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, 20192020
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)
____________________________
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Delaware | 77-0466789 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
4040 Lake5808 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 43,057,00044,740,000 shares of the registrant’s common stock issued and outstanding as of May 3, 2019.4, 2020.
MONOLITHIC POWER SYSTEMS, INC.
TABLE OF CONTENTS | PAGE | |
ITEM 1. | ||
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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, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 181,769 | $ | 172,704 | $ | 154,880 | $ | 172,960 | ||||||||
Short-term investments | 177,255 | 204,577 | 334,386 | 282,437 | ||||||||||||
Accounts receivable, net | 58,889 | 55,214 | 54,341 | 52,704 | ||||||||||||
Inventories | 142,543 | 136,384 | 131,499 | 127,500 | ||||||||||||
Other current assets | 13,629 | 11,931 | 29,679 | 19,605 | ||||||||||||
Total current assets | 574,085 | 580,810 | 704,785 | 655,206 | ||||||||||||
Property and equipment, net | 205,497 | 150,001 | 236,807 | 228,315 | ||||||||||||
Long-term investments | 3,290 | 3,241 | 3,057 | 3,138 | ||||||||||||
Goodwill | 6,571 | 6,571 | 6,571 | 6,571 | ||||||||||||
Deferred tax assets, net | 16,779 | 16,830 | 13,821 | 17,193 | ||||||||||||
Other long-term assets | 41,987 | 35,979 | 42,463 | 45,952 | ||||||||||||
Total assets | $ | 848,209 | $ | 793,432 | $ | 1,007,504 | $ | 956,375 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 27,259 | $ | 22,678 | $ | 37,752 | $ | 27,271 | ||||||||
Accrued compensation and related benefits | 18,969 | 18,799 | 18,633 | 26,164 | ||||||||||||
Other accrued liabilities | 45,348 | 38,962 | 56,110 | 44,790 | ||||||||||||
Total current liabilities | 91,576 | 80,439 | 112,495 | 98,225 | ||||||||||||
Income tax liabilities | 34,375 | 34,375 | 37,596 | 37,596 | ||||||||||||
Other long-term liabilities | 42,007 | 38,525 | 44,223 | 47,063 | ||||||||||||
Total liabilities | 167,958 | 153,339 | 194,314 | 182,884 | ||||||||||||
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: 44,715 and 43,616, respectively | 581,736 | 549,517 | ||||||||||||||
Retained earnings | 202,378 | 194,728 | 241,465 | 229,450 | ||||||||||||
Accumulated other comprehensive loss | (1,040 | ) | (5,543 | ) | (10,011 | ) | (5,476 | ) | ||||||||
Total stockholders’ equity | 680,251 | 640,093 | 813,190 | 773,491 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 848,209 | $ | 793,432 | $ | 1,007,504 | $ | 956,375 |
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 March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Revenue | $ | 141,363 | $ | 129,150 | $ | 165,778 | $ | 141,363 | ||||||||
Cost of revenue | 63,357 | 57,655 | 74,331 | 63,357 | ||||||||||||
Gross profit | 78,006 | 71,495 | 91,447 | 78,006 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 25,458 | 21,609 | 25,956 | 25,458 | ||||||||||||
Selling, general and administrative | 30,553 | 27,318 | 32,164 | 30,553 | ||||||||||||
Litigation expense | 278 | 531 | 2,341 | 278 | ||||||||||||
Total operating expenses | 56,289 | 49,458 | 60,461 | 56,289 | ||||||||||||
Income from operations | 21,717 | 22,037 | 30,986 | 21,717 | ||||||||||||
Interest and other income, net | 3,341 | 440 | ||||||||||||||
Other income (expense), net | (1,714 | ) | 3,341 | |||||||||||||
Income before income taxes | 25,058 | 22,477 | 29,272 | 25,058 | ||||||||||||
Income tax expense (benefit) | (1,123 | ) | 621 | |||||||||||||
Income tax benefit | (6,484 | ) | (1,123 | ) | ||||||||||||
Net income | $ | 26,181 | $ | 21,856 | $ | 35,756 | $ | 26,181 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.61 | $ | 0.52 | $ | 0.80 | $ | 0.61 | ||||||||
Diluted | $ | 0.58 | $ | 0.49 | $ | 0.77 | $ | 0.58 | ||||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic | 42,749 | 41,922 | 44,455 | 42,749 | ||||||||||||
Diluted | 45,232 | 44,282 | 46,670 | 45,232 |
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 March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Net income | $ | 26,181 | $ | 21,856 | $ | 35,756 | $ | 26,181 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments | 3,677 | 4,389 | (2,882 | ) | 3,677 | |||||||||||
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 $55 and $(98), respectively | (1,653 | ) | 826 | |||||||||||||
Other comprehensive income (loss), net of tax | (4,535 | ) | 4,503 | |||||||||||||
Comprehensive income | $ | 30,684 | $ | 25,085 | $ | 31,221 | $ | 30,684 |
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’ | |||||||||||||||||
Shares | Amount | Earnings | Loss | Equity | ||||||||||||||||
Balance as of January 1, 2020 | 43,616 | $ | 549,517 | $ | 229,450 | $ | (5,476 | ) | $ | 773,491 | ||||||||||
Net income | - | - | 35,756 | - | 35,756 | |||||||||||||||
Other comprehensive loss | - | - | - | (4,535 | ) | (4,535 | ) | |||||||||||||
Dividends and dividend equivalents declared ($0.50 per share) | - | - | (23,741 | ) | - | (23,741 | ) | |||||||||||||
Common stock issued under the employee equity incentive plan | 1,084 | 11,758 | - | - | 11,758 | |||||||||||||||
Common stock issued under the employee stock purchase plan | 15 | 1,892 | - | - | 1,892 | |||||||||||||||
Stock-based compensation expense | - | 18,569 | - | - | 18,569 | |||||||||||||||
Balance as of March 31, 2020 | 44,715 | $ | 581,736 | $ | 241,465 | $ | (10,011 | ) | $ | 813,190 |
Accumulated | ||||||||||||||||||||
Common Stock and | Other | Total | ||||||||||||||||||
Additional Paid-in Capital | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
Shares | Amount | Earnings | 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 | ) | |||||||||||||
Common stock issued under the employee equity incentive plan | 514 | 10,383 | - | - | 10,383 | |||||||||||||||
Common stock 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 |
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, | ||||||||||||||||
2019 | 2018 | Three Months Ended March 31, | ||||||||||||||
2020 | 2019 | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 26,181 | $ | 21,856 | $ | 35,756 | $ | 26,181 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 3,255 | 2,755 | 4,328 | 3,255 | ||||||||||||
Loss on sales of property and equipment | 14 | - | ||||||||||||||
(Gain) loss on disposal and sale of property and equipment, net | (1 | ) | 14 | |||||||||||||
