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Table of Contents



 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

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

 

For the quarterly period ended March 31, 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)

 

5808 Lake Washington Blvd. NE, Kirkland, Washington 98033

(Address of principal executive offices)(Zip Code)

 

(425) 296-9956

(Registrant’s telephone number, including area code) 

 

 


 

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

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

MPWR

 

The NASDAQ Global Select Market

 

1

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

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

 

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

There were 45,754,000 shares of the registrant’s common stock issued and outstanding as of May 3, 2021.

 



 

2

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

TABLE OF CONTENTS

PAGE

PART I. FINANCIAL INFORMATION

4

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

4

 

CONDENSED CONSOLIDATED BALANCE SHEETS

4

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

5

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

6

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

7

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

8

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9

ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

23

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30

ITEM 4.

CONTROLS AND PROCEDURES

30

PART II. OTHER INFORMATION

30

ITEM 1.

LEGAL PROCEEDINGS

30

ITEM1A.

RISK FACTORS

30

ITEM 6.

EXHIBITS

48

 

3

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(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 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

(unaudited)

 

  

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.

 

5

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

  

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.

 

6

 

 

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

  -   -   45,413   -   45,413 

Other comprehensive loss

  -   -   -   (3,128)  (3,128)

Dividends and dividend equivalents declared ($0.60 per share)

  -   -   (28,953)  -   (28,953)

Common stock issued under the employee equity incentive plan

  460   10,744   -   -   10,744 

Common stock issued under the employee stock purchase plan

  10   2,293   -   -   2,293 

Stock-based compensation expense

  -   28,621   -   -   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

  -   -   35,756   -   35,756 

Other comprehensive loss

  -   -   -   (4,535)  (4,535)

Dividends and dividend equivalents declared ($0.50 per share)

  -   -   (23,741)  -   (23,741)

Common stock issued under the employee equity incentive plan

  1,084   11,758   -   -   11,758 

Common stock issued under the employee stock purchase plan

  15   1,892   -   -   1,892 

Stock-based compensation expense

  -   18,569   -   -   18,569 

Balance as of March 31, 2020

  44,715  $581,736  $241,465  $(10,011) $813,190 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

7

 

 

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.

 

8

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended  December 31, 2020, filed with the SEC on  March 1, 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’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-Q are not necessarily indicative of the results that  may be expected for the year ending  December 31, 2021 or for any other future periods.

 

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 related 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 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 months ended  March 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 those disclosed in the Annual Report on Form 10-K for the year ended December 31, 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.

 

Recently Adopted Accounting Pronouncement

 

In  December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard 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 in the first quarter of 2021 and the adoption 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 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.

 

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 contracts with customers. The unit price as stated on the purchase orders is considered the observable, stand-alone selling price for the arrangements.

 

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company excludes taxes assessed by government authorities, such as sales taxes, from revenue.

 

Product sales consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue from distributors and direct end customers when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. In accordance with the shipping terms specified in the contracts, these criteria are generally met when the products are shipped from the Company’s facilities (such as the “Ex Works” shipping term) or delivered to the customers’ locations (such as the “Delivered Duty Paid” shipping term).

 

Under certain consignment agreements, revenue is not recognized when the products are shipped and delivered to be held at customers’ designated locations because the Company continues to control the products and retain ownership, and the customers do not have an unconditional obligation to pay. The Company recognizes revenue when the customers consume the products from the consigned inventory locations or, in some cases, after a 60-day period from the delivery date has passed, at which time control transfers to the customers and the Company invoices them for payment.

 

Variable Consideration

 

The Company accounts for price adjustment and stock rotation rights as variable consideration that reduces the transaction price and recognizes that reduction in the same period the associated revenue is recognized. Four U.S.-based distributors have price adjustment rights when they sell the Company’s products to their end customers at a price that is lower than the distribution price invoiced by the Company. When the Company receives claims from the distributors that products have been sold to the end customers at the lower price, the Company issues the distributors credit memos for the price adjustments. The Company estimates the price adjustments using the expected value method based on an analysis of historical claims, at both the distributor and product level, as well as an assessment of any known trends of product sales mix. Other U.S. distributors and non-U.S. distributors, which make up the majority of the Company’s total sales to distributors, do not have price adjustment rights. The Company records a credit against accounts receivable for the estimated price adjustments, with a corresponding reduction to revenue.

