0001280452 MONOLITHIC POWER SYSTEMS INC false --12-31 Q2 2020 0.001 0.001 150,000 150,000 44,911 44,911 43,616 43,616 406 64 351 162 0.50 0.40 1.00 0.80 0 0 0 2 3 4 1 2 50 50 2 2 0 5 5 1 5 5 1 1 2 0 0 2.5 1 Amount reflects the number of awards that may ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period. Amounts reflect the tax benefit related to stock-based compensation recorded for equity awards that are expected to generate tax deductions when they vest in future periods. For the six months ended June 30, 2019, the amount includes $2.2 million for operating leases existing on January 1, 2019. 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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

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

 

For the quarterly period ended June 30, 2020

 

OR

 

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

 

Commission file number: 000-51026

 


 

Monolithic Power Systems, Inc.

(Exact name of registrant as specified in its charter)

 


 

 

Delaware

77-0466789

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

5808 Lake Washington Blvd. NE, Kirkland, Washington 98033

(Address of principal executive offices)(Zip Code)

 

  (425296-9956

(Registrant’s telephone number, including area code) 

 


 

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

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

MPWR

 

The NASDAQ Global Select Market

 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

 

 

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

 

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

  

There were 44,913,000 shares of the registrant’s common stock issued and outstanding as of July 27, 2020.

 



 

1

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

TABLE OF CONTENTS

PAGE

PART I. FINANCIAL INFORMATION

3

ITEM 1.

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 STOCKHOLDERS’ EQUITY

6

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

7

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8

ITEM 2.

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

23

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31

ITEM 4.

CONTROLS AND PROCEDURES

31

PART II. OTHER INFORMATION

31

ITEM 1.

LEGAL PROCEEDINGS

31

ITEM1A.

RISK FACTORS

31

ITEM 6.

EXHIBITS

50

 

2

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

  

  

June 30,

  

December 31,

 
  

2020

  

2019

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $156,483  $172,960 

Short-term investments

  355,840   282,437 

Accounts receivable, net

  55,136   52,704 

Inventories

  152,119   127,500 

Other current assets

  29,286   19,605 

Total current assets

  748,864   655,206 

Property and equipment, net

  251,980   228,315 

Long-term investments

  3,032   3,138 

Goodwill

  6,571   6,571 

Deferred tax assets, net

  13,432   17,193 

Other long-term assets

  47,276   45,952 

Total assets

 $1,071,155  $956,375 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

 $45,169  $27,271 

Accrued compensation and related benefits

  32,785   26,164 

Other accrued liabilities

  58,831   44,790 

Total current liabilities

  136,785   98,225 

Income tax liabilities

  35,624   37,596 

Other long-term liabilities

  49,801   47,063 

Total liabilities

  222,210   182,884 

Commitments and contingencies

        

Stockholders’ equity:

        

Common stock and additional paid-in capital: $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 44,911 and 43,616, respectively

  605,165   549,517 

Retained earnings

  247,864   229,450 

Accumulated other comprehensive loss

  (4,084)  (5,476)

Total stockholders’ equity

  848,945   773,491 

Total liabilities and stockholders’ equity

 $1,071,155  $956,375 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

(unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue

  $ 186,209     $ 151,007     $ 351,987     $ 292,370  

Cost of revenue

    83,616       67,782       157,947       131,139  

Gross profit

    102,593       83,225       194,040       161,231  

Operating expenses:

                               

Research and development

    31,673       27,545       57,629       53,003  

Selling, general and administrative

    40,883       35,058       73,047       65,611  

Litigation expense

    2,082       503       4,423       781  

Total operating expenses

    74,638       63,106       135,099       119,395  

Income from operations

    27,955       20,119       58,941       41,836  

Other income, net

    5,200       2,229       3,486       5,569  

Income before income taxes

    33,155       22,348       62,427       47,405  

Income tax expense (benefit)

    2,988       1,655       (3,495 )     531  

Net income

  $ 30,167     $ 20,693     $ 65,922     $ 46,874  
                                 

Net income per share:

                               

