UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-51026
Monolithic Power Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 77-0466789 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
79 Great Oaks Boulevard, San Jose, CA 951195808 Lake Washington Blvd. NE, Kirkland, Washington 98033
(Address of principal executive offices)(Zip code)Code)
(408) 826-0600(425)296-9956
(Registrant’sRegistrant’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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large“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. ☐
IndicateIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 41,516,913 45,754,000 shares of the registrant’s common stock issued and outstanding as of October 30, 2017.May 3, 2021.
MONOLITHIC POWER SYSTEMS, INC.
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ITEM 2. | MANAGEMENT |
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MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 104,424 | $ | 112,703 | ||||
Short-term investments | 195,174 | 155,521 | ||||||
Accounts receivable, net | 50,757 | 34,248 | ||||||
Inventories | 99,887 | 71,469 | ||||||
Other current assets | 13,560 | 9,043 | ||||||
Total current assets | 463,802 | 382,984 | ||||||
Property and equipment, net | 100,629 | 85,171 | ||||||
Long-term investments | 5,368 | 5,354 | ||||||
Goodwill | 6,571 | 6,571 | ||||||
Acquisition-related intangible assets, net | 1,464 | 3,002 | ||||||
Deferred tax assets, net | 661 | 633 | ||||||
Other long-term assets | 26,518 | 27,411 | ||||||
Total assets | $ | 605,013 | $ | 511,126 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 21,831 | $ | 17,427 | ||||
Accrued compensation and related benefits | 17,458 | 12,578 | ||||||
Accrued liabilities | 26,879 | 22,916 | ||||||
Total current liabilities | 66,168 | 52,921 | ||||||
Income tax liabilities | 4,627 | 3,870 | ||||||
Other long-term liabilities | 28,695 | 23,219 | ||||||
Total liabilities | 99,490 | 80,010 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 41,508 and 40,793 | 364,726 | 315,969 | ||||||
Retained earnings | 140,455 | 119,362 | ||||||
Accumulated other comprehensive income (loss) | 342 | (4,215 | ) | |||||
Total stockholders’ equity | 505,523 | 431,116 | ||||||
Total liabilities and stockholders’ equity | $ | 605,013 | $ | 511,126 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.(unaudited)
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 218,368 | $ | 334,944 | ||||
Short-term investments | 420,455 | 260,169 | ||||||
Accounts receivable, net | 84,059 | 66,843 | ||||||
Inventories | 175,223 | 157,062 | ||||||
Other current assets | 24,325 | 22,980 | ||||||
Total current assets | 922,430 | 841,998 | ||||||
Property and equipment, net | 297,741 | 281,528 | ||||||
Goodwill | 6,571 | 6,571 | ||||||
Deferred tax assets, net | 17,668 | 18,556 | ||||||
Other long-term assets | 63,782 | 59,838 | ||||||
Total assets | $ | 1,308,192 | $ | 1,208,491 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 57,235 | $ | 38,169 | ||||
Accrued compensation and related benefits | 56,307 | 45,840 | ||||||
Other accrued liabilities | 74,367 | 62,960 | ||||||
Total current liabilities | 187,909 | 146,969 | ||||||
Income tax liabilities | 37,062 | 37,062 | ||||||
Other long-term liabilities | 61,644 | 57,873 | ||||||
Total liabilities | 286,615 | 241,904 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock and additional paid-in capital: $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 45,737 and 45,267, respectively | 699,359 | 657,701 | ||||||
Retained earnings | 315,206 | 298,746 | ||||||
Accumulated other comprehensive income | 7,012 | 10,140 | ||||||
Total stockholders’ equity | 1,021,577 | 966,587 | ||||||
Total liabilities and stockholders’ equity | $ | 1,308,192 | $ | 1,208,491 | ||||
MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | $ | 128,939 | $ | 106,456 | $ | 341,499 | $ | 285,047 | ||||||||
Cost of revenue | 58,083 | 48,531 | 154,377 | 130,686 | ||||||||||||
Gross profit | 70,856 | 57,925 | 187,122 | 154,361 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 21,442 | 20,472 | 60,629 | 55,669 | ||||||||||||
Selling, general and administrative | 25,255 | 22,397 | 73,219 | 61,696 | ||||||||||||
Litigation expense, net | 327 | 55 | 903 | 92 | ||||||||||||
Total operating expenses | 47,024 | 42,924 | 134,751 | 117,457 | ||||||||||||
Income from operations | 23,832 | 15,001 | 52,371 | 36,904 | ||||||||||||
Interest and other income, net | 1,255 | 780 | 3,873 | 1,920 | ||||||||||||
Income before income taxes | 25,087 | 15,781 | 56,244 | 38,824 | ||||||||||||
Income tax provision | 1,445 | 1,408 | 3,112 | 2,678 | ||||||||||||
Net income | $ | 23,642 | $ | 14,373 | $ | 53,132 | $ | 36,146 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.57 | $ | 0.35 | $ | 1.29 | $ | 0.90 | ||||||||
Diluted | $ | 0.54 | $ | 0.34 | $ | 1.22 | $ | 0.87 | ||||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic | 41,458 | 40,590 | 41,276 | 40,335 | ||||||||||||
Diluted | 43,486 | 41,895 | 43,384 | 41,752 | ||||||||||||
Cash dividends declared per common share | $ | 0.20 | $ | 0.20 | $ | 0.60 | $ | 0.60 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS
(in thousands)thousands, except per-share amounts)
(unaudited)(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 23,642 | $ | 14,373 | $ | 53,132 | $ | 36,146 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments, net of $0 tax in 2017 and 2016 | 1,500 | (52 | ) | 3,992 | (1,593 | ) | ||||||||||
Change in unrealized gain (loss) on available-for-sale securities, net of $0 tax in 2017 and 2016 | 222 | (13 | ) | 565 | 190 | |||||||||||
Total other comprehensive income (loss), net of tax | 1,722 | (65 | ) | 4,557 | (1,403 | ) | ||||||||||
Comprehensive income | $ | 25,364 | $ | 14,308 | $ | 57,689 | $ | 34,743 | ||||||||
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Revenue | $ | 254,455 | $ | 165,778 | ||||
Cost of revenue | 113,396 | 74,331 | ||||||
Gross profit | 141,059 | 91,447 | ||||||
Operating expenses: | ||||||||
Research and development | 41,892 | 25,956 | ||||||
Selling, general and administrative | 51,453 | 32,164 | ||||||
Litigation expense | 1,628 | 2,341 | ||||||
Total operating expenses | 94,973 | 60,461 | ||||||
Income from operations | 46,086 | 30,986 | ||||||
Other income (expense), net | 2,587 | (1,714 | ) | |||||
Income before income taxes | 48,673 | 29,272 | ||||||
Income tax expense (benefit) | 3,260 | (6,484 | ) | |||||
Net income | $ | 45,413 | $ | 35,756 | ||||
Net income per share: | ||||||||
Basic | $ | 1.00 | $ | 0.80 | ||||
Diluted | $ | 0.95 | $ | 0.77 | ||||
Weighted-average shares outstanding: | ||||||||
Basic | 45,498 | 44,455 | ||||||
Diluted | 47,711 | 46,670 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME
(in thousands)
(unaudited)(unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 53,132 | $ | 36,146 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization of intangible assets | 12,092 | 10,542 | ||||||
Loss on sales or write-off of property and equipment | - | 58 | ||||||
Amortization of premium on available-for-sale investments | 1,494 | 619 | ||||||
Gain on deferred compensation plan investments | (1,902 | ) | (1,097 | ) | ||||
Deferred taxes, net | - | 12 | ||||||
Excess tax benefits from equity awards | - | (1,078 | ) | |||||
Stock-based compensation expense | 40,759 | 34,241 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (16,505 | ) | (2,503 | ) | ||||
Inventories | (28,384 | ) | (7,522 | ) | ||||
Other assets | 1,696 | (10,869 | ) | |||||
Accounts payable | 4,999 | 5,713 | ||||||
Accrued compensation and related benefits | 4,542 | 6,549 | ||||||
Accrued liabilities | 7,276 | 4,308 | ||||||
Income tax liabilities | 1,249 | 1,668 | ||||||
Net cash provided by operating activities | 80,448 | 76,787 | ||||||
Cash flows from investing activities: | ||||||||
Property and equipment purchases | (25,108 | ) | (29,036 | ) | ||||
Purchases of short-term investments | (102,274 | ) | (147,055 | ) | ||||
Proceeds from maturities and sales of short-term investments | 61,678 | 140,733 | ||||||
Contributions to deferred compensation plan, net | (2,124 | ) | (2,314 | ) | ||||
Net cash used in investing activities | (67,828 | ) | (37,672 | ) | ||||
Cash flows from financing activities: | ||||||||
Property and equipment purchased on extended payment terms | (250 | ) | (150 | ) | ||||
Proceeds from exercise of stock options | 129 | 1,191 | ||||||
Proceeds from shares issued under the employee stock purchase plan | 2,701 | 2,463 | ||||||
Dividends and dividend equivalents paid | (25,264 | ) | (24,634 | ) | ||||
Excess tax benefits from equity awards | - | 1,078 | ||||||
Net cash used in financing activities | (22,684 | ) | (20,052 | ) | ||||
Effect of change in exchange rates | 1,785 | (444 | ) | |||||
Net increase (decrease) in cash and cash equivalents | (8,279 | ) | 18,619 | |||||
Cash and cash equivalents, beginning of period | 112,703 | 90,860 | ||||||
Cash and cash equivalents, end of period | $ | 104,424 | $ | 109,479 | ||||
Supplemental disclosures for cash flow information: | ||||||||
Cash paid for taxes and interest | $ | 1,855 | $ | 843 | ||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Liability accrued for property and equipment purchases | $ | 284 | $ | 197 | ||||
Liability accrued for dividends and dividend equivalents | $ | 10,131 | $ | 9,882 | ||||
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Net income | $ | 45,413 | $ | 35,756 | ||||
Other comprehensive loss, net of tax: | ||||||||
Foreign currency translation adjustments | (2,474 | ) | (2,882 | ) | ||||
Change in unrealized loss on available-for-sale securities, net of tax of $124 and $55, respectively | (654 | ) | (1,653 | ) | ||||
Other comprehensive loss, net of tax | (3,128 | ) | (4,535 | ) | ||||
Comprehensive income | $ | 42,285 | $ | 31,221 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
MONOLITHIC POWER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per-share amounts)
(unaudited)
Accumulated | ||||||||||||||||||||
Common Stock and | Other | Total | ||||||||||||||||||
Additional Paid-in Capital | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
Three Months Ended March 31, 2021 | Shares | Amount | Earnings | Income | Equity | |||||||||||||||
Balance as of January 1, 2021 | 45,267 | $ | 657,701 | $ | 298,746 | $ | 10,140 | $ | 966,587 | |||||||||||
Net income | - | 0 | 45,413 | 0 | 45,413 | |||||||||||||||
Other comprehensive loss | - | 0 | 0 | (3,128 | ) | (3,128 | ) | |||||||||||||
Dividends and dividend equivalents declared ($0.60 per share) | - | 0 | (28,953 | ) | 0 | (28,953 | ) | |||||||||||||
Common stock issued under the employee equity incentive plan | 460 | 10,744 | 0 | 0 | 10,744 | |||||||||||||||
Common stock issued under the employee stock purchase plan | 10 | 2,293 | 0 | 0 | 2,293 | |||||||||||||||
Stock-based compensation expense | - | 28,621 | 0 | 0 | 28,621 | |||||||||||||||
Balance as of March 31, 2021 | 45,737 | $ | 699,359 | $ | 315,206 | $ | 7,012 | $ | 1,021,577 | |||||||||||
Accumulated | ||||||||||||||||||||
Common Stock and | Other | Total | ||||||||||||||||||
Additional Paid-in Capital | Retained | Comprehensive | Stockholders’ | |||||||||||||||||
Three Months Ended March 31, 2020 | Shares | Amount | Earnings | Loss | Equity | |||||||||||||||
Balance as of January 1, 2020 | 43,616 | $ | 549,517 | $ | 229,450 | $ | (5,476 | ) | $ | 773,491 | ||||||||||
Net income | - | 0 | 35,756 | 0 | 35,756 | |||||||||||||||
Other comprehensive loss | - | 0 | 0 | (4,535 | ) | (4,535 | ) | |||||||||||||
Dividends and dividend equivalents declared ($0.50 per share) | - | 0 | (23,741 | ) | 0 | (23,741 | ) | |||||||||||||
Common stock issued under the employee equity incentive plan | 1,084 | 11,758 | 0 | 0 | 11,758 | |||||||||||||||
Common stock issued under the employee stock purchase plan | 15 | 1,892 | 0 | 0 | 1,892 | |||||||||||||||
Stock-based compensation expense | - | 18,569 | 0 | 0 | 18,569 | |||||||||||||||
Balance as of March 31, 2020 | 44,715 | $ | 581,736 | $ | 241,465 | $ | (10,011 | ) | $ | 813,190 | ||||||||||
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, | ||||||||
2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 45,413 | $ | 35,756 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 5,529 | 4,328 | ||||||
Amortization of premium on available-for-sale securities | 813 | 494 | ||||||
(Gain) loss on deferred compensation plan investments | (1,177 | ) | 3,750 | |||||
Deferred taxes, net | 1,004 | 3,412 | ||||||
Stock-based compensation expense | 28,583 | 18,562 | ||||||
Other | 5 | (1 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (17,236 | ) | (1,635 | ) | ||||
Inventories | (18,151 | ) | (3,994 | ) | ||||
Other assets | (2,215 | ) | (10,061 | ) | ||||
Accounts payable | 13,513 | 7,185 | ||||||
Accrued compensation and related benefits | 10,609 | (7,374 | ) | |||||
Income tax liabilities | 1,800 | 34 | ||||||
Other accrued liabilities | 8,567 | 963 | ||||||
Net cash provided by operating activities | 77,057 | 51,419 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (18,970 | ) | (9,951 | ) | ||||
Purchases of short-term investments | (201,517 | ) | (101,566 | ) | ||||
Proceeds from maturities and sales of short-term investments | 38,472 | 47,397 | ||||||
Proceeds from sales of long-term investments | 25 | 100 | ||||||
Contributions to deferred compensation plan, net | (876 | ) | (438 | ) | ||||
Net cash used in investing activities | (182,866 | ) | (64,458 | ) | ||||
Cash flows from financing activities: | ||||||||
Property and equipment purchased on extended payment terms | (563 | ) | (279 | ) | ||||
Proceeds from common stock issued under the employee equity incentive plan | 10,744 | 11,758 | ||||||
Proceeds from common stock issued under the employee stock purchase plan | 2,293 | 1,892 | ||||||
Dividends and dividend equivalents paid | (23,467 | ) | (17,427 | ) | ||||
Net cash used in financing activities | (10,993 | ) | (4,056 | ) | ||||
Effect of change in exchange rates | 218 | (985 | ) | |||||
Net decrease in cash, cash equivalents and restricted cash | (116,584 | ) | (18,080 | ) | ||||
Cash, cash equivalents and restricted cash, beginning of period | 335,071 | 173,076 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 218,487 | $ | 154,996 | ||||
Supplemental disclosures for cash flow information: | ||||||||
Cash paid for taxes | $ | 377 | $ | 279 | ||||
Non-cash investing and financing activities: | ||||||||
Liability accrued for property and equipment purchases | $ | 12,963 | $ | 10,909 | ||||
Liability accrued for dividends and dividend equivalents | $ | 29,000 | $ | 23,725 | ||||
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’sCompany’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K10-K for the year ended December 31, 2016, 2020, filed with the SEC on March 1, 2017.2021.
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’sCompany’s financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Quarterly Report on Form 10-Q10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 20172021 or for any other future periods.
Summary of Significant Accounting Policies
Other than
Use of Estimates
The preparation of financial statements in conformity with 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 discussed in “Recent Accounting Pronouncements” below, there have been no changesrelated to revenue recognition, inventory valuation, valuation of share-based awards, contingencies and income tax valuation allowances. Actual results could differ from these estimates and assumptions, and any such differences may be material to the Company’s significant accounting policies duringCompany’s condensed consolidated financial statements.
The COVID-19 pandemic has significantly affected the global economy and is disrupting business operations worldwide for an unknown period of time until the disease is contained. Although these events did not adversely affect the Company’s overall operating results and financial condition for the three or nine months ended September 30, 2017March 31, 2021, they could have a negative impact on the Company’s business operations in future periods. However, the Company is currently unable to predict 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 related to the COVID-19 pandemic that would require management to update the significant estimates and assumptions used in the preparation of the condensed 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, 2016.2020. As new events continue to evolve and additional information becomes available, any changes to these estimates and assumptions will be recognized in the condensed consolidated financial statements as soon as they become known.
Recent Accounting Pronouncements
Stock-Based Compensation:
Recently Adopted Accounting Pronouncement
In March 2016, December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,2019-12, Compensation—Stock CompensationIncome Taxes (Topic 718)740): Improvements to Employee Share-Based PaymentSimplifying the Accounting for Income Taxes, which changed how entities accounteliminates certain exceptions related to the approach for certainintra-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 share-based payment awards, including the accounting for excess tax benefits and tax deficiencies, forfeitures, statutory tax withholding requirements, as well as classification of excess tax benefits in the statements of cash flows.income taxes. The standard is effective for annual reporting periods beginning after December 15, 2020. The standard is generally applied prospectively, with certain exceptions. The Company adopted the standard on January 1, 2017in the first quarter of 2021 and the primaryadoption did not have a material impact on its condensed consolidated financial 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 accounted for 97% and 98% of the adoption was as follows:Company’s total revenue for the three months ended March 31, 2021 and 2020, 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 7 for the disaggregation of the Company’s revenue by geographic regions and by product families.
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9 The Company sells its products primarily through third-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, 2021 and 2020, 89% and 80%, 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 |
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Revenue Recognition:
In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard’s core principleunit price as stated on the purchase orders is that an entity will recognizeconsidered the observable, stand-alone selling price for the arrangements.
The Company recognizes revenue when it transferssatisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration to which the entityCompany expects to be entitled to in exchange for those goods or services. The standard will be effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016.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 does not plan to early adopt,recognizes product revenue from distributors and accordingly,direct end customers when the following events have occurred: (a) the Company will adopthas transferred physical possession of the new standard effective January 1, 2018.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.
The primary effects of the new standardVariable Consideration
The Company accounts for the Company relate to the timing of revenue recognition with three U.S.-based distributors. Sales to these distributors are transacted under the terms of agreements providing price adjustment and other rights. The Company determinesstock rotation rights as variable consideration that uncertainties onreduces the salestransaction price exist under these arrangements primarily becauseand recognizes that reduction in the amount ofsame period the associated revenue is recognized. Four U.S.-based distributors have price adjustmentsadjustment rights when they sell the Company’s products to be claimedtheir end customers at a price that is lower than the distribution price invoiced by the distributors is not fixed or determinable. As a result, revenue and costs related to these sales are deferred untilCompany. When the Company receives notificationclaims from the distributors that products have been sold to the end customers and the amount of price adjustments is finalized. Under the new standard, the transaction price takes into consideration the effect of variable consideration such as price adjustments, which are estimated and recorded at the time the promised goods are transferred to the customers. Accordingly,lower price, the Company will be required to recognize revenue at the time of shipment toissues the distributors adjustedcredit memos for an estimate ofthe price adjustments. The Company estimates the price adjustments using the expected value method based on an analysis of historical dataclaims, at both the distributor and other information available at the time. For the threeproduct level, as well as an assessment of any known trends of product sales mix. Other U.S. distributors and nine months ended September 30, 2017, the Company recognized $2.2 million and $5.9 million of revenue net of the final price adjustments, respectively, from the U.S.-based distributors for products that have been sold to the end customers. As of September 30, 2017, the deferred revenue balance, before the final price adjustments, was $2.7 million for products held by the U.S.-based distributors that have not been sold to the end customers.
Revenue from non-U.S. distributors, which make up the majority of the Company’sCompany’s total sales to distributors, is currently recognized atdo not have price adjustment rights. The Company records a credit against accounts receivable for the time of shipment to the distributors because these arrangements do not containestimated price adjustments, or other amountswith a corresponding reduction to revenue.
Certain distributors have limited stock rotation rights that are not fixed or determinable. Accordingly, revenue recognition on arrangements with non-U.S. distributors will remain substantially unchanged upon adoptionpermit the return of a small percentage of the new standard.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.
While the Company continues to assess the impact of the new standard, it currently does not expect the adoption of the new standard to have a material impact on its financial statements. The new standard will require the Company to include expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used by management.Contract Balances
Accounts Receivable:
The newCompany records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of March 31, 2021 and December 31, 2020, accounts receivable totaled $84.1 million and $66.8 million, respectively. The Company's accounts receivable are short-term, with standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company currently planspayment terms generally ranging from 30 to adopt the new standard using the modified retrospective method.
Other:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires entities to recognize a right-of-use asset and a lease liability on the balance sheets for substantially all leases with a lease term greater than 12 months, including leases currently accounted for as operating leases. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted.90 days. The Company is evaluatingdoes not require its customers to provide collateral to support accounts receivable. The Company assesses the impactcollectability by reviewing accounts receivable on a customer-by-customer basis. To manage credit risk, management performs ongoing credit evaluations of the adoption on its consolidatedcustomers’ financial position, resultscondition, monitors payment performance, and assesses current economic conditions, as well as reasonable and supportable forecasts of operations, cash flows and disclosures.
In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized costfuture economic conditions, that may affect collectability 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 applyoutstanding receivables. For certain high risk customers, the standard by recording a cumulative-effect adjustmentCompany requires standby letters of credit or advance payment prior to retained earnings.shipments of goods. The Company is evaluating the impactdid not recognize any write-offs of accounts receivable in any of the adoption on its consolidated financial position, resultsperiods presented. As of operations, cash flows March 31, 2021 and disclosures.
In January 2017,December 31, 2020, the FASB issued ASU No. 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the AccountingCompany did not record any allowance for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted after January 1, 2017. The Company is evaluating the impact of the adoption on its annual goodwill impairment test.credit losses.
Contract Liabilities:
2.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, 2021 and December 31, 2020, customer prepayments totaled $7.0 million and $7.2 million, respectively. The decrease in the customer prepayment balance for the three months ended March 31, 2021 resulted from a decrease in unfulfilled customer orders for which the Company has received payments. For the three months ended March 31, 2021, the Company recognized $6.7 million of revenue that was included in the customer prepayment balance as of December 31, 2020.
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 90 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 a quarter. The Company has elected not to determine whether contracts with customers contain significant financing components.
The Company’s unsatisfied performance obligations primarily include 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.
3. STOCK-BASED COMPENSATION
2014 Equity Incentive Plan (the “2014 Plan”)
TheIn April 2013, the Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”), which the Company's stockholders approved in AprilJune 2013 and the stockholders approved it in June 2013.. In October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The amended 2014 Plan as amended, became effective on November 13, 2014 and providesprovided for the issuance of up to 5.5 million shares. In April 2020, the Board of Directors further amended and restated the amended 2014 Plan (the “Amended and Restated 2014 Plan”), which the Company's stockholders approved in June 2020.The Amended and Restated 2014 Plan became effective on June 11, 2020 and provides for the issuance of up to 10.5 million shares. The Amended and Restated 2014 Plan will expire on November 13, 2024.June 11, 2030. As of September 30, 2017, 3.2March 31, 2021, 5.6 million shares remained available for future issuance under the Amended and Restated 2014 Plan.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expenses as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | |||||||||||||||||||
Cost of revenue | $ | 453 | $ | 403 | $ | 1,264 | $ | 1,217 | $ | 816 | $ | 557 | ||||||||||||
Research and development | 3,838 | 3,986 | 11,297 | 11,001 | 6,165 | 4,370 | ||||||||||||||||||
Selling, general and administrative | 9,678 | 9,127 | 28,198 | 22,023 | 21,602 | 13,635 | ||||||||||||||||||
Total | $ | 13,969 | $ | 13,516 | $ | 40,759 | $ | 34,241 | ||||||||||||||||
Total stock-based compensation expense | $ | 28,583 | $ | 18,562 | ||||||||||||||||||||
Tax benefit related to stock-based compensation (1) | $ | 430 | $ | 470 | ||||||||||||||||||||
(1) | Amount reflects 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. |
In the first quarter
Restricted Stock Units (“RSUs”) had not been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested RSUs and this credit was reflected in selling, general and administrative expenses for the nine months ended September 30, 2016.
