UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2019
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 ☐ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
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There were 43,057,00043,439,000 shares of the registrant’s common stock issued and outstanding as of May 3,October 28, 2019.
MONOLITHIC POWER SYSTEMS, INC.
TABLE OF CONTENTS | PAGE | |
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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 3. |
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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)
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 181,769 | $ | 172,704 | $ | 205,229 | $ | 172,704 | ||||||||
Short-term investments | 177,255 | 204,577 | 213,511 | 204,577 | ||||||||||||
Accounts receivable, net | 58,889 | 55,214 | 58,261 | 55,214 | ||||||||||||
Inventories | 142,543 | 136,384 | 135,634 | 136,384 | ||||||||||||
Other current assets | 13,629 | 11,931 | 16,660 | 11,931 | ||||||||||||
Total current assets | 574,085 | 580,810 | 629,295 | 580,810 | ||||||||||||
Property and equipment, net | 205,497 | 150,001 | 217,043 | 150,001 | ||||||||||||
Long-term investments | 3,290 | 3,241 | 3,264 | 3,241 | ||||||||||||
Goodwill | 6,571 | 6,571 | 6,571 | 6,571 | ||||||||||||
Deferred tax assets, net | 16,779 | 16,830 | 16,619 | 16,830 | ||||||||||||
Other long-term assets | 41,987 | 35,979 | 43,343 | 35,979 | ||||||||||||
Total assets | $ | 848,209 | $ | 793,432 | $ | 916,135 | $ | 793,432 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 27,259 | $ | 22,678 | $ | 30,318 | $ | 22,678 | ||||||||
Accrued compensation and related benefits | 18,969 | 18,799 | 28,724 | 18,799 | ||||||||||||
Other accrued liabilities | 45,348 | 38,962 | 45,984 | 38,962 | ||||||||||||
Total current liabilities | 91,576 | 80,439 | 105,026 | 80,439 | ||||||||||||
Income tax liabilities | 34,375 | 34,375 | 32,402 | 34,375 | ||||||||||||
Other long-term liabilities | 42,007 | 38,525 | 44,279 | 38,525 | ||||||||||||
Total liabilities | 167,958 | 153,339 | 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: 43,033 and 42,505, respectively | 478,913 | 450,908 | ||||||||||||||
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 | 202,378 | 194,728 | 215,692 | 194,728 | ||||||||||||
Accumulated other comprehensive loss | (1,040 | ) | (5,543 | ) | (10,039 | ) | (5,543 | ) | ||||||||
Total stockholders’ equity | 680,251 | 640,093 | 734,428 | 640,093 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 848,209 | $ | 793,432 | $ | 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 March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Revenue | $ | 141,363 | $ | 129,150 | $ | 168,813 | $ | 159,975 | $ | 461,183 | $ | 428,885 | ||||||||||||
Cost of revenue | 63,357 | 57,655 | 75,655 | 70,957 | 206,794 | 190,810 | ||||||||||||||||||
Gross profit | 78,006 | 71,495 | 93,158 | 89,018 | 254,389 | 238,075 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development | 25,458 | 21,609 | 27,742 | 25,630 | 80,746 | 70,720 | ||||||||||||||||||
Selling, general and administrative | 30,553 | 27,318 | 34,692 | 29,552 | 100,302 | 85,431 | ||||||||||||||||||
Litigation expense | 278 | 531 | 692 | 343 | 1,473 | 1,513 | ||||||||||||||||||
Total operating expenses | 56,289 | 49,458 | 63,126 | 55,525 | 182,521 | 157,664 | ||||||||||||||||||
Income from operations | 21,717 | 22,037 | 30,032 | 33,493 | 71,868 | 80,411 | ||||||||||||||||||
Interest and other income, net | 3,341 | 440 | 2,257 | 2,714 | 7,827 | 5,387 | ||||||||||||||||||
Income before income taxes | 25,058 | 22,477 | 32,289 | 36,207 | 79,695 | 85,798 | ||||||||||||||||||
Income tax expense (benefit) | (1,123 | ) | 621 | |||||||||||||||||||||
Income tax expense | 2,761 | 4,639 | 3,293 | 8,168 | ||||||||||||||||||||
Net income | $ | 26,181 | $ | 21,856 | $ | 29,528 | $ | 31,568 | $ | 76,402 | $ | 77,630 | ||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | 0.61 | $ | 0.52 | $ | 0.68 | $ | 0.75 | $ | 1.77 | $ | 1.84 | ||||||||||||
Diluted | $ | 0.58 | $ | 0.49 | $ | 0.64 | $ | 0.71 | $ | 1.68 | $ | 1.75 | ||||||||||||
Weighted-average shares outstanding: | ||||||||||||||||||||||||
Basic | 42,749 | 41,922 | 43,308 | 42,362 | 43,055 | 42,173 | ||||||||||||||||||
Diluted | 45,232 | 44,282 | 45,833 | 44,669 | 45,516 | 44,450 |
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 March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Net income | $ | 26,181 | $ | 21,856 | $ | 29,528 | $ | 31,568 | $ | 76,402 | $ | 77,630 | ||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||||||
Foreign currency translation adjustments | 3,677 | 4,389 | (6,135 | ) | (4,526 | ) | (6,167 | ) | (6,999 | ) | ||||||||||||||
Change in unrealized gain (loss) on available-for-sale securities, net of tax of $(98) and $0, respectively | 826 | (1,160 | ) | |||||||||||||||||||||
Total other comprehensive income, net of tax | 4,503 | 3,229 | ||||||||||||||||||||||
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 | $ | 30,684 | $ | 25,085 | $ | 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)thousands, except per-share amounts)
(unaudited)
Accumulated | ||||||||||||||||||||
Common Stock and | Other | Total | ||||||||||||||||||
