10-Q 1 mpwr20121022_10q.htm FORM 10-Q mpwr20121022_10q.htm


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, 2012

 

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 95119 (408) 826-0600

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE AND TELEPHONE NUMBER)

 


 

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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer      Non-accelerated filer      Smaller reporting company  

 

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 35,475,580 shares of the registrant's common stock issued and outstanding as of October 26, 2012.

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

TABLE OF CONTENTS

 

PAGE

PART I. FINANCIAL INFORMATION

 

3

ITEM1.

FINANCIAL STATEMENTS (Unaudited)

3

CONDENSED CONSOLIDATED BALANCE SHEETS

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

4

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

20

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30

ITEM 4.

CONTROLS AND PROCEDURES

31

PART II. OTHER INFORMATION

31

ITEM 1.

LEGAL PROCEEDINGS

31

ITEM1A.

RISK FACTORS

32

ITEM 4.

MINE SAFETY DISCLOSURES

46

ITEM 6.

EXHIBITS

47

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)

(Unaudited) 

  
 

September 30,

December 31,

 

2012

2011

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 78,247   $ 96,371

Short-term investments

    107,279     77,827

Accounts receivable, net of allowances of $5 in 2012 and 2011

    21,561     15,097

Inventories

    32,623     20,104

Deferred income tax assets, net - current

    644     421

Prepaid expenses and other current assets

    2,214     1,685

Total current assets

    242,568     211,505

Property and equipment, net

    59,883     47,794

Long-term investments

    11,756     13,675

Deferred income tax assets, net - long-term

    19     239

Other assets

    1,043     654

Total assets

  $ 315,269   $ 273,867
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 11,405   $ 8,904

Accrued compensation and related benefits

    5,959     9,321

Accrued liabilities

    7,500     7,845

Total current liabilities

    24,864     26,070
                 

Non-current income tax liabilities

    5,341     4,920

Total liabilities

    30,205     30,990

Commitments and contingencies (Note 7)

               

Stockholders' equity:

               

Common stock, $0.001 par value; shares authorized: 150,000,000; shares issued and outstanding: 35,431,808 and 33,826,032 in 2012 and 2011, respectively

    185,583     159,336

Retained earnings

    95,456     79,948

Accumulated other comprehensive income

    4,025     3,593

Total stockholders’ equity

    285,064     242,877

Total liabilities and stockholders’ equity

  $ 315,269   $ 273,867

 

See accompanying notes to condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

 

Three months ended September 30,

Nine months ended September 30,

 

2012

2011

2012

2011

                                 

Revenue

  $ 56,508   $ 52,962   $ 165,599   $ 149,058

Cost of revenue (1)

    26,495     25,148     78,004     72,381

Gross profit

    30,013     27,814     87,595     76,677

Operating expenses:

                               

Research and development (2)

    11,967     11,792     35,553     33,115

Selling, general and administrative (3)

    11,955     10,249     36,088     30,082

Litigation expense (benefit), net

    (229 )     722     (345 )     2,474

Total operating expenses

    23,693     22,763     71,296     65,671

Income from operations

    6,320     5,051     16,299     11,006

Interest income and other, net

    156     3     621     210

Income before income taxes

    6,476     5,054     16,920     11,216

Income tax provision (benefit)

    555     (419 )     1,412     368

Net income

  $ 5,921   $ 5,473   $ 15,508   $ 10,848

Basic net income per share

  $ 0.17   $ 0.16   $ 0.45   $ 0.32

Diluted net income per share

  $ 0.16   $ 0.16   $ 0.43   $ 0.31

Weighted average common shares outstanding:

                               

Basic

    35,145     33,594     34,677     34,149

Diluted

    36,438     34,240     36,008     35,275

(1) Includes stock-based compensation expense

  $ 112   $ 83   $ 325   $ 235

(2) Includes stock-based compensation expense

  $ 1,465   $ 1,576   $ 4,255   $ 4,553

(3) Includes stock-based compensation expense

  $ 2,605   $ 1,715   $ 6,746   $ 5,248

Total stock-based compensation expense

  $ 4,182   $ 3,374   $ 11,326   $ 10,036

 

See accompanying notes to condensed consolidated financial statements. 

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

Three months ended September 30,

Nine months ended September 30,

 

2012

2011

2012

2011

Net income

  $ 5,921   $ 5,473   $ 15,508   $ 10,848

Other comprehensive income (loss), net of tax:

                               

Auction-rate securities valuation reserve adjustment

    42     150     141     290

Unrealized gain/ (loss) on available-for-sale securities

    42     (38 )     36     (36 )

Foreign currency translation adjustments

    (141 )     302     255     1,160

Comprehensive income

  $ 5,864   $ 5,887   $ 15,940   $ 12,262
 

 

  

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

Nine months ended September 30,

 

2012

2011

                 

Cash flows from operating activities:

               

Net income

  $ 15,508   $ 10,848

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    6,866     6,550

Loss on disposal of property and equipment

    79     -

Amortization and realized gain on debt instruments

    145     357

Credit gain on auction-rate securities

    (40 )     -

Tax benefit from stock option transactions

    2,606     1,907

Excess tax benefit from stock option transactions

    (835 )     (145 )

Stock-based compensation

    11,326     10,036

Changes in operating assets and liabilities:

               

Accounts receivable

    (6,464 )     1,927

Inventories

    (12,519 )     2,240

Prepaid expenses and other current assets

    (490 )     363

Accounts payable

    2,345     712

Accrued and other long-term liabilities

    (345 )     (387 )

Accrued income taxes payable and noncurrent tax liabilities

    (1,352 )     (1,806 )

Accrued compensation and related benefits

    (3,380 )     (2,183 )

Net cash provided by operating activities

    13,450     30,419
                 

Cash flows from investing activities:

               

Property and equipment purchases

    (18,735 )     (18,795 )

Proceeds from sale of property and equipment

    13     -

Purchase of intangible assets

    (459 )     -

Purchases of short-term investments

    (115,709 )     (47,261 )

Proceeds from sale of short-term investments

    86,168     108,718

Proceeds from sale of long-term investments

    2,100     3,750

Net cash provided by (used in) investing activities

    (46,622 )     46,412
                 

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    12,233     4,334

Proceeds from employee stock purchase plan

    1,852     1,773

Repurchase of common stock

    -     (38,472 )

Excess tax benefits from stock option transactions

    835     145

Net cash provided by (used in) financing activities

    14,920     (32,220 )
                 

Effect of change in exchange rates

    128     351

Net increase (decrease) in cash and cash equivalents

    (18,124 )     44,962

Cash and cash equivalents, beginning of period

    96,371     48,010

Cash and cash equivalents, end of period

  $ 78,247   $ 92,972
                 

Supplemental disclosures for cash flow information:

               

Cash paid for taxes

  $ 732   $ 581

Supplemental disclosures of non-cash investing and financing activities:

               

Liability accrued for equipment purchases

  $ 1,687   $ 462

Reversal of temporary impairment of auction-rate securities

  $ (141 )   $ (290 )
 

 

See accompanying notes to 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 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 its Form 10-K filed with the SEC on March 12, 2012.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Form 10-Q are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any other future period.

 

Summary of Significant Accounting Policies

 

There have been no changes to the Company's significant accounting policies during the nine months ended September 30, 2012 as compared to the significant accounting policies described in the Company's audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The following policy was not previously disclosed in our Form 10-K as it was not considered significant.

 

Litigation Expenses. We expense litigation costs in the period in which they are incurred. Due to the uncertainties inherent in litigation proceedings, we generally recognize the proceeds resulting from settlement of litigation or favorable judgments when the cash is received. The proceeds are recorded as a reduction in litigation expense to the extent that litigation costs were previously incurred in the related case. Proceeds in excess of cumulative costs incurred for a case is recorded to interest income and other, net in the Condensed Consolidated Statements of Operations.