RSUs
The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”), and RSUs with market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals.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 | Weighted-Average Grant Date Fair Value Per Share | PSUs and MPSUs | Weighted-Average Grant Date Fair Value Per Share | MSUs | Weighted-Average Grant Date Fair Value Per Share | Total | Weighted-Average Grant Date Fair Value Per Share | |||||||||||||||||||||||||
Outstanding at January 1, 2017 | 366 | $ | 51.35 | 2,284 | $ | 43.24 | 1,620 | $ | 23.57 | 4,270 | $ | 36.47 | ||||||||||||||||||||
Granted | 75 | $ | 92.53 | 645 | (1) | $ | 61.08 | - | $ | - | 720 | $ | 64.35 | |||||||||||||||||||
Released | (148 | ) | $ | 47.93 | (520 | ) | $ | 42.34 | - | $ | - | (668 | ) | $ | 43.57 | |||||||||||||||||
Forfeited | (14 | ) | $ | 62.01 | (5 | ) | $ | 49.82 | - | $ | - | (19 | ) | $ | 58.43 | |||||||||||||||||
Outstanding at September 30, 2017 | 279 | $ | 63.68 | 2,404 | $ | 48.20 | 1,620 | $ | 23.57 | 4,303 | $ | 39.93 | ||||||||||||||||||||
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 | |||||||||||||||||||||||||
Outstanding at January 1, 2021 | 161 | $ | 151.62 | 1,390 | $ | 132.60 | 1,554 | $ | 40.40 | 3,105 | $ | 87.42 | ||||||||||||||||||||
Granted | 25 | $ | 374.57 | 362 | (1) | $ | 351.85 | 0 | $ | 0 | 387 | $ | 353.33 | |||||||||||||||||||
Vested | (21 | ) | $ | 139.43 | (358 | ) | $ | 92.39 | (81 | ) | $ | 23.57 | (460 | ) | $ | 82.43 | ||||||||||||||||
Forfeited | (1 | ) | $ | 163.87 | (10 | ) | $ | 86.01 | (1 | ) | $ | 68.48 | (12 | ) | $ | 94.88 | ||||||||||||||||
Outstanding at March 31, 2021 | 164 | $ | 187.34 | 1,384 | $ | 200.75 | 1,472 | $ | 41.31 | 3,020 | $ | 122.26 | ||||||||||||||||||||
| Amount |
The intrinsic value related to RSUs released was $12.5 million and $10.6 million for the three months ended September 30, 2017 and 2016, respectively. The intrinsic value related to vested RSUs released was $61.3$159.3 million and $53.2$182.1 million for the ninethree months ended September 30, 2017 March 31, 2021 and 2016,2020, respectively. As of September 30, 2017, March 31, 2021, the total intrinsic value of all outstanding RSUs was $422.1 million,$1.0 billion, based on the closing stock price of $106.55.$353.21. As of September 30, 2017, March 31, 2021, unamortized compensation expense related to all outstanding RSUs was approximately $89.6$243.9 million with a weighted-average remaining recognition period of approximately three2.1 years.
Cash proceeds from vested PSUs with a purchase price requirement totaled $10.7 million and $11.8 million for the three months ended March 31, 2021 and 2020, respectively.
Time-Based RSUs:
For the ninethree months ended September 30, 2017, March 31, 2021, the Board of DirectorsCompensation Committee granted 75,00025,000 RSUs with time-based vestingservice 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.
20172021 PSUs:
In February 2017,2021, the Board of DirectorsCompensation Committee granted 200,00080,000 PSUs to the executive officers, which represent a target number of shares that can be earned subject to be awardedthe achievement of two sets of performance goals (“2021 Executive PSUs”). For the first goal, the executive officers can earn up to 300% of the target number of the 2021 Executive PSUs based on the achievement of the Company’s average two-year (2017two-year (2021 and 2018)2022) revenue growth rate compared against the analog industry’s average two-yeartwo-year revenue growth rate as published by the Semiconductor Industry Association (“2017 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2017 Executive PSUs.Association. 50% of the 20172021 Executive PSUs will vest in the first quarter of 20192023 if the pre-determined performance goals arerevenue goal is met during the performance period and approved by the Board of Directors.period. The remaining 20172021 Executive PSUs will vest over the following two years on a quarterly basis. Vesting isFor the second goal, the executive officers can earn an additional 100% of the target number of the 2021 Executive PSUs based on the achievement of certain environmental objectives under the environmental, social and governance (“ESG”) initiatives with a performance period through December 31, 2023. The 2021 Executive PSUs will fully vest upon achievement of the ESG goal, but no earlier than December 31, 2022. All vested shares under the ESG goal will be subject to the employees’ continued employment with the Company.a post-vesting sales restriction period of one year. Assuming the achievement of the highest level of the performance goals, the total stock-based compensation cost for the 20172021 Executive PSUs is approximately $36.3$114.4 million.
In February 2017,2021, the Board of DirectorsCompensation Committee granted 48,00014,000 PSUs to certain non-executive employees, which represent a target number of shares that can be earned subject to be awarded based onthe achievement of the Company’s 20182022 revenue goals for certain regions or product line divisions, or based on the achievement of the Company’s average two-year (2017two-year (2021 and 2018)2022) revenue growth rate compared against the analog industry’s average two-yeartwo-year revenue growth rate as published by the Semiconductor Industry Association (“2017(“2021 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 20172021 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 20172021 Non-Executive PSUs will vest in the first quarter of 20192023 if the pre-determined performance goals are met during the performance period and approved by the Board of Directors.period. The remaining 20172021 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 20172021 Non-Executive PSUs is approximately $7.1$12.5 million.
The 20172021 Executive PSUs and the 20172021 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. Shares that do not vest will not be subject to the The $30 purchase price payment.requirement is deemed satisfied and waived if the average stock price for 20 consecutive trading days at any time between the grant date and December 31, 2022 is $30 higher than the grant date stock price of $374.57. The Company determined the grant date fair value of the 20172021 Executive PSUs and the 20172021 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $89.37, expected term of 2.6 years, expected volatility of 28.6% and risk-free interest rate of 1.3%.
2015 MPSUs:
On December 31, 2015, the Board of Directors granted 127,000 MPSUs to the executive officers and certain key employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2015 MPSUs. The 2015 MPSUs consist of four separate tranches with various performance periods ending on December 31, 2019. The first tranche contains market conditions only, which require the achievement of five stock price targets ranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. As of September 30, 2017, all five price targets for the first tranche have been achieved.
The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of five stock price targets measured against a base price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading days immediately before the start of the measurement period for that tranche, or (2) the closing stock price immediately before the start of the measurement period for that tranche. The stock price targets for the second tranche range from $89.56 to $106.81 with a performance period from January 1, 2017 to December 31, 2019. As of September 30, 2017, four price targets for the second tranche have been achieved. The stock price targets for the third tranche will be determined on December 31, 2017 with a performance period from January 1, 2018 to December 31, 2019. The stock price targets for the fourth tranche will be determined on December 31, 2018 with a performance period from January 1, 2019 to December 31, 2019.
In addition, each of the second, third and fourth tranches requires the achievement of one of following six operating metrics:
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As of September 30, 2017, none of the operating metrics have been achieved.
Subject to the employees’ continued employment with the Company, the 2015 MPSUs will fully vest on January 1, 2020 if the pre-determined individual market and performance goals in each tranche are met during the performance periods and approved by the Board of Directors. In addition, the 2015 MPSUs contain post-vesting sales restrictions on the vested shares by employees for up to two years.
The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of $61.35,$374.57, simulation term of 4.0 years, expected volatility of 33.2%41.4%, risk-free interest rate of 1.3%0.3%, and expected dividend yield of 0.6%. In addition, the grant date fair value for the 2021 Executive PSUs subject to the ESG goal included an illiquidity discount of 7.8%9.8% to account for the post-vesting sales restrictions. In March 2016, the Company cancelled 13,000 2015 MPSUs as a result
2004 Employee Stock Purchase Plan (“ESPP”)
For the first tranche, stock-based compensation expense is being recognized over the requisite service period. For the second, third and fourth tranches, stock-based compensation expense for each tranche is recognized depending upon the number of the operating metrics management deems probable of being achieved during the performance periods in each reporting period. As of September 30, 2017, based on management’s quarterly assessment, three of the six operating metrics were considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranches over the requisite service period.
Stock Options
No options were granted for the three and nine months ended September 30, 2017 March 31, 2021 and 2016. No options were exercised for the three months ended September 30, 2017. Total intrinsic value of options exercised was $0.7 million for the three months ended September 30, 2016. Total intrinsic value of options exercised was $0.6 million2020, 10,000 and $3.2 million for the nine months ended September 30, 2017 and 2016, respectively. Cash proceeds from the exercise of stock options were $0.1 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was no unamortized compensation expense and outstanding options were not material.
Employee Stock Purchase Plan (“ESPP”)
For the three months ended September 30, 2017 and 2016, 18,000 and 24,000 shares, respectively, were issued under the ESPP. For the nine months ended September 30, 2017 and 2016, 40,000 and 53,00015,000 shares, respectively, were issued under the ESPP. As of September 30, 2017, 4.6March 31, 2021, 4.5 million shares were available for future issuance.issuance under the ESPP.
The intrinsic value of the shares issued was $0.5 million and $0.6 million for the three months ended September 30, 2017 and 2016, respectively. The intrinsic value of the shares issued was $1.4 million and $1.0 million for both the ninethree months ended September 30, 2017 March 31, 2021 and 2016.2020, respectively. As of September 30, 2017, March 31, 2021, the unamortized expense was $0.3$0.6 million, which will be recognized through the firstthird quarter of 2018.2021. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | |||||||||||||||||||
Expected term (years) | 0.5 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||||
Expected term (in years) | 0.5 | 0.5 | ||||||||||||||||||||||
Expected volatility | 23.5 | % | 27.5 | % | 23.5 | % | 28.6 | % | 43.3 | % | 31.4 | % | ||||||||||||
Risk-free interest rate | 1.2 | % | 0.5 | % | 0.9 | % | 0.4 | % | 0.1 | % | 1.6 | % | ||||||||||||
Dividend yield | 0.8 | % | 1.1 | % | 0.9 | % | 1.2 | % | 0.6 | % | 1.1 | % | ||||||||||||
Cash proceeds from the shares issued under the ESPP were $2.7$2.3 million and $2.5$1.9 million for the ninethree months ended September 30, 2017 March 31, 2021 and 2016,2020, respectively.
4. BALANCE SHEET COMPONENTS
3Inventories. BALANCE SHEET COMPONENTS
Inventories
Inventories consist of the following (in thousands):
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Raw materials | $ | 18,861 | $ | 14,599 | $ | 26,055 | $ | 25,503 | ||||||||
Work in process | 43,462 | 26,048 | 90,571 | 77,100 | ||||||||||||
Finished goods | 37,564 | 30,822 | 58,597 | 54,459 | ||||||||||||
Total | $ | 99,887 | $ | 71,469 | $ | 175,223 | $ | 157,062 | ||||||||
Other Current Assets
Other current assets consist of the following (in thousands):
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Prepaid wafer purchase | $ | 7,642 | $ | 5,000 | ||||
Other prepaid expense | 3,334 | 2,249 | ||||||
Interest receivable | 1,268 | 966 | ||||||
Other | 1,316 | 828 | ||||||
Total | $ | 13,560 | $ | 9,043 | ||||
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
RSU tax withholding proceeds receivable | $ | 11,428 | $ | 12,504 | ||||
Prepaid expense | 7,225 | 5,032 | ||||||
Accrued interest receivable | 2,126 | 1,914 | ||||||
Assets for product returns | 1,724 | 1,684 | ||||||
Other | 1,822 | 1,846 | ||||||
Total | $ | 24,325 | $ | 22,980 | ||||
Other Long-Term Assets
Other long-term assets consist of the following (in thousands):
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Deferred compensation plan assets | $ | 24,315 | $ | 20,288 | $ | 48,138 | $ | 46,146 | ||||||||
Prepaid wafer purchase | - | 5,000 | ||||||||||||||
Other prepaid expense | 1,010 | 1,117 | ||||||||||||||
Operating lease right-of-use (“ROU”) assets | 5,845 | 3,719 | ||||||||||||||
Prepaid expense | 2,503 | 2,340 | ||||||||||||||
Debt investment | 2,820 | 2,861 | ||||||||||||||
Equity investment in a privately held company | 3,180 | 3,400 | ||||||||||||||
Other | 1,193 | 1,006 | 1,296 | 1,372 | ||||||||||||
Total | $ | 26,518 | $ | 27,411 | $ | 63,782 | $ | 59,838 | ||||||||
Other Accrued Liabilities
Accrued Other accrued liabilities consist of the following (in thousands):
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Dividends and dividend equivalents | $ | 9,390 | $ | 8,946 | ||||
Deferred revenue and customer prepayments | 6,527 | 6,799 | ||||||
Stock rotation reserve | 3,358 | 1,937 | ||||||
Warranty | 2,507 | 1,030 | ||||||
Income tax payable | 1,750 | 1,239 | ||||||
Commissions | 1,035 | 1,008 | ||||||
Other | 2,312 | 1,957 | ||||||
Total | $ | 26,879 | $ | 22,916 | ||||
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Dividends and dividend equivalents | $ | 31,472 | $ | 26,435 | ||||
Stock rotation and sales returns | 6,240 | 6,005 | ||||||
Accrued purchases of property and equipment | 5,339 | 5,841 | ||||||
Income tax payable | 5,545 | 3,755 | ||||||
Customer prepayments | 6,998 | 7,238 | ||||||
Commissions | 1,252 | 1,107 | ||||||
Operating lease liabilities | 1,953 | 1,406 | ||||||
Warranty | 9,941 | 6,895 | ||||||
Other | 5,627 | �� | 4,278 | |||||
Total | $ | 74,367 | $ | 62,960 | ||||
A roll-forward of the warranty reserve is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Balance at beginning of period | $ | 2,627 | $ | 950 | $ | 1,030 | $ | 289 | ||||||||
Warranty provision for product sales | 129 | 107 | 2,431 | 926 | ||||||||||||
Settlements made | (161 | ) | (25 | ) | (710 | ) | (67 | ) | ||||||||
Unused warranty provision | (88 | ) | (41 | ) | (244 | ) | (157 | ) | ||||||||
Balance at end of period | $ | 2,507 | $ | 991 | $ | 2,507 | $ | 991 | ||||||||
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Deferred compensation plan liabilities | $ | 24,146 | $ | 19,836 | $ | 49,837 | $ | 48,280 | ||||||||
Dividend equivalents | 4,482 | 3,294 | 8,323 | 7,871 | ||||||||||||
Operating lease liabilities | 3,454 | 1,693 | ||||||||||||||
Other | 67 | 89 | 30 | 29 | ||||||||||||
Total | $ | 28,695 | $ | 23,219 | $ | 61,644 | $ | 57,873 | ||||||||
5. LEASES
4Lessee. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET
ThereThe Company has operating leases primarily for administrative and sales and marketing offices, manufacturing operations and research and development facilities, employee housing units and certain equipment. These leases have been no changes inremaining lease terms from less than a year to five years. Some of these leases include options to renew the balance of goodwill during the three and nine months ended September 30, 2017.lease term for up to two years or on a month-to-month basis. The Company does not have finance lease arrangements.
As of March 31, 2021 and December 31, 2020, operating lease ROU assets totaled $5.8 million and $3.7 million, respectively. As of March 31, 2021 and December 31, 2020, operating lease liabilities totaled $5.4 million and $3.1 million, respectively. The following tables summarize certain information related to the Acquisition-related intangible assets consistfollowingleases (in thousands)thousands, except percentages):
September 30, 2017 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Know-how | $ | 1,018 | $ | (653 | ) | $ | 365 | |||||
Developed technologies | 6,466 | (5,367 | ) | 1,099 | ||||||||
Total | $ | 7,484 | $ | (6,020 | ) | $ | 1,464 | |||||
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Lease costs: | ||||||||
Operating lease costs | $ | 499 | $ | 366 | ||||
Other | 121 | 77 | ||||||
Total lease costs | $ | 620 | $ | 443 | ||||
December 31, 2016 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Know-how | $ | 1,018 | $ | (500 | ) | $ | 518 | |||||
Developed technologies | 6,466 | (3,982 | ) | 2,484 | ||||||||
Total | $ | 7,484 | $ | (4,482 | ) | $ | 3,002 | |||||
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 312 | $ | 373 | ||||
ROU assets obtained in exchange for new operating lease liabilities | $ | 2,940 | $ | 277 | ||||
Amortization expense is recorded in cost of revenue in the Condensed Consolidated Statements of Operations. For both the three months ended September 30, 2017 and 2016, amortization expense totaled $0.5 million. For both the nine months ended September 30, 2017 and 2016, amortization expense totaled $1.5 million.
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Weighted-average remaining lease term (in years) | 3.6 | 2.7 | ||||||
Weighted-average discount rate | 2.3 | % | 2.7 | % | ||||
As of September 30, 2017, March 31, 2021, the estimatedmaturities of the lease liabilities were as follows (in thousands):
2021 (remaining nine months) | $ | 1,602 | ||
2022 | 1,582 | |||
2023 | 1,015 | |||
2024 | 829 | |||
2025 | 637 | |||
Thereafter | 8 | |||
Total remaining lease payments | 5,673 | |||
Less: imputed interest | (266 | ) | ||
Total lease liabilities | $ | 5,407 | ||
Reported as: | ||||
Current liabilities | $ | 1,953 | ||
Long-term liabilities | $ | 3,454 |
As of March 31, 2021, the Company had one operating lease that has not yet commenced with future amortization expenselease obligations of $4.0 million. The lease is expected to commence in the second half of 2021 with a contractual lease term of five years.
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 ranging from one year to four years. Some of these leases include options to renew the lease term for up to five years.
For the three months ended March 31, 2021 and 2020, income related to lease payments was $0.3 million and $0.4 million, respectively. As of March 31, 2021, future income related to lease payments was as follows (in thousands):
2017 (remaining three months) | $ | 513 | ||
2018 | 841 | |||
2019 | 110 | |||
Total | $ | 1,464 |
2021 (remaining nine months) | $ | 1,691 | ||
2022 | 2,241 | |||
2023 | 1,568 | |||
2024 | 581 | |||
2025 | 59 | |||
Total | $ | 6,140 |
5.6. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock,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 outstandingCompany’s 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 September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | |||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net income | $ | 23,642 | $ | 14,373 | $ | 53,132 | $ | 36,146 | $ | 45,413 | $ | 35,756 | ||||||||||||
Denominator: | ||||||||||||||||||||||||
Weighted-average outstanding shares used to compute basic net income per share | 41,458 | 40,590 | 41,276 | 40,335 | ||||||||||||||||||||
Weighted-average outstanding shares - basic | 45,498 | 44,455 | ||||||||||||||||||||||
Effect of dilutive securities | 2,028 | 1,305 | 2,108 | 1,417 | 2,213 | 2,215 | ||||||||||||||||||
Weighted-average outstanding shares used to compute diluted net income per share | 43,486 | 41,895 | 43,384 | 41,752 | ||||||||||||||||||||
Weighted-average outstanding shares - diluted | 47,711 | 46,670 | ||||||||||||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | 0.57 | $ | 0.35 | $ | 1.29 | $ | 0.90 | $ | 1.00 | $ | 0.80 | ||||||||||||
Diluted | $ | 0.54 | $ | 0.34 | $ | 1.22 | $ | 0.87 | $ | 0.95 | $ | 0.77 | ||||||||||||
Anti-dilutive common stock equivalents were not material in any of the periods presented.
6.7. 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 consumer, computing and storage, automotive, industrial, automotivecommunications and communicationsconsumer markets. The Company’sCompany’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 two those customers who are distributors with sales greater than equal to 10% or more of the Company's total revenue:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
Customer | 2017 | 2016 | 2017 | 2016 | 2021 | 2020 | ||||||||||||||||||
Distributor A | 17 | % | 22 | % | 17 | % | 22 | % | 26 | % | 23 | % | ||||||||||||
Distributor B | 15 | % | * | * | * | 16 | % | * | ||||||||||||||||
Direct customer A | * | 10 | % | |||||||||||||||||||||
The following table summarizes three customers who are distributors with accounts receivable balances greater than 10% of the Company’s total accounts receivable:
September 30, | December 31, | |||||||
Customer | 2017 | 2016 | ||||||
Distributor A | 17 | % | 19 | % | ||||
Distributor B | 16 | % | * | |||||
Distributor C | 12 | % | 17 | % | ||||
__________________
* Represents less than 10%.
The Company’sCompany’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 distributorscustomers 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 anyeither of thesethe distributors was terminated, the Company believes that such termination would not have a material adverse effect on its financial statements because it would be able to engage alternative distributors, resellers and other distribution channels to deliver its products to end customers within a short period following the termination of the agreement with the distributor. customer.
The following table summarizes those customers with accounts receivable equal to 10% or more of the Company’s total accounts receivable:
March 31, | December 31, | |||||||
Customer | 2021 | 2020 | ||||||
Distributor A | 25 | % | 24 | % | ||||
Distributor B | 18 | % | 21 | % | ||||
Value-added reseller A | 11 | % | 13 | % | ||||
Direct customer A | * | 10 | % | |||||
* Represents less than 10%.
