MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (Unaudited)
The underlying maturity of these auction-rate securities is up to 35 years. As of June 30, 2012 and December 31, 2011 the portion of the impairment classified as temporary was based on the following analysis:
| |
●
|
The decline in the fair value of these securities is not largely attributable to adverse conditions specifically related to these securities or to specific conditions in an industry or in a geographic area;
|
| |
●
|
Management possesses both the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value;
|
| |
●
|
Management believes that it is more likely than not that the Company will not have to sell these securities before recovery of its cost basis;
|
| |
●
|
Except for the credit loss of $70,000 recognized during the year ended December 31, 2009 for the Company’s holdings in auction-rate securities described below, the Company does not believe that there is any additional credit loss associated with other auction-rate securities because the Company expects to recover the entire amortized cost basis;
|
| |
●
|
The face value of $6.0 million of the auction-rate securities remain AAA rated and a face value of $6.3 million of the auction-rate securities having been downgraded by Moody’s to A3-Baa3, during the year ended December 31, 2009 and there have been no downgrades since;
|
| |
●
|
All scheduled interest payments have been made pursuant to the reset terms and conditions; and
|
| |
●
|
All redemptions of auction-rate securities representing 68% of the original portfolio purchased by the Company in February 2008 have been at par.
|
Based on the guidance of ASC 320-10-35 and ASC 320-10-50, the Company evaluated the potential credit loss of each of the auction-rate securities that are currently held by the Company. Based on such analysis, the Company determined that those securities that are not 100% Federal Family Education Loan Program (FFELPS) guaranteed are potentially subject to credit risks based on the extent to which the underlying debt is collateralized and the security-specific student-loan default rates. The Company’s portfolio includes two such securities. The senior parity ratio for the two securities is approximately 106%. If, therefore, the student-loan default rate and borrowing rate increases for these issuers, the remaining balance in these trusts may not be sufficient to cover the senior debt. The Company therefore concluded that there is potential credit risk for these two securities and as such, used the discounted cash flow model to determine the amount of credit loss to be recorded. In valuing the potential credit loss, the following parameters were used: 2.0 year expected term, cash flows based on the 90-day t-bill rates for 2.0 year forwards and a risk premium of 5.9%, the amount of interest that the Company was receiving on these securities when the market was last active. During the year ended December 31, 2009, the potential credit loss associated with these securities was $70,000, which the Company deemed other-than-temporary and recorded in other expense in its Consolidated Statement of Operations during 2009. There have been no such losses since. During the three months ended June 30, 2012, the Company was able to redeem one of these two securities at par and therefore, recognized a gain of $40,000 in other expense in its Consolidated Statement of Operations.
Unless a rights offering or other similar offer is made to redeem at par and accepted by the Company, the Company intends to hold the balance of these investments through successful auctions at par, which the Company believes could take approximately 2.0 years.
Determining the fair value of the auction-rate securities requires significant management judgment regarding projected future cash flows which will depend on many factors, including the quality of the underlying collateral, estimated time for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, among others. To determine the fair value of the auction-rate securities at December 31, 2011 and June 30, 2012, the Company used a discounted cash flow model, for which there are four unobservable inputs: estimated time-to-liquidity, discount rate, credit quality of the issuer and expected interest receipts. A significant increase in the time-to-liquidity or the discount rate inputs or a significant decrease in the credit quality of the issuer or the expected interest receipts inputs in isolation would result in a significantly lower fair value measurement.
The following are the values used in the discounted cash flow model:
MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) (Unaudited)
| |
June 30, 2012 |
December 31, 2011 |
|
Time-to-Liquidity
|
24 months |
24 months |
|
Expected Return (Based on the requisite treasury rate, plus a contractual penalty rate)
|
|
1.8%
|
|
|
1.8%
|
|
|
Discount Rate (Based on the requisite LIBOR, the cost of debt and a liquidity risk premium) and (depending on the credit-rating of the security)
|
2.6% |
- |
7.4%
|
3.1% |
- |
7.9%
|
If the auctions continue to fail, the liquidity of the Company’s investment portfolio may be negatively impacted and the value of its investment portfolio could decline.
9. Income Taxes
The income tax provision for the three and six months ended June 30, 2012 was $0.5 million or 7.7% of the Company’s income before income taxes and $0.9 million or 8.2% of the pre-tax income, respectively. This differs from the federal statutory rate of 34% primarily because the Company’s foreign income was taxed at lower rates and because of the benefit that the Company realized as a result of stock option exercises and restricted units vested. The income tax provision for the three and six months ended June 30, 2011 was $0.6 million or 14.3% of the Company’s income before income taxes and $0.8 million or 12.8% of the pre-tax income, respectively. This differs from the federal statutory rate of 34% primarily because the Company’s foreign income was taxed at lower rates and because of the benefit that the Company realized as a result of restricted units released.
The Company is subject to examination of its income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. The Company’s U.S. Federal income tax returns for the years ended December 31, 2000 through December 31, 2007 are under examination by the IRS. In April 2011, the Company received from the IRS a Notice of Proposed Adjustment, or “NOPA”, relating to a cost-sharing agreement entered into by the Company and its international subsidiaries in 2004. In the NOPA, the IRS objected to the Company’s allocation of certain litigation expenses between the Company and our international subsidiaries and the amount of “buy-in payments” made by the Company’s international subsidiaries to the Company in connection with the cost-sharing agreement, and proposed to increase the Company’s U.S. taxable income according to a few alternative methodologies. The methodology resulting in the largest potential adjustment could, if the IRS were to prevail on all matters in dispute, increase the Company’s potential federal and state income tax liabilities by up to $37.0 million, plus interest and penalties, if any. In February 2012, the Company received a revised NOPA from the IRS (Revised NOPA). In this revised NOPA, the largest potential adjustment, if the IRS were to prevail on all matters in dispute, has decreased to $10.5 million, plus interest and penalties, if any. The IRS also audited and proposed adjustments on the research and development credits generated in years 2005 through 2007. On March 20, 2012, the Company received an examination report from the IRS, commonly referred to as a “30-day letter”, formally proposing adjustments to the taxable years 2005, 2006 and 2007. As of June 30, 2012, a formal protest to the IRS proposed adjustments has been filed. There is no expected timeframe for MPS to receive feedback from the IRS. The Company regularly assesses the likelihood of an adverse outcome resulting from such examinations to determine the adequacy of its provision for income taxes. Based on the technical merits of its tax return filing positions, as of June 30, 2012, the Company believes that it is more-likely-than-not the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. As of June 30, 2012, no other audits were in process in any other material jurisdiction.