Amortization of premium on available-for-sale securities | 121 | 435 | 494 | 121 | ||||||||||||
(Gain) loss on deferred compensation plan investments | (1,935 | ) | 66 | 3,750 | (1,935 | ) | ||||||||||
Deferred taxes, net | (33 | ) | - | 3,412 | (33 | ) | ||||||||||
Stock-based compensation expense | 16,010 | 15,030 | 18,562 | 16,010 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (3,676 | ) | (11,103 | ) | (1,635 | ) | (3,676 | ) | ||||||||
Inventories | (6,171 | ) | (12,590 | ) | (3,994 | ) | (6,171 | ) | ||||||||
Other assets | (1,576 | ) | (3,954 | ) | (10,061 | ) | (1,576 | ) | ||||||||
Accounts payable | 4,778 | 3,856 | 7,185 | 4,778 | ||||||||||||
Accrued compensation and related benefits | 4 | (2,821 | ) | (7,374 | ) | 4 | ||||||||||
Accrued liabilities | 3,355 | 4,998 | ||||||||||||||
Income tax liabilities | (1,491 | ) | (2,236 | ) | 34 | (1,491 | ) | |||||||||
Other accrued liabilities | 963 | 3,355 | ||||||||||||||
Net cash provided by operating activities | 38,836 | 16,292 | 51,419 | 38,836 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property and equipment | (58,376 | ) | (7,400 | ) | (9,952 | ) | (58,376 | ) | ||||||||
Acquisition of in-place leases | (981 | ) | - | - | (981 | ) | ||||||||||
Purchases of short-term investments | - | (47,565 | ) | (101,566 | ) | - | ||||||||||
Proceeds from maturities and sales of short-term investments | 28,076 | 31,063 | 47,397 | 28,076 | ||||||||||||
Proceeds from sales of long-term investments | 100 | - | ||||||||||||||
Proceeds from sales of property and equipment | 1,456 | - | 1 | 1,456 | ||||||||||||
Contributions to deferred compensation plan, net | (956 | ) | (1,300 | ) | (438 | ) | (956 | ) | ||||||||
Net cash used in investing activities | (30,781 | ) | (25,202 | ) | (64,458 | ) | (30,781 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Property and equipment purchased on extended payment terms | (10 | ) | - | (279 | ) | (10 | ) | |||||||||
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 the employee equity incentive plan | 11,758 | 10,383 | ||||||||||||||
Proceeds from common stock issued under the employee stock purchase plan | 1,892 | 1,627 | ||||||||||||||
Dividends and dividend equivalents paid | (12,761 | ) | (8,339 | ) | (17,427 | ) | (12,761 | ) | ||||||||
Net cash provided by (used in) financing activities | (761 | ) | 1,033 | |||||||||||||
Net cash used in financing activities | (4,056 | ) | (761 | ) | ||||||||||||
Effect of change in exchange rates | 1,770 | 1,137 | (985 | ) | 1,770 | |||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 9,064 | (6,740 | ) | (18,080 | ) | 9,064 | ||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 172,818 | 82,874 | 173,076 | 172,818 | ||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 181,882 | $ | 76,134 | $ | 154,996 | $ | 181,882 | ||||||||
Supplemental disclosures for cash flow information: | ||||||||||||||||
Cash paid for taxes and interest | $ | 393 | $ | 3,374 | ||||||||||||
Cash paid for taxes | $ | 279 | $ | 393 | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Liability accrued for property and equipment purchases | $ | 958 | $ | 2,491 | $ | 10,909 | $ | 958 | ||||||||
Liability accrued for dividends and dividend equivalents | $ | 18,534 | $ | 13,603 | $ | 23,725 | $ | 18,534 |
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, 2019, filed with the SEC on March 1, 2019.February 28, 2020.
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, 20192020 or for any other future periods.
SummaryUse of Significant Accounting PoliciesEstimates
ExceptThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions used in these condensed consolidated financial statements primarily include those related to revenue recognition, inventory valuation, valuation of share-based awards, contingencies and income tax valuation allowances.
The coronavirus pandemic first identified in December 2019 (“COVID-19”) has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels, supply chains and other business operations for an unknown period of time until the disease is contained. These events could have a negative impact on the Company’s sales and results of operations for the changes relatedremainder of 2020, but the Company is currently unable to leases discussedpredict the size and duration of such impact. As of the date of issuance of these condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require management to update the significant estimates and assumptions used in Note 6, there have been no other changes to the Company’s significant accounting policies duringpreparation of the three months ended March 31, 2019condensed consolidated financial statements, as compared to the significant accounting policies described in the Company’s audited consolidated financial statements includedthose disclosed in the Annual Report on Form 10-K10-K for the year ended December 31, 2018.2019. As new events continue to evolve and additional information becomes available, these estimates and assumptions may change and will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and assumptions, and any such differences may be material to the Company’s financial statements.
Recently AAdopted Accounting Pronouncementdopted Accounting Pronouncements
In February 2016, August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 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.
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.
Recent Accounting Pronouncements Not Yet Adopted as of March 31, 2019
In August 2018 the FASB issued ASU No. 2018-13,-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 Company adopted the standard will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluatingin the impactfirst quarter of2020 and the adoption did not 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 beis the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continuecontinues to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The Company adopted the standard will be applied prospectively,in the first quarter of 2020 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 adoption did not 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 beare 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 willare required to apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company adopted the standard in the first quarter of 2020, which did not have a material impact on its consolidated financial statements.
