative catch-up adjustment, which could have an adverse impact on our results of operations. Conversely, if the projected achievement was revised downward or if the actual achievement was lower than the projected achievement, previously accrued compensation expense would be reversed for the performance-based awards, which would have a favorable impact on our results of operations. As a result, our stock-based compensation expense is subject to volatility and may fluctuate significantly each quarter due to changes in our probability assessment or actual results being different from projections made by management.

 

Recent Accounting Pronouncements

 

Refer to Note 1 to our consolidated financial statements regarding recently issued accounting pronouncements.  

 

Results of Operations

 

The following table summarizes our results of operations:

 

   

Year Ended December 31,

 
   

2016

   

2015

   

2014

 
   

(in thousands, except percentages)

 

Revenue

  $ 388,665       100.0

%

  $ 333,067       100.0

%

  $ 282,535       100.0

%

Cost of revenue

    177,792       45.7       152,898       45.9       129,917       46.0  

Gross profit

    210,873       54.3       180,169       54.1       152,618       54.0  

Operating expenses:

                                               

Research and development

    73,643       18.9       65,787       19.8       58,590       20.7  

Selling, general and administrative

    83,012       21.4       72,312       21.7       66,755       23.6  

Litigation expense (benefit), net

    (229 )     -       1,000       0.3       (8,027 )     (2.8 )

Total operating expenses

    156,426       40.3       139,099       41.8       117,318       41.5  

Income from operations

    54,447       14.0       41,070       12.3       35,300       12.5  

Interest and other income, net

    2,817       0.7       1,421       0.5       1,092       0.4  

Income before income taxes

    57,264       14.7       42,491       12.8       36,392       12.9  

Income tax provision

    4,544       1.1       7,319       2.2       897       0.3  

Net income

  $ 52,720       13.6

%

  $ 35,172       10.6

%

  $ 35,495       12.6

%

 

 
36

 

 

Revenue

 

The following table summarizes our revenue by market segments:

 

   

Year Ended December 31,

   

Change

 

Market Segment

 

2016

   

% of Revenue

   

2015

   

% of Revenue

   

2014

   

% of Revenue

   

From 2015 to 2016

   

From 2014 to 2015

 
   

(in thousands, except percentages)

 

Consumer

  $ 153,732       39.5 %   $ 145,090       43.6 %   $ 122,733       43.4 %     6.0 %     18.2 %

Industrial

    89,639       23.1 %     66,343       19.9 %     49,037       17.4 %     35.1 %     35.3 %

Computing and storage

    80,562       20.7 %     56,568       17.0 %     46,147       16.3 %     42.4 %     22.6 %

Communications

    64,732       16.7 %     65,066       19.5 %     64,618       22.9 %     (0.5 )%     0.7 %

Total

  $ 388,665       100.0 %   $ 333,067       100.0 %   $ 282,535       100.0 %     16.7 %     17.9 %

 

Revenue for the year ended December 31, 2016 was $388.7 million, an increase of $55.6 million, or 16.7%, from $333.1 million for the year ended December 31, 2015. This increase was driven by higher sales in the computing and storage, industrial and consumer segments, as overall unit shipments increased 19% due to higher market demand with current customers and design wins with new customers, partially offset by a 2% decrease in average sales prices. 

 

Revenue from the consumer segment for the year ended December 31, 2016 increased $8.6 million, or 6.0%, from the same period in 2015. This increase was primarily driven by higher demand in battery management systems, home appliances and other high value consumer products. Revenue from the industrial segment for the year ended December 31, 2016 increased $23.3 million, or 35.1%, from the same period in 2015. This increase was primarily driven by higher sales in automotive applications, security products, smart meters and power sources. Revenue from the computing and storage segment for the year ended December 31, 2016 increased $24.0 million, or 42.4%, from the same period in 2015. This increase was primarily driven by strength in the high-performance notebook, server and solid-state drive storage markets. Revenue from the communications segment for the year ended December 31, 2016 was essentially flat compared to the same period in 2015.

 

Revenue for the year ended December 31, 2015 was $333.1 million, an increase of $50.6 million, or 17.9%, from $282.5 million for the year ended December 31, 2014. This increase was driven by higher sales in all market segments, as overall unit shipments increased 17% due to higher market demand with current customers and design wins with new customers, coupled with an increase of 1% in average sales prices. 