The following is a summary of revenuerevenue by geographic regions (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
Country or Region | 2017 | 2016 | 2017 | 2016 | 2021 | 2020 | ||||||||||||||||||
China | $ | 66,645 | $ | 67,372 | $ | 185,054 | $ | 180,689 | $ | 153,383 | $ | 105,737 | ||||||||||||
Taiwan | 27,387 | 12,786 | 59,548 | 31,801 | 30,445 | 16,540 | ||||||||||||||||||
Europe | 10,726 | 7,193 | 28,227 | 21,232 | 20,380 | 13,072 | ||||||||||||||||||
Korea | 9,279 | 7,405 | 25,594 | 21,522 | ||||||||||||||||||||
South Korea | 19,287 | 10,944 | ||||||||||||||||||||||
Southeast Asia | 7,179 | 5,370 | 20,476 | 13,210 | 11,497 | 8,780 | ||||||||||||||||||
Japan | 4,813 | 4,084 | 14,584 | 9,771 | 12,049 | 6,890 | ||||||||||||||||||
United States | 2,781 | 2,164 | 7,711 | 6,613 | 7,302 | 3,737 | ||||||||||||||||||
Other | 129 | 82 | 305 | 209 | 112 | 78 | ||||||||||||||||||
Total | $ | 128,939 | $ | 106,456 | $ | 341,499 | $ | 285,047 | $ | 254,455 | $ | 165,778 | ||||||||||||
The following is a summary of revenue by product family (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
Product Family | 2017 | 2016 | 2017 | 2016 | 2021 | 2020 | ||||||||||||||||||
DC to DC | $ | 119,089 | $ | 95,615 | $ | 312,700 | $ | 256,953 | $ | 241,429 | $ | 156,875 | ||||||||||||
Lighting Control | 9,850 | 10,841 | 28,799 | 28,094 | 13,026 | 8,903 | ||||||||||||||||||
Total | $ | 128,939 | $ | 106,456 | $ | 341,499 | $ | 285,047 | $ | 254,455 | $ | 165,778 | ||||||||||||
The following is a summary of long-lived assets by geographic regions (in thousands):
September 30, | December 31, | March 31, | December 31, | |||||||||||||
Country | 2017 | 2016 | 2021 | 2020 | ||||||||||||
China | $ | 167,625 | $ | 151,752 | ||||||||||||
United States | $ | 61,447 | $ | 50,242 | 101,891 | 101,768 | ||||||||||
China | 46,175 | 45,728 | ||||||||||||||
Taiwan | 16,908 | 8,919 | 18,435 | 18,797 | ||||||||||||
Bermuda | 8,035 | 9,573 | ||||||||||||||
Other | 413 | 571 | 9,790 | 9,211 | ||||||||||||
Total | $ | 132,978 | $ | 115,033 | $ | 297,741 | $ | 281,528 | ||||||||
8. COMMITMENTS AND CONTINGENCIES
7Product Warranties. LITIGATION
The Company 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 warranty reserves are as follows (in thousands):
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Balance at beginning of period | $ | 6,895 | $ | 1,139 | ||||
Warranty provision for product sales | 3,609 | 541 | ||||||
Settlements made | (313 | ) | (111 | ) | ||||
Unused warranty provision | (250 | ) | (425 | ) | ||||
Balance at end of period | $ | 9,941 | $ | 1,144 | ||||
Purchase Commitments
The Company has outstanding purchase commitments with its suppliers and other parties that require the future purchases of goods or services, which primarily consist of wafer and other inventory purchases, assembly and other manufacturing services, construction or purchases of property and equipment, and license arrangements. As of March 31, 2021, the Company’s outstanding purchase obligations totaled approximately $152.2 million.
Litigation
The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its shareholders,stockholders, challenges to the enforceability or validity of its intellectual property, claims that the Company’sCompany’s products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The Company defends itself vigorously against any such claims.
As of September 30, 2017,March 31, 2021, there were no material pending legal proceedings to which the Company was a party.
8.9. CASH, CASH EQUIVALENTS, INVESTMENTS AND INVESTMENTSRESTRICTED CASH
The following is a summary of the Company’sCompany’s cash, cash equivalents and short-term and long-termdebt investments (in thousands):
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Cash, cash equivalents and investments: | ||||||||||||||||
Cash | $ | 91,674 | $ | 87,747 | $ | 197,744 | $ | 300,609 | ||||||||
Money market funds | 11,250 | 24,956 | 20,624 | 34,335 | ||||||||||||
Certificates of deposit | 106,763 | 0 | ||||||||||||||
Corporate debt securities | 180,551 | 109,644 | 306,201 | 249,671 | ||||||||||||
Commercial paper | 0 | 2,999 | ||||||||||||||
U.S. treasuries and government agency bonds | 16,123 | 45,877 | 7,491 | 7,499 | ||||||||||||
Auction-rate securities backed by student-loan notes | 5,368 | 5,354 | 2,820 | 2,861 | ||||||||||||
Total | $ | 304,966 | $ | 273,578 | $ | 641,643 | $ | 597,974 | ||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Reported as: | ||||||||||||||||
Cash and cash equivalents | $ | 104,424 | $ | 112,703 | 218,368 | 334,944 | ||||||||||
Short-term investments | 195,174 | 155,521 | 420,455 | 260,169 | ||||||||||||
Long-term investments | 5,368 | 5,354 | ||||||||||||||
Debt investment within other long-term assets | 2,820 | 2,861 | ||||||||||||||
Total | $ | 304,966 | $ | 273,578 | $ | 641,643 | $ | 597,974 | ||||||||
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, 2021 (in thousands):
September 30, | December 31, | |||||||||||||||
2017 | 2016 | Amortized Cost | Fair Value | |||||||||||||
Due in less than 1 year | $ | 70,798 | $ | 47,568 | $ | 89,085 | $ | 89,289 | ||||||||
Due in 1 - 5 years | 124,376 | 107,953 | 330,053 | 331,166 | ||||||||||||
Due in greater than 5 years | 5,368 | 5,354 | 2,995 | 2,820 | ||||||||||||
Total | $ | 200,542 | $ | 160,875 | $ | 422,133 | $ | 423,275 | ||||||||
Gross realized gains and losses recognized on the sales of 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):
September 30, 2017 | March 31, 2021 | |||||||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Total Fair Value | Fair Value of Investments in Unrealized Loss Position | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||
Money market funds | $ | 11,250 | $ | - | $ | - | $ | 11,250 | $ | - | $ | 20,624 | $ | 0 | $ | 0 | $ | 20,624 | ||||||||||||||||||
Certificates of deposit | 106,763 | 0 | 0 | 106,763 | ||||||||||||||||||||||||||||||||
Corporate debt securities | 180,791 | 122 | (362 | ) | 180,551 | 122,780 | 304,876 | 1,611 | (286 | ) | 306,201 | |||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 16,139 | - | (16 | ) | 16,123 | 13,873 | 7,499 | 0 | (8 | ) | 7,491 | |||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 5,570 | - | (202 | ) | 5,368 | 5,368 | 2,995 | 0 | (175 | ) | 2,820 | |||||||||||||||||||||||||
Total | $ | 213,750 | $ | 122 | $ | (580 | ) | $ | 213,292 | $ | 142,021 | $ | 442,757 | $ | 1,611 | $ | (469 | ) | $ | 443,899 | ||||||||||||||||
December 31, 2016 | December 31, 2020 | |||||||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Total Fair Value | Fair Value of Investments in Unrealized Loss Position | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||
Money market funds | $ | 24,956 | $ | - | $ | - | $ | 24,956 | $ | - | $ | 34,335 | $ | 0 | $ | 0 | $ | 34,335 | ||||||||||||||||||
Corporate debt securities | 110,429 | 65 | (850 | ) | 109,644 | 91,938 | 247,591 | 2,177 | (97 | ) | 249,671 | |||||||||||||||||||||||||
Commercial paper | 2,999 | 0 | 0 | 2,999 | ||||||||||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 45,899 | - | (22 | ) | 45,877 | 39,275 | 7,499 | 2 | (2 | ) | 7,499 | |||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 5,570 | - | (216 | ) | 5,354 | 5,354 | 3,020 | 0 | (159 | ) | 2,861 | |||||||||||||||||||||||||
Total | $ | 186,854 | $ | 65 | $ | (1,088 | ) | $ | 185,831 | $ | 136,567 | $ | 295,444 | $ | 2,179 | $ | (258 | ) | $ | 297,365 | ||||||||||||||||
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, 2021 | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Corporate debt securities | $ | 152,871 | $ | (286 | ) | $ | 0 | $ | 0 | $ | 152,871 | $ | (286 | ) | ||||||||||
U.S. treasuries and government agency bonds | 7,491 | (8 | ) | 0 | 0 | 7,491 | (8 | ) | ||||||||||||||||
Auction-rate securities backed by student-loan notes | 0 | 0 | 2,820 | (175 | ) | 2,820 | (175 | ) | ||||||||||||||||
Total | $ | 160,362 | $ | (294 | ) | $ | 2,820 | $ | (175 | ) | $ | 163,182 | $ | (469 | ) | |||||||||
December 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 | $ | 59,144 | $ | (97 | ) | $ | 0 | $ | 0 | $ | 59,144 | $ | (97 | ) | ||||||||||
U.S. treasuries and government agency bonds | 5,998 | (2 | ) | 0 | 0 | 5,998 | (2 | ) | ||||||||||||||||
Auction-rate securities backed by student-loan notes | 0 | 0 | 2,861 | (159 | ) | 2,861 | (159 | ) | ||||||||||||||||
Total | $ | 65,142 | $ | (99 | ) | $ | 2,861 | $ | (159 | ) | $ | 68,003 | $ | (258 | ) | |||||||||
An impairment exists when the fair value of an investment is less than its amortized cost basis. As of March 31, 2021 and December 31, 2020, the Company did not consider the impairment of its investments to be a result of credit losses. 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 25 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 $40.3 million, or 93% of the original portfolio in these auction-rate securities, at par without any realized losses.
Non-Marketable Equity Investment
In November 2020, the Company made an equity investment in a privately held Swiss company (the “Investee”) that is accounted for under the measurement alternative. One member of the Company’s Board of Directors is an executive officer of a company that has a commercial relationship with the Investee. In addition, the Company’s Chief Executive Officer has a personal investment in the Investee. As of March 31, 2021 and December 31, 2020, the Company’s investment in the Investee, which is denominated in CHF, had a carrying value of $3.2 million and $3.4 million, respectively. The Company did not record any impairment or adjustments resulting from observable price changes for the three months ended March 31, 2021.
9Restricted Cash. FAIR VALUE MEASUREMENTS
The following table detailsprovides 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 (in thousands):
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Cash and cash equivalents | $ | 218,368 | $ | 334,944 | ||||
Restricted cash included in other long-term assets | 119 | 127 | ||||||
Total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Statements of Cash Flows | $ | 218,487 | $ | 335,071 | ||||
As of March 31, 2021 and December 31, 2020, 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 upon the expiration of the lease.
10. FAIR VALUE MEASUREMENTS
The following tables summarize the fair value measurement of the financial assets measured on a recurring basis (in thousands):
Fair Value Measurement at September 30, 2017 | March 31, 2021 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Money market funds | $ | 11,250 | $ | 11,250 | $ | - | $ | - | $ | 20,624 | $ | 20,624 | $ | 0 | $ | 0 | ||||||||||||||||
Certificates of deposit | 106,763 | 0 | 106,763 | 0 | ||||||||||||||||||||||||||||
Corporate debt securities | 180,551 | - | 180,551 | - | 306,201 | 0 | 306,201 | 0 | ||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 16,123 | - | 16,123 | - | 7,491 | 0 | 7,491 | 0 | ||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 5,368 | - | - | 5,368 | 2,820 | 0 | 0 | 2,820 | ||||||||||||||||||||||||
Mutual funds under deferred compensation plan | 13,097 | 13,097 | - | - | ||||||||||||||||||||||||||||
Mutual funds and money market funds under deferred compensation plan | 28,252 | 28,252 | 0 | 0 | ||||||||||||||||||||||||||||
Total | $ | 226,389 | $ | 24,347 | $ | 196,674 | $ | 5,368 | $ | 472,151 | $ | 48,876 | $ | 420,455 | $ | 2,820 | ||||||||||||||||
Fair Value Measurement at December 31, 2016 | December 31, 2020 | |||||||||||||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Money market funds | $ | 24,956 | $ | 24,956 | $ | - | $ | - | $ | 34,335 | $ | 34,335 | $ | 0 | $ | 0 | ||||||||||||||||
Corporate debt securities | 109,644 | - | 109,644 | - | 249,671 | 0 | 249,671 | 0 | ||||||||||||||||||||||||
Commercial paper | 2,999 | 0 | 2,999 | 0 | ||||||||||||||||||||||||||||
U.S. treasuries and government agency bonds | 45,877 | - | 45,877 | - | 7,499 | 0 | 7,499 | 0 | ||||||||||||||||||||||||
Auction-rate securities backed by student-loan notes | 5,354 | - | - | 5,354 | 2,861 | 0 | 0 | 2,861 | ||||||||||||||||||||||||
Mutual funds under deferred compensation plan | 12,108 | 12,108 | - | - | ||||||||||||||||||||||||||||
Mutual funds and money market funds under deferred compensation plan | 26,924 | 26,924 | 0 | 0 | ||||||||||||||||||||||||||||
Total | $ | 197,939 | $ | 37,064 | $ | 155,521 | $ | 5,354 | $ | 324,289 | $ | 61,259 | $ | 260,169 | $ | 2,861 | ||||||||||||||||
_________________
● | Level 1 |
● | Level 2 |
● | Level 3 |
The Company’s level 3 assets consist of government-backed student loan auction-rate securities, which became illiquidRedemptions and changes in 2008. The following table provides a rollforward of the fair value of the auction-rate securities (in thousands):
Balance at January 1, 2017 | $ | 5,354 | ||
Change in unrealized gain included in other comprehensive income | 14 | |||
Balance at September 30, 2017 | $ | 5,368 |
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, | |||||||||
2017 | 2016 | |||||||||
Time-to-liquidity (months) | 24 | 24 | ||||||||
Discount rate | 40% | - | 9.0% | 4.3% | - | 9.3% | ||||
10. DEFERRED COMPENSATION PLAN
The Company has a non-qualified, unfunded deferred compensation plan, which provides certain key employees, including executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax deferred basis. The Company does classified as Level 3 assets were not make contributions to the plan or guarantee returns on the investments. The Company is responsible material for the plan’s administrative expenses. Participants’ deferrals and investment gains and losses remain as the Company’s liabilities and the underlying assets are subject to claims of general creditors.three months ended March 31, 2021.
11. DEFERRED COMPENSATION PLAN
The liabilities for compensation deferred under the plan are recorded at fair value in each reporting period. Changes in the fair value of the liabilities are included in operating expense in the Condensed Consolidated Statements of Operations. The Company manages the risk of changes in the fair value of the liabilities by electing to match the liabilities with investments in corporate-owned life insurance policies and mutual funds that offset a substantial portion of the exposure. The investments are recorded at the cash surrender value of the corporate-owned life insurance policies and at the fair value of the mutual funds, which are classified as trading securities. Changes in the cash surrender value of the corporate-owned life insurance policies and the fair value of mutual fund investments are included in interest and other income, net in the Condensed Consolidated Statements of Operations.The following table summarizes the deferred compensation plan balances inon the Condensed Consolidated Balance Sheets (in thousands):
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Deferred compensation plan asset components: | ||||||||||||||||
Cash surrender value of corporate-owned life insurance policies | $ | 11,218 | $ | 8,180 | $ | 19,886 | $ | 19,222 | ||||||||
Fair value of mutual funds | 13,097 | 12,108 | ||||||||||||||
Fair value of mutual funds and money market funds | 28,252 | 26,924 | ||||||||||||||
Total | $ | 24,315 | $ | 20,288 | $ | 48,138 | $ | 46,146 | ||||||||
Deferred compensation plan assets reported in: | ||||||||||||||||
Other long-term assets | $ | 24,315 | $ | 20,288 | $ | 48,138 | $ | 46,146 | ||||||||
Deferred compensation plan liabilities reported in: | ||||||||||||||||
Accrued compensation and related benefits (short-term) | $ | 341 | $ | 479 | $ | 396 | $ | 155 | ||||||||
Other long-term liabilities | 24,146 | 19,836 | 49,837 | 48,280 | ||||||||||||
Total | $ | 24,487 | $ | 20,315 | $ | 50,233 | $ | 48,435 | ||||||||
11. INTEREST AND12. OTHER INCOME (EXPENSE), NET
The components of interest and other income (expense), net, are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | |||||||||||||||||||
Interest income | $ | 1,346 | $ | 585 | $ | 3,938 | $ | 1,595 | $ | 2,282 | $ | 2,374 | ||||||||||||
Amortization of premium on available-for-sale investments | (490 | ) | (252 | ) | (1,494 | ) | (619 | ) | ||||||||||||||||
Gain on deferred compensation plan investments | 636 | 488 | 1,902 | 1,097 | ||||||||||||||||||||
Foreign currency exchange loss | (237 | ) | (48 | ) | (473 | ) | (170 | ) | ||||||||||||||||
Amortization of premium on available-for-sale securities | (813 | ) | (494 | ) | ||||||||||||||||||||
Gain (loss) on deferred compensation plan investments | 1,177 | (3,750 | ) | |||||||||||||||||||||
Foreign currency exchange gain | 15 | 3 | ||||||||||||||||||||||
Other | - | 7 | - | 17 | (74 | ) | 153 | |||||||||||||||||
Total | $ | 1,255 | $ | 780 | $ | 3,873 | $ | 1,920 | $ | 2,587 | $ | (1,714 | ) | |||||||||||
12.13. 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.
The income tax expense for the three and nine months ended September 30, 2017 March 31, 2021 was $1.4$3.3 million, or 5.8%6.7% of pre-tax income, and $3.1 million, or 5.5% of pre-tax income, respectively.income. The effective tax rate differed from the federal statutory rate primarily becausedue to foreign income generated byfrom the Company’s subsidiaries in Bermuda and China wasbeing taxed at lower rates. In addition,statutory tax rates, and excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was impactedpartially offset by changes in the valuation allowance primarily related to stock-based compensation.inclusion of the global intangible low-taxed income (“GILTI”) tax.
The income tax provisionbenefit for the three and nine months ended September 30, 2016 March 31, 2020 was $1.4$6.5 million, or 8.9%22.2% of pre-tax income, and $2.7 million, or 6.9% of pre-tax income, respectively. income. The effective tax rate differed from the federal statutory rate primarily becausedue to excess tax benefits from stock-based compensation, and foreign income generated byfrom the Company’s subsidiaries in Bermuda and China wasbeing taxed at lower statutory tax rates. In addition,The decrease in the effective tax rate relative to the federal statutory rate was impactedpartially offset by changes in the valuation allowance primarily related to stock-based compensation.inclusion of the GILTI tax.
On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued in December 2015, and the Internal Revenue Service (“IRS”) appealed the decision in February 2016. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in the cost pool to be shared under a cost-sharing arrangement. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any adjustments as of September 30, 2017. The Company will continue to monitor developments related to this opinion and the potential impact on its financial statements.
Adoption of ASU No. 2016-09
Upon adoption of ASU No. 2016-09 on January 1, 2017, excess tax benefits are now recognized in the income tax provision in the Condensed Consolidated Statements of Operations prospectively, rather than in additional paid-in capital in the Condensed Consolidated Balance Sheets. The Company applied the modified retrospective method and there was no net cumulative-effect adjustment to retained earnings on January 1, 2017, as the increase in deferred tax assets for previously unrecognized excess tax benefits was fully offset by a valuation allowance.
Unrecognized Tax Benefits
As of September 30, 2017, the Company had $16.1 million of unrecognized tax benefits, $4.5 million of which would affect its effective tax rate if recognized after considering the valuation allowance. As of December 31, 2016, the Company had $14.4 million of unrecognized tax benefits, $3.5 million of which would affect its effective tax rate if recognized after considering the valuation allowance.
UncertainCompany’s uncertain tax positions relate to the allocation of income and deductions among the Company’sits global entities and to the determination of the research and development tax credit. TheVarious 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 expects to release approximately $0.6 million ofincrease or decrease its unrecognizedreserves and effective income tax benefits in the fourth quarter of 2017 as a result of a lapse of the statute of limitation. It is reasonably possible thatrate over the next twelve-month period the Company may experience other increases or decreases in its unrecognized tax benefits.twelve months. However, it is not possible to determine either the magnitude or the range of other increases or decreases at this time.
The following table summarizes the changes in accumulated other comprehensive income Unrealized Losses on Available-for- Sale Securities Foreign Currency Translation Adjustments Total Balance as of January 1, 2017 Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current period other comprehensive income Balance as of March 31, 2017 Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current period other comprehensive income Balance as of June 30, 2017 Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive income Net current period other comprehensive income Balance as of September 30, 2017 Unrealized Gains on Available-for- Sale Securities Foreign Currency Translation Adjustments Total Balance as of January 1, 2021 Other comprehensive loss before reclassifications Amounts reclassified from accumulated other comprehensive income Tax effect Net current period other comprehensive loss Balance as of March 31, 2021 The amounts reclassified from accumulated other comprehensive income 15. DIVIDENDS AND DIVIDEND EQUIVALENTS Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31, 2017 2016 2017 2016 2021 2020 Dividend declared per share Total amount declared Total amount As of The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other things, the The Company anticipates that The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As13. ACCUMULATED14. ACCUMULATED OTHER COMPREHENSIVEINCOME (LOSS)(loss) (in thousands): $ (1,023 ) $ (3,192 ) $ (4,215 ) 202 1,306 1,508 - - - 202 1,306 1,508 (821 ) (1,886 ) (2,707 ) 144 1,186 1,330 (3 ) - (3 ) 141 1,186 1,327 (680 ) (700 ) (1,380 ) 217 1,500 1,717 5 - 5 222 1,500 1,722 $ (458 ) $ 800 $ 342 $ 1,601 $ 8,539 $ 10,140 (754 ) (2,474 ) (3,228 ) (24 ) 0 (24 ) 124 0 124 (654 ) (2,474 ) (3,128 ) $ 947 $ 6,065 $ 7,012 (loss) were recorded in interest and other income (expense), net, inon the Condensed Consolidated Statements of Operations.14Cash Dividend Program. STOCK REPURCHASEIn February 2016,The Company has a dividend program approved by the Board of Directors, approved a stock repurchase program (the “2016 Program”) that authorized the Company to repurchase up to $50 million in the aggregate of its common stock through December 31, 2016. In December 2016, the Board of Directors approved an extension of the 2016 Program through December 31, 2017.For the three and nine months ended September 30, 2017 and 2016, the Company did not repurchase any shares under the 2016 Program. As of September 30, 2017, $50 million remained available for future repurchases. Shares will be retired upon repurchase.15. DIVIDENDS AND DIVIDEND EQUIVALENTSCash Dividend ProgramIn 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 ourthe 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): $ 0.20 $ 0.20 $ 0.60 $ 0.60 $ 0.60 $ 0.50 $ 8,301 $ 8,132 $ 24,822 $ 24,275 $ 27,393 $ 22,317 September 30, 2017 March 31, 2021 and December 31, 2016,2020, accrued dividends totaled $8.3$27.4 million and $8.2$22.6 million, respectively.Company’sCompany’s financial condition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, compliance with the terms of future indebtedness and credit facilities and other factors that the Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of the stockholders.the cash used for future dividendsdividend payments will come from its current domestic cash, and cash generated from ongoing U.S. operations. Ifoperations, and cash held by the Company’s internationalrepatriated from its Bermuda subsidiary. The Company also anticipates that earnings from other foreign subsidiaries is needed for the payment of dividends, the Company maywill continue to be required to accrue and pay U.S. taxes to repatriate the funds under the current tax laws.
Cash Dividend Equivalent Rights
Under the Company’s stock plans, 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 September 30, 2017 March 31, 2021 and December 31, 2016,2020, accrued dividend equivalents totaled $5.6$12.4 million and $4.1$11.7 million, respectively.
16. SUBSEQUENT EVENT
In October 2017, the Company entered into agreements to purchase office space in Shanghai, China and Hangzhou, China for approximately $14.4 million and $16.0 million, respectively. The Company closed both transactions by early November 2017.
ITEM2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among other things,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 above-average industry growth of product and market areas that we have targeted,
• | the continuing application of our products in the computing and storage, automotive, industrial, communications and consumer markets, |
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,
• | estimates of our future liquidity requirements, |
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 cyclical nature of the semiconductor industry, |
the effect that liquidity of our investments has on our capital resources,
• | the effects of the COVID-19 pandemic on the global economy, the semiconductor industry and our business; | |
• | protection of our proprietary technology, |
the continuing application of our products in the consumer, computing and storage, industrial, automotive and communications markets,
• | business outlook for the remainder of 2021 and beyond, | |
• | the factors that we believe will impact our business, operations and financial condition, as well as our ability to achieve revenue growth, | |
• | the percentage of our total revenue from various end markets, | |
• | our ability to identify, acquire and integrate companies, businesses and products, and achieve the anticipated benefits from such acquisitions and integrations, |
estimates of our future liquidity requirements,
the cyclical nature of the semiconductor industry,
protection of our proprietary technology,
business outlook for the remainder of 2017 and beyond,
the factors that we believe will impact our ability to achieve revenue growth,
the percentage of our total revenue from various market segments,
our ability to identify, acquire and integrate the companies, businesses and products that we acquire and achieve the anticipated benefits from such acquisitions,
our intention and ability to repurchase shares under our stock repurchase program and pay future cash dividends, and
the factors that differentiate us from our competitors.