Recent Accounting PronouncementNot Yet Adopted as of March 31, 2020
In December 2019, the FASB issued ASU No.2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard will be effective for annual reporting periods beginning after December 15, 2020. Early adoption is permitted. The standard will generally be applied prospectively, with certain exceptions. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.statements.
2. REVENUE RECOGNITION
Revenue from Product Sales
The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits (“ICs”), as well as dies in wafer form. These product sales were 99%98% and 97%99% of the Company’s total revenue for the three months ended March 31, 2019 2020 and 2018,2019, 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 87 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 (“OEMs”), original design manufacturers (“ODMs”) and electronic manufacturing service (“EMS”) providers. For the three months ended March 31, 2019 2020 and 2018,2019, 80% and 84% 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, 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, certainCertain 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
Accounts Receivable:
The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of March 31, 2019 2020 and December 31, 2018, 2019, accounts receivable totaled $58.9$54.3 million and $55.2$52.7 million, respectively. The Company's accounts receivable are short-term, with standard payment terms generally ranging from 30 to 60 days. The Company does not require its customers to provide collateral to support accounts receivable. To manage credit risk, management performs ongoing credit evaluations of the customers’ financial condition, monitors payment performance, and assesses current economic conditions, as well as reasonable and supportable forecasts of future economic conditions, that may affect collectability of the outstanding receivables. For certain high risk customers, the Company requires standby letters of credit or payment in advance prior to shipments of goods. For the three months ended March 31, 2020 and 2019, the Company did not recognize any write-offs of its accounts receivable. As of March 31, 2020, the Company did not record any allowance for credit losses, and as of December 31, 2019, the Company did not record any allowance for doubtful accounts as of March 31, 2019 and December 31, 2018.accounts.
Contract Liabilities:
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, 2019 2020 and December 31, 2018, 2019, customer prepayments totaled $2.9$5.2 million and $2.5$3.4 million, respectively. The increase in the customer prepayment balance for the three months ended March 31, 2019 2020 resulted from an increase in unfulfilled customer orders for which the Company has received payments. For the three months ended March 31, 2019, 2020, the Company recognized $2.4$3.2 million of revenue that was included in the customer prepayment balance as of December 31, 2018.2019.
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.a quarter. The Company has elected not to determine whether contactscontracts 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, 2019, 1.62020, 1.2 million shares remained available for future issuance under the 2014 Plan.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expenses as follows (in thousands):
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cost of revenue | $ | 531 | $ | 433 | $ | 557 | $ | 531 | ||||||||
Research and development | 4,429 | 3,995 | 4,370 | 4,429 | ||||||||||||
Selling, general and administrative | 11,050 | 10,602 | 13,635 | 11,050 | ||||||||||||
Total stock-based compensation expense | $ | 16,010 | $ | 15,030 | $ | 18,562 | $ | 16,010 | ||||||||
Tax benefit related to stock-based compensation | $ | 838 | $ | 1,131 | $ | 470 | $ | 838 |
_________________
(1) | Amounts reflect the tax benefit related to stock-based compensation recorded for equity awards that are expected to generate tax deductions when they vest in future periods. |
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at January 1, 2020 | 180 | $ | 115.45 | 1,987 | $ | 74.50 | 1,886 | $ | 37.63 | 4,053 | $ | 59.16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Granted | 26 | $ | 130.67 | 311 | (1) | $ | 107.14 | - | $ | - | 337 | $ | 108.93 | 47 | $ | 183.53 | 324 | (1) | $ | 168.69 | - | $ | - | 371 | $ | 170.56 | ||||||||||||||||||||||||||||||||||||||
Vested | (33 | ) | $ | 77.83 | (400 | ) | $ | 56.71 | (81 | ) | $ | 23.57 | (514 | ) | $ | 52.86 | (24 | ) | $ | 104.06 | (979 | ) | $ | 56.22 | (81 | ) | $ | 23.57 | (1,084 | ) | $ | 54.85 | ||||||||||||||||||||||||||||||||
Forfeited | (2 | ) | $ | 89.22 | - | $ | - | (1 | ) | $ | 68.48 | (3 | ) | $ | 83.26 | (2 | ) | $ | 114.71 | (7 | ) | $ | 81.64 | (3 | ) | $ | 68.48 | (12 | ) | $ | 83.20 | |||||||||||||||||||||||||||||||||
Outstanding at March 31, 2019 | 231 | $ | 101.91 | 2,085 | $ | 69.34 | 2,137 | $ | 36.14 | 4,453 | $ | 55.09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding at March 31, 2020 | 201 | $ | 132.71 | 1,325 | $ | 110.99 | 1,802 | $ | 38.21 | 3,328 | $ | 72.88 |
_____________
| Amount reflects the number of |
The intrinsic value related to vested RSUs was $57.7$182.1 million and $49.5$57.7 million for the three months ended March 31, 2019 2020 and 2018,2019, respectively. As of March 31, 2019, 2020, the total intrinsic value of all outstanding RSUs was $559.8$517.6 million, based on the closing stock price of $135.49.$167.46. As of March 31, 2019, 2020, unamortized compensation expense related to all outstanding RSUs was $145.2$144.1 million with a weighted-average remaining recognition period of approximately 3.5three years.
Cash proceeds from vested PSUs with a purchase price totaled $10.4$11.8 million and $7.8$10.4 million for the three months ended March 31, 2019 2020 and 2018,2019, respectively.
Time-Based RSUs:
For the three months ended March 31, 2019, 2020, the Compensation Committee granted 26,00047,000 RSUs with service conditions to non-executive employees and non-employee directors. The RSUs generally vest over four years for employees and one year for directors, subject to continued service with the Company.