Basic

  $ 0.67     $ 0.48     $ 1.48     $ 1.09  

Diluted

  $ 0.64     $ 0.45     $ 1.41     $ 1.03  

Weighted-average shares outstanding:

                               

Basic

    44,785       43,109       44,620       42,929  

Diluted

    46,831       45,483       46,750       45,358  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net income

 $30,167  $20,693  $65,922  $46,874 

Other comprehensive income (loss), net of tax:

                

Foreign currency translation adjustments

  1,018   (3,709)  (1,864)  (32)

Change in unrealized gain on available-for-sale securities, net of tax of $(406), $(64), $(351) and $(162), respectively

  4,909   611   3,256   1,437 

Other comprehensive income (loss), net of tax

  5,927   (3,098)  1,392   1,405 

Comprehensive income

 $36,094  $17,595  $67,314  $48,279 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per-share amounts)

(unaudited)

 

              

Accumulated

     
  

Common Stock and

      

Other

  

Total

 
  

Additional Paid-in Capital

  

Retained

  

Comprehensive

  

Stockholders’

 

Three Months Ended June 30, 2020

 

Shares

  

Amount

  

Earnings

  

Loss

  

Equity

 

Balance as of April 1, 2020

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

Net income

  -   -   30,167   -   30,167 

Other comprehensive income

  -   -   -   5,927   5,927 

Dividends and dividend equivalents declared ($0.50 per share)

  -   -   (23,768)  -   (23,768)

Common stock issued under the employee equity incentive plan

  196   2,352   -   -   2,352 

Stock-based compensation expense

  -   21,077   -   -   21,077 

Balance as of June 30, 2020

  44,911  $605,165  $247,864  $(4,084) $848,945 

 

              

Accumulated

     
  

Common Stock and

      

Other

  

Total

 
  

Additional Paid-in Capital

  

Retained

  

Comprehensive

  

Stockholders’

 

Three Months Ended June 30, 2019

 

Shares

  

Amount

  

Earnings

  

Loss

  

Equity

 

Balance as of April 1, 2019

  43,033  $478,913  $202,378  $(1,040) $680,251 

Net income

  -   -   20,693   -   20,693 

Other comprehensive loss

  -   -   -   (3,098)  (3,098)

Dividends and dividend equivalents declared ($0.40 per share)

  -   -   (18,538)  -   (18,538)

Common stock issued under the employee equity incentive plan

  201   2,088   -   -   2,088 

Stock-based compensation expense

  -   22,758   -   -   22,758 

Balance as of June 30, 2019

  43,234  $503,759  $204,533  $(4,138) $704,154 

 

              

Accumulated

     
  

Common Stock and

      

Other

  

Total

 
  

Additional Paid-in Capital

  

Retained

  

Comprehensive

  

Stockholders’

 

Six Months Ended June 30, 2020

 

Shares

  

Amount

  

Earnings

  

Loss

  

Equity

 

Balance as of January 1, 2020

  43,616  $549,517  $229,450  $(5,476) $773,491 

Net income

  -   -   65,922   -   65,922 

Other comprehensive income

  -   -   -   1,392   1,392 

Dividends and dividend equivalents declared ($1.00 per share)

  -   -   (47,508)  -   (47,508)

Common stock issued under the employee equity incentive plan

  1,280   14,110   -   -   14,110 

Common stock issued under the employee stock purchase plan

  15   1,892   -   -   1,892 

Stock-based compensation expense

  -   39,646   -   -   39,646 

Balance as of June 30, 2020

  44,911  $605,165  $247,864  $(4,084) $848,945 

 

              

Accumulated

     
  

Common Stock and

      

Other

  

Total

 
  

Additional Paid-in Capital

  

Retained

  

Comprehensive

  

Stockholders’

 

Six Months Ended June 30, 2019

 

Shares

  

Amount

  

Earnings

  

Loss

  

Equity

 

Balance as of January 1, 2019

  42,505  $450,908  $194,728  $(5,543) $640,093 

Net income

  -   -   46,874   -   46,874 

Other comprehensive income

  -   -   -   1,405   1,405 

Dividends and dividend equivalents declared ($0.80 per share)