• | the impact of various tax laws and regulations on our income tax provision, financial position and cash flows, | |
• | our plan to repatriate cash from our subsidiary in Bermuda, | |
• | our intention and ability to pay future cash dividends and dividend equivalents, and | |
• | the factors that differentiate us from our competitors. |
In some cases, words such as “would,” “could,” “may,” “should,” “predict,” “potential,” “targets,” “continue,” “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “will,” the negative of these terms or other variations of such terms and similar expressions relating to the future identify forward-looking statements. All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans or objectives about our business and our industry.industry, including our expectations regarding the potential impacts of the COVID-19 pandemic on our business. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events or results could differ materially and adversely from those expressed in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this Quarterly Report on Form 10-Q and, in particular, in the section entitled “Item 1A. Risk Factors.” Except as required by law, we disclaim any duty to, and undertake no obligation to, update any forward-looking statements, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that we file from time to time with the Securities and Exchange Commission,SEC, such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
The following management’s discussion and analysis should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2017 included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year ended December 31, 2016 included in our Annual Report on Form 10-K.
Overview
We are a leading semiconductor company that designs, develops and markets high-performance power solutions. FoundedIncorporated in 1997, MPS’sour core strengths include deep system-level and applications knowledge, strong analog design expertise and an innovative proprietary process technology.technologies. These combined strengths enable MPSus to deliver highly integrated monolithic products that offer energy efficient,energy-efficient, cost-effective, easy-to-use solutions for systems found in computing and storage, automotive, industrial, applications, telecommunication infrastructures, cloud computing, automotive,communications and consumer applications. Our mission is to reduce total energy consumption in our customers'customers’ systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy efficient,energy-efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.
We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term.
We work with third parties to manufacture and assemble our integrated circuits (“ICs”).ICs. This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.
Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up. Typical lead timetimes for orders is fewer than 90 days.are generally 16 to 26 weeks. These factors, combined with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer, make the forecasting of our orders and revenue difficult.
We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where theour products we produce are incorporated into end-user products. Our revenue from direct or indirect sales to customers in Asia was 89% and 91%90% for the three months ended September 30, 2017March 31, 2021 and 2016, and 89% and 90% for the nine months ended September 30, 2017 and 2016,2020, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the consumer, computing and storage, automotive, industrial, automotivecommunications and communicationsconsumer markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfullycontinue to secure manufacturing capacity.
Impact of COVID-19 on Our Business
Our primary focus is to continue to execute our business plan and mitigate the effect of the COVID-19 pandemic on our financial position and operations, while actively taking all necessary precautions to ensure the safety of our employees, our suppliers and our customers. The pandemic did not materially and adversely impact our overall operating results or business operations during the three months ended March 31, 2021. Some of the key developments and initiatives we implemented since the outbreak of the COVID-19 pandemic in March 2020 include, but are not limited to, the following:
● | Employees: |
Our top priority during the pandemic is protecting the health and safety of our employees. As governments continue to institute new guidelines on commercial operations, we continue to monitor new developments and work to ensure our compliance while also maintaining business continuity for essential operations. In the U.S. and certain international locations, we continue to implement work-from-home arrangements in accordance with local regulations. To date, we believe these arrangements have contributed to the health and safety of our employees and allowed us to successfully maintain business operations and customer relations. |
● | Facilities and Supply Chain: |
Our manufacturing facilities in China, Taiwan and South Korea are fully operational and have experienced minimal disruptions, as we continue to follow the proper guidance issued by governmental authorities. In addition, we have not experienced any major supply chain disruptions as a result of the pandemic. |
● | Customers: |
Overall, we did not experience an adverse impact on customer demand during the first quarter of 2021 as a result of the pandemic. Our revenue increased in all of our end markets compared to the same period in 2020. Furthermore, there were no significant delays in payments by our customers. However, we cannot provide assurance that we will not experience a material and adverse impact on customer demand for the remainder of 2021 as a result of the pandemic. |
● | Liquidity and Capital Resources: |
Our cash and investment balances remain strong and we continue to generate positive operating cash flows. We believe we have sufficient liquidity to satisfy our cash needs as we manage through the current uncertain environment. However, we will continue to monitor, evaluate and take action, as necessary, to preserve adequate liquidity to support our business for the remainder of 2021. |
We are actively working with our stakeholders, including customers, suppliers and employees, to address the impact of the pandemic. We will continue to monitor the situation, to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences. However, we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on the global economy, the semiconductor industry and our business. A prolonged economic slowdown as a result of the pandemic could materially and adversely impact our business, results of operations and financial condition for the remainder 2021 and beyond.
Cybersecurity Risk Management
We are committed to protecting our information technology (“IT”) assets, including computers, systems, corporate networks and sensitive data, from unauthorized access or attack. We have established an internal global IT policy handbook as well as IT security management control procedures designed to cover the following key areas:
| ● | Create information security awareness and define responsibilities among our employees and business partners; |
| ● | Implement controls to identify IT risks and monitor the use of our systems and information resources; |
| ● | Establish key policies and processes to adequately and timely respond to security threats; |
| ● | Maintain disaster recovery and business continuity plans; and |
| ● | Ensure compliance with applicable laws and regulations regarding the management of information security. |
We require all new employees to attend an IT security training orientation. In addition, on an as-needed basis, our IT team provides trainings and updates to employees related to our policies and procedures.
Our IT Steering Committee, which consists of our senior management and IT team, meets on a regular basis to review initiatives and projects to improve IT security, as well as resources and budgets for our cybersecurity compliance and education efforts.
Our Audit Committee of the Board of Directors, which consists of three independent members, is responsible for the oversight of our cybersecurity risk program. On a regular basis, the Audit Committee reviews reports and updates from our Chief Financial Officer about major risk exposures, their potential impact on our business operations, and management’s strategies to assess, monitor and mitigate those risks. The Audit Committee also provides updates of their oversight and findings to the Board of Directors.
We believe we have adequate resources and sufficient policies, procedures and oversight in place to identify and manage our IT security risks to our business operations. To date, we have not experienced any material information security breaches or incurred significant operating expenses related to information security breaches.
Critical Accounting Policies and Estimates
Other than those discussedIn preparing our condensed consolidated financial statements in “Recent Accounting Pronouncements” in Note 1accordance with GAAP, we are required to Condensed Consolidated Financial Statements, there have been no significant changesmake estimates, assumptions and judgments that affect the amounts reported in our critical accounting policiesfinancial statements and estimatesthe accompanying disclosures. Estimates and judgments used in the preparation of our condensed consolidated financial statements duringare, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, including demand for our products, economic conditions and other current and future events, such as the threeimpact of the COVID-19 pandemic. As of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require our management to update the significant estimates and nine months ended September 30, 2017,assumptions used in the preparation of the condensed consolidated financial statements, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.2020. As new events continue to evolve and additional information becomes available, any changes to these estimates and assumptions will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from these estimates and assumptions, and any such differences may be material to our condensed consolidated financial statements.
Results of Operations
The table below sets forth the data inon the Condensed Consolidated StatementsStatements of Operations as a percentage of revenue:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
(in thousands, except percentages) | (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 128,939 | 100.0 | % | $ | 106,456 | 100.0 | % | $ | 341,499 | 100.0 | % | $ | 285,047 | 100.0 | % | $ | 254,455 | 100.0 | % | $ | 165,778 | 100.0 | % | ||||||||||||||||||||||||
Cost of revenue | 58,083 | 45.0 | 48,531 | 45.6 | 154,377 | 45.2 | 130,686 | 45.8 | 113,396 | 44.6 | 74,331 | 44.8 | ||||||||||||||||||||||||||||||||||||
Gross profit | 70,856 | 55.0 | 57,925 | 54.4 | 187,122 | 54.8 | 154,361 | 54.2 | 141,059 | 55.4 | 91,447 | 55.2 | ||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 21,442 | 16.6 | 20,472 | 19.2 | 60,629 | 17.8 | 55,669 | 19.5 | 41,892 | 16.5 | 25,956 | 15.7 | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 25,255 | 19.6 | 22,397 | 21.0 | 73,219 | 21.4 | 61,696 | 21.6 | 51,453 | 20.2 | 32,164 | 19.4 | ||||||||||||||||||||||||||||||||||||
Litigation expense, net | 327 | 0.3 | 55 | - | 903 | 0.3 | 92 | 0.1 | ||||||||||||||||||||||||||||||||||||||||
Litigation expense | 1,628 | 0.6 | 2,341 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 47,024 | 36.5 | 42,924 | 40.2 | 134,751 | 39.5 | 117,457 | 41.2 | 94,973 | 37.3 | 60,461 | 36.5 | ||||||||||||||||||||||||||||||||||||
Income from operations | 23,832 | 18.5 | 15,001 | 14.2 | 52,371 | 15.3 | 36,904 | 13.0 | 46,086 | 18.1 | 30,986 | 18.7 | ||||||||||||||||||||||||||||||||||||
Interest and other income, net | 1,255 | 1.0 | 780 | 0.6 | 3,873 | 1.2 | 1,920 | 0.6 | ||||||||||||||||||||||||||||||||||||||||
Other income (expense), net | 2,587 | 1.0 | (1,714 | ) | (1.0 | ) | ||||||||||||||||||||||||||||||||||||||||||
Income before income taxes | 25,087 | 19.5 | 15,781 | 14.8 | 56,244 | 16.5 | 38,824 | 13.6 | 48,673 | 19.1 | 29,272 | 17.7 | ||||||||||||||||||||||||||||||||||||
Income tax provision | 1,445 | 1.2 | 1,408 | 1.3 | 3,112 | 0.9 | 2,678 | 0.9 | ||||||||||||||||||||||||||||||||||||||||
Income tax expense (benefit) | 3,260 | 1.3 | (6,484 | ) | (3.9 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net income | $ | 23,642 | 18.3 | % | $ | 14,373 | 13.5 | % | $ | 53,132 | 15.6 | % | $ | 36,146 | 12.7 | % | $ | 45,413 | 17.8 | % | $ | 35,756 | 21.6 | % | ||||||||||||||||||||||||
Revenue
The following table summarizes our revenue by end market, based on management’s assessment of available end market data:market:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
End Market | 2017 | % of Revenue | 2016 | % of Revenue | Change | 2017 | % of Revenue | 2016 | % of Revenue | Change | 2021 | % of Revenue | 2020 | % of Revenue | Change | |||||||||||||||||||||||||||||||||||||||||||||
(in thousands, except percentages) | (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Computing and storage | $ | 67,495 | 26.5 | % | $ | 51,957 | 31.3 | % | 29.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Automotive | 44,867 | 17.6 | 23,312 | 14.1 | 92.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 39,788 | 15.6 | 25,237 | 15.2 | 57.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Communications | 36,070 | 14.2 | 27,870 | 16.8 | 29.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | $ | 55,342 | 42.9 | % | $ | 43,646 | 41.0 | % | 26.8 | % | $ | 134,870 | 39.5 | % | $ | 115,763 | 40.6 | % | 16.5 | % | 66,235 | 26.1 | 37,402 | 22.6 | 77.1 | % | ||||||||||||||||||||||||||||||||||
Computing and storage | 29,020 | 22.5 | % | 23,463 | 22.1 | % | 23.7 | % | 74,103 | 21.7 | % | 57,157 | 20.1 | % | 29.6 | % | ||||||||||||||||||||||||||||||||||||||||||||
Industrial | 16,348 | 12.7 | % | 14,519 | 13.6 | % | 12.6 | % | 46,736 | 13.7 | % | 40,542 | 14.2 | % | 15.3 | % | ||||||||||||||||||||||||||||||||||||||||||||
Automotive | 12,857 | 10.0 | % | 8,640 | 8.1 | % | 48.8 | % | 38,042 | 11.1 | % | 23,906 | 8.4 | % | 59.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
Communications | 15,372 | 11.9 | % | 16,188 | 15.2 | % | (5.0 | )% | 47,748 | 14.0 | % | 47,679 | 16.7 | % | 0.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 128,939 | 100.0 | % | $ | 106,456 | 100.0 | % | 21.1 | % | $ | 341,499 | 100.0 | % | $ | 285,047 | 100.0 | % | 19.8 | % | $ | 254,455 | 100.0 | % | $ | 165,778 | 100.0 | % | 53.5 | % | ||||||||||||||||||||||||||||||
Revenue for the three months ended September 30, 2017March 31, 2021 was $128.9$254.5 million, an increase of $22.4$88.7 million, or 21.1%53.5%, from $106.5$165.8 million for the three months ended September 30, 2016. This increase was driven by higher sales in all of our end markets except for communications. Overall unit shipments increased by approximately 4% due to higher market demand with current customers and design wins with new customers, coupled with a 15% increase in average sales prices.
Revenue from the consumer market for the three months ended September 30, 2017 increased $11.7 million, or 26.8%, from the same period in 2016. This increase was primarily driven by higher demand in gaming and home appliance products. Revenue from the computing and storage market increased $5.6 million, or 23.7%, from the same period in 2016. This increase was primarily driven by strength in the solid-state drive storage and cloud computing markets. Revenue from the industrial market increased $1.8 million, or 12.6%, from the same period in 2016. This increase was primarily driven by higher sales in power source products. Revenue from the automotive market increased $4.2 million, or 48.8%, from the same period in 2016. This increase was primarily driven by higher sales in products for infotainment, safety and connectivity applications. Revenue from the communications market decreased $0.8 million, or 5.0%, from the same period in 2016. This decrease was primarily driven by lower demand in networking and telecommunication application markets.
Revenue for the nine months ended September 30, 2017 was $341.5 million, an increase of $56.5 million, or 19.8%, from $285.0 million for the nine months ended September 30, 2016.March 31, 2020. This increase was driven by higher sales in all of our end markets. Overall unit shipments increased by 8% due28% and average sales prices increased by approximately 17% compared to higher market demand with current customers and design wins with new customers, coupled with an 11%the same period in 2020. The increase in average sales prices.
Revenue from the consumer market for the nine months ended September 30, 2017 increased $19.1 million, or 16.5%, from the same period in 2016. This increaseprices was primarily driven by favorable changes in product mix with more sales coming from products with higher demand in gaming and home appliance products. Revenueunit prices.
For the three months ended March 31, 2021, revenue from the computing and storage market increased $16.9$15.5 million, or 29.6%29.9%, from the same period in 2016.2020. This increase was primarily driven by strength in the solid-state drive storage, high-performance notebook and cloud computingstorage markets. Revenue from the automotive market increased $21.6 million, or 92.5%, from the same period in 2020. This increase was primarily driven by sales growth for infotainment, safety and connectivity applications. Revenue from the industrial market increased $6.2$14.6 million, or 15.3%57.7%, from the same period in 2016.2020. This increase was primarily driven by higher sales in power source and point of sale systemsecurity products. Revenue from the automotivecommunications market increased $14.1$8.2 million, or 59.1%29.4%, from the same period in 2016.2020. This increase was primarily driven by higher sales in products for infotainment, safety and connectivity applications.increased infrastructure sales. Revenue from the communicationsconsumer market was essentially flat compared toincreased $28.8 million, or 77.1%, from the same period in 2016.2020. This increase was primarily driven by increased sales for gaming, appliances and mobile devices.
Cost of Revenue and Gross Margin
Cost of revenue primarily consists of costs incurred to manufacture, assemble and test our products, as well as warranty costs, inventory-related and other overhead costs, and stock-based compensation expenses. In addition, cost of revenue includes amortization for acquisition-related intangible assets.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||||||
Cost of revenue | $ | 58,083 | $ | 48,531 | 19.7 | % | $ | 154,377 | $ | 130,686 | 18.1 | % | ||||||||||||
As a percentage of revenue | 45.0 | % | 45.6 | % | 45.2 | % | 45.8 | % | ||||||||||||||||
Gross profit | $ | 70,856 | $ | 57,925 | 22.3 | % | $ | 187,122 | $ | 154,361 | 21.2 | % | ||||||||||||
Gross margin | 55.0 | % | 54.4 | % | 54.8 | % | 54.2 | % | ||||||||||||||||
Three Months Ended March 31, | ||||||||||||
2021 | 2020 | Change | ||||||||||
(in thousands, except percentages) | ||||||||||||
Cost of revenue | $ | 113,396 | $ | 74,331 | 52.6 | % | ||||||
As a percentage of revenue | 44.6 | % | 44.8 | % | ||||||||
Gross profit | $ | 141,059 | $ | 91,447 | 54.3 | % | ||||||
Gross margin | 55.4 | % | 55.2 | % | ||||||||
Cost of revenue was $58.1$113.4 million, or 45.0%44.6% of revenue, for the three months ended September 30, 2017,March 31, 2021, and $48.5$74.3 million, or 45.6%44.8% of revenue, for the three months ended September 30, 2016.March 31, 2020. The $9.6$39.1 million increase in cost of revenue was primarily due to a 4%28% increase in overall unit shipments coupled with an 18% increase in the average direct cost of units shipped.
Gross margin was 55.0% for the three months ended September 30, 2017, compared with 54.4% for the three months ended September 30, 2016. The increase in gross margin was primarily due to lower labor and manufacturing overhead costs as a percentage of revenue, partially offset by increased sales of lower margin products.
Cost of revenue was $154.4 million, or 45.2% of revenue, for the nine months ended September 30, 2017, and $130.7 million, or 45.8% of revenue, for the nine months ended September 30, 2016. The $23.7 million increase in cost of revenue was primarily due to an 8% increase in overall unit shipments, coupled with a 12%15% increase in the average direct cost of units shipped. The increase in cost of revenue was also driven by an increase of $1.7 million in warranty expenses and inventory write-downs.
Gross margin was 54.8%55.4% for the ninethree months ended September 30, 2017,March 31, 2021, compared with 54.2%55.2% for the ninethree months ended September 30, 2016.March 31, 2020. The increase in gross margin was primarily due to lower labormainly driven by a more favorable product mix, offset in part by higher warranty expenses and manufacturing overhead costsinventory write-downs as a percentage of revenue, partially offset by higher inventory write-downs.revenue.
Research and Development (“R&D”)
Research and development (“R&D”)&D expenses primarily consist of salary and benefit expenses, bonuses, and stock-based compensation expensesand deferred compensation for design and product engineers, expenses related to new product development and supplies, and facility costs.
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||
(in thousands, except percentages) | (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
R&D expenses | $ | 21,442 | $ | 20,472 | 4.7 | % | $ | 60,629 | $ | 55,669 | 8.9 | % | $ | 41,892 | $ | 25,956 | 61.4 | % | ||||||||||||||||||
As a percentage of revenue | 16.6 | % | 19.2 | % | 17.8 | % | 19.5 | % | 16.5 | % | 15.7 | % | ||||||||||||||||||||||||
R&D expenses were $21.4$41.9 million, or 16.6%16.5% of revenue, for the three months ended September 30, 2017March 31, 2021, and $20.5$26.0 million, or 19.2%15.7% of revenue, for the three months ended September 30, 2016.March 31, 2020. The $0.9$15.9 million increase in R&D expenses was primarily due to an increase of $0.9$7.9 million in compensation expenses, which include salary, benefits and bonuses. Our R&D headcount was 624 employees as of September 30, 2017, compared with 570 employees as of September 30, 2016.
R&D expenses were $60.6 million, or 17.8% of revenue, for the nine months ended September 30, 2017 and $55.7 million, or 19.5% of revenue, for the nine months ended September 30, 2016. The $4.9 million increase in R&D expenses was primarily due to an increase of $2.1 million incash compensation expenses, which include salary, benefits and bonuses, an increase of $1.2 million in laboratory supplies, an increase of $1.1$1.9 million in new product development expenses, an increase of $1.8 million in stock-based compensation expenses, which were mainly associated with performance-based equity awards, and an increase of $0.5$1.8 million in expenses related to changes in the value of the deferred compensation plan liabilities. Our R&D headcount was 909 employees as of March 31, 2021, compared with 837 employees as of March 31, 2020.
Selling, General and Administrative (“SG&A”)
Selling, general and administrative (“SG&A”)&A expenses primarily include salary and benefit expenses, bonuses, and stock-based compensation expensesand deferred compensation for sales, marketing and administrative personnel, sales commissions, travel expenses, facilities costs, and professional service fees.
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||
(in thousands, except percentages) | (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
SG&A expenses | $ | 25,255 | $ | 22,397 | 12.8 | % | $ | 73,219 | $ | 61,696 | 18.7 | % | $ | 51,453 | $ | 32,164 | 60.0 | % | ||||||||||||||||||
As a percentage of revenue | 19.6 | % | 21.0 | % | 21.4 | % | 21.6 | % | 20.2 | % | 19.4 | % | ||||||||||||||||||||||||
SG&A expenses were $25.3$51.5 million, or 19.6%20.2% of revenue, for the three months ended September 30, 2017March 31, 2021, and $22.4$32.2 million, or 21.0%19.4% of revenue, for the three months ended September 30, 2016.March 31, 2020. The $2.9$19.3 million increase in SG&A expenses was primarily due to an increase of $0.8 million in compensation expenses, which include salary, benefits and bonuses, an increase of $0.7 million in commission expenses due to higher revenue, an increase of $0.6$8.0 million in stock-based compensation expenses, which were mainly associated with the performance-based equity awards, and an increase of $0.4 million in depreciation expense. Our SG&A headcount was 378 employees as of September 30, 2017, compared with 350 employees as of September 30, 2016.
SG&A expenses were $73.2 million, or 21.4% of revenue, for the nine months ended September 30, 2017 and $61.7 million, or 21.6% of revenue, for the nine months ended September 30, 2016. The $11.5 million increase in SG&A expenses was primarily due to an increase of $3.3 million in stock-based compensation expenses mainly associated with the performance-based equity awards, an increase of $2.3$5.3 million in cash compensation expenses, which include salary, benefits and bonuses, an increase of $1.3 million in depreciation expense, an increase of $0.6$2.8 million in expenses related to changes in the value of the deferred compensation plan liabilities, and an increase of $0.5$1.6 million in commission expenses due todriven by higher revenue. In addition, contributing to the increase inOur SG&A expenses for the nine months ended September 30, 2017headcount was a stock-based compensation credit recorded in the nine months ended September 30, 2016 due to the retirement585 employees as of our then Chief Financial Officer in the first quarterMarch 31, 2021, compared with 513 employees as of 2016. As the service or performance conditions for her outstanding restricted stock units had not been satisfied at the time of her departure, we reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested restricted stock units and recorded the credit in SG&A expenses for the nine months ended September 30, 2016. March 31, 2020.
Litigation Expense, Net
Litigation expense was $0.3$1.6 million for the three months ended September 30, 2017,March 31, 2021, compared with $55,000 for the three months ended September 30, 2016. The increase in litigation expense was due to increased litigation activity.
Litigation expense was $0.9 million for the nine months ended September 30, 2017, compared with $92,000 for the nine months ended September 30, 2016. The increase in litigation expense was due to increased litigation activity. In addition, contributing to the increase in litigation expense was $0.2 million in proceeds received in connection with a litigation settlement recorded in the nine months ended September 30, 2016.