Additional Paid-in Capital | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
Shares | Amount | Earnings | Income (Loss) | Equity | ||||||||||||||||
Balance as of January 1, 2019 | 42,505 | $ | 450,908 | $ | 194,728 | $ | (5,543 | ) | $ | 640,093 | ||||||||||
Net income | - | - | 26,181 | - | 26,181 | |||||||||||||||
Other comprehensive income | - | - | - | 4,503 | 4,503 | |||||||||||||||
Dividends and dividend equivalents declared ($0.40 per share) | - | - | (18,531 | ) | - | (18,531 | ) | |||||||||||||
Vesting of restricted stock units | 514 | 10,383 | - | - | 10,383 | |||||||||||||||
Shares issued under the employee stock purchase plan | 14 | 1,627 | - | - | 1,627 | |||||||||||||||
Stock-based compensation expense | - | 15,995 | - | - | 15,995 | |||||||||||||||
Balance as of March 31, 2019 | 43,033 | $ | 478,913 | $ | 202,378 | $ | (1,040 | ) | $ | 680,251 | ||||||||||
Balance as of January 1, 2018 | 41,614 | $ | 376,586 | $ | 143,608 | $ | 1,813 | $ | 522,007 | |||||||||||
Net income | - | - | 21,856 | - | 21,856 | |||||||||||||||
Other comprehensive income | - | - | - | 3,229 | 3,229 | |||||||||||||||
Dividends and dividend equivalents declared ($0.30 per share) | - | - | (13,586 | ) | - | (13,586 | ) | |||||||||||||
Exercise of stock options | 1 | 16 | - | - | 16 | |||||||||||||||
Vesting of restricted stock units | 512 | 7,793 | - | - | 7,793 | |||||||||||||||
Shares issued under the employee stock purchase plan | 18 | 1,563 | - | - | 1,563 | |||||||||||||||
Stock-based compensation expense | - | 15,049 | - | - | 15,049 | |||||||||||||||
Cumulative effect of a change in accounting principles | - | - | 379 | - | 379 | |||||||||||||||
Balance as of March 31, 2018 | 42,145 | $ | 401,007 | $ | 152,257 | $ | 5,042 | $ | 558,306 |
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)
Three Months Ended March 31, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 26,181 | $ | 21,856 | $ | 76,402 | $ | 77,630 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 3,255 | 2,755 | 10,817 | 9,058 | ||||||||||||
Loss on sales of property and equipment | 14 | - | ||||||||||||||
Gain on disposal and sale of property and equipment, net | (282 | ) | - | |||||||||||||
Amortization of premium on available-for-sale securities | 121 | 435 | 384 | 1,122 | ||||||||||||
(Gain) loss on deferred compensation plan investments | (1,935 | ) | 66 | |||||||||||||
Gain on deferred compensation plan investments | (2,630 | ) | (949 | ) | ||||||||||||
Deferred taxes, net | (33 | ) | - | (18 | ) | 3,169 | ||||||||||
Stock-based compensation expense | 16,010 | 15,030 | 60,019 | 45,765 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (3,676 | ) | (11,103 | ) | (3,048 | ) | (22,752 | ) | ||||||||
Inventories | (6,171 | ) | (12,590 | ) | 754 | (37,496 | ) | |||||||||
Other assets | (1,576 | ) | (3,954 | ) | (5,849 | ) | (665 | ) | ||||||||
Accounts payable | 4,778 | 3,856 | 7,173 | 5,978 | ||||||||||||
Accrued compensation and related benefits | 4 | (2,821 | ) | 10,328 | 7,838 | |||||||||||
Accrued liabilities | 3,355 | 4,998 | ||||||||||||||
Other accrued liabilities | 7,453 | 4,635 | ||||||||||||||
Income tax liabilities | (1,491 | ) | (2,236 | ) | (6,186 | ) | 528 | |||||||||
Net cash provided by operating activities | 38,836 | 16,292 | 155,317 | 93,861 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property and equipment | (58,376 | ) | (7,400 | ) | (87,129 | ) | (18,057 | ) | ||||||||
Acquisition of in-place leases | (981 | ) | - | (981 | ) | - | ||||||||||
Purchases of short-term investments | - | (47,565 | ) | (106,409 | ) | (86,021 | ) | |||||||||
Proceeds from maturities and sales of short-term investments | 28,076 | 31,063 | 98,814 | 83,679 | ||||||||||||
Proceeds from sales of long-term investments | 125 | - | ||||||||||||||
Proceeds from sales of property and equipment | 1,456 | - | 9,268 | - | ||||||||||||
Contributions to deferred compensation plan, net | (956 | ) | (1,300 | ) | (1,797 | ) | (1,396 | ) | ||||||||
Net cash used in investing activities | (30,781 | ) | (25,202 | ) | (88,109 | ) | (21,795 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Property and equipment purchased on extended payment terms | (10 | ) | - | (204 | ) | - | ||||||||||
Proceeds from exercise of stock options | - | 16 | ||||||||||||||
Proceeds from vesting of restricted stock units | 10,383 | 7,793 | ||||||||||||||
Proceeds from shares issued under the employee stock purchase plan | 1,627 | 1,563 | ||||||||||||||
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 | (12,761 | ) | (8,339 | ) | (48,641 | ) | (34,381 | ) | ||||||||
Net cash provided by (used in) financing activities | (761 | ) | 1,033 | |||||||||||||
Net cash used in financing activities | (31,007 | ) | (21,669 | ) | ||||||||||||
Effect of change in exchange rates | 1,770 | 1,137 | (2,516 | ) | (2,062 | ) | ||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 9,064 | (6,740 | ) | |||||||||||||
Net increase in cash, cash equivalents and restricted cash | 33,685 | 48,335 | ||||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 172,818 | 82,874 | 172,818 | 82,874 | ||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 181,882 | $ | 76,134 | $ | 206,503 | $ | 131,209 | ||||||||
Supplemental disclosures for cash flow information: | ||||||||||||||||
