UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

OR

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

Commission file number: 000-51026

Monolithic Power Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware	77-0466789
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

5808 Lake Washington Blvd. NE, Kirkland, Washington 98033

(Address of principal executive offices)(Zip Code)

(425) 296-9956

(Registrant’s telephone number, including area code) 

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.001 per share	MPWR	The NASDAQ Global Select Market

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 47,423,000 shares of the registrant’s common stock issued and outstanding as of April 28, 2023. 

1

MONOLITHIC POWER SYSTEMS, INC.

Form 10-Q

For the Quarter Ended March 31, 2023

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	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II. OTHER INFORMATION		35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

	March 31,			December 31,
	2023			2022
ASSETS
Current assets:
Cash and cash equivalents	$	488,972		$	288,607
Short-term investments		428,598			449,266
Accounts receivable, net		184,274			182,714
Inventories		430,830			447,290
Other current assets		89,955			42,742
Total current assets		1,622,629			1,410,619
Property and equipment, net		354,313			357,157
Goodwill		6,571			6,571
Deferred tax assets, net		35,571			35,252
Other long-term assets		207,567			249,286
Total assets	$	2,226,651		$	2,058,885
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	58,001		$	61,461
Accrued compensation and related benefits		101,881			88,260
Other accrued liabilities		155,961			113,679
Total current liabilities		315,843			263,400
Income tax liabilities		56,900			53,509
Other long-term liabilities		77,647			73,374
Total liabilities		450,390			390,283
Commitments and contingencies
Stockholders’ equity:
Common stock and additional paid-in capital: $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 47,411 and 47,107, respectively		1,017,131			975,276
Retained earnings		777,075			716,403
Accumulated other comprehensive loss		(17,945	)		(23,077	)
Total stockholders’ equity		1,776,261			1,668,602
Total liabilities and stockholders’ equity	$	2,226,651		$	2,058,885

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 March 31,
	2023		2022
Revenue	$	451,065	$	377,714
Cost of revenue		192,285		158,834
Gross profit		258,780		218,880
Operating expenses:
Research and development		63,709		54,104
Selling, general and administrative		70,795		68,642
Total operating expenses		134,504		122,746
Operating income		124,276		96,134
Other income (expense), net		5,297		(634	)
Income before income taxes		129,573		95,500
Income tax expense		19,771		15,934
Net income	$	109,802	$	79,566
Net income per share:
Basic	$	2.32	$	1.71
Diluted	$	2.26	$	1.65
Weighted-average shares outstanding:
Basic		47,234		46,424
Diluted		48,655		48,250

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 March 31,
	2023		2022
Net income	$	109,802	$	79,566
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		2,919		(178	)
Change in unrealized gain (loss) on available-for-sale securities, net of tax of $311 and $565, respectively		2,213		(5,400	)
Other comprehensive income (loss), net of tax:		5,132		(5,578	)
Comprehensive income	$	114,934	$	73,988

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 March 31, 2023	Shares		Amount		Earnings			Loss			Equity
Balance as of January 1, 2023		47,107	$	975,276	$	716,403		$	(23,077	)	$	1,668,602
Net income		-		-		109,802			-			109,802
Other comprehensive income		-		-		-			5,132			5,132
Dividends and dividend equivalents declared ($1.00 per share)		-		-		(49,130	)		-			(49,130	)
Common stock issued under the employee equity incentive plan		295		1,110		-			-			1,110
Common stock issued under the employee stock purchase plan		9		3,737		-			-			3,737
Stock-based compensation expense		-		37,008		-			-			37,008
Balance as of March 31, 2023		47,411	$	1,017,131	$	777,075		$	(17,945	)	$	1,776,261

								Accumulated
	Common Stock and							Other			Total
	Additional Paid-in Capital				Retained			Comprehensive			Stockholders’
Three Months Ended March 31, 2022	Shares		Amount		Earnings			Income			Equity
Balance as of January 1, 2022		46,256	$	803,226	$	424,879		$	15,880		$	1,243,985
Net income		-		-		79,566			-			79,566
Other comprehensive loss		-		-		-			(5,578	)		(5,578	)
Dividends and dividend equivalents declared ($0.75 per share)		-		-		(36,601	)		-			(36,601	)
Common stock issued under the employee equity incentive plan		362		2,318		-			-			2,318
Common stock issued under the employee stock purchase plan		7		2,786		-			-			2,786
Stock-based compensation expense		-		39,636		-			-			39,636
Balance as of March 31, 2022		46,625	$	847,966	$	467,844		$	10,302		$	1,326,112

See accompanying notes to unaudited condensed consolidated financial statements. 

