UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Forthe quarterly period ended September 30, 20182019
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) |
4040 Lake Washington Blvd. NE, Suite 201, Kirkland, Washington 98033
(Address of principal executive offices)(Zip code)Code)
(425) 296-9956
(Registrant’s telephone number, including area code)
____________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | MPWR | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ |
Smaller reporting company ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 42,412,00043,439,000 shares of the registrant’s common stock issued and outstanding as of October 29, 2018.28, 2019.
MONOLITHIC POWER SYSTEMS, INC.
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ITEM 1. | 3 | |
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 4. |
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ITEM 1. |
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ITEM 6. |
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MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 131,094 | $ | 82,759 | $ | 205,229 | $ | 172,704 | ||||||||
Short-term investments | 216,754 | 216,331 | 213,511 | 204,577 | ||||||||||||
Accounts receivable | 59,887 | 38,037 | ||||||||||||||
Accounts receivable, net | 58,261 | 55,214 | ||||||||||||||
Inventories | 136,790 | 99,281 | 135,634 | 136,384 | ||||||||||||
Other current assets | 12,876 | 12,762 | 16,660 | 11,931 | ||||||||||||
Total current assets | 557,401 | 449,170 | 629,295 | 580,810 | ||||||||||||
Property and equipment, net | 147,497 | 144,636 | 217,043 | 150,001 | ||||||||||||
Long-term investments | 5,257 | 5,256 | 3,264 | 3,241 | ||||||||||||
Goodwill | 6,571 | 6,571 | 6,571 | 6,571 | ||||||||||||
Acquisition-related intangible assets, net | 308 | 951 | ||||||||||||||
Deferred tax assets, net | 12,852 | 15,917 | 16,619 | 16,830 | ||||||||||||
Other long-term assets | 33,271 | 30,068 | 43,343 | 35,979 | ||||||||||||
Total assets | $ | 763,157 | $ | 652,569 | $ | 916,135 | $ | 793,432 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 27,603 | $ | 22,813 | $ | 30,318 | $ | 22,678 | ||||||||
Accrued compensation and related benefits | 22,996 | 15,597 | 28,724 | 18,799 | ||||||||||||
Accrued liabilities | 34,908 | 27,507 | ||||||||||||||
Other accrued liabilities | 45,984 | 38,962 | ||||||||||||||
Total current liabilities | 85,507 | 65,917 | 105,026 | 80,439 | ||||||||||||
Income tax liabilities | 31,173 | 31,621 | 32,402 | 34,375 | ||||||||||||
Other long-term liabilities | 36,313 | 33,024 | 44,279 | 38,525 | ||||||||||||
Total liabilities | 152,993 | 130,562 | 181,707 | 153,339 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders' equity: | ||||||||||||||||
Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 42,408 and 41,614, respectively | 435,085 | 376,586 | ||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock and additional paid-in capital: $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 43,435 and 42,505, respectively | 528,775 | 450,908 | ||||||||||||||
Retained earnings | 180,819 | 143,608 | 215,692 | 194,728 | ||||||||||||
Accumulated other comprehensive income (loss) | (5,740 | ) | 1,813 | |||||||||||||
Accumulated other comprehensive loss | (10,039 | ) | (5,543 | ) | ||||||||||||
Total stockholders’ equity | 610,164 | 522,007 | 734,428 | 640,093 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 763,157 | $ | 652,569 | $ | 916,135 | $ | 793,432 |
See accompanying notes to unaudited condensed consolidated financial statements.
MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Revenue | $ | 159,975 | $ | 128,939 | $ | 428,885 | $ | 341,499 | $ | 168,813 | $ | 159,975 | $ | 461,183 | $ | 428,885 | ||||||||||||||||
Cost of revenue | 70,957 | 58,083 | 190,810 | 154,377 | 75,655 | 70,957 | 206,794 | 190,810 | ||||||||||||||||||||||||
Gross profit | 89,018 | 70,856 | 238,075 | 187,122 | 93,158 | 89,018 | 254,389 | 238,075 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Research and development | 25,630 | 21,442 | 70,720 | 60,629 | 27,742 | 25,630 | 80,746 | 70,720 | ||||||||||||||||||||||||
Selling, general and administrative | 29,552 | 25,255 | 85,431 | 73,219 | 34,692 | 29,552 | 100,302 | 85,431 | ||||||||||||||||||||||||
Litigation expense | 343 | 327 | 1,513 | 903 | 692 | 343 | 1,473 | 1,513 | ||||||||||||||||||||||||
Total operating expenses | 55,525 | 47,024 | 157,664 | 134,751 | 63,126 | 55,525 | 182,521 | 157,664 | ||||||||||||||||||||||||
Income from operations | 33,493 | 23,832 | 80,411 | 52,371 | 30,032 | 33,493 | 71,868 | 80,411 | ||||||||||||||||||||||||
Interest and other income, net | 2,714 | 1,255 | 5,387 | 3,873 | 2,257 | 2,714 | 7,827 | 5,387 | ||||||||||||||||||||||||
Income before income taxes | 36,207 | 25,087 | 85,798 | 56,244 | 32,289 | 36,207 | 79,695 | 85,798 | ||||||||||||||||||||||||
Income tax provision | 4,639 | 1,445 | 8,168 | 3,112 | ||||||||||||||||||||||||||||
Income tax expense | 2,761 | 4,639 | 3,293 | 8,168 | ||||||||||||||||||||||||||||
Net income | $ | 31,568 | $ | 23,642 | $ | 77,630 | $ | 53,132 | $ | 29,528 | $ | 31,568 | $ | 76,402 | $ | 77,630 | ||||||||||||||||
Net income per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.75 | $ | 0.57 | $ | 1.84 | $ | 1.29 | $ | 0.68 | $ | 0.75 | $ | 1.77 | $ | 1.84 | ||||||||||||||||
Diluted | $ | 0.71 | $ | 0.54 | $ | 1.75 | $ | 1.22 | $ | 0.64 | $ | 0.71 | $ | 1.68 | $ | 1.75 | ||||||||||||||||
Weighted-average shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 42,362 | 41,458 | 42,173 | 41,276 | 43,308 | 42,362 | 43,055 | 42,173 | ||||||||||||||||||||||||
Diluted | 44,669 | 43,486 | 44,450 | 43,384 | 45,833 | 44,669 | 45,516 | 44,450 | ||||||||||||||||||||||||
Cash dividends declared per common share | $ | 0.30 | $ | 0.20 | $ | 0.90 | $ | 0.60 |
See accompanying notes to unaudited condensed consolidated financial statements.
MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Net income | $ | 31,568 | $ | 23,642 | $ | 77,630 | $ | 53,132 | $ | 29,528 | $ | 31,568 | $ | 76,402 | $ | 77,630 | ||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (4,526 | ) | 1,500 | (6,999 | ) | 3,992 | (6,135 | ) | (4,526 | ) | (6,167 | ) | (6,999 | ) | ||||||||||||||||||
Change in unrealized gain (loss) on available-for-sale securities, net of tax of $241, $0, $241, 0, respectively | 491 | 222 | (554 | ) | 565 | |||||||||||||||||||||||||||
Total other comprehensive income (loss), net of tax | (4,035 | ) | 1,722 | (7,553 | ) | 4,557 | ||||||||||||||||||||||||||
Change in unrealized gain (loss) on available-for-sale securities, net of tax of $(38), $241, $(200) and $241, respectively | 234 | 491 | 1,671 | (554 | ) | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (5,901 | ) | (4,035 | ) | (4,496 | ) | (7,553 | ) | ||||||||||||||||||||||||
Comprehensive income | $ | 27,533 | $ | 25,364 | $ | 70,077 | $ | 57,689 | $ | 23,627 | $ | 27,533 | $ | 71,906 | $ | 70,077 |
See accompanying notes to unaudited condensed consolidated financial statements.
MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per-share amounts)
(unaudited)
Accumulated | ||||||||||||||||||||
Common Stock and | Other | Total | ||||||||||||||||||
Additional Paid-in Capital | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
Three Months Ended September 30, 2019 | Shares | Amount | Earnings | Loss | Equity | |||||||||||||||
Balance as of July 1, 2019 | 43,234 | $ | 503,759 | $ | 204,533 | $ | (4,138 | ) | $ | 704,154 | ||||||||||
Net income | - | - | 29,528 | - | 29,528 | |||||||||||||||
Other comprehensive loss | - | - | - | (5,901 | ) | (5,901 | ) | |||||||||||||
Dividends and dividend equivalents declared ($0.40 per share) | - | - | (18,369 | ) | - | (18,369 | ) | |||||||||||||
Common stock issued under employee equity incentive plans | 187 | 2,090 | - | - | 2,090 | |||||||||||||||
Common stock issued under employee stock purchase plan | 14 | 1,650 | - | - | 1,650 | |||||||||||||||
Stock-based compensation expense | - | 21,276 | - | - | 21,276 | |||||||||||||||
Balance as of September 30, 2019 | 43,435 | $ | 528,775 | $ | 215,692 | $ | (10,039 | ) | $ | 734,428 |
Accumulated | ||||||||||||||||||||
Common Stock and | Other | Total | ||||||||||||||||||
Additional Paid-in Capital | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
Three Months Ended September 30, 2018 | Shares | Amount | Earnings | Loss | Equity | |||||||||||||||
Balance as of July 1, 2018 | 42,285 | $ | 417,866 | $ | 162,859 | $ | (1,705 | ) | $ | 579,020 | ||||||||||
Net income | - | - | 31,568 | - | 31,568 | |||||||||||||||
Other comprehensive loss | - | - | - | (4,035 | ) | (4,035 | ) | |||||||||||||
Dividends and dividend equivalents declared ($0.30 per share) | - | - | (13,608 | ) | - | (13,608 | ) | |||||||||||||
Common stock issued under employee equity incentive plans | 108 | 916 | - | - | 916 | |||||||||||||||
Common stock issued under employee stock purchase plan | 15 | 1,465 | - | - | 1,465 | |||||||||||||||
Stock-based compensation expense | - | 14,838 | - | - | 14,838 | |||||||||||||||
Balance as of September 30, 2018 | 42,408 | $ | 435,085 | $ | 180,819 | $ | (5,740 | ) | $ | 610,164 |
Accumulated | ||||||||||||||||||||
Common Stock and | Other | Total | ||||||||||||||||||
Additional Paid-in Capital | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
Nine Months Ended September 30, 2019 | Shares | Amount | Earnings | Loss | Equity | |||||||||||||||
Balance as of January 1, 2019 | 42,505 | $ | 450,908 | $ | 194,728 | $ | (5,543 | ) | $ | 640,093 | ||||||||||
Net income | - | - | 76,402 | - | 76,402 | |||||||||||||||
Other comprehensive loss | - | - | - | (4,496 | ) | (4,496 | ) | |||||||||||||
Dividends and dividend equivalents declared ($1.20 per share) | - | - | (55,438 | ) | - | (55,438 | ) | |||||||||||||
Common stock issued under employee equity incentive plans | 902 | 14,561 | - | - | 14,561 | |||||||||||||||
Common stock issued under employee stock purchase plan | 28 | 3,277 | - | - | 3,277 | |||||||||||||||
Stock-based compensation expense | - | 60,029 | - | - | 60,029 | |||||||||||||||
Balance as of September 30, 2019 | 43,435 | $ | 528,775 | $ | 215,692 | $ | (10,039 | ) | $ | 734,428 |
Accumulated | ||||||||||||||||||||
Common Stock and | Other | Total | ||||||||||||||||||
Additional Paid-in Capital | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
Nine Months Ended September 30, 2018 | Shares | Amount | Earnings | Income (Loss) | Equity | |||||||||||||||
Balance as of January 1, 2018 | 41,614 | $ | 376,586 | $ | 143,608 | $ | 1,813 | $ | 522,007 | |||||||||||
Net income | - | - | 77,630 | - | 77,630 | |||||||||||||||
Other comprehensive loss | - | - | - | (7,553 | ) | (7,553 | ) | |||||||||||||
Dividends and dividend equivalents declared ($0.90 per share) | - | - | (40,798 | ) | - | (40,798 | ) | |||||||||||||
Common stock issued under employee equity incentive plans | 761 | 9,684 | - | - | 9,684 | |||||||||||||||
Common stock issued under employee stock purchase plan | 33 | 3,028 | - | - | 3,028 | |||||||||||||||
Stock-based compensation expense | - | 45,787 | - | - | 45,787 | |||||||||||||||
Cumulative effect of a change in accounting principles | - | - | 379 | - | 379 | |||||||||||||||
Balance as of September 30, 2018 | 42,408 | $ | 435,085 | $ | 180,819 | $ | (5,740 | ) | $ | 610,164 |
See accompanying notes to unaudited condensed consolidated financial statements.
MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 77,630 | $ | 53,132 | $ | 76,402 | $ | 77,630 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization of intangible assets | 9,058 | 12,092 | ||||||||||||||
Depreciation and amortization | 10,817 | 9,058 | ||||||||||||||
Gain on disposal and sale of property and equipment, net | (282 | ) | - | |||||||||||||
Amortization of premium on available-for-sale securities | 1,122 | 1,494 | 384 | 1,122 | ||||||||||||
Gain on deferred compensation plan investments | (949 | ) | (1,902 | ) | (2,630 | ) | (949 | ) | ||||||||
Deferred taxes, net | (18 | ) | 3,169 | |||||||||||||
Stock-based compensation expense | 45,765 | 40,759 | 60,019 | 45,765 | ||||||||||||
Deferred taxes, net | 3,169 | - | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (22,752 | ) | (16,505 | ) | (3,048 | ) | (22,752 | ) | ||||||||
Inventories | (37,496 | ) | (28,384 | ) | 754 | (37,496 | ) | |||||||||
Other assets | (665 | ) | 1,696 | (5,849 | ) | (665 | ) | |||||||||
Accounts payable | 5,978 | 4,999 | 7,173 | 5,978 | ||||||||||||
Accrued compensation and related benefits | 7,838 | 4,542 | 10,328 | 7,838 | ||||||||||||
Accrued liabilities | 4,635 | 7,276 | ||||||||||||||
Other accrued liabilities | 7,453 | 4,635 | ||||||||||||||
Income tax liabilities | 528 | 1,249 | (6,186 | ) | 528 | |||||||||||
Net cash provided by operating activities | 93,861 | 80,448 | 155,317 | 93,861 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Property and equipment purchases | (18,057 | ) | (25,108 | ) | ||||||||||||
Purchases of property and equipment | (87,129 | ) | (18,057 | ) | ||||||||||||
Acquisition of in-place leases | (981 | ) | - | |||||||||||||
Purchases of short-term investments | (86,021 | ) | (102,274 | ) | (106,409 | ) | (86,021 | ) | ||||||||
Proceeds from maturities and sales of short-term investments | 83,679 | 61,678 | 98,814 | 83,679 | ||||||||||||
Proceeds from sales of long-term investments | 125 | - | ||||||||||||||
Proceeds from sales of property and equipment | 9,268 | - | ||||||||||||||
Contributions to deferred compensation plan, net | (1,396 | ) | (2,124 | ) | (1,797 | ) | (1,396 | ) | ||||||||
Net cash used in investing activities | (21,795 | ) | (67,828 | ) | (88,109 | ) | (21,795 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Property and equipment purchased on extended payment terms | - | (250 | ) | (204 | ) | - | ||||||||||
Proceeds from exercise of stock options | 59 | 129 | ||||||||||||||
Proceeds from vesting of restricted stock units | 9,625 | - | ||||||||||||||
Proceeds from shares issued under the employee stock purchase plan | 3,028 | 2,701 | ||||||||||||||
Proceeds from common stock issued under employee equity incentive plans | 14,561 | 9,684 | ||||||||||||||
Proceeds from common stock issued under employee stock purchase plan | 3,277 | 3,028 | ||||||||||||||
Dividends and dividend equivalents paid | (34,381 | ) | (25,264 | ) | (48,641 | ) | (34,381 | ) | ||||||||
Net cash used in financing activities | (21,669 | ) | (22,684 | ) | (31,007 | ) | (21,669 | ) | ||||||||
Effect of change in exchange rates | (2,062 | ) | 1,790 | (2,516 | ) | (2,062 | ) | |||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 48,335 | (8,274 | ) | |||||||||||||
Net increase in cash, cash equivalents and restricted cash | 33,685 | 48,335 | ||||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 82,874 | 112,813 | 172,818 | 82,874 | ||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 131,209 | $ | 104,539 | $ | 206,503 | $ | 131,209 | ||||||||
Supplemental disclosures: | ||||||||||||||||
Cash paid for taxes and interest | $ | 6,388 | $ | 1,855 | ||||||||||||
Supplemental disclosures for cash flow information: | ||||||||||||||||
Cash paid for taxes | $ | 9,472 | $ | 6,388 | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Liability accrued for property and equipment purchases | $ | 1,563 | $ | 284 | $ | 4,969 | $ | 1,563 | ||||||||
Liability accrued for dividends and dividend equivalents | $ | 15,397 | $ | 10,131 | $ | 20,866 | $ | 15,397 |
See accompanying notes to unaudited condensed consolidated financial statements.
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K10-K for the year ended December 31, 2017, 2018, filed with the SEC on March 1, 2018.2019.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Form 10-Q10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 20182019 or for any other future periods.
Summary of Significant Accounting Policies
Except for the changes related to revenue recognitionleases discussed in “Recently Adopted Accounting Pronouncements” and in Note 2 below,6, there have been no other changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2018 2019, as compared to the significant accounting policies described in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K10-K for the year ended December 31, 2017.2018.
Recently Adopted Accounting PronouncementsPronouncement
In May 2014, February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,2016-02, Revenue from Contracts with CustomersLeases (Topic 606)842),which outlines a single comprehensive model forrequires entities to userecognize right-of-use (“ROU”) assets and lease liabilities on the balance sheets for leases with terms greater than 12 months. In addition, the standard applies to leases embedded in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goodsservice or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.other arrangements. The Company adopted the standard on January 1, 2018 2019 using the modified retrospective method appliedand did not restate comparative periods, as permitted by the standard. In addition, the Company elected the transition practical expedients to thosenot reassess its contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after that existed prior to January 1, 2018 are presented under Topic 606, while prior-period amounts have not been retrospectively adjusted and continue to be reported in accordance with Topic 605, Revenue Recognition.2019.
TheUpon adoption, the Company recorded a net increase torecognized ROU assets and lease liabilities of its outstanding operating leases on the opening balance of retained earnings of $0.4 million, net of tax, as of January 1, 2018 due to the cumulative effect of initially applying Topic 606,Condensed Consolidated Balance Sheets, primarily related to real estate. The adoption did not have a material impact on the change in revenue recognition for three U.S.-based distributors. Sales to these distributors are transacted underCondensed Consolidated Statements of Operations or the termsCondensed Consolidated Statements of agreements providing price adjustment rights. Prior to the adoption of Topic 606, revenue and costs related to these sales were deferred until the Company received notification from the distributors that the products had been sold to the end customers and the amount of price adjustments was fixed and finalized. Upon adoption of Topic 606, the transaction price takes into consideration the effect of variable consideration such as price adjustments, which are estimated and recorded at the time the promised goods are transferred to the distributors. Accordingly, effective January 1, 2018, the Company recognizes revenue at the time of shipment to the distributors, adjusted for an estimate of the price adjustments based on management’s review of historical data and other information available at the time.Cash Flows. See Note 2 for further discussion.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows. The Company adopted the standard on January 1, 2018 and applied the guidance retrospectively to all periods presented. See Note 96 for further discussion.
Recent Accounting Pronouncements Not Yet Adopted as of September 30, 20182019
In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain disclosure requirements, including the presentation of changes in stockholders’ equity and the dividend per share for interim periods. The final rule will be effective on November 5, 2018. The Company is evaluating the impact of the adoption on its disclosures.
In August 2018, the FASB issued ASU No. 2018-13,2018-13, Fair Value Measurement (Topic 820820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,, which changes certain disclosure requirements, including those related to Level 3 fair value measurements. The standard will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the standard and does not expect the adoption to have a material impact on its disclosures.
In January 2017, the FASB issued ASU No. 2017-04,2017-04, Intangibles – Goodwill and Other (Topic 350)350), which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the standard and does not expect the adoption to have a material impact on its annual goodwill impairment test.
In June 2016, the FASB issued ASU No. 2016-13,2016-13, Financial Instruments – Credit Losses (Topic 326)326), which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities, with unrealized losses, the lossesstandard eliminates the concept of other-than-temporary impairment and entities will be recognized as allowancesrequired to recognize an allowance for credit losses rather than reductions in the amortized cost of the securities. The standard will be effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. Entities will apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company is evaluating the impact of the adoptionBased on its consolidated financial position, results of operations, cash flows and disclosures.
In February 2016,preliminary assessment, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires entities to recognize a right-of-use asset and a lease liability on the balance sheets for substantially all leases with a lease term greater than 12 months, including leases currently accounted for as operating leases. In addition,Company does not expect the standard applies to leases embedded in service or other arrangements. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company will adopt the standard on January 1, 2019. The Company is evaluating thehave a material impact of the adoption on its consolidated financial statements and disclosures, and expects to elect certain available transitional practical expedients. The Company anticipates recording assets and liabilities primarily related to its real estate leases on its Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations.upon adoption.