 

Certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases in accordance with the contract terms. The Company estimates the stock rotation returns using the expected value method based on an analysis of historical returns, and the current level of inventory in the distribution channel. The Company records a liability for the stock rotation reserve, with a corresponding reduction to revenue. In addition, the Company recognizes an asset for product returns which represents the right to recover products from the customers related to stock rotations, with a corresponding reduction to cost of revenue.

 

Contract Balances

 

Accounts Receivable:

 

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of March 31, 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 payment terms generally ranging from 30 to 90 days. The Company does not require its customers to provide collateral to support accounts receivable. The Company assesses the collectability by reviewing accounts receivable on a customer-by-customer basis. To manage credit risk, management performs ongoing credit evaluations of the customers’ financial condition, monitors payment performance, and assesses current economic conditions, as well as reasonable and supportable forecasts of future economic conditions, that may affect collectability of the outstanding receivables. For certain high risk customers, the Company requires standby letters of credit or advance payment prior to shipments of goods. The Company did not recognize any write-offs of accounts receivable in any of the periods presented. As of March 31, 2021 and December 31, 2020, the Company did not record any allowance for credit losses.

 

10

 

Contract Liabilities:

 

For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of March 31, 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

 

In  April 2013, the Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”), which the Company's stockholders approved in  June 2013. In  October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The amended 2014 Plan became effective on  November 13, 2014 and provided 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  June 11, 2030. As of March 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 March 31,

 
  

2021

  

2020

 

Cost of revenue

 $816  $557 

Research and development

  6,165   4,370 

Selling, general and administrative

  21,602   13,635 

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.

 

11

 

Restricted Stock Units (RSUs)

 

The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company. A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

 

  

Time-Based RSUs

  

PSUs and MPSUs

  

MSUs

  

Total

 
  

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   -  $-   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 

 


(1)

Amount reflects the number of awards that  may ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period.

 

The intrinsic value related to vested RSUs was $159.3 million and $182.1 million for the three months ended  March 31, 2021 and 2020, respectively. As of  March 31, 2021, the total intrinsic value of all outstanding RSUs was $1.0 billion, based on the closing stock price of $353.21. As of  March 31, 2021, unamortized compensation expense related to all outstanding RSUs was $243.9 million with a weighted-average remaining recognition period of approximately 2.1 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 three months ended  March 31, 2021, the Compensation Committee granted 25,000 RSUs with service conditions to non-executive employees and non-employee directors. The RSUs generally vest over four years for employees and one year for directors, subject to continued service with the Company.

 

2021 PSUs:

 

In  February 2021, the Compensation Committee granted 80,000 PSUs to the executive officers, which represent a target number of shares that can be earned subject to the 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 (2021 and 2022) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association. 50% of the 2021 Executive PSUs will vest in the first quarter of 2023 if the pre-determined revenue goal is met during the performance period. The remaining 2021 Executive PSUs will vest over the following two years on a quarterly basis. For 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 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 2021 Executive PSUs is $114.4 million.

 

In  February 2021, the Compensation Committee granted 14,000 PSUs to certain non-executive employees, which represent a target number of shares that can be earned subject to the achievement of the Company’s 2022 revenue goals for certain regions or product line divisions, or based on the achievement of the Company’s average two-year (2021 and 2022) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“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 2021 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2021 Non-Executive PSUs will vest in the first quarter of 2023 if the pre-determined performance goals are met during the performance period. The remaining 2021 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2021 Non-Executive PSUs is $12.5 million.

 

The 2021 Executive PSUs and the 2021 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. The $30 purchase price 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 2021 Executive PSUs and the 2021 Non-Executive PSUs using a Monte Carlo simulation model with the following assumptions: stock price of $374.57, simulation term of 4.0 years, expected volatility of 41.4%, risk-free interest rate of 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 9.8% to account for the post-vesting sales restrictions.