  -   -   (37,069)  -   (37,069)

Common stock issued under the employee equity incentive plan

  715   12,471   -   -   12,471 

Common stock issued under the employee stock purchase plan

  14   1,627   -   -   1,627 

Stock-based compensation expense

  -   38,753   -   -   38,753 

Balance as of June 30, 2019

  43,234  $503,759  $204,533  $(4,138) $704,154 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

6

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net income

  $ 65,922     $ 46,874  

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

               

Depreciation and amortization

    8,829       6,994  

Loss on disposal and sale of property and equipment, net

    3       15  

Amortization of premium on available-for-sale securities

    1,121       216  

(Gain) loss on deferred compensation plan investments

    178       (2,555 )

Deferred taxes, net

    3,400       (20 )

Stock-based compensation expense

    39,606       38,719  

Changes in operating assets and liabilities:

               

Accounts receivable

    (2,428 )     (176 )

Inventories

    (24,580 )     (7,205 )

Other assets

    (10,001 )     (42 )

Accounts payable

    15,489       2,153  

Accrued compensation and related benefits

    6,773       4,124  

Income tax liabilities

    (61 )     (6,627 )

Other accrued liabilities

    6,498       423  

Net cash provided by operating activities

    110,749       82,893  

Cash flows from investing activities:

               

Purchases of property and equipment

    (24,536 )     (77,638 )

Acquisition of in-place leases

    -       (981 )

Purchases of short-term investments

    (189,637 )     (21,546 )

Proceeds from maturities and sales of short-term investments

    118,701       57,999  

Proceeds from sales of long-term investments

    125       75  

Proceeds from sales of property and equipment

    1       1,456  

Contributions to deferred compensation plan, net

    (775 )     (1,435 )

Net cash used in investing activities

    (96,121 )     (42,070 )

Cash flows from financing activities:

               

Property and equipment purchased on extended payment terms

    (4,061 )     (3 )

Proceeds from common stock issued under the employee equity incentive plan

    14,110       12,471  

Proceeds from common stock issued under the employee stock purchase plan

    1,892       1,627  

Dividends and dividend equivalents paid

    (42,267 )     (30,784 )

Net cash used in financing activities

    (30,326 )     (16,689 )

Effect of change in exchange rates

    (777 )     175  

Net increase (decrease) in cash, cash equivalents and restricted cash

    (16,475 )     24,309  

Cash, cash equivalents and restricted cash, beginning of period

    173,076       172,818  

Cash, cash equivalents and restricted cash, end of period

  $ 156,601     $ 197,127  

Supplemental disclosures for cash flow information:

               

Cash paid for taxes

  $ 633     $ 7,168  

Non-cash investing and financing activities:

               

Liability accrued for property and equipment purchases

  $ 7,258     $ 3,028  

Liability accrued for dividends and dividend equivalents

  $ 25,044     $ 19,749  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

1. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended  December 31, 2019, filed with the SEC on  February 28, 2020.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Form 10-Q are not necessarily indicative of the results that  may be expected for the year ending  December 31, 2020 or for any other future periods.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions used in these condensed consolidated financial statements primarily include those related to revenue recognition, inventory valuation, valuation of share-based awards, contingencies and income tax valuation allowances. 

 

The coronavirus pandemic first identified in December 2019 (“COVID-19”) has resulted in a global slowdown of economic activity and a decrease in demand for a broad variety of goods and services, while also disrupting business operations for an unknown period of time until the disease is contained. While these events did not adversely affect the Company’s overall operating results and financial condition for the three and six months ended June 30, 2020, they could have a negative impact on the Company’s business operations for the remainder of 2020. However, the Company is currently unable to predict the size and duration of such impact.

 

As of the date of issuance of these condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require management to update the significant estimates and assumptions used in the preparation of the condensed consolidated financial statements, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019. As new events continue to evolve and additional information becomes available, any changes to these estimates and assumptions will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from these estimates and assumptions, and any such differences may be material to the Company’s condensed consolidated financial statements. 