 

Revenue from the consumer segment for the year ended December 31, 2015 increased $22.4 million, or 18.2%, from the same period in 2014. This increase was primarily driven by higher demand in gaming, battery management systems, home appliances and other high value consumer products. Revenue from the industrial segment for the year ended December 31, 2015 increased $17.3 million, or 35.3%, from the same period in 2014. This increase was primarily driven by higher sales in automotive applications and other industrial equipment. Revenue from the computing and storage segment for the year ended December 31, 2015 increased $10.4 million, or 22.6%, from the same period in 2014. This increase was primarily driven by strength in the server and high-performance notebook markets. Revenue from the communications segment for the year ended December 31, 2015 was essentially flat compared to the same period in 2014.

 

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.

 

   

Year Ended December 31,

   

Change

 
   

2016

   

2015

   

2014

   

From 2015 to 2016

   

From 2014 to 2015

 
   

(in thousands, except percentages)

 

Cost of revenue

  $ 177,792     $ 152,898     $ 129,917       16.3 %     17.7 %

As a percentage of revenue

    45.7 %     45.9 %     46.0 %                

Gross profit

  $ 210,873     $ 180,169     $ 152,618       17.0 %     18.1 %

Gross margin

    54.3 %     54.1 %     54.0 %                

 

Cost of revenue was $177.8 million, or 45.7% of revenue, for the year ended December 31, 2016, and $152.9 million, or 45.9% of revenue, for the year ended December 31, 2015. The $24.9 million increase in cost of revenue was primarily due to a 19% increase in overall unit shipments, which was partially offset by a 2% decrease in the average direct cost of units shipped. The increase in cost of revenue was also driven by an increase of $1.0 million in warranty expenses and inventory write-downs. Gross margin was 54.3% for the year ended December 31, 2016, compared with 54.1% for the year ended December 31, 2015. The increase in gross margin was primarily due to lower direct and overhead costs as a percentage of revenue, partially offset by the impact of certain manufacturing cost variances.

 

 
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Cost of revenue was $152.9 million, or 45.9% of revenue, for the year ended December 31, 2015, and $129.9 million, or 46.0% of revenue, for the year ended December 31, 2014. The $23.0 million increase in cost of revenue was primarily due to a 17% increase in overall unit shipments, coupled with a 4% increase in the average direct cost of units shipped. The increase in cost of revenue was also driven by an additional $1.1 million of amortization for intangible assets. Gross margin was 54.1% for the year ended December 31, 2015, compared with 54.0% for the year ended December 31, 2014. The increase in gross margin was primarily due to lower direct and overhead costs as a percentage of revenue, partially offset by increased sales of lower margin products and higher amortization for intangible assets compared to the same period in 2014.

 

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. 

 

   

Year Ended December 31,

   

Change

 
   

2016

   

2015

   

2014

   

From 2015 to 2016

   

From 2014 to 2015

 
   

(in thousands, except percentages)

 

R&D expenses

  $ 73,643     $ 65,787     $ 58,590       11.9 %     12.3 %

As a percentage of revenue

    18.9 %     19.8 %     20.7 %                

 

R&D expenses were $73.6 million, or 18.9% of revenue, for the year ended December 31, 2016 and $65.8 million, or 19.8% of revenue, for the year ended December 31, 2015. The $7.8 million increase in R&D expenses was primarily due to an increase of $2.9 million in stock-based compensation expenses mainly associated with the performance and market-based equity awards, an increase of $2.2 million in cash compensation expenses, which include salary, benefits and bonuses, an increase of $1.6 million in new product development expenses, and an increase of $0.5 million in expenses related to changes in the value of the employee deferred compensation plan liabilities. Our R&D headcount was 578 employees as of December 31, 2016, compared with 506 employees as of December 31, 2015.  

 

R&D expenses were $65.8 million, or 19.8% of revenue, for the year ended December 31, 2015 and $58.6 million, or 20.7% of revenue, for the year ended December 31, 2014. The $7.2 million increase in R&D expenses was primarily due to an increase of $3.7 million in cash compensation expenses, which include salary, benefits and bonuses, an increase of $2.1 million in stock-based compensation expenses primarily associated with the performance-based equity awards, an increase of $0.5 million in new product development expenses, and an increase of $0.3 million in manufacturing and laboratory supplies. These increases were partially offset by a decrease of $0.2 million related to changes in the value of the employee deferred compensation plan liabilities. Our R&D headcount was 506 employees as of December 31, 2015, compared with 476 employees as of December 31, 2014.    