20192020 PSUs:
In February 2019, 2020, the Compensation Committee granted 151,000100,000 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 (2020 and 2020)2021) revenue growth rate compared against the analog industry’s average two-yeartwo-year revenue growth rate as published by the Semiconductor Industry Association (“2019(“2020 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 20192020 Executive PSUs. 50% of the 20192020 Executive PSUs will vest in the first quarter of 20212022 if the pre-determined performance goals are met during the performance period. The remaining 20192020 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 20192020 Executive PSUs is $46.6$51.1 million.
In February 2020, the Compensation Committee granted 30,000 PSUs to certain non-executive employees, which represent a target number of shares to be earned based on the Company’s 2021 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2020 and 2021) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2020 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2020 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2020 Non-Executive PSUs will vest in the first quarter of 2022 if the pre-determined performance goals are met during the performance period. The remaining 2020 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2020 Non-Executive PSUs is $12.9 million.
The 20192020 Executive PSUs and the 2020 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 vestThe Company will not be subject towaive the$30 purchase price payment.requirement if the average stock price for 20 consecutive trading days at any time during the performance period is $30 higher than the grant date stock price of $182.62. The Company determined the grant date fair value of the 2019 Executive PSUs using the Black-Scholesa Monte Carlo simulation model with the following assumptions: stock price of $130.67, expected$182.62, simulation term of 2.62.0 years, expected volatility of 29.0% and33.6%, risk-free interest rate of 2.5%1.4% and expected dividend yield of 1.1%.
Employee2004 Employee Stock Purchase Plan (“ESPP”)
For the three months ended March 31, 2019 2020 and 2018,2019, 15,000 and 14,000 and 18,000 shares, respectively, were issued under the ESPP. As of March 31, 2019, 2020, 4.5 million shares were available for future issuance.issuance under the ESPP.
The intrinsic value of the shares issued was $0.3$1.0 million and $0.5$0.3 million for the three months ended March 31, 2019 2020 and 2018,2019, respectively. As of March 31, 2019, 2020, the unamortized expense was $0.4 million, which will be recognized through the third 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 March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Expected term (in years) | 0.5 | 0.5 | 0.5 | 0.5 | ||||||||||||
Expected volatility | 37.3 | % | 28.2 | % | 31.4 | % | 37.3 | % | ||||||||
Risk-free interest rate | 2.5 | % | 1.8 | % | 1.6 | % | 2.5 | % | ||||||||
Dividend yield | 1.2 | % | 1.0 | % | 1.1 | % | 1.2 | % |
Cash proceeds from the shares issued under the ESPP were $1.9 million and $1.6 million for both the three months ended March 31, 2019 2020 and 2018.2019, respectively.
4. BALANCE SHEET COMPONENTS
Inventories
Inventories consist of the following (in thousands):
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Raw materials | $ | 32,502 | $ | 22,872 | ||||
Work in process | 48,022 | 42,681 | ||||||
Finished goods | 50,975 | 61,947 | ||||||
Total | $ | 131,499 | $ | 127,500 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Raw materials | $ | 43,142 | $ | 43,017 | ||||
Work in process | 39,402 | 38,674 | ||||||
Finished goods | 59,999 | 54,693 | ||||||
Total | $ | 142,543 | $ | 136,384 |
Other Current Assets
Other current assets consist of the following (in thousands):
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
RSU tax withholding proceeds receivable | $ | 4,331 | $ | 39 | $ | 5,744 | $ | 6,106 | ||||||||
Prepaid expense | 3,298 | 3,425 | 18,444 | 7,991 | ||||||||||||
Accrued interest receivable | 2,530 | 2,490 | ||||||||||||||
Assets for product returns | 2,225 | 1,602 | 1,824 | 1,585 | ||||||||||||
Interest receivable | 1,457 | 1,441 | ||||||||||||||
Value-added tax receivable | 505 | 423 | ||||||||||||||
Prepaid wafer refund receivable | - | 4,297 | ||||||||||||||
Other | 1,813 | 704 | 1,137 | 1,433 | ||||||||||||
Total | $ | 13,629 | $ | 11,931 | $ | 29,679 | $ | 19,605 |
Other Long-Term Assets
Other long-term assets consist of the following (in thousands):
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Deferred compensation plan assets | $ | 34,861 | $ | 31,970 | $ | 35,547 | $ | 38,858 | ||||||||
Operating lease right-of-use (“ROU”) assets | 2,744 | 2,863 | ||||||||||||||
Prepaid expense | 2,775 | 2,713 | 2,715 | 2,687 | ||||||||||||
Operating lease ROU assets | 2,770 | - | ||||||||||||||
Other | 1,581 | 1,296 | 1,457 | 1,544 | ||||||||||||
Total | $ | 41,987 | $ | 35,979 | $ | 42,463 | $ | 45,952 |
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Dividends and dividend equivalents | $ | 21,289 | $ | 15,044 | $ | 27,846 | $ | 21,747 | ||||||||
Stock rotation and sales returns | 7,580 | 5,363 | 6,474 | 5,530 | ||||||||||||
Accrued purchases of property and equipment | 5,834 | 4,678 | ||||||||||||||
Income tax payable | 5,527 | 7,018 | 2,462 | 2,435 | ||||||||||||
Customer prepayments | 2,927 | 2,520 | 5,221 | 3,412 | ||||||||||||
Warranty | 2,045 | 4,564 | ||||||||||||||
Commissions | 1,661 | 1,369 | 2,191 | 1,425 | ||||||||||||
Operating lease liabilities | 1,158 | - | 1,140 | 1,254 | ||||||||||||
Warranty | 1,144 | 1,139 | ||||||||||||||
Other | 3,161 | 3,084 | 3,798 | 3,170 | ||||||||||||
Total | $ | 45,348 | $ | 38,962 | $ | 56,110 | $ | 44,790 |
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
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. 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 has in-place leases 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 paid 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 to acquire new tenants.
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.
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Deferred compensation plan liabilities | $ | 36,627 | $ | 39,665 | ||||
Dividend equivalents | 6,481 | 6,265 | ||||||
Operating lease liabilities | 1,086 | 1,103 | ||||||
Other | 29 | 30 | ||||||
Total | $ | 44,223 | $ | 47,063 |
6.5. 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.