 

Recently Adopted Accounting Pronouncements

  

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which changes certain disclosure requirements, including those related to Level 3 fair value measurements. The Company adopted the standard in the first quarter of 2020 and the adoption did not have a material impact on its disclosures.

 

In  January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities continues to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The Company adopted the standard in the first quarter of 2020 and the adoption did not have a material impact on its annual goodwill impairment test.

 

8

 

In  June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities, the standard eliminates the concept of other-than-temporary impairment and entities are required to recognize an allowance for credit losses rather than reductions in the amortized cost of the securities. Entities are required to apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company adopted the standard in the first quarter of 2020, which did not have a material impact on its condensed consolidated financial statements.

 

Recent Accounting Pronouncement Not Yet Adopted as of June 30, 2020

 

In  December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard will be effective for annual reporting periods beginning after  December 15, 2020. Early adoption is permitted. The standard will generally be applied prospectively, with certain exceptions. The Company is currently evaluating the impact of the adoption on its condensed consolidated financial statements.

    

 

 

2. REVENUE RECOGNITION

 

Revenue from Product Sales

  

The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits (“ICs”), as well as dies in wafer form. These product sales accounted for 97% and 99% of the Company’s total revenue for the three months ended  June 30, 2020 and 2019, respectively, and 98% and 99% of the Company’s total revenue for the six months ended  June 30, 2020 and 2019, respectively. The remaining revenue primarily includes royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periods presented. See Note 7 for the disaggregation of the Company’s revenue by geographic regions and by product families.

 

The Company sells its products primarily through third-party distributors, value-added resellers, original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and electronic manufacturing service (“EMS”) providers. For the three months ended  June 30, 2020 and 2019, 83% and 77%, respectively, of the Company’s product sales were made through distribution arrangements. For the six months ended  June 30, 2020 and 2019, 82% and 80%, respectively, of the Company’s product sales were made through distribution arrangements. These distribution arrangements contain enforceable rights and obligations specific to those distributors and not the end customers. Purchase orders, which are generally governed by sales agreements or the Company's standard terms of sale, set the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers purchase orders to be the contracts with customers. The unit price as stated on the purchase orders is considered the observable, stand-alone selling price for the arrangements.

   

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

 

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

 

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

 

Variable Consideration

 

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

  

9

 

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

  

Contract Balances

 

Accounts Receivable:

 

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of  June 30, 2020 and December 31, 2019, accounts receivable totaled $55.1 million and $52.7 million, respectively. The Company's accounts receivable are short-term, with standard payment terms generally ranging from 30 to 60 days. The Company does not require its customers to provide collateral to support accounts receivable. The Company assesses the collectability by reviewing accounts receivable on an individual basis. To manage credit risk, management performs ongoing credit evaluations of the customers’ financial condition, monitors payment performance, and assesses current economic conditions, as well as reasonable and supportable forecasts of future economic conditions, that may affect collectability of the outstanding receivables. For certain high risk customers, the Company requires standby letters of credit or advance payment prior to shipments of goods. The Company did not recognize any write-offs of accounts receivable in any of the periods presented. As of June 30, 2020, the Company did not record any allowance for credit losses, and as of December 31, 2019, the Company did not record any allowance for doubtful accounts.

 

Contract Liabilities:

 

For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of  June 30, 2020 and December 31, 2019, customer prepayments totaled $6.7 million and $3.4 million, respectively. The increase in the customer prepayment balance for the six months ended June 30, 2020 resulted from an increase in unfulfilled customer orders for which the Company has received payments. For the six months ended  June 30, 2020, the Company recognized $3.3 million of revenue that was included in the customer prepayment balance as of  December 31, 2019.

 

Practical Expedients

 

The Company has elected the practical expedient to expense sales commissions as incurred because the amortization period would have been one year or less. 

  

The Company’s standard payment terms generally require customers to pay 30 to 60 days after the Company satisfies the performance obligations. For those customers who are required to pay in advance, the Company satisfies the performance obligations generally within a quarter. The Company has elected not to determine whether contracts with customers contain significant financing components.

