Description of Business and Significant Accounting Policies

3 Months Ended

Mar. 31, 2013

Description of Business and Significant Accounting Policies [Abstract]

Description of Business and Significant Accounting Policies

1. Description of Business and Significant Accounting Policies

Volterra Semiconductor Corporation (the “Company” or “Volterra”) was incorporated in Delaware in 1996, and its principal offices are located in Fremont, California. The Company designs, develops and markets proprietary, high-performance analog and mixed-signal power management semiconductors.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The functional currency of the Company and its significant subsidiaries is the United States dollar. Foreign currency transaction gains and losses are recorded in income. For all periods presented, there have been no material foreign currency transaction or translation gains or losses.

The Company’s accompanying condensed consolidated financial statements have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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 2012 annual report on Form 10-K for the fiscal year ended December 31, 2012 as filed with the SEC on March 6, 2013.

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 operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for any other future interim period or full year. The condensed consolidated balance sheet as of December 31, 2012 is derived from the audited consolidated financial statements as of the year then ended.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes.

The accounting estimates that require our most significant, difficult and subjective judgments include:

• determination of sales return allowances;

• the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions);

• the valuation of inventory;

• measurement of stock-based compensation;

• valuation of indefinite-lived intangible assets; and

• valuation of goodwill.

Actual results could differ from those estimates.

Concentrations of Credit Risk

The Company sells its products to distributors and original equipment manufacturers (and their outsourced suppliers) in the computing, storage, networking, and consumer electronic industries. The Company performs credit evaluations of its customers’ financial condition and generally does not require collateral from its customers. An allowance is provided for bad debts when it is probable and estimable that accounts receivable will not be collected.

Financial Instruments

Financial instruments consist of cash equivalents, short-term investments, accounts receivable, and accounts payable. The carrying value of the Company’s financial instruments approximates the respective fair value due to the relatively short maturities of these instruments. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and trade accounts receivable.

The Company maintains cash, cash equivalents, and short-term investments with high credit quality financial institutions. Cash equivalents consist of highly liquid investments maturing in 90 days or less from the date of purchase. Short-term investments are comprised of U.S. Treasury and debt securities with remaining contractual maturities on the date of purchase greater than 90 days but less than one year. Investments in debt securities are classified as held-to-maturity and carried at amortized cost. The fair value of these instruments would be categorized as Level 1 of the fair value hierarchy. The following table reconciles the amortized cost to the fair value of short-term investments:

	As of March 31,		As of December 31,
	2013		2012
Amortized cost	$	3,000	$	2,000
Unrealized gains		—		—
Fair value	$	3,000	$	2,000

Segment Reporting and Significant Customers

The Company is organized and operates as a single business segment: analog and mixed-signal power management semiconductors. The Company’s chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis for the purposes of making operating decisions and assessing financial performance.

Significant customers are those customers directly accounting for more than 10% of the Company’s net revenue or accounts receivable. For each significant customer, net revenue as a percentage of total net revenue and accounts receivable as a percentage of total accounts receivable are as follows:

	Net Revenue						Accounts Receivable
	Three Months Ended						As of
	March 31,						March 31,			December 31,
Customer	2013			2012			2013			2012
A		23	%		25	%		27	%		28	%
B		20	%			*		26	%		23	%
C		18	%		26	%		*			12	%
D		10	%		13	%		11	%		10	%
E		*			11	%		*			*
F		*			10	%		*			*

* Less than 10%

The Company reports its net revenue by geographic areas according to the destination to which the product was shipped. The geographic area to which a product was shipped is not necessarily the same location in which the product is ultimately used. In all periods, substantially all of the Company’s net revenue was denominated in U.S. dollars. Net revenue by geographic area was as follows:

	Three Months Ended
	March 31,
	2013			2012
China		65	%		62	%
Singapore		27			29
United States		2			2
Other		6			7
		100	%		100	%

Revenue Recognition

Revenue from the sale of semiconductor products is recognized upon shipment when title transfers to the customer provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. An allowance is recorded at the time of sale to provide for estimated future sales returns. The allowance is based upon historical experience, current trends, and the Company’s expectations regarding future return activity. Sales returns must be authorized by Volterra and are generally limited to instances of product failure under the Company’s warranty that generally provides that products will be free from defects for a limited period of time, generally not longer than twelve months.