 

Recently Adopted Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820) – Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011 and should be applied prospectively. The Company adopted this standard effective January 1, 2012.

 

In June 2011, the FASB issued ASU No. 2011-05 relating to Comprehensive Income (Topic 220) – Presentation of Comprehensive Income (ASU 2011-05), which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011 and must be applied retrospectively. The Company adopted this standard effective January 1, 2012.

 

2. Stock-Based Compensation — The Company has two stock option plans and an employee stock purchase plan (ESPP)—the 1998 Stock Option Plan, the 2004 Equity Incentive Plan and the 2004 Employee Stock Purchase Plan. The Company recognized stock-based compensation expenses for the three and nine months ended September 30, 2012 and 2011, as follows (in thousands):

 

 

Three months ended September 30,

Nine months ended September 30,

 

2012

2011

2012

2011

Non-Employee

  $ 6   $ 2   $ 17   $ 10

ESPP

    88     99     478     401

Restricted Stock

    3,447     2,058     8,508     5,278

Stock Options

    641     1,215     2,323     4,347

TOTAL

  $ 4,182   $ 3,374   $ 11,326   $ 10,036

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited) 

 

2004 Equity Incentive Plan

 

The Company's Board of Directors adopted the Company's 2004 Equity Incentive Plan in March 2004, and the Company's stockholders approved it in November 2004. Options granted under the 2004 Plan have a maximum term of ten years. New hire grants generally vest over four years at the rate of 25 percent one year from the date of grant and 1/48th monthly thereafter. Refresh grants generally vest over four years at the rate of 50 percent two years from the date of grant and 1/48th monthly thereafter. There were 800,000 shares initially reserved for issuance under the 2004 Plan. The 2004 Plan provides for annual increases in the number of shares available for issuance beginning on January 1, 2005 equal to the lesser of: 5% of the outstanding shares of common stock on the first day of the year, 2,400,000 shares, or a number of shares determined by the Board of Directors. The following is a summary of the 2004 Plan, which includes stock options and restricted stock awards and units:

 

Available for Grant as of December 31, 2011

    4,291,737

2012 Additions to Plan

    1,641,301

2012 Grants

    (877,931 )

2012 Cancellations

    137,934

Available for Grant as of September 30, 2012

    5,193,041
 

A summary of the status of the Company's stock option plans at September 30, 2012 and changes during the nine months then ended is presented in the table below: 

 

                 

Weighted

       
                 

Average

       
         

Weighted

Remaining

       
         

Average

Contractual

Aggregate

 

Stock Options

Exercise Price

Term (Years)

Intrinsic Value

Outstanding at December 31, 2011 (4,202,786 options exercisable at a weighted-average exercise price of $15.05 per share)

    4,863,239   $ 15.31     3.44   $ 8,817,049

Options granted (weighted-average fair value of $6.69 per share)

    7,000     15.96                

Options exercised

    (1,053,687 )     11.61                

Options forfeited and expired

    (73,270 )     20.85                

Outstanding at September 30, 2012

    3,743,282     16.24     2.80     15,375,791

Options exercisable at September 30, 2012 and expected to become exercisable

    3,726,760     16.25     2.79     15,306,445

Options vested and exercisable at September 30, 2012

    3,472,405   $ 16.21     2.64   $ 14,395,333

 

The total fair value of options that vested during the three months ended September 30, 2012 and 2011 was $0.6 million and $1.2 million, respectively, and the total fair value of options that vested during the nine months ended September 30, 2012 and 2011 was $2.3 million and $4.3 million, respectively. The total intrinsic value of options exercised during the three months ended September 30, 2012 and 2011 was $3.6 million and $0.2 million, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2012 and 2011 was $9.1 million and $5.7 million, respectively. Net cash proceeds from the exercise of stock options were $4.9 million for the three months ended September 30, 2012 and $0.1 million for the three months ended September 30, 2011. Net cash proceeds from the exercise of stock options were $12.2 million for the nine months ended September 30, 2012 and $4.3 million for the nine months ended September 30, 2011. At September 30, 2012, unamortized compensation expense related to unvested options was approximately $1.9 million, net of estimated forfeitures. The weighted average period over which compensation expense related to these options will be recognized is approximately 1.9 years. 

 

The employee stock-based compensation expense recognized under Accounting Standards Codification (“ASC”) 718 Compensation – Stock Compensation, was determined using the Black-Scholes option pricing model. Option pricing models require the input of subjective assumptions and these assumptions can vary over time. The Company did not grant any stock option awards during the three months ended September 30, 2012.

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

Weighted-average assumptions to determine the fair values of stock option awards granted were as follows:

 
 

Three months ended September 30,

Nine months ended September 30,

 

2012

2011

2012

2011

Expected term (years)

    4.1     4.1     4.1     4.0

Expected volatility

    52.1 %     52.3 %     53.4 %     52.8 %

Risk-free interest rate

    0.5 %     1.1 %     0.6 %     1.3 %

Dividend yield

    -     -     -     -

 

In estimating the expected term, the Company considers its historical stock option exercise experience, post vesting cancellations and remaining contractual term of the options outstanding. In estimating the expected volatility, the Company uses its own historical data to determine its estimated expected volatility. The Company uses the U.S. Treasury constant maturity yield based on the expected term for its risk-free interest rate and a dividend yield of zero as it does not pay dividends. The Company applies a forfeiture rate that is based on options that have been forfeited historically.

 

Restricted Stock

 

The Company grants restricted stock units (RSUs), which vest generally over four years as determined by the Company's Compensation Committee, and the Company's common shares are issued on a one-for-one basis upon vesting. Before vesting, these restricted stock units are not eligible for dividends, if and when declared. A summary of the restricted stock units is presented in the table below:

 
 

Restricted Stock Units

Weighted Average Grant Date Fair Value Per Share

Weighted Average Remaining Recognition Period (Years)

Outstanding at December 31, 2011

    1,299,556   $ 16.87     2.71

Awards granted

    870,931     18.20        

Awards released

    (400,319 )     18.06        

Awards forfeited

    (64,664 )     16.77        

Outstanding at September 30, 2012

    1,705,504   $ 17.27     2.41

 

The total expense recognized for RSUs was $3.4 million for the three months ended September 30, 2012 and $2.1 million for the three months ended September 30, 2011. The total expense recognized for RSUs was $8.5 million for the nine months ended September 30, 2012 and $5.3 million for the nine months ended September 30, 2011. The intrinsic value on the vesting date related to restricted stock units released for the three months ended September 30, 2012 and 2011 was $3.3 million and $1.6 million, respectively, and the intrinsic value on the vesting date related to restricted stock units released for the nine months ended September 30, 2012 and 2011 was $7.7 million and $4.7 million, respectively. The intrinsic value related to restricted stock units outstanding at September 30, 2012 and 2011 was $33.7 million and $13.4 million, respectively. At September 30, 2012, the unamortized compensation expense related to unvested restricted stock units was approximately $21.7 million, net of estimated forfeitures, with a weighted average remaining recognition period of 2.4 years.

 

On February 25, 2010, the Board granted 416,000 performance units to the Company's executive officers (“2010 Executive RSUs”). These performance units generally vest over four years, with a graded acceleration feature that allows all or a portion of these awards to be accelerated if certain performance conditions are satisfied. The amount of shares to be accelerated is based on achieving certain performance targets as set forth in the Company's annual operating plan approved by the Board, as determined by the Compensation Committee in its sole discretion. The Compensation Committee has the discretion not to accelerate any shares, if it so chooses, even if the performance targets are met. To date, none of the shares have been accelerated.