10. Stock Repurchase Program
On July 27, 2010, the Board of Directors approved a stock repurchase program that authorized MPS to repurchase up to $50.0 million in the aggregate of its common stock between August 2, 2010 and December 31, 2011. In February 2011, the Board of Directors approved an increase from $50.0 million to $70.0 million. From August 2010 through June 2011, the Company repurchased 4,385,289 shares for a total of $70.0 million. During the six months ended June 30, 2011, the following shares have been repurchased through the open market and subsequently retired:
|
2011 Calendar Year
|
|
Shares Repurchased
|
|
|
|
|
|
Value (in thousands)
|
|
|
February
|
|
|
817,500 |
|
|
$ |
15.47 |
|
|
$ |
12,648 |
|
|
March
|
|
|
75,000 |
|
|
$ |
14.17 |
|
|
$ |
1,062 |
|
|
April
|
|
|
917,200 |
|
|
$ |
14.82 |
|
|
$ |
13,617 |
|
|
May
|
|
|
657,800 |
|
|
$ |
16.48 |
|
|
$ |
10,843 |
|
|
June
|
|
|
18,000 |
|
|
$ |
16.79 |
|
|
$ |
302 |
|
| |
|
|
2,485,500 |
|
|
|
|
|
|
$ |
38,472 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events and our future performance and are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. These include statements concerning, among others:
| |
●
|
the above-average industry growth of product and market areas that we have targeted,
|
| |
●
|
our plan to introduce additional new products within our existing product families as well as in new product categories and families
|
| |
|
|
| |
●
|
Our intention to exercise our purchase option with respect to our manufacturing facility in Chengdu, China,
|
| |
●
|
our belief that we will continue to incur significant legal expenses that vary with the level of activity in each of our legal proceedings,
|
| |
●
|
the effect of auction-rate securities on our liquidity and capital resources,
|
| |
●
|
the application of our products in the Communications, Computing, Consumer and Industrial markets continuing to account for a majority of our revenue,
|
| |
●
|
estimates of our future liquidity requirements,
|
| |
●
|
the cyclical nature of the semiconductor industry,
|
| |
●
|
protection of our proprietary technology,
|
| |
●
|
near term business outlook for 2012,
|
| |
●
|
the factors that we believe will impact our ability to achieve revenue growth,
|
| |
●
|
the outcome of the IRS audit of our tax return for the tax years ended December 31, 2000 through 2007,
|
| |
●
|
the percentage of our total revenue from various market segments, and
|
| |
●
|
the factors that differentiate us from our competitors.
|
In some cases, words such as “would,” “could,” “may,” “should,” “predict,” “potential,” “targets,” “continue,” “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “will,” the negative of these terms or other variations of such terms and similar expressions relating to the future identify forward-looking statements. All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans or objectives about our business and our industry. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events or results could differ materially and adversely from those expressed in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this quarterly report on Form 10-Q and, in particular, in the section entitled “Part II. Other Information, Item 1A. Risk Factors”. Except as required by law, we disclaim any duty to and undertake no obligation to update any forward-looking statements, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this quarterly report on Form 10-Q. Readers should carefully review future reports and documents that we file from time to time with the Securities and Exchange Commission, such as our annual reports on Form 10-K and any current reports on Form 8-K.
The following management’s discussion and analysis should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and six months ended June 30, 2012 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K filed on March 12, 2012 with the Securities and Exchange Commission.
Overview
We are a fabless semiconductor company that designs, develops, and markets proprietary, advanced analog and mixed-signal semiconductors. We offer products that serve multiple markets, including flat panel televisions, wireless communications, telecommunications equipment, general consumer products, notebook computers, and set top boxes, among others. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.
We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not and will not be immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance.
We work with third parties to manufacture and assemble our integrated circuits (“ICs”). This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.
Following the introduction of a product, our sales cycle generally takes a number of quarters to achieve revenue and volume production is usually achieved several months after we receive an initial customer order for a new product. Typical lead time for orders is fewer than 90 days. These factors, combined with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer, make the forecasting of our orders and revenue difficult.
We derive most of our revenue from sales through distribution arrangements, or direct sales to customers in Asia, where the products we produce are incorporated into end-user products. Out of our total revenue, 91% of our revenue for both the quarters ended June 30, 2012 and 2011 was attributable to direct or indirect sales to customers in Asia. We derive a majority of our revenue from the sales of our DC to DC converter product family which services the Communications, Computing, Consumer and Industrial markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfully secure manufacturing capacity.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, long-term investments, short-term investments, inventories, income taxes, warranty obligations and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates.
We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financial statements.
Revenue Recognition. We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) – Accounting Standards Codification (“ASC”) 605-10-S25 Revenue Recognition – Overall – Recognition. ASC 605-10-S25 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of the fee charged for products delivered and the collectability of those fees. The application of these criteria has resulted in our generally recognizing revenue upon shipment (when title passes) to customers. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely impacted.
Approximately 81% of our sales for the six months ended June 30, 2012 were made through distributors with formal distribution agreements. These arrangements do not include any special payment terms (our normal payment terms are 30-45 days for our distributors), price protection or exchange rights. Returns are limited to our standard product warranty. Certain of our large distributors have contracts that include limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases in return for a compensating new order of equal or greater dollar value.
Our revenue consists primarily of assembled and tested finished goods. We also sell die in wafer form to our customers and value-added resellers and receive royalty revenue from third parties and value-added resellers.
We maintain a sales reserve for stock rotation rights, which is based on historical experience of actual stock rotation returns on a per distributor basis, where available, and information related to products in the distribution channel. This reserve is recorded at the time of sale. In the future, if we are unable to estimate our stock rotation returns accurately, we may not be able to recognize revenue from sales to our distributors based on when we sell inventory to our distributors. Instead, we may have to recognize revenue when the distributor sells through such inventory to an end-customer.