2. REVENUE RECOGNITION
Revenue from Product Sales
The following table presents the Company’s revenue disaggregated by end market (in thousands, except for percentages):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
End Market | 2018 | % of Revenue | 2017 (1) | % of Revenue | 2018 | % of Revenue | 2017 (1) | % of Revenue | ||||||||||||||||||||||||
Computing and storage | $ | 47,658 | 29.8 | % | $ | 29,020 | 22.5 | % | $ | 115,584 | 27.0 | % | $ | 74,103 | 21.7 | % | ||||||||||||||||
Automotive | 19,785 | 12.4 | 12,857 | 10.0 | 57,857 | 13.5 | 38,042 | 11.1 | ||||||||||||||||||||||||
Industrial | 24,869 | 15.5 | 16,348 | 12.7 | 61,544 | 14.3 | 46,736 | 13.7 | ||||||||||||||||||||||||
Communications | 19,158 | 12.0 | 15,372 | 11.9 | 50,442 | 11.8 | 47,748 | 14.0 | ||||||||||||||||||||||||
Consumer | 48,505 | 30.3 | 55,342 | 42.9 | 143,458 | 33.4 | 134,870 | 39.5 | ||||||||||||||||||||||||
Total | $ | 159,975 | 100.0 | % | $ | 128,939 | 100.0 | % | $ | 428,885 | 100.0 | % | $ | 341,499 | 100.0 | % |
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The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits, as well as dies in wafer form. These product sales were 99% and 98% of the Company’s total revenue for the three months ended September 30, 2019 and 2018, respectively, and 99% and 98% of the Company’s total revenue for the nine months ended September 30, 2019 and 2018, respectively. The Company also generatesremaining revenue primarily includes royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periods presented. See Note 8 for the disaggregation of the Company’s revenue by geographic regions and by product families.
The Company sells its products primarily through third-partythird-party distributors, value-added resellers, original equipment manufacturers, original design manufacturers and electronic manufacturing service providers. For the three months ended September 30, 2018 2019 and 2017, approximately2018, 88% and 87% and 88%, respectively, of the Company’s product sales were made through distribution arrangements. For the nine months ended September 30, 2018 2019 and 2017, approximately2018, 83% and 87% and 88%, respectively, of the Company’s product sales were made through distribution arrangements. These distribution arrangements contain enforceable rights and obligations specific to those distributors and not the end customers. Purchase orders, which are generally governed by sales agreements or the Company's standard terms of sale, stateset the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers purchase orders to be the contracts with customers. The unit price as stated on the purchase orders is considered the observable, stand-alone selling price for the arrangements.
Under Topic 606, theThe Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company excludes taxes assessed by government authorities, such as sales taxes, from revenue.
Product sales consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue from distributors and direct end customers when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. In accordance with the shipping terms specified in the contracts, these criteria are generally met when the products are shipped from the Company’s facilities (such as the “Ex Works” shipping term) or delivered to the customers’ locations (such as the “Delivered Duty Paid” shipping term).
Under certain consignment agreements, revenue is not recognized when the products are shipped and delivered to be held at customers’ designated locations because the Company retainscontinues to control the products and retain ownership, and the customers do not have an unconditional obligation to pay. The Company recognizes revenue when the customers pullconsume the products from the consigned inventory locations or, in some cases, after a 60-day period lapses,from the delivery date has passed, at which time control transfers to the customers and the Company invoices them for payment.
Variable Consideration
The Company recordsaccounts for price adjustment and stock rotation rights as variable consideration as athat reduces the transaction price, and recognizes that reduction to revenue in the same period the associated revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell the Company’s products to their end customers at a price that is lower than the distribution price invoiced by the Company. When the Company receives claims from the distributors that products have been sold to the end customers at the lower price, the Company issues the distributors credit memos for the price adjustments. The Company estimates the price adjustments using the expected value method based on analysesan analysis of historical claims, at both the distributor and product level, as well as an assessment of any known trends of product sales mix. Other U.S. distributors and non-U.S. distributors, which make up the majority of the Company’s total sales to distributors, do not have price adjustment rights. The Company records a credit against accounts receivable for the estimated price adjustments, with a corresponding reduction to revenue.
In addition, certain
Certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases.purchases in accordance with the contract terms. The Company estimates the stock rotation returns using the expected value method based on analysesan analysis of historical returns, and the current level of inventory in the distribution channel. The Company records a liability for the stock rotation reserve, with a corresponding reduction to revenue. In addition, the Company recognizes an asset for product returns which represents the right to recover products from the customers related to stock rotations, with a corresponding reduction to cost of goods sold.revenue.
Contract Balances
The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of September 30, 2018 2019 and December 31, 2017, 2018, accounts receivable totaled $59.9$58.3 million and $38.0$55.2 million, respectively. To manage credit risk, management performs ongoing credit evaluations of its customers’ financial condition. The Company did not recognize record any impairment losses related to its receivables in anyallowance for doubtful accounts as of the periods presented.September 30, 2019 and December 31, 2018.
For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of September 30, 2018 2019 and December 31, 2017, 2018, customer prepayments totaled $1.8$4.2 million and $4.7$2.5 million, respectively. The decreaseincrease in the customer prepayment balance for the nine months ended September 30, 2018 2019 resulted from a decreasean increase in unfulfilled customer orders for which the Company has received payments. For the nine months ended September 30, 2018, 2019, the Company recognized $4.7$2.5 million of revenue that was included in the customer prepayment balance as of December 31, 2017.2018.
Contract Costs
The Company pays sales commissions based on the achievement of pre-determined product sales targets. As the Company recognizes product sales at a point in time, sales commissions are expensed as incurred.
WarrantyPractical Expedients
The Company generally provides onehas elected the practical expedient to two-year warranties against defects in materials and workmanship and will either repairexpense sales commissions as incurred because the products, provide replacements at no charge to customersamortization period would have been one year or issue a refund. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations. Warranty reserve requirements are generally based on a specific assessment of the products sold with warranties when a customer asserts a claim for warranty or a product defect.
Practical Expedientsless.
The Company’s standard payment terms generally require customers to pay 30 to 60 days after the Company satisfies the performance obligations. For those customers who are required to pay in advance, the Company satisfies the performance obligations typicallygenerally within one quarter.two weeks. The Company has elected not to determine whether contacts with customers contain significant financing components.
As of September 30, 2018, theThe Company’s unsatisfied performance obligations primarily includedinclude products held in consignment arrangements and customer purchase orders for products that the Company has not yet shipped. Because the Company expects to fulfill these performance obligations within one year, the Company has elected not to disclose the amount of these remaining performance obligations or the timing of recognition.
Changes to Financial Statement Line Items
The following tables compare the impact on the financial statement line items between the application of Topic 606 and Topic 605 as of September 30, 2018, and for the three and nine months ended September 30, 2018. The significant changes between the two standards are primarily attributable to the following:
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Condensed Consolidated Balance Sheet (in thousands):
September 30, 2018 | ||||||||||||
Topic 606 | ||||||||||||
Line Item | (As Reported) | Topic 605 | Difference | |||||||||
Assets: | ||||||||||||
Accounts receivable | $ | 59,887 | $ | 61,430 | $ | (1,543 | ) | |||||
Inventories | $ | 136,790 | $ | 137,129 | $ | (339 | ) | |||||
Other current assets | $ | 12,876 | $ | 10,556 | $ | 2,320 | ||||||
Total current assets | $ | 557,401 | $ | 556,963 | $ | 438 | ||||||
Deferred tax assets, net | $ | 12,852 | $ | 12,953 | $ | (101 | ) | |||||
Total assets | $ | 763,157 | $ | 762,820 | $ | 337 | ||||||
Liabilities and Stockholders' Equity: | ||||||||||||
Accrued liabilities | $ | 34,908 | $ | 35,190 | $ | (282 | ) | |||||
Total current liabilities | $ | 85,507 | $ | 85,789 | $ | (282 | ) | |||||
Total liabilities | $ | 152,993 | $ | 153,275 | $ | (282 | ) | |||||
Retained earnings | $ | 180,819 | $ | 180,200 | $ | 619 | ||||||
Total stockholders' equity | $ | 610,164 | $ | 609,545 | $ | 619 | ||||||
Total liabilities and stockholders' equity | $ | 763,157 | $ | 762,820 | $ | 337 |
Condensed Consolidated Statement of Operations (in thousands, except per-share amounts):
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
Topic 606 | Topic 606 | |||||||||||||||||||||||
Line Item | (As Reported) | Topic 605 | Difference | (As Reported) | Topic 605 | Difference | ||||||||||||||||||
Revenue | $ | 159,975 | $ | 159,723 | $ | 252 | $ | 428,885 | $ | 428,440 | $ | 445 | ||||||||||||
Cost of revenue | $ | 70,957 | $ | 70,848 | $ | 109 | $ | 190,810 | $ | 190,668 | $ | 142 | ||||||||||||
Gross profit | $ | 89,018 | $ | 88,875 | $ | 143 | $ | 238,075 | $ | 237,772 | $ | 303 | ||||||||||||
Income from operations | $ | 33,493 | $ | 33,350 | $ | 143 | $ | 80,411 | $ | 80,108 | $ | 303 | ||||||||||||
Income before income taxes | $ | 36,207 | $ | 36,064 | $ | 143 | $ | 85,798 | $ | 85,495 | $ | 303 | ||||||||||||
Income tax provision | $ | 4,639 | $ | 4,609 | $ | 30 | $ | 8,168 | $ | 8,104 | $ | 64 | ||||||||||||
Net income | $ | 31,568 | $ | 31,455 | $ | 113 | $ | 77,630 | $ | 77,391 | $ | 239 | ||||||||||||
Net income per share - basic | $ | 0.75 | $ | 0.74 | $ | 0.01 | $ | 1.84 | $ | 1.84 | $ | - | ||||||||||||
Net income per share - diluted | $ | 0.71 | $ | 0.70 | $ | 0.01 | $ | 1.75 | $ | 1.74 | $ | 0.01 |
Condensed Consolidated Statement of Comprehensive Income (in thousands):
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
Topic 606 | Topic 606 | |||||||||||||||||||||||
Line Item | (As Reported) | Topic 605 | Difference | (As Reported) | Topic 605 | Difference | ||||||||||||||||||
Net income | $ | 31,568 | $ | 31,455 | $ | 113 | $ | 77,630 | $ | 77,391 | $ | 239 | ||||||||||||
Comprehensive income | $ | 27,533 | $ | 27,420 | $ | 113 | $ | 70,077 | $ | 69,838 | $ | 239 |
Condensed Consolidated Statement of Cash Flows (in thousands):
Nine Months Ended September 30, 2018 | ||||||||||||
Topic 606 | ||||||||||||
Line Item | (As Reported) | Topic 605 | Difference | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 77,630 | $ | 77,391 | $ | 239 | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | $ | (22,752 | ) | $ | (23,394 | ) | $ | 642 | ||||
Inventories | $ | (37,496 | ) | $ | (37,835 | ) | $ | 339 | ||||
Other assets | $ | (665 | ) | $ | 1,563 | $ | (2,228 | ) | ||||
Accrued liabilities | $ | 4,635 | $ | 3,691 | $ | 944 | ||||||
Income tax liabilities | $ | 528 | $ | 464 | $ | 64 |
3. STOCK-BASED COMPENSATION
2014 Equity Incentive Plan (the “2014(as amended, the “2014 Plan”)
The Board of Directors adopted the 2014 Plan in April 2013, and the stockholders approved it in June 2013. In October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The 2014 Plan, as amended, became effective on November 13, 2014 and provides for the issuance of up to 5.5 million shares. The 2014 Plan will expire on November 13, 2024. As of September 30, 2018, 2.72019, 1.6 million shares remained available for future issuance under the 2014 Plan.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expenses as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Cost of revenue | $ | 471 | $ | 453 | $ | 1,384 | $ | 1,264 | $ | 641 | $ | 471 | $ | 1,834 | $ | 1,384 | ||||||||||||||||
Research and development | 3,979 | 3,838 | 12,168 | 11,297 | 4,960 | 3,979 | 14,801 | 12,168 | ||||||||||||||||||||||||
Selling, general and administrative | 10,393 | 9,678 | 32,213 | 28,198 | 15,699 | 10,393 | 43,384 | 32,213 | ||||||||||||||||||||||||
Total stock-based compensation expense | $ | 14,843 | $ | 13,969 | $ | 45,765 | $ | 40,759 | $ | 21,300 | $ | 14,843 | $ | 60,019 | $ | 45,765 | ||||||||||||||||
Tax benefit related to stock-based compensation | $ | 764 | $ | - | $ | 2,723 | $ | - | $ | 595 | $ | 764 | $ | 2,139 | $ | 2,723 |
Restricted Stock Units (“RSUs”)
The Company’s restricted stock units (“RSUs”)RSUs include time-based RSUs, RSUs with only performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”), and RSUs with only market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals. goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company.