 

Based on the Company's non-GAAP earnings per share forecast for 2012 as of September 30, 2012, the Company has determined that it is probable that it will be able to achieve the pre-determined goal for the 2010 Executive RSUs and therefore, the unvested shares will fully vest in February 2013. The unamortized stock-based compensation expense will be amortized over the estimated remaining vesting period.

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

The Company granted 153,000 Time-based RSUs to its CEO in February 2011. In the fourth quarter of 2011, the compensation committee proposed modifying half of the Time-based RSUs to Performance-based RSUs and on February 7, 2012 the Board approved the performance goals based on the Company's 2012 revenue (“2012 Modification”). The Time-based RSUs will vest over two years on a quarterly basis. The performance-based RSUs will vest upon achievement of the pre-determined goal. The maximum number of RSUs the CEO may receive is 100% of the RSUs originally granted.

 

On February 14, 2012, the Board granted 413,000 RSUs to the Company's executive officers. Fifty percent of the RSUs granted to Company's executive officers will vest over two years on a quarterly basis (“Time-based RSUs”) and 50% of the units represents a target number of RSUs awarded upon achievement of a pre-determined goal (“2012 Executive RSUs”) for the Company's revenue in 2013. Half of these Performance-based RSUs will vest when earned with the remainder vesting during the following two years on a quarterly basis. The maximum number of RSU an executive employee may receive is 300% of the Performance-based RSUs originally granted. The Performance-based RSUs earned will be reduced by maximum 15% in the event that the Company's total shareholder return (“TSR”), defined as the cumulative change in share price plus dividends, as compared to the Company's compensation peer group is below a specified percentile for calendar years 2012 and 2013.

 

On April 24, 2012, the Company granted 344,650 RSUs to its existing non-executive employees. These RSUs grants include 219,317 Time-based RSUs and 125,333 Performance-based RSUs. The Performance-based RSUs will be a target number of RSUs awarded upon achievement of a pre-determined goal (“2012 Non-Executive RSUs”) for revenue of the Company, certain regions or product-line divisions in 2013. Half of these Performance-based RSUs will vest when earned with the remainder vesting during the following two years on a quarterly basis. The maximum number of RSUs an employee may receive is 300% of the Performance-based RSUs originally granted.

 

Based on the Company's revenue forecast as of September 30, 2012, the Company has determined that it is probable that it will be able to achieve the pre-determined goals for the 2012 Modification, the 2012 Executive RSUs and for the majority of the 2012 Non-Executive RSUs. The Company has recorded stock-based compensation expense for the Performance-based RSUs, expected to meet the pre-determined goals, based on grant date fair value adjusted for expected forfeiture rate which will be amortized based on graded-vesting method.

 

2004 Employee Stock Purchase Plan

 

Under the 2004 Employee Stock Purchase Plan (the Purchase Plan), eligible employees may purchase common stock through payroll deductions. Participants may not purchase more than 2,000 shares in a six-month offering period or stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period in accordance with the Internal Revenue Code and applicable Treasury Regulations. A total of 200,000 shares of common stock were reserved for issuance under the Purchase Plan.  The Purchase Plan provides for an automatic annual increase beginning on January 1, 2005 by an amount equal to the lessor of: 1,000,000 shares, 2% of the outstanding shares of common stock on the first day of the year, or a number of shares as determined by the Board of Directors. For the three months ended September 30, 2012 and 2011, 54,523 shares and 79,296 shares, respectively, were issued under the Purchase Plan. For the nine months ended September 30, 2012 and 2011, 151,770 shares and 149,981 shares, respectively, were issued under the Purchase Plan. The following is a summary of the Purchase Plan and changes during the nine months ended September 30, 2012:

 

Available Shares as of December 31, 2011

    3,693,210

2012 Additions to Plan

    676,520

2012 Purchases

    (151,770 )

Available Shares as of September 30, 2012

    4,217,960

      

The Purchase Plan is considered compensatory under ASC 718-50-25, Compensation – Stock Compensation - Employee Share Purchase Plans - Recognition, and is accounted for in accordance with ASC 718-50-30 Compensation – Stock Compensation - Employee Share Purchase Plans - Initial Measurement - Look-Back Plans. The intrinsic value for stock purchased was $0.3 million and $0.1 million for the three months ended September 30, 2012 and 2011, respectively. The intrinsic value for stock purchased was $1.0 million and $0.3 million for the nine months ended September 30, 2012 and 2011, respectively. The unamortized expense as of September 30, 2012 was $0.2 million, which will be recognized over 0.4 years.

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

The Black-Scholes option pricing model was used to value the employee stock purchase rights. For the three and nine months ended September 30, 2012 and 2011, the following weighted average assumptions were used in the valuation of the stock purchase rights: 

 

Three months ended September 30,

Nine months ended September 30,

 

2012

2011

2012

2011

Expected term (years)

    0.5     0.5     0.5     0.5

Expected volatility

    39.6 %     40.9 %     45.8 %     39.2 %

Risk-free interest rate

    0.1 %     0.1 %     0.1 %     0.1 %

Dividend yield

    -     -     -     -
 

Cash proceeds from employee stock purchases for each of the three months ended September 30, 2012 and 2011 was $0.8 million. Cash proceeds from employee stock purchases for the nine months ended September 30, 2012 and 2011 was $1.9 million and $1.8 million, respectively.

 

3. Inventories - Inventories consist of the following (in thousands):

  
 

September 30,

December 31,

 

2012

2011

Work in progress

  $ 22,091   $ 11,596

Finished goods

    10,532     8,508

Total inventories

  $ 32,623   $ 20,104

   

4. Accrued Liabilities- Accrued liabilities consist of the following (in thousands):

 

 

September 30,

December 31,

 

2012

2011

                 

Deferred revenue and customer prepayments

  $ 2,950   $ 3,603

Stock rotation reserve

    1,413     1,086

Legal expenses and settlement costs

    446     911

Warranty

    859     561

Other

    1,832     1,684

Total accrued liabilities

  $ 7,500   $ 7,845

       

A roll-forward of the warranty reserve for the nine months ended September 30, 2012 and 2011 is as follows (in thousands):

 

 

Nine months ended September 30,

 

2012

2011

Balance at beginning of year

  $ 561   $ 764

Warranty provision for product sales

    802     747

Settlements made during the period

    (154 )     (607 )

Unused warranty provision

    (350 )     (324 )

Balance at end of period

  $ 859   $ 580

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited) 

 

5. Net Income per Share — Basic net income per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is calculated using the treasury stock method and reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock.  For the three and nine months ended September 30, 2012 and 2011, the Company had securities outstanding, which could potentially dilute basic net income per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive. 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,

 

2012

2011

2012

2011

Numerator:

                               

Net income

  $ 5,921   $ 5,473   $ 15,508   $ 10,848
                                 

Denominator:

                               

Weighted average outstanding shares used to compute basic net income per share

    35,145     33,594     34,677     34,149

Effect of dilutive securities

    1,293     646     1,331     1,126

Weighted average outstanding shares used to compute diluted net income per share

    36,438     34,240     36,008     35,275
                                 

Net income per share - basic

  $ 0.17   $ 0.16   $ 0.45   $ 0.32

Net income per share - diluted

  $ 0.16   $ 0.16   $ 0.43   $ 0.31

 

For the three months ended September 30, 2012 and 2011, approximately 1.0 million and 5.9 million weighted common stock equivalents, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive. For the nine months ended September 30, 2012 and 2011, approximately 1.3 million and 4.8 million weighted common stock equivalents, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.

 

6. Segment Information

 

As defined by the requirements of ASC 280-10-50 Segment Reporting – Overall - Disclosure, the Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance, mixed-signal analog semiconductors for the communications, computing, consumer, and industrial markets. Geographic revenue is based on the location to which customer shipments are delivered. For the three and nine months ended September 30, 2012 and 2011, the Company derived substantially all of its revenue from sales to customers located outside North America. The following is a list of customers whose sales exceeded 10% of revenue for the three and nine months ended September 30, 2012 and 2011.