Cash paid for taxes and interest | $ | 393 | $ | 3,374 | ||||||||||||
Cash paid for taxes | $ | 9,472 | $ | 6,388 | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Liability accrued for property and equipment purchases | $ | 958 | $ | 2,491 | $ | 4,969 | $ | 1,563 | ||||||||
Liability accrued for dividends and dividend equivalents | $ | 18,534 | $ | 13,603 | $ | 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, 2018, filed with the SEC on March 1, 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 31,2019 or for any other future periods.
Summary of Significant Accounting Policies
Except for the changes related to leases discussed in Note 6, there have been no other changes to the Company’s significant accounting policies during the three and nine months ended March 31,September 30, 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, 2018.
Recently AdoptedAdopted Accounting Pronouncement
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,2016-02, Leases (Topic 842)842), which requires entities to recognize 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 service or other arrangements. The Company adopted the standard on January 1, 2019 using the modified retrospective method and did not restate comparative periods, as permitted by the standard. In addition, the Company elected the transition practical expedients to not reassess whether its outstanding contracts contained or were leases, classification of its existing leases and lease terms.that existed prior to January 1, 2019.
Upon adoption, the Company recognized ROU assets and lease liabilities of its outstanding operating leases on the Condensed Consolidated Balance Sheets, primarily related to real estate. The adoption did not have a material impact on the Condensed Consolidated Statements of Operations or the Condensed Consolidated Statements of Cash Flows. See Note 6 for further discussion of the impact of the adoption on the Company’s financial statements.discussion.
Recent Accounting Pronouncements Not Yet Pronouncements Not Yet Adopted as of March 31, September30,2019
In August 2018, the FASB issued ASU No. 2018-13,2018-13, Fair Value Measurement (Topic 820)820): 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, the standard eliminates the concept of other-than-temporary impairment and entities will be required 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 consolidatedpreliminary assessment, the Company does not expect the standard to have a material impact on its financial position, results of operations, cash flows and disclosures.statements upon adoption.
2. REVENUE RECOGNITION
Revenue from Product Sales
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 97%98% of the Company’s total revenue for the three months ended March 31,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 remaining 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 March 31,September 30, 2019 and 2018, 84% 88% and 88%87%, respectively, of the Company’s product sales were made through distribution arrangements. For the nine months ended September 30, 2019 and 2018, 83% and 87%, 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, set 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.
The 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 continues 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 consume the products from the consigned inventory locations or, in some cases, after a 60-day period 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 accounts for price adjustment and stock rotation rights as variable consideration that reduces the transaction price, and recognizes that reduction 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 an 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 in accordance with the contract terms. The Company estimates the stock rotation returns using the expected value method based on an 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 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 March 31,September 30, 2019 and December 31, 2018, accounts receivable totaled $58.9$58.3 million and $55.2 million, respectively. The Company did not record any allowance for doubtful accounts as of March 31,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 March 31,September 30, 2019 and December 31, 2018, customer prepayments totaled $2.9$4.2 million and $2.5 million, respectively. The increase in the customer prepayment balance for the threenine months ended March 31,September 30, 2019 resulted from an increase in unfulfilled customer orders for which the Company has received payments. For the threenine months ended March 31,September 30, 2019, the Company recognized $2.4$2.5 million of revenue that was included in the customer prepayment balance as of December 31, 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.
Practical Expedients
The Company has elected the practical expedient to expense sales commissions as incurred because the amortization period would have been one year or less.
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 generally within two weeks. The Company has elected not to determine whether contacts with customers contain significant financing components.
As of March 31, 2019, 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.