 

12

 

2004 Employee Stock Purchase Plan (ESPP)

 

For the three months ended March 31, 2021 and 2020, 10,000 and 15,000 shares, respectively, were issued under the ESPP. As of March 31, 2021, 4.5 million shares were available for future issuance under the ESPP.

 

The intrinsic value of the shares issued was $1.4 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the unamortized expense was $0.6 million, which will be recognized through the third quarter of 2021. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Expected term (in years)

  0.5   0.5 

Expected volatility

  43.3%  31.4%

Risk-free interest rate

  0.1%  1.6%

Dividend yield

  0.6%  1.1%

 

Cash proceeds from the shares issued under the ESPP were $2.3 million and $1.9 million for the three months ended March 31, 2021 and 2020, respectively.  

 

 

4. BALANCE SHEET COMPONENTS

 

Inventories 

 

Inventories consist of the following (in thousands): 

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Raw materials

 $26,055  $25,503 

Work in process

  90,571   77,100 

Finished goods

  58,597   54,459 

Total

 $175,223  $157,062 

 

Other Current Assets

 

Other current assets consist of the following (in thousands):

 

  

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 

 

13

 

Other Long-Term Assets

 

Other long-term assets consist of the following (in thousands):

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Deferred compensation plan assets

 $48,138  $46,146 

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

  1,296   1,372 

Total

 $63,782  $59,838 

 

Other Accrued Liabilities

 

Other accrued liabilities consist of the following (in thousands): 

 

  

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 

 

Other Long-Term Liabilities

 

Other long-term liabilities consist of the following (in thousands):

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Deferred compensation plan liabilities

 $49,837  $48,280 

Dividend equivalents

  8,323   7,871 

Operating lease liabilities

  3,454   1,693 

Other

  30   29 

Total

 $61,644  $57,873 

 

 

5. LEASES

 

Lessee

 

The Company has operating leases primarily for administrative and sales and marketing offices, manufacturing operations and research and development facilities, employee housing units and certain equipment. These leases have remaining lease terms from less than a year to five years. Some of these leases include options to renew the lease term for up to two years or on a month-to-month basis. The Company does not have finance lease arrangements.

 

14

 

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 leases (in thousands, except percentages):

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Lease costs:

        

Operating lease costs

 $499  $366 

Other

  121   77 

Total lease costs

 $620  $443 

 

  

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 

 

  

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 March 31, 2021, the maturities 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 lease 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):

 

2021 (remaining nine months)

 $1,691 

2022

  2,241 

2023

  1,568 

2024

  581 

2025

  59 

Total

 $6,140 

 

15

 
 

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 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 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 the requisite service requirement and, as a result, the awards do not vest. Accordingly, these awards are not treated as participating securities in the net income per share calculation. 

 

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per-share amounts): 

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Numerator:

        

Net income

 $45,413  $35,756 
         

Denominator:

        

Weighted-average outstanding shares - basic

  45,498   44,455 

Effect of dilutive securities

  2,213   2,215 

Weighted-average outstanding shares - diluted

  47,711   46,670 
         

Net income per share:

        

Basic

 $1.00  $0.80 

Diluted

 $0.95  $0.77 

 

Anti-dilutive common stock equivalents were not material in any of the periods presented.

 

 

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 computing and storage, automotive, industrial, communications and consumer markets. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company derives a majority of its revenue from sales to customers located outside North America, with geographic revenue based on the customers’ ship-to locations.  

 

The Company sells its products primarily through third-party distributors and value-added resellers, and directly to OEMs, ODMs and EMS providers. The following table summarizes those customers with sales equal to 10% or more of the Company's total revenue:  

 

  

Three Months Ended March 31,

 

Customer

 

2021

  

2020

 

Distributor A

  26%  23%

Distributor B

  16%  * 

Direct customer A

  *   10%

 


* Represents less than 10%.

 

The Company’s agreements with these third-party customers were made in the ordinary course of business and  may be terminated with or without cause by these customers with advance notice. Although the Company  may experience a short-term disruption in the distribution of its products and a short-term decline in revenue if its agreement with either of the 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 customer.