 

The Company’s unsatisfied performance obligations primarily include products held in consignment arrangements and customer purchase orders for products that the Company has not yet shipped. Because the Company expects to fulfill these performance obligations within one year, the Company has elected not to disclose the amount of these remaining performance obligations.

   

 

3. STOCK-BASED COMPENSATION

 

2014 Equity Incentive Plan

 

The Board of Directors (the “Board”) adopted the 2014 Equity Incentive Plan (the “2014 Plan”) in  April 2013, and the Company's stockholders approved it in  June 2013. In  October 2014, the Board approved certain amendments to the 2014 Plan. The amended 2014 Plan became effective on  November 13, 2014 and provided for the issuance of up to 5.5 million shares. In April 2020, the Board further amended and restated the amended 2014 Plan (the “Amended and Restated 2014 Plan”), and the Company's stockholders approved it in June 2020. The Amended and Restated 2014 Plan became effective on June 11, 2020 and provides for the issuance of up to 10.5 million shares. The Amended and Restated 2014 Plan will expire on  June 11, 2030. As of  June 30, 2020, 6.2 million shares remained available for future issuance under the Amended and Restated 2014 Plan. 

  

10

 

Stock-Based Compensation Expense

 

The Company recognized stock-based compensation expenses as follows (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Cost of revenue

 $642  $663  $1,199  $1,193 

Research and development

  4,962   5,412   9,332   9,841 

Selling, general and administrative

  15,440   16,634   29,075   27,685 

Total stock-based compensation expense

 $21,044  $22,709  $39,606  $38,719 

Tax benefit related to stock-based compensation (1)

 $468  $706  $938  $1,544 

 


 

(1)

Amounts reflect the tax benefit related to stock-based compensation recorded for equity awards that are expected to generate tax deductions when they vest in future periods.

 

Restricted Stock Units (“RSUs”)

 

The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals and the approval of such achievement by the Compensation Committee of the Board (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company.

 

A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

 

  

Time-Based RSUs

  

PSUs and MPSUs

  

MSUs

  

Total

 
  

Number of

Shares

  

Weighted-

Average Grant

Date Fair

Value Per

Share

  

Number of

Shares

  

Weighted-

Average Grant

Date Fair

Value Per

Share

  

Number of

Shares

  

Weighted-

Average Grant

Date Fair

Value Per

Share

  

Number of

Shares

  

Weighted-

Average Grant

Date Fair

Value Per

Share

 

Outstanding at January 1, 2020

  180  $115.45   1,987  $74.50   1,886  $37.63   4,053  $59.16 

Granted

  70  $181.41   383(1)  $169.65   -  $-   453  $171.47 

Vested

  (60) $105.95   (1,058) $57.29   (162) $23.57   (1,280) $55.30 

Forfeited

  (4) $129.31   (9) $83.15   (5) $68.48   (18) $89.81 

Outstanding at June 30, 2020

  186  $143.09   1,303  $116.39   1,719  $38.86   3,208  $76.39 

 


 

(1)

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

 

The intrinsic value related to vested RSUs was $39.7 million and $26.3 million for the three months ended  June 30, 2020 and 2019, respectively. The intrinsic value related to vested RSUs was $221.9 million and $84.0 million for the six months ended  June 30, 2020 and 2019, respectively. As of  June 30, 2020, the total intrinsic value of all outstanding RSUs was $721.3 million, based on the closing stock price of $237.00. As of  June 30, 2020, unamortized compensation expense related to all outstanding RSUs was $135.8 million with a weighted-average remaining recognition period of approximately three years. 

 

Cash proceeds from vested PSUs with a purchase price requirement totaled $14.1 million and $12.5 million for the six months ended June 30, 2020 and 2019, respectively. 

 

Time-Based RSUs:

 

For the six months ended  June 30, 2020, the Compensation Committee granted 70,000 RSUs with service conditions to non-executive employees and non-employee directors. The RSUs generally vest over four years for employees and one year for directors, subject to continued service with the Company.