 

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.  

 

   

Year Ended December 31,

   

Change

 
   

2016

   

2015

   

2014

   

From 2015 to 2016

   

From 2014 to 2015

 
   

(in thousands, except percentages)

 

SG&A expenses

  $ 83,012     $ 72,312     $ 66,755       14.8 %     8.3 %

As a percentage of revenue

    21.4 %     21.7 %     23.6 %                

 

SG&A expenses were $83.0 million, or 21.4% of revenue, for the year ended December 31, 2016 and $72.3 million, or 21.7% of revenue, for the year ended December 31, 2015. The $10.7 million increase in SG&A expenses was primarily due to an increase of $3.0 million in stock-based compensation expenses mainly associated with the performance and market-based equity awards, an increase of $2.9 million in cash compensation expenses, which include salary, benefits and bonuses, an increase of $2.1 million in commission expenses due to higher revenue, and an increase of $0.8 million in expenses related to changes in the value of the employee deferred compensation plan liabilities. In addition, contributing to the increase in SG&A expenses in 2016 was a credit of $2.5 million related to the release of a contingent consideration liability which reduced SG&A expenses in 2015 (see below). These increases were partially offset by a stock-based compensation credit recorded in 2016 due to the retirement of our then Chief Financial Officer. As the service or performance conditions for certain of her 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 shares and recorded the credit in SG&A expenses for the three months ended March 31, 2016. Our SG&A headcount was 355 employees as of December 31, 2016, compared with 306 employees as of December 31, 2015.

 

 
38

 

 

SG&A expenses were $72.3 million, or 21.7% of revenue, for the year ended December 31, 2015 and $66.8 million, or 23.6% of revenue, for the year ended December 31, 2014. The $5.5 million increase in SG&A expenses was primarily due to an increase of $5.7 million in stock-based compensation expenses primarily associated with the performance-based equity awards, an increase of $2.0 million in cash compensation expenses, which include salary, benefits and bonuses, and an increase of $0.6 million in commission expenses due to higher revenue. These increases were partially offset by a credit of $2.5 million related to the release of a contingent consideration liability (see below), a decrease of $0.6 million in professional service fees due to the transaction costs incurred in the Sensima acquisition in 2014 but not in 2015, and a gain of $0.3 million from sales of certain operating equipment. Our SG&A headcount was 306 employees as of December 31, 2015, compared with 274 employees as of December 31, 2014.

   

Our acquisition of Senisma in July 2014 included a contingent consideration arrangement which required us to pay up to an additional $8.9 million to former Sensima shareholders if Sensima achieved a new product introduction as well as certain product revenue and direct margin targets in 2016. The fair value of the contingent consideration at the acquisition date was $2.5 million, which was estimated based on a probability-weighted analysis of possible future revenue outcomes. As part of the quarterly assessment in the fourth quarter of 2015, management reviewed the sales forecast for the products and determined that the projected product revenue in 2016 would likely not meet the minimum target required to earn the contingent consideration, primarily because the product adoption process by customers would take longer than we had originally anticipated. Accordingly, the fair value of the contingent consideration was deemed to be $0 as of December 31, 2015, and we released the liability of $2.5 million and recorded the credit in SG&A expenses. On December 31, 2016, management concluded that no contingent consideration was earned as the actual product revenue in 2016 did not meet the minimum target.

 

Litigation Expense (Benefit), Net

  

Litigation benefit, net was $0.2 million for the year ended December 31, 2016, compared with litigation expense of $1.0 million for the year ended December 31, 2015. The net litigation benefit in 2016 was attributable to the recognition of $0.7 million of benefit in connection with two litigation settlements, partially offset by $0.5 million of litigation expenses.

 

Litigation expense was $1.0 million for the year ended December 31, 2015, compared with a litigation benefit, net of $8.0 million for the year ended December 31, 2014. The net litigation benefit in 2014 was attributable to the recognition of a $9.5 million award from the O2 Micro litigation, partially offset by $0.5 million of additional legal fees incurred in connection with the final resolution of the litigation and $1.0 million of litigation expenses in other matters.