We generally recognize revenue upon shipment of products to the distributor for the following reasons (based on ASC 605-15-25-1 Revenue Recognition – Products – Recognition – Sales of Products When Right of Return Exists):
| |
(1)
|
Our price is fixed or determinable at the date of sale. We do not offer special payment terms, price protection or price adjustments to distributors where we recognize revenue upon shipment
|
| |
(2)
|
Our distributors are obligated to pay us and this obligation is not contingent on the resale of our products
|
| |
(3)
|
The distributor’s obligation is unchanged in the event of theft or physical destruction or damage to the products
|
| |
(4)
|
Our distributors have stand-alone economic substance apart from our relationship
|
| |
(5)
|
We do not have any obligations for future performance to directly bring about the resale of our products by the distributor
|
| |
(6)
|
The amount of future returns can be reasonably estimated. We have the ability and the information necessary to track inventory sold to and held at our distributors. We maintain a history of returns and have the ability to estimate the stock rotation returns on a quarterly basis.
|
If we enter into arrangements that have rights of return that are not estimable, we recognize revenue under such arrangements only after the distributor has sold our products to an end customer.
Approximately 8% of our sales for the six months ended June 30, 2012 were made through value-added resellers based on purchase orders rather than formal distribution arrangements. These value-added resellers do not receive any stock rotation rights and, as such, hold very little inventory, if any. We do not have a history of accepting returns from these value-added resellers.
The terms in a majority of our distribution agreements include the non-exclusive right to sell, and the agreement to use best efforts to promote and develop a market for, our products in certain regions of the world and the ability to terminate the distribution agreement by either party with up to three months notice. We provide a one year warranty against defects in materials and workmanship. Under this warranty, we will repair the goods, provide replacements at no charge, or, under certain circumstances, provide a refund to the customer for defective products. Estimated warranty returns and warranty costs are based on historical experience and are recorded at the time product revenue is recognized.
Two of the Company's U.S. distributors have distribution agreements where revenue is recognized upon sale by these distributors to their end customers because these distributors have certain rights of return which management believes are not estimable. The deferred revenue balance from these two distributors as of June 30, 2012 and December 31, 2011 was $1.7 million and $1.0 million, respectively.
Warranty Reserves. We currently provide a 12-month warranty against defects in materials and workmanship and will either repair the goods or provide replacement products at no charge to the customer for defective products. We record estimated warranty costs by product, which are based on historical experience over the preceding 12 months, at the time we recognize product revenue. Reserve requirements are recorded in the period of sale and are based on an assessment of the products sold with warranty and historical warranty costs incurred. As the complexity of our products increases, we could experience higher warranty claims relative to sales than we have previously experienced, and we may need to increase these estimated warranty reserves.
Inventory Valuation. We value our inventory at the lower of the standard cost (which approximates actual cost on a first-in, first-out basis) or its current estimated market value. We write down inventory for obsolescence or lack of demand, based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. On the contrary, if market conditions are more favorable, we may be able to sell inventory that was previously reserved.
Accounting for Income Taxes. ASC 740-10 Income Taxes – Overall prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. In accordance with ASC 740-10, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities for our estimate of future tax effects attributable to temporary differences and carryforwards. We record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality or uncertainty to an anticipated outcome, changes in accounting or tax laws in the U.S., or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on our tax returns if it has less than a 50% likelihood of being sustained. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements in the period such determination is made. We have calculated our uncertain tax positions which were attributable to certain estimates and judgments primarily related to transfer pricing, cost sharing and our international tax structure exposure.
As of both June 30, 2012 and December 31, 2011, we had a valuation allowance of $14.6 million attributable to management’s determination that it is more likely than not that none of the deferred tax assets in the United States will be realized, except for certain deferred tax assets related to uncertain income tax positions. Should it be determined that all or part of the net deferred tax asset will not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance will be charged to income in the period such determination is made. Likewise, in the event we were to determine that it is more likely than not that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance for the deferred tax asset would increase income in the period such determination was made.
Contingencies. We and certain of our subsidiaries are parties to actions and proceedings incident to our business in the ordinary course of business, including litigation regarding our intellectual property, challenges to the enforceability or validity of our intellectual property and claims that our products infringe on the intellectual property rights of others. The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend. In addition, from time to time, we become aware that we are subject to other contingent liabilities. When this occurs, we will evaluate the appropriate accounting for the potential contingent liabilities using ASC 450-20-25-2 Contingencies – Loss Contingencies - Recognition to determine whether a contingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the facts and circumstances in each matter, we use our judgment to determine whether it is probable that a contingent loss has occurred and whether the amount of such loss can be estimated. If we determine a loss is probable and estimable, we record a contingent loss in accordance with ASC 450-20-25-2. In determining the amount of a contingent loss, we take into account advice received from experts for each specific matter regarding the status of legal proceedings, settlement negotiations (which may be ongoing), prior case history and other factors. Should the judgments and estimates made by management need to be adjusted as additional information becomes available, we may need to record additional contingent losses that could materially and adversely impact our results of operations. Alternatively, if the judgments and estimates made by management are adjusted, for example, if a particular contingent loss does not occur, the contingent loss recorded would be reversed which could result in a favorable impact on our results of operations.
Accounting for Stock-Based Compensation. We account for stock-based compensation under the provisions of ASC 718-10-30 Compensation – Stock Compensation – Overall – Initial Measurement. This standard requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). We currently use the Black-Scholes option-pricing model to estimate the fair value of our share-based payments. The Black-Scholes option-pricing model is based on a number of assumptions, including historical volatility, expected life, risk-free interest rate and expected dividends. The amount of stock-based compensation that we recognize is also based on an expected forfeiture rate. If there is a difference between the forfeiture assumptions used in determining stock-based compensation costs and the actual forfeitures which become known over time, we may change the forfeiture rate, which could have a significant impact on our stock-based compensation expense.
Fair Value Instruments. ASC 820-10 Fair Value Measurements and Disclosures – Overall defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of America, and requires that assets and liabilities carried at fair value be classified and disclosed in one of the three categories, as follows:
| |
a.
|
Level 1: Quoted prices in active markets for identical assets;
|
| |
b.
|
Level 2: Significant other observable inputs; and
|
| |
c.
|
Level 3: Significant unobservable inputs.
|
ASC 820-10-35-51 Fair Value Measurement and Disclosure – Overall – Subsequent Measurement – Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly provides additional guidance for estimating fair value in accordance with ASC 820-10 Fair Value Measurements and Disclosures – Overall, when the volume and level of activity for the asset or liability have significantly decreased.
