10-Q 1 mpwr20220930_10q.htm FORM 10-Q mpwr20220930_10q.htm
0001280452 MONOLITHIC POWER SYSTEMS INC false --12-31 Q3 2022 0.001 0.001 150,000 150,000 46,941 46,941 46,256 46,256 130 32 865 177 0.75 0.60 2.25 1.80 2 2 4 1 1 2 2 2 4 5 6 7,000 1 4 2 0 1 4 5 1.7 12 11 1 2 0 0 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. 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. 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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 September 30, 2022

 

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 46,942,000 shares of the registrant’s common stock issued and outstanding as of November 2, 2022. 

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

Form 10-Q

For the Quarter Ended September 30, 2022

 

TABLE OF CONTENTS

 

 

PAGE

PART I. FINANCIAL INFORMATION

4

Item 1.

Financial Statements (unaudited)

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Income

6

 

Condensed Consolidated Statements of Stockholders’ Equity

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

   

PART II. OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

Defaults Upon Senior Securities

50

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MONOLITHIC POWER SYSTEMS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $316,210  $189,265 

Short-term investments

  419,837   535,817 

Accounts receivable, net

  153,404   104,813 

Inventories

  397,435   259,417 

Other current assets

  36,571   35,540 

Total current assets

  1,323,457   1,124,852 

Property and equipment, net

  343,123   362,962 

Goodwill

  6,571   6,571 

Deferred tax assets, net

  23,905   21,917 

Other long-term assets

  234,165   69,523 

Total assets

 $1,931,221  $1,585,825 
         

LIABILITIES AND STOCKHOLDERS EQUITY

        

Current liabilities:

        

Accounts payable

 $78,673  $83,027 

Accrued compensation and related benefits

  103,253   62,635 

Other accrued liabilities

  109,062   81,282 

Total current liabilities

  290,988   226,944 

Income tax liabilities

  49,963   47,669 

Other long-term liabilities

  59,561   67,227 

Total liabilities

  400,512   341,840 

Commitments and contingencies

          

Stockholders’ equity:

        

Common stock and additional paid-in capital: $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 46,941 and 46,256, respectively

  938,993   803,226 

Retained earnings

  633,640   424,879 

Accumulated other comprehensive income (loss)

  (41,924)  15,880 

Total stockholders’ equity

  1,530,709   1,243,985 

Total liabilities and stockholders’ equity

 $1,931,221  $1,585,825 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

(unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2022

   

2021

   

2022

   

2021

 

Revenue

  $ 495,418     $ 323,522     $ 1,334,136     $ 871,294  

Cost of revenue

    204,516       137,211       553,393       379,709  

Gross profit

    290,902       186,311       780,743       491,585  

Operating expenses:

                               

Research and development

    67,263       49,468       178,497       136,113  

Selling, general and administrative

    69,717       56,291       207,538       164,982  

Litigation expense

    2,051       3,421       4,815       6,645  

Total operating expenses

    139,031       109,180       390,850       307,740  

Operating income

    151,871       77,131       389,893       183,845  

Other income (expense), net

    5       793       (5,720 )     6,411  

Income before income taxes

    151,876       77,924       384,173       190,256  

Income tax expense

    27,539       9,154       65,591       20,904  

Net income

  $ 124,337     $ 68,770     $ 318,582     $ 169,352  
                                 

Net income per share:

                               

Basic

  $ 2.66     $ 1.50     $ 6.83     $ 3.70  

Diluted

  $ 2.57     $ 1.44     $ 6.60     $ 3.55  

Weighted-average shares outstanding:

                               

Basic

    46,829       45,970       46,643       45,754  

Diluted

    48,349       47,852       48,295       47,772  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net income

 $124,337  $68,770  $318,582  $169,352 

Other comprehensive income (loss), net of tax:

                

Foreign currency translation adjustments

  (26,081)  (371)  (49,844)  2,592 

Change in unrealized loss on available-for-sale securities, net of tax of $130, $32, $865 and $177, respectively

  (1,157)  (268)  (7,960)  (1,070)

Other comprehensive income (loss), net of tax:

  (27,238)  (639)  (57,804)  1,522 

Comprehensive income

 $97,099  $68,131  $260,778  $170,874 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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 September 30, 2022

 

Shares

  

Amount

  

Earnings

  