A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):
Time-Based RSUs | PSUs and MPSUs | MSUs | Total | Time-Based RSUs | PSUs and MPSUs | MSUs | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number of Shares | Weighted- Average Grant Date Fair Value Per Share | Number of Shares | Weighted- Average Grant Date Fair Value Per Share | Number of Shares | Weighted- Average Grant Date Fair Value Per Share | Number of Shares | Weighted- Average Grant Date Fair Value Per Share | Number of Shares | Weighted- Average Grant Date Fair Value Per Share | Number of Shares | Weighted- Average Grant Date Fair Value Per Share | Number of Shares | Weighted- Average Grant Date Fair Value Per Share | Number of Shares | Weighted- Average Grant Date Fair Value Per Share | |||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at January 1, 2018 | 258 | $ | 66.30 | 2,266 | $ | 48.59 | 1,620 | $ | 23.57 | 4,144 | $ | 39.91 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at January 1, 2019 | 240 | $ | 95.38 | 2,174 | $ | 61.61 | 2,219 | $ | 35.69 | 4,633 | $ | 50.94 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Granted | 93 | $ | 116.01 | 595 | (1) | $ | 82.64 | - | $ | - | 688 | $ | 87.16 | 47 | $ | 141.03 | 535 | (1) | $ | 98.45 | - | $ | - | 582 | $ | 101.89 | ||||||||||||||||||||||||||||||||||||||
Vested | (121 | ) | $ | 59.01 | (636 | ) | $ | 40.78 | - | $ | - | (757 | ) | $ | 43.69 | (88 | ) | $ | 79.91 | (571 | ) | $ | 54.41 | (243 | ) | $ | 23.57 | (902 | ) | $ | 48.61 | |||||||||||||||||||||||||||||||||
Forfeited | (14 | ) | $ | 82.08 | (6 | ) | $ | 63.16 | - | $ | - | (20 | ) | $ | 76.57 | (6 | ) | $ | 110.23 | (43 | ) | $ | 42.72 | (7 | ) | $ | 68.48 | (56 | ) | $ | 53.06 | |||||||||||||||||||||||||||||||||
Outstanding at September 30, 2018 | 216 | $ | 90.79 | 2,219 | $ | 59.92 | 1,620 | $ | 23.57 | 4,055 | $ | 47.04 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at September 30, 2019 | 193 | $ | 113.22 | 2,095 | $ | 73.37 | 1,969 | $ | 37.08 | 4,257 | $ | 58.38 |
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| Amount reflects the number of PSUs |
The intrinsic value related to vested RSUs was $13.9$26.1 million and $12.5$13.9 million for the three months ended September 30, 2018 2019 and 2017,2018, respectively. The intrinsic value related to vested RSUs was $79.0$110.1 million and $61.3$79.0 million for the nine months ended September 30, 2018 2019 and 2017,2018, respectively. As of September 30, 2018, 2019, the total intrinsic value of all outstanding RSUs was $465.9$617.6 million, based on the closing stock price of $125.53.$155.63. As of September 30, 2018, 2019, unamortized compensation expense related to all outstanding RSUs was $89.3$120.5 million with a weighted-average remaining recognition period of approximately three3.4 years.
Cash proceeds from vested PSUs with a purchase price feature totaled $14.6 million and $9.6 million for the nine months ended September 30, 2018. There were no proceeds for the nine months ended September 30, 2017.2019 and 2018, respectively.
Time-Based RSUs:
For the nine months ended September 30, 2018, 2019, the Compensation Committee of the Board of Directors (the "Compensation Committee") granted 93,00088,000 RSUs with time-based vestingservice conditions to non-executive employees and non-employee directors. The RSUs vest over four years for employees and one year for directors, subject to continued service with the Company.
20182019 PSUs:
In February 2018, 2019, the Compensation Committee granted 188,000151,000 PSUs to the executive officers, which represent a target number of shares to be awardedearned based on the Company’s average two-year (2018two-year (2019 and 2019)2020) revenue growth rate compared against the analog industry’s average two-yeartwo-year revenue growth rate as published by the Semiconductor Industry Association (“2018(“2019 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 20182019 Executive PSUs. 50% of the 20182019 Executive PSUs will vest in the first quarter of 20202021 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee.period. The remaining 20182019 Executive PSUs will vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 20182019 Executive PSUs is $46.1$46.6 million.
In February 2018, the Compensation Committee granted 44,000 PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s 2019 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2018 and 2019) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2018 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2018 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2018 Non-Executive PSUs will vest in the first quarter of 2020 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining 2018 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2018 Non-Executive PSUs, excluding cancelled shares, is $8.8 million.
The 20182019 Executive PSUs and the 2018 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 20182019 Executive PSUs and the 2018 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $110.00,$130.67, expected term of 2.6 years, expected volatility of 27.5%29.0% and risk-free interest rate of 2.3%.
2015 MPSUs:
On December 31, 2015, the Compensation Committee granted 86,000 MPSUs to the executive officers and 41,000 MPSUs to certain non-executive employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2015 MPSUs. The 2015 MPSUs consist of four separate tranches with various performance periods ending on December 31, 2019. The first tranche contains market conditions only, which require the achievement of five stock price targets ranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. As of September 30, 2017, all five stock price targets for the first tranche have been achieved and approved by the Compensation Committee.
The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of five stock price targets measured against a base price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading days immediately before the start of the performance period for that tranche, or (2) the closing stock price immediately before the start of the performance period for that tranche. The stock price targets for the second tranche range from $89.56 to $106.81 with a performance period from January 1, 2017 to December 31, 2019. As of December 31, 2017, all five stock price targets for the second tranche have been achieved and approved by the Compensation Committee. The stock price targets for the third tranche range from $120.80 to $135.48 with a performance period from January 1, 2018 to December 31, 2019. As of September 30, 2018, all five stock price targets for the third tranche have been achieved and approved by the Compensation Committee. The stock price targets for the fourth tranche will be determined on December 31, 2018 with a performance period from January 1, 2019 to December 31, 2019.
In addition, each of the second, third and fourth tranches requires the achievement of one of following six operating metrics:
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As of October 30, 2018, the first and the second operating metrics have been achieved and the determination of achievement was approved by the Compensation Committee.
Subject to the employees’ continued employment with the Company, the 2015 MPSUs will fully vest on January 1, 2020 if the pre-determined individual market and performance goals in each tranche are met during the performance periods and approved by the Compensation Committee. In addition, the 2015 MPSUs contain sales restrictions on the vested shares by employees for up to two years.
The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of $61.35, expected volatility of 33.2%, risk-free interest rate of 1.3%, and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. Assuming the achievement of all of the required market and performance goals, the total stock-based compensation cost for the 2015 MPSUs, excluding cancelled shares, is $24.6 million ($8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for the third tranche, and $6.6 million for the fourth tranche)2.5%.
For the first tranche, stock-based compensation expense is being recognized over the requisite service period. For the second, third and fourth tranches, stock-based compensation expense for each tranche is recognized if an operating metric has been achieved, or if management believes it is probable that an operating metric will be achieved during the performance periods in each reporting period. As of October 30, 2018, two operating metrics have been achieved, and based on management’s quarterly assessment, one additional operating metric was considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranches over the requisite service period.
2004Employee Stock Purchase Plan (“ESPP”)
For the three months ended September 30, 2018 2019 and 2017,2018, 14,000 and 15,000 and 18,000 shares, respectively, were issued under the ESPP.issued. For the nine months ended September 30, 2018 2019 and 2017,2018, 28,000 and 33,000 and 40,000 shares, respectively, were issued under the ESPP.issued. As of September 30, 2018, 4.62019, 4.5 million shares were available for future issuance.issuance under the ESPP.
The intrinsic value of the shares issued was $0.6$0.4 million and $0.5$0.6 million for the three months ended September 30, 2018 2019 and 2017,2018, respectively. The intrinsic value of the shares issued was $1.1$0.7 million and $1.0$1.1 million for the nine months ended September 30, 2018 2019 and 2017,2018, respectively. As of September 30, 2018, 2019, the unamortized expense was $0.4 million, which will be recognized through the first quarter of 2019.2020. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Expected term (years) | 0.5 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||||||||||||
Expected term (in years) | 0.5 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||||||||||||
Expected volatility | 30.8 | % | 23.5 | % | 29.5 | % | 23.5 | % | 36.7 | % | 30.8 | % | 37.0 | % | 29.5 | % | ||||||||||||||||
Risk-free interest rate | 2.2 | % | 1.2 | % | 2.0 | % | 0.9 | % | 1.9 | % | 2.2 | % | 2.2 | % | 2.0 | % | ||||||||||||||||
Dividend yield | 0.9 | % | 0.8 | % | 1.0 | % | 0.9 | % | 1.1 | % | 0.9 | % | 1.1 | % | 1.0 | % |
Cash proceeds from the shares issued under the ESPP were $3.0$3.3 million and $2.7$3.0 million for the nine months ended September 30, 2018 2019 and 2017,2018, respectively.