As permitted by Topic 842, the Company does not recognize leases with a term of 12 months or less on the Condensed Consolidated Balance Sheets. For all 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, 2020 and December 31, 2019, operating lease ROU assets totaled $2.8$2.7 million and $2.9 million, respectively. As of March 31, 2020 and December 31, 2019, 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.
million and $2.4 million, respectively. 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 March 31, | ||||||||
2020 | 2019 | |||||||
Lease costs: | ||||||||
Operating lease costs | $ | 366 | $ | 305 | ||||
Short-term and other lease costs | 77 | 98 | ||||||
Total lease costs | $ | 443 | $ | 403 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 373 | $ | 304 | ||||
ROU assets obtained in exchange for new operating lease liabilities (1) | $ | 277 | $ | 2,264 |
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Weighted-average remaining lease term (in years) | 2.2 | 2.1 | ||||||
Weighted-average discount rate | 3.6 | % | 3.7 | % |
(1) | For the three months ended March 31, 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, 2019, 2020, the maturities of the lease liabilities arewere as follows (in thousands):
2019 (remaining nine months) | $ | 957 | ||||||
2020 | 859 | |||||||
2020 (remaining nine months) | $ | 994 | ||||||
2021 | 254 | 774 | ||||||
2022 | 193 | 453 | ||||||
2023 | 58 | 96 | ||||||
2024 | 12 | |||||||
Total remaining lease payments | 2,321 | 2,329 | ||||||
Less: imputed interest | (167 | ) | (103 | ) | ||||
Total lease liabilities | $ | 2,154 | $ | 2,226 | ||||
Reported as: | ||||||||
Current liabilities | $ | 1,158 | $ | 1,140 | ||||
Long-term liabilities | $ | 996 | $ | 1,086 |
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 one year to five years. Some of these leases include options to renew the lease term for up to five years.
For the three months ended March 31, 2020 and 2019, income related to lease payments was $0.4 million and $0.2 million, respectively. As of March 31, 2020, future income related to lease payments was as follows (in thousands):
2020 (remaining nine months) | $ | 1,620 | ||
2021 | 2,285 | |||
2022 | 2,074 | |||
2023 | 1,240 | |||
2024 | 552 | |||
Thereafter | 59 | |||
Total | $ | 7,830 |
76. 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, as a result, 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 March 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 26,181 | $ | 21,856 | $ | 35,756 | $ | 26,181 | ||||||||
Denominator: | ||||||||||||||||
Weighted-average outstanding shares used to compute basic net income per share | 42,749 | 41,922 | ||||||||||||||
Weighted-average outstanding shares - basic | 44,455 | 42,749 | ||||||||||||||
Effect of dilutive securities | 2,483 | 2,360 | 2,215 | 2,483 | ||||||||||||
Weighted-average outstanding shares used to compute diluted net income per share | 45,232 | 44,282 | ||||||||||||||
Weighted-average outstanding shares - diluted | 46,670 | 45,232 | ||||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.61 | $ | 0.52 | $ | 0.80 | $ | 0.61 | ||||||||
Diluted | $ | 0.58 | $ | 0.49 | $ | 0.77 | $ | 0.58 |
Anti-dilutive common stock equivalents were not material in any of the periods presented.
87. SEGMENT, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance analog solutions for the 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 manufacturersOEMs, ODMs and electronic manufacturing serviceEMS 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 March 31, | March 31, | December 31, | ||||||||||||||
Customer | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Distributor A | 23 | % | 23 | % | 28 | % | 24 | % | ||||||||
Distributor B | * | * | 13 | % | 11 | % | ||||||||||
Value-added reseller A | * | * | 16 | % | 13 | % | ||||||||||
Direct customer A | 10 | % | * | * | * |
___________
* Represents less than 10%.
The Company’s agreements with these third-party distributorsthird-party customers 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 customersthe distributors or the value-added reseller 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. If the Company's agreement with the direct customer was terminated, or if sales to such customer decrease significantly in future periods, the Company's operating results could be materially and adversely affected.
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 March 31, | ||||||||
Country or Region | 2020 | 2019 | ||||||
China | $ | 105,737 | $ | 76,198 | ||||
Taiwan | 16,540 | 21,347 | ||||||
Europe | 13,072 | 12,984 | ||||||
South Korea | 10,944 | 9,611 | ||||||
Southeast Asia | 8,780 | 8,672 | ||||||
Japan | 6,890 | 6,642 | ||||||
United States | 3,737 | 5,806 | ||||||
Other | 78 | 103 | ||||||
Total | $ | 165,778 | $ | 141,363 |
The following is a summary of revenue by product family (in thousands):
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
Product Family | 2019 | 2018 | 2020 | 2019 | ||||||||||||
DC to DC | $ | 132,711 | $ | 119,268 | $ | 156,875 | $ | 132,711 | ||||||||
Lighting Control | 8,652 | 9,882 | 8,903 | 8,652 | ||||||||||||
Total | $ | 141,363 | $ | 129,150 | $ | 165,778 | $ | 141,363 |
The following is a summary of property and equipment, net, by geographic regions (in thousands):
March 31, | December 31, | |||||||
Country | 2020 | 2019 | ||||||
China | $ | 119,904 | $ | 113,888 | ||||
United States | 96,982 | 94,671 | ||||||
Taiwan | 17,341 | 17,652 | ||||||
Other | 2,580 | 2,104 | ||||||
Total | $ | 236,807 | $ | 228,315 |
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 |
98. COMMITMENTS AND CONTINGENCIES
Product Warranties
The following table presentsCompany generally provides one to two-year warranties against defects in materials and workmanship and will either repair the products, provide replacements at no charge to customers 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.