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 March 31,September 30, 2019, 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, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cost of revenue | $ | 641 | $ | 471 | $ | 1,834 | $ | 1,384 | ||||||||
Research and development | 4,960 | 3,979 | 14,801 | 12,168 | ||||||||||||
Selling, general and administrative | 15,699 | 10,393 | 43,384 | 32,213 | ||||||||||||
Total stock-based compensation expense | $ | 21,300 | $ | 14,843 | $ | 60,019 | $ | 45,765 | ||||||||
Tax benefit related to stock-based compensation | $ | 595 | $ | 764 | $ | 2,139 | $ | 2,723 |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cost of revenue | $ | 531 | $ | 433 | ||||
Research and development | 4,429 | 3,995 | ||||||
Selling, general and administrative | 11,050 | 10,602 | ||||||
Total stock-based compensation expense | $ | 16,010 | $ | 15,030 | ||||
Tax benefit related to stock-based compensation | $ | 838 | $ | 1,131 |
Restricted Stock Units (“RSUs”)
The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance 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, 2019 | 240 | $ | 95.38 | 2,174 | $ | 61.61 | 2,219 | $ | 35.69 | 4,633 | $ | 50.94 | 240 | $ | 95.38 | 2,174 | $ | 61.61 | 2,219 | $ | 35.69 | 4,633 | $ | 50.94 | ||||||||||||||||||||||||||||||||||||||||
Granted | 26 | $ | 130.67 | 311 | (1) | $ | 107.14 | - | $ | - | 337 | $ | 108.93 | 47 | $ | 141.03 | 535 | (1) | $ | 98.45 | - | $ | - | 582 | $ | 101.89 | ||||||||||||||||||||||||||||||||||||||
Vested | (33 | ) | $ | 77.83 | (400 | ) | $ | 56.71 | (81 | ) | $ | 23.57 | (514 | ) | $ | 52.86 | (88 | ) | $ | 79.91 | (571 | ) | $ | 54.41 | (243 | ) | $ | 23.57 | (902 | ) | $ | 48.61 | ||||||||||||||||||||||||||||||||
Forfeited | (2 | ) | $ | 89.22 | - | $ | - | (1 | ) | $ | 68.48 | (3 | ) | $ | 83.26 | (6 | ) | $ | 110.23 | (43 | ) | $ | 42.72 | (7 | ) | $ | 68.48 | (56 | ) | $ | 53.06 | |||||||||||||||||||||||||||||||||
Outstanding at March 31, 2019 | 231 | $ | 101.91 | 2,085 | $ | 69.34 | 2,137 | $ | 36.14 | 4,453 | $ | 55.09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at September 30, 2019 | 193 | $ | 113.22 | 2,095 | $ | 73.37 | 1,969 | $ | 37.08 | 4,257 | $ | 58.38 |
_____________
| Amount reflects the number of PSUs |
The intrinsic value related to vested RSUs was $57.7$26.1 million and $49.5$13.9 million for the three months ended March 31,September 30, 2019 and 2018, respectively. The intrinsic value related to vested RSUs was $110.1 million and $79.0 million for the nine months ended September 30, 2019 and 2018, respectively. As of March 31,September 30, 2019, the total intrinsic value of all outstanding RSUs was $559.8$617.6 million, based on the closing stock price of $135.49.$155.63. As of March 31,September 30, 2019, unamortized compensation expense related to all outstanding RSUs was $145.2$120.5 million with a weighted-average remaining recognition period of approximately 3.53.4 years.
Cash proceeds from vested PSUs with a purchase price totaled $10.4$14.6 million and $7.8$9.6 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively.
Time-Based RSUs:
For the threenine months ended March 31,September 30, 2019, the Compensation Committee granted 26,00088,000 RSUs with service 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.
2019 PSUs:
In February 2019, the Compensation Committee granted 151,000 PSUs to the executive officers, which represent a target number of shares to be earned based on the Company’s average two-year (2019two-year (2019 and 2020)2020) revenue growth rate compared against the analog industry’s average two-yeartwo-year revenue growth rate as published by the Semiconductor Industry Association (“(“2019 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2019 Executive PSUs. 50% of the 2019 Executive PSUs will vest in the first quarter of 2021 if the pre-determined performance goals are met during the performance period. The remaining 2019 Executive PSUs will vest over the following two years on a quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2019 Executive PSUs is $46.6 million.
The 2019 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 2019 Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $130.67, expected term of 2.6 years, expected volatility of 29.0% and risk-free interest rate of 2.5%.
Employee2004 Employee Stock Purchase Plan (“ESPP”)
For the three months ended March 31,September 30, 2019 and 2018, 14,000 and 18,00015,000 shares, respectively, were issued underissued. For the ESPP.nine months ended September 30, 2019 and 2018, 28,000 and 33,000 shares, respectively, were issued. As of March 31,September 30, 2019, 4.5 million shares were available for future issuance.issuance under the ESPP.
The intrinsic value of the shares issued was $0.3$0.4 million and $0.5$0.6 million for the three months ended March 31,September 30, 2019 and 2018, respectively. The intrinsic value of the shares issued was $0.7 million and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively. As of March 31,September 30, 2019, the unamortized expense was $0.4 million, which will be recognized through the thirdfirst 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 March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Expected term (in years) | 0.5 | 0.5 | 0.5 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||
Expected volatility | 37.3 | % | 28.2 | % | 36.7 | % | 30.8 | % | 37.0 | % | 29.5 | % | ||||||||||||
Risk-free interest rate | 2.5 | % | 1.8 | % | 1.9 | % | 2.2 | % | 2.2 | % | 2.0 | % | ||||||||||||
Dividend yield | 1.2 | % | 1.0 | % | 1.1 | % | 0.9 | % | 1.1 | % | 1.0 | % |
Cash proceeds from the shares issued under the ESPP were $1.6$3.3 million and $3.0 million for both the threenine months ended March 31,September 30, 2019 and 2018. 2018, respectively.