Loss

  

Equity

 

Balance as of July 1, 2022

  46,787  $891,888  $545,920  $(14,686) $1,423,122 

Net income

  -   -   124,337   -   124,337 

Other comprehensive loss

  -   -   -   (27,238)  (27,238)

Dividends and dividend equivalents declared ($0.75 per share)

  -   -   (36,617)  -   (36,617)

Common stock issued under the employee equity incentive plan

  147   1,014   -   -   1,014 

Common stock issued under the employee stock purchase plan

  7   3,091   -   -   3,091 

Stock-based compensation expense

  -   43,000   -   -   43,000 

Balance as of September 30, 2022

  46,941  $938,993  $633,640  $(41,924) $1,530,709 

 

              

Accumulated

     
  

Common Stock and

      

Other

  

Total

 
  

Additional Paid-in Capital

  

Retained

  

Comprehensive

  

Stockholders

 

Three Months Ended September 30, 2021

 

Shares

  

Amount

  

Earnings

  

Income

  

Equity

 

Balance as of July 1, 2021

  45,917  $733,672  $341,382  $12,301  $1,087,355 

Net income

  -   -   68,770   -   68,770 

Other comprehensive loss

  -   -   -   (639)  (639)

Dividends and dividend equivalents declared ($0.60 per share)

  -   -   (28,959)  -   (28,959)

Common stock issued under the employee equity incentive plan

  167   2,227   -   -   2,227 

Common stock issued under the employee stock purchase plan

  7   2,377   -   -   2,377 

Stock-based compensation expense

  -   31,582   -   -   31,582 

Balance as of September 30, 2021

  46,091  $769,858  $381,193  $11,662  $1,162,713 

 

              

Accumulated

     
  

Common Stock and

      

Other

  

Total

 
  

Additional Paid-in Capital

  

Retained

  

Comprehensive

  

Stockholders

 

Nine Months Ended September 30, 2022

 

Shares

  

Amount

  

Earnings

  

Income (Loss)

  

Equity

 

Balance as of January 1, 2022

  46,256  $803,226  $424,879  $15,880  $1,243,985 

Net income

  -   -   318,582   -   318,582 

Other comprehensive loss

  -   -   -   (57,804)  (57,804)

Dividends and dividend equivalents declared ($2.25 per share)

  -   -   (109,821)  -   (109,821)

Common stock issued under the employee equity incentive plan

  671   4,345   -   -   4,345 

Common stock issued under the employee stock purchase plan

  14   5,877   -   -   5,877 

Stock-based compensation expense

  -   125,545   -   -   125,545 

Balance as of September 30, 2022

  46,941  $938,993  $633,640  $(41,924) $1,530,709 

 

              

Accumulated

     
  

Common Stock and

      

Other

  

Total

 
  

Additional Paid-in Capital

  

Retained

  

Comprehensive

  

Stockholders

 

Nine Months Ended September 30, 2021

 

Shares

  

Amount

  

Earnings

  

Income

  

Equity

 

Balance as of January 1, 2021

  45,267  $657,701  $298,746  $10,140  $966,587 

Net income

  -   -   169,352   -   169,352 

Other comprehensive income

  -   -   -   1,522   1,522 

Dividends and dividend equivalents declared ($1.80 per share)

  -   -   (86,905)  -   (86,905)

Common stock issued under the employee equity incentive plan

  807   15,147   -   -   15,147 

Common stock issued under the employee stock purchase plan

  17   4,670   -   -   4,670 

Stock-based compensation expense

  -   92,340   -   -   92,340 

Balance as of September 30, 2021

  46,091  $769,858  $381,193  $11,662  $1,162,713 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

 

MONOLITHIC POWER SYSTEMS, INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

  

Nine Months Ended September 30,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net income

 $318,582  $169,352 

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

        

Depreciation and amortization

  28,349   20,376 

Amortization of premium on available-for-sale securities

  3,682   3,231 

(Gain) loss on deferred compensation plan investments

  8,607   (2,640)

Deferred taxes, net

  (1,217)  1,004 

Stock-based compensation expense

  125,723   92,282 

Other

  97   (8)

Changes in operating assets and liabilities:

        

Accounts receivable

  (48,608)  (13,033)

Inventories

  (138,241)  (50,968)

Other assets

  (172,050)  (14,051)