4. BALANCE SHEET COMPONENTS
Inventories
Inventories consist of the following (in thousands):
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Raw materials | $ | 41,679 | $ | 20,573 | $ | 27,001 | $ | 43,017 | ||||||||
Work in process | 43,112 | 40,030 | 43,076 | 38,674 | ||||||||||||
Finished goods | 51,999 | 38,678 | 65,557 | 54,693 | ||||||||||||
Total | $ | 136,790 | $ | 99,281 | $ | 135,634 | $ | 136,384 |
Other Current Assets
Other current assets consist of the following (in thousands):
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Prepaid wafer purchase | $ | 4,297 | $ | 6,217 | ||||
Other prepaid expense | 3,813 | 2,742 | ||||||
Interest receivable | 1,413 | 1,352 | ||||||
Assets for product returns | 2,320 | - | ||||||
Value-added tax receivable | 396 | 1,235 | ||||||
Other | 637 | 1,216 | ||||||
Total | $ | 12,876 | $ | 12,762 |
Under Topic 606, “assets for product returns” primarily represent the carrying value of inventory the Company expects to recover from customers related to stock rotation returns. Prior to the adoption of Topic 606, such amounts were netted against the stock rotation reserve within current accrued liabilities.
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
RSU tax withholding proceeds receivable | $ | 5,331 | $ | 39 | ||||
Prepaid expense | 4,024 | 3,425 | ||||||
Assets for product returns | 2,261 | 1,602 | ||||||
Interest receivable | 1,869 | 1,441 | ||||||
Value-added tax receivable | 628 | 423 | ||||||
Prepaid wafer refund receivable | - | 4,297 | ||||||
Other | 2,547 | 704 | ||||||
Total | $ | 16,660 | $ | 11,931 |
Other Long-Term Assets
Other long-term assets consist of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Deferred compensation plan assets | $ | 36,397 | $ | 31,970 | ||||
Operating lease ROU assets | 3,102 | - | ||||||
Prepaid expense | 2,274 | 2,713 | ||||||
Other | 1,570 | 1,296 | ||||||
Total | $ | 43,343 | $ | 35,979 |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Deferred compensation plan assets | $ | 30,425 | $ | 28,080 | ||||
Prepaid expense | 1,588 | 897 | ||||||
Other | 1,258 | 1,091 | ||||||
Total | $ | 33,271 | $ | 30,068 |
Other Accrued Liabilities
AccruedOther accrued liabilities consist of the following (in thousands):
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Dividends and dividend equivalents | $ | 14,737 | $ | 9,248 | ||||
Stock rotation and sales returns | 7,464 | 2,647 | ||||||
Warranty | 4,934 | 2,416 | ||||||
Income tax payable | 1,911 | 2,861 | ||||||
Customer prepayments | 1,818 | 4,742 | ||||||
Commissions | 1,334 | 938 | ||||||
Sales rebate | 380 | 1,036 | ||||||
Deferred income | - | 1,845 | ||||||
Other | 2,330 | 1,774 | ||||||
Total | $ | 34,908 | $ | 27,507 |
A roll-forward of the warranty reserve is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Balance at beginning of period | $ | 3,951 | $ | 2,627 | $ | 2,416 | $ | 1,030 | ||||||||
Warranty provision for product sales | 3,840 | 129 | 5,654 | 2,431 | ||||||||||||
Settlements made | (36 | ) | (161 | ) | (100 | ) | (710 | ) | ||||||||
Unused warranty provision | (2,821 | ) | (88 | ) | (3,036 | ) | (244 | ) | ||||||||
Balance at end of period | $ | 4,934 | $ | 2,507 | $ | 4,934 | $ | 2,507 |
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Dividends and dividend equivalents | $ | 21,895 | $ | 15,044 | ||||
Stock rotation and sales returns | 7,884 | 5,363 | ||||||
Customer prepayments | 4,160 | 2,520 | ||||||
Income tax payable | 2,778 | 7,018 | ||||||
Operating lease liabilities | 1,318 | - | ||||||
Warranty | 1,267 | 4,564 | ||||||
Commissions | 976 | 1,369 | ||||||
Other | 5,706 | 3,084 | ||||||
Total | $ | 45,984 | $ | 38,962 |
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Deferred compensation plan liabilities | $ | 36,968 | $ | 32,283 | ||||
Dividend equivalents | 6,091 | 6,145 | ||||||
Operating lease liabilities | 1,190 | - | ||||||
Other | 30 | 97 | ||||||
Total | $ | 44,279 | $ | 38,525 |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Deferred compensation plan liabilities | $ | 30,412 | $ | 28,087 | ||||
Dividend equivalents | 5,818 | 4,881 | ||||||
Other | 83 | 56 | ||||||
Total | $ | 36,313 | $ | 33,024 |
5. REAL ESTATE TRANSACTION
In March 2019, the Company completed the purchase of an office building and land located in Kirkland, Washington for $52.9 million in cash. The property also had in-place leases for a portion of the building which were assumed by the Company. The Company accounted for the purchase as an asset acquisition and capitalized $0.4 million of transaction costs.
The purchase price allocation was as follows (in thousands):
Building | $ | 30,078 | ||
Land | 22,254 | |||
In-place leases | 981 | |||
Total | $ | 53,313 |
The fair value of the building was determined based on the income approach, which considered the discounted cash flows and direct capitalization analysis, and the sales comparison approach. The fair value of land was determined based on the sales comparison approach. The fair value of the in-place leases was determined primarily based on the analysis of the economic benefits of certain cost savings attributable to the leases.
The building is depreciated over a useful life of 40 years and the in-place leases are amortized over the average remaining lease terms of 3.5 years. Land is not depreciated.
6. LEASES
Lessee
The Company has operating leases primarily for administrative and sales and marketing offices, manufacturing operations and research and development facilities, employee housing units, and certain equipment. These leases have remaining lease terms from less than a year to four years. Some of these leases include options to renew the lease term for up to five years or on a month-to-month basis. The Company does not have finance lease arrangements.
5. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET
Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. ROU assets also include any initial direct costs incurred and prepaid lease payments, less lease incentives received. As of September 30, 2019, operating lease ROU assets totaled $3.1 million and operating lease liabilities totaled $2.5 million. The Company recognizes operating lease costs on a straight-line basis over the lease term.
There have been no changesAs permitted by Topic 842, the Company does not recognize leases with a term of 12 months or less at the commencement date on the Condensed Consolidated Balance Sheets. For those lease arrangements that contain lease and nonlease components, the Company has elected the practical expedient to combine them as single lease components. Because the implicit rate in each lease is not readily determinable, the balanceCompany uses its incremental borrowing rate to determine the present value of goodwill during the three and nine months ended September 30, 2018.remaining lease payments.
Acquisition-related intangible assets consistThe following tables summarize certain information related to the leases (in thousands, except percentages):
Three Months Ended | Nine Months Ended | |||||||
September 30, 2019 | September 30, 2019 | |||||||
Lease costs: | ||||||||
Operating lease costs | $ | 377 | $ | 1,013 | ||||
Short-term and other lease costs | 102 | 394 | ||||||
Total lease costs | $ | 479 | $ | 1,407 |
Three Months Ended | Nine Months Ended | |||||||
September 30, 2019 | September 30, 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 299 | $ | 1,026 | ||||
ROU assets obtained in exchange for operating lease liabilities (1) | $ | 869 | $ | 3,450 |
September 30, 2019 | ||||
Weighted-average remaining lease term (in years) | 2.3 | |||
Weighted-average discount rate | 3.9 | % |
(1) | For the nine months ended September 30, 2019, the amount includes $2.2 million for operating leases existing on January 1, 2019. |
As of September 30, 2019, the maturities of the followinglease liabilities were as follows (in thousands):
September 30, 2018 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Know-how | $ | 1,018 | $ | (857 | ) | $ | 161 | |||||
Developed technologies | 6,466 | (6,319 | ) | 147 | ||||||||
Total | $ | 7,484 | $ | (7,176 | ) | $ | 308 |
2019 (remaining three months) | $ | 364 | ||
2020 | 1,241 | |||
2021 | 634 | |||
2022 | 379 | |||
2023 | 22 | |||
Total remaining lease payments | 2,640 | |||
Less: imputed interest | (132 | ) | ||
Total lease liabilities | $ | 2,508 | ||
Reported as: | ||||
Current liabilities | $ | 1,318 | ||
Long-term liabilities | $ | 1,190 |
December 31, 2017 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Know-how | $ | 1,018 | $ | (704 | ) | $ | 314 | |||||
Developed technologies | 6,466 | (5,829 | ) | 637 | ||||||||
Total | $ | 7,484 | $ | (6,533 | ) | $ | 951 |
Amortization expense is recorded in cost of revenue in the Condensed Consolidated Statements of Operations. For the three months ended September 30, 2018 and 2017, amortization expense totaled $0.2 million and $0.5 million, respectively. For the nine months ended September 30, 2018 and 2017, amortization expense totaled $0.6 million and $1.5 million, respectively.
Lessor
The Company owns certain office buildings and leases a portion of these properties to third parties under arrangements that are classified as operating leases. These leases have remaining lease terms from two years to five years. Some of these leases include options to renew the lease term for up to five years.
For the three and nine months ended September 30, 2019, income related to lease payments was $0.5 million and $1.3 million, respectively. As of September 30, 2018, the estimated 2019, future amortization expenseincome related to lease payments was as follows (in thousands):
2019 (remaining three months) | $ | 279 | ||
2020 | 1,539 | |||
2021 | 1,384 | |||
2022 | 1,136 | |||
2023 | 602 | |||
2024 and beyond | 597 | |||
Total | $ | 5,537 |
2018 (remaining three months) | $ | 198 | ||
2019 | 110 | |||
Total | $ | 308 |
6.7. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common shares, and calculated using the treasury stock method. Contingently issuable shares, including equity awards with performance conditions or market conditions, are considered outstanding common shares and included in the basic net income per share as of the date that all necessary conditions to earn the awards have been satisfied. Prior to the end of the contingency period, the number of contingently issuable shares included in the diluted net income per share is based on the number of shares, if any, that would be issuable under the terms of the arrangement at the end of the reporting period.