Volterra’s sales to distributors are made under agreements that do not provide for price adjustments after purchase and provide limited return rights under the Company’s standard warranty. Revenue on these sales is recognized upon shipment when title passes to the distributor. Volterra estimates future distributor sales returns based on historical data and current business expectations and reduces revenue for estimated future returns through the allowance for sales returns.

Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

Stock-Based Compensation

Stock-based compensation costs are calculated on the date of grant based on the estimated fair value of the award. The compensation cost is recognized on a straight-line basis over the vesting period.

The effect of stock-based compensation was as follows:

	Three Months Ended March 31,
	2013		2012
Stock-based compensation expense:
Cost of revenue	$	181	$	229
Research and development		1,115		970
Sales, general and administrative		1,463		1,195
Effect on net income	$	2,759	$	2,394
Effect on basic net income per share	$	0.11	$	0.10
Effect on diluted net income per share	$	0.11	$	0.09

The Company has not recognized any tax benefit related to stock-based compensation expense as a result of the full valuation allowance on its net domestic deferred tax assets.

Provision for Income Taxes

Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date.

As of March 31, 2013, the total amount of unrecognized tax benefits was $8,338 of which $1,422 would affect the effective tax rate if recognized. The remaining $6,915 in unrecognized tax benefits would not result in a tax benefit since it would be fully offset with a valuation allowance.

As of December 31, 2012, the total amount of unrecognized tax benefits was $7,564, of which $1,381 would affect the effective tax rate if recognized. The remaining $6,183 in unrecognized tax benefits would not result in a tax benefit since it would be fully offset with a valuation allowance.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Cumulative interest and penalties through the first quarter of 2013 are immaterial.

The Company files U.S. federal, state and foreign income tax returns and is subject to examination in these jurisdictions for all tax years since inception. Although timing of the resolution or closure on audits is highly uncertain, the Company believes it is reasonably possible that there would be immaterial changes in its currently unrecognized tax benefits in the next 12 months.

Earnings Per Share

Basic net income per share is calculated by dividing net income by the weighted average shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing the net income by the weighted average shares outstanding of common stock and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of dilutive shares issuable upon the exercise of outstanding stock options and the vesting of outstanding restricted stock units, computed using the treasury stock method. The sum of the quarterly net income per share will not necessarily equal the net income per share for the total period due to the effects of rounding.

The following table sets forth for all periods presented the computation of basic and diluted net income per share, including the reconciliation of the numerator and denominator used in the calculation:

	Three Months Ended March 31,
	2013		2012
Numerator:
Net income	$	3,036	$	6,190
Denominator:
Weighted average shares outstanding, basic		25,163		25,122
Effect of dilutive securities:
Stock options and restricted stock units		624		1,630
Weighted average shares outstanding, diluted		25,787		26,752
Basic net income per share	$	0.12	$	0.25
Diluted net income per share	$	0.12	$	0.23

Stock options and restricted stock units outstanding in the amount of 3,682 and 1,293 shares for the three months ended March 31, 2013 and 2012, respectively, were excluded from the computation of diluted earnings per share because their effect was anti-dilutive in the period. These securities outstanding as of March 31, 2013 could dilute net income per share in the future.

Long-lived Assets and Indefinite-lived Intangible Assets

We assess the impairment of long-lived assets and indefinite-lived intangible assets and in-process research and development (“IPR&D”), whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Whenever events or changes in circumstances suggest that the carrying amount of long-lived assets and indefinite-lived intangible assets may not be recoverable, we estimate the future undiscounted cash flows expected to be generated by the asset from its use or eventual disposition. If the sum of the expected future undiscounted cash flows, which includes revenue, is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. IPR&D is tested for impairments annually. If a particular IPR&D project were to be abandoned and have no future alternative use then its value would be reduced.

Goodwill

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and indefinite-lived intangible assets acquired and liabilities assumed. We evaluate goodwill for impairment at least on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow. We perform the goodwill impairment test for each reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired. We perform our goodwill impairment assessment at the Company level, which is our sole reporting unit.

Accounting for Lease Incentives

As part of the Company’s existing leased facilities, the Company has received various lease incentives which take the form of a fixed allowance towards lease improvements on the facility. The Company used the allowance to make leasehold improvements which will be depreciated over the useful life of the assets or the lease term, whichever is shorter. The offsetting lease incentives liability is being amortized on a straight-line basis over the term of the lease as an offset to rent expense.