 

16

 

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 revenue by geographic regions (in thousands):

 

  

Three Months Ended March 31,

 

Country or Region

 

2021

  

2020

 

China

 $153,383  $105,737 

Taiwan

  30,445   16,540 

Europe

  20,380   13,072 

South Korea

  19,287   10,944 

Southeast Asia

  11,497   8,780 

Japan

  12,049   6,890 

United States

  7,302   3,737 

Other

  112   78 

Total

 $254,455  $165,778 

 

The following is a summary of revenue by product family (in thousands):

 

  

Three Months Ended March 31,

 

Product Family

 

2021

  

2020

 

DC to DC

 $241,429  $156,875 

Lighting Control

  13,026   8,903 

Total

 $254,455  $165,778 

 

The following is a summary of long-lived assets by geographic regions (in thousands):

 

  

March 31,

  

December 31,

 

Country

 

2021

  

2020

 

China

 $167,625  $151,752 

United States

  101,891   101,768 

Taiwan

  18,435   18,797 

Other

  9,790   9,211 

Total

 $297,741  $281,528 

 

 

8. COMMITMENTS AND CONTINGENCIES

 

Product Warranties

 

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.  

 

17

 

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 stockholders, challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and  may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The Company defends itself vigorously against any such claims. As of March 31, 2021, there were no material pending legal proceedings to which the Company was a party.  

 

 

9. CASH, CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH

 

The following is a summary of the Company’s cash, cash equivalents and debt investments (in thousands): 

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Cash

 $197,744  $300,609 

Money market funds

  20,624   34,335 

Certificates of deposit

  106,763   - 

Corporate debt securities

  306,201   249,671 

Commercial paper

  -   2,999 

U.S. treasuries and government agency bonds

  7,491   7,499 

Auction-rate securities backed by student-loan notes

  2,820   2,861 

Total

 $641,643  $597,974 

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Reported as:

        

Cash and cash equivalents

  218,368   334,944 

Short-term investments

  420,455   260,169 

Debt investment within other long-term assets

  2,820   2,861 

Total

 $641,643  $597,974 

 

18

 

The following table summarizes the contractual maturities of the short-term and long-term available-for-sale investments as of March 31, 2021 (in thousands):  

 

  

Amortized Cost

  

Fair Value

 

Due in less than 1 year

 $89,085  $89,289 

Due in 1 - 5 years

  330,053   331,166 

Due in greater than 5 years

  2,995   2,820 

Total

 $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 available-for sale investments (in thousands): 

 

  

March 31, 2021

 
  

Amortized Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

Money market funds

 $20,624  $-  $-  $20,624 

Certificates of deposit

  106,763   -   -   106,763 

Corporate debt securities

  304,876   1,611   (286)  306,201 

U.S. treasuries and government agency bonds

  7,499   -   (8)  7,491 

Auction-rate securities backed by student-loan notes

  2,995   -   (175)  2,820 

Total

 $442,757  $1,611  $(469) $443,899 

 

  

December 31, 2020

 
  

Amortized Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

Money market funds

 $34,335  $-  $-  $34,335 

Corporate debt securities

  247,591   2,177   (97)  249,671 

Commercial paper

  2,999   -   -   2,999 

U.S. treasuries and government agency bonds

  7,499   2   (2)  7,499 

Auction-rate securities backed by student-loan notes

  3,020   -   (159)  2,861 

Total

 $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) $-  $-  $152,871  $(286)

U.S. treasuries and government agency bonds

  7,491   (8)  -   -   7,491   (8)

Auction-rate securities backed by student-loan notes

  -   -   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) $-  $-  $59,144  $(97)

U.S. treasuries and government agency bonds

  5,998   (2)  -   -   5,998   (2)

Auction-rate securities backed by student-loan notes

  -   -   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.

 

19

 

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.