4. BALANCE SHEET COMPONENTS
Inventories
Inventories consist of the following (in thousands):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Raw materials | $ | 43,142 | $ | 43,017 | $ | 27,001 | $ | 43,017 | ||||||||
Work in process | 39,402 | 38,674 | 43,076 | 38,674 | ||||||||||||
Finished goods | 59,999 | 54,693 | 65,557 | 54,693 | ||||||||||||
Total | $ | 142,543 | $ | 136,384 | $ | 135,634 | $ | 136,384 |
Other Current Assets
Other current assets consist of the following (in thousands):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
RSU tax withholding proceeds receivable | $ | 4,331 | $ | 39 | $ | 5,331 | $ | 39 | ||||||||
Prepaid expense | 3,298 | 3,425 | 4,024 | 3,425 | ||||||||||||
Assets for product returns | 2,225 | 1,602 | 2,261 | 1,602 | ||||||||||||
Interest receivable | 1,457 | 1,441 | 1,869 | 1,441 | ||||||||||||
Value-added tax receivable | 505 | 423 | 628 | 423 | ||||||||||||
Prepaid wafer refund receivable | - | 4,297 | - | 4,297 | ||||||||||||
Other | 1,813 | 704 | 2,547 | 704 | ||||||||||||
Total | $ | 13,629 | $ | 11,931 | $ | 16,660 | $ | 11,931 |
Other Long-Term Assets
Other long-term assets consist of the following (in thousands):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Deferred compensation plan assets | $ | 34,861 | $ | 31,970 | $ | 36,397 | $ | 31,970 | ||||||||
Operating lease ROU assets | 3,102 | - | ||||||||||||||
Prepaid expense | 2,775 | 2,713 | 2,274 | 2,713 | ||||||||||||
Operating lease ROU assets | 2,770 | - | ||||||||||||||
Other | 1,581 | 1,296 | 1,570 | 1,296 | ||||||||||||
Total | $ | 41,987 | $ | 35,979 | $ | 43,343 | $ | 35,979 |
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Dividends and dividend equivalents | $ | 21,289 | $ | 15,044 | $ | 21,895 | $ | 15,044 | ||||||||
Stock rotation and sales returns | 7,580 | 5,363 | 7,884 | 5,363 | ||||||||||||
Customer prepayments | 4,160 | 2,520 | ||||||||||||||
Income tax payable | 5,527 | 7,018 | 2,778 | 7,018 | ||||||||||||
Customer prepayments | 2,927 | 2,520 | ||||||||||||||
Operating lease liabilities | 1,318 | - | ||||||||||||||
Warranty | 2,045 | 4,564 | 1,267 | 4,564 | ||||||||||||
Commissions | 1,661 | 1,369 | 976 | 1,369 | ||||||||||||
Operating lease liabilities | 1,158 | - | ||||||||||||||
Other | 3,161 | 3,084 | 5,706 | 3,084 | ||||||||||||
Total | $ | 45,348 | $ | 38,962 | $ | 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 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Deferred compensation plan liabilities | $ | 35,310 | $ | 32,283 | ||||
Dividend equivalents | 5,670 | 6,145 | ||||||
Operating lease liabilities | 996 | - | ||||||
Other | 31 | 97 | ||||||
Total | $ | 42,007 | $ | 38,525 |
5.5. REAL ESTATETRANSACTION
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 hashad 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 consideration paidpurchase price allocation was allocated to the individual assets based on their relative fair values 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 acquire new tenants.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.
6.6. 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. TheThese leases have remaining lease terms from oneless than a year to four years. Some of thethese leases include renewal options which can extendto renew the lease term for up to five years or on a month-to-month basis. The Company does not have finance lease arrangements.
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.
As 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 allthose lease arrangements that contain lease and nonlease components, the Company has elected the practical expedient to combine them as single lease components. As of March 31, 2019, operating lease ROU assets totaled $2.8 million and operating lease liabilities totaled $2.2 million. The Company recognizes operating lease costs on a straight-line basis over the lease term.
Because the implicit rate in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the remaining lease payments.
The following tables summarize certain information related to the leases (in thousands, except years and percentages):
Three Months Ended | ||||
March 31, 2019 | ||||
Lease costs: | ||||
Operating lease costs | $ | 305 | ||
Short-term lease costs | 98 | |||
Total lease costs | $ | 403 | ||
Other information: | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 304 | ||
ROU assets obtained in exchange for operating lease liabilities (1) | $ | 2,264 |
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 |
| ||||
Weighted-average remaining lease term (in years) | 2.3 | |||
Weighted-average discount rate | % |
(1) | For the nine months ended September 30, 2019, the amount includes $2.2 million for operating leases existing on January 1, 2019. |
____________
(1) Includes $2.2 million for operating leases existing on January 1, 2019 and $0.1 million for new operating leases that commenced during the three months ended March 31, 2019.