 

11

 

2020 PSUs:

 

In  February 2020, the Compensation Committee granted 100,000 PSUs to the executive officers, which represent a target number of shares to be earned based on the Company’s average two-year (2020 and 2021) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2020 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2020 Executive PSUs. 50% of the 2020 Executive PSUs will vest in the first quarter of 2022 if the pre-determined performance goals are met during the performance period. The remaining 2020 Executive PSUs will vest over the following two years on a quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2020 Executive PSUs is $51.1 million.

 

In  February 2020, the Compensation Committee granted 30,000 PSUs to certain non-executive employees, which represent a target number of shares to be earned based on the Company’s 2021 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2020 and 2021) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2020 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2020 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2020 Non-Executive PSUs will vest in the first quarter of 2022 if the pre-determined performance goals are met during the performance period. The remaining 2020 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2020 Non-Executive PSUs is $12.9 million.

 

The 2020 Executive PSUs and the 2020 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. The $30 purchase price requirement is deemed satisfied and waived if the average stock price for 20 consecutive trading days at any time during the performance period is $30 higher than the grant date stock price of $182.62. This market condition was achieved in the second quarter of 2020. The Company determined the grant date fair value using a Monte Carlo simulation model with the following assumptions: stock price of $182.62, simulation term of 2.0 years, expected volatility of 33.6%, risk-free interest rate of 1.4% and expected dividend yield of 1.1%. 

  

2004 Employee Stock Purchase Plan (“ESPP”)

  

No shares were issued under the ESPP for the three months ended  June 30, 2020 and 2019. For the six months ended June 30, 2020 and 2019, 15,000 and 14,000 shares, respectively, were issued under the ESPP. As of June 30, 2020, 4.5 million shares were available for future issuance under the ESPP.

 

The intrinsic value of the shares issued was $1.0 million and $0.3 million for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, the unamortized expense was $0.1 million, which will be recognized through the third quarter of 2020. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Expected term (in years)

  0.5   0.5 

Expected volatility

  31.4%  37.3%

Risk-free interest rate

  1.6%  2.5%

Dividend yield

  1.1%  1.2%

 

Cash proceeds from the shares issued under the ESPP were $1.9 million and $1.6 million for the six months ended June 30, 2020 and 2019, respectively.  

  

 

4. BALANCE SHEET COMPONENTS

 

Inventories 

 

Inventories consist of the following (in thousands): 

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

Raw materials

  $ 24,447     $ 22,872  

Work in process

    64,992       42,681  

Finished goods

    62,680       61,947  

Total

  $ 152,119     $ 127,500  

 

12

 

Other Current Assets

 

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

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

RSU tax withholding proceeds receivable

  $ 8,125     $ 6,106  

Prepaid expense

    15,543       7,991  

Accrued interest receivable

    2,847       2,490  

Assets for product returns

    1,262       1,585  

Other

    1,509       1,433  

Total

  $ 29,286     $ 19,605  

 

Other Long-Term Assets

 

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

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

Deferred compensation plan assets

  $ 39,456     $ 38,858  

Operating lease right-of-use ("ROU") assets

    3,909       2,863  

Prepaid expense

    2,515       2,687  

Other

    1,396       1,544  

Total

  $ 47,276     $ 45,952  

 

Other Accrued Liabilities

 

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

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

Dividends and dividend equivalents

  $ 26,466     $ 21,747  

Stock rotation and sales returns

    4,705       5,530  

Accrued purchases of property and equipment

    7,789       4,678  

Income tax payable

    4,343       2,435  

Customer prepayments

    6,731       3,412  

Commissions

    1,507       1,425  

Operating lease liabilities

    1,532       1,254  

Warranty

    1,174       1,139  

Other

    4,584       3,170  

Total

  $ 58,831     $ 44,790  

 

Other Long-Term Liabilities

 

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

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

Deferred compensation plan liabilities

  $ 41,087     $ 39,665  

Dividend equivalents

    6,787       6,265  

Operating lease liabilities

    1,897       1,103  

Other

    30       30  

Total

  $ 49,801     $ 47,063  

 

13

 

 

5. LEASES

 

Lessee

 

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

  