6

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2023			2022
Cash flows from operating activities:
Net income	$	109,802		$	79,566
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,987			9,120
Amortization of premium on available-for-sale securities		260			1,348
(Gain) loss on deferred compensation plan investments		(2,534	)		2,192
Deferred taxes, net		(622	)		(381	)
Stock-based compensation expense		37,009			39,811
Changes in operating assets and liabilities:
Accounts receivable		(1,558	)		(15,506	)
Inventories		16,063			(51,797	)
Other assets		213			(5,916	)
Accounts payable		(880	)		(4,177	)
Accrued compensation and related benefits		13,422			27,382
Income tax liabilities		20,137			16,017
Other accrued liabilities		17,508			9,760
Net cash provided by operating activities		218,807			107,419
Cash flows from investing activities:
Purchases of property and equipment		(8,854	)		(26,877	)
Purchases of investments		(129,321	)		(16,243	)
Maturities and sales of investments		152,698			32,267
Contributions to deferred compensation plan, net		(2,209	)		(760	)
Net cash provided by (used in) investing activities		12,314			(11,613	)
Cash flows from financing activities:
Property and equipment purchased on extended payment terms		(374	)		(528	)
Proceeds from common stock issued under the employee equity incentive plan		1,110			2,318
Proceeds from common stock issued under the employee stock purchase plan		3,737			2,786
Dividends and dividend equivalents paid		(36,725	)		(28,825	)
Net cash used in financing activities		(32,252	)		(24,249	)
Effect of change in exchange rates		1,497			(220	)
Net increase in cash, cash equivalents and restricted cash		200,366			71,337
Cash, cash equivalents and restricted cash, beginning of period		288,729			189,389
Cash, cash equivalents and restricted cash, end of period	$	489,095		$	260,726
Supplemental disclosures for cash flow information:
Cash paid (refund) for income taxes, net	$	(1,300	)	$	244
Non-cash investing and financing activities:
Liability accrued for property and equipment purchases	$	2,482		$	6,122
Liability accrued for dividends and dividend equivalents	$	49,219		$	36,611

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 generally accepted accounting principles 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, 2022, filed with the SEC on  February 24, 2023.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Quarterly Report on Form 10-Q are not necessarily indicative of the results that  may be expected for the year ending  December 31, 2023 or for any other future periods.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions used in these condensed consolidated financial statements primarily include those related to revenue recognition, inventory valuation, valuation of share-based awards, contingencies and income tax valuation allowances. Actual results could differ from these estimates and assumptions, and any such differences may be material to the Company’s condensed consolidated financial statements.

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 99% and 98% of the Company’s total revenue for the three months ended March 31, 2023 and 2022, 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 for the periods presented. See Note 7 for the disaggregation of the Company’s revenue by geographic region and by product family.

The Company sells its products primarily through third-party distributors, value-added resellers, original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and electronic manufacturing service (“EMS”) providers. For the three months ended March 31, 2023 and 2022, 81% and 82% of the Company’s product sales were made through distribution arrangements, respectively. 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).

8

 

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 adjustments and stock rotation rights as variable consideration that reduces the transaction price and recognizes that reduction in the same period the associated revenue is recognized. Four U.S.-based distributors have price adjustment rights when they sell the Company’s products to their end customers at a price that is lower than the distribution price invoiced by the Company. When the Company receives claims from the distributors that products have been sold to the end customers at the lower prices, 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 do not have price adjustment rights. The Company records a credit against accounts receivable for the estimated price adjustments, with a corresponding reduction to revenue.

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

Contract Balances

Accounts Receivable:

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of March 31, 2023 and December 31, 2022, accounts receivable totaled $184.3 million and $182.7 million, respectively. The Company’s accounts receivable are short-term, with standard payment terms generally ranging from 30 to 90 days. The Company does not require its customers to provide collateral to support accounts receivable. The Company assesses the collectability by reviewing accounts receivable on a customer-by-customer basis. To manage credit risk, management performs ongoing credit evaluations of the customers’ financial condition, monitors payment performance, and assesses current economic conditions, as well as reasonable and supportable forecasts of future economic conditions, that may affect collectability of the outstanding receivables. For certain high-risk customers, the Company requires standby letters of credit or advance payment prior to shipments of goods. The Company did not recognize any write-offs of accounts receivable or record any allowance for credit losses for the periods presented.

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 both March 31, 2023 and December 31, 2022, customer prepayments totaled $3.6 million. For the three months ended March 31, 2023, the Company recognized $3.2 million of revenue that was included in the customer prepayment balance as of December 31, 2022.

Practical Expedients

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

The Company’s standard payment terms generally require customers to pay 30 to 90 days after the Company satisfies the performance obligations. For those customers who are required to pay in advance, the Company satisfies the performance obligations generally within a quarter. For these reasons, the Company has elected not to determine whether contracts with customers contain significant financing components.