Accounts payable

  6,274   30,032 

Accrued compensation and related benefits

  45,054   30,030 

Income tax liabilities

  5,734   4,088 

Other accrued liabilities

  12,485   22,109 

Net cash provided by operating activities

  194,471   291,804 

Cash flows from investing activities:

        

Purchases of property and equipment

  (46,002)  (76,849)

Purchases of short-term investments

  (16,243)  (354,171)

Purchases of long-term investments

  (2,084)  - 

Maturities and sales of short-term investments

  104,666   94,192 

Sales of long-term investments

  325   400 

Contributions to deferred compensation plan, net

  (2,993)  (1,917)

Purchases of intangible assets

  -   (793)

Net cash provided by (used in) investing activities

  37,669   (339,138)

Cash flows from financing activities:

        

Property and equipment purchased on extended payment terms

  (1,587)  (2,049)

Proceeds from common stock issued under the employee equity incentive plan

  4,345   15,147 

Proceeds from common stock issued under the employee stock purchase plan

  5,877   4,670 

Dividends and dividend equivalents paid

  (101,564)  (80,725)

Net cash used in financing activities

  (92,929)  (62,957)

Effect of change in exchange rates

  (12,275)  1,431 

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

  126,936   (108,860)

Cash, cash equivalents and restricted cash, beginning of period

  189,389   335,071 

Cash, cash equivalents and restricted cash, end of period

 $316,325  $226,211 

Supplemental disclosures for cash flow information:

        

Cash paid for taxes

 $61,430  $16,217 

Non-cash investing and financing activities:

        

Liability accrued for property and equipment purchases

 $4,710  $7,144 

Liability accrued for dividends and dividend equivalents

 $39,672  $31,911 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

1. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with 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, 2021, filed with the SEC on  February 25, 2022.

 

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, 2022 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.

 

Neither the COVID-19 pandemic nor the Russia-Ukraine conflict materially and adversely impacted the Company’s overall operating results or business operations for the three and nine months ended September 30, 2022. As of the date of issuance of these condensed consolidated financial statements, the Company is not aware of any specific event or circumstance related to the pandemic or the Russia-Ukraine conflict that would require management to update the significant estimates and assumptions used in the preparation of the condensed consolidated financial statements. 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.

 

 

 

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 98% and 96% of the Company’s total revenue for the three months ended September 30, 2022 and 2021, respectively, and 98% and 96% of the Company’s total revenue for the nine months ended September 30, 2022 and 2021, 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.

 

9

 

The Company sells its products primarily through third-party distributors, value-added resellers, original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and electronic manufacturing service (“EMS”) providers. For the three months ended September 30, 2022 and 2021, 83% and 89% of the Company’s product sales were made through distribution arrangements, respectively. For the nine months ended September 30, 2022 and 2021, 83% and 89% 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).

 

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

 

Variable Consideration

 

The Company accounts for price adjustment and stock rotation rights as variable consideration that reduces the transaction price and recognizes that reduction in the same period the associated revenue is recognized. Four U.S.-based distributors have price adjustment rights when they sell the Company’s products to their end customers at a price that is lower than the distribution price invoiced by the Company. When the Company receives claims from the distributors that products have been sold to the end customers at the lower 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 in connection with 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 September 30, 2022 and December 31, 2021, accounts receivable totaled $153.4 million and $104.8 million, respectively. The Company’s accounts receivable are short-term, with standard payment terms generally ranging from 30 to 90 days. The Company does not require its customers to provide collateral to support accounts receivable. The Company assesses the collectability by reviewing accounts receivable on a customer-by-customer basis. To manage credit risk, management performs ongoing credit evaluations of the customers’ financial condition, monitors payment performance, and assesses current economic conditions, as well as reasonable and supportable forecasts of future economic conditions, that may affect collectability of the outstanding receivables. For certain high-risk customers, the Company requires standby letters of credit or advance payment prior to shipments of goods. The Company did not recognize any write-offs of accounts receivable or record any allowance for credit losses for the periods presented.

 

10

 

Contract Liabilities:

 

For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of September 30, 2022 and December 31, 2021, customer prepayments totaled $3.4 million and $4.3 million, respectively. The decrease in the customer prepayment balance for the nine months ended September 30, 2022 resulted from a decrease in unfulfilled customer orders for which the Company had received payments. For the nine months ended September 30, 2022, the Company recognized $4.1 million of revenue that was included in the customer prepayment balance as of December 31, 2021.