 

For a description of our material litigation matters, see Note 14 “Litigation” of the Notes to Consolidated Financial Statements.

 

Interest and Other Income, Net

 

Interest and other income, net, was $2.8 million for the year ended December 31, 2016, compared with $1.4 million for the year ended December 31, 2015. The increase was primarily due to an increase of $1.6 million in income related to changes in the value of the employee deferred compensation plan assets and an increase of $0.9 million in interest income, partially offset by an increase of $0.6 million in amortization of premium on investments and a decrease of $0.5 million in foreign currency exchange gains.

 

Interest and other income, net, was $1.4 million for the year ended December 31, 2015, compared with $1.1 million for the year ended December 31, 2014. The increase was primarily due to an increase of $0.5 million in foreign currency exchange gains and an increase of $0.5 million in interest income, partially offset by an increase of $0.5 million in expenses related to changes in the value of the employee deferred compensation plan assets. 

 

Income Tax Provision

 

The income tax provision for the year ended December 31, 2016 was $4.5 million, or 7.9% of pre-tax income. 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 and deferred compensation.

 

 
39

 

 

The income tax provision for the year ended December 31, 2015 was $7.3 million, or 17.2% of pre-tax income. We recorded a one-time net charge of $2.7 million to the income tax provision related to the resolution of the income tax audits in the second quarter of 2015. In addition to the impact of this charge, the effective tax rate differed from the federal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates and from the release of an income tax reserve where the statute of limitations expired. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation and deferred compensation.

 

The income tax provision for the year ended December 31, 2014 was $0.9 million, or 2.5% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily because our foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates, and because of the benefit that we realized from stock options exercises and the release of RSUs, and changes in our valuation allowance primarily related to stock-based compensation and deferred compensation.

  

For additional information on the income tax provision and the resolution of the income tax audits, see Note 12 “Income Taxes” of the Notes to Consolidated Financial Statements.

 

Liquidity and Capital Resources

 

   

December 31,

 
   

2016

   

2015

 
   

(in thousands, except percentages)

 

Cash and cash equivalents

  $ 112,703     $ 90,860  

Short-term investments

    155,521       144,103  

Total cash, cash equivalents and short-term investments

  $ 268,224     $ 234,963  

Percentage of total assets

    52.5 %     54.5 %
                 

Total current assets

  $ 382,984     $ 331,928  

Total current liabilities

    (52,921 )     (43,283 )

Working capital

  $ 330,063     $ 288,645  

 

As of December 31, 2016, we had cash and cash equivalents of $112.7 million and short-term investments of $155.5 million, compared with cash and cash equivalents of $90.9 million and short-term investments of $144.1 million as of December 31, 2015. As of December 31, 2016, $87.6 million of cash and cash equivalents and $52.1 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. 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 investments, accounts receivable, inventories and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of December 31, 2016, we had working capital of $330.1 million, compared with working capital of $288.6 million as of December 31, 2015. The $41.5 million increase in working capital was due to a $51.1 million increase in current assets, partially offset by a $9.6 million increase in current liabilities. The increase in current assets was primarily due to an increase in cash and cash equivalents, short-term investments, accounts receivable, inventories and prepaid expenses. 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:

 

   

Year Ended December 31,

 
   

2016

   

2015

   

2014

 
   

(in thousands)

 

Net cash provided by operating activities

  $ 107,786     $ 69,736     $ 74,133  

Net cash used in investing activities

    (55,726 )     (57,197 )     (9,367 )

Net cash used in financing activities

    (28,127 )     (46,652 )     (39,227 )

Effect of exchange rate changes on cash and cash equivalents

    (2,090 )     (1,293 )     (486 )

Net increase (decrease) in cash and cash equivalents

  $ 21,843     $ (35,406 )   $ 25,053  

 

 
40

 

 

For the year ended December 31, 2016, net cash provided by operating activities was $107.8 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 $2.9 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 during the year. The increase in inventories was primarily driven by increased purchases to meet current demand and future growth. The increase in accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensation plan. 

  

For the year ended December 31, 2015, net cash provided by operating activities was $69.7 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization, stock-based compensation, change in fair value of contingent consideration and a net decrease of $12.6 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily driven by increased sales. The increase in inventories was primarily driven by increased purchases to meet current demand and future growth. The increase in accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensation plan.