9

 

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

3. STOCK-BASED COMPENSATION

2014 Equity Incentive Plan

In  April 2013, the Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”), which the Company’s stockholders approved in  June 2013. In  October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The amended 2014 Plan became effective on  November 13, 2014 and provided for the issuance of up to 5.5 million shares. In  April 2020, the Board of Directors further amended and restated the amended 2014 Plan (the “Amended and Restated 2014 Plan”), which the Company’s stockholders approved in  June 2020. The Amended and Restated 2014 Plan became effective on  June 11, 2020 and provides for the issuance of up to 10.5 million shares. The Amended and Restated 2014 Plan will expire on  June 11, 2030. As of  March 31, 2023, 4.2 million shares remained available for future issuance under the Amended and Restated 2014 Plan.  

Stock-Based Compensation Expense

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

	Three Months Ended March 31,
	2023		2022
Cost of revenue	$	1,147	$	1,307
Research and development		8,614		8,401
Selling, general and administrative		27,248		30,103
Total stock-based compensation expense	$	37,009	$	39,811
Tax benefit related to stock-based compensation (1)	$	423	$	573

(1) Amount reflects the tax benefit related to stock-based compensation recorded for equity awards that are expected to generate tax deductions when they vest in future periods. Equity awards granted to the Company’s executive officers are subject to the tax deduction limitations set by Section 162(m) of the Internal Revenue Code.

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/market goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company. A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

	Time-Based RSUs					PSUs and MPSUs					MSUs					Total
	Number of Shares			Weighted- Average Grant Date Fair Value Per Share		Number of Shares			Weighted- Average Grant Date Fair Value Per Share		Number of Shares			Weighted- Average Grant Date Fair Value Per Share		Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Outstanding at January 1, 2023		106		$	327.13		748		$	275.70		1,805		$	126.57		2,659		$	176.50
Granted		27		$	467.62		246	(1)	$	449.22		-		$	-		273		$	450.13
Vested		(16	)	$	279.89		(198	)	$	291.65		(81	)	$	23.57		(295	)	$	217.47
Forfeited		(2	)	$	361.26		(2	)	$	285.23		(5	)	$	139.15		(9	)	$	225.18
Outstanding at March 31, 2023		115		$	365.93		794		$	326.02		1,719		$	131.39		2,628		$	200.37

(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.

10

 

The intrinsic value related to vested RSUs was $141.6 million and $151.7 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the total intrinsic value of all outstanding RSUs was $1.3 billion, based on the closing stock price of $500.54. As of March 31, 2023, unamortized compensation expense related to all outstanding RSUs was $308.0 million with a weighted-average remaining recognition period of approximately three years.

Cash proceeds from vested PSUs with a purchase price requirement totaled $1.1 million and $2.3 million for the three months ended March 31, 2023 and 2022, respectively.

Time-Based RSUs:

For the three months ended March 31, 2023, the Compensation Committee granted 27,000 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.

2023 PSUs:

In February 2023, the Compensation Committee granted 69,000 PSUs to the executive officers, which represent a target number of shares that can be earned based on the degree of achievement of two sets of performance goals (“2023 Executive PSUs”). For the first goal, the executive officers can earn up to 300% of the target number of the 2023 Executive PSUs based on the achievement of the Company’s average three-year (2023 through 2025) revenue growth rate in excess of the analog industry’s average three-year revenue growth rate as published by the Semiconductor Industry Association (the “SIA”). For the second goal, the executive officers can earn up to an additional 200% of the target number of the 2023 Executive PSUs if the Company secures additional manufacturing capacity outside of Mainland China during a three-year performance period. For both goals, a percentage of the 2023 Executive PSUs will fully vest on December 31, 2025 depending on the degree to which the pre-determined goals are met during the performance periods. Assuming the achievement of the highest level of the performance goals, the total stock-based compensation cost for the 2023 Executive PSUs is $156.2 million.

In February 2023, the Compensation Committee granted 13,000 PSUs to certain non-executive employees, which represent a target number of shares that can be earned based on the degree of achievement of the Company’s 2024 revenue goals for certain regions or product line divisions, or based on the degree of achievement of the Company’s average two-year (2023 and 2024) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the SIA (“2023 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2023 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2023 Non-Executive PSUs will vest in the first quarter of 2025 depending on the degree to which the pre-determined goals are met during the performance period. The remaining 2023 Non-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 2023 Non-Executive PSUs is $14.2 million.

The 2023 Executive PSUs and the 2023 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 Company's stock price on the last trading day of the performance period is $30 higher than the grant date stock price of $467.62. The Company determined the grant date fair value of the 2023 Executive PSUs and the 2023 Non-Executive PSUs using a Monte Carlo simulation model with the following assumptions: stock price of $467.62, simulation term of four years, expected volatility of 51.0%, risk-free interest rate of 3.9%, and expected dividend yield of 0.9%. There is no illiquidity discount because the awards do not contain any post-vesting sales restrictions.

11

 

2004 Employee Stock Purchase Plan (“ESPP”)

For the three months ended March 31, 2023 and 2022, 9,000 and 7,000 shares, respectively, were issued under the ESPP. As of March 31, 2023, 4.5 million shares were available for future issuance under the ESPP.