 
 

Three months ended September 30,

Nine months ended September 30,

Customers

2012

2011

2012

2011

                                 

A

    18 %     21 %     16 %     18 %

B

    17 %     10 %     15 %     *

 

(*) represents less than 10%

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

The following is a summary of revenue by geographic region based on customer ship-to location (in thousands):

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

Country

2012

2011

2012

2011

China

  $ 31,023   $ 32,480   $ 95,207   $ 87,360

Taiwan

    7,579     6,110     21,814     16,395

Korea

    3,022     2,754     7,581     11,598

Europe

    5,004     3,736     12,987     10,778

Japan

    2,029     2,475     6,690     8,193

USA

    1,437     1,230     4,150     3,196

Other

    6,414     4,177     17,170     11,538

Total

  $ 56,508   $ 52,962   $ 165,599   $ 149,058
 

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

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

Product Family

2012

    2011*     2012     2011*

DC to DC Converters

  $ 49,710   $ 44,936   $ 145,217   $ 128,287

Lighting Control Products

    6,798     8,026     20,382     20,771

Total

  $ 56,508   $ 52,962   $ 165,599   $ 149,058

* 2011 Revenue associated with Audio Amplifiers has been included with DC to DC Converters to conform with current year presentation.

  

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

  
 

September 30,

December 31,

 

2012

2011

China

  $ 37,859   $ 32,566

United States

    22,868     15,662

Taiwan

    86     98

Japan

    65     70

Other

    49     51

TOTAL

  $ 60,927   $ 48,447

 

On July 8, 2011, the Company purchased the property located at 79 Great Oaks Boulevard in San Jose, California, to be used as its new headquarters and sales offices. The property consists of an approximately 106,262 square foot office building and approximately 5.5 acres of land. The $11.0 million purchase price for the property was allocated based on an independent third party valuation with $5.0 million attributable to the building and $6.0 million attributable to the land. The Company moved into its new headquarters and started to depreciate the building in May 2012. The increase of $7.2 million in the long-lived assets for the nine months ended September 30, 2012 for the United States was primarily related to the building improvements at this new location. Buildings and building improvements have a depreciation life of up to 40 years.

 

7. Litigation

 

The Company and certain of its subsidiaries are parties to actions and proceedings incident to the Company's business in the ordinary course of business, including litigation regarding its shareholders, a former employee and its intellectual property, challenges to the enforceability or validity of its intellectual property and claims that the Company's products infringe on the intellectual property rights of others. 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.

 

  

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

O2 Micro


On May 3, 2012, the United States District Court for the Northern District of California issued an order finding O2 Micro International, Ltd. (“O2 Micro”) liable for approximately $9.1 million in attorneys' fees and non-taxable costs, plus interest, in connection with the patent litigation that the Company won in 2010.  This award is in addition to the approximately $0.3 million in taxable costs that the Court had earlier ordered O2 Micro to pay to the Company in connection with the same lawsuit. The Court then entered judgment for the Company. O2 Micro filed an appeal against the judgment.   


Silergy

 

In December 2011, the Company entered into a settlement and license agreement with Silergy Corp and Silergy Technologies (“Silergy”) for infringement of the Company's patent whereby the Company will receive a total of $2 million which will be paid in equal installments of $0.3 million in each quarter of 2012 and the remainder will be paid in two equal installments in first two quarters of 2013. For the three and nine months ended September 30, 2012, the Company received the $0.3 million and $0.9 million payments, respectively, which were recorded as credits to litigation expense (benefit) in the Condensed Consolidated Statements of Operations.

 

Linear

 

On August 12, 2012, the United States Court of Appeal for the Federal Circuit issued an order affirming the judgment issued by the United States District Court of Delaware finding Linear Technology Corporation (“Linear”) liable for approximately $2.3 million in attorneys' fees and non-taxable costs, plus interest, in connection with the litigation regarding a contract dispute that the Company won in 2011The Company is seeking reimbursement of additional attorney fees in the amount of $0.2 million in connection with the cost of defending the appeal. As of September 30, 2012, the Company did not record this as income as the cash was not received.

 

8. Fair Value Measurements

 

The following is a schedule of Company's cash and cash equivalents, short-term investments and long-term investments as of September 30, 2012 and December 31, 2011 (in thousands):

 

 
 

Estimated Fair Market Value as of

 
 

September 30, 2012

December 31, 2011

                 

Cash, Cash Equivalents and Investments

               

Cash in Banks

  $ 51,153   $ 43,305

Money Market Funds

    27,094     51,066

Government Agencies/ Treasuries

    107,279     79,827

Auction-Rate Securities backed by Student-Loan Notes

    11,756     13,675

Total Cash, Cash Equivalents and Investments

  $ 197,282   $ 187,873

 

 

 

September 30,

December 31,

Reported as:

2012

2011

Cash and Cash Equivalents

  $ 78,247   $ 96,371

Short-term Investments

    107,279     77,827

Long-term Investments

    11,756     13,675

Total Cash, Cash Equivalents and Investments

  $ 197,282   $ 187,873
 

 

  

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

The contractual maturities of the Company's investments classified as available-for-sale as of September 30, 2012 and December 31, 2011 is as follows (in thousands):

 

 
 

September 30,

December 31,

 

2012

2011

Due in less than 1 year

    33,998     45,133

Due in 1 - 5 years

    73,281     32,694

Due in greater than 5 years

    11,756     13,675
      119,035     91,502

 

The following table details the fair value measurements as of September 30, 2012 and December 31, 2011 within the fair value hierarchy of the financial assets that are required to be recorded at fair value (in thousands): 

 
 

Fair Value Measurements at September 30, 2012 Using

 
         

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

 

Total

Level 1

Level 2

Level 3

Money Market Funds

  $ 27,094   $ 27,094   $ -   $ -

US Treasuries and US Government Agency Bonds

    107,279             107,279     -

Long-term available-for-sale auction-rate securities

    11,756     -     -     11,756
    $ 146,129   $ 27,094   $ 107,279   $ 11,756

 

 

Fair Value Measurements at December 31, 2011 Using

 
         

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

 

Total

Level 1

Level 2

Level 3

Money Market Funds

  $ 51,066   $ 51,066   $ -   $ -

US Treasuries and US Government Agency Bonds

    79,827     -     79,827     -

Long-term available-for-sale auction-rate securities

    13,675     -     -     13,675
    $ 144,568   $ 51,066   $ 79,827   $ 13,675

 

At September 30, 2012, fixed income available-for-sale securities included $107.3 million in US government agencies and treasuries, all of which were classified as short-term investments. The Company also had $27.1 million invested in money market funds. From these investments, there were $9,000 in unrealized losses. The impact of gross unrealized gains and losses was not material. At September 30, 2012, the Company also had $12.3 million in face value of auction-rate securities, all of which were classified as long-term available-for-sale investments.

 

At December 31, 2011, fixed income available-for-sale securities included securities issued by US government agencies and treasuries, $77.8 million of which were classified as short-term investments and $2.0 million of which were classified as cash equivalents. The Company also had $51.1 million invested in money market funds. At December 31, 2011, there were $17,000 in net unrealized losses from these investments. The impact of gross unrealized gains and losses was not material. At December 31, 2011, the Company also had $14.4 million in face value of auction-rate securities, all of which were classified as long-term available-for-sale investments. 

 

Temporary impairment charges are recorded in accumulated other comprehensive income (loss) within stockholders' equity and have no impact on net income. Other-than-temporary impairment exists when the Company either has the intent to sell the security, it will more likely than not be required to sell the security before anticipated recovery or it does not expect to recover the entire amortized cost basis of the security. Other-than-temporary impairment charges are recorded in other income (expense) in the Condensed Consolidated Statement of Operations.