Our financial instruments include cash and cash equivalents and short-term and long-term investments. Cash equivalents are stated at cost, which approximates fair market value. Short-term and long-term investments are stated at their fair market value.
The face value of our holdings in auction rate securities is $12.3 million, all of which is classified as long-term available-for-sale investments.
Investments in available-for-sale securities are recorded at fair value, and unrealized gains or losses (that are deemed to be temporary) are recognized through shareholders' equity, as a component of accumulated other comprehensive income in our condensed consolidated balance sheet and in our condensed consolidated statement of comprehensive income. We record an impairment charge to earnings when an available-for-sale investment has experienced a decline in value that is deemed to be other-than-temporary.
We adopted the provisions of ASC 320-10-35 Investments – Debt and Equity Securities – Overall – Subsequent Measurement and ASC 320-10-50 Investments – Debt and Equity Securities – Overall - Disclosure, effective April 1, 2009 and used the guidelines therein to determine whether the impairment is temporary or other-than temporary. Other-than-temporary impairment charges exist when the entity has the intent to sell the security or it will more likely than not be required to sell the security before anticipated recovery. During the year ended December 31, 2009, we recognized a credit loss of $70,000, which was deemed to be other-than-temporary in other income (expense) in our Condensed Consolidated Statement of Operations. There have been no such losses since.
Based on certain assumptions described in Note 8, “Fair Value Measurements”, to our condensed consolidated financial statements and the Liquidity and Capital Resources section of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this quarterly report on Form 10-Q, we recorded impairment charges on our holdings in auction-rate securities. The valuation of these securities is subject to fluctuations in the future, which will depend on many factors, including the collateral quality, potential to be called or restructured, underlying final maturity, insurance guaranty, liquidity and market conditions, among others.
Results of Operations
The table below sets forth the data from our Condensed Consolidated Statement of Operations as a percentage of revenue for the periods indicated:
| |
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of revenue
|
|
|
46.8 |
% |
|
|
48.6 |
% |
|
|
47.2 |
% |
|
|
49.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
53.2 |
% |
|
|
51.4 |
% |
|
|
52.8 |
% |
|
|
50.8 |
% |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
21.3 |
% |
|
|
21.8 |
% |
|
|
21.6 |
% |
|
|
22.2 |
% |
|
Selling, general and administrative
|
|
|
20.8 |
% |
|
|
20.0 |
% |
|
|
22.1 |
% |
|
|
20.6 |
% |
|
Litigation expense (benefit)
|
|
|
(0.4 |
%) |
|
|
1.8 |
% |
|
|
(0.1 |
%) |
|
|
1.8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
41.7 |
% |
|
|
43.6 |
% |
|
|
43.6 |
% |
|
|
44.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11.5 |
% |
|
|
7.8 |
% |
|
|
9.2 |
% |
|
|
6.2 |
% |
|
Interest income and other, net
|
|
|
0.6 |
% |
|
|
0.1 |
% |
|
|
0.4 |
% |
|
|
0.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
12.1 |
% |
|
|
7.9 |
% |
|
|
9.6 |
% |
|
|
6.4 |
% |
|
Income tax provision / (benefit)
|
|
|
0.9 |
% |
|
|
1.2 |
% |
|
|
0.8 |
% |
|
|
0.8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11.2 |
% |
|
|
6.7 |
% |
|
|
8.8 |
% |
|
|
5.6 |
% |
Revenue.
| |
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
| |
|
(in thousands)
|
|
|
Change
|
|
|
(in thousands)
|
|
|
Change
|
|
|
Revenue
|
|
$ |
58,607 |
|
|
$ |
51,628 |
|
|
|
13.5 |
% |
|
$ |
109,091 |
|
|
$ |
96,096 |
|
|
|
13.5 |
% |
Revenue for the three months ended June 30, 2012 was $58.6 million, an increase of $7.0 million, or 13.5%, from $51.6 million for the three months ended June 30, 2011. This increase was primarily due to increased demand for our DC to DC converters. Revenue from our DC to DC converters of $51.2 million increased $6.4 million, or 14.3% in 2012 compared to the same period in 2011 primarily due to a demand driven increase in unit product shipment for our DCDC and Mini-Monster products. Sales of our lighting control products for the three months ended June 30, 2012 was up by 8.5% compared to the same period in 2011.
Revenue for the six months ended June 30, 2012 was $109.1 million, an increase of $13.0 million, or 13.5%, from $96.1 million for the six months ended June 30, 2011. This increase was primarily due to increased demand for our DC to DC converters. The revenue from our DC to DC converters was $95.5 million, an increase of $12.2 million, or 14.6% compared to the same period in 2011. The revenue increase in DC to DC converter product line was primarily driven by increased demand for our DCDC and Mini-Monster products. For the first six months of 2012, sales of our lighting control products were up 6.6% year over year.
The following table illustrates changes in our revenue by product family:
| |
|
For the three months ended June 30,
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
|
| |
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
| |
|
(in thousands) Amount
|
|
|
|
|
|
(in thousands) Amount
|
|
|
|
|
|
Change
|
|
|
(in thousands) Amount
|
|
|
|
|
|
(in thousands) Amount
|
|
|
|
|
|
Change
|
|
|
DC to DC Converters
|
|
|
51,165 |
|
|
|
87.3 |
% |
|
$ |
44,771 |
|
|
|
86.7 |
% |
|
|
14.3 |
% |
|
|
95,507 |
|
|
|
87.5 |
% |
|
$ |
83,351 |
|
|
|
86.7 |
% |
|
|
14.6 |
% |
|
Lighting Control Products
|
|
|
7,442 |
|
|
|
12.7 |
% |
|
|
6,857 |
|
|
|
13.3 |
% |
|
|
8.5 |
% |
|
|
13,584 |
|
|
|
12.5 |
% |
|
|
12,745 |
|
|
|
13.3 |
% |
|
|
6.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
58,607 |
|
|
|
100.0 |
% |
|
$ |
51,628 |
|
|
|
100.0 |
% |
|
|
13.5 |
% |
|
$ |
109,091 |
|
|
|
100.0 |
% |
|
$ |
96,096 |
|
|
|
100.0 |
% |
|
|
13.5 |
% |
Cost of Revenue and Gross Margin.