As of March 31,September 30, 2019, the maturities of the lease liabilities arewere as follows (in thousands):
2019 (remaining nine months) | $ | 957 | ||||||
2019 (remaining three months) | $ | 364 | ||||||
2020 | 859 | 1,241 | ||||||
2021 | 254 | 634 | ||||||
2022 | 193 | 379 | ||||||
2023 | 58 | 22 | ||||||
Total remaining lease payments | 2,321 | 2,640 | ||||||
Less: imputed interest | (167 | ) | (132 | ) | ||||
Total lease liabilities | $ | 2,154 | $ | 2,508 | ||||
Reported as: | ||||||||
Current liabilities | $ | 1,158 | $ | 1,318 | ||||
Long-term liabilities | $ | 996 | $ | 1,190 |
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, 2019, future income 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 |
7.7. 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 March 31, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net income | $ | 26,181 | $ | 21,856 | ||||
Denominator: | ||||||||
Weighted-average outstanding shares used to compute basic net income per share | 42,749 | 41,922 | ||||||
Effect of dilutive securities | 2,483 | 2,360 | ||||||
Weighted-average outstanding shares used to compute diluted net income per share | 45,232 | 44,282 | ||||||
Net income per share: | ||||||||
Basic | $ | 0.61 | $ | 0.52 | ||||
Diluted | $ | 0.58 | $ | 0.49 |
8.8. 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 computing and storage, automotive, industrial, communications and consumer 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 March 31, | March 31, | December 31, | ||||||||||||||
Customer | 2019 | 2018 | 2019 | 2018 | ||||||||||||
A (distributor) | 23 | % | 20 | % | 22 | % | 25 | % | ||||||||
B (distributor) | * | 10 | % | 17 | % | 16 | % |
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 resellers 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 March 31, | ||||||||
Country or Region | 2019 | 2018 | ||||||
China | $ | 76,198 | $ | 72,865 | ||||
Taiwan | 21,347 | 16,391 | ||||||
Europe | 12,984 | 11,465 | ||||||
Korea | 9,611 | 9,787 | ||||||
Southeast Asia | 8,672 | 9,024 | ||||||
Japan | 6,642 | 5,613 | ||||||
United States | 5,806 | 3,755 | ||||||
Other | 103 | 250 | ||||||
Total | $ | 141,363 | $ | 129,150 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Country or Region | 2019 | 2018 | 2019 | 2018 | ||||||||||||
China | $ | 105,857 | $ | 91,509 | $ | 276,892 | $ | 245,580 | ||||||||
Taiwan | 18,547 | 20,774 | 55,912 | 55,315 | ||||||||||||
Europe | 12,047 | 12,579 | 38,071 | 36,696 | ||||||||||||
Korea | 11,990 | 11,406 | 31,224 | 30,046 | ||||||||||||
Southeast Asia | 7,904 | 11,259 | 23,698 | 28,261 | ||||||||||||
Japan | 8,150 | 6,895 | 21,084 | 18,994 | ||||||||||||
United States | 4,225 | 5,375 | 14,044 | 13,404 | ||||||||||||
Other | 93 | 178 | 258 | 589 | ||||||||||||
Total | $ | 168,813 | $ | 159,975 | $ | 461,183 | $ | 428,885 |
The following is a summary of revenue by product family (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
Product Family | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
DC to DC | $ | 132,711 | $ | 119,268 | $ | 159,723 | $ | 147,727 | $ | 432,125 | $ | 394,492 | ||||||||||||
Lighting Control | 8,652 | 9,882 | 9,090 | 12,248 | 29,058 | 34,393 | ||||||||||||||||||
Total | $ | 141,363 | $ | 129,150 | $ | 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 |
March 31, | December 31, | |||||||
Country | 2019 | 2018 | ||||||
China | $ | 98,117 | $ | 93,096 | ||||
United States | 89,720 | 39,054 | ||||||
Taiwan | 16,854 | 16,972 | ||||||
Other | 806 | 879 | ||||||
Total | $ | 205,497 | $ | 150,001 |
9.9. COMMITMENTS AND CONTINGENCIES
Product Warranties
The following table presents changes in the warranty reserve (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Balance at beginning of period | $ | 4,564 | $ | 2,416 | $ | 1,748 | $ | 3,951 | $ | 4,564 | $ | 2,416 | ||||||||||||
Warranty provision for product sales | 268 | 1,479 | 92 | 3,840 | 671 | 5,654 | ||||||||||||||||||
Settlements made | (2,271 | ) | (55 | ) | (326 | ) | (36 | ) | (2,625 | ) | (100 | ) | ||||||||||||
Unused warranty provision | (516 | ) | (100 | ) | (247 | ) | (2,821 | ) | (1,343 | ) | (3,036 | ) | ||||||||||||
Balance at end of period | $ | 2,045 | $ | 3,740 | $ | 1,267 | $ | 4,934 | $ | 1,267 | $ | 4,934 |
Purchase 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 March 31,September 30, 2019, the Company’s outstanding purchase obligations totaled approximately $79.1$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 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 March 31,September 30, 2019, there were no material pending legal proceedings to which the Company was a party.