 

Practical Expedients

 

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

 

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

 

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

 

 

 

3. STOCK-BASED COMPENSATION

 

2014 Equity Incentive Plan

 

In  April 2013, the Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”), which the Company’s stockholders approved in  June 2013. In  October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The amended 2014 Plan became effective on  November 13, 2014 and provided for the issuance of up to 5.5 million shares. In  April 2020, the Board of Directors further amended and restated the amended 2014 Plan (the “Amended and Restated 2014 Plan”), which the Company’s stockholders approved in  June 2020. The Amended and Restated 2014 Plan became effective on  June 11, 2020 and provides for the issuance of up to 10.5 million shares. The Amended and Restated 2014 Plan will expire on  June 11, 2030. As of  September 30, 2022, 5.0 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 September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Cost of revenue

 $1,186  $922  $3,691  $2,622 

Research and development

  9,287   6,646   26,875   19,564 

Selling, general and administrative

  32,524   24,004   95,157   70,096 

Total stock-based compensation expense

 $42,997  $31,572  $125,723  $92,282 

Tax benefit related to stock-based compensation (1)

 $654  $488  $1,879  $1,299 

 


(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.

 

11

 

Restricted Stock Units (RSUs)

 

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

 

  

Time-Based RSUs

  

PSUs and MPSUs

  

MSUs

  

Total

 
  

Number of Shares

  

Weighted-Average Grant Date Fair Value Per Share

  

Number of Shares

  

Weighted-Average Grant Date Fair Value Per Share

  

Number of Shares

  

Weighted-Average Grant Date Fair Value Per Share

  

Number of Shares

  

Weighted-Average Grant Date Fair Value Per Share

 

Outstanding at January 1, 2022

  125  $235.82   1,166  $222.78   1,218  $44.59   2,509  $136.87 

Granted

  44  $396.77   442(1) $363.74   120  $270.15   606  $347.57 

Vested

  (53) $188.73   (375) $141.02   (243) $23.57   (671) $102.22 

Forfeited

  (6) $308.76   (1) $374.87   (6) $216.37   (13) $268.11 

Outstanding at September 30, 2022

  110  $318.11   1,232  $298.24   1,089  $73.23   2,431  $198.26 

 


(1)

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

 

The intrinsic value related to vested RSUs was $62.3 million and $76.8 million for the three months ended September 30, 2022 and 2021, respectively. The intrinsic value related to vested RSUs was $277.9 million and $297.7 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the total intrinsic value of all outstanding RSUs was $881.1 million, based on the closing stock price of $363.40. As of September 30, 2022, unamortized compensation expense related to all outstanding RSUs was $239.3 million with a weighted-average remaining recognition period of approximately two years.

 

Cash proceeds from vested PSUs with a purchase price requirement totaled $4.3 million and $15.1 million for the nine months ended September 30, 2022 and 2021, respectively.

 

Time-Based RSUs:

 

For the nine months ended September 30, 2022, the Compensation Committee granted 44,000 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.

 

2022 PSUs:

 

In February 2022, the Compensation Committee granted 81,000 PSUs to the executive officers, which represented a target number of shares that could be earned subject to the achievement of two sets of performance goals ( “February 2022 Executive PSUs”). For the first goal, the executive officers could earn up to 300% of the target number of the February 2022 Executive PSUs based on the achievement of the Company’s average two-year (2022 and 2023) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association. 50% of the February 2022 Executive PSUs would vest in the first quarter of 2024 if the pre-determined revenue goal was met during the performance period. The remaining February 2022 Executive PSUs would vest over the following two years on a quarterly basis. For the second goal, the executive officers could earn up to an additional 200% of the target number of the February 2022 Executive PSUs if the Company secured additional wafer capacity during a three-year performance period. The February 2022 Executive PSUs related to the second goal would fully vest in the first quarter of 2025 if the pre-determined goal was met during the performance period. In addition, all vested shares related to the second goal would be subject to a post-vesting sales restriction period of one year. Assuming the achievement of the highest level of the performance goals, the total stock-based compensation cost for the February 2022 Executive PSUs would be $145.7 million.