| |
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
| |
|
(in thousands)
|
|
|
Change
|
|
|
(in thousands)
|
|
|
Change
|
|
|
Cost of Revenue (1)
|
|
$ |
27,435 |
|
|
$ |
25,070 |
|
|
|
9.4 |
% |
|
$ |
51,509 |
|
|
$ |
47,233 |
|
|
|
9.1 |
% |
|
Cost of revenue as a percentage of revenue
|
|
|
46.8 |
% |
|
|
48.6 |
% |
|
|
|
|
|
|
47.2 |
% |
|
|
49.2 |
% |
|
|
|
|
|
Gross Profit
|
|
$ |
31,172 |
|
|
|
26,558 |
|
|
|
17.4 |
% |
|
$ |
57,582 |
|
|
|
48,863 |
|
|
|
17.8 |
% |
|
Gross Margin
|
|
|
53.2 |
% |
|
|
51.4 |
% |
|
|
|
|
|
|
52.8 |
% |
|
|
50.8 |
% |
|
|
|
|
|
(1) Includes stock-based compensation expense
|
|
$ |
118 |
|
|
$ |
89 |
|
|
|
|
|
|
$ |
213 |
|
|
$ |
152 |
|
|
|
|
|
Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, as well as other overhead costs relating to the aforementioned costs including stock-based compensation expense. Gross Profit as a percentage of revenue, or gross profit margin, was 53.2% for the three months ended June 30, 2012 and 51.4% for the three months ended June 30, 2011. Gross profit as a percentage of revenue, or gross profit margin, was 52.8% for the six months ended June 30, 2012 and 50.8% for the six months ended June 30, 2011. The respective 1.8 and 2.0 percentage point increases, in gross profit margin for the three and six months ended June 30, 2012 were primarily due to cost efficiency and higher absorption of in-house test manufacturing overhead on higher revenue, lower relative costs for Inventory and warranty reserves, and better product mix compared to the same periods in 2011.
Research and Development.
| |
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
| |
|
(in thousands)
|
|
|
Change
|
|
|
(in thousands)
|
|
|
Change
|
|
|
Research and development (“R&D”) (1)
|
|
$ |
12,468 |
|
|
$ |
11,237 |
|
|
|
11.0 |
% |
|
$ |
23,586 |
|
|
$ |
21,323 |
|
|
|
10.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D as a percentage of revenue
|
|
|
21.3 |
% |
|
|
21.8 |
% |
|
|
|
|
|
|
21.6 |
% |
|
|
22.2 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based compensation expense
|
|
$ |
1,524 |
|
|
$ |
1,550 |
|
|
|
|
|
|
$ |
2,790 |
|
|
$ |
2,977 |
|
|
|
|
|
R&D expenses consist of salary and benefit expenses for design and product engineers, expenses related to new product development, and related facility costs. R&D expenses were $12.5 million or 21.3% of revenue, for the three months ended June 30, 2012 and $11.2 million, or 21.8% of revenue, for the three months ended June 30, 2011. R&D expenses were $23.6 million or 21.6% of revenue, for the six months ended June 30, 2012 and $21.3 million, or 22.2% of revenue, for the six months ended June 30, 2011. R&D expenses increased year-over-year due to an increase in personnel-related costs, increase in facilities costs related to moving expenses associated with our new headquarter location and costs associated with new product development. Our R&D head count as of June 30, 2012 was 388 employees as compared to 379 employees as of June 30, 2011.
Selling, General and Administrative.
| |
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
| |
|
(in thousands)
|
|
|
Change
|
|
|
(in thousands)
|
|
|
Change
|
|
|
Selling, general and administrative (“SG&A”) (1)
|
|
$ |
12,167 |
|
|
$ |
10,343 |
|
|
|
17.6 |
% |
|
$ |
24,133 |
|
|
$ |
19,833 |
|
|
|
21.7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A as a percentage of revenue
|
|
|
20.8 |
% |
|
|
20.0 |
% |
|
|
|
|
|
|
22.1 |
% |
|
|
20.6 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based compensation expense
|
|
$ |
2,187 |
|
|
$ |
2,036 |
|
|
|
|
|
|
$ |
4,141 |
|
|
$ |
3,533 |
|
|
|
|
|
SG&A expenses include salary and benefit expenses for sales, marketing and administrative personnel, sales commissions, travel expenses, related facilities costs, outside legal and accounting fees, and fees associated with Sarbanes-Oxley compliance requirements. SG&A expenses were $12.2 million, or 20.8% of revenue, for the three months ended June 30, 2012 and $10.3 million, or 20.0% of revenue for the three months ended June 30, 2011. SG&A expenses were $24.1 million, or 22.1% of revenue, for the six months ended June 30, 2012 and $19.8 million, or 20.6% of revenue, for the six months ended June 30, 2011. For the three and six months ended June 30, 2012, SG&A expenses increased year over year due to an increase in personnel-related costs, sales commission and stock-based compensation expense. Our SG&A head count as of June 30, 2012 were 248 employees as compared to 233 employees as of June 30, 2011.
Litigation Expense.
| |
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
| |
|
(in thousands)
|
|
|
Change
|
|
|
(in thousands)
|
|
|
Change
|
|
|
Litigation expense
|
|
$ |
(244 |
) |
|
$ |
939 |
|
|
|
(126.0 |
)% |
|
$ |
(116 |
) |
|
$ |
1,752 |
|
|
|
(106.6 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation expense as a percentage of revenue
|
|
|
-0.4 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
-0.1 |
% |
|
|
1.8 |
% |
|
|
|
|
Litigation expenses (benefit) were ($0.2) million, or (0.4%) of revenue, for the three months ended June 30, 2012, compared to $0.9 million, or 1.8% of revenue, for the three months ended June 30, 2011. Litigation expenses were ($0.1) million or (0.1%) of revenue, for the six months ended June 30, 2012, compared to $1.8 million, or 1.8% of revenue, for the six months ended June 30, 2011. This decrease was primarily due to lower litigation spending in 2012 compared to the same period in 2011, plus the benefit of a $0.3 million and $0.6 million of payments received under a settlement and license agreement for the three and six months ended June 30, 2012, respectively. In December 2011, the Company entered into a settlement agreement with a third-party company for infringement of the Company’s patent whereby the Company will receive a total of $2 million which will be paid in equal installments of $300,000 in each quarter of 2012 and the remainder will be paid in two equal installments in the first two quarters of 2013. For the three and six months ended June 30, 2012, the Company received $0.3 million and $0.6 million payments, respectively, which were recorded as credits to litigation expenses in the Condensed Consolidated Statements of Operations. During the three and six months ended June 30, 2011, we incurred legal expenses primarily to recover attorneys’ fees from O2Micro relating to our lawsuits involving O2Micro, which were resolved in the second quarter of 2010. Overall, our litigation expense has decreased as a result of MPS being party to fewer material litigations.