The Company’s outstanding RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill theirthe requisite service requirement and the awards do not vest. Accordingly, these awards are not treated as participating securities in the net income per share calculation.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per-share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 29,528 | $ | 31,568 | $ | 76,402 | $ | 77,630 | ||||||||
Denominator: | ||||||||||||||||
Weighted-average outstanding shares - basic | 43,308 | 42,362 | 43,055 | 42,173 | ||||||||||||
Effect of dilutive securities | 2,525 | 2,307 | 2,461 | 2,277 | ||||||||||||
Weighted-average outstanding shares - diluted | 45,833 | 44,669 | 45,516 | 44,450 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.68 | $ | 0.75 | $ | 1.77 | $ | 1.84 | ||||||||
Diluted | $ | 0.64 | $ | 0.71 | $ | 1.68 | $ | 1.75 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 31,568 | $ | 23,642 | $ | 77,630 | $ | 53,132 | ||||||||
Denominator: | ||||||||||||||||
Weighted-average outstanding shares used to compute basic net income per share | 42,362 | 41,458 | 42,173 | 41,276 | ||||||||||||
Effect of dilutive securities | 2,307 | 2,028 | 2,277 | 2,108 | ||||||||||||
Weighted-average outstanding shares used to compute diluted net income per share | 44,669 | 43,486 | 44,450 | 43,384 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.75 | $ | 0.57 | $ | 1.84 | $ | 1.29 | ||||||||
Diluted | $ | 0.71 | $ | 0.54 | $ | 1.75 | $ | 1.22 |
7.8. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one1 reportable segment that includes the design, development, marketing and sale of high-performance analog solutions for the consumer, computing and storage, automotive, industrial, automotivecommunications and communicationsconsumer markets. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company derives a majority of its revenue from sales to customers located outside North America, with geographic revenue based on the customers’ ship-to locations.
The Company sells its products primarily through third-partythird-party distributors and value-added resellers, and directly to original equipment manufacturers, original design manufacturers and electronic manufacturing service providers. The following table summarizes those customers with sales equal to 10%or greater than 10%more of the Company's total revenue, or with accounts receivable balances greater than equal to 10% or more of the Company’s total accounts receivable:
Revenue | Accounts Receivable | |||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | December 31, | |||||||||||||||||||||
Customer | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
A (distributor) | 23 | % | 17 | % | 21 | % | 17 | % | 21 | % | 16 | % | ||||||||||||
B (distributor) | 10 | % | 15 | % | 10 | % | * | 16 | % | * | ||||||||||||||
C (value-added reseller) | * | * | * | * | * | 15 | % |
Revenue | Accounts Receivable | |||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | December 31, | |||||||||||||||||||||
Customer | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
Company A (distributor) | 24 | % | 23 | % | 23 | % | 21 | % | 25 | % | 25 | % | ||||||||||||
Company B (distributor) | * | 10 | % | * | 10 | % | 12 | % | 16 | % | ||||||||||||||
Company A (value-added reseller) | * | * | * | * | 10 | % | * |
__________________
* Represents less than 10%.
The Company’s agreements with these third-partythird-party distributors and value-added resellerresellers were made in the ordinary course of business and may be terminated with or without cause by these customers with advance notice. Although the Company may experience a short-term disruption in the distribution of its products and a short-term decline in revenue if its agreement with any of these customers was terminated, the Company believes that such termination would not have a material adverse effect on its financial statements because it would be able to engage alternative distributors, resellers and other distribution channels to deliver its products to end customers within a short period following the termination of the agreement with the customer.
The following is a summary of revenue by geographic regions (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
Country or Region | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
China | $ | 91,509 | $ | 66,645 | $ | 245,580 | $ | 185,054 | $ | 105,857 | $ | 91,509 | $ | 276,892 | $ | 245,580 | ||||||||||||||||
Taiwan | 20,774 | 27,387 | 55,315 | 59,548 | 18,547 | 20,774 | 55,912 | 55,315 | ||||||||||||||||||||||||
Europe | 12,579 | 10,726 | 36,696 | 28,227 | 12,047 | 12,579 | 38,071 | 36,696 | ||||||||||||||||||||||||
Korea | 11,406 | 9,279 | 30,046 | 25,594 | 11,990 | 11,406 | 31,224 | 30,046 | ||||||||||||||||||||||||
Southeast Asia | 11,259 | 7,179 | 28,261 | 20,476 | 7,904 | 11,259 | 23,698 | 28,261 | ||||||||||||||||||||||||
Japan | 6,895 | 4,813 | 18,994 | 14,584 | 8,150 | 6,895 | 21,084 | 18,994 | ||||||||||||||||||||||||
United States | 5,375 | 2,781 | 13,404 | 7,711 | 4,225 | 5,375 | 14,044 | 13,404 | ||||||||||||||||||||||||
Other | 178 | 129 | 589 | 305 | 93 | 178 | 258 | 589 | ||||||||||||||||||||||||
Total | $ | 159,975 | $ | 128,939 | $ | 428,885 | $ | 341,499 | $ | 168,813 | $ | 159,975 | $ | 461,183 | $ | 428,885 |
The following is a summary of revenue by product family (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Product Family | 2019 | 2018 | 2019 | 2018 | ||||||||||||
DC to DC | $ | 159,723 | $ | 147,727 | $ | 432,125 | $ | 394,492 | ||||||||
Lighting Control | 9,090 | 12,248 | 29,058 | 34,393 | ||||||||||||
Total | $ | 168,813 | $ | 159,975 | $ | 461,183 | $ | 428,885 |
The following is a summary of property and equipment, net, by geographic regions (in thousands):
September 30, | December 31, | |||||||
Country | 2019 | 2018 | ||||||
China | $ | 105,030 | $ | 93,096 | ||||
United States | 93,967 | 39,054 | ||||||
Taiwan | 16,750 | 16,972 | ||||||
Other | 1,296 | 879 | ||||||
Total | $ | 217,043 | $ | 150,001 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Product Family | 2018 | 2017 | 2018 | 2017 | ||||||||||||
DC to DC | $ | 147,727 | $ | 119,089 | $ | 394,492 | $ | 312,700 | ||||||||
Lighting Control | 12,248 | 9,850 | 34,393 | 28,799 | ||||||||||||
Total | $ | 159,975 | $ | 128,939 | $ | 428,885 | $ | 341,499 |
9. COMMITMENTS AND CONTINGENCIES
Product Warranties
The following is a summary of long-lived assets by geographic regionstable presents changes in the warranty reserve (in thousands):
September 30, | December 31, | |||||||
Country | 2018 | 2017 | ||||||
China | $ | 92,066 | $ | 89,472 | ||||
United States | 68,014 | 65,618 | ||||||
Taiwan | 17,033 | 17,238 | ||||||
Bermuda | 6,879 | 7,522 | ||||||
Other | 810 | 388 | ||||||
Total | $ | 184,802 | $ | 180,238 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Balance at beginning of period | $ | 1,748 | $ | 3,951 | $ | 4,564 | $ | 2,416 | ||||||||
Warranty provision for product sales | 92 | 3,840 | 671 | 5,654 | ||||||||||||
Settlements made | (326 | ) | (36 | ) | (2,625 | ) | (100 | ) | ||||||||
Unused warranty provision | (247 | ) | (2,821 | ) | (1,343 | ) | (3,036 | ) | ||||||||
Balance at end of period | $ | 1,267 | $ | 4,934 | $ | 1,267 | $ | 4,934 |
8. LITIGATIONPurchase Commitments
The Company has outstanding purchase commitments with its suppliers and other parties that require the future purchase of goods or services, which primarily consist of wafer purchases, assembly and other manufacturing services, construction services and license arrangements. As of September 30, 2019, the Company’s outstanding purchase obligations totaled approximately $70.9 million.
Litigation
The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its shareholders,stockholders, challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The Company defends itself vigorously against any such claims. As of September 30, 2018, 2019, there were no material pending legal proceedings to which the Company was a party.