 

In February 2022, the Compensation Committee granted 14,000 PSUs to certain non-executive employees, which represent a target number of shares that can be earned subject to the achievement of the Company’s 2023 revenue goals for certain regions or product line divisions, or based on the achievement of the Company’s average two-year (2022 and 2023) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2022 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2022 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2022 Non-Executive PSUs will vest in the first quarter of 2024 if the pre-determined goals are met during the performance period. The remaining 2022 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 2022 Non-Executive PSUs is $13.7 million. 

 

12

 

The February 2022 Executive PSUs and the 2022 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 2022 and 2023 is $30 higher than the grant date stock price of $393.16. This market condition was achieved in the first quarter of 2022. The Company determined the grant date fair value of the February 2022 Executive PSUs for the first goal and the 2022 Non-Executive PSUs using a Monte Carlo simulation model with the following assumptions: stock price of $393.16, simulation term of four years, expected volatility of 44.6%, risk-free interest rate of 1.5%, and expected dividend yield of 0.8%. In addition, for the February 2022 Executive PSUs related to the second goal, the fair value was determined based on the closing stock price at the end of each reporting period, adjusted for accrued dividends and an illiquidity discount of 10.3% to account for the post-vesting sales restrictions.

 

In October 2022, the Compensation Committee cancelled the February 2022 Executive PSUs and granted the executive officers MSUs as replacement awards, which can now be earned subject to the achievement of both stock price targets and total stockholder return performance compared to the companies comprising the Philadelphia Semiconductor Sector Index over a three-year performance period ( “October 2022 Executive MSUs”). The October 2022 Executives MSUs will vest at the end of the three-year performance period depending on the degree to which the pre-determined goals are met. Under modification accounting, the Company will continue to recognize stock-based compensation cost for the February 2022 Executive PSUs and any incremental cost of the October 2022 Executive MSUs over the vesting period of the October 2022 Executive MSUs. The Company will determine the grant date fair value of the October 2022 Executive MSUs using a Monte Carlo simulation model, which has not been finalized as of the issuance of this Quarterly Report on Form 10-Q; therefore, we are not able to quantify the impact of the modification at this time.

 

2022 MSUs:

 

In February 2022, the Compensation Committee granted 24,000 MSUs to certain non-executive employees, which represent a target number of shares that can be earned upon achievement of stock price targets (“2022 MSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2022 MSUs if the Company achieves five stock price targets ranging from $472 to $590 during a performance period from February 3, 2022 to February 3, 2025. Two stock price targets were achieved during the third quarter of 2022. The 2022 MSUs will vest in equal amounts on each of the first, second and third anniversaries of February 3, 2025. The total stock-based compensation cost for the 2022 MSUs is $31.3 million.

 

The Company determined the grant date fair value of the 2022 MSUs using a Monte Carlo simulation model with the following assumptions: stock price of $393.16, simulation term of six years, expected volatility of 39.0%, risk-free interest rate of 1.7%, and expected dividend yield of 0.8%.

 

2004 Employee Stock Purchase Plan (ESPP)

 

For each of the three months ended September 30, 2022 and 2021, 7,000 shares were issued under the ESPP. For the nine months ended September 30, 2022 and 2021, 14,000 and 17,000 shares, respectively, were issued under the ESPP. As of September 30, 2022, 4.5 million shares were available for future issuance under the ESPP.

 

The intrinsic value of the shares issued was $0.9 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively. The intrinsic value of the shares issued was $1.6 million and $2.4 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the unamortized expense was $1.1 million, which will be recognized through the first 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 September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Expected term (in years)

  0.5   0.5   0.5   0.5 

Expected volatility

  63.2%  43.0%  50.6%  43.2%

Risk-free interest rate

  3.1%  0.1%  1.9%  0.1%

Dividend yield

  0.6%  0.5%  0.6%  0.6%

 

Cash proceeds from the shares issued under the ESPP were $5.9 million and $4.7 million for the nine months ended September 30, 2022 and 2021, respectively.  