The changes in the warranty reservereserves are as follows (in thousands):
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Balance at beginning of period | $ | 4,564 | $ | 2,416 | $ | 1,139 | $ | 4,564 | ||||||||
Warranty provision for product sales | 268 | 1,479 | 541 | 268 | ||||||||||||
Settlements made | (2,271 | ) | (55 | ) | (111 | ) | (2,271 | ) | ||||||||
Unused warranty provision | (516 | ) | (100 | ) | (425 | ) | (516 | ) | ||||||||
Balance at end of period | $ | 2,045 | $ | 3,740 | $ | 1,144 | $ | 2,045 |
Purchase Commitments
The Company has outstanding purchase commitments with its suppliers and other parties that require the future purchasepurchases of goods or services, which primarily consist of wafer and other inventory purchases, assembly and other manufacturing services, construction servicesor purchases of property and equipment, and license arrangements. As of March 31, 2019, 2020, the Company’s outstanding purchase obligations totaled approximately $79.1$102.6 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, 2019, 2020, there were no material pending legal proceedings to which the Company was a party.
109. 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, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash, cash equivalents and investments: | ||||||||||||||||
Cash | $ | 125,687 | $ | 131,569 | $ | 143,926 | $ | 144,860 | ||||||||
Money market funds | 56,082 | 41,135 | 10,954 | 28,100 | ||||||||||||
Corporate debt securities | 143,453 | 170,909 | 308,909 | 260,950 | ||||||||||||
Commercial paper | 4,943 | 1,994 | ||||||||||||||
U.S. treasuries and government agency bonds | 32,202 | 32,068 | 20,534 | 19,493 | ||||||||||||
Certificates of deposit | 1,600 | 1,600 | ||||||||||||||
Auction-rate securities backed by student-loan notes | 3,290 | 3,241 | 3,057 | 3,138 | ||||||||||||
Total | $ | 362,314 | $ | 380,522 | $ | 492,323 | $ | 458,535 |
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Reported as: | ||||||||||||||||
Cash and cash equivalents | $ | 181,769 | $ | 172,704 | $ | 154,880 | $ | 172,960 | ||||||||
Short-term investments | 177,255 | 204,577 | 334,386 | 282,437 | ||||||||||||
Long-term investments | 3,290 | 3,241 | 3,057 | 3,138 | ||||||||||||
Total | $ | 362,314 | $ | 380,522 | $ | 492,323 | $ | 458,535 |
The following table summarizes the contractual maturities of the Company’s short-term and long-term available-for-sale investments are as follows (inof March 31, 2020 (in thousands):
March 31, | December 31, | |||||||||||||||
2019 | 2018 | Amortized Cost | Fair Value | |||||||||||||
Due in less than 1 year | $ | 119,617 | $ | 125,845 | $ | 175,874 | $ | 175,281 | ||||||||
Due in 1 - 5 years | 57,638 | 78,732 | 159,928 | 159,105 | ||||||||||||
Due in greater than 5 years | 3,290 | 3,241 | 3,220 | 3,057 | ||||||||||||
Total | $ | 180,545 | $ | 207,818 | $ | 339,022 | $ | 337,443 |
Realized gains and losses recognized on the sale of the available-for-sale investments were not material for any of the periods presented.
The following tables summarize the unrealized gain and loss positions related to the Company’s available-for sale investments (in thousands):
March 31, 2020 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Money market funds | $ | 10,954 | $ | - | $ | - | $ | 10,954 | ||||||||
Corporate debt securities | 310,367 | 559 | (2,017 | ) | 308,909 | |||||||||||
Commercial paper | 4,942 | 3 | (2 | ) | 4,943 | |||||||||||
U.S. treasuries and government agency bonds | 20,493 | 41 | - | 20,534 | ||||||||||||
Auction-rate securities backed by student-loan notes | 3,220 | - | (163 | ) | 3,057 | |||||||||||
Total | $ | 349,976 | $ | 603 | $ | (2,182 | ) | $ | 348,397 |
December 31, 2019 | ||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
Money market funds | $ | 28,100 | $ | - | $ | - | $ | 28,100 | ||||||||
Corporate debt securities | 260,645 | 383 | (78 | ) | 260,950 | |||||||||||
Commercial paper | 1,994 | - | - | 1,994 | ||||||||||||
U.S. treasuries and government agency bonds | 19,487 | 7 | (1 | ) | 19,493 | |||||||||||
Auction-rate securities backed by student-loan notes | 3,320 | - | (182 | ) | 3,138 | |||||||||||
Total | $ | 313,546 | $ | 390 | $ | (261 | ) | $ | 313,675 |
The following tables present information about the available-for-sale investments that had been in a continuous unrealized loss position for less than 12 months and for greater than 12 months (in thousands):
March 31, 2020 | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Corporate debt securities | $ | 215,069 | $ | (2,017 | ) | $ | - | $ | - | $ | 215,069 | $ | (2,017 | ) | ||||||||||
Commercial paper | 2,469 | (2 | ) | - | - | 2,469 | (2 | ) | ||||||||||||||||
Auction-rate securities backed by student-loan notes | - | - | 3,057 | (163 | ) | 3,057 | (163 | ) | ||||||||||||||||
Total | $ | 217,538 | $ | (2,019 | ) | $ | 3,057 | $ | (163 | ) | $ | 220,595 | $ | (2,182 | ) |
December 31, 2019 | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Corporate debt securities | $ | 82,126 | $ | (63 | ) | $ | 11,136 | $ | (15 | ) | $ | 93,262 | $ | (78 | ) | |||||||||
U.S. treasuries and government agency bonds | 993 | (1 | ) | - | - | 993 | (1 | ) | ||||||||||||||||
Auction-rate securities backed by student-loan notes | - | - | 3,138 | (182 | ) | 3,138 | (182 | ) | ||||||||||||||||
Total | $ | 83,119 | $ | (64 | ) | $ | 14,274 | $ | (197 | ) | $ | 97,393 | $ | (261 | ) |
An impairment exists when the fair value of an investment is less than its amortized cost basis. As of March 31, 2020, the Company did not consider the impairment of its investments to be a result of credit losses. As of December 31, 2019, the Company did not consider the impairment of its investments to be other-than-temporary. The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. When evaluating a debt security for impairment, management reviews factors such as the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis, the extent to which the fair value of the security is less than its cost, the financial condition of the issuer and the credit quality of the investment.