Interest and Other Income, Net
Interest and other income, net, was $1.3$2.3 million for the three months ended September 30, 2017, compared with $0.8March 31, 2020. The decrease was due to a decrease in litigation activity related to ongoing patent infringement and other matters.
Other Income (Expense), Net
Other income, net, was $2.6 million for the three months ended September 30, 2016.March 31, 2021, compared with other expense, net, of $1.7 million for the three months ended March 31, 2020. The increase was primarily due to an increase of $0.8 million in interest income, partially offset by an increase of $0.2 million in amortization of premium on available-for-sale investments and an increase of $0.2 million in foreign currency exchange loss.
Interest and other income, net, was $3.9 million for the nine months ended September 30, 2017, compared with $1.9 million for the nine months ended September 30, 2016. The increase was primarily due to an increase of $2.3 million in interest income and an increase of $0.8$4.9 million in income related to changes in the value of the deferred compensation plan investments, which was partially offset by an increase of $0.9$0.3 million in amortization of the premium on available-for-sale investments and an increase of $0.3 million in foreign currency exchange loss.securities.
Income Tax ProvisionExpense (Benefit)
The income tax provision or benefit for interim periods is generally determined using an estimate of our 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 our estimated tax rate changes, a cumulative adjustment is made.
The income tax expense for the three and nine months ended September 30, 2017March 31, 2021 was $1.4$3.3 million, or 5.8%6.7% of pre-tax income, and $3.1 million, or 5.5% of pre-tax income, respectively.income. The effective tax rate differed from the federal statutory rate primarily becausedue to foreign income generated byfrom our subsidiaries in Bermuda and China wasbeing taxed at lower rates. In addition,statutory tax rates, and excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was impactedpartially offset by changes in the valuation allowance primarily related to stock-based compensation.inclusion of the GILTI tax.
The income tax provisionbenefit for the three and nine months ended September 30, 2016March 31, 2020 was $1.4$6.5 million, or 8.9%22.2% of pre-tax income, and $2.7 million, or 6.9% of pre-tax income, respectively.income. The effective tax rate differeddiffered from the federal statutory rate primarily becausedue to excess tax benefits from stock-based compensation, and foreign income generated byfrom our subsidiaries in Bermuda and China wasbeing taxed at lower statutory tax rates. In addition,The decrease in the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation.
On July 27, 2015, inAltera Corp. v. Commissioner, the U.S. Tax Court issued an opinion relatedrelative to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decisionfederal statutory rate was issued in December 2015, andpartially offset by the IRS appealed the decision in February 2016. At this time, the U.S. Departmentinclusion of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in the cost pool to be shared under a cost-sharing arrangement. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any adjustments as of September 30, 2017. We will continue to monitor developments related to this opinion and the potential impact on our financial statements.GILTI tax.
Liquidity and Capital Resources
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
(in thousands, except percentages) | (in thousands, except percentages) | |||||||||||||||
Cash and cash equivalents | $ | 104,424 | $ | 112,703 | $ | 218,368 | $ | 334,944 | ||||||||
Short-term investments | 195,174 | 155,521 | 420,455 | 260,169 | ||||||||||||
Total cash, cash equivalents and short-term investments | $ | 299,598 | $ | 268,224 | $ | 638,823 | $ | 595,113 | ||||||||
Percentage of total assets | 49.5 | % | 52.5 | % | 48.8 | % | 49.2 | % | ||||||||
Total current assets | $ | 463,802 | $ | 382,984 | $ | 922,430 | $ | 841,998 | ||||||||
Total current liabilities | (66,168 | ) | (52,921 | ) | (187,909 | ) | (146,969 | ) | ||||||||
Working capital | $ | 397,634 | $ | 330,063 | $ | 734,521 | $ | 695,029 | ||||||||
As of September 30, 2017,March 31, 2021, we had cash and cash equivalents of $104.4$218.4 million and short-term investments of $195.2$420.5 million, compared with cash and cash equivalents of $112.7$334.9 million and short-term investments of $155.5$260.2 million as of December 31, 2016.2020. As of September 30, 2017, $74.8March 31, 2021, $103.5 million of cash and cash equivalents and $98.3$223.5 million of short-term investments were held by our international subsidiaries. If these funds are needed forFor the three months ended March 31, 2021, we repatriated $70 million of cash from our operations in the U.S., we may be requiredBermuda subsidiary to accrue and pay U.S. taxes to repatriate these funds under the current tax laws. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate these fundsThe proceeds will primarily be used to fund our U.S.ongoing business operations. We may repatriate additional cash from our Bermuda subsidiary to fund our expenditures in future periods. We anticipate that earnings from other foreign subsidiaries will continue to be indefinitely reinvested.
The significant components of our working capital are cash and cash equivalents, short-term investments,investments, accounts receivable, inventories and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of September 30, 2017,March 31, 2021, we had working capital of $397.6$734.5 million, compared with working capital of $330.1$695.0 million as of December 31, 2016.2020. The $67.5$39.5 million increase in working capital was due to an $80.8$80.4 million increase in current assets, which was partially offset by a $13.3$40.9 million increase in current liabilities. The increase in current assets was primarily due to an increase in short-term investments, accounts receivable and inventories, and prepaid expenses,which was partially offset by a decrease in cash and cash equivalents. The increase in current liabilities was primarily due to an increase in accounts payable, accrued compensation and related benefits and other accrued liabilities.
Summary of Cash Flows
The following table summarizes our cash flow activities:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Net cash provided by operating activities | $ | 80,448 | $ | 76,787 | $ | 77,057 | $ | 51,419 | ||||||||
Net cash used in investing activities | (67,828 | ) | (37,672 | ) | (182,866 | ) | (64,458 | ) | ||||||||
Net cash used in financing activities | (22,684 | ) | (20,052 | ) | (10,993 | ) | (4,056 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | 1,785 | (444 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | (8,279 | ) | $ | 18,619 | |||||||||||
Effect of change in exchange rates | 218 | (985 | ) | |||||||||||||
Net decrease in cash, cash equivalents and restricted cash | $ | (116,584 | ) | $ | (18,080 | ) | ||||||||||
For the ninethree months ended September 30, 2017,March 31, 2021, net cash provided by operating activities was $80.4$77.1 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $25.1$3.1 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily driven by higherincreased sales and outstanding balances with certain customers with longer payment terms.timing of shipments during the three months ended March 31, 2021. The increase in inventories was primarily driven by an increase in strategic wafer and die inventories as well as an increase in finished goods to meet current demand and future growth. The increase in accounts payable was primarily driven by increased inventory and capital asset purchases to meet future demand. The increase in accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensation plan and warranty expenses. For the ninethree months ended September 30, 2016,March 31, 2020, net cash provided by operating activities was $76.8$51.4 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $2.7$14.9 million from the changes in our operating assets and liabilities. The increase in other assets was primarily due to aan increase in prepaid wafer purchase agreement we funded in the second quarter of 2016.income taxes. The increase in inventories was primarily due todriven by an increase in strategic wafer and die inventories as well as an increase in finished goods to meet current demand and future growth. The increasedecrease in accounts payableaccrued compensation and related benefits was primarily driven by increased inventory and capital asset purchasesdue to meet future demand.
For the ninethree months ended September 30, 2017,March 31, 2021, net cash used in investing activities was $67.8$182.9 million, primarily due to net purchases of short-term investments of $40.6$163.0 million and purchases of property and equipment of $25.1 million, and net contributions to the deferred compensation plan of $2.1$19.0 million. For the ninethree months ended September 30, 2016,March 31, 2020, net cash used in investing activities was $37.7$64.5 million, primarily due to purchases of property and equipment of $29.0$10.0 million and net purchases of short-term investments of $6.3 million, and net contributions to the deferred compensation plan of $2.3$54.2 million.
During the first nine months of 2017, we funded the purchases of land in Kirkland, Washington, and land and office space in Taipei, Taiwan for $13.3 million. During the first nine months of 2016, we funded the purchases of a previously leased manufacturing facility in Chengdu, China, office space in Shenzhen, China, and land and office space in Taipei, Taiwan for $17.5 million.
For the ninethree months ended September 30, 2017,March 31, 2021, net cash used in financing activities was $22.7$11.0 million, primarily reflecting $25.3$23.5 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, which was partially offset by $2.8$13.0 million of cash proceeds from stock option exercisesthe vesting of RSUs and the issuance of shares through our employee stock purchase plan.ESPP. For the ninethree months ended September 30, 2016,March 31, 2020, net cash used in financing activities was $20.1$4.1 million, primarily reflecting $24.6$17.4 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, which was partially offset by $3.7$13.7 million of cash proceeds from stock option exercisesthe vesting of RSUs and the issuance of shares through our employee stock purchase plan.ESPP.
We have a dividend program pursuant to which we intend to pay quarterlyanticipate that cash dividends on our common stock. In addition, outstanding RSU awards contain rights to receive dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. For the nine months ended September 30, 2017, we paidused for future dividends and dividend equivalents totaling $25.3 million. Forequivalent payments, as well as payments for the nine months ended September 30, 2016, we paid dividendsone-time deemed repatriation transition tax and dividend equivalents totaling $24.6 million.other expenditures, will come from our domestic cash, cash generated from ongoing U.S. operations, and cash repatriated from our Bermuda subsidiary. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested.
Although consequences of the COVID-19 pandemic and resulting economic uncertainty could adversely affect our liquidity and capital resources in the future, and cash requirements willmay fluctuate based on the timing and extent of many factors such as those discussed above, we currently believe that cash generated from operations, together with the liquidity provided by existing cash balances and short-term investments, will be sufficient to satisfy our liquidity requirements for the next 12 months.
We anticipate the cash used for future dividends, dividend equivalents and the stock repurchase program will come from our current domestic cash and cash generated from ongoing U.S. operations. If cash held by our international subsidiaries is needed for these payments, we may be required to accrue and pay U.S. taxes to repatriate these funds under the current tax laws. In the future, in order to strengthen our financial position, respond to adverse developments such as the COVID-19 pandemic, changes in our circumstance or unforeseen events or conditions, or fund our growth, we may need to discontinue paying dividends and dividend equivalents, or repurchasing shares, and may need to raise additional funds by any one or a combination of the following: issuing equity securities, issuing debt or convertible debt securities, incurring indebtedness secured by our assets, or selling certain product lines and/or portions of our business. Accordingly, we cannot ensure that we will continue to pay dividends and dividend equivalents or repurchase shares in the future, and there can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.
From time to time, we have engaged in discussions with third parties concerning capital investments and potential acquisitions of product lines, technologies, businesses and companies, and we continue to consider potential investments and acquisition candidates. Any such transactions could involve the issuance of a significant number of new equity securities, assumptions of debt, and/or payment of cash consideration. We may also be required to raise additional funds to complete any such investments or acquisitions, through either the issuance of equity and debt securities or incurring indebtedness secured by our assets. If we raise additional funds or acquire businesses or technologies through the issuance of equity securities or convertible debt securities, our existing stockholders may experience significant dilution.
Contractual Obligations
In October 2017, we entered into agreements to purchase office space in Shanghai, China and Hangzhou, China for approximately $14.4 million and $16.0 million, respectively. We closed both transactions by early November 2017.
Our outstanding purchase commitments represent our obligations with our suppliers and other parties that require the future purchases of goods or services, which primarily consist of wafer and other inventory purchases, from our foundries, assembly and other manufacturing services, construction or purchases of property and equipment, and license arrangements. As of September 30, 2017,March 31, 2021, the outstanding balance under our purchase commitments was $52.8 million, compared with $46.3 million as of December 31, 2016.$152.2 million.
March 31, 2021, the outstanding liability was $16.8 million.
OtherOur other long-term obligations include long-term liabilities reflected inon our Condensed Consolidated Balance Sheets, which primarily consist of the deferred compensation plan liabilities and accrued dividend equivalents.equivalents. As of September 30, 2017,March 31, 2021, the outstanding long-term obligations were $28.7 million, compared with $23.2 million as of December 31, 2016.$61.6 million.
Our otherOther contractual obligations have not changed significantly from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Off-Balance Sheet Arrangements
As of March 31, 2021, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S-K.
ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of market risks, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2016.2020. During the three and nine months ended September 30, 2017,March 31, 2021, there were no material changes or developments that would materially alter the market risk assessment performed as of December 31, 2016.2020.
ITEM4. CONTROLS AND PROCEDURES
Evaluation of Disclosure ControlsControls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined inpursuant to Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017,March 31, 2021, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred duringduring the quarter ended September 30, 2017March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As a result of the COVID-19 pandemic, we continue to implement work-from-home arrangements in accordance with local shelter-in-place orders and other governmental restrictions in the United States and certain international locations during the three months ended March 31, 2021. We have reviewed our financial reporting process and business continuity plans in order to mitigate the impact to our control environment, operating procedures, and data. We believe that our internal controls over financial reporting continue to be effective.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, managementmanagement recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
We are a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by our shareholders,stockholders, challenges to the enforceability or validity of our intellectual property, claims that our products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. We defend ourselves vigorously against any such claims.
As of September 30, 2017,March 31, 2021, there were no material pending legal proceedings to which we were a party.
Our business involves numerous risks and uncertainties. You should carefully consider the risks described below, together with all of the other information in this Quarterly Report on Form 10-Q and other filings with the Securities and Exchange CommissionSEC in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results, and growth prospects would likely be materially and adversely affected. In such an event, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock. Our past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. These risks involve forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.Risk Factors Summary
The future trading pricefollowing summary description sets forth an overview of the material risks we are exposed to in the normal course of our common stock is likelybusiness activities. The summary does not purport to be highly volatilecomplete and could be subject to wide fluctuationsis qualified in response to various factors, many of which are beyond our control, including:
our results of operations and financial performance;
general economic, industry and market conditions worldwide;
our ability to outperform the market, and outperform at a level that meets or exceeds our investors’ expectations;
whether our guidance meets the expectations of our investors;
the depth and liquidity of the market for our common stock;
developments generally affecting the semiconductor industry;
commencement of or developments relating to our involvement in litigation;
investor perceptions of us and our business strategies;
changes in securities analysts’ expectations or our failure to meet those expectations;
actionsits entirety by institutional or other large stockholders;
terrorist acts or acts of war;
actual or anticipated fluctuations in our results of operations;
actual or anticipated manufacturing capacity limitations;
developments with respect to intellectual property rights;
introduction of new products by us or our competitors;
our sale of common stock or other securities in the future;
conditions and trends in technology industries;
our loss of key customers;
changes in market valuation or earnings of our competitors;
any mergers, acquisitions or divestitures of assets undertaken by us;
government debt default;
government policies and regulations on international trade restrictions and corporate taxes;
our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfully secure manufacturing capacity;
our ability to increase our gross margins;
market reactions to guidance from other semiconductor companies or third-party research groups;
market reactions to merger and acquisition activities in the semiconductor industry, and rumors or expectations of further consolidation in the industry;
investments in sales and marketing resources to enter new markets;
costs of increasing wafer capacity and qualifying additional third-party wafer fabrication facilities;
our ability to repurchase shares under our stock repurchase program and pay quarterly cash dividends to stockholders; and,
changes in the estimation of the future size and growth rate of our markets.
In addition, the stock market often experiences substantial volatility that may be unrelatedreference to the operating performance of particular companies. These broad market fluctuations may adversely affectfull risk factor discussion immediately following this summary description. We encourage you to read the trading price of our common stock.
We expect our operating results to fluctuate from quarter to quarter and year over year, which may make it difficult to predict our future performance and could cause our stock price to decline and be volatile.full risk factor discussion carefully.
Our revenue expenses, and results of operationsexpenses are difficult to predict, have varied significantly in the past and will continue to fluctuate significantly in the future due to a number of factors,numerous risks and uncertainties, many of which are beyond our control. We expect fluctuations to continue forAs a numberresult, we may not be profitable on a quarterly or annual basis. Our business, results of reasons, including:operations and financial condition, as well as your investment in our common stock, could be materially and adversely affected by any of the following material risks:
changes in general demand for electronic products as a result of worldwide macroeconomic conditions;
• | the effect of epidemics and pandemics, such as the COVID-19 pandemic, on our business; |
changes in business conditions at our distributors, value-added resellers and/or end-customers;
• | changes in general economic conditions in the countries where our products are sold or used, particularly in China; |
changes in general economic conditions in the countries where our products are sold or used;
• | our dependence on the Asian markets for our customer base and our significant manufacturing operations in China, which may expose us to political, cultural, regulatory, economic, foreign currency and operational risks; |
the timing of developments and related expenses in our litigation matters;
• | the impact of extensive Chinese government regulation on us and our manufacturing partners; |
the loss of key customers or our inability to attract new customers due to customer and prospective customer concerns about being litigation targets;
• | changes in international trade policy, such as tariffs on imports of foreign goods and regulations restricting the export of goods and services, between the U.S. and China; |
continued dependence on turns business (orders received and shipped within the same fiscal quarter);
• | adverse movements in foreign exchange rates, including the Renminbi; |
continued dependence on the Asian markets for our customer base;
• | our ability to experience grow rates comparable to past years; |
increases in assembly costs due to commodity price increases, such as the price of gold;
• | changes in general demand for electronic products as a result of worldwide macroeconomic conditions, and the seasonality and variability in the end markets that we serve; |
the timing of new product introductions by us and our competitors;
• | our ability to accurately forecast sales and expenses due to the nature of our business as a component supplier; |
changes in our revenue mix between original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), distributors and value-added resellers;
• | our and our competitors’ ability to timely develop and introduce new products, and the acceptance of our new products in the marketplace; |
changes in product mix, product returns, and actual and potential product liability;
• | our dependency on a limited number of customers, including distributors, for a significant portion of our revenue; |
the acceptance of our new products in the marketplace;
• | potential product liability risks due to defects or failures to meet specifications; |
our ability to develop new process technologies and achieve volume production;
• | lengthy sales cycles for our products balanced against the fixed nature of a substantial portion of our expenses; |
our ability to meet customer product demand in a timely manner;
• | availability of adequate manufacturing capacity from our suppliers, and our ability to increase product sales and revenue in spite of capacity issues; |
the scheduling, rescheduling, or cancellation of orders by our customers;
• | increases in unanticipated costs as a result of increasing manufacturing capacity; |
the cyclical nature of demand for our customers’ products;
• | our dependency on third-party suppliers for wafer purchases and potential increases in prices for wafers due to general capacity shortages; |
fluctuations in our estimate for stock rotation reserves;
• | our ability to deliver products on a timely basis due to disruptions in our relationships with assembly and test subcontractors; |
• | our ability to manage our inventory levels, including the levels of inventory held by our distributors; |
our ability to manage our inventory levels, including the levels of inventory held by our distributors;
• | increases in manufacturing costs due to commodity price increases; |
product obsolescence;
• | the highly cyclical nature of the semiconductor industry, and increased competition due to industry consolidation; |
seasonality
• | competition from companies with greater financial and technological resources and customers developing products internally; |
• | the impact of system upgrades, cyber attacks or other system security, data protection and privacy breaches on our business operations; |
• | our significant investment of resources on research and development; |
• | our ability to realize the anticipated benefits of any business acquisitions and other strategic investments; |
• | risks associated with financial reporting, including the impact of new tax laws on our tax provision and tax planning; |
• | our failure to comply with various governmental laws and regulations; |
• | our ability to successfully defend ourselves in legal proceedings and protect our intellectual property, and the significant increase in legal expenses as a result of such proceedings; |
• | the loss of key personnel; and |
• | risks associated with owning our stock, including volatility in our trading price due to our business and financial performance, analyst downgrades, elimination of our dividend program, and dilution from issuance of additional shares. |
Risks Associated with Global Pandemics on Our Business
The effects of global pandemics such as COVID-19 could adversely affect our business, results of operationsand variabilityfinancial condition.
We face various risks related to epidemics and pandemics, including the global outbreak of COVID-19 first identified in December 2019. In March 2020, the World Health Organization characterized the COVID-19 outbreak as a pandemic. Since then, governments around the world have imposed various mandatory measures and the private sectors have taken actions in an effort to combat the spread of the disease, such as travel restrictions, quarantines and business shutdowns. In addition, the U.S. government has declared a state of emergency or similar disaster declaration, and many states, including Washington and California where we have substantial operations, have enacted shelter-in-place or similar restrictive orders. These events have led to significant disruptions and uncertainties in the consumer, computingglobal economy and storage, industrial, automotivein the financial markets, which could materially and communications markets;
adversely affect our financial condition and results of operations. Uncertainties regarding the availabilityeconomic impact of adequate manufacturing capacity fromthe pandemic is likely to result in sustained market turmoil and could adversely impact the semiconductor industry, which could in turn negatively and materially impact our outside suppliers;
increases in prices for finished wafers due to general capacity shortages;
the potential lossbusiness, financial condition and results of future business resulting from capacity issues;operations.
changes in manufacturing yields;
movements in foreign exchange rates, interest rates or tax rates; and,
stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees.
Due toThe extent of the factors noted aboveimpact of the pandemic on our operational and financial performance will depend on numerous evolving developments, including the duration and magnitude of the pandemic, and the effects on our customers, employees, suppliers and other risks described in this section, manypartners, all of which are beyond our control, you should not rely on quarter-to-quarter or year-over-year comparisonsuncertain and difficult to predict at this time. The ongoing outbreak could exacerbate the adverse impact on our future financial performance. Unfavorablebusiness, which may include:
• | unpredictability in demand, pricing and costs for our products, and losses of significant contracts or key customers as a result of a global economic downturn caused by the pandemic; |
• | our ability to accurately forecast our results of operation, including products sales and market demand for our products; |
• | negative impacts on our business operations, including reductions or delays in production levels, qualification activities with our customers, and valuation of our inventory due to changes in forecasted demand and our outlook on market conditions; |
• | disruptions to our distribution channels and supply chain in connection with the sourcing of materials from geographic areas that have been impacted by the pandemic; |
• | facility closures and increased costs resulting from work-from-home and other measures we have enacted at certain of our locations around the world to mitigate the impact of the pandemic and protect our employees' health and well-being; and |
• | losses on our investments due to defaults on payments by the issuers, write-offs of our accounts receivable due to defaults and insolvency, or significant delays in payments by our customers. |
We are working with our stakeholders, including customers, suppliers and employees, to address the impact of this global pandemic. We continue to monitor the situation, to assess further possible implications to our business, supply chain and customers, and to take actions in anyan effort to mitigate adverse consequences. The resumption of normal business operations may be delayed or constrained by lingering effects of the above factors may seriously harmpandemic (including limitations imposed by governmental authorities on our ability to return to normal operating practices). These effects, alone or taken together, could have a material adverse impact on our business, and results of operations and may cause our stock price to decline and be volatile.or financial condition.
Risks Associated with Our Significant Operations in Asia, in Particular China
Our business has been and may continue to be significantly impacted by worldwide economic conditions, and uncertainty in the outlook for the global economy makes it more likely that our actual results will differ materially from expectations.particular changing economic conditions in China.
In recent years, global credit and financial markets have experienced disruptions, and may continue to experience disruptions in the future, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and continued uncertainty about economic stability. These economic uncertainties affectEconomic uncertainty affects businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The continued or further tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. Volatility in the credit markets could severely diminish liquidity and capital availability.
Demand for our products is a function of the health of the economies in the United States, Europe, China and the rest of the world.Asia. We cannot predict the timing, strength or duration of any economic disruptiondisruptions, such as those resulting from the COVID-19 pandemic, or subsequent economic recovery worldwide, in the United States, in our industry, or in the different markets that we serve. We also may not accurately assess the impact of changing market and economic conditions on our business and operations. These and other economic factors have had, and may in the future have, a material adverse effect on demand for our products and on our financial condition and operating results.