 

 

4. BALANCE SHEET COMPONENTS

 

Inventories 

 

Inventories consist of the following (in thousands): 

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Raw materials

 $83,313  $29,478 

Work in process

  155,904   130,029 

Finished goods

  158,218   99,910 

Total

 $397,435  $259,417 

 

13

 

Other Current Assets

 

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

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

RSU tax withholding proceeds receivable

 $11,957  $16,224 

Prepaid expenses

  9,197   9,526 

Accrued interest receivable

  7,676   5,440 

Assets for product returns

  4,969   1,596 

Other

  2,772   2,754 

Total

 $36,571  $35,540 

 

Other Long-Term Assets

 

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

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Deferred compensation plan assets

 $47,516  $53,172 

Prepaid expenses

  173,229   2,311 

Other

  13,420   14,040 

Total

 $234,165  $69,523 

 

As of September 30, 2022, prepaid expenses included $170.0 million relating 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): 

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Dividends and dividend equivalents

 $40,823  $32,364 

Warranty

  22,644   20,989 

Stock rotation and sales returns

  22,757   5,748 

Customer prepayments

  3,417   4,300 

Income tax payable

  8,296   4,921 

Other

  11,125   12,960 

Total

 $109,062  $81,282 

 

As of September 30, 2022, stock rotation and sales returns included a $22.4 million stock rotation reserve, compared with a $5.5 million reserve as of December 31, 2021. The change in the reserve can be 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):

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Deferred compensation plan liabilities

 $49,417  $55,489 

Dividend equivalents

  8,267   8,470 

Other

  1,877   3,268 

Total

 $59,561  $67,227 

 

14

 
 

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 four 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):

 

   

September 30,

  

December 31,

 
 

Financial Statement Line Item

 

2022

  

2021

 

Operating lease ROU assets

Other long-term assets

 $4,617  $6,297 
          

Operating lease liabilities

Other accrued liabilities

 $2,263  $2,539 
 

Other long-term liabilities

 $1,877  $3,268 

 

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Lease costs:

                

Operating lease costs

 $656  $623  $2,061  $1,694 

Other

  454   140   1,259   387 

Total lease costs

 $1,110  $763  $3,320  $2,081 

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

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

                

Operating cash flows from operating leases

 $649  $612  $2,115  $1,622 

ROU assets obtained in exchange for new operating lease liabilities

 $13  $793  $1,071  $4,477 

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Weighted-average remaining lease term (in years)

  2.3   2.8 

Weighted-average discount rate

  2.0%  2.0%

 

As of September 30, 2022, the maturities of the lease liabilities were as follows (in thousands):

 

2022 (remaining three months)

 $674 

2023

  1,999 

2024

  967 

2025

  590 

2026

  7 

Total remaining lease payments

  4,237 

Less: imputed interest

  (97)

Total lease liabilities

 $4,140 

 

As of September 30, 2022, the Company had no operating leases that had not yet commenced.

 

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 four years. Some of these leases include options to renew the lease term for up to five years.

 

15

 

For the three months ended September 30, 2022 and 2021, income related to lease payments was $0.6 million and $0.7 million, respectively. For both the nine months ended September 30, 2022 and 2021, income related to lease payments was $1.7 million. As of September 30, 2022, future income related to lease payments was as follows (in thousands):

 

2022 (remaining three months)

 $554 

2023

  1,557 

2024

  607 

2025

  102 

2026

  18 

Total

 $2,838 

 

 

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 September 30,

   

Nine Months Ended September 30,

 
   

2022

   

2021

   

2022

   

2021

 

Numerator:

                               

Net income

  $ 124,337     $ 68,770     $ 318,582     $ 169,352  
                                 

Denominator:

                               

Weighted-average outstanding shares - basic

    46,829       45,970       46,643       45,754  

Effect of dilutive securities

    1,520       1,882       1,652       2,018  

Weighted-average outstanding shares - diluted

    48,349       47,852       48,295       47,772  
                                 

Net income per share:

                               

Basic

  $ 2.66     $ 1.50     $ 6.83     $ 3.70  

Diluted

  $ 2.57     $ 1.44     $ 6.60     $ 3.55  

 

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, semiconductor-based power electronics 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.  

 

16

 

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 September 30,

   

Nine Months Ended September 30,

 

Customer

 

2022

   

2021

   

2022

   

2021

 

Distributor A

    25 %     24 %     24 %     26 %

Distributor B

    18 %     15 %     18 %     16 %

Distributor C

    10 %     12 %     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 the termination of the agreement with the distributor.

 

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

 

   

September 30,

   

December 31,

 
   

2022

   

2021

 

Distributor A

    27 %     26 %

Distributor B

    18 %     17 %

Value-added reseller A

    *       12 %

 

 


* Represents less than 10%.