 

  

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

  

The following tables summarize unrealized gains and losses related to our investments in marketable securities designated as available-for sale (in thousands): 

 
 

As of September 30, 2012

 
 

Adjusted Cost

Unrealized gains or losses

Total Fair Value

Fair Value of Investments in Unrealized Loss Position

                                 

Money Market Funds

  $ 27,094   $ -   $ 27,094   $ -

US Treasuries and US Government Agency Bonds

    107,241     37     107,279     22,080

Auction-rate securities backed by Student-Loan Notes

    12,245     (489 )     11,756     11,756
    $ 146,580   $ (452 )   $ 146,129   $ 33,836

 
 

As of December 31, 2011

 
 

Adjusted Cost

Unrealized Gains or Losses

Total Fair Value

Fair Value of Investments in Unrealized Loss Position

                                 

Money Market Funds

  $ 51,066   $ -   $ 51,066   $ -

US Treasuries and US Government Agency Bonds

    79,830     (3 )     79,827     25,281

Auction-rate securities backed by Student-Loan Notes

    14,305     (630 )     13,675     13,675
    $ 145,201   $ (633 )   $ 144,568   $ 38,956

The Company's level 2 assets consist of US treasuries, US government agency bonds, corporate notes and commercial paper. These securities generally have market prices available from multiple sources, which are used as inputs into a distribution-curve based algorithm to determine fair value. 

The Company's level 3 assets consist of government-backed student loan auction-rate securities, with interest rates that reset through a Dutch auction every 7 to 35 days and which became illiquid in 2008. The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3) (in thousands):

 

  

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

 
 

Auction-Rate Securities

Ending balances at December 31, 2011

  $ 13,675

Sales and Settlement at Par

    (100 )

Total realized and unrealized gains (losses):

       

Included in other income (expense)

    -

Included in other comprehensive income

    90
         

Ending balances at March 31, 2012

  $ 13,665

Sales and Settlement at Par

    (2,000 )

Total realized and unrealized gains (losses):

       

Included in other income (expense)

    40

Included in other comprehensive income

    9
         

Ending balances at June 30, 2012

  $ 11,714

Sales and Settlement at Par

    -

Total realized and unrealized gains (losses):

       

Included in other income (expense)

    -

Included in other comprehensive income

    42
         

Ending balances at September 30, 2012

  $ 11,756

 

At September 30, 2012, the Company's investment portfolio included $11.8 million in government-backed student loan auction-rate securities, net of impairment charges of $0.52 million; of which, $0.49 million was temporary and $0.03 million was other-than-temporary. This compares to an investment balance of auction-rate securities as of December 31, 2011 of $13.7 million net of impairment charges of $0.7 million; of which, $0.6 million was temporary and $0.1 million was other-than-temporary.

 

The underlying maturities of these auction-rate securities are up to 35 years. As of September 30, 2012 and December 31, 2011 the portion of the impairment classified as temporary was based on the following analysis:

 

 

The decline in the fair value of these securities is not largely attributable to adverse conditions specifically related to these securities or to specific conditions in an industry or in a geographic area;

 

Management possesses both the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value;

 

Management believes that it is more likely than not that the Company will not have to sell these securities before recovery of its cost basis;

 

Except for the credit loss of $70,000 recognized during the year ended December 31, 2009 for the Company's holdings in auction-rate securities described below, the Company does not believe that there is any additional credit loss associated with other auction-rate securities because the Company expects to recover the entire amortized cost basis;

 

A face value of $6.0 million of the auction-rate securities remain AAA rated and a face value of $6.3 million of the auction-rate securities having been downgraded by Moody's to A3-Baa3, during the year ended December 31, 2009 have not been downgraded since;

 

All scheduled interest payments have been made pursuant to the reset terms and conditions; and

 

All redemptions of auction-rate securities representing 68% of the original portfolio purchased by the Company in February 2008, have been at par.

  

Based on the guidance of ASC 320-10-35 and ASC 320-10-50, the Company evaluated the potential credit loss of each of the auction-rate securities that are currently held by the Company. Based on such analysis, the Company determined that those securities that are not 100% Federal Family Education Loan Program (FFELPS) guaranteed are potentially subject to credit risks based on the extent to which the underlying debt is collateralized and the security-specific student-loan default rates. The Company's portfolio includes two such securities. The senior parity ratio for the two securities is approximately 106%. If, therefore, the student-loan default rate and borrowing rate increases for these issuers, the remaining balance in these trusts may not be sufficient to cover the senior debt. The

 

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

Company therefore concluded that there is potential credit risk for these two securities and as such, used the discounted cash flow model to determine the amount of credit loss to be recorded. In valuing the potential credit loss, the following parameters were used: 2.0 year expected term, cash flows based on the 90-day t-bill rates for 2.0 year forwards and a risk premium of 5.9%, the amount of interest that the Company was receiving on these securities when the market was last active. During the year ended December 31, 2009, the potential credit loss associated with these securities was $70,000, which the Company deemed other-than-temporary and recorded in other expense in its Consolidated Statement of Operations during 2009. There have been no such losses since. During the nine months ended September 30, 2012, the Company was able to redeem one of these two securities at par and therefore, recognized a gain of $40,000 in other expense in its Consolidated Statement of Operations.

 

Unless a rights offering or other similar offer is made to redeem at par and accepted by the Company, the Company intends to hold the balance of these investments through successful auctions at par, which the Company believes could take approximately 2.0 years.

 

Determining the fair value of the auction-rate securities requires significant management judgment regarding projected future cash flows which will depend on many factors, including the quality of the underlying collateral, estimated time for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, among others. To determine the fair value of the auction-rate securities at December 31, 2011 and September 30, 2012, the Company used a discounted cash flow model, for which there are four unobservable inputs: estimated time-to-liquidity, discount rate, credit quality of the issuer and expected interest receipts. A significant increase in the time-to-liquidity or the discount rate inputs or a significant decrease in the credit quality of the issuer or the expected interest receipts inputs in isolation would result in a significantly lower fair value measurement.

 

The following are the values used in the discounted cash flow model:

 

 

September 30, 2012

December 31, 2011

Time-to-Liquidity (months)

24

24

Expected Return (Based on the requisite treasury rate, plus a contractual penalty rate)

1.8%

1.8%

Discount Rate (Based on the requisite LIBOR, the cost of debt and a liquidity risk premium and depending on the credit-rating of the security)

2.4% - 7.2%

3.1% - 7.9%

  

If the auctions continue to fail, the liquidity of the Company's investment portfolio may be negatively impacted and the value of its investment portfolio could decline. 

 

9.           Income Taxes

 

The income tax provision for the three and nine months ended September 30, 2012 was $0.6 million or 8.6% of the Company's income before income taxes and $1.4 million or 8.3% of the pre-tax income, respectively. This differs from the federal statutory rate of 34% primarily because the Company's foreign income was taxed at lower rates and because of the benefit that the Company realized as a result of stock option exercises and restricted stock units vested. The income tax provision (benefit) for the three months ended September 30, 2011 was ($0.4) million or (8.3%) of the Company's income before income taxes. The income tax provision for the nine months ended September 30, 2011 was $0.4 million or 3.3% of the pre-tax income. This differs from the federal statutory rate of 34% primarily because the Company's foreign income was taxed at lower rates and because of the benefit the Company realized as a result of restricted stock units vested.