WeIn particular, since we have significant operations in China, our business development plans, results of operations and financial condition may not be profitable on a quarterly or annual basis.
Our profitability is dependent on many factors, including:
our sales, which because of our turns business, are difficult to accurately forecast;
the cancellation or rescheduling of our customers’ orders, which may occur withoutmaterially and adversely affected by significant penalty to our customers;
changespolitical, social and economic developments in general demand for electronic products as a result of worldwide macroeconomic conditions;
changesChina. A slowdown in revenue mix between OEMs, ODMs, distributors and value-added resellers;
changeseconomic growth in product mix, and actual and potential product liability;
changes in revenue mix between end market segments (i.e. consumer, computing and storage, industrial, automotive and communications);
our competition, whichChina could adversely impact our selling pricescustomers, prospective customers, suppliers, distributors and our potential sales;
our manufacturing costs, including our ability to negotiate with our vendors and our ability to efficiently run our test facilitypartners in China;
manufacturing capacity constraints;
level of activity in our legal proceedings,China, which could result in significant legal expenses;
stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees; and,
our operating expenses, including general and administrative expenses, selling and marketing expenses, and research and development expenses relating to products that will not be introduced and will not generate revenue until later periods, if at all.
We may not achieve profitability on a quarterly or annual basis in the future. Unfavorable changes in our operations, including any of the factors noted above, may have a material adverse effect on our quarterlyresults of the operations and financial condition. There is no guarantee that economic downturns, whether actual or annual profitability.perceived, any further decrease in economic growth rates or an otherwise uncertain economic outlook in China will not occur or persist in the future, that they will not be protracted, or that governments will respond adequately to control and reverse such conditions, any of which could materially and adversely affect our business, financial condition and results of operations.
We derive most of our revenue from direct or indirect sales to customers in Asia and have significant operations in Asia, which may expose us to political, cultural, regulatory, economic, foreign exchange, and operational risks.
We derive most of our revenue from customers located in Asia through direct sales or indirect sales through distribution arrangements and value-added reseller agreements with parties located in Asia. As a result, we are subject to increased risks due to this geographic concentration of business and operations. For the three months ended March 31, 2021, 89% of our revenue was from customers in Asia. There are risks inherent in doing business in Asia, and internationally in general, including:
• | changes in, or impositions of, legislative or regulatory requirements, including tax laws in the U.S. and in the countries in which we manufacture or sell our products, and government action to restrict our ability to sell to foreign customers where sales of products may require export license; |
• | trade restrictions, including restrictions imposed by the United States on trading with parties in foreign countries; |
• | currency exchange rate fluctuations impacting intra-company transactions; |
• | the fluctuations in the value of the U.S. Dollar relative to other foreign currencies, which could affect the competitiveness of our products; |
• | transportation delays; |
• | changes in tax regulations in China that may impact our tax status in Chengdu, Hangzhou and other regions where we have significant operations; |
• | tariffs imposed by China and the United States that may impact our sales; |
• | export controls, trade and economic sanctions and regulations, and other regulatory or contractual limitations on our ability to sell or develop our products in China; |
• | multi-tiered distribution channels that lack visibility to end customer pricing and purchase patterns; |
• | international political relationships and threats of war; |
• | terrorism and threats of terrorism; |
• | epidemics and illnesses, such as the COVID-19 pandemic; |
• | work stoppages and infrastructure problems due to adverse weather conditions or natural disasters; |
• | work stoppages related to employee dissatisfaction; |
• | economic, social and political instability; |
• | longer accounts receivable collection cycles and difficulties in collecting accounts receivables; |
• | enforcing contracts generally; and |
• | less effective protection of intellectual property and contractual arrangements. |
If we fail to expand our customer base and significantly reduce the geographic concentration of our customers, we will continue to be subject to the foregoing risks, which could materially and adversely affect our business, financial condition and results of operations.
We and our manufacturing partners are or will be subject to extensive Chinese government regulation, and the benefit of various incentives from Chinese governments that we and our manufacturing partners receive may be reduced or eliminated, which could increase our costs or limit our ability to sell products and conduct activities in China.
We have manufacturing and testing facilities in China and most of our manufacturing partners are located in China. The Chinese government has broad discretion and authority to regulate the technology industry in China. Additionally, China’s government has implemented policies from time to time to regulate economic expansion in China. It exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Personal privacy, cyber security, and data protection are becoming increasingly significant issues in China. To address these issues, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law of the People’s Republic of China (the “Cyber Security Law”), which took effect on June 1, 2017. The Cyber Security Law sets forth various requirements relating to the collection, use, storage, disclosure and security of data, among other things. Various Chinese agencies are expected to issue additional regulations in the future to define these requirements more precisely. These requirements may increase our costs of compliance. We cannot assure you that we will be able to comply with all of these regulatory requirements. Any failure to comply with the Cyber Security Law and the relevant regulations and policies could result in further cost and liability to us and could adversely affect our business and results of operations. Additionally, increased costs to comply with, and other burdens imposed by, the Cyber Security Law and relevant regulations and policies that are applicable to the businesses of our suppliers, vendors and other service providers, as well as our customers, could adversely affect our business and results of operations.
Any additional new regulations or the amendment or modification of previously implemented regulations could require us and our manufacturing partners to change our business plans, increase our costs, or limit our ability to sell products and conduct activities in China, which could adversely affect our business and operating results.
The Chinese government and provincial and local governments also have provided, and continue to provide, various incentives to encourage the development of the semiconductor industry in China. Such incentives include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to our manufacturing partners and to us with respect to our facilities in China. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any such reduction or elimination of incentives currently provided to us and our manufacturing partners could adversely affect our business and operating results.
There are inherent risks associated with the operation of our manufacturing and testing facilities in China, which could increase product costs or cause a delay in product shipments.
We have manufacturing and testing facilities in China. We face the following risks, among others, with respect to our operations in China:
• | inability to hire and maintain a qualified workforce; |
• | inability to maintain appropriate and acceptable manufacturing controls; and |
• | higher than anticipated overhead and other costs of operation. |
If we are unable to maintain our facilities in China at fully operational status with qualified workers, appropriate manufacturing controls and reasonable cost levels, we may incur higher costs than our current expense levels, which would affect our gross margins. In addition, if capacity restraints result in significant delays in product shipments, our business and results of operations would be adversely affected.
We are subject to export laws, trade policies and restrictions including international tariffsthat could materially and adversely affect our business and results of operations.
As a global company headquartered in the United States, we are subject to U.S. laws and regulations that could limit and restrict the export of some of our products and services and may restrict our transactions with certain customers, business partners and other persons, including, in certain cases, dealings with or between our employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies, and in other circumstances we may be required to obtain an export license before exporting the controlled item. Compliance with these laws and regulations has not materially limited our operations or our sales, but could materially limit them in the future, which would materially and adversely affect our business and results of operations. We maintain an export compliance program but there are risks that the compliance controls could be circumvented, exposing us to legal liabilities. We must also comply with export restrictions and laws imposed by other countries affecting trade and investments. Although these restrictions and laws have not materially restricted our operations in the recent past, there is a significant risk that they could do so in the future, which would materially and adversely affect our business and results of operations. In addition, U.S. laws and regulations and sanctions, or threat of sanctions, that could limit and restrict the export of some of our products and services to our customers may also encourage our customers to develop their own solutions to replace our products, or seek to obtain a greater supply of similar or substitute products from our competitors that are not subject to these restrictions, which could materially and adversely affect our business, financial condition and results of operations.
Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding tariffs against foreign imports of certain materials. More specifically, there have been several rounds of U.S. tariffs on Chinese goods taking effect in the past few years, some of which prompted retaliatory Chinese tariffs on U.S. goods. The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively affecting both countries’ overall economic condition. If these tariffs continue or additional new tariffs are imposed in the future, they could have a negative impact on us as we have significant operations in China and the U.S.
Fluctuations inthevalue of theU.S.Dollar relative to other foreign currencies, including theRenminbi, may adversely affect results of operations.
Our manufacturing and packaging suppliers are and will continue to be primarily located in China for the foreseeable future. If the value of the Renminbi rises against the U.S. Dollar, there could be an increase in our manufacturing costs relative to competitors who have manufacturing facilities located in the U.S., which could adversely affect our operations. In addition, our sales are primarily denominated in the U.S. Dollar. If the value of the U.S Dollar rises against other currencies, it may adversely affect the demand for our products in international markets, which could negatively impact our business and results of operations.
We incur foreign currency exchange gains or losses related to the timing of payments for transactions between the U.S. and our foreign subsidiaries, which are reported in interest and other income in the statements of operations. Fluctuations in the value of the U.S. Dollar relative to the foreign currencies could increase the amount of foreign currency exchange losses we record, which could have an adverse impact on our results of operations.
Risks Associated with Product Demand and Sales
We may not experience growth rates comparable to past years.
In the past, our revenue increased significantly in certain years due to increased sales of certain of our products. We are subject to numerous risks and factors that could cause a decrease in our growth rates compared to past periods, including increased competition, loss of certain of our customers, unfavorable changes in our operations, reduced global electronics demand, a deterioration in market conditions, end-customer market downturn, market acceptance and penetration of our current and future products, and ongoing litigation. A material decrease in our growth rates could adversely affect our stock price and results of operations.
There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts.
In June 2014, the Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. We anticipate the cash used for future dividends will come from our current domestic cash and cash generated from ongoing U.S. operations. If cash held by our international subsidiaries is needed for the payment of dividends, we may be required to accrue and pay U.S. taxes to repatriate these funds under the current tax laws, which may have a material adverse effect on our financial condition and results of operations.
The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other things, our financial condition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, compliance with the terms of future indebtedness and credit facilities and other factors that our Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of our stockholders. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on the price of our common stock.
We may be unsuccessful in developing and selling new products with margins similar to or better than what we have experienced in the past, which would impact our overall gross margin and financial performance.
Our success depends on products that are differentiated in the market, which result in gross margins that have historically been above industry averages. Should we fail to improve our gross margin in the future, and accordingly develop and introduce sufficiently differentiated products that result in higher gross margins than industry averages, our financial condition and results of operations could be materially and adversely affected.
The highly cyclical nature of the semiconductor industry, which has produced significant and sometimes prolonged downturns, could materially adversely affect our operating results, financial condition and cash flows.
Historically, the semiconductor industry has been highly cyclical and, at various times, has experienced significant downturns and wide fluctuations in supply and demand. These conditions have caused significant variances in product demand and production capacity, as well as rapid erosion of average selling prices. The industry may experience severe or prolonged downturns in the future, which could result in downward pressure on the price of our products as well as lower demand for our products. Because significant portions of our expenses are fixed in the short term or incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any sales shortfall. These conditions could have a material adverse effect on our operating results, financial condition and cash flows.
Industry consolidation may lead to increased competition and may harm our operating results.
In recent years, there has been a trend toward semiconductor industry consolidation. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry, or become unable to continue operations unless they find an acquirer or consolidate with another company. In addition, companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that semiconductor industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.
If demand for our products declines in the major end markets that we serve, our revenue will decrease and our results of operations and financial condition would be materially and adversely affected.
We believe that the application of our products in the consumer, computing and storage, automotive, industrial, automotivecommunications and communicationsconsumer markets will continue to account for the majority of our revenue. If the demand for our products declines in the major end markets that we serve, our revenue will decrease and our results of operations and financial condition would be materially and adversely affected. In addition, as technology evolves, the ability to integrate the functionalities of various components, including our discrete semiconductor products, onto a single chip and/or onto other components of systems containing our products increases. Should our customers require integrated solutions that we do not offer, demand for our products could decrease, and our business, financial condition and results of operations would be materially and adversely affected.
Due to the nature of our business as a component supplier, we may have difficulty both in accurately predicting our future revenue and appropriately managing our expenses.
Because we provide components for end products and systems, demand for our products is influenced by our customers’ end product demand. As a result, we may have difficulty in accurately forecasting our revenue and expenses. Our revenue depends on the timing, size, and speed of commercial introductions of end products and systems that incorporate our products, all of which are inherently difficult to forecast, as well as the ongoing demand for previously introduced end products and systems. In addition, demand for our products is influenced by our customers’ ability to manage their inventory. Our sales to distributors are subject to higher volatility because they service demand from multiple levels of the supply chain which, in itself, is inherently difficult to forecast, all of which may be exacerbated by the adverse effects of the COVID-19 pandemic. If our customers, including distributors, do not manage their inventory correctly or misjudge their customers’ demand, our shipments to and orders from our customers may vary significantly on a quarterly basis, which could reduce our revenue and adversely affect our financial condition and results of operations.
We may be unsuccessful in developing and selling new products with margins similar to or better than what we have experienced in the past, which would impact our overall gross margin and financial performance.
Our success depends on products that are differentiated in the market, which result in gross margins that have historically been above industry averages. Should we fail to improve our gross margin in the future, and accordingly develop and introduce sufficiently differentiated products that result in higher gross margins than industry averages, our business, financial condition and results of operations could be materially and adversely affected.
We may be unsuccessful in developing and selling new products or in penetrating new markets required to maintain or expand our business.
Our competitiveness and future success depend on our ability to design, develop, manufacture, assemble, test, market, and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our product markets could have a material adverse effect on our competitive position within these markets. Our failure to timely develop new technologies or to react quickly to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenue, and/or a loss of market share to competitors.
As we develop new product lines, we must adapt to market conditions that are unfamiliar to us, such as competitors and distribution channels that are different from those we have known in the past. Some of our new product lines require us to re-equip our labs to test parameters we have not tested in the past. If we are unable to adapt rapidly to these new and additional conditions, we may not be able to successfully penetrate new markets.
The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:
• | timely and efficient completion of process design and device structure improvements; |
• | timely and efficient implementation of manufacturing, assembly, and test processes; |
• | the ability to secure and effectively utilize fabrication capacity in different geometries; |
timely and efficient implementation of manufacturing, assembly, and test processes;
• | product performance; |
the ability to secure and effectively utilize fabrication capacity in different geometries;
• | product availability; |
product performance;
• | product quality and reliability; and |
product availability;
product quality and reliability; and,
effective marketing, sales and service.
• | effective marketing, sales and service. |
To the extent that we fail to timely introduce new products or to quickly penetrate new markets, our revenue and financial condition could be materially adversely affected.
We may face competition from customers developing products internally.
Our customers generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop their own products internally. The future prospects for our products in these markets are dependent in part upon our customers' acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. Customers may in the future continue to use internally developed components. They also may decide to develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations could be materially and adversely affected.
We derive most of our revenue from direct or indirect sales to customers in Asia and have significant operations in Asia, which may expose us to political, cultural, regulatory, economic, foreign exchange, and operational risks.
We derive most of our revenue from customers located in Asia through direct sales or indirect sales through distribution arrangements and value-added reseller agreements with parties located in Asia. As a result, we are subject to increased risks due to this geographic concentration of business and operations. For both the three and nine months ended September 30, 2017, 89% of our revenue was from customers in Asia. There are risks inherent in doing business in Asia, and internationally in general, including:
changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States and in the countries in which we manufacture or sell our products;
trade restrictions, including restrictions imposed by the United States on trading with parties in foreign countries;
currency exchange rate fluctuations impacting intra-company transactions;
the fluctuations in the value of the U.S. Dollar relative to other foreign currencies, which could affect the competitiveness of our products;
transportation delays;
changes in tax regulations in China that may impact our tax status in Chengdu and other regions where we have significant operations;
multi-tiered distribution channels that lack visibility to end customer pricing and purchase patterns;
international political relationships and threats of war;
terrorism and threats of terrorism;
epidemics and illnesses;
work stoppages and infrastructure problems due to adverse weather conditions or natural disasters;
work stoppages related to employee dissatisfaction;
economic, social and political instability;
longer accounts receivable collection cycles and difficulties in collecting accounts receivables;
enforcing contracts generally; and,
less effective protection of intellectual property and contractual arrangements.
If we fail to expand our customer base and significantly reduce the geographic concentration of our customers, we will continue to be subject to the foregoing risks, which could materially and adversely affect our revenue and financial condition.
We depend on a limited number of customers, including distributors, for a significant percentage of our revenue.
Historically, we have generated most of our revenue from a limited number of customers, including distributors. For example, sales to our largest distributor accounted for approximately 17%26% of our total revenuerevenue for both the three and nine months ended September 30, 2017.March 31, 2021. We continue to rely on a limited number of customers for a significant portion of our revenue. Because we rely on a limited number of customers for significant percentages of our revenue, a decrease in demand or significant pricing pressure for our products from any of our major customers for any reason (including due to competition, market conditions, catastrophic events or otherwise) could have a materially adverse impact on our financial conditions and results of operations.
We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act, or the FCPA. Our failure to comply with these laws could result in penalties which could harm our reputation and have a material adverse effect on our business, results of operations and financial condition.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. Although we have implemented policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. We have significant operations in Asia, which places us in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance with the FCPA and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by the U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financial condition and results of operations.
Regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
Pursuant to the Dodd-Frank Act, the SEC adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to conduct diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have undertaken the necessary diligence to determine whether such minerals are used in the manufacture of our products. However, the implementation of these new requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, regardless of our findings, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
We receive a significant portion of our revenue from distribution arrangements, value-added resellers and direct customers, and the loss of any one of these distributors, value-added resellers or direct customers or failure to collect a receivable from them could adversely affect our operationsfinancial position and financial position.results of operations.
We market our products through distribution arrangements and value-added resellers, and through our direct sales and applications support organization to customers that include OEMs, ODMs and electronic manufacturing service providers (“EMSs”).EMS providers. Receivables from our customers are generally not secured by any type of collateral and are subject to the risk of being uncollectible. Sales to our largest distributor accounted for approximately 17%26% of our total revenuerevenue for both the three and nine months ended September 30, 2017.March 31, 2021. Significant deterioration in the liquidity or financial condition of any of our major customers or any group of our customers could have a material adverse impact on the collectability of our accounts receivable and our future operating results. We primarily conduct our sales on a purchase order basis, and we do not have any long-term supply commitments.
Moreover, we believe a high percentage of our products are eventually sold to a number of OEMs. Although we communicate with OEMs in an attempt to achieve “design wins,” which are decisions by OEMs and/or ODMs to incorporate our products, we do not have purchase commitments from these end users. Therefore, there can be no assurance that the OEMs and/or ODMs will continue to incorporate our ICs into their products. OEM technical specifications and requirements can change rapidly, and we may not have products that fit new specifications from an end-customerend customer for whom we have had previous design wins. We cannot be certain that we will continue to achieve design wins from large OEMs, that our direct customers will continue to be successful in selling to the OEMs, or that the OEMs will be successful in selling products which incorporate our ICs. The loss of any significant customer, any material reduction in orders by any of our significant customers or by their OEM customers, the cancellation of a significant customer order, or the cancellation or delay of a customer’scustomer’s or an OEM’s significant program or product could reduce our revenue and adversely affect our results of operations and financial condition.
Due to the nature of our business as a component supplier, we may have difficulty both in accurately predicting our future revenue and appropriately managing our expenses.
Because we provide components for end products and systems, demand for our products is influenced by our customers’ end product demand. As a result, we may have difficulty in accurately forecasting our revenue and expenses. Our revenue depends on the timing, size, and speed of commercial introductions of end products and systems that incorporate our products, all of which are inherently difficult to forecast, as well as the ongoing demand for previously introduced end products and systems. In addition, demand for our products is influenced by our customers’ ability to manage their inventory. Our sales to distributors are subject to higher volatility because they service demand from multiple levels of the supply chain which, in itself, is inherently difficult to forecast. If our customers, including distributors, do not manage their inventory correctly or misjudge their customers’ demand, our shipments to and orders from our customers may vary significantly on a quarterly basis.
Our ability to increase product sales and revenue may be constrained by the manufacturing capacity of our suppliers.
Although we provide our suppliers with rolling forecasts of our production requirements, their ability to provide wafers to us is limited by the available capacity, particularly capacity in the geometries we require, at the facilities in which they manufacture wafers for us. As a result, this lack of capacity has at times constrained our product sales and revenue growth. In addition, an increased need for capacity to meet internal demands or demands of other customers could cause our suppliers to reduce capacity available to us. Our suppliers may also require us to pay amounts in excess of contracted or anticipated amounts for wafer deliveries or require us to make other concessions in order to acquire the wafer supply necessary to meet our customer requirements. If our suppliers extend lead times, limit supplies or the types of capacity we require, or increase prices due to capacity constraints or other factors, our revenue and gross margin may materially decline. In addition, if we experience supply delays or limitations, our customers may reduce their purchase levels with us and/or seek alternative solutions to meet their demand, which could materially and adversely impact our businesscondition and results of operations. Delays in increasing third-party manufacturing capacity may also limit our ability to meet customer demand.
We currently depend on third-party suppliers to provide us with wafers for our products. If any of our wafer suppliers become insolvent or capacity constrained and are unable and/or fail to provide us sufficient wafers at acceptable yields and at anticipated costs, our revenue and gross margin may decline or we may not be able to fulfill our customer orders.
We have a supply arrangement with certain suppliers for the production of wafers. Should any of our suppliers become insolvent or capacity constrained, we may not be able to fulfill our customer orders, which would likely cause a decline in our revenue.
While certain aspects of our relationship with these suppliers are contractual, many important aspects of this relationship depend on our suppliers’ continued cooperation and our management of the supplier relationships. In addition, the fabrication of ICs is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous ICs on each wafer to be non-functional. This could potentially reduce yields. The failure of our suppliers to supply us wafers at acceptable yields could prevent us from fulfilling our customer orders for our products and would likely cause a decline in our revenue.
Further, as is common in the semiconductor industry, our customers may reschedule or cancel orders on relatively short notice. If our customers cancel orders after we submit a committed forecast to our suppliers for the corresponding wafers, we may be required to purchase wafers that we may not be able to resell, which would adversely affect our operating results, financial condition and cash flows.
We might not be able to deliver our products on a timely basis if our relationships with our assembly and test subcontractors are disrupted or terminated.
We do not have direct control over product delivery schedules or product quality because all of our products are assembled by third-party subcontractors and a portion of our testing is currently performed by third-party subcontractors. Also, due to the amount of time typically required to qualify assembly and test subcontractors, we could experience delays in the shipment of our products if we were forced to find alternate third parties to assemble or test our products. In addition, events such as global economic crises may materially impact our assembly suppliers’ ability to operate. Any future product delivery delays or disruptions in our relationships with our subcontractors could have a material adverse effect on our operating results, financial condition and cash flows.
There may be unanticipated costs associated with adding to or supplementing our third-party suppliers’ manufacturing capacity.
We anticipate that future growth of our business will require increased manufacturing capacity on the part of third-party supply foundries, assembly shops, and testing facilities for our products. In order to facilitate such growth, we may need to enter into strategic transactions, investments and other activities. Such activities are subject to a number of risks, including:
the costs and expense associated with such activities;
the availability of modern foundries to be developed, acquired, leased or otherwise made available to us or our third-party suppliers;
the ability of foundries and our third-party suppliers to obtain the advanced equipment used in the production of our products;
delays in bringing new foundry operations online to meet increased product demand; and,
unforeseen environmental, engineering or manufacturing qualification problems relating to existing or new foundry facilities, including delays in qualification of new foundries by our customers.
These and other risks may affect the ultimate cost and timing of any expansion of our third-party suppliers’ capacity.
We purchase inventory in advance based on expected demand for our products, and if demand is not as expected, we may have insufficient or excess inventory, which could adversely impact our financial position.