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Country or Region

 

2022

   

2021

   

2022

   

2021

 

China

  $ 265,053     $ 184,796     $ 720,911     $ 509,072  

Taiwan

    58,920       47,048       185,025       125,756  

Europe

    44,885       21,328       101,279       62,498  

South Korea

    52,613       24,442       136,031       62,721  

Southeast Asia

    26,458       14,820       64,460       38,506  

Japan

    22,399       20,944       63,690       47,546  

United States

    24,965       10,091       62,384       24,935  

Other

    125       53       356       260  

Total

  $ 495,418     $ 323,522     $ 1,334,136     $ 871,294  

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Product Family

 

2022

   

2021

   

2022

   

2021

 

Direct Current (“DC”) to DC

  $ 462,982     $ 307,368     $ 1,264,081     $ 827,605  

Lighting Control

    32,436       16,154       70,055       43,689  

Total

  $ 495,418     $ 323,522     $ 1,334,136     $ 871,294  

 

17

 

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

 

   

September 30,

   

December 31,

 

Country

 

2022

   

2021

 

China

  $ 194,811     $ 211,973  

United States

    112,982       113,805  

Taiwan

    18,787       19,607  

Other

    16,543       17,577  

Total

  $ 343,123     $ 362,962  

 

 

8. COMMITMENTS AND CONTINGENCIES

 

Product Warranties

 

The Company generally provides one to two year warranties 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 September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Balance at beginning of period

 $25,209  $10,873  $20,989  $6,895 

Warranty provision for product sales

  1,141   7,757   11,531   12,954 

Settlements made

  (306)  (770)  (1,825)  (1,739)

Unused warranty provision

  (3,400)  (84)  (8,051)  (334)

Balance at end of period

 $22,644  $17,776  $22,644  $17,776 

 

The warranty and unused warranty provisions for product sales included net adjustments for changes in estimates to pre-existing claims of $(3.4) million and $1.4 million for the three months ended September 30, 2022 and 2021, respectively, and $1.9 million and $2.2 million for the nine months ended September 30, 2022 and 2021, respectively.

 

Purchase Commitments

 

The Company has outstanding purchase obligations 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 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 the next four years. As of September 30, 2022, the Company had made prepayments under this agreement of $170.0 million.

 

Total estimated future unconditional purchase commitments to all suppliers and other parties as of September 30, 2022 were as follows (in thousands):

 

2022 (remaining three months)

 $303,070 

2023

  420,883 

2024

  285,813 

2025

  353,952 

Total

 $1,363,718 

 

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 intends to defend itself vigorously against any such claims. As of September 30, 2022, there were no material pending legal proceedings to which the Company was a party.

 

18

 
 

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): 

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Cash

 $245,051  $174,937 

Money market funds

  71,159   14,328 

Certificates of deposit

  126,532   141,478 

Corporate debt securities

  286,065   386,883 

U.S. treasuries and government agency bonds

  7,240   7,456 

Auction-rate securities backed by student-loan notes

  2,083   2,401 

Total

 $738,130  $727,483 

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Reported as:

        

Cash and cash equivalents

 $316,210  $189,265 

Short-term investments

  419,837   535,817 

Investment within other long-term assets

  2,083   2,401 

Total

 $738,130  $727,483 

 

The following table summarizes the contractual maturities of the short-term and long-term available-for-sale investments as of September 30, 2022 (in thousands):  

 

  

Amortized Cost

  

Fair Value

 

Due in less than 1 year

 $316,904  $313,134 

Due in 1 - 5 years

  113,002   106,703 

Due in greater than 5 years

  2,195   2,083 

Total

 $432,101  $421,920 

 

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

 

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

 

  

September 30, 2022

 
  

Amortized

Cost

  

Unrealized

Gains

  

Unrealized

Losses

  

Fair Value

 

Money market funds

 $71,159  $-  $-  $71,159 

Certificates of deposit

  126,532   -   -   126,532 

Corporate debt securities

  295,877   -   (9,812)  286,065 

U.S. treasuries and government agency bonds

  7,497   -   (257)  7,240 

Auction-rate securities backed by student-loan notes

  2,195   -   (112)  2,083 

Total

 $503,260  $-