The intrinsic value of the shares issued was $0.7 million for both the three months ended March 31, 2023 and 2022. As of March 31, 2023, the unamortized expense was $1.1 million, which will be recognized through the third quarter of 2023. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

	Three Months Ended March 31,
	2023			2022
Expected term (in years)		0.5			0.5
Expected volatility		55.8	%		38.1	%
Risk-free interest rate		5.0	%		0.7	%
Dividend yield		0.8	%		0.6	%

Cash proceeds from the shares issued under the ESPP were $3.7 million and $2.8 million for the three months ended March 31, 2023 and 2022, respectively.  

4. BALANCE SHEET COMPONENTS

Inventories 

Inventories consist of the following (in thousands): 

	March 31,		December 31,
	2023		2022
Raw materials	$	131,367	$	126,760
Work in process		126,417		134,071
Finished goods		173,046		186,459
Total	$	430,830	$	447,290

Other Current Assets

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

	March 31,		December 31,
	2023		2022
Prepaid wafer purchase	$	50,000	$	-
RSU tax withholding proceeds receivable		15,997		14,480
Prepaid expenses		9,719		11,045
Accrued interest receivable		3,537		8,752
Other		10,702		8,465
Total	$	89,955	$	42,742

Prepaid wafer purchase of $50.0 million relates to a deposit made to a vendor under a long-term wafer supply agreement. See Note 8 for further details.

12

 

Other Long-Term Assets

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

	March 31,		December 31,
	2023		2022
Prepaid wafer purchase	$	120,000	$	170,000
Deferred compensation plan assets		67,765		63,022
Other		19,802		16,264
Total	$	207,567	$	249,286

Prepaid wafer purchase relates to a deposit made to a vendor under a long-term wafer supply agreement. See Note 8 for further details.

Other Accrued Liabilities

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

	March 31,		December 31,
	2023		2022
Dividends and dividend equivalents	$	54,656	$	42,170
Warranty		19,726		24,082
Stock rotation and sales returns		30,155		14,931
Income tax payable		32,338		15,595
Other		19,086		16,901
Total	$	155,961	$	113,679

As of March 31, 2023, stock rotation and sales returns included a $26.4 million stock rotation reserve, compared with a $14.3 million reserve as of December 31, 2022. The change in the reserve is affected by the timing of returns and the level of inventory in the distribution channel.

Other Long-Term Liabilities

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

	March 31,		December 31,
	2023		2022
Deferred compensation plan liabilities	$	65,678	$	64,863
Dividend equivalents		6,765		6,847
Other		5,204		1,664
Total	$	77,647	$	73,374

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 one year to eight years. Some of these leases include options to renew the lease term for up to two years or on a month-to-month basis. The Company does not have finance lease arrangements.

The following table summarizes the balances of operating lease right-of-use (“ROU”) assets and liabilities (in thousands):

		March 31,		December 31,
	Financial Statement Line Item	2023		2022
Operating lease ROU assets	Other long-term assets	$	7,820	$	4,288
Operating lease liabilities	Other accrued liabilities	$	2,018	$	2,133
	Other long-term liabilities	$	5,203	$	1,664

The following tables summarize certain information related to the leases (in thousands, except percentages):

	Three Months Ended March 31,
	2023		2022
Lease costs:
Operating lease costs	$	716	$	729
Other		538		367
Total lease costs	$	1,254	$	1,096

	Three Months Ended March 31,
	2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	864	$	932
ROU assets obtained in exchange for new operating lease liabilities	$	4,545	$	1,010

	March 31,			December 31,
	2023			2022
Weighted-average remaining lease term (in years)		5.3			2.1
Weighted-average discount rate		3.4	%		2.1	%

As of March 31, 2023, the maturities of the lease liabilities were as follows (in thousands):

2023 (remaining nine months)	$	1,756
2024		1,591
2025		1,190
2026		921
2027		929
Thereafter		1,509
Total remaining lease payments		7,896
Less: imputed interest		(675	)
Total lease liabilities	$	7,221

As of March 31, 2023, the Company had no operating leases that had not yet commenced.

14

 

Lessor 

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

For the three months ended March 31, 2023 and 2022, income related to lease payments was $0.5 million and $0.6 million, respectively. As of March 31, 2023, future income related to lease payments was as follows (in thousands):

2023 (remaining nine months)	$	1,112
2024		613
2025		107
2026		20
Total	$	1,852

6. NET INCOME PER SHARE

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

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

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

	Three Months Ended March 31,
	2023		2022
Numerator:
Net income	$	109,802	$	79,566
Denominator:
Weighted-average outstanding shares - basic		47,234		46,424
Effect of dilutive securities		1,421		1,826
Weighted-average outstanding shares - diluted		48,655		48,250
Net income per share:
Basic	$	2.32	$	1.71
Diluted	$	2.26	$	1.65

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

15

  

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

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

	Three Months Ended March 31,
Customer	2023			2022
Distributor A		20	%		24	%
Distributor B		21	%		18	%
Distributor C		*			11	%

* 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 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 any termination of the agreement with a distributor.