As a fabless semiconductor company, we purchase our inventory from third-party manufacturers in advance of selling our products. We place orders with our manufacturers based on existing and expected orders from our customers for particular products. While most of our contracts with our customers and distributors include lead time requirements and cancellation penalties that are designed to protect us from misalignment between customer orders and inventory levels, we must nonetheless make some predictions when we place orders with our manufacturers. In the event that our predictions are inaccurate due to unexpected increases in orders or unavailability of product within the timeframe that is required, we may have insufficient inventory to meet our customer demands. In the event that we order products that we are unable to sell due to a decrease in orders, unexpected order cancellations, injunctions due to patent litigation, or product returns, we may have excess inventory which, if not sold, may need to be disposed of or would result in a decrease in our revenue in future periods as the excess inventory at our distributors is sold. If any of these situations were to arise, it could have a material impact on our business and financial position.
Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof and discrete items such as future exercises or dispositions of stock options and restricted stock releases. In addition, we are subject to potential future examinations of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. For example, our U.S. federal income tax returns for the years ended December 31, 2005 through December 31, 2007 were examined by the IRS. We reached a resolution on the audits in April 2015 and recorded a one-time net charge of $2.7 million to our income tax provision in the second quarter of 2015. In addition, the IRS examined our U.S. federal income tax return for the year ended December 31, 2014. No adjustments were made by the IRS upon conclusion of the examination. We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from any examinations will not have an adverse effect on our operating results and financial condition.
The complexity of calculating our tax provision may result in errors that could result in restatements of our financial statements.
Due to the complexity associated with the calculation of our tax provision, we have hired third-party tax advisors to assist us in the calculation. If we or our independent tax advisors fail to resolve or fully understand certain issues that we may have had in the past and issues that may arise in the future, we could be subject to errors, which, if material, would result in us having to restate our financial statements. Restatements are generally costly and could adversely impact our results of operations, damage our reputation, and/or have a negative impact on the trading price of our common stock.
Implementation of an enterprise resource planning (“ERP”) or other information technology systems could result in significant disruptions to our operations.
From time to time, we may implement new ERP software solutions or upgrade existing systems. Implementation of these solutions and systems is highly dependent on coordination of system providers and internal business teams. We may experience difficulties as we transition to these new or upgraded systems and processes, including loss or corruption of financial, business or customer data. In addition, transitioning to these new systems requires significant capital investments and personnel resources. Difficulties in implementing new or upgraded information systems or significant system failures could disrupt our operations, which could have a material adverse effect on our capital resources, financial condition or results of operations.
System security risks, data protection or privacy breaches, cyber attacks and systems integration issues could disrupt our internal operations and/or harm our reputation, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, create system disruptions or cause shutdowns. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution or other critical functions.
In the ordinary course of business, we store sensitive data on our internal systems, network and servers, such as proprietary business and financial information, and confidential data pertaining to our customers, suppliers and business partners. The secure maintenance of sensitive information on our networks and the protection features of our solutions are both critical to our operations and business strategy. We devote significant resources to network security, data encryption, and other security measures to protect our systems and data. However, these security measures cannot provide absolute security. Although we make significant efforts to maintain the security and integrity of our systems and solutions, any destructive or intrusive breach could compromise our networks, creating system disruptions or slowdowns, and the information stored on our networks could be accessed, publicly disclosed, lost or stolen. If any of these types of security breaches were to occur and we were unable to protect sensitive data, our relationships with our business partners and customers could be materially damaged, our reputation could be materially harmed, and we could be exposed to a risk of litigation and possible significant liability.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and our remediation efforts may be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.
If we are unsuccessful in legal proceedings brought against us or any of our customers, we could be prevented from selling many of our products and/or be required to pay substantial damages. An unfavorable outcome or an additional award of damages, attorneys’ fees or an injunction could cause our revenue to decline significantly and could severely harm our business and operating results.
From time to time we are a party to various legal proceedings. If we are not successful in litigation that could be brought against us or our customers, we could be ordered to pay monetary fines and/or damages. If we are found liable for willful patent infringement, damages could be significant. We and/or our customers could also be prevented from selling some or all of our products. Moreover, our customers and end-users could decide not to use our products, and our products and our customers’ accounts payable to us could be seized. Finally, interim developments in these proceedings could increase the volatility in our stock price as the market assesses the impact of such developments on the likelihood that we will or will not ultimately prevail in these proceedings.
Given our inability to control the timing and nature of significant events in our legal proceedings that either have arisen or may arise, our legal expenses are difficult to forecast and may vary substantially from our publicly disclosed forecasts with respect to any given quarter, which could contribute to increased volatility in our stock price and financial condition.
Historically, we have incurred significant expenses in connection with various legal proceedings that vary with the level of activity in the proceeding. It is difficult for us to forecast our legal expenses for any given quarter, which adversely affects our ability to forecast our expected results of operations in general. We may also be subject to unanticipated legal proceedings, which would result in us incurring unexpected legal expenses. If we fail to meet the expectations of securities or industry analysts as a result of unexpected changes in our legal expenses, our stock price could be materially impacted.
Future legal proceedings may divert our financial and management resources.
The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights. Patent infringement is an ongoing risk, in part because other companies in our industry could have patent rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to enforce our intellectual property rights, and we may have to defend ourselves against additional infringement claims. Such litigation is very costly. In the event any third party makes a new infringement claim against us or our customers, we could incur additional ongoing legal expenses. In addition, in connection with these legal proceedings, we may be required to post bonds to defend our intellectual property rights in certain countries for an indefinite period of time, until such dispute is resolved. If our legal expenses materially increase or exceed anticipated amounts, our capital resources and financial condition could be adversely affected. Further, if we are not successful in any of our intellectual property defenses, our financial condition could be adversely affected and our business could be harmed. Our management team may also be required to devote a great deal of time, effort and energy to these legal proceedings, which could divert management’s attention from focusing on our operations and adversely affect our business.
Failure to protect our proprietary technologies or maintain the right to certain technologies may negatively affect our ability to compete.
We rely heavily on our proprietary technologies. Our future success and competitive position depend in part upon our ability to obtain and maintain protection of certain proprietary technologies used in our products. We pursue patents for some of our new products and unique technologies, and we also rely on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our technology, know-how and processes. Despite the precautions we take, it may be possible for unauthorized third parties to copy aspects of our current or future technologies or products, or to obtain and use information that we regard as proprietary. We intend to continue to protect our proprietary technologies, including through patents. However, there can be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated or circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in the United States. Our failure to adequately protect our proprietary technologies could materially harm our business.
The market for government-backed student loan auction-rate securities has suffered a decline in liquidity which may impact the liquidity and potential value of our investment portfolio.
The market for government-backed student loan auction-rate securities became illiquid in 2008. Since 2008, we have redeemed 87% of the original portfolio of our auction-rate securities at par. It is unclear as to when the remaining balance of our auction-rate securities will regain their liquidity. The underlying maturity of these auction-rate securities is up to 31 years. We have historically recorded temporary and other-than-temporary impairment charges on these investments. The valuation is subject to fluctuations in the future, which will depend on many factors, including the quality of underlying collateral, estimated time for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, among others. Should there be further deterioration in the market for auction-rate securities, the value of our portfolio may decline, which may have an adverse impact on our cash position and our earnings. If the accounting rules for these securities change, there may be an adverse impact on our earnings.
We face risks in connection with our internal control over financial reporting.
Effective internal control over financial reporting is necessary for us to provide reliable and accurate financial reports. If we cannot provide reliable financial reports or prevent fraud or other financial misconduct, our business and operating results could be harmed. Our failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our results of operations and/or have a negative impact on the trading price of our common stock, and could subject us to stockholder litigation. In addition, we cannot assure you that we will not in the future identify material weaknesses in our internal control over financial reporting that we have not discovered to date, which may impact the reliability of our financial reporting and financial statements.
Our products must meet specifications, and undetected defects and failures may occur, which may cause customers to return or stop buying our products and may expose us to product liability risk.
Our customers generally establish demanding specifications for quality, performance, and reliability that our products must meet. ICs as complex as ours often encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments, which might require product replacement or recall. Further, our third-party manufacturing processes or changes thereof, or raw material used in the manufacturing processes may cause our products to fail. We have from time to time in the past experienced product quality, performance or reliability problems. Our standard warranty period is generally one to two years, which exposes us to significant risks of claims for defects and failures. If defects and failures occur in our products, we could experience lost revenue, increased costs, including warranty expense and costs associated with customer support, cancellations or rescheduling of orders or shipments, and product returns or discounts, any of which would harm our operating results.
In addition, product liability claims may be asserted with respect toby our technology or products.customers. Although we currently have insurance, there can be no assurance that we have obtained a sufficient amount of insurance coverage or that asserted claims will be within the scope of coverage. Our insurance providers could deny or challenge these claims, and as a result, reimbursement to us is not guaranteed or could be delayed. If coverage of the insurance, or thatis denied, we willmay not have sufficient resources to satisfy any assertedpay for these claims.
The price Furthermore, due to recent changes in the insurance industry, we may experience a significant increase in premiums and availabilitytherefore decide to self-insure, which may not meet the expectations or requirements of commodities (e.g., gold, coppercertain customers. All of these factors could have a material and silicon) may adverselyadverse impact our ability to deliver our products in a timely and cost-effective manner, and may adversely affecton our business, financial condition and results of operations.
Our products incorporate commodities such as gold, copper and silicon. An increase in the price or a decrease in the availability of these commodities and similar commodities that we use could negatively impact our business and results of operations.
Fluctuations in the value of the U.S. Dollar relative to other foreign currencies, including the Renminbi, may adversely affect results of operations.
Our manufacturing and packaging suppliers are and will continue to be primarily located in China for the foreseeable future. If the value of the Renminbi rises against the U.S. Dollar, there could be an increase in our manufacturing costs relative to competitors who have manufacturing facilities located in the U.S., which could adversely affect our operations. In addition, our sales are primarily denominated in the U.S. Dollar. If the value of the U.S Dollar rises against other currencies, it may adversely affect the demand for our products in international markets, which could negatively impact our business and results of operations.
We incur foreign currency exchange gains or losses related to the timing of payments for transactions between the U.S. and our foreign subsidiaries, which are reported in interest and other income in the statements of operations. Fluctuations in the value of the U.S. Dollar relative to the foreign currencies could increase the amount of foreign currency exchange losses we record, which could have an adverse impact on our results of operations.
Our business is subject to various governmental laws and regulations, and compliance with these regulations may impact our revenue and cause us to incur significant expense. If we fail to maintain compliance with applicable regulations, we may be forced to recall products and cease their distribution, and we could be subject to civil or criminal penalties.
Our business is subject to various significant laws and other legal requirements imposed by the U.S. and other countries we conduct business with, including export control laws such as the U.S. Export Administration Regulations. These laws and regulations are complex, change frequently and have generally become more stringent over time. We may be required to incur significant expense to comply with these regulations or to remedy violations of these regulations. In addition, if our customers fail to comply with these regulations, we may be required to suspend sales to these customers, which could negatively impact our results of operations. We must conform the manufacture and distribution of our products to various laws and adapt to regulatory requirements in many countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, we could be required to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products commercially until the products are brought into compliance.
Environmental laws and regulations could cause a disruption in our business and operations.
We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Union member countries and countries in Asia. There can be no assurance that similar laws and regulations will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive.
We and our manufacturing partners are or will be subject to extensive Chinese government regulation, and the benefit of various incentives from Chinese governments that we and our manufacturing partners receive may be reduced or eliminated, which could increase our costs or limit our ability to sell products and conduct activities in China.
We have manufacturing and testing facilities in China and most of our manufacturing partners are located in China. The Chinese government has broad discretion and authority to regulate the technology industry in China. Additionally, China’s government has implemented policies from time to time to regulate economic expansion in China. It exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Additionally, personal privacy, cyber security, and data protection are becoming increasingly significant issues in China. To address these issues, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law of the People’s Republic of China (the “Cyber Security Law”), which took effect on June 1, 2017. The Cyber Security Law sets forth various requirements relating to the collection, use, storage, disclosure and security of data, among other things. Various Chinese agencies are expected to issue additional regulations in the future to define these requirements more precisely. These requirements may increase our costs of compliance. We cannot assure you that we will be able to comply with all of these regulatory requirements.Any failure to comply with the Cyber Security Law and the relevant regulations and policies could result in additional cost and liability to us and could adversely affect our business and results of operations. Additionally, increased costs to comply with, and other burdens imposed by, the Cyber Security Law and relevant regulations and policies that are applicable to the businesses of our suppliers, vendors and other service providers, as well as our customers, could adversely affect our business and results of operations.
Any additional new regulations or the amendment or modification of previously implemented regulations could require us and our manufacturing partners to change our business plans, increase our costs, or limit our ability to sell products and conduct activities in China, which could adversely affect our business and operating results.
The Chinese government and provincial and local governments also have provided, and continue to provide, various incentives to encourage the development of the semiconductor industry in China. Such incentives include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may be available to our manufacturing partners and to us with respect to our facilities in China. Any of these incentives could be reduced or eliminated by governmental authorities at any time. Any such reduction or elimination of incentives currently provided to our manufacturing partners could adversely affect our business and operating results.
There are inherent risks associated with the operation of our manufacturing and testing facilities in China, which could increase product costs or cause a delay in product shipments.
We have manufacturing and testing facilities in China that began operations in 2006. We face the following risks, among others, with respect to our operations in China:
inability to hire and maintain a qualified workforce;
inability to maintain appropriate and acceptable manufacturing controls; and,
higher than anticipated overhead and other costs of operation.
If we are unable to maintain our facilities in China at fully operational status with qualified workers, appropriate manufacturing controls and reasonable cost levels, we may incur higher costs than our current expense levels, which would affect our gross margins. In addition, if capacity restraints result in significant delays in product shipments, our business and results of operations would be adversely affected.
The average selling prices of products in our markets have historically decreased over time and could do so in the future, which could harm our revenue and gross profits.
Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our gross profits and financial results will suffer if we are unable to offset any reductions in our average selling prices by reducing our costs, developing new or enhanced products on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own wafer manufacturing or assembly facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our profit margins.
Because of the lengthy sales cycles for our products and the fixed nature of a significant portion of our expenses, we may incur substantial expenses before we earn associated revenue and may not ultimately achieve our forecasted sales for our products.
The introduction of new products presents significant business challenges because product development plans and expenditures may be made up to two years or more in advance of any sales. It generally takes us up to 12 months or more to design and manufacture a new product prototype. Only after we have a prototype do we introduce the product to the market and begin selling efforts in an attempt to achieve design wins. This sales process requires us to expend significant sales and marketing resources without any assurance of success. Volume production of products that use our ICs, if any, may not be achieved for an additional period of time after an initial sale. Sales cycles for our products are lengthy for a number of reasons, including:
our customers usually complete an in-depth technical evaluation of our products before they place a purchase order;
• | our customers usually complete an in-depth technical evaluation of our products before they place a purchase order; |
the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of their product to evaluate product performance and consumer demand;
• | the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of their product to evaluate product performance and consumer demand; |
our products must be designed into our customers’ products or systems; and,
• | our products must be designed into our customers’ products or systems; and |
the development and commercial introduction of our customers’ products incorporating new technologies frequently are delayed.
• | the development and commercial introduction of our customers’ products incorporating new technologies are frequently delayed. |
As a result of our lengthy sales cycles, we may incur substantial expenses before we earn associated revenue because a significant portion of our operating expenses is relatively fixed and based on expected revenue. The lengthy sales cycles of our products also make forecasting the volume and timing of orders difficult. In addition, the delays inherent in lengthy sales cycles raise additional risks that customers may cancel or change their orders. Our sales are made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog is not always a good indicator of our future sales. If customer cancellations or product changes occur, we could lose anticipated sales and not have sufficient time to reduce our inventory and operating expenses.
Our success depends on our investment of significant resources in researchRisks Associated with Supply and development. We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.Manufacturing
Our success depends onability to increase product sales and revenuemay beconstrained by the manufacturing capacity of our suppliers.
Although we provide our suppliers with rolling forecasts of our production requirements, their ability to provide wafers to us investing significant amountsis limited by the available capacity, particularly capacity in the geometries we require, at the facilities in which they manufacture wafers for us. For example, we believe the strong increase in industry-wide demand for electronic equipment for remote work arrangements as a result of resources into researchthe COVID-19 pandemic has resulted, and development. We expect to have towill continue to invest heavilyresult, in researchcapacity shortages of our suppliers. As a result, this lack of capacity has at times constrained our product sales and developmentrevenue growth. In addition, an increased need for capacity to meet internal demands or demands of other customers could cause our suppliers to reduce capacity available to us. Our suppliers may also require us to pay amounts in the futureexcess of contracted or anticipated amounts for wafer deliveries or require us to make other concessions in order to continueacquire the wafer supply necessary to innovate and introduce new products in a timely manner andmeet our customer requirements. If our suppliers extend lead times, limit supplies or the types of capacity we require, or increase prices due to capacity constraints or other factors, our revenue and profitability.gross margin may materially decline. We may also be required to increase the prices of our products in order to remain profitable, which could result in a loss of customers. In addition, if we experience supply delays or limitations, our customers may reduce their purchase levels with us and/or seek alternative solutions to meet their demand, which could materially and adversely impact our business and results of operations. Delays in increasing third-party manufacturing capacity may also limit our ability to meet customer demand.
There may be unanticipated costs associated with adding to or supplementing our third-party suppliers’ manufacturing capacity.
We anticipate that future growth of our business will require increased manufacturing capacity on the part of third-party supply foundries, assembly shops, and testing facilities for our products. In order to facilitate such growth, we may need to enter into strategic transactions, investments and other activities. Such activities are subject to a number of risks, including:
• | the costs and expense associated with such activities; |
• | the availability of modern foundries to be developed, acquired, leased or otherwise made available to us or our third-party suppliers; |
• | the ability of foundries and our third-party suppliers to obtain the advanced equipment used in the production of our products; |
• | delays in bringing new foundry operations online to meet increased product demand; and |
• | unforeseen environmental, engineering or manufacturing qualification problems relating to existing or new foundry facilities, including delays in qualification of new foundries by our customers. |
These and other risks may affect the ultimate cost and timing of any expansion of our third-party suppliers’ capacity. If our manufacturing costs increase, we may be required to raise the prices for our products to remain profitable, which could result in a loss of customers.
We currently depend on third-party suppliers to provide us with wafers for our products. If any of our wafer suppliers areacquired, becomeinsolvent or capacity constrained and areunable to provide us sufficient wafers at acceptable yields and at anticipated costs, our revenue and gross margin may decline or we may not be able to fulfill our customer orders.
We have a supply arrangement with certain suppliers for the production of wafers. Should any of our suppliers be acquired or become insolvent or capacity constrained, we may not be able to fulfill our customer orders, which would likely cause a decline in our revenue.
While certain aspects of our relationship with these suppliers are contractual, many important aspects of this relationship depend on our suppliers’ continued cooperation and our management of the supplier relationships. Our relationships could also be negatively impacted by changes in control or changes in the management team of the suppliers. In addition, the fabrication of ICs is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous ICs on each wafer to be non-functional. This could potentially reduce yields. The failure of our suppliers to supply us wafers at acceptable yields could prevent us from fulfilling our customer orders for our products and would likely cause a decline in our revenue.
Further, as is common in the semiconductor industry, our customers may reschedule or cancel orders on relatively short notice. If our customers cancel orders after we submit a committed forecast to our suppliers for the corresponding wafers, we may be required to purchase wafers that we may not be able to resell, which would adversely affect our financial condition, results of operations and cash flows.
We might not be able to deliver our products on a timely basis if our relationships with our assembly and test subcontractors are disrupted or terminated.
We do not have direct control over product delivery schedules or product quality because all of our products are assembled by third-party subcontractors and a portion of our testing is currently performed by third-party subcontractors. Also, due to the amount of time typically required to qualify assembly and test subcontractors, we could experience delays in the shipment of our products if we were forced to find alternate third parties to assemble or test our products. In addition, events such as global economic crises and the COVID-19 pandemic may materially impact our assembly suppliers’ ability to operate. Any future product delivery delays or disruptions in our relationships with our subcontractors could have a material adverse effect on our financial condition, results of operations and cash flows.
We purchase inventory in advance based on expected demand for our products, and if demand is not as expected, we may have insufficient or excess inventory, which could adversely impact our financial position.
As a fabless semiconductor company, we purchase our inventory from third-party manufacturers in advance of selling our products. We place orders with our manufacturers based on existing and expected orders from our customers for particular products. While most of our contracts with our customers and distributors include lead time requirements and cancellation penalties that are designed to protect us from misalignment between customer orders and inventory levels, we must nonetheless make some predictions when we place orders with our manufacturers. In the event that our predictions are inaccurate due to unexpected increases in orders or unavailability of product within the timeframe that is required, we may have insufficient inventory to meet our customer demands. In addition, a perceived negative trend in market condition could lead us to decrease the manufacturing volume of our products to avoid excess inventory. If we inaccurately assessed the market conditions for our products, we would have insufficient inventory to invest more resources in research and development thanmeet our customer demands. In the event that we anticipate, we could see an increase in our operating expenses which may negatively impact our operating results. Also, iforder products that we are unable to properly manage and effectively utilizesell due to a decrease in orders, unexpected order cancellations, injunctions due to patent litigation, or product returns, we may have excess inventory which, if not sold, may need to be written down or would result in a decrease in our research and development resources, werevenue in future periods as the excess inventory at our distributors is sold. If any of these situations were to arise, it could seehave a material adverse effectsimpact on our business, financial condition and operating results.results of operations.
In addition, if new competitors, technological advances by existing competitors,The price and availability of commodities (e.g., gold, copper and silicon) may adversely impact our entry into new markets, or other competitive factors require usability to invest significantly greater resources than anticipateddeliver our products in a timely and cost-effective manner, and may adversely affect our researchbusiness and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in researchresults of operations.
Our products incorporate commodities such as gold, copper and development efforts without a correspondingsilicon. An increase in revenue, our operating results could decline. Researchthe price or a decrease in the availability of these commodities and development expenses are likely to fluctuate from time to time to the extentsimilar commodities that we make periodic incremental investments in research and development and these investments may be independent of our level of revenue, whichuse could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to researchbusiness and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater numberresults of products under development.
The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could affect our operations or impair our ability to grow our business.
Our future success depends upon our ability to attract and retain highly qualified technical and managerial personnel. We are particularly dependent on the continued services of our key executives, including Michael Hsing, our President and Chief Executive Officer, who founded our company and developed our proprietary process technology. In addition, personnel with highly skilled analog and mixed-signal design engineering expertise are scarce and competition for personnel with these skills is intense. There can be no assurance that we will be able to retain existing key employees or that we will be successful in attracting, integrating or retaining other highly qualified personnel with critical capabilities in the future. If we are unable to retain the services of existing key employees or are unsuccessful in attracting new highly qualified employees quickly enough to meet the demands of our business, including design cycles, our business could be harmed. Furthermore, if we lose key personnel, the search for a qualified replacement and the transition could interrupt our operations as the search could take us longer than expected and divert management resources, and the newly hired employee could take longer than expected to integrate into the team.operations.
If we fail to retain key employees in our sales, applications, financeRisks Associated with Industry Dynamics and legal staff or to make continued improvements to our internal systems, particularly in the accounting and finance area, our business may suffer.Competition
If we fail to continue to adequately staffThe highly cyclical nature of the semiconductor industry, which has produced significant and sometimes prolonged downturns, could materially and adversely affect our sales, applications, financial condition and legal staff, maintain or upgrade our business systems and maintain internal control that meet the demandsresults of our business, our ability to operate effectively will suffer. The operation of our business also depends upon our ability to retain these employees, as these employees hold a significant amount of institutional knowledge about us and our products, and, if they were to terminate their employment, our sales and internal control over financial reporting could be adversely affected.operations.