9.10. CASH, CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH
The following is a summary of the Company’s cash, cash equivalents and short-term and long-term investments (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Cash, cash equivalents and investments: | ||||||||
Cash | $ | 162,741 | $ | 131,569 | ||||
Money market funds | 39,982 | 41,135 | ||||||
Corporate debt securities | 195,667 | 170,909 | ||||||
U.S. treasuries and government agency bonds | 20,350 | 32,068 | ||||||
Certificates of deposit | - | 1,600 | ||||||
Auction-rate securities backed by student-loan notes | 3,264 | 3,241 | ||||||
Total | $ | 422,004 | $ | 380,522 |
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Reported as: | ||||||||
Cash and cash equivalents | $ | 205,229 | $ | 172,704 | ||||
Short-term investments | 213,511 | 204,577 | ||||||
Long-term investments | 3,264 | 3,241 | ||||||
Total | $ | 422,004 | $ | 380,522 |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Cash, cash equivalents and investments: | ||||||||
Cash | $ | 105,859 | $ | 75,125 | ||||
Money market funds | 25,235 | 7,134 | ||||||
Corporate debt securities | 190,924 | 203,807 | ||||||
U.S. treasuries and government agency bonds | 24,230 | 13,024 | ||||||
Certificates of deposit | 1,600 | - | ||||||
Auction-rate securities backed by student-loan notes | 5,257 | 5,256 | ||||||
Total | $ | 353,105 | $ | 304,346 |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Reported as: | ||||||||
Cash and cash equivalents | $ | 131,094 | $ | 82,759 | ||||
Short-term investments | 216,754 | 216,331 | ||||||
Long-term investments | 5,257 | 5,256 | ||||||
Total | $ | 353,105 | $ | 304,346 |
The contractual maturities of the Company’s short-term and long-term available-for-sale investments are as follows (in thousands):
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Due in less than 1 year | $ | 111,908 | $ | 89,399 | ||||
Due in 1 - 5 years | 104,846 | 126,932 | ||||||
Due in greater than 5 years | 5,257 | 5,256 | ||||||
Total | $ | 222,011 | $ | 221,587 |
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Due in less than 1 year | $ | 142,336 | $ | 125,845 | ||||
Due in 1 - 5 years | 71,175 | 78,732 | ||||||
Due in greater than 5 years | 3,264 | 3,241 | ||||||
Total | $ | 216,775 | $ | 207,818 |
The following tables summarize the unrealized gain and loss positions related to the Company’s available-for sale investments (in thousands):
September 30, 2018 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Total Fair Value | Fair Value of Investments in Unrealized Loss Position | Amortized Cost | Unrealized Gains | Unrealized Losses | Total Fair Value | Fair Value of Investments in Unrealized Loss Position | |||||||||||||||||||||||||||||||
Money market funds | $ | 25,235 | $ | - | $ | - | $ | 25,235 | $ | - | $ | 39,982 | $ | - | $ | - | $ | 39,982 | $ | - | ||||||||||||||||||||
Corporate debt securities | 192,581 | 2 | (1,659 | ) | 190,924 | 187,359 | 195,471 | 324 | (128 | ) | 195,667 | 83,247 | ||||||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 24,419 | - | (189 | ) | 24,230 | 24,230 | 20,341 | 11 | (2 | ) | 20,350 | 7,998 | ||||||||||||||||||||||||||||
Certificates of deposit | 1,600 | - | - | 1,600 | - | |||||||||||||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 5,570 | - | (313 | ) | 5,257 | 5,257 | 3,445 | - | (181 | ) | 3,264 | 3,264 | ||||||||||||||||||||||||||||
Total | $ | 249,405 | $ | 2 | $ | (2,161 | ) | $ | 247,246 | $ | 216,846 | $ | 259,239 | $ | 335 | $ | (311 | ) | $ | 259,263 | $ | 94,509 |
December 31, 2017 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Total Fair Value | Fair Value of Investments in Unrealized Loss Position | Amortized Cost | Unrealized Gains | Unrealized Losses | Total Fair Value | Fair Value of Investments in Unrealized Loss Position | |||||||||||||||||||||||||||||||
Money market funds | $ | 7,134 | $ | - | $ | - | $ | 7,134 | $ | - | $ | 41,135 | $ | - | $ | - | $ | 41,135 | $ | - | ||||||||||||||||||||
Corporate debt securities | 204,789 | 17 | (999 | ) | 203,807 | 197,564 | 172,288 | 7 | (1,386 | ) | 170,909 | 166,204 | ||||||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 13,092 | - | (68 | ) | 13,024 | 13,024 | 32,207 | 2 | (141 | ) | 32,068 | 28,507 | ||||||||||||||||||||||||||||
Certificates of deposit | 1,600 | - | - | 1,600 | - | |||||||||||||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 5,570 | - | (314 | ) | 5,256 | 5,256 | 3,570 | - | (329 | ) | 3,241 | 3,241 | ||||||||||||||||||||||||||||
Total | $ | 230,585 | $ | 17 | $ | (1,381 | ) | $ | 229,221 | $ | 215,844 | $ | 250,800 | $ | 9 | $ | (1,856 | ) | $ | 248,953 | $ | 197,952 |
As of September 30, 2019 and December 31,2018, unrealized losses that had been in a continuous loss position for 12 months or longer were $0.3 million and $1.6 million, respectively. As of September 30, 2019, the Company did not consider any of its available-for-sale investments to be other-than-temporarily impaired.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported withinon the Condensed Consolidated Balance Sheets to the amounts shown inreported on the Condensed Consolidated Statements of Cash Flows:Flows (in thousands):
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Cash and cash equivalents | $ | 131,094 | $ | 82,759 | $ | 205,229 | $ | 172,704 | ||||||||
Restricted cash included in other current assets | 1,161 | - | ||||||||||||||
Restricted cash included in other long-term assets | 115 | 115 | 113 | 114 | ||||||||||||
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 131,209 | $ | 82,874 | ||||||||||||
Total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Statements of Cash Flows | $ | 206,503 | $ | 172,818 |
RestrictedAs of September 30, 2019, restricted cash includesincluded amounts that are set aside for the liquidation of a wholly-owned foreign subsidiary and cannot be withdrawn by the Company under the local law. The restriction will end when the liquidation is complete. In addition, as of September 30, 2019 and December 31, 2018, restricted cash included a security deposit that is set aside in a bank account and cannot be withdrawn by the Company under the terms of a lease agreement. The restriction will end and any unused amount will be returned to the Company upon the expiration of the lease.
10.11. FAIR VALUE MEASUREMENTS
The following tables summarize the fair value measurement of the financial assets (in thousands):
Fair Value Measurement at September 30, 2018 | Fair Value Measurement at September 30, 2019 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | �� | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Money market funds | $ | 25,235 | $ | 25,235 | $ | - | $ | - | $ | 39,982 | $ | 39,982 | $ | - | $ | - | ||||||||||||||||
Corporate debt securities | 190,924 | - | 190,924 | - | 195,667 | - | 195,667 | - | ||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 24,230 | - | 24,230 | - | 20,350 | - | 20,350 | - | ||||||||||||||||||||||||
Certificates of deposit | 1,600 | - | 1,600 | - | ||||||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 5,257 | - | - | 5,257 | 3,264 | - | - | 3,264 | ||||||||||||||||||||||||
Mutual funds and money market funds under deferred compensation plan | 16,284 | 16,284 | - | - | 19,968 | 19,968 | - | - | ||||||||||||||||||||||||
Total | $ | 263,530 | $ | 41,519 | $ | 216,754 | $ | 5,257 | $ | 279,231 | $ | 59,950 | $ | 216,017 | $ | 3,264 |
Fair Value Measurement at December 31, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds | $ | 41,135 | $ | 41,135 | $ | - | $ | - | ||||||||
Corporate debt securities | 170,909 | - | 170,909 | - | ||||||||||||
U.S. treasuries and government agency bonds | 32,068 | - | 32,068 | - | ||||||||||||
Certificates of deposit | 1,600 | - | 1,600 | - | ||||||||||||
Auction-rate securities backed by student-loan notes | 3,241 | - | - | 3,241 | ||||||||||||
Mutual funds and money market funds under deferred compensation plan | 18,867 | 18,867 | - | - | ||||||||||||
Total | $ | 267,820 | $ | 60,002 | $ | 204,577 | $ | 3,241 |
Fair Value Measurement at December 31, 2017 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds | $ | 7,134 | $ | 7,134 | $ | - | $ | - | ||||||||
Corporate debt securities | 203,807 | - | 203,807 | - | ||||||||||||
U.S. treasuries and government agency bonds | 13,024 | - | 13,024 | - | ||||||||||||
Auction-rate securities backed by student-loan notes | 5,256 | - | - | 5,256 | ||||||||||||
Mutual funds and money market funds under deferred compensation plan | 16,625 | 16,625 | - | - | ||||||||||||
Total | $ | 245,846 | $ | 23,759 | $ | 216,831 | $ | 5,256 |
● | Level 1—includes instruments with quoted prices in active markets for identical assets. |
● | Level 2—includes instruments for which the valuations are based upon quoted market prices in active markets involving similar assets or inputs other than quoted prices that are observable for the assets. The market inputs used to value these instruments generally consist of market yields, recently executed transactions, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources may include industry standard data providers, security master files from large financial institutions, and other |
● | Level 3—includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement. |
The Company’s level 3 assets consist of government-backed student loan auction-rate securities. The following table provides a rollforward of the fair value of the auction-rate securities which became illiquid in 2008. (in thousands):
Balance at January 1, 2019 | $ | 3,241 | ||
Change in unrealized gain included in other comprehensive income | 148 | |||
Sale and settlement at par | (125 | ) | ||
Balance at September 30, 2019 | $ | 3,264 |
The Company determined the fair value of the auction-rate securities using a discounted cash flow model with the following assumptions:
September 30, | December 31, | |||||||||||
2019 | 2018 | |||||||||||
Time-to-liquidity (in years) | 2 | - | 3 | 2 | - | 3 | ||||||
Discount rate | 3.7% | - | 7.9% | 4.9% | - | 10.1% |
September 30, | December 31, | ||||||||
2018 | 2017 | ||||||||
Time-to-liquidity (years) | 2 | - | 3 | 2 | - | 3 | |||
Discount rate | 5.4% | - | 10.5% | 4.5% | - | 9.6% |
11.12. DEFERRED COMPENSATION PLAN
The following table summarizes the deferred compensation plan balances inon the Condensed Consolidated Balance Sheets (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Deferred compensation plan asset components: | ||||||||
Cash surrender value of corporate-owned life insurance policies | $ | 16,429 | $ | 13,103 | ||||
Fair value of mutual funds and money market funds | 19,968 | 18,867 | ||||||
Total | $ | 36,397 | $ | 31,970 | ||||
Deferred compensation plan assets reported in: | ||||||||
Other long-term assets | $ | 36,397 | $ | 31,970 | ||||
Deferred compensation plan liabilities reported in: | ||||||||
Accrued compensation and related benefits (short-term) | $ | 425 | $ | 447 | ||||
Other long-term liabilities | 36,968 | 32,283 | ||||||
Total | $ | 37,393 | $ | 32,730 |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Deferred compensation plan asset components: | ||||||||
Cash surrender value of corporate-owned life insurance policies | $ | 14,141 | $ | 11,455 | ||||
Fair value of mutual funds and money market funds | 16,284 | 16,625 | ||||||
Total | $ | 30,425 | $ | 28,080 | ||||
Deferred compensation plan assets reported in: | ||||||||
Other long-term assets | $ | 30,425 | $ | 28,080 | ||||
Deferred compensation plan liabilities reported in: | ||||||||
Accrued compensation and related benefits (short-term) | $ | 447 | $ | 356 | ||||
Other long-term liabilities | 30,412 | 28,087 | ||||||
Total | $ | 30,859 | $ | 28,443 |
12.13. INTEREST AND OTHER INCOME, NET
The components of interest and other income, net, are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Interest income | $ | 1,583 | $ | 1,346 | $ | 4,606 | $ | 3,938 | $ | 1,850 | $ | 1,583 | $ | 5,207 | $ | 4,606 | ||||||||||||||||
Amortization of premium on available-for-sale securities | (314 | ) | (490 | ) | (1,122 | ) | (1,494 | ) | (168 | ) | (314 | ) | (384 | ) | (1,122 | ) | ||||||||||||||||
Gain on deferred compensation plan investments | 717 | 636 | 949 | 1,902 | 74 | 717 | 2,630 | 949 | ||||||||||||||||||||||||
Foreign currency exchange gain (loss) | 700 | (237 | ) | 915 | (473 | ) | ||||||||||||||||||||||||||
Foreign currency exchange gain | 175 | 700 | 47 | 915 | ||||||||||||||||||||||||||||
Other | 28 | - | 39 | - | 326 | 28 | 327 | 39 | ||||||||||||||||||||||||
Total | $ | 2,714 | $ | 1,255 | $ | 5,387 | $ | 3,873 | $ | 2,257 | $ | 2,714 | $ | 7,827 | $ | 5,387 |
13. INCOME TAXESFor the three and nine months ended September 30, 2019, “other” includes a $0.7 million gain recognized from the sale of a parcel of land, net of certain capitalized costs and selling expenses.
As of September 30, 2018, the Company has not adjusted its provisional tax estimates related to the U.S. Tax Cuts and Jobs Act enacted in December 2017 (the “2017 Tax Act”) that were recorded in the fourth quarter of 2017. These amounts remained as estimates and, as permitted by Staff Accounting Bulletin No. 118, they will be refined through December 2018 based on the Company’s ongoing analysis of data and tax positions along with new guidance from regulators and interpretation of the law.