 

  

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued) (Unaudited)

 

The Company is subject to examination of its income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. The Company's U.S. Federal income tax returns for the years ended December 31, 2005 through December 31, 2007 are under examination by the IRS. In April 2011, the Company received from the IRS a Notice of Proposed Adjustment, or “NOPA”, relating to a cost-sharing agreement entered into by the Company and its international subsidiaries in 2004. In the NOPA, the IRS objected to the Company's allocation of certain litigation expenses between the Company and its international subsidiaries and the amount of “buy-in payments” made by the Company's international subsidiaries to the Company in connection with the cost-sharing agreement, and proposed to increase the Company's U.S. taxable income according to a few alternative methodologies. The methodology resulting in the largest potential adjustment could, if the IRS were to prevail on all matters in dispute, increase the Company's potential federal and state income tax liabilities by up to $37.0 million, plus interest and penalties, if any. In February 2012, the Company received a revised NOPA from the IRS (Revised NOPA). In this revised NOPA, the largest potential adjustment, if the IRS were to prevail on all matters in dispute, has decreased to $10.5 million, plus interest and penalties, if any. The IRS also audited and proposed adjustments on the research and development credits generated in years 2005 through 2007. On March 20, 2012, the Company received an examination report from the IRS, commonly referred to as a “30-day letter”, formally proposing adjustments to the taxable years 2005, 2006 and 2007. In May 2012, a formal protest to the IRS proposed adjustments was filed. There is no expected timeframe for the Company to receive feedback from the IRS. The Company regularly assesses the likelihood of an adverse outcome resulting from such examinations to determine the adequacy of its provision for income taxes. Based on the technical merits of its tax return filing positions, as of September 30, 2012, the Company believes that it is more-likely-than-not the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. As of September 30, 2012, the IRS has requested for, and the Company has agreed to, an extension of the statute of limitation for taxable years 2005, 2006 and 2007. The French subsidiary of the Company is currently under audit for taxable years 2009 and 2010. The Company is in the process of responding to the questions raised by the tax authority. Aside from U.S. and France, there are no other income tax audits in process in any other material jurisdiction.

 

10.           Stock Repurchase Program

 

On July 27, 2010, the Board of Directors approved a stock repurchase program that authorized MPS to repurchase up to $50.0 million in the aggregate of its common stock between August 2, 2010 and December 31, 2011. In February 2011, the Board of Directors approved an increase from $50.0 million to $70.0 million. From August 2010 through June 2011, the Company repurchased 4,385,289 shares for a total of $70.0 million.

 

During the nine months ended September 30, 2011, the following shares have been repurchased through the open market and subsequently retired:

 

         

Average Price Per

       

2011 Calendar Year

Shares Repurchased

Share

Value (in thousands)

February

    817,500   $ 15.47   $ 12,648

March

    75,000   $ 14.17   $ 1,062

April

    917,200   $ 14.82   $ 13,617

May

    657,800   $ 16.48   $ 10,843

June

    18,000   $ 16.79   $ 302
      2,485,500           $ 38,472

 

11.     Subsequent Events

 

On October 5, 2012, the Company received a payment of $2.3 million from Linear (see Note 7) which will be recorded as credits to litigation expense (benefit) on the Condensed Consolidated Statements of Operations during the quarter ended December 31, 2012.

 

  

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This quarterly report on Form 10-Q contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events and our future performance and are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. These include statements concerning, among others:

 

 

the above-average industry growth of product and market areas that we have targeted,

 

 

our plan to introduce additional new products within our existing product families as well as in new product categories and families, 

our intention to exercise our purchase option with respect to our manufacturing facility in Chengdu, China,

 

 

our belief that we will continue to incur significant legal expenses that vary with the level of activity in each of our legal proceedings,

 

 

the effect of auction-rate securities on our liquidity and capital resources,

 

 

the application of our products in the Communications, Computing, Consumer and Industrial markets continuing to account for a majority of our revenue,

 

 

estimates of our future liquidity requirements,

 

 

the cyclical nature of the semiconductor industry,

 

 

protection of our proprietary technology,

 

 

near term business outlook for 2012,

 

 

the factors that we believe will impact our ability to achieve revenue growth,

 

 

the outcome of the IRS audit of our tax return for the tax years ended December 31, 2005 through 2007,

 

 

the percentage of our total revenue from various market segments, 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. 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 “Part II. Other Information, 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, such as our annual reports on Form 10-K 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, 2012 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed on March 12, 2012 with the Securities and Exchange Commission.

 

 

 

Overview

 

We are a fabless semiconductor company that designs, develops, and markets proprietary, advanced analog and mixed-signal semiconductors. We offer products that serve multiple markets, including flat panel televisions, wireless communications, telecommunications equipment, general consumer products, notebook computers, and set top boxes, among others. 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 and will not be 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.

 

We work with third parties to manufacture and assemble our integrated circuits (“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 time for orders is fewer than 90 days. 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 the products we produce are incorporated into end-user products. Out of our total revenue, 88% and 90% of our revenue for the quarter ended September 30, 2012 and 2011, respectively, was attributable to direct or indirect sales to customers in Asia. We derive a majority of our revenue from the sales of our DC to DC converter product family which services the Communications, Computing, Consumer and Industrial 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 successfully secure manufacturing capacity.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, long-term investments, short-term investments, inventories, income taxes, warranty obligations and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions.  Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates.

  

We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financial statements.

 

Revenue Recognition. We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) – Accounting Standards Codification (“ASC”) 605-10-S25 Revenue Recognition – Overall – Recognition. ASC 605-10-S25 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgment regarding the fixed nature of the fee charged for products delivered and the collectability of those fees. The application of these criteria has resulted in our generally recognizing revenue upon shipment (when title passes) to customers. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely impacted.

 

Approximately 82% of our sales for the nine months ended September 30, 2012 was made through distributors with formal distribution agreements. These arrangements do not include any special payment terms (our normal payment terms are 30-45 days for our distributors), price protection or exchange rights. Returns are limited to our standard product warranty. Certain of our large distributors have contracts that include limited stock rotation rights that permit the return of a small percentage of the previous six months' purchases.

 

 

 

Our revenue consists primarily of assembled and tested finished goods. We also sell die in wafer form to our customers and value-added resellers and receive royalty revenue from third parties and value-added resellers.

 

We maintain a sales reserve for stock rotation rights, which is based on historical experience of actual stock rotation returns on a per distributor basis, where available, and information related to products in the distribution channel. This reserve is recorded at the time of sale. In the future, if we are unable to estimate our stock rotation returns accurately, we may not be able to recognize revenue from sales to our distributors based on when we sell inventory to our distributors. Instead, we may have to recognize revenue when the distributor sells through such inventory to an end-customer.

 

We generally recognize revenue upon shipment of products to the distributor for the following reasons (based on ASC 605-15-25-1 Revenue Recognition – Products – Recognition – Sales of Products When Right of Return Exists):

 

(1)

Our price is fixed or determinable at the date of sale. We do not offer special payment terms, price protection or price adjustments to distributors where we recognize revenue upon shipment

(2)

Our distributors are obligated to pay us and this obligation is not contingent on the resale of our products

(3)

The distributor's obligation is unchanged in the event of theft or physical destruction or damage to the products

(4)

Our distributors have stand-alone economic substance apart from our relationship

(5)

We do not have any obligations for future performance to directly bring about the resale of our products by the distributor

(6)

The amount of future returns can be reasonably estimated. We have the ability and the information necessary to track inventory sold to and held at our distributors. We maintain a history of returns and have the ability to estimate the stock rotation returns on a quarterly basis.

 

If we enter into arrangements that have rights of return that are not estimable, we recognize revenue under such arrangements only after the distributor has sold our products to an end customer.

 

Approximately 8% of our sales for the nine months ended September 30, 2012 was made through value-added resellers based on purchase orders rather than formal distribution arrangements.  These value-added resellers have limited stock rotation rights.