As of  June 30, 2020 and December 31, 2019, operating lease ROU assets totaled $3.9 million and $2.9 million, respectively. As of June 30, 2020 and December 31, 2019, operating lease liabilities totaled $3.4 million and $2.4 million, respectively. The following tables summarize certain information related to the leases (in thousands, except percentages):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Lease costs:

                               

Operating lease costs

  $ 363     $ 332     $ 729     $ 637  

Short-term and other lease costs

    71       84       148       182  

Total lease costs

  $ 434     $ 416     $ 877     $ 819  

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

                               

Operating cash flows from operating leases

  $ 330     $ 423     $ 703     $ 727  

ROU assets obtained in exchange for new operating lease liabilities (1)

  $ 1,467     $ 317     $ 1,744     $ 2,581  

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

Weighted-average remaining lease term (in years)

    2.7       2.1  

Weighted-average discount rate

    3.0 %     3.7 %

 


(1)

For the six months ended June 30, 2019, the amount includes $2.2 million for operating leases existing on January 1, 2019.

 

As of June 30, 2020, the maturities of the lease liabilities were as follows (in thousands):

 

2020 (remaining six months)

 $851 

2021

  1,296 

2022

  852 

2023

  271 
2024  186 

2025

  130 

Total remaining lease payments

  3,586 

Less: imputed interest

  (157)

Total lease liabilities

 $3,429 

Reported as:

    

Current liabilities

 $1,532 

Long-term liabilities

 $1,897 

 

Lessor 

 

The Company owns certain office buildings and leases a portion of these properties to third parties under arrangements that are classified as operating leases. These leases have remaining lease terms from one year to five years. Some of these leases include options to renew the lease term for up to five years.

 

14

 

For the three months ended June 30, 2020 and 2019, income related to lease payments was $0.4 million and $0.7 million, respectively. For the six months ended June 30, 2020 and 2019, income related to lease payments was $0.8 million and $0.9 million, respectively. As of  June 30, 2020, future income related to lease payments was as follows (in thousands):

 

2020 (remaining six months)

 $1,010 

2021

  2,281 

2022

  2,069 

2023

  1,477 

2024

  552 

Thereafter

  59 

Total

 $7,448 

 

 

6. NET INCOME PER SHARE

  

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common shares, and calculated using the treasury stock method. Contingently issuable shares, including equity awards with performance conditions or market conditions, are considered outstanding common shares and included in the basic net income per share as of the date that all necessary conditions to earn the awards have been satisfied. Prior to the end of the contingency period, the number of contingently issuable shares included in the diluted net income per share is based on the number of shares, if any, that would be issuable under the terms of the arrangement at the end of the reporting period.

 

The Company’s RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill the requisite service requirement and, as a result, the awards do not vest. Accordingly, these awards are not treated as participating securities in the net income per share calculation. 

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Numerator:

                               

Net income

  $ 30,167     $ 20,693     $ 65,922     $ 46,874  
                                 

Denominator:

                               

Weighted-average outstanding shares - basic

    44,785       43,109       44,620       42,929  

Effect of dilutive securities

    2,046       2,374       2,130       2,429  

Weighted-average outstanding shares - diluted

    46,831       45,483       46,750       45,358  
                                 

Net income per share:

                               

Basic

  $ 0.67     $ 0.48     $ 1.48     $ 1.09  

Diluted

  $ 0.64     $ 0.45     $ 1.41     $ 1.03  

 

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

  

 

7. SEGMENT, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION

 

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

 

15

 

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

 

   

Revenue

   

Accounts Receivable

 
   

Three Months Ended June 30,

   

Six Months Ended June 30,

   

June 30,

   

December 31,

 

Customer

 

2020

   

2019

   

2020

   

2019

   

2020

   

2019

 

Distributor A

    26 %     22 %     24 %     22 %     27 %     24 %

Distributor B

    *       *       *       *       *       11 %

Value-added reseller A

    *       *       *       *       19 %     13 %

Direct customer A

    *       13 %     *       10 %     *       *  

 


* Represents less than 10%.

