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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

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(Mark One)

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

 

For the quarterly period ended March 31, 2016

 

OR

 

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

 

Commission file number: 000-51026

 

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Monolithic Power Systems, Inc.

(Exact name of registrant as specified in its charter)

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

 

79 Great Oaks Boulevard, San Jose, CA 95119

(Address of principal executive offices)(Zip code)

 

  (408) 826-0600

(Registrant’s telephone number, including area code)

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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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

 

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

 

Large accelerated filer  ☒

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company  ☐

 

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 40,291,092 shares of the registrant’s common stock issued and outstanding as of May 2, 2016.

 

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MONOLITHIC POWER SYSTEMS, INC.

 

 

TABLE OF CONTENTS		PAGE
PART I. FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	3
	CONDENSED CONSOLIDATED BALANCE SHEETS	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	4
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
ITEM 4.	CONTROLS AND PROCEDURES	25
PART II. OTHER INFORMATION		26
ITEM 1.	LEGAL PROCEEDINGS	26
ITEM 1A.	RISK FACTORS	26
ITEM 6.	EXHIBITS	42

 

 

 PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited) 

 

 

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)  

 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited) 

 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

 

 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited) 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

 

  

 

  

 

 

   

 

 

 

 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. These statements include among other things, statements concerning:

 

	•	the above-average industry growth of product and market areas that we have targeted,
	•	our plan to increase our revenue through the introduction of new products within our existing product families as well as in new product categories and families,
	•	our belief that we may incur significant legal expenses that vary with the level of activity in each of our legal proceedings,
	•	the effect that liquidity of our investments has on our capital resources,
	•	the continuing application of our products in the communications, storage and computing, consumer and industrial markets, which 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 the remainder of 2016 and beyond,
	•	the factors that we believe will impact our ability to achieve revenue growth,
	•	the percentage of our total revenue from various market segments,
	•	our ability to identify, acquire and integrate acquisitions and achieve the anticipated benefits from such acquisitions,
	•	our intention and ability to continue our stock repurchase program and pay future cash dividends, 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 “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, Quarterly Reports on Form 10-Q 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 months ended March 31, 2016 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, 2015 included in our Annual Report on Form 10-K.

 

Overview

 

We are a leading company in high performance power solutions. Founded in 1997, we design and provide small, highly energy efficient, easy-to-use power solutions for systems found in industrial applications, telecommunication infrastructure, cloud computing, automotive, and consumer applications. Our mission is to reduce total energy consumption in our customers' systems with green, practical, compact solutions. 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 after we receive an initial customer order for a new product to ramp up. 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 and direct sales to customers in Asia, where the products we produce are incorporated into end-user products. Our revenue from direct or indirect sales to customers in Asia was 89% and 91% for the three months ended March 31, 2016 and 2015, respectively. We derive a majority of our revenue from the sales of our DC to DC converter product family which serves the communications, storage and 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

 

There have been no significant changes in our critical accounting policies and estimates used in the preparation of our financial statements during the three months ended March 31, 2016, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2015.

 

  

Results of Operations

 

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

 

		Three Months Ended March 31,
		2016								2015
		(in thousands, except percentages)
Revenue		$	84,512				100.0	%		$	73,538				100.0	%
Cost of revenue			39,002				46.1				33,855				46.0
Gross profit			45,510				53.9				39,683				54.0
Operating expenses:
Research and development			17,321				20.5				16,038				21.8
Selling, general and administrative			17,768				21.0				17,518				23.8
Litigation expense			45				0.1				270				0.4
Total operating expenses			35,134				41.6				33,826				46.0
Income from operations			10,376				12.3				5,857				8.0
Interest and other income, net			543				0.6				642				0.8
Income before income taxes			10,919				12.9				6,499				8.8
Income tax provision			344				0.4				536				0.7
Net income		$	10,575				12.5	%		$	5,963				8.1	%

 

Revenue

 

The following table shows our revenue by product family: 

 

		Three Months Ended March 31,
Product Family		2016				% of Revenue				2015				% of Revenue				Change
		(in thousands, except percentages)
DC to DC products		$	77,118				91.3	%		$	66,297				90.2	%			16.3	%
Lighting control products			7,394				8.7	%			7,241				9.8	%			2.1	%
Total		$	84,512				100.0	%		$	73,538				100.0	%			14.9	%

 

Revenue for the three months ended March 31, 2016 was $84.5 million, an increase of $11.0 million, or 14.9%, from $73.5 million for the three months ended March 31, 2015. This increase was due to higher sales of both DC to DC and lighting control products, as unit shipments increased 22% due to higher market demand with current customers and design wins with new customers, which was partially offset by a 6% decrease in average sales prices. Revenue from our DC to DC products was $77.1 million for the three months ended March 31, 2016, an increase of $10.8 million, or 16.3%, from the same period in 2015. This increase was primarily due to higher sales of our DC to DC converters and battery chargers, which were offset in part by lower sales of our Mini-Monsters products. Revenue from our lighting control products was $7.4 million for the three months ended March 31, 2016, an increase of $0.2 million, or 2.1%, compared with the same period in 2015. 

 

Cost of Revenue and Gross Margin

 

Cost of revenue primarily consists of costs incurred to manufacture, assemble and test our products, as well as warranty costs, inventory-related and other overhead costs, and stock-based compensation expenses. In addition, cost of revenue includes amortization of acquisition-related intangible assets. 