 

Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the Condensed Consolidated Balance Sheets to the amounts reported on the Condensed Consolidated Statements of Cash Flows (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 of the financial assets measured on a recurring basis (in thousands): 

 

  

March 31, 2021

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 

Money market funds

 $20,624  $20,624  $-  $- 

Certificates of deposit

  106,763   -   106,763   - 

Corporate debt securities

  306,201   -   306,201   - 

U.S. treasuries and government agency bonds

  7,491   -   7,491   - 

Auction-rate securities backed by student-loan notes

  2,820   -   -   2,820 

Mutual funds and money market funds under deferred compensation plan

  28,252   28,252   -   - 

Total

 $472,151  $48,876  $420,455  $2,820 

 

  

December 31, 2020

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 

Money market funds

 $34,335  $34,335  $-  $- 

Corporate debt securities

  249,671   -   249,671   - 

Commercial paper

  2,999   -   2,999   - 

U.S. treasuries and government agency bonds

  7,499   -   7,499   - 

Auction-rate securities backed by student-loan notes

  2,861   -   -   2,861 

Mutual funds and money market funds under deferred compensation plan

  26,924   26,924   -   - 

Total

 $324,289  $61,259  $260,169  $2,861 

 


Level 1 —includes instruments with quoted prices in active markets for identical assets.

Level 2 —includes instruments for which the valuations are based upon quoted market prices in active markets involving similar assets or inputs other than quoted prices that are observable for the assets. The market inputs used to value these instruments generally consist of market yields, recently executed transactions, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources  may include industry standard data providers, security master files from large financial institutions, and other third-party sources used to determine a daily market value.

Level 3 —includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement.

 

Redemptions and changes in the fair value of the auction-rate securities classified as Level 3 assets were not material for the three months ended March 31, 2021.

 

20

 
 

11. DEFERRED COMPENSATION PLAN

 

The following table summarizes the deferred compensation plan balances on the Condensed Consolidated Balance Sheets (in thousands):

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Deferred compensation plan asset components:

        

Cash surrender value of corporate-owned life insurance policies

 $19,886  $19,222 

Fair value of mutual funds and money market funds

  28,252   26,924 

Total

 $48,138  $46,146 
         

Deferred compensation plan assets reported in:

        

Other long-term assets

 $48,138  $46,146 
         

Deferred compensation plan liabilities reported in:

        

Accrued compensation and related benefits (short-term)

 $396  $155 

Other long-term liabilities

  49,837   48,280 

Total

 $50,233  $48,435 

 

 

12. OTHER INCOME (EXPENSE), NET

 

The components of other income (expense), net, are as follows (in thousands):

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Interest income

 $2,282  $2,374 

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

  (74)  153 

Total

 $2,587  $(1,714)

 

 

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 months ended  March 31, 2021 was $3.3 million, or 6.7% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily due to foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the global intangible low-taxed income (“GILTI”) tax.

 

The income tax benefit for the three months ended  March 31, 2020 was $6.5 million, or 22.2% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily due to excess tax benefits from stock-based compensation, and foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax.

 

The Company’s uncertain tax positions relate to the allocation of income and deductions among its global entities and to the determination of the research and development tax credit. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means,  may occur and would require the Company to increase or decrease its reserves and effective income tax rate over the next twelve months. However, it is not possible to determine either the magnitude or the range of increases or decreases at this time.

 

21

 
 

14. ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table summarizes the changes in accumulated other comprehensive income (in thousands):

 

  

Unrealized Gains

on Available-for-

Sale Securities

  

Foreign Currency

Translation

Adjustments

  

Total

 

Balance as of January 1, 2021

 $1,601  $8,539  $10,140 

Other comprehensive loss before reclassifications

  (754)  (2,474)  (3,228)

Amounts reclassified from accumulated other comprehensive income

  (24)  -   (24)

Tax effect

  124   -   124 

Net current period other comprehensive loss

  (654)  (2,474)  (3,128)

Balance as of March 31, 2021

 $947  $6,065  $7,012 

 

The amounts reclassified from accumulated other comprehensive income were recorded in other income (expense), net, on the Condensed Consolidated Statements of Operations.

 

 

15. DIVIDENDS AND DIVIDEND EQUIVALENTS

 

Cash Dividend Program

 

The Company has a dividend program approved by the Board of Directors, pursuant to which the Company intends to pay quarterly cash dividends on its common stock. Based on the Company’s historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared by the Board of Directors, which are payable to the stockholders in the following month. The Board of Directors declared the following cash dividends (in thousands, except per-share amounts): 

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Dividend declared per share

 $0.60  $0.50 

Total amount

 $27,393  $22,317 

 

As of  March 31, 2021 and December 31, 2020, accrued dividends totaled $27.4 million and $22.6 million, respectively.