The Company’s auction-rate securities are backed by pools of student loans supported by guarantees by the U.S. Department of Education. The underlying maturities of these securities are up to 26 years. The Company has received all scheduled interest payments on a timely basis pursuant to the terms and conditions of the securities. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities, before recovery of its amortized cost basis. To date, the Company has redeemed $40.1 million, or 93% of the original portfolio in these auction-rate securities, at par without any realized losses.
March 31, 2019 | ||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Total Fair Value | Fair Value of Investments in Unrealized Loss Position | ||||||||||||||||
Money market funds | $ | 56,082 | $ | - | $ | - | $ | 56,082 | $ | - | ||||||||||
Corporate debt securities | 144,041 | 44 | (632 | ) | 143,453 | 123,828 | ||||||||||||||
U.S. treasuries and government agency bonds | 32,257 | 10 | (65 | ) | 32,202 | 22,879 | ||||||||||||||
Certificates of deposit | 1,600 | - | - | 1,600 | - | |||||||||||||||
Auction-rate securities backed by student-loan notes | 3,570 | - | (280 | ) | 3,290 | 3,290 | ||||||||||||||
Total | $ | 237,550 | $ | 54 | $ | (977 | ) | $ | 236,627 | $ | 149,997 |
December 31, 2018 | ||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Total Fair Value | Fair Value of Investments in Unrealized Loss Position | ||||||||||||||||
Money market funds | $ | 41,135 | $ | - | $ | - | $ | 41,135 | $ | - | ||||||||||
Corporate debt securities | 172,288 | 7 | (1,386 | ) | 170,909 | 166,204 | ||||||||||||||
U.S. treasuries and government agency bonds | 32,207 | 2 | (141 | ) | 32,068 | 28,507 | ||||||||||||||
Certificates of deposit | 1,600 | - | - | 1,600 | - | |||||||||||||||
Auction-rate securities backed by student-loan notes | 3,570 | - | (329 | ) | 3,241 | 3,241 | ||||||||||||||
Total | $ | 250,800 | $ | 9 | $ | (1,856 | ) | $ | 248,953 | $ | 197,952 |
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, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash and cash equivalents | $ | 181,769 | $ | 172,704 | $ | 154,880 | $ | 172,960 | ||||||||
Restricted cash included in other long-term assets | 113 | 114 | 116 | 116 | ||||||||||||
Total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Statements of Cash Flows | $ | 181,882 | $ | 172,818 | $ | 154,996 | $ | 173,076 |
RestrictedAs of March 31, 2020 and December 31, 2019, restricted cash includesincluded 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.
1110. FAIR VALUE MEASUREMENTS
The following tables summarize the fair value measurement of the financial assets (in thousands):
March 31, 2020 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Money market funds | $ | 10,954 | $ | 10,954 | $ | - | $ | - | ||||||||
Corporate debt securities | 308,909 | - | 308,909 | - | ||||||||||||
Commercial paper | 4,943 | - | 4,943 | - | ||||||||||||
U.S. treasuries and government agency bonds | 20,534 | - | 20,534 | - | ||||||||||||
Auction-rate securities backed by student-loan notes | 3,057 | - | - | 3,057 | ||||||||||||
Mutual funds and money market funds under deferred compensation plan | 20,226 | 20,226 | - | - | ||||||||||||
Total | $ | 368,623 | $ | 31,180 | $ | 334,386 | $ | 3,057 |
Fair Value Measurement at March 31, 2019 | December 31, 2019 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Money market funds | $ | 56,082 | $ | 56,082 | $ | - | $ | - | $ | 28,100 | $ | 28,100 | $ | - | $ | - | ||||||||||||||||
Corporate debt securities | 143,453 | - | 143,453 | - | 260,950 | - | 260,950 | - | ||||||||||||||||||||||||
Commercial paper | 1,994 | - | 1,994 | - | ||||||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 32,202 | - | 32,202 | - | 19,493 | - | 19,493 | - | ||||||||||||||||||||||||
Certificates of deposit | 1,600 | 1,600 | ||||||||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 3,290 | - | - | 3,290 | 3,138 | - | - | 3,138 | ||||||||||||||||||||||||
Mutual funds and money market funds under deferred compensation plan | 20,873 | 20,873 | - | - | 21,975 | 21,975 | - | - | ||||||||||||||||||||||||
Total | $ | 257,500 | $ | 76,955 | $ | 177,255 | $ | 3,290 | $ | 335,650 | $ | 50,075 | $ | 282,437 | $ | 3,138 |
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, 2020 | $ | 3,138 | ||
Change in unrealized gain included in other comprehensive income | 19 | |||
Sale and settlement at par | (100 | ) | ||
Balance at March 31, 2020 | $ | 3,057 |
Balance at January 1, 2019 | $ | 3,241 | ||
Change in unrealized gain included in other comprehensive income | 49 | |||
Balance at March 31, 2019 | $ | 3,290 |
The Company determined the fair value of the auction-rate securities using a discounted cash flow model with the following assumptions:
March 31, | December 31, | ||||||||||||||||||||
2019 | 2018 | March 31, 2020 (1) | December 31, 2019 | ||||||||||||||||||
Time-to-liquidity (in years) | 2 | - | 3 | 2 | - | 3 | 2 | - | 3 | (2.5) | 2 | - | 3 | ||||||||
Discount rate | 4.6% | - | 9.9% | 4.9% | - | 10.1% | 3.1% | - | 7.3% | (5.0%) | 4.0% | - | 8.3% |
(1) | The parenthetical value represents the weighted average, which was calculated based on the relative fair value of the securities. |
The fair value measurement involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities and independent pricing services. The valuation of the auction-rate securities is subject to significant management judgment regarding projected future cash flows, which will depend on many factors, including the quality of the underlying collateral, estimated time to liquidity including potential to be called or restructured, underlying final maturity, and market conditions, among others. Changes in any of the unobservable inputs used in the fair value measurement of auction-rate securities in isolation would result in a lower or higher fair value measurement. For example, an increase in the time-to-liquidity assumption or estimated discount rate would result in a lower fair value measurement.