The following table summarizes those customers with accounts receivable equal to 10% or more of the Company’s total accounts receivable:  

	March 31,			December 31,
Customer	2023			2022
Distributor A		22	%		29	%
Distributor B		23	%		23	%

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

	Three Months Ended March 31,
Country or Region	2023		2022
China	$	225,052	$	206,079
Taiwan		48,833		56,437
South Korea		45,680		40,373
Europe		43,103		25,215
United States		31,017		13,446
Japan		30,815		19,155
Southeast Asia		26,432		16,889
Other		133		120
Total	$	451,065	$	377,714

16

 

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

	Three Months Ended March 31,
Product Family	2023		2022
Direct Current (“DC”) to DC	$	425,181	$	358,849
Lighting Control		25,884		18,865
Total	$	451,065	$	377,714

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

	March 31,		December 31,
Country	2023		2022
China	$	196,790	$	200,508
United States		115,363		113,996
Taiwan		19,812		20,074
Other		22,348		22,579
Total	$	354,313	$	357,157

8. COMMITMENTS AND CONTINGENCIES

Product Warranties

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

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

	Three Months Ended March 31,
	2023			2022
Balance at beginning of period	$	24,082		$	20,989
Warranties issued		362			-
Repairs, replacement and refund		(672	)		(1,380	)
Changes in liability for pre-existing warranties		(4,046	)		4,224
Balance at end of period	$	19,726		$	23,833

Changes in liability for pre-existing warranties result from changes in estimates for warranties issued in prior periods.

Purchase Commitments

The Company has outstanding purchase obligations with its suppliers and other parties that require the future purchases of goods or services. The purchase obligations primarily consist of wafer and other inventory purchases, assembly and other manufacturing services, construction of manufacturing and research and development facilities, purchases of production and other equipment, and license arrangements.

In May 2022, the Company entered into a long-term supply agreement in order to secure manufacturing production capacity for silicon wafers over a four-year period. As of March 31, 2023, the Company had made prepayments under this agreement of $170.0 million, of which $50.0 million was classified as short-term.

Total estimated future unconditional purchase commitments to all suppliers and other parties as of March 31, 2023 were as follows (in thousands):

2023 (remaining nine months)	$	337,545
2024		337,537
2025		353,952
Total	$	1,029,034

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Litigation

The Company is a party to actions and proceedings in the ordinary course of business, including 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. The Company may also be subject to litigation initiated by its stockholders. These proceedings often involve complex questions of fact and law and  may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The Company defends itself vigorously against any such claims. As of March 31, 2023, there were no material pending legal proceedings to which the Company was a party.

9. CASH, CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH

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

	March 31,		December 31,
	2023		2022
Cash	$	447,746	$	273,145
Money market funds		41,226		15,462
Certificates of deposit		131,042		130,467
Corporate debt securities		244,155		292,586
Commercial paper		18,163		17,928
U.S. treasuries and government agency bonds		35,238		8,285
Auction-rate securities backed by student-loan notes		1,516		1,711
Total	$	919,086	$	739,584

	March 31,		December 31,
	2023		2022
Reported as:
Cash and cash equivalents	$	488,972	$	288,607
Short-term investments		428,598		449,266
Investment within other long-term assets		1,516		1,711
Total	$	919,086	$	739,584

The following table summarizes the contractual maturities of the short-term and long-term available-for-sale investments as of March 31, 2023 (in thousands):  

	Amortized Cost		Fair Value
Due in less than 1 year	$	252,449	$	249,803
Due in 1 - 5 years		181,774		178,795
Due in greater than 5 years		1,571		1,516
Total	$	435,794	$	430,114

Gross realized gains and losses recognized on the sales of available-for-sale investments were not material for the periods presented. 

18

 

The following tables summarize the unrealized gain and loss positions related to the available-for-sale investments (in thousands):  

	March 31, 2023
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Money market funds	$	41,226	$	-	$	-		$	41,226
Certificates of deposit		131,042		-		-			131,042
Corporate debt securities		249,743		39		(5,627	)		244,155
Commercial paper		18,163		-		-			18,163
U.S. treasuries and government agency bonds		35,276		83		(121	)		35,238
Auction-rate securities backed by student-loan notes		1,570		-		(54	)		1,516
Total	$	477,020	$	122	$	(5,802	)	$	471,340