10.10. 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):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cash, cash equivalents and investments: | ||||||||||||||||
Cash | $ | 125,687 | $ | 131,569 | $ | 162,741 | $ | 131,569 | ||||||||
Money market funds | 56,082 | 41,135 | 39,982 | 41,135 | ||||||||||||
Corporate debt securities | 143,453 | 170,909 | 195,667 | 170,909 | ||||||||||||
U.S. treasuries and government agency bonds | 32,202 | 32,068 | 20,350 | 32,068 | ||||||||||||
Certificates of deposit | 1,600 | 1,600 | - | 1,600 | ||||||||||||
Auction-rate securities backed by student-loan notes | 3,290 | 3,241 | 3,264 | 3,241 | ||||||||||||
Total | $ | 362,314 | $ | 380,522 | $ | 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 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Reported as: | ||||||||
Cash and cash equivalents | $ | 181,769 | $ | 172,704 | ||||
Short-term investments | 177,255 | 204,577 | ||||||
Long-term investments | 3,290 | 3,241 | ||||||
Total | $ | 362,314 | $ | 380,522 |
The contractual maturities of the Company’s short-term and long-term available-for-sale investments are as follows (in thousands):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Due in less than 1 year | $ | 119,617 | $ | 125,845 | $ | 142,336 | $ | 125,845 | ||||||||
Due in 1 - 5 years | 57,638 | 78,732 | 71,175 | 78,732 | ||||||||||||
Due in greater than 5 years | 3,290 | 3,241 | 3,264 | 3,241 | ||||||||||||
Total | $ | 180,545 | $ | 207,818 | $ | 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):
March 31, 2019 | 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 | $ | 56,082 | $ | - | $ | - | $ | 56,082 | $ | - | $ | 39,982 | $ | - | $ | - | $ | 39,982 | $ | - | ||||||||||||||||||||
Corporate debt securities | 144,041 | 44 | (632 | ) | 143,453 | 123,828 | 195,471 | 324 | (128 | ) | 195,667 | 83,247 | ||||||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 32,257 | 10 | (65 | ) | 32,202 | 22,879 | 20,341 | 11 | (2 | ) | 20,350 | 7,998 | ||||||||||||||||||||||||||||
Certificates of deposit | 1,600 | - | - | 1,600 | - | |||||||||||||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 3,570 | - | (280 | ) | 3,290 | 3,290 | 3,445 | - | (181 | ) | 3,264 | 3,264 | ||||||||||||||||||||||||||||
Total | $ | 237,550 | $ | 54 | $ | (977 | ) | $ | 236,627 | $ | 149,997 | $ | 259,239 | $ | 335 | $ | (311 | ) | $ | 259,263 | $ | 94,509 |
December 31, 2018 | 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 | $ | 41,135 | $ | - | $ | - | $ | 41,135 | $ | - | $ | 41,135 | $ | - | $ | - | $ | 41,135 | $ | - | ||||||||||||||||||||
Corporate debt securities | 172,288 | 7 | (1,386 | ) | 170,909 | 166,204 | 172,288 | 7 | (1,386 | ) | 170,909 | 166,204 | ||||||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 32,207 | 2 | (141 | ) | 32,068 | 28,507 | 32,207 | 2 | (141 | ) | 32,068 | 28,507 | ||||||||||||||||||||||||||||
Certificates of deposit | 1,600 | - | - | 1,600 | - | 1,600 | - | - | 1,600 | - | ||||||||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 3,570 | - | (329 | ) | 3,241 | 3,241 | 3,570 | - | (329 | ) | 3,241 | 3,241 | ||||||||||||||||||||||||||||
Total | $ | 250,800 | $ | 9 | $ | (1,856 | ) | $ | 248,953 | $ | 197,952 | $ | 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 on the Condensed Consolidated Balance Sheets to the amounts reported on the Condensed Consolidated Statements of Cash Flows:Flows (in thousands):
March 31, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cash and cash equivalents | $ | 181,769 | $ | 172,704 | $ | 205,229 | $ | 172,704 | ||||||||
Restricted cash included in other current assets | 1,161 | - | ||||||||||||||
Restricted cash included in other long-term assets | 113 | 114 | 113 | 114 | ||||||||||||
Total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Statements of Cash Flows | $ | 181,882 | $ | 172,818 | $ | 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.
11.11. FAIR VALUE MEASUREMENTS
The following tables summarize the fair value measurement of the financial assets (in thousands):
Fair Value Measurement at September 30, 2019 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds | $ | 39,982 | $ | 39,982 | $ | - | $ | - | ||||||||
Corporate debt securities | 195,667 | - | 195,667 | - | ||||||||||||
U.S. treasuries and government agency bonds | 20,350 | - | 20,350 | - | ||||||||||||
Auction-rate securities backed by student-loan notes | 3,264 | - | - | 3,264 | ||||||||||||
Mutual funds and money market funds under deferred compensation plan | 19,968 | 19,968 | - | - | ||||||||||||
Total | $ | 279,231 | $ | 59,950 | $ | 216,017 | $ | 3,264 |
Fair Value Measurement at March 31, 2019 | Fair Value Measurement at December 31, 2018 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Money market funds | $ | 56,082 | $ | 56,082 | $ | - | $ | - | $ | 41,135 | $ | 41,135 | $ | - | $ | - | ||||||||||||||||
Corporate debt securities | 143,453 | - | 143,453 | - | 170,909 | - | 170,909 | - | ||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 32,202 | - | 32,202 | - | 32,068 | - | 32,068 | - | ||||||||||||||||||||||||
Certificates of deposit | 1,600 | 1,600 | 1,600 | - | 1,600 | - | ||||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 3,290 | - | - | 3,290 | 3,241 | - | - | 3,241 | ||||||||||||||||||||||||
Mutual funds and money market funds under deferred compensation plan | 20,873 | 20,873 | - | - | 18,867 | 18,867 | - | - | ||||||||||||||||||||||||
Total | $ | 257,500 | $ | 76,955 | $ | 177,255 | $ | 3,290 | $ | 267,820 | $ | 60,002 | $ | 204,577 | $ | 3,241 |
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 |
__________
● | 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 (in thousands):
Balance at January 1, 2019 | $ | 3,241 | $ | 3,241 | ||||