 

The terms in a majority of our distribution agreements include the non-exclusive right to sell, and the agreement to use best efforts to promote and develop a market for, our products in certain regions of the world and the ability to terminate the distribution agreement by either party with up to three months' notice. We provide a one year warranty against defects in materials and workmanship. Under this warranty, we will repair the goods, provide replacements at no charge, or, under certain circumstances, provide a refund to the customer for defective products. Estimated warranty returns and warranty costs are based on historical experience and are recorded at the time product revenue is recognized.

 

Two of the Company's U.S. distributors have distribution agreements where revenue is recognized upon sale by these distributors to their end customers because these distributors have certain rights of return which management believes are not estimable. The deferred revenue balance from these two distributors as of September 30, 2012 and December 31, 2011 was $1.8 million and $1.0 million, respectively.

 

Warranty Reserves. We currently provide a 12-month warranty against defects in materials and workmanship and will either repair the goods or provide replacement products at no charge to the customer for defective products. We record estimated warranty costs by product, which are based on historical experience over the preceding 12 months, at the time we recognize product revenue. Reserve requirements are recorded in the period of sale and are based on an assessment of the products sold with warranty and historical warranty costs incurred. As the complexity of our products increases, we could experience higher warranty claims relative to sales than we have previously experienced, and we may need to increase these estimated warranty reserves.

 

Inventory Valuation. We value our inventory at the lower of the standard cost (which approximates actual cost on a first-in, first-out basis) or its current estimated market value.  We write down inventory for obsolescence or lack of demand, based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. On the contrary, if market conditions are more favorable, we may be able to sell inventory that was previously reserved.

 

Accounting for Income Taxes.  ASC 740-10 Income Taxes – Overall prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. In accordance with ASC 740-10, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities for our estimate of future tax effects attributable to temporary differences and carry forwards. We record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

 

 

 

Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality or uncertainty to an anticipated outcome, changes in accounting or tax laws in the U.S., or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on our tax returns if it has less than a 50% likelihood of being sustained. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements in the period such determination is made. We have calculated our uncertain tax positions which were attributable to certain estimates and judgments primarily related to transfer pricing, cost sharing and our international tax structure exposure.

 

As of both September 30, 2012 and December 31, 2011, we had a valuation allowance of $14.6 million attributable to management's determination that it is more likely than not that none of the deferred tax assets in the United States will be realized, except for certain deferred tax assets related to uncertain income tax positions. Should it be determined that all or part of the net deferred tax asset will not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance will be charged to income in the period such determination is made. Likewise, in the event we were to determine that it is more likely than not that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance for the deferred tax asset would increase income in the period such determination was made.

 

Contingencies. We and certain of our subsidiaries are parties to actions and proceedings incident to our business in the ordinary course of business, including litigation regarding our intellectual property, challenges to the enforceability or validity of our intellectual property and claims that our products infringe on the intellectual property rights of others. The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend. In addition, from time to time, we become aware that we are subject to other contingent liabilities. When this occurs, we will evaluate the appropriate accounting for the potential contingent liabilities using ASC 450-20-25-2 Contingencies – Loss Contingencies - Recognition to determine whether a contingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the facts and circumstances in each matter, we use our judgment to determine whether it is probable that a contingent loss has occurred and whether the amount of such loss can be estimated. If we determine a loss is probable and estimable, we record a contingent loss in accordance with ASC 450-20-25-2. In determining the amount of a contingent loss, we take into account advice received from experts for each specific matter regarding the status of legal proceedings, settlement negotiations (which may be ongoing), prior case history and other factors. Should the judgments and estimates made by management need to be adjusted as additional information becomes available, we may need to record additional contingent losses that could materially and adversely impact our results of operations. Alternatively, if the judgments and estimates made by management are adjusted, for example, if a particular contingent loss does not occur, the contingent loss recorded would be reversed which could result in a favorable impact on our results of operations.

 

Accounting for Stock-Based Compensation. We account for stock-based compensation under the provisions of ASC 718-10-30 Compensation – Stock Compensation – Overall – Initial Measurement. This standard requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). We currently use the Black-Scholes option-pricing model to estimate the fair value of our share-based payments. The Black-Scholes option-pricing model is based on a number of assumptions, including historical volatility, expected life, risk-free interest rate and expected dividends. The amount of stock-based compensation that we recognize is also based on an expected forfeiture rate. If there is a difference between the forfeiture assumptions used in determining stock-based compensation costs and the actual forfeitures which become known over time, we may change the forfeiture rate, which could have a significant impact on our stock-based compensation expense.

 

Fair Value Instruments. ASC 820-10 Fair Value Measurements and Disclosures – Overall defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of America, and requires that assets and liabilities carried at fair value be classified and disclosed in one of the three categories, as follows:

 

a.

Level 1: Quoted prices in active markets for identical assets;

b.

Level 2: Significant other observable inputs; and

c.

Level 3: Significant unobservable inputs.

ASC 820-10-35-51 Fair Value Measurement and Disclosure – Overall – Subsequent Measurement – Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly provides additional guidance for estimating fair value in accordance with ASC 820-10 Fair Value Measurements and Disclosures – Overall, when the volume and level of activity for the asset or liability have significantly decreased.

 

Our financial instruments include cash and cash equivalents and short-term and long-term investments. Cash equivalents are stated at cost, which approximates fair market value. Short-term and long-term investments are stated at their fair market value.

 

The face value of our holdings in auction rate securities is $12.3 million, all of which is classified as long-term available-for-sale investments. Investments in available-for-sale securities are recorded at fair value, and unrealized gains or losses (that are deemed to be temporary) are recognized through shareholders' equity, as a component of accumulated other comprehensive income in our condensed consolidated balance sheet and in our condensed consolidated statement of comprehensive income. We record an impairment charge to earnings when an available-for-sale investment has experienced a decline in value that is deemed to be other-than-temporary.

 

We adopted the provisions of ASC 320-10-35 Investments – Debt and Equity Securities – Overall – Subsequent Measurement and ASC 320-10-50 Investments – Debt and Equity Securities – Overall - Disclosure, effective April 1, 2009 and used the guidelines therein to determine whether the impairment is temporary or other-than temporary. Other-than-temporary impairment charges exist when the entity has the intent to sell the security or it will more likely than not be required to sell the security before anticipated recovery. During the year ended December 31, 2009, we recognized a credit loss of $70,000, which was deemed to be other-than-temporary in other income (expense) in our Condensed Consolidated Statement of Operations. There have been no such losses since.

 

Based on certain assumptions described in Note 8, “Fair Value Measurements”, to our condensed consolidated financial statements and the Liquidity and Capital Resources section of “Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations” of this quarterly report on Form 10-Q, we recorded impairment charges on our holdings in auction-rate securities. The valuation of these securities is subject to fluctuations in the future, which will depend on many factors, including the collateral quality, potential to be called or restructured, underlying final maturity, insurance guaranty, liquidity and market conditions, among others.