 

The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other things, the Company’s financial condition, results of operations, capital requirements, business conditions, and other factors that the Board of Directors  may deem relevant, as well as a determination that cash dividends are in the best interests of the stockholders.

 

The Company anticipates that cash used for future dividend payments will come from its domestic cash, cash generated from ongoing U.S. operations, and cash repatriated from its Bermuda subsidiary. The Company also anticipates that earnings from other foreign subsidiaries will continue to be indefinitely reinvested.

 

Cash Dividend Equivalent Rights

 

The 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 the requisite service requirement and, as a result, the awards do not vest. As of March 31, 2021 and December 31, 2020, accrued dividend equivalents totaled $12.4 million and $11.7 million, respectively.    

 

22

 
 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements concerning:
 

  the above-average industry growth of product and market areas that we have targeted,
     
  our plan to increase our revenue through the introduction of new products within our existing product families as well as in new product categories and families,
     
 

our belief that we may incur significant legal expenses that vary with the level of activity in each of our current or future legal proceedings,

   

 

 

the effect that liquidity of our investments has on our capital resources,

 

 

the continuing application of our products in the computing and storage, automotive, industrial, communications and consumer markets,

 

 

estimates of our future liquidity requirements,

 

 

the cyclical nature of the semiconductor industry,

 

 

the effects of the COVID-19 pandemic on the global economy, the semiconductor industry and our business;

   

 

 

protection of our proprietary technology,

 

 

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,

 

 

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, 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 SEC, such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 

 

23

 

Overview

 

We are a leading semiconductor company that designs, develops and markets high-performance power solutions. Incorporated in 1997, our core strengths include deep system-level and applications knowledge, strong analog design expertise and innovative proprietary process technologies. These combined strengths enable us to deliver highly integrated monolithic products that offer energy-efficient, cost-effective, easy-to-use solutions for systems found in computing and storage, automotive, industrial, communications and consumer applications. Our mission is to reduce total energy consumption in our customers’ systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy-efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.

 

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

 

We work with third parties to manufacture and assemble our 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 times for orders 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 our products are incorporated into end-user products. Our revenue from direct or indirect sales to customers in Asia was 89% and 90% for the three months ended March 31, 2021 and 2020, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the computing and storage, automotive, industrial, communications and consumer 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 continue 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.

 

24

 

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

 

In preparing our condensed consolidated financial statements in accordance with GAAP, we are required to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying disclosures. Estimates and judgments used in the preparation of our condensed consolidated financial statements are, 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 impact 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 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, 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 on the Condensed Consolidated Statements of Operations as a percentage of revenue:  

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
   

(in thousands, except percentages)

 

Revenue

  $ 254,455       100.0

%

  $ 165,778       100.0

%

Cost of revenue

    113,396       44.6       74,331       44.8  

Gross profit

    141,059       55.4       91,447       55.2  

Operating expenses:

                               

Research and development

    41,892       16.5       25,956       15.7  

Selling, general and administrative

    51,453       20.2       32,164       19.4  

Litigation expense

    1,628       0.6       2,341       1.4  

Total operating expenses

    94,973       37.3       60,461       36.5  

Income from operations

    46,086       18.1       30,986       18.7  

Other income (expense), net

    2,587       1.0       (1,714 )     (1.0 )

Income before income taxes

    48,673       19.1       29,272       17.7  

Income tax expense (benefit)

    3,260       1.3       (6,484 )     (3.9 )

Net income

  $ 45,413       17.8

%

  $ 35,756       21.6

%

 

25

 

Revenue

 

The following table summarizes our revenue by end market:

 

   

Three Months Ended March 31,

         

End Market

 

2021

   

% of

Revenue

   

2020

   

% of

Revenue

   

Change

 
   

(in thousands, except percentages)

 

Computing and storage

  $ 67,495       26.5

%

  $ 51,957<