   

For the year ended December 31, 2014, net cash provided by operating activities was $74.1 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 $8.0 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily due to increased sales. The increase in inventories was primarily driven by increased purchases to meet current demand and future growth. The decrease in accrued liabilities was primarily driven by the release of a liability related to the O2 Micro litigation, partially offset by an increase in employee contributions to the deferred compensation plan. 

 

For the year ended December 31, 2016, net cash used in investing activities was $55.7 million, primarily due to purchases of property and equipment of $37.1 million, net purchases of investments of $13.6 million, and net contributions to the employee deferred compensation plan of $5.0 million. For the year ended December 31, 2015, net cash used in investing activities was $57.2 million, primarily due to net purchases of investments of $33.5 million, purchases of property and equipment of $16.0 million, and net contributions to the employee deferred compensation plan of $8.0 million. For the year ended December 31, 2014, net cash used in investing activities was $9.4 million, primarily due to $11.6 million paid to acquire Sensima, purchases of property and equipment of $9.5 million, and net contributions to the employee deferred compensation plan of $5.3 million, partially offset by net proceeds from maturities and sales of investments of $12.4 million and proceeds of $4.7 million from the redemption of auction-rate securities.

 

For the year ended December 31, 2016, we funded the purchases of a previously leased manufacturing facility in Chengdu, China and building units in Shenzhen, China and Taipei, Taiwan for approximately $17.5 million. For the year ended December 31, 2015, we spent $5.4 million to purchase building units located in Shanghai, China.

 

For the year ended December 31, 2016, net cash used in financing activities was $28.1 million, primarily reflecting $33.1 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $3.8 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan. For the year ended December 31, 2015, net cash used in financing activities was $46.7 million, primarily reflecting $32.3 million used in repurchases of our common stock pursuant to our stock repurchase program and $30.0 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $10.0 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan. For the year ended December 31, 2014, net cash used in financing activities was $39.2 million, primarily reflecting $41.2 million used in repurchases of our common stock pursuant to our stock repurchase program and $11.7 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $14.0 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan.

 

In July 2013, our Board of Directors approved a stock repurchase program that authorized us to repurchase up to $100 million in the aggregate of our common stock. The program expired on December 31, 2015. In February 2016, our Board of Directors approved a new stock repurchase program that authorized us to repurchase up to $50 million in the aggregate of our common stock through December 31, 2016. The program was extended by the Board of Directors to December 31, 2017. For the year ended December 31, 2016, we did not repurchase any shares. For the year ended December 31, 2015, we repurchased a total of 0.6 million shares for $32.3 million, at an average price of $50.05 per share. For the year ended December 31, 2014, we repurchased a total of 1.1 million shares for $41.2 million, at an average price of $39.19 per share.  

 

In June 2014, our Board of Directors approved 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 year ended December 31, 2016, we paid dividends and dividend equivalents totaling $33.1 million.  For the year ended December 31, 2015, we paid dividends and dividend equivalents totaling $30.0 million. For the year ended December 31, 2014, we paid dividends and dividend equivalents totaling $11.7 million.

 

 
41

 

 

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. 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

 

The following table summarizes our contractual obligations at December 31, 2016:

 

           

Payment Due by Period

 
   

Total

   

Less Than 1 Year

   

1 - 3 Years

   

3 - 5 Years

   

More Than 5 years

 
   

(in thousands)

 

Operating leases

  $ 1,700     $ 969     $ 617     $ 114     $ -  

Outstanding purchase commitments (1)

    46,263       44,663       300       300       1,000  

Other long-term obligations (2)

    22,277       -       3,167       9,312       9,798  

Total

  $ 70,240     $ 45,632     $ 4,084     $ 9,726     $ 10,798  

______________

 

(1)

Outstanding purchase commitments primarily consist of wafer purchases from our foundries, assembly services and license arrangements.

 

 

(2)

Other long-term obligations include long-term liabilities reflected in our Consolidated Balance Sheets, which primarily consist of the employee deferred compensation plan liabilities and accrued dividend equivalents. Because of the uncertainty as to the timing of distributions related to a portion of the employee deferred compensation plan liabilities, we have excluded estimated obligations of $0.9 million from the table above. In addition, because of the uncertainty as to the timing of payments related to our liabilities for unrecognized tax benefits, we have excluded estimated obligations of $3.9 million from the table above.