We intend to continue to expand our operations, which may strain our resourcesHistorically, the semiconductor industry has been highly cyclical and, increase our operating expenses.
We plan to continue to expand our domesticat various times, has experienced significant downturns and foreign operations through internal growth, strategic relationships, and/or acquisitions. We expect that any such expansion will strain our systemswide fluctuations in supply and operationaldemand. These conditions have caused significant variances in product demand and financial controls. In addition, we are likely to incur significantly higher operating costs. To manage our growth effectively, we must continue to improve and expand our systems and controls,production capacity, as well as hire experienced administrative and financial personnel. If we fail to do so, our growth will be limited. If we fail to effectively manage our planned expansionrapid erosion of operations, our business and operating resultsaverage selling prices. The industry may be harmed.
We may not realizeexperience severe or prolonged downturns in the anticipated benefits of any company or business that we acquire. In addition, acquisitionsfuture, which could result in diluting the ownership interests of our stockholders, reduce our cash balances, and cause us to incur debt or to assume contingent liabilities, which could adversely affect our business.
As a part of our business strategy, from time to time we review acquisition prospects that would complement our current product offerings, enhance our design capability or offer other competitive opportunities. As a result of completing acquisitions, we could use a significant portion of our available cash, cash equivalents and short-term investments, issue equity securities that would dilute current stockholders’ percentage ownership, incur substantial debt or contingent liabilities, or incur impairment charges related to goodwill or other acquisition-related intangibles. Such actions could impact our operating results anddownward pressure on the price of our common stock.
In addition, we may be unable to identify or complete prospective acquisitionsproducts as well as lower demand for various reasons, including competition from other companiesour products. Because significant portions of our expenses are fixed in the semiconductor industry, the valuation expectationsshort term or incurred in advance of acquisition candidates and applicable antitrust laws or related regulations. If we are unable to identify and complete acquisitions,anticipated sales, we may not be able to successfully expanddecrease our expenses in a timely manner to offset any sales shortfall. Any significant or prolonged downturns could have a material adverse effect on our business, financial condition and product offerings.results of operations.
Industry consolidation may lead to increased competition and may harm our operating results.
In recent years, there has been a trend toward semiconductor industry consolidation. We cannot guaranteeexpect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry, or become unable to continue operations unless they find an acquirer or consolidate with another company. In addition, companies that anyare strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that semiconductor industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, financial condition and results of operations.
We may face competition from customers developing products internally.
Our customers generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop their own products internally. The future acquisitions will improveprospects for our products in these markets are dependent in part upon our customers' acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. Customers may in the future continue to use internally developed components. They may also decide to develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations or that we will otherwise realize the anticipated benefits of any acquisitions. In addition, if we are unsuccessful in integrating any acquired company or business into our operations or if integration is more difficult than anticipated, we may experience disruptions that could harm our businessbe materially and result in our failure to realize the anticipated benefits of the acquisitions. Some of the risks that may adversely affect our ability to integrate or realize any anticipated benefits from the acquired companies, businesses or assets include those associated with:
unexpected losses of key employees or customers of the acquired companies or businesses;
conforming the acquired company’s standards, processes, procedures and controls with our operations;
coordinating new product and process development;
hiring additional management and other critical personnel;
increasing the scope, geographic diversity and complexity of our operations;
difficulties in consolidating facilities and transferring processes and know-how;
difficulties in the assimilation of acquired operations, technologies or products;
the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or stockholders of acquired companies;
our inability to commercialize acquired technologies;
the risk that the future business potential as projected is not realized and as a result, we may be required to take a charge to earnings that would impact our profitability;
the need to take impairment charges or write-downs with respect to acquired assets and technologies;
difficulties in assessing the fair value of earn-out arrangements;
diversion of management’s attention from other business concerns; and,
adverse effects on existing business relationships with customers.
If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders.affected.
We may issue additional shares of common stock in the future in order to raise additional capital to fund our global operations or in connection with an acquisition. We also issue restricted stock units to employees, which convert into shares of common stock upon vesting. Any issuance of our common stock may result in immediate dilution of our stockholders. In addition, the issuance of a significant amount of our common stock may result in additional regulatory requirements, such as stockholder approval.
We compete against many companies with substantially greater financial and other resources, and our market share may be reduced if we are unable to respond to our competitors effectively.
The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue. Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit applications and design talent, our ability to introduce new products, and our ability to maintain the rate at which we introduce these new products. We compete with domestic and non-domestic semiconductor companies, many of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. We are in direct and active competition, with respect to one or more of our product lines, with many manufacturers of such products, of varying size and financial strength. The number of our competitors has grown due to the expansion of the market segments in which we participate.
We cannot assure you that our products will continue to compete favorably, or that we will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering this market, which would materially and adversely affect our results of operations and our financial condition.
Risks Associated with Information Technology and Cybersecurity
Implementation of an enterprise resource planning (“ERP”) or other information technology systems could result in significant disruptions to our operations.
From time to time, we may implement new ERP software solutions or upgrade existing systems. Implementation of these solutions and systems is highly dependent on coordination of system providers and internal business teams. We may experience difficulties as we transition to these new or upgraded systems and processes, including system downtime causing interruptions in business operations. In addition, transitioning to these new systems requires significant capital investments and personnel resources. Difficulties in implementing new or upgraded information systems or any significant system failures could disrupt our operations, which could have a material adverse effect on our capital resources, financial condition or results of operations.
System security risks, data protection or privacy breaches, cyber attacks and systems integration issues could disrupt our internal operations and/or harm our reputation, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price.
Experienced hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, create system disruptions or cause shutdowns. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution, financial reporting or other critical functions.
In the ordinary course of business, we store sensitive data on our internal systems, network and servers, such as proprietary business and financial information, and confidential data pertaining to our customers, suppliers and business partners. The secure maintenance of sensitive information on our networks and the protection features of our solutions are both critical to our operations and business strategy. We devote significant resources to network security, data encryption, and other security measures to protect our systems and data. However, these security measures cannot provide absolute security. Although we make significant efforts to maintain the security and integrity of our systems and solutions, any destructive or intrusive breach could compromise our networks, creating system disruptions or slowdowns, and the information stored on our networks could be accessed, publicly disclosed, lost or stolen. The increase in remote working arrangements during the COVID-19 pandemic has also heightened our potential exposure to cyber attacks, which could put the sensitive proprietary and financial information we store on our internal systems at risk. If any of these types of security breaches were to occur and we were unable to protect sensitive data, our relationships with our business partners and customers could be materially damaged, our reputation could be materially harmed, and we could be exposed to a risk of litigation and possible significant liability.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and our remediation efforts may be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.
Effective May 25, 2018, the European Union (“EU”) implemented the General Data Protection Regulation (“GDPR”), a broad data protection framework that expands the scope of current EU data protection law to non-European Union entities that process, or control the processing of, the personal information of EU subjects. The GDPR allows for the imposition of fines and corrective action on entities that improperly use or disclose the personal information of EU subjects, including through a data security breach. The State of California enacted the California Consumer Privacy Act of 2018 (“CCPA”), effective on January 1, 2020, which contains requirements similar to GDPR for the handling of personal information of California residents.
Our failure to fully comply with GDPR, CCPA and other laws could lead to significant fines and require onerous corrective action. In addition, data security breaches experienced by us could result in the loss of trade secrets or other intellectual property, public disclosure of sensitive commercial data, and the exposure of personally identifiable information (including sensitive personal information) of our employees, customers, suppliers and others.
Unauthorized use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers or vendors by an unauthorized party, or through employee error, theft or misuse, or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information was to occur, our operations could be seriously disrupted, and we could be subject to demands, claims and litigation by private parties, and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business, financial condition and results of operations.
Risks Associated with Strategic Investments and Initiatives
Our success depends on our investment of significant resources in research and development. We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
Our success depends on us investing significant amounts of resources into research and development. We expect to have to continue to invest heavily in research and development in the future in order to continue to innovate and introduce new products in a timely manner and increase our revenue and profitability. If we have to invest more resources in research and development than we anticipate, we could see an increase in our operating expenses which may negatively impact our operating results. Also, if we are unable to properly manage and effectively utilize our research and development resources, we could see material adverse effects on our business, financial condition and operating results.
In addition, if new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue, which could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development.
We maynot realize the anticipated benefits of any company or business that we acquire. In addition,acquisitionscould result in dilutingthe ownership interests of our stockholders, reduce our cash balances,and cause us to incur debt or to assume contingent liabilities, whichcould adversely affect our business.
As a part of our business strategy, from time to time we review acquisition prospects that would complement our current product offerings, enhance our design capability or offer other competitive opportunities. As a result of completing acquisitions, we could use a significant portion of our available cash, cash equivalents and short-term investments, issue equity securities that would dilute current stockholders’ percentage ownership, or incur substantial debt or contingent liabilities. Such actions could impact our operating results and the price of our common stock.
In addition, we may be unable to identify or complete prospective acquisitions for various reasons, including competition from other companies in the semiconductor industry, the valuation expectations of acquisition candidates and applicable antitrust laws or related regulations. If we are unable to identify and complete acquisitions, we may not be able to successfully expand our business and product offerings.
We cannot guarantee that any future acquisitions will improve our results of operations or that we will otherwise realize the anticipated benefits of any acquisitions. In addition, if we are unsuccessful in integrating any acquired company or business into our operations or if integration is more difficult than anticipated, we may experience disruptions that could harm our business and result in our failure to realize the anticipated benefits of the acquisitions. Some of the risks that may adversely affect our ability to integrate or realize any anticipated benefits from the acquired companies, businesses or assets include those associated with:
• | unexpected losses of key employees or customers of the acquired companies or businesses; |
• | conforming the acquired company’s standards, processes, procedures and controls with our operations; |
• | coordinating new product and process development; |
• | hiring additional management and other critical personnel; |
• | increasing the scope, geographic diversity and complexity of our operations; |
• | difficulties in consolidating facilities and transferring processes and know-how; |
• | difficulties in the assimilation of acquired operations, technologies or products; |
• | the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or stockholders of acquired companies; |
• | our inability to commercialize acquired technologies; |
• | the risk that the future business potential as projected is not realized and as a result, we may be required to take an impairment charge related to goodwill or acquired intangibles that would impact our profitability; |
• | difficulties in assessing the fair value of earn-out arrangements; |
• | diversion of management’s attention from other business concerns; and |
• | adverse effects on existing business relationships with customers. |
Risks Associated with Financial Reporting
The complexity of calculating our tax provision may result in errors that could result in restatements of our financial statements.
Due to the complexity associated with the calculation of our tax provision, including the effects of the 2017 Tax Act and the enactment of other tax laws, we engage third-party tax advisors to assist us in the calculation. If we or our tax advisors fail to resolve or fully understand certain issues that we may have had in the past and issues that may arise in the future, we could be subject to errors, which, if material, would result in us having to restate our financial statements. Restatements are generally costly and could adversely impact our results of operations, damage our reputation, and/or have a negative impact on the trading price of our common stock.
Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results of operations.
Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets, or by changes in tax laws such as the 2017 Tax Act, regulations, accounting principles or interpretations thereof and discrete items. In addition, we are subject to potential future examinations of our income tax returns by the Internal Revenue Service (“IRS”) and tax authorities in various jurisdictions where we have business operations. We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from any examinations will not have an adverse effect on our financial condition and results of operations.
Our international operations subject us to potentially significanttax consequences, which couldadversely affect our results of operations.
We conduct our international operations through wholly-owned subsidiaries, branches and representative offices and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Such corporate structures are subject to complex transfer pricing and other local regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our positions were not sustained, we could be required to pay additional taxes, interest and penalties, resulting in higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Additionally, our future worldwide tax rate and financial position may be affected by changes in the relevant tax laws, interpretation of such tax laws or the influence of certain tax policy efforts of the European Union and the Organization for Economic Co-operation and Development.
We face risks in connection with our internal control over financial reporting.
Effective internal control over financial reporting is necessary for us to provide reliable and accurate financial reports. If we cannot provide reliable financial reports or prevent fraud or other financial misconduct, our business and operating results could be harmed. Our failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our results of operations and/or have a negative impact on the trading price of our common stock, and could subject us to stockholder litigation. In addition, we cannot assure you that we will not in the future identify material weaknesses in our internal control over financial reporting that we have not discovered to date, which may impact the reliability of our financial reporting and financial statements.
Risks Associated with Regulatory Compliance, Intellectual Property Protection and Litigation
We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act (the “FCPA”). Our failure to comply with these laws could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. Although we have implemented policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. We have significant operations in Asia, which place us in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance with the FCPA and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have a material adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by the U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financial condition and results of operations.
Our business is subject to various governmental laws and regulations, and compliance withthese regulations may impact our revenue and cause us to incur significant expense. If we fail to maintaincompliance with applicable regulations or obtain government licenses and approvals for our desired international trading activities or technology transfers, we may be forced to recall products and ceasetheir distribution, and we could be subject to civil or criminalpenalties.
Our business is subject to various significant laws and other legal requirements imposed by the U.S. and other countries we conduct business with, including export control laws such as the Export Administration Act, the Export Administration Regulations and other laws, regulations and requirements governing international trade and technology transfer. These laws and regulations are complex, change frequently and have generally become more stringent over time. We may be required to incur significant expense to comply with these regulations or to remedy violations of these regulations. In addition, if our customers fail to comply with these regulations, we may be required to suspend sales to these customers, which could negatively impact our results of operations. We must conform the manufacture and distribution of our products to various laws and adapt to regulatory requirements in many countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, we could be required to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products commercially until the products are brought into compliance.
Environmental laws and regulations could cause a disruption in our business and operations.
We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Union member countries and countries in Asia. There can be no assurance that similar laws and regulations will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future products if the cost were to become prohibitive.
If we are unsuccessful in legal proceedings brought against us or any of our customers, we could be prevented from selling many of our products and/or be required to pay substantial damages. An unfavorable outcome or an additional award of damages, attorneys’ fees or an injunction could cause our revenue to decline significantly and could severely harm our business and operating results.
From time to time we are a party to various legal proceedings. If we are not successful in litigation that could be brought against us or our customers, we could be ordered to pay monetary fines and/or damages. If we are found liable for willful patent infringement, damages could be significant. We and/or our customers could also be prevented from selling some or all of our products. Moreover, our customers and end users could decide not to use our products, and our products and our customers’ accounts payable to us could be seized. Finally, interim developments in these proceedings could increase the volatility in our stock price as the market assesses the impact of such developments on the likelihood that we will or will not ultimately prevail in these proceedings.
Given our inability to control the timing and nature of significant events in our legal proceedings that either have arisen or may arise, our legal expenses are difficult to forecast and may vary substantially from our publicly disclosed forecasts with respect to any given quarter, which could contribute to increased volatility in our stock price and financial condition.
Historically, we have incurred significant expenses in connection with various legal proceedings that vary with the level of activity in the proceeding. It is difficult for us to forecast our legal expenses for any given quarter, which adversely affects our ability to forecast our expected results of operations in general. We may also be subject to unanticipated legal proceedings, which would result in us incurring unexpected legal expenses. If we fail to meet the expectations of securities or industry analysts as a result of unexpected changes in our legal expenses, our stock price could be materially impacted.
Future legal proceedings may divert our financial and management resources.
The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights. Patent infringement is an ongoing risk, in part because other companies in our industry could have patent rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to enforce our intellectual property rights, and we may have to defend ourselves against additional infringement claims. Such litigation is very costly. In the event any third party makes a new infringement claim against us or our customers, we could incur additional ongoing legal expenses. In addition, in connection with these legal proceedings, we may be required to post bonds to defend our intellectual property rights in certain countries for an indefinite period of time, until such dispute is resolved. If our legal expenses materially increase or exceed anticipated amounts, our capital resources and financial condition could be adversely affected. Further, if we are not successful in any of our intellectual property defenses, our financial condition could be adversely affected and our business could be harmed. Our management team may also be required to devote a great deal of time and effort to these legal proceedings, which could divert management’s attention from focusing on our operations and adversely affect our business.
Failure to protect our proprietary technologies or maintain the right to certain technologies may negatively affect our ability to compete.
We rely heavily on our proprietary technologies. Our future success and competitive position depend in part upon our ability to obtain and maintain protection of certain proprietary technologies used in our products. We pursue patents for some of our new products and unique technologies, and we also rely on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our technology, know-how and processes. Despite the precautions we take, it may be possible for unauthorized third parties to copy aspects of our current or future technologies or products, or to obtain and use information that we regard as proprietary. We intend to continue to protect our proprietary technologies, including through patents. However, there can be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated or circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in the United States. Our failure to adequately protect our proprietary technologies could materially harm our business.
Risks Associated with Human Capital Management
The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel couldaffect our operations orimpair our ability to grow our business.
Our future success depends upon our ability to attract and retain highly qualified technical and managerial personnel. We are particularly dependent on the continued services of our key executives, including Michael Hsing, our President and Chief Executive Officer, who founded our company and developed our proprietary process technology. In addition, personnel with highly skilled analog and mixed-signal design engineering expertise are scarce and competition for personnel with these skills is intense. There can be no assurance that we will be able to retain existing key employees or that we will be successful in attracting, integrating or retaining other highly qualified personnel with critical capabilities in the future. If we are unable to retain the services of existing key employees or are unsuccessful in attracting new highly qualified employees quickly enough to meet the demands of our business, including design cycles, our business could be harmed. Furthermore, if we lose key personnel, the search for a qualified replacement and the transition could interrupt our operations as the search could take us longer than expected and divert management resources, and the newly hired employee could take longer than expected to integrate into the team.
If we fail to retain key employees in our sales, applications, finance and legal staff or to make continued improvements to our internal systems, particularly in the accounting and finance area, our business may suffer.
If we fail to continue to adequately staff our sales, applications, financial and legal staff, maintain or upgrade our business systems and maintain internal control that meet the demands of our business, our ability to operate effectively will suffer. The operation of our business also depends upon our ability to retain these employees, as these employees hold a significant amount of institutional knowledge about us and our products, and, if they were to terminate their employment, our sales and internal control over financial reporting could be adversely affected.
Risks Associated with Ownership of Our Stock
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The future trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, many of which are beyond our control, including:
• | actual or anticipated results of operations and financial performance; |
• | general economic, industry and market conditions worldwide; |
• | our ability to outperform the market and outperform at a level that meets or exceeds our investors’ expectations; |
• | whether our guidance meets the expectations of our investors; |
• | the breath and liquidity of the market for our common stock; |
• | the inclusion, exclusion or deletion of our common stock from any major trading indices, such as the S&P 500 Index; |
• | developments generally affecting the semiconductor industry; |
• | commencement of or developments relating to our involvement in litigation; |
• | investor perceptions of us and our business strategies; |
• | changes in securities analysts’ expectations or our failure to meet those expectations; |
• | actions by institutional or other large stockholders; |
• | terrorist acts or acts of war; |
• | epidemics and pandemics, such as the COVID-19 pandemic; |
• | trading activity in our common stock, including short positions; |
• | actual or anticipated manufacturing capacity limitations; |
• | developments with respect to intellectual property rights; |
• | introduction of new products by us or our competitors; |
• | our sale of common stock or other securities in the future; |
• | conditions and trends in technology industries; |
• | our loss of key customers; |
• | changes in market valuation or earnings of our competitors; |
• | any mergers, acquisitions or divestitures of assets undertaken by us; |
• | government debt default; |
• | changes in corporate tax laws; |
• | government policies and regulations on international trade policies and restrictions, including tariffs on imports of foreign goods; |
• | export controls, trade and economic sanctions and regulations, and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets, particularly in China; |
• | our ability to obtain governmental licenses and approvals for international trading activities or technology transfers, including export licenses; |
• | ratings published by third-party organizations with respect to our environmental, social and governance compliance efforts; |
• | our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfully secure manufacturing capacity; |
• | our ability to increase our gross margins; |
• | our ability to accurately forecast future demand for our products; |
• | market reactions to guidance from other semiconductor companies or third-party research groups; |
• | market reactions to merger and acquisition activities in the semiconductor industry, and rumors or expectations of further consolidation in the industry; |
• | investments in sales and marketing resources to enter new markets; |
• | costs of increasing wafer capacity and qualifying additional third-party wafer fabrication facilities; |
• | cyber attacks or other system security, data protection and privacy breaches; |
• | our ability to pay quarterly cash dividends to stockholders; and |
• | changes in the estimation of the future size and growth rate of our markets. |
In addition, the stock market often experiences substantial volatility that may be unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
If securities or industry analysts downgrade our stock or do not continue to publish research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend, in part, on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Major earthquakesShort positions in our stock could have a substantial impact on the trading price of our stock.
Historically, there have been “short” positions in our common stock. The anticipated downward pressure on our stock price due to actual or anticipated sales of our stock by some institutions or individuals who engage in short sales of our common stock could cause our stock price to decline. Such stock price decreases could encourage further short-sales that could place additional downward pressure on our stock price. This could lead to further increases in the existing short position in our common stock and cause volatility in our stock price. The volatility of our stock may cause the value of a stockholder’s investment to decline rapidly. Additionally, if our stock price declines, it may be more difficult for us to raise capital and may have other adverse effects on our business.
There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts.
We have a dividend program approved by our Board of Directors, pursuant to which we intend to pay quarterly cash dividends on our common stock. The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other things, our financial condition, results of operations, capital requirements, business conditions, and other factors that our Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of our stockholders. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on the price of our common stock.
If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders.
We may issue additional shares of common stock in the future in order to raise additional capital to fund our global operations or in connection with an acquisition. We also issue restricted stock units (“RSUs”) to employees, which convert into shares of common stock upon vesting. Any issuance of our common stock may result in immediate dilution to our stockholders. In addition, the issuance of a significant amount of our common stock may result in additional regulatory requirements, such as stockholder approval.
General Risk Factors
Our worldwide operations are subject to political, economic and health risks and natural disasters, and resulting systems outages may cause us significant losses.which could have a material adverse effect on our business operations.
Our corporate headquarters,offices in California and Washington, the production facilities of our third-party wafer suppliers, our IC testing and manufacturing facilities, a portion of our assembly and research and development activities, and certain other critical business operations are located in or near seismically active regions and are subject to periodic earthquakes. We do not maintain earthquake insurance and could be materially and adversely affected in the event of a major earthquake. Much of our revenue, as well as our manufacturers and assemblers, are concentrated in Asia, particularly in China. Such concentration increases the risk that other natural disasters, labor strikes, terrorism, war, political unrest, epidemics and pandemics, and/or health advisories could disrupt our operations. For example, the COVID-19 pandemic has resulted in disruptions in business operations and other global economic activities. Any of these events may cause disruptions and have a material adverse impact on our business and results of operations.
In addition, we rely heavily on our internal information and communications systems and on systems or support services from third parties to manage our operations efficiently and effectively. Any of these are subject to failure due to a natural disaster or other disruption.disruptions. System-wide or local failures that affect our information processing could have material adverse effects on our business, financial condition operatingand results and cash flows.of operations.
Exhibit No. |
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31.1 |
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31.2 |
32.1* | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* This exhibit shall not be deemed “filed”“filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
MONOLITHIC POWER SYSTEMS, INC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MONOLITHIC POWER SYSTEMS, INC. | |
Dated: | |
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T. Bernie Blegen | |
Chief Financial Officer | |
(Duly Authorized Officer and Principal Financial and Accounting Officer) |
EXHIBIT INDEX
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* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
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