	December 31, 2022
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Money market funds	$	15,462	$	-	$	-		$	15,462
Certificates of deposit		130,467		-		-			130,467
Corporate debt securities		300,529		18		(7,961	)		292,586
Commercial paper		17,928		-		-			17,928
U.S. treasuries and government agency bonds		8,487		-		(202	)		8,285
Auction-rate securities backed by student-loan notes		1,770		-		(59	)		1,711
Total	$	474,643	$	18	$	(8,222	)	$	466,439

The following tables present information about the available-for-sale investments that had been in a continuous unrealized loss position for less than 12 months and for greater than 12 months (in thousands): 

	March 31, 2023
	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	18,084	$	(68	)	$	212,767	$	(5,559	)	$	230,851	$	(5,627	)
U.S. treasuries and government agency bonds		2,878		(5	)		7,383		(116	)		10,261		(121	)
Auction-rate securities backed by student-loan notes		-		-			1,516		(54	)		1,516		(54	)
Total	$	20,962	$	(73	)	$	221,666	$	(5,729	)	$	242,628	$	(5,802	)

	December 31, 2022
	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate debt securities	$	72,943	$	(973	)	$	202,074	$	(6,988	)	$	275,017	$	(7,961	)
U.S. treasuries and government agency bonds		987		(2	)		7,298		(200	)		8,285		(202	)
Auction-rate securities backed by student-loan notes		-		-			1,711		(59	)		1,711		(59	)
Total	$	73,930	$	(975	)	$	211,083	$	(7,247	)	$	285,013	$	(8,222	)

An impairment exists when the fair value of an investment is less than its amortized cost basis. As of March 31, 2023 and December 31, 2022, the Company did not consider the impairment of its investments to be a result of credit losses. The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. When evaluating a debt security for impairment, management reviews factors such as the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis, the extent to which the fair value of the security is less than its cost, the financial condition of the issuer and the credit quality of the investment.

19

 

The Company’s auction-rate securities are backed by pools of student loans supported by guarantees by the U.S. Department of Education. The underlying maturities of these securities are up to 23 years. The Company has received all scheduled interest payments on a timely basis pursuant to the terms and conditions of the securities. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities, before recovery of its amortized cost basis. To date, the Company has redeemed $41.7 million, or 96% of the original portfolio in these auction-rate securities, at par without any realized losses.

Non-Marketable Equity Investment

In  November 2020, the Company made an equity investment in a privately held Swiss company (the “Investee”) that is accounted for under the measurement alternative. In April 2022, the Company made an investment of CHF 2.0 million in a convertible loan that will convert into additional shares of the Investee. One member of the Company’s Board of Directors is an executive officer of a company that has a commercial relationship with the Investee. In addition, the Company’s Chief Executive Officer has a personal investment in the Investee and is on the Investee’s board of directors. As of March 31, 2023 and December 31, 2022, the Company’s investment in the Investee, which is denominated in Swiss Francs, had a carrying value of $5.8 million and $5.4 million, respectively. The Company did not record any impairment or adjustments resulting from observable price changes for the three months ended March 31, 2023.

Restricted Cash

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

	March 31,		December 31,
	2023		2022
Cash and cash equivalents	$	488,972	$	288,607
Restricted cash included in other long-term assets		123		122
Total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Statements of Cash Flows	$	489,095	$	288,729

As of March 31, 2023 and December 31, 2022, restricted cash included a security deposit that is set aside in a bank account and cannot be withdrawn by the Company under the terms of a lease agreement. The restriction will end upon the expiration of the lease.

20

  

10. FAIR VALUE MEASUREMENTS

The following tables summarize the fair value of the financial assets measured on a recurring basis (in thousands):

	March 31, 2023
	Total		Level 1		Level 2		Level 3
Money market funds	$	41,226	$	41,226	$	-	$	-
Certificates of deposit		131,042		-		131,042		-
Corporate debt securities		244,155		-		244,155		-
Commercial paper		18,163		-		18,163
U.S. treasuries and government agency bonds		35,238		-		35,238		-
Auction-rate securities backed by student-loan notes		1,516		-		-		1,516
Mutual funds and money market funds under deferred compensation plan		47,114		47,114		-		-
Total	$	518,454	$	88,340	$	428,598	$	1,516

	December 31, 2022
	Total		Level 1		Level 2		Level 3
Money market funds	$	15,462	$	15,462	$	-	$	-
Certificates of deposit		130,467		-		130,467		-
Corporate debt securities		292,586		-		292,586		-
Commercial paper		17,928		-		17,928		-
U.S. treasuries and government agency bonds		8,285		-		8,285		-
Auction-rate securities backed by student-loan notes		1,711		-		-		1,711
Mutual funds and money market funds under deferred compensation plan		43,933		43,933		-		-
Total	$	510,372	$	59,395	$	449,266	$	1,711

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

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

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

Redemptions and changes in the fair value of the auction-rate securities classified as Level 3 assets were not material for the periods presented.