 

The Company’s agreements with these third-party customers were made in the ordinary course of business and  may be terminated with or without cause by these customers with advance notice. Although the Company  may experience a short-term disruption in the distribution of its products and a short-term decline in revenue if its agreement with any of the distributors or the value-added reseller was terminated, the Company believes that such termination would not have a material adverse effect on its financial statements because it would be able to engage alternative distributors, resellers and other distribution channels to deliver its products to end customers within a short period following the termination of the agreement with the customer. If the Company's agreement with the direct customer was terminated, or if sales to such customer decrease significantly in future periods, the Company's operating results could be materially and adversely affected.

 

The following is a summary of revenue by geographic regions (in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Country or Region

 

2020

   

2019

   

2020

   

2019

 

China

  $ 112,756     $ 94,837     $ 218,493     $ 171,035  

Taiwan

    22,322       16,018       38,862       37,365  

Europe

    13,443       13,040       26,515       26,024  

South Korea

    12,573       9,623       23,517       19,234  

Southeast Asia

    11,622       7,122       20,402       15,794  

Japan

    8,756       6,292       15,646       12,934  

United States

    4,681       4,013       8,418       9,819  

Other

    56       62       134       165  

Total

  $ 186,209     $ 151,007     $ 351,987     $ 292,370  

 

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

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Product Family

 

2020

   

2019

   

2020

   

2019

 

DC to DC

  $ 176,113     $ 139,691     $ 332,988     $ 272,402  

Lighting Control

    10,096       11,316       18,999       19,968  

Total

  $ 186,209     $ 151,007     $ 351,987     $ 292,370  

 

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

 

   

June 30,

   

December 31,

 

Country

 

2020

   

2019

 

China

  $ 129,700     $ 113,888  

United States

    100,716       94,671  

Taiwan

    17,808       17,652  

Other

    3,756       2,104  

Total

  $ 251,980     $ 228,315  

 

16

 

 

8. COMMITMENTS AND CONTINGENCIES

 

Product Warranties

 

The Company generally provides one to two-year warranties against defects in materials and workmanship and will either repair the products, provide replacements at no charge to customers or issue a refund. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations. Warranty reserve requirements are generally based on a specific assessment of the products sold with warranties when a customer asserts a claim for warranty or a product defect. 

 

The changes in warranty reserves are as follows (in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Balance at beginning of period

  $ 1,144     $ 2,045     $ 1,139     $ 4,564  

Warranty provision for product sales

    499       311       1,040       579  

Settlements made

    (395 )     (28 )     (506 )     (2,299 )

Unused warranty provision

    (74 )     (580 )     (499 )     (1,096 )

Balance at end of period

  $ 1,174     $ 1,748     $ 1,174     $ 1,748  

 

Purchase Commitments

 

The Company has outstanding purchase commitments with its suppliers and other parties that require the future purchases of goods or services, which primarily consist of wafer and other inventory purchases, assembly and other manufacturing services, construction or purchases of property and equipment, and license arrangements. As of  June 30, 2020, the Company’s outstanding purchase obligations totaled approximately $101.0 million.

 

Litigation

 

The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its stockholders, challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and  may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The Company defends itself vigorously against any such claims. As of  June 30, 2020, there were no material pending legal proceedings to which the Company was a party. 

  

 

9. CASH, CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH

 

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

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

Cash, cash equivalents and investments:

               

Cash

  $ 130,397     $ 144,860  

Money market funds

    26,086       28,100  

Corporate debt securities

    333,622       260,950  

Commercial paper

    7,968       1,994  

U.S. treasuries and government agency bonds

    14,250       19,493  

Auction-rate securities backed by student-loan notes

    3,032       3,138  

Total

  $ 515,355     $ 458,535  

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

Reported as:

               

Cash and cash equivalents

  $ 156,483     $ 172,960  

Short-term investments

    355,840       282,437  

Long-term investments

    3,032       3,138  

Total

  $ 515,355     $ 458,535  

 

17

 

The following table summarizes the contractual maturities of the short-term and long-term available-for-sale investments as of June 30, 2020 (in thousands):

 

   

Amortized Cost

   

Fair Value

 

Due in less than 1 year

  $ 168,329