Income Tax Provision. The income tax provision for the three and six months ended June 30, 2012 was $0.5 million or 7.7% of the Company’s income before income taxes and $0.9 million, or 8.2% of the pre-tax income, respectively. This differs from the federal statutory rate of 34% primarily because the Company’s foreign income was taxed at lower rates and because of the benefit that the Company realized as a result of stock option exercises and restricted units vested. The income tax provision for the three and six months ended June 30, 2011 was $0.6 million or 14.3% of our income before income taxes and $0.8 million, or 12.8% of pre-tax income, respectively. This differs from the federal statutory rate of 34% primarily because our foreign income was taxed at lower rates and because of the benefit that we realized as a result of restricted units released.
Liquidity and Capital Resources.
| |
|
|
|
|
|
|
| |
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$ |
81,644 |
|
|
$ |
96,371 |
|
|
Short-term investments
|
|
|
103,013 |
|
|
|
77,827 |
|
|
Total cash, cash equivalents and short-term investments
|
|
$ |
184,657 |
|
|
$ |
174,198 |
|
|
Percentage of total assets
|
|
|
59.6 |
% |
|
|
63.6 |
% |
| |
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$ |
238,151 |
|
|
$ |
211,505 |
|
|
Total current liabilities
|
|
|
(35,584 |
) |
|
|
(26,070 |
) |
|
Working Capital
|
|
$ |
202,567 |
|
|
$ |
185,435 |
|
As of June 30, 2012, we had working capital of $202.6 million, including cash and cash equivalents of $81.6 million and short-term investments of $103.0 million, compared to working capital of $185.4 million, including cash and cash equivalents of $96.4 million and short-term investments of $77.8 million as of December 31, 2011. For the six months ended June 30, 2012, cash and cash equivalents decreased by $14.8 million primarily due to investment in short-term securities and cash used to pay for the cost of building improvements at our new headquarters located in San Jose, California. We have financed our operations primarily with proceeds from cash generated from operating activities, proceeds from the exercise of stock options and proceeds from the issuance of shares through the Company’s employee stock purchase plan. As of June 30, 2012, $41.4 million of the $81.6 million of cash and cash equivalents and $16.0 million of the $103.0 million of short-term investments were held by our international subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories, deferred income taxes and prepaid expenses and other current assets, reduced by accounts payable, accrued and other current liabilities, deferred revenue and customer prepayments.
Working capital at June 30, 2012 increased by $17.2 million compared to the working capital at December 31, 2011, primarily due to a $26.6 million net increase in current assets offset a by $9.5 million net increase in current liabilities. The increase in current assets was primarily due to investment in short-term securities and an increase in inventories to meet the anticipated future demand. In addition, accounts receivable increased reflecting a change in the timing of shipments during the quarter relative to the fourth quarter of 2011. The increase in current liabilities was primarily due to an increase in accounts payable.
Summary of Cash Flows. The table below summarizes the cash and cash equivalents provided by (used in) in our operating, investing and financing activities for the periods presented:
| |
|
Six months ended June 30,
|
|
| |
|
2012
|
|
|
2011
|
|
| |
|
(Dollars in thousands)
|
|
|
Cash provided by operating activities
|
|
|
12,292 |
|
|
|
21,514 |
|
|
Cash provided by (used in) investing activities
|
|
|
(36,327 |
) |
|
|
60,591 |
|
|
Cash provided by (used in) financing activities
|
|
|
9,144 |
|
|
|
(32,808 |
) |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
164 |
|
|
|
378 |
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(14,727 |
) |
|
|
49,675 |
|
For the six months ended June 30, 2012, net cash provided by operating activities was $12.3 million, primarily reflecting strong operating results and an increase in accounts payable in support of both our building improvements for our new headquarters and inventory purchases. This was partially offset by an increase in accounts receivable resulting from the timing of shipments relative to the fourth quarter of 2011 for which the collections have not been made and increase in inventories. For the six months ended June 30, 2011, net cash provided by operating activities was $21.5 million primarily due to strong operating results and an increase in accounts payable for inventory purchases. This was partially offset by an increase in inventories to meet the anticipated future demand and an increase in accounts receivable resulting from shipments at the end of the quarter for which the collections had not been made.
For the six months ended June 30, 2012, net cash used in investing activities was $36.3 million, primarily related to the investment in short-term securities and investment in building improvements at our new headquarters location in San Jose, California. For the six months ended June 30, 2011, net cash provided by investing activities was $60.6 million, primarily related to the redemption of short-term investments to fund our stock repurchase program.
We use professional investment management firms to manage the majority of our invested cash. Our fixed income portfolio is primarily invested in US government securities, auction-rate securities and highly rated corporate notes and commercial paper. The balance of the fixed income portfolio is managed internally and invested primarily in money market securities for working capital purposes.
We adopted the provisions of ASC 320-10-35 Investments – Debt and Equity Securities – Overall – Subsequent Measurement and ASC 320-10-50 Investments – Debt and Equity Securities – Overall - Disclosure, effective April 1, 2009 and used the guidelines therein to determine whether the impairment is temporary or other-than temporary. Temporary impairment charges are recorded in accumulated other comprehensive income (loss) within equity and has no impact on net income. Other-than-temporary impairment charges exist when the entity has the intent to sell the security, it will more likely than not be required to sell the security before anticipated recovery, or it does not expect to recover the entire amortized cost basis of the security. Other-than-temporary impairment charges are recorded in other income (expenses) in the Condensed Consolidated Statement of Operations.