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11. DEFERRED COMPENSATION PLAN

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

	March 31,		December 31,
	2023		2022
Deferred compensation plan asset components:
Cash surrender value of corporate-owned life insurance policies	$	20,651	$	19,089
Fair value of mutual funds and money market funds		47,114		43,933
Total	$	67,765	$	63,022
Deferred compensation plan assets reported in:
Other long-term assets	$	67,765	$	63,022
Deferred compensation plan liabilities reported in:
Accrued compensation and related benefits (short-term)	$	4,191	$	118
Other long-term liabilities		65,678		64,863
Total	$	69,869	$	64,981

12. OTHER INCOME (EXPENSE), NET

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

	Three Months Ended March 31,
	2023			2022
Interest income	$	4,808		$	3,461
Amortization of premium on available-for-sale securities		(260	)		(1,348	)
Gain (loss) on deferred compensation plan investments		2,534			(2,192	)
Charitable contributions		(2,000	)		(500	)
Other		215			(55	)
Total	$	5,297		$	(634	)

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13. INCOME TAXES

The income tax provision or benefit for interim periods is generally determined using an estimate of the Company’s annual effective tax rate and adjusted for discrete items, if any, in the relevant period. Each quarter the estimate of the annual effective tax rate is updated, and if the Company’s estimated tax rate changes, a cumulative adjustment is made.

The income tax expense for the three months ended March 31, 2023 was $19.8 million, or 15.3% of pre-tax income. The effective tax rate was lower than the federal statutory rate of 21% primarily due to foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the global intangible low-taxed income (“GILTI”) tax.

The income tax expense for the three months ended  March 31, 2022 was $15.9 million, or 16.7% of pre-tax income. The effective tax rate was lower than the federal statutory rate of 21% primarily due to foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax. 

On August 9, 2022, the U.S. government enacted the U.S. CHIPS and Science Act of 2022 (the “CHIPS Act”) to provide certain financial and tax incentives to the semiconductor industry, primarily for manufacturing activities within the United States. On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted and signed into law. The IRA, among other things, introduces a new 15% corporate minimum tax, based on adjusted financial statement income of certain large corporations, and imposes a 1% surcharge on stock repurchases. This excise tax was effective January 1, 2023. The Company does not believe the CHIPS Act or the IRA had a material impact on the Company’s income tax provisions, results of operations or financial condition for the three months ended March 31, 2023.  

14. ACCUMULATED OTHER COMPREHENSIVE LOSS

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

	Unrealized Gains (Losses) on Available-for- Sale Securities			Foreign Currency Translation Adjustments			Total
Balance as of January 1, 2023	$	(7,727	)	$	(15,350	)	$	(23,077	)
Other comprehensive income before reclassifications		2,524			2,919			5,443
Tax effect		(311	)		-			(311	)
Net current period other comprehensive income		2,213			2,919			5,132
Balance as of March 31, 2023	$	(5,514	)	$	(12,431	)	$	(17,945	)

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15. DIVIDENDS AND DIVIDEND EQUIVALENTS

Cash Dividend Program

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

	Three Months Ended March 31,
	2023		2022
Dividend declared per share	$	1.00	$	0.75
Total amount	$	47,330	$	34,908

As of March 31, 2023 and December 31, 2022, accrued dividends totaled $47.3 million and $35.3 million, respectively.

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

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

Cash Dividend Equivalent Rights

The Company’s RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill the requisite service requirement and, as a result, the awards do not vest. As of March 31, 2023 and December 31, 2022, accrued dividend equivalents totaled $14.1 million and $13.8 million, respectively.    

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

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

• our plan to increase our revenue through the introduction of new products within our existing product families as well as in new product categories and families;

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

• the effect that liquidity of our investments has on our capital resources;

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

• estimates of our future liquidity requirements;

• the cyclical nature of the semiconductor industry;

• the effects of macroeconomic factors, including the recent banking crisis, the global economic downturn and the Russia-Ukraine conflict, on the semiconductor industry and our business;

• protection of our proprietary technology;

• business outlook for the remainder of 2023 and beyond;

• the factors that we believe will impact our business, operations and financial condition, as well as our ability to achieve revenue growth;

• the percentage of our total revenue from various end markets;

• our ability to identify, acquire and integrate companies, businesses and products, and achieve the anticipated benefits from such acquisitions and integrations;

• the impact of various tax laws and regulations on our income tax provision, financial position and cash flows;

• our plan to repatriate cash from our subsidiary in Bermuda;

• our intention and ability to pay cash dividends and dividend equivalents; and

• the factors that differentiate us from our competitors.