Change in unrealized gain included in other comprehensive income | 49 | 148 | ||||||
Balance at March 31, 2019 | $ | 3,290 | ||||||
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% |
March 31, | December 31, | |||||||||||
2019 | 2018 | |||||||||||
Time-to-liquidity (in years) | 2 | - | 3 | 2 | - | 3 | ||||||
Discount rate | 4.6% | - | 9.9% | 4.9% | - | 10.1% |
12.12. DEFERRED COMPENSATION PLAN
The following table summarizes the deferred compensation plan balances on 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 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Deferred compensation plan asset components: | ||||||||
Cash surrender value of corporate-owned life insurance policies | $ | 13,988 | $ | 13,103 | ||||
Fair value of mutual funds and money market funds | 20,873 | 18,867 | ||||||
Total | $ | 34,861 | $ | 31,970 | ||||
Deferred compensation plan assets reported in: | ||||||||
Other long-term assets | $ | 34,861 | $ | 31,970 | ||||
Deferred compensation plan liabilities reported in: | ||||||||
Accrued compensation and related benefits (short-term) | $ | 425 | $ | 447 | ||||
Other long-term liabilities | 35,310 | 32,283 | ||||||
Total | $ | 35,735 | $ | 32,730 |
13.13. INTEREST AND OTHER INCOME, NET
The components of interest and other income, net, are as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Interest income | $ | 1,696 | $ | 1,460 | $ | 1,850 | $ | 1,583 | $ | 5,207 | $ | 4,606 | ||||||||||||
Amortization of premium on available-for-sale securities | (121 | ) | (435 | ) | (168 | ) | (314 | ) | (384 | ) | (1,122 | ) | ||||||||||||
Gain (loss) on deferred compensation plan investments | 1,935 | (186 | ) | |||||||||||||||||||||
Foreign currency exchange loss | (201 | ) | (399 | ) | ||||||||||||||||||||
Gain on deferred compensation plan investments | 74 | 717 | 2,630 | 949 | ||||||||||||||||||||
Foreign currency exchange gain | 175 | 700 | 47 | 915 | ||||||||||||||||||||
Other | 32 | - | 326 | 28 | 327 | 39 | ||||||||||||||||||
Total | $ | 3,341 | $ | 440 | $ | 2,257 | $ | 2,714 | $ | 7,827 | $ | 5,387 |
For 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.
14.14. INCOME TAXES
The income tax provision for interim periods is generally determined using an estimate of the Company’s annual effective tax rate and adjusted 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 benefitexpense for the three months ended March 31,September 30, 2019 was $1.1$2.8 million, or 4.5%8.6% of pre-tax income. The income tax expense for the nine months ended September 30, 2019 was $3.3 million, or 4.1% of pre-tax income. The effective tax raterates 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 period,periods, including excess tax benefits from stock-based compensation. The decrease in the effective tax raterates relative to the federal statutory rate was partially offset by the inclusion of the global intangible low-taxed income ("GILTI"(“GILTI”) tax.
The income tax expenseprovision for the three months ended March 31,September 30, 2018 was $0.6$4.6 million, or 2.8%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 raterates 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 period,periods, including excess tax benefits from stock-based compensation. The decrease in the effective tax raterates relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax.
For the three and nine months ended March 31,September 30, 2019, and 2018, the Company’s effective tax raterates included the estimated impact of $15.5$13.0 million and $12.4$38.5 million, respectively, related to the GILTI provisions that waswere 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.
The Company’s uncertain 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.
In July 2018, 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 the Internal Revenue Service (“IRS”) appealed the decision in June 2016. In 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. At this time, the Treasury Department has not withdrawn the requirement from its regulations to include stock-based compensation in the cost pool to be shared under a cost-sharing arrangement.Appeals. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any adjustments as of March 31,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.
15. ACCUMULATED15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes in accumulated other comprehensive 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, 2019 | $ | (1,638 | ) | $ | (3,905 | ) | $ | (5,543 | ) | |||
Other comprehensive income before reclassifications | 924 | 3,677 | 4,601 | |||||||||
Tax effect | (98 | ) | - | (98 | ) | |||||||
Net current period other comprehensive income | 826 | 3,677 | 4,503 | |||||||||
Balance as of March 31, 2019 | $ | (812 | ) | $ | (228 | ) | $ | (1,040 | ) |
16.16. 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 March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Dividend declared per share | $ | 0.40 | $ | 0.30 | $ | 0.40 | $ | 0.30 | $ | 1.20 | $ | 0.90 | ||||||||||||
Total amount | $ | 17,180 | $ | 12,644 | $ | 17,341 | $ | 12,722 | $ | 51,782 | $ | 38,052 |
As of March 31,September 30, 2019 and December 31,2018, accrued dividends totaled $17.2$17.3 million and $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, 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, cash generated from ongoing U.S. operations, and cash 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 March 31,September 30, 2019 and December 31, 2018, accrued dividend equivalents totaled $9.8$10.6 million and $8.4 million, respectively.
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 computing and storage, automotive, industrial, communications and consumer 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 2019 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,