14. INCOME TAXES
The income tax provision for interim periods is generally determined using an estimate of the threeCompany’s annual effective tax rate and nineadjusted for discrete items, if any, in the relevant period. Each quarter the estimate of the annual effective tax rate is updated, and if the Company’s estimated tax rate changes, a cumulative adjustment is made.
The income tax expense for the three months ended September 30, 2018 2019 was $4.6$2.8 million, or 12.8%8.6% of pre-tax income. The income and $8.2tax expense for the nine months ended September 30, 2019 was $3.3 million, or 9.5%4.1% of pre-tax income, respectively.income. The effective tax raterates differed from the federal statutory rate primarily becausedue to foreign income generated byfrom the Company’s subsidiaries in Bermuda and China wasbeing taxed at lower statutory tax rates, and because ofthe benefit obtained from certain discrete items recognized in the periods, including excess tax benefits from stock-based compensation deductions. In addition,compensation. The decrease in the effective tax rates relative to the federal statutory rate was impactedpartially offset by the inclusion of the global intangible low-taxed income ("GILTI"(“GILTI”) undertax.
The income tax provision for the 2017 Tax Act.three months ended September 30, 2018 was $4.6 million, or 12.8% of pre-tax income. The income tax provision for the nine months ended September 30, 2018 was $8.2 million, or 9.5% of pre-tax income. The effective tax rates differed from the federal statutory rate primarily due to foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and the benefit obtained from certain discrete items recognized in the periods, including excess tax benefits from stock-based compensation. The decrease in the effective tax rates relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax.
For the three and nine months ended September 30, 2018, 2019, the Company’s effective tax raterates included the estimated impact of $13.0 million and $38.5 million, respectively, related to the GILTI provisions that were included as additional subpart F income, which was accounted for as a period cost. For the three and nine months ended September 30, 2018, the Company’s effective tax rates included the estimated impact of $18.4 million and $46.2 million, respectively, related to the GILTI provisions that was included as additional subpart F income, which was accounted for as a period cost. In addition, during the first quarter of 2018, the Company paid the 2018 installment of $1.9 million related to the deemed repatriation transition tax liability. As of September 30, 2018, $1.9 million of the transition tax liability was recorded in current accrued liabilities and $20.1 million was recorded in long-term income tax liabilities on the Condensed Consolidated Balance Sheet.provisions.
The income tax provision for the three and nine months ended September 30, 2017 was $1.4 million, or 5.8% of pre-tax income, and $3.1 million, or 5.5% of pre-tax income, respectively. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by the Company’s subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation.
As of September 30, 2018, the Company had $18.1 million of unrecognized tax benefits, $11.2 million of which would affect its effective tax rate if recognized after considering the valuation allowance. At December 31, 2017, the Company had $16.3 million of unrecognized tax benefits, $9.1 million of which would affect its effective tax rate if recognized after considering the valuation allowance.
Uncertainuncertain tax positions relate to the allocation of income and deductions between the Company’s global entities and to the determination of the research and development tax credit. It is reasonably possible that over the next twelve-monthtwelve-month period, the Company may experience increases or decreases in its unrecognized tax benefits. However, it is not possible to determine either the magnitude or the range of increases or decreases at this time.
The Company recognizes interest
In July 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, invalidating the Treasury regulations that require participants in qualified intercompany cost-sharing arrangements to share stock-based compensation costs. A final decision was issued by the Tax Court in December 2015, and penalties, if any, related to uncertain tax positionsthe Internal Revenue Service (“IRS”) appealed the decision in its income tax provision. As of September 30, 2018 and December 31, 2017, the Company has $0.8 million and $0.5 million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities in the Consolidated Balance Sheets.
June 2016. In July 2018, June 2019, the U.S. Ninth Circuit Court of Appeals overturnedupheld the U.S. Tax Court’s unanimous 2015 decisioncost-sharing regulations. In July 2019, Altera filed a petition for rehearing en banc inAltera v. Commissioner, holding that the Internal Revenue Service ("IRS") did not violate the rule-making procedures required by the Administrative Procedures Act. In the case, the taxpayer challenged IRS regulations that required participants in qualified cost sharing arrangements to share stock based compensation costs. The Tax Court had invalidated those regulations, in part because the Treasury Department failed to adequately consider significant taxpayer comments when adopting them. In August 2018, the U.S. Ninth Circuit Court of Appeals withdrew its July 2018 opinion. Appeals. Due to the uncertainty surrounding the status of the current regulations, the Company has not recorded any adjustments as of September 30, 2019. The Company will continue to monitor developments related to this case and evaluate the potential impact of any new developments on its financial statements.
14.15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)LOSS
The following table summarizes the changes in accumulated other comprehensive income (loss)loss (in thousands):
Unrealized Gains (Losses) on Available-for-Sale Securities | Foreign Currency Translation Adjustments | Total | ||||||||||
Balance as of January 1, 2019 | $ | (1,638 | ) | $ | (3,905 | ) | $ | (5,543 | ) | |||
Other comprehensive income before reclassifications | 924 | 3,677 | 4,601 | |||||||||
Tax effect | (98 | ) | - | (98 | ) | |||||||
Other comprehensive income | 826 | 3,677 | 4,503 | |||||||||
Balance as of March 31, 2019 | (812 | ) | (228 | ) | (1,040 | ) | ||||||
Other comprehensive income (loss) before reclassifications | 675 | (3,709 | ) | (3,034 | ) | |||||||
Tax effect | (64 | ) | - | (64 | ) | |||||||
Other comprehensive income (loss) | 611 | (3,709 | ) | (3,098 | ) | |||||||
Balance as of June 30, 2019 | (201 | ) | (3,937 | ) | (4,138 | ) | ||||||
Other comprehensive income (loss) before reclassifications | 272 | (6,135 | ) | (5,863 | ) | |||||||
Tax effect | (38 | ) | - | (38 | ) | |||||||
Other comprehensive income (loss) | 234 | (6,135 | ) | (5,901 | ) | |||||||
Balance as of September 30, 2019 | $ | 33 | $ | (10,072 | ) | $ | (10,039 | ) |
Unrealized Losses on Available-for- Sale Securities | Foreign Currency Translation Adjustments | Total | ||||||||||
Balance as of January 1, 2018 | $ | (1,364 | ) | $ | 3,177 | $ | 1,813 | |||||
Other comprehensive income (loss) before reclassifications | (1,185 | ) | 4,389 | 3,204 | ||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | 25 | - | 25 | |||||||||
Net current period other comprehensive income (loss) | (1,160 | ) | 4,389 | 3,229 | ||||||||
Balance as of March 31, 2018 | (2,524 | ) | 7,566 | 5,042 | ||||||||
Other comprehensive income (loss) before reclassifications | 94 | (6,862 | ) | (6,768 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (loss) | 21 | - | 21 | |||||||||
Net current period other comprehensive income (loss) | 115 | (6,862 | ) | (6,747 | ) | |||||||
Balance as of June 30, 2018 | (2,409 | ) | 704 | (1,705 | ) | |||||||
Other comprehensive income (loss) before reclassifications | 242 | (4,526 | ) | (4,284 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (loss) | 8 | - | 8 | |||||||||
Tax effect | 241 | - | 241 | |||||||||
Net current period other comprehensive income (loss) | 491 | (4,526 | ) | (4,035 | ) | |||||||
Balance as of September 30, 2018 | $ | (1,918 | ) | $ | (3,822 | ) | $ | (5,740 | ) |
The amounts reclassified from accumulated other comprehensive income (loss) were recorded in interest and other income, net, in the Condensed Consolidated Statements of Operations.
15.16. DIVIDENDS AND DIVIDEND EQUIVALENTS
Cash Dividend Program
In June 2014, the Board of Directors approved a dividend program pursuant to which the Company intends to pay quarterly cash dividends on its common stock. Based on the Company’s historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared by the Board of Directors, which are payable to the stockholders in the following month. The Board of Directors declared the following cash dividends (in thousands, except per-share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Dividend declared per share | $ | 0.30 | $ | 0.20 | $ | 0.90 | $ | 0.60 | $ | 0.40 | $ | 0.30 | $ | 1.20 | $ | 0.90 | ||||||||||||||||
Total amount | $ | 12,722 | $ | 8,301 | $ | 38,052 | $ | 24,822 | $ | 17,341 | $ | 12,722 | $ | 51,782 | $ | 38,052 |
As of September 30, 2018 2019 and December 31, 2017,2018, accrued dividends totaled $12.7$17.3 million and $8.3$12.8 million, respectively.
The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other things, the Company’s financial condition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, and other factors that the Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of the stockholders.
The Company anticipates that cash used for future dividend payments will come from its current domestic cash, and cash generated from ongoing U.S. operations, as well asand cash to be repatriated from its Bermuda subsidiary. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested.
Cash Dividend Equivalent Rights
Under the Company’s stock plans, outstanding RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill theirthe requisite service requirement and the awards do not vest. As of September 30, 2018 2019 and December 31, 2017, 2018, accrued dividend equivalents totaled $7.8$10.6 million and $5.8$8.4 million, respectively.
16. SUBSEQUENT EVENTS
Employee Equity Awards
2018 MSUs:
In October 2018, the Compensation Committee granted 60,000 MSUs to the executive officers and 60,000 MSUs to certain non-executive employees, which represent a target number of shares to be awarded upon achievement of stock price targets (“2018 MSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2018 MSUs if the Company achieves five stock price targets ranging from $140 to $172. The performance period for the first two stock price targets is from October 26, 2018 to December 31, 2021, and the performance period for the last three price targets is from October 26, 2018 to December 31, 2023.
Subject to the employees’ continued employment with the Company, the 2018 MSUs will fully vest on January 1, 2024 if the pre-determined stock price targets are met during the performance periods and approved by the Compensation Committee. In addition, the 2018 MSUs contain sales restrictions on the vested shares by employees for up to two years.
2019 PSUs:
In October 2018, the Compensation Committee granted 53,000 PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s 2020 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2019 and 2020) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2019 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2019 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2019 Non-Executive PSUs will vest in the first quarter of 2021 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining 2019 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements concerning:
the above-average industry growth of product and market areas that we have targeted,
our plan to increase our revenue through the introduction of new products within our existing product families as well as in new product categories and families,
our belief that we may incur significant legal expenses that vary with the level of activity in each of our current or future legal proceedings,
the effect that liquidity of our investments has on our capital resources,
the continuing application of our products in the consumer, computing and storage, industrial, automotive and communications markets,
estimates of our future liquidity requirements,
the cyclical nature of the semiconductor industry,
protection of our proprietary technology,
business outlook for the remainder of 2018 and beyond,
the factors that we believe will impact our ability to achieve revenue growth,
the percentage of our total revenue from various end markets,