1211. DEFERRED COMPENSATION PLAN
The following table summarizes the deferred compensation plan balances on the Condensed Consolidated Balance Sheets (in thousands):
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Deferred compensation plan asset components: | ||||||||||||||||
Cash surrender value of corporate-owned life insurance policies | $ | 13,988 | $ | 13,103 | $ | 15,321 | $ | 16,883 | ||||||||
Fair value of mutual funds and money market funds | 20,873 | 18,867 | 20,226 | 21,975 | ||||||||||||
Total | $ | 34,861 | $ | 31,970 | $ | 35,547 | $ | 38,858 | ||||||||
Deferred compensation plan assets reported in: | ||||||||||||||||
Other long-term assets | $ | 34,861 | $ | 31,970 | $ | 35,547 | $ | 38,858 | ||||||||
Deferred compensation plan liabilities reported in: | ||||||||||||||||
Accrued compensation and related benefits (short-term) | $ | 425 | $ | 447 | $ | 155 | $ | 425 | ||||||||
Other long-term liabilities | 35,310 | 32,283 | 36,627 | 39,665 | ||||||||||||
Total | $ | 35,735 | $ | 32,730 | $ | 36,782 | $ | 40,090 |
1312. INTEREST AND OTHER INCOME (EXPENSE), NET
The components of interest and other income (expense), net, are as follows (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Interest income | $ | 2,374 | $ | 1,696 | ||||
Amortization of premium on available-for-sale securities | (494 | ) | (121 | ) | ||||
Gain (loss) on deferred compensation plan investments | (3,750 | ) | 1,935 | |||||
Foreign currency exchange gain (loss) | 3 | (201 | ) | |||||
Other | 153 | 32 | ||||||
Total | $ | (1,714 | ) | $ | 3,341 |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Interest income | $ | 1,696 | $ | 1,460 | ||||
Amortization of premium on available-for-sale securities | (121 | ) | (435 | ) | ||||
Gain (loss) on deferred compensation plan investments | 1,935 | (186 | ) | |||||
Foreign currency exchange loss | (201 | ) | (399 | ) | ||||
Other | 32 | - | ||||||
Total | $ | 3,341 | $ | 440 |
1413. INCOME TAXES
The income tax provision or benefit 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.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law to provide economic relief to individuals and businesses to combat the COVID-19 pandemic and stimulate the U.S. economy. The CARES Act includes certain temporary changes to tax laws, such as the utilization of net operating loss carryforwards and interest expense deductions. The Company reviewed the provisions of the CARES Act and does not believe the CARES Act will have a material impact on its income tax provisions, results of operations or financial condition for the year ending December 31, 2020. The Company will continue to monitor any new developments related to the CARES Act and evaluate their impact on its financial statements.
The income tax benefit for the three months ended March 31, 2020 was $6.5 million, or 22.2% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily due to excess tax benefits from stock-based compensation, and foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the global intangible low-taxed income (“GILTI”) tax.
The income tax benefit for the three months ended March 31, 2019 was $1.1 million, or 4.5% of pre-tax income. The effective tax rate 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, including excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the global intangible low-taxed income ("GILTI") tax.
The income tax expense for the three months ended March 31, 2018 was $0.6 million, or 2.8% of pre-tax income. The effective tax rate 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, including excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax.
For the three months ended March 31, 2019 and 2018, the Company’s effective tax rate included the estimated impact of $15.5 million and $12.4 million, respectively, related to the GILTI provisions that was included as additional subpart F income, which was accounted for as a period cost.
The Company’s uncertain tax positions relate to the allocation of income and deductions between the Company’samong its global entities and to the determination of the research and development tax credit. It is reasonably possible thatVarious events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur and would require the Company to increase or decrease its reserves and effective income tax rate over the next twelve-month period, the Company may experience increases or decreases in its unrecognized tax benefits.twelve months. 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 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 in Altera v. Commissioner, holding that the Internal Revenue Service ("IRS") did not violate the rule-making procedures required by the Administrative Procedures Act.Ninth Circuit Court of Appeals. In November 2019, 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,declined to rehear the Treasury Department has not withdrawncase. In February 2020, Altera filed a petition with the requirement from its regulationsSupreme Court to include stock-based compensation inreview the cost pool to be shared under a cost-sharing arrangement.case. 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, 2019. 2020. The Company will continue to monitor developments related to this case and evaluate the potential impact of any new developments on its financial statements.
1514. ACCUMULATEDACCUMULATED 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, 2020 | $ | 135 | $ | (5,611 | ) | $ | (5,476 | ) | ||||
Other comprehensive loss before reclassifications | (1,680 | ) | (2,882 | ) | (4,562 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss | (28 | ) | - | (28 | ) | |||||||
Tax effect | 55 | - | 55 | |||||||||
Net current period other comprehensive loss | (1,653 | ) | (2,882 | ) | (4,535 | ) | ||||||
Balance as of March 31, 2020 | $ | (1,518 | ) | $ | (8,493 | ) | $ | (10,011 | ) |
The amounts reclassified from accumulated other comprehensive loss were recorded in other income (expense), net, on the Condensed Consolidated Statements of Operations.
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 | ) |
1615. DIVIDENDS AND DIVIDEND EQUIVALENTS
Cash Dividend Program
In June 2014,The Company has a dividend program approved by 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 March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Dividend declared per share | $ | 0.40 | $ | 0.30 | $ | 0.50 | $ | 0.40 | ||||||||
Total amount | $ | 17,180 | $ | 12,644 | $ | 22,317 | $ | 17,180 |
As of March 31, 2019 2020 and December 31, 2018,2019, accrued dividends totaled $17.2$22.3 million and $12.8$17.4 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, outstandingThe Company's 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, as a result, the awards do not vest. As of March 31, 2019 2020 and December 31, 2018, 2019, accrued dividend equivalents totaled $9.8$12.0 million and $8.4$10.6 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,