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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, our industry and the global economy, including our expectations regarding the potential impacts of macroeconomic factors, such as the ongoing banking crisis, the global economic downturn and the Russia-Ukraine conflict on the semiconductor industry and our business. These statements are not guarantees of future performance and are subject to significant 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 our Annual Report on Form 10-K including, in particular, in the section entitled “Item 1A. Risk Factors.” Except as required by law, we disclaim any duty, 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 and entail significant risks. Readers should carefully review future reports and documents that we file from time to time with the SEC, such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 

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Overview

We are a fabless company with a global footprint that provides high-performance, semiconductor-based power electronic solutions. Incorporated in 1997, our three core strengths include deep system-level knowledge, strong semiconductor expertise, and innovative proprietary technologies in the areas of semiconductor processes, system integration, and packaging. These combined advantages enable us to deliver reliable, compact, and monolithic solutions found in storage and computing, enterprise data, automotive, industrial, communications and consumer applications. Our mission is to reduce energy and material consumption to improve all aspects of quality of life. 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. While we are not immune from industry downturns, we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term. Historically, our revenue has generally been higher in the second half of the year than in the first half although various factors, such as market conditions and the timing of key product introductions, could impact this trend.

We work with third parties to manufacture and assemble our ICs. This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.

Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up. Typical supply chain lead times for orders are generally 16 to 26 weeks. These factors, combined with the fact that our customers can cancel or reschedule orders without significant penalty to the customer, make the forecasting of our orders and revenue difficult.

We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where our products are incorporated into end-user products. Our revenue from direct and indirect sales to customers in Asia was 84% and 90% for the three months ended March 31, 2023 and 2022, respectively. 

We derive a majority of our revenue from the sales of our DC to DC converter products which serve the storage and computing, enterprise data, automotive, industrial, communications and consumer markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and continue to secure manufacturing capacity.

Macroeconomic Conditions and Recent Regulations

The semiconductor industry faces a number of macro-economic challenges including wide swings in customer demand, rising inflation, increased interest rates, and fluctuations in currency rates. We remain cautious in light of changing macroeconomic conditions and will continue to monitor the potential impact on our operations. The implications of macroeconomic events on our business, results of operations and overall financial position remain uncertain.

We closely monitor changes to export control laws, trade regulations and other trade requirements. To date, no restrictions have had a material impact on our revenue and operations. We will continue to monitor any changes to export control laws, trade regulations and other trade requirements and are committed to complying with all applicable trade laws, regulations and other requirements.

Cybersecurity Risk Management

We are committed to protecting our information technology (“IT”) assets, including computers, systems, corporate networks and sensitive data, from unauthorized access or attack. We have established an internal global IT policy handbook as well as IT security management control procedures designed to:

• Create information security awareness and define responsibilities among our employees and business partners;

•  Implement controls to identify IT risks and monitor the use of our systems and information resources;

•  Establish key policies and processes to adequately and timely respond to security threats;

•  Maintain disaster recovery and business continuity plans; and

•  Ensure compliance with applicable laws and regulations regarding the management of information security.

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We require all new employees to attend an IT security training orientation. In addition, on a regular basis, our IT team updates training materials related to our policies and procedures and shares news and articles related to cybersecurity awareness, both of which are stored on our intranet and available to all employees. We also currently maintain an insurance policy that provides certain coverage for losses we incur due to data breaches and other cybersecurity incidents.

Our IT Steering Committee, which consists of our senior management and IT team, meets on a regular basis to review initiatives and projects to improve IT security, as well as resources and budgets for our cybersecurity compliance and education efforts. In 2021, we completed the ISO 27001 certification, a globally recognized information security standard.

The Audit Committee of our Board of Directors, which consists of three independent members, is responsible for the oversight of our cybersecurity risk program. At least quarterly, the Audit Committee reviews reports and updates from our Chief Financial Officer and IT senior management about major risk exposures, their potential impact on our business operations, and management’s strategies to assess, monitor and mitigate those risks. The Audit Committee also provides updates of their oversight and findings to the Board of Directors.  

We believe we have adequate resources and sufficient policies, procedures and oversight in place to identify and manage our IT security risks to our business operations. To date, we do not believe we have experienced any material information security breaches and have not incurred significant operating expenses related to information security breaches.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements in accordance with GAAP, we are required to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying disclosures. Estimates and judgments used in the preparation of our condensed consolidated financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, including demand for our products, economic conditions and other current and future events, such as macroeconomic factors, including the impact of the recent banking crisis and the global economic downturn. Actual results could differ from these estimates and assumptions, and any such differences may be material to our condensed consolidated financial statements. 

As of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require our management to update the significant estimates and assumptions used in the preparation of the condensed consolidated financial statements included in this Report, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022. 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.  

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Results of Operations

The table below sets forth the data on the Condensed Consolidated Statements of Operations as a percentage of revenue:

	Three Months Ended March 31,
	2023				2022
	(in thousands, except percentages)
Revenue	$	451,065	100.0	%	$	377,714	100.0	%
Cost of revenue		192,285	42.6			158,834	42.1
Gross profit		258,780	57.4			218,880	57.9
Operating expenses:
Research and development		63,709	14.1			54,104	14.3
Selling, general and administrative		70,795	15.7			68,642