At June 30, 2012, the Company’s investment portfolio included $11.7 million in government-backed student loan auction-rate securities, net of impairment charges of $0.56 million; of which, $0.53 million was temporary and $0.03 million was recorded other-than-temporary. This compares to an investment balance of auction-rate securities as of December 31, 2011 of $13.7 million, net of impairment charges of $0.7 million; of which, $0.6 million was temporary and $0.1 million was recorded as other-than-temporary. The underlying maturity of these auction-rate securities is up to 35 years. As of June 30, 2012 and December 31, 2011 the portion of the impairment classified as temporary was based on the following analysis:
| |
1.
|
The decline in the fair value of these securities is not attributable to adverse conditions specifically related to these securities or to specific conditions in an industry or in a geographic area;
|
| |
2.
|
Management possesses both the intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value;
|
| |
3.
|
Management believes that it is more likely than not that the Company will not have to sell these securities before recovery of its cost basis;
|
| |
4.
|
Except for the credit loss of $70,000 recognized in year ended December 31, 2009 for the Company’s holdings in auction rate securities described below, the Company does not believe that there is any additional credit loss associated with other auction-rate securities because the Company expects to recover the entire amortized cost basis;
|
| |
5.
|
The face value of $6.0 million of the auction-rate securities remain AAA rated and the face value of $6.3 million of the auction rate securities having been downgraded by Moody’s to A3-Baa3 during the year ended December 31, 2009, and there have been no downgrades since; and
|
| |
6.
|
All scheduled interest payments have been made pursuant to the reset terms and conditions; and
|
| |
7.
|
All redemptions of auction-rate securities representing 68% of the original portfolio purchased by the Company in February 2008 have been at par.
|
Based on the guidance of ASC 320-10-35 and ASC 320-10-50, the Company evaluated the potential credit loss of each of the auction-rate securities that are currently held by the Company. Based on such analysis, the Company determined that those securities that are not 100% FFELPS guaranteed are potentially subject to credit risks based on the extent to which the underlying debt is collateralized and the security-specific student-loan default rates. The Company’s portfolio includes two such securities. The senior parity ratio for the two securities is approximately 106%. If, therefore, the student-loan default rate and borrowing rate increases for these issuers, the remaining balance in these trusts may not be sufficient to cover the senior debt. The Company therefore concluded that there is potential credit risk for these two securities and as such, used the discounted cash flow model to determine the amount of credit loss to be recorded. In valuing the potential credit loss, the following parameters were used: 2.0 year expected term, cash flows based on the 90-day t-bill rates for 2.0 year forwards and a risk premium of 5.9%, the amount of interest that the Company was receiving on these securities when the market was last active. During the year ended December 31, 2009, the potential credit loss associated with these securities was $70,000, which the Company deemed other-than-temporary and recorded in other expense in its Consolidated Statement of Operations during 2009. There have been no such losses since. During the three months ended June 30, 2012, the Company was able to redeem one of these two securities at par and therefore, recognized a gain of $40,000 in other expense in its Consolidated Statement of Operations.
Unless a rights offering or other similar offer is made to redeem at par and accepted by us, we intend to hold the balance of these investments through successful auctions at par, which we believe could take approximately 2.0 years.
Determining the fair value of the auction-rate securities requires significant management judgment regarding projected future cash flows which will depend on many factors, including the quality of the underlying collateral, estimated time for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, among others. To determine the fair value of the auction-rate securities at December 31, 2011 and June 30, 2012, the Company used a discounted cash flow model, for which there are four unobservable inputs: estimated time-to-liquidity, discount rate, credit quality of the issuer and expected interest receipts. A significant increase in the time-to-liquidity or the discount rate inputs or a significant decrease in the credit quality of the issuer or the expected interest receipts inputs in isolation would result in a significantly lower fair value measurement.
The following are the values used in the discounted cash flow model:
| |
June 30, 2012 |
December 31, 2011 |
|
Time-to-Liquidity
|
24 months |
24 months |
|
Expected Return (Based on the requisite treasury rate, plus a contractual penalty rate)
|
|
1.8%
|
|
|
1.8%
|
|
|
Discount Rate (Based on the requisite LIBOR, the cost of debt and a liquidity risk premium) and (depending on the credit-rating of the security)
|
2.6% |
- |
7.4%
|
3.1% |
- |
7.9%
|
From the fourth quarter of 2011 to the first and second quarter of 2012, we kept the time-to-liquidity constant at 2.0 years. We sold $2.1 million in auction-rate securities at par and reversed the impairment related to these securities in the amount of $0.1 million. This reduced the overall impairment from $0.7 million at December 31, 2011 to $0.6 million at June 30, 2012.
Net cash provided by financing activities for the six months ended June 30, 2012 was $9.1 million, primarily from the proceeds from the exercise of stock options in the amount of $7.3 million and proceeds from the employee stock purchase plan of $1.0 million. Net cash used in financing activities for the six months ended June 30, 2011 was $32.8 million, primarily due to stock repurchases in the amount of $38.5 million, which was partially offset by the proceeds from the exercise of stock options in the amount of $4.3 million and proceeds from the employee stock purchase plan of $0.9 million.
On July 27, 2010, we announced that our Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to $50.0 million of its common stock between August 2, 2010 and December 31, 2011. From August 2010 through June 2011, we repurchased 4,385,289 shares for a total of $70.0 million. In February 2011, our Board of Directors approved an increase from $50.0 million to $70.0 million. During the six months ended June 30, 2011, the following shares have been repurchased through the open market and subsequently retired:
|
2011 Calendar Year
|
|
Shares Repurchased
|
|
|
|
|
|
Value (in thousands)
|
|
|
February
|
|
|
817,500 |
|
|
$ |
15.47 |
|
|
$ |
12,648 |
|
|
March
|
|
|
75,000 |
|
|
$ |
14.17 |
|
|
$ |
1,062 |
|
|
April
|
|
|
917,200 |
|
|
$ |
14.82 |
|
|
$ |
13,617 |
|
|
May
|
|
|
657,800 |
|
|
$ |
16.48 |
|
|
$ |
10,843 |
|
|
June
|
|
|
18,000 |
|
|
$ |
16.79 |
|
|
$ |
302 |
|
| |
|
|
2,485,500 |
|
|
|
|
|
|
$ |
38,472 |
|
Although cash requirements will fluctuate based on the timing and extent of many factors such as those discussed above, we believe that cash generated from operations, together with the liquidity provided by existing cash and cash equivalents and short-term investments, will be sufficient to satisfy our liquidity requirements for at least the next 12 months. For further details regarding our operating, investing and financing activities, see our Condensed Consolidated Statements of Cash Flows.
Contractual Obligations and Off Balance Sheet Arrangements.
In May 2012, we moved from our previous headquarters in San Jose, California to our current Company-owned headquarters also located in San Jose, California.