 

Off Balance Sheet Arrangements

 

As of December 31, 2016, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Our cash equivalents and investments are subject to market risk, primarily interest rate and credit risk. Our investments are managed by outside professional managers within investment guidelines set by management and approved by our Board of Directors. Such guidelines include security type, credit quality and maturity and are intended to limit market risk by restricting our investments to high quality debt instruments with relatively short-term maturities. Fluctuations in interest rates of 10% would not have a material impact on our results of operations.

    

 
42

 

 

We do not use derivative financial instruments in our investment portfolio. Investments in debt securities are classified as available-for-sale. For available-for-sale investments, no gains or losses are recognized in our results of operations due to changes in interest rates unless such securities are sold prior to maturity or are determined to be other-than-temporarily impaired. Available-for-sale investments are reported at fair value with the related unrealized gains or losses being included in accumulated other comprehensive income (loss), a component of stockholders’ equity.

 

Long-Term Investments

 

As of December 31, 2016, our holdings in auction-rate securities, which have a fair value of $5.4 million, have failed to reset as a result of current market conditions. A 10% decline in the fair value could impact our results of operations by approximately $0.5 million if we determine the decline in value to be other-than-temporary.

 

Foreign Currency Exchange Risk

 

Our sales outside the United States are primarily transacted in U.S. dollars through our subsidiary in Bermuda. Accordingly, our sales are not generally impacted by foreign currency rate changes. The functional currency of the Company’s offshore operations is generally the local currency, including the Renminbi, the New Taiwan Dollar and the Euro. In addition, we incur foreign currency exchange gains or losses related to certain intercompany transactions between the U.S. and our foreign subsidiaries that are denominated in a currency other than the functional currency. Gains or losses from the settlement and remeasurement of the balances are reported in interest and other income. To date, fluctuations in foreign currency exchange rates have not had a material impact on our results of operations.   

 

 
43

 

 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

MONOLITHIC POWER SYSTEMS, INC.

CONSOLIDATED FINANCIAL STATEMENTS

 

Contents

 

  

Page

Report of Independent Registered Public Accounting Firm

45

Consolidated Balance Sheets

46

Consolidated Statements of Operations

47

Consolidated Statements of Comprehensive Income

48

Consolidated Statements of Stockholders’ Equity

49

Consolidated Statements of Cash Flows

50

Notes to Consolidated Financial Statements

51

 

 
44

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Monolithic Power Systems, Inc.

San Jose, California

 

We have audited the accompanying consolidated balance sheets of Monolithic Power Systems, Inc. and subsidiaries (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Monolithic Power Systems, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in  Internal Control – Integrated Framework (2013)   issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.

 

 

/s/ DELOITTE & TOUCHE LLP

 

San Jose, California

March 1, 2017

 

 
45

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

   

December 31,

 
   

2016

   

2015

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 112,703     $ 90,860  

Short-term investments

    155,521       144,103  

Accounts receivable, net

    34,248       30,830  

Inventories

    71,469       63,209  

Other current assets

    9,043       2,926  

Total current assets

    382,984       331,928  

Property and equipment, net

    85,171       65,359  

Long-term investments

    5,354       5,361  

Goodwill

    6,571       6,571  

Acquisition-related intangible assets, net

    3,002       5,053  

Deferred tax assets, net

    633       672  

Other long-term assets

    27,411       16,341  

Total assets

  $ 511,126     $ 431,285  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 17,427     $ 13,487  

Accrued compensation and related benefits

    12,578       9,812  

Accrued liabilities

    22,916       19,984  

Total current liabilities

    52,921       43,283  

Income tax liabilities

    3,870       2,941  

Other long-term liabilities

    23,219       16,545  

Total liabilities

    80,010       62,769  

Commitments and contingencies (notes 12, 13 and 14)

               

Stockholders' equity:

               

Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 40,793 and 39,689 as of December 31, 2016 and December 31, 2015, respectively

    315,969       265,763  

Retained earnings

    119,362       101,287  

Accumulated other comprehensive income (loss)

    (4,215 )     1,466  

Total stockholders’ equity

    431,116       368,516  

Total liabilities and stockholders’ equity

  $ 511,126     $ 431,285  

 

See accompanying notes to consolidated financial statements.

&n