 

Results of Operations

 

The table below sets forth the data from our Condensed Consolidated Statement of Operations as a percentage of revenue for the periods indicated:  

 

 

Three months ended September 30,

 

Nine months ended September 30,

 
 

2012

2011

2012

2011

Revenue

    100.0 %     100.0 %     100.0 %     100.0 %

Cost of revenue

    46.9 %     47.5 %     47.1 %     48.6 %
                                 

Gross profit

    53.1 %     52.5 %     52.9 %     51.4 %

Operating expenses:

                               

Research and development

    21.2 %     22.2 %     21.5 %     22.2 %

Selling, general and administrative

    21.1 %     19.4 %     21.8 %     20.2 %

Litigation expense (benefit), net

    (0.4% )     1.4 %     (0.2% )     1.7 %
                                 

Total operating expenses

    41.9 %     43.0 %     43.1 %     44.1 %
                                 

Income from operations

    11.2 %     9.5 %     9.8 %     7.3 %

Interest income and other, net

    0.3 %     0.0 %     0.4 %     0.2 %
                                 

Income before income taxes

    11.5 %     9.5 %     10.2 %     7.5 %

Income tax provision (benefit)

    1.0 %     (0.8% )     0.8 %     0.3 %
                                 

Net income

    10.5 %     10.3 %     9.4 %     7.3 %

 

 

  

Revenue 

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 
 

2012

2011

       

2012

2011

       
 

(in thousands)

 

Change

(in thousands)

 

Change

Revenue

  $ 56,508   $ 52,962     6.7 %   $ 165,599   $ 149,058     11.1 %

 

Revenue for the three months ended September 30, 2012 was $56.5 million, an increase of $3.6 million, or 6.7%, from $53.0 million for the three months ended September 30, 2011. This increase was primarily due to increased demand for our DC to DC converters. Revenue from our DC to DC converters was $49.7 million, an increase of $4.8 million, or 10.6% over same period in 2011 primarily due to increased demand for our DCDC, Mini-Monster and CLS products. Sales of our lighting control products for the three months ended September 30, 2012 were down by 15.3% compared to the same period in 2011 primarily due to reductions in demand for our WLED products.

 

Revenue for the nine months ended September 30, 2012 was $165.6 million, an increase of $16.5 million, or 11.1%, from $149.1 million for the nine months ended September 30, 2011. This increase was primarily due to increased demand for our DC to DC converters partly offset by a reduction in revenue from our lighting control products. Revenue from our DC to DC converters was $145.2 million, an increase of $16.9 million, or 13.2% compared to the same period in 2011. The revenue increase in our DC to DC converter product line was primarily driven by increased demand for our DCDC, Mini-Monster, and CLS products, partly offset by reductions in revenue from our audio products. For the first nine months of 2012, sales of our lighting control products were down 1.9% year over year.

 

The following table illustrates changes in our revenue by product family:

 

 

For the three months ended September 30,

For the nine months ended September 30,

 

2012

2011*           2012   2011*          
 

(in thousands)

% of

(in thousands)

% of

       

(in thousands)

% of

(in thousands)

% of

       
  Amount

Revenue

Amount

Revenue

Change

Amount

Revenue

Amount

Revenue

Change

DC to DC Converters

    49,710     88.0 %   $ 44,936     84.8 %     10.6 %     145,217     87.7 %   $ 128,287     86.1 %     13.2 %

Lighting Control Products

    6,798     12.0 %     8,026     15.2 %     (15.3 )%     20,382     12.3 %     20,771     13.9 %     (1.9 )%
    $ 56,508     100.0 %   $ 52,962     100.0 %     6.7 %   $ 165,599     100.0 %   $ 149,058     100.0 %     11.1 %

* 2011 Revenue associated with Audio Amplifiers has been included with DC to DC Converters to comform with current year presentation.

 

Cost of Revenue and Gross Margin 

 

 

For the three months ended September 30,

 

For the three months ended September 30,

 
 

2012

2011

       

2012

2011

       
 

(in thousands)

 

Change

(in thousands)

 

Change

Cost of Revenue (1)

  $ 26,495   $ 25,148     5.4 %   $ 78,004   $ 72,381     7.8 %

Cost of revenue as a percentage of revenue

    46.9 %     47.5 %     (1.3 )%     47.1 %     48.6 %     (3.0 )%

Gross Profit

  $ 30,013     27,814           $ 87,595     76,677        

Gross Margin

    53.1 %     52.5 %             52.9 %     51.4 %        

(1) Includes stock-based compensation expense

  $ 112   $ 83           $ 325   $ 235        

 

Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, as well as other overhead costs relating to the aforementioned costs including stock-based compensation expense. Gross Profit as a percentage of revenue, or gross profit margin, was 53.1% for the three months ended September 30, 2012 and 52.5% for the three months ended September 30, 2011. Gross profit as a percentage of revenue, or gross profit margin, was 52.9% for the nine months ended September 30, 2012 and 51.4% for the nine months ended September 30, 2011. The 0.6 percentage point increase in gross profit margin for the three months ended September 30, 2012 was primarily due to cost efficiencies and better product mix offset by higher relative costs for inventory reserves and warranty reserves compared to the same period in 2011. The 1.5 percentage point increase in gross profit margin for the nine months ended September 30, 2012 was primarily due to cost efficiencies, higher absorption of in-house test manufacturing overhead on higher revenue, and a better product mix offset by higher relative costs for inventory reserves, compared to the same period in 2011.

 

 

 

Research and Development

 

 

For the three months ended September 30,

 

For the three months ended September 30,

 
 

2012

2011

       

2012

2011

       
 

(in thousands)

 

Change

(in thousands)

 

Change

Research and development (“R&D”) (1)

  $ 11,967   $ 11,792     1.5 %   $ 35,553   $ 33,115     7.4 %
                                                 

R&D as a percentage of revenue

    21.2 %     22.2 %             21.5 %     22.2 %        
                                                 

(1) Includes stock-based compensation expense

  $ 1,465   $ 1,576           $ 4,255   $ 4,553        

 

R&D expenses consist of salary and benefit expenses for design and product engineers, expenses related to new product development, and related facility costs. R&D expenses were $12.0 million or 21.2% of revenue, for the three months ended September 30, 2012 and $11.8 million, or 22.2% of revenue, for the three months ended September 30, 2011. R&D expenses were $35.6 million or 21.5% of revenue, for the nine months ended September 30, 2012 and $33.1 million, or 22.2% of revenue, for the nine months ended September 30, 2011. R&D expenses increased for the three months ended September 30, 2012 compared to the same period in 2011 due to costs associated with new product development. R&D expenses increased for the nine months ended September 30, 2012 compared to the same period in 2011 due to an increase in personnel-related costs, an increase in facilities costs related to moving expenses associated with our new headquarter location and an increase in costs associated with new product development. Our R&D headcount as of September 30, 2012 was 388 employees as compared to 380 employees as of September 30, 2011.

 

Selling, General and Administrative

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 
 

2012

2011

       

2012

2011

       
 

(in thousands)

 

Change

(in thousands)

 

Change

Selling, general and administrative (“SG&A”) (1)

  $ 11,955   $ 10,249     16.6 %   $ 36,088   $ 30,082     20.0 %
                                                 

SG&A as a percentage of revenue

    21.1 %     19.4 %             21.8 %     20.2 %        
                                                 

(1) Includes stock-based compensation expense

  $ 2,605   $ 1,715           $ 6,746   $ 5,248        

 

SG&A expenses include salary and benefit expenses for sales, marketing and administrative personnel, sales commissions, travel expenses, related facilities costs, outside legal and accounting fees, and fees associated with Sarbanes-Oxley compliance requirements. SG&A expenses were $12.0 million, or 21.1% of revenue, for the three months ended September 30, 2012 and $10.2 million, or 19.4% of revenue for the three months ended September 30, 2011. SG&A expenses were $36.1 million, or 21.8% of revenue, for the nine months ended September 30, 2012 and $30.1 million, or 20.2% of revenue, for the nine months ended September 30, 2011. For the three and nine months ended September 30, 2012, SG&A expenses increased year over year due to an increase in personnel-related costs, stock-based compensation expense, professional services fees and sales commission on higher revenue compared to the same period in 2011. Our SG&A headcount as of September 30, 2012 was 251 employees as compared to 241 employees as of September 30, 2011.

 

Litigation Expense (Benefit), net

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 
 

2012

2011

       

2012

2011

       
 

(in thousands)

 

Change

(in thousands)

 

Change

Litigation expense (benefit), net

  $ (229 )   $ 722     (131.7 )%   $ (345