Certain of our facility leases provide for periodic rent increases. In September 2004, we signed an agreement with the Chinese local authority to construct a facility in Chengdu, China. We have the option to acquire this facility in Chengdu after a five-year lease term, which option became exercisable in March 2011. We will likely exercise our purchase option and enter into a purchase agreement for this facility in the future. We constructed a 150,000 square foot research and development facility in Chengdu, China which was put into operation in October 2010.
We also lease our sales offices in Japan, China, Taiwan, and Korea.
Our other contractual obligations have not changed significantly from that disclosed in our annual report on Form 10-K filed with the SEC on March 12, 2012.
As of June 30, 2012, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of market risks at December 31, 2011, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in our annual report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 12, 2012. During the six months ended June 30, 2012, there were no material changes or developments that would materially alter the market risk assessment performed as of December 31, 2011.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this quarterly report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 16, 2011 and September 29, 2011, two nearly identical shareholder derivative actions were filed in the United States District Court for the Northern District of California and the California Superior Court for Santa Clara County, naming as defendants certain of the Company’s current and former directors and officers and the Company’s compensation advisory firm. The complaints asserted claims for, among other things, breach of fiduciary duty in connection with the directors' approval of compensation for the Company's executive officers during 2010. The complaints each sought an award of damages in favor of the Company, equitable relief, costs and attorney's fees. On March 2, 2012, the parties in the state court action stipulated to the dismissal without prejudice of that action. On April 3, 2012, a hearing was held in the United States District Court on the defendants’ motions to dismiss the case. On June 13, 2012, the United States District Court issued an order granting the motions and dismissing the complaint without prejudice. The court ruled that the plaintiff had failed to sufficiently allege that pre-suit demand on the Company’s board of directors was excused, and granted the plaintiff leave to amend the complaint. The plaintiff subsequently informed the defendants that it did not intend to amend the complaint. On July 9, 2012, the parties in the federal court action stipulated to the dismissal without prejudice of that action, and on July 10, 2012, the federal court signed an order dismissing the action without prejudice.
On May 3, 2012, the United States District Court for the Northern District of California issued an order finding O2 Micro International, Ltd. (“O2 Micro”) liable for approximately $9.1 million in attorneys’ fees and non-taxable costs, plus interest, in connection with the patent litigation that the Company won in 2010. This award is in addition to the approximately $340,000 in taxable costs that the Court had earlier ordered O2 Micro to pay to the Company in connection with the same lawsuit. O2 Micro filed complaints against the Company in both the United States International Trade Commission (“ITC”) and the Northern District of California, alleging that the Company infringed four O2 Micro patents but then voluntarily dismissed three patents. In June 2010, the ITC found that the Company's products did not infringe O2 Micro’s patent. Subsequently, O2 Micro unilaterally dismissed its infringement claims with prejudice, and granted the Company and its customers broad covenants not to sue in the district court case. On March 3, 2011, the Court ordered O2 Micro to pay the Company $339,315.13 in costs. The Court also found that “O2 Micro engaged in a vexatious litigation strategy and litigation misconduct,” entitling the Company to its reasonable attorneys' fees. O2 Micro's vexatious litigation strategy consisted of filing lawsuits against the Company and its customers; only to dismiss them after substantial litigation had taken place. This allowed O2 Micro to damage the Company's business while avoiding trials at which the validity of its patents would be challenged. Since that time, the Company submitted the documentation for its attorneys’ fees and non-taxable costs. O2 Micro challenged those fees on various grounds. On May 3, 2012, the Court accepted the Company’s figures and entered an order awarding $8,419,429 in attorneys’ fees, and $663,151 in non-taxable costs, plus interest. The Court then entered judgment for the Company. The Company anticipates that O2 Micro will appeal the Court’s orders and the final judgment. These amounts will be recognized in the Consolidated Financial Statements of the Company when all related appeals have been exhausted and collectability is probable.
We and certain of our subsidiaries are parties to actions and proceedings incident to our business in the ordinary course of business, including litigation regarding our intellectual property, challenges to the enforceability or validity of our intellectual property and claims that our products infringe on the intellectual property rights of others. These proceedings often involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend. We defend ourselves vigorously against any such claims.
In December 2011, the Company entered into a settlement and license agreement with a third-party company for infringement of the Company’s patent whereby the Company will receive a total of $2 million which will be paid in equal installments of $300,000 in each quarter of 2012 and the remainder will be paid in two equal installments in the first two quarters of 2013. For the three and six months ended June 30, 2012, the Company received $0.3 million and $0.6 million payments, respectively, which were recorded as credits to litigation expenses in the Condensed Consolidated Statements of Operations.
ITEM 1A. RISK FACTORS
Our business involves risks and uncertainties. You should carefully consider the risks described below, together with all of the other information in this quarterly report on Form 10-Q and our other filings with the Securities and Exchange Commission in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results and growth prospects would likely be adversely affected. In such an event, the trading price of our common stock could decline, and you could lose all or part of your investment in our common stock. Our past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. These risks, which have been updated from the risk factors previously disclosed in our Annual Report on Form 10-K involve forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.
The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.
The future trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:
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●
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our results of operations and financial performance;
|
| |
●
|
general economic, industry and global market conditions;
|
| |
●
|
whether our forward guidance meets the expectations of our investors;
|
| |
●
|
the depth and liquidity of the market for our common stock;
|
| |
●
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developments generally affecting the semiconductor industry;
|
| |
●
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commencement of or developments relating to our involvement in litigation;
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| |
●
|
investor perceptions of us and our business strategies;
|
| |
●
|
changes in securities analysts’ expectations or our failure to meet those expectations;
|
| |
●
|
actions by institutional or other large stockholders;
|
| |
●
|
terrorist acts or acts of war;
|
| |
●
|
actual or anticipated fluctuations in our results of operations;
|
| |
●
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developments with respect to intellectual property rights;
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| |
●
|
announcements of technological innovations or significant contracts by us or our competitors;
|
| |
●
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introduction of new products by us or our competitors;
|
| |
●
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our sale of common stock or other securities in the future;
|
| |
●
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conditions and trends in technology industries;
|
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●
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changes in market valuation or earnings of our competitors;
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| |
●
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our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfully secure manufacturing capacity;
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| |
●
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our ability to increase our gross margins; and
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