 

		Three Months Ended March 31,
		2016				2015				Change
		(in thousands, except percentages)
Cost of revenue		$	39,002			$	33,855				15.2	%
Cost of revenue as a percentage of revenue			46.1	%			46.0	%
Gross profit		$	45,510			$	39,683				14.7	%
Gross margin			53.9	%			54.0	%

  

  

Cost of revenue was $39.0 million, or 46.1% of revenue, for the three months ended March 31, 2016, and $33.9 million, or 46.0% of revenue, for the three months ended March 31, 2015. The $5.1 million increase in cost of revenue was primarily due to a 22% increase in unit shipments, partially offset by a 5% decrease in the average direct cost of units shipped.

 

Gross margin was 53.9% for the three months ended March 31, 2016, compared with 54.0% for the three months ended March 31, 2015. The decrease in gross margin was primarily due to increased sales of lower margin products and a larger write-down on inventory, partially offset by lower labor and overhead costs as a percentage of revenue.

 

When we record a write-down on inventory, it establishes a new, lower cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis.

 

Research and Development

 

Research and development (“R&D”) expenses primarily consist of salary and benefit expenses, bonuses and stock-based compensation expenses for design and product engineers, expenses related to new product development and supplies, and facility costs.  

 

		Three Months Ended March 31,
		2016				2015				Change
		(in thousands, except percentages)
R&D expenses		$	17,321			$	16,038				8.0	%
As a percentage of revenue			20.5	%			21.8	%

 

R&D expenses were $17.3 million, or 20.5% of revenue, for the three months ended March 31, 2016 and $16.0 million, or 21.8% of revenue, for the three months ended March 31, 2015. The $1.3 million increase in R&D expenses was primarily due to an increase of $1.1 million in stock-based compensation expenses mainly associated with the performance and market-based equity awards, and an increase of $1.1 million in cash compensation expenses, which include salary, benefits and bonuses. These increases were partially offset by a decrease of $0.7 million related to certain new product development expenses. Our R&D headcount was 512 employees as of March 31, 2016, compared with 482 employees as of March 31, 2015. 

 

Selling, General and Administrative

 

Selling, general and administrative (“SG&A”) expenses primarily include salary and benefit expenses, bonuses and stock-based compensation expenses for sales, marketing and administrative personnel, sales commissions, travel expenses, facilities costs, and professional service fees.  

 

		Three Months Ended March 31,
		2016				2015				Change
		(in thousands, except percentages)
SG&A expenses		$	17,768			$	17,518				1.4	%
As a percentage of revenue			21.0	%			23.8	%

 

SG&A expenses were $17.8 million, or 21.0% of revenue, for the three months ended March 31, 2016 and $17.5 million, or 23.8% of revenue, for the three months ended March 31, 2015. The $0.3 million increase in SG&A expenses was primarily due to an increase of $1.4 million in stock-based compensation expenses mainly associated with the performance and market-based equity awards, an increase of $1.0 million in cash compensation expenses, which include salary, benefits and bonuses, an increase of $0.4 million in commission expenses due to higher revenue, and an increase of $0.1 million in advertising expenses. These increases were partially offset by a $2.9 million credit we recorded for the reversal of certain previously accrued stock-based compensation expenses (see below). Our SG&A headcount was 319 employees as of March 31, 2016, compared with 276 employees as of March 31, 2015.

 

In the first quarter of 2016, Ms. Meera Rao retired from the position of Chief Financial Officer. As the service or performance conditions for certain of Ms. Rao’s unvested restricted stock units had not been satisfied at the time of her departure, we reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested shares and recorded the credit in SG&A expenses for the three months ended March 31, 2016.

 

  

Litigation Expense

 

Litigation expense was $45,000 for the three months ended March 31, 2016, compared with $0.3 million for the three months ended March 31, 2015. The lower expense was due to decreased litigation activity.

 

Interest and Other Income, Net

 

Interest and other income, net, was $0.5 million for the three months ended March 31, 2016, compared with $0.6 million for the three months ended March 31, 2015. The decrease was primarily due to foreign currency exchange losses incurred in the three months ended March 31, 2016 compared to foreign currency exchange gains recorded in the same period in 2015, partially offset by higher income related to the changes in the value of the employee deferred compensation plan assets. 

 

Income Tax Provision

 

The income tax provision for the three months ended March 31, 2016 was $0.3 million, or 3.2% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily because foreign income was taxed at lower rates, and because of the benefit that we realized from the release of RSUs. In addition, the effective tax rate was impacted by changes in the valuation allowance.

 

The income tax provision for the three months ended March 31, 2015 was $0.5 million, or 8.2% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily because foreign income was taxed at lower rates, and because of the benefit that we realized from stock option exercises, the release of RSUs and changes in the valuation allowance.

 

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued in December 2015, and the IRS appealed the decision in February 2016. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any adjustments as of March 31, 2016. We will continue to monitor developments related to this opinion and the potential impact on our financial statements.

 

Liquidity and Capital Resources 

 

		March 31, 2016				December 31, 2015
		(in thousands, except percentages)
Cash and cash equivalents		$	77,808			$	90,860
Short-term investments			173,693				144,103
Total cash, cash equivalents and short-term investments		$	251,501			$	234,963
Percentage of total assets			56.3	%			54.5	%
Total current assets		$	345,564			$	331,928
Total current liabilities			(45,323	)			(43,283	)
Working capital		$	300,241			$	288,645

 

As of March 31, 2016, we had cash and cash equivalents of $77.8 million and short-term investments of $173.7 million, compared with cash and cash equivalents of $90.9 million and short-term investments of $144.1 million as of December 31, 2015. As of March 31, 2016, $44.0 million of cash and cash equivalents and $72.9 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 the U.S. operations.

 

   

The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories, prepaid expenses and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of March 31, 2016, we had working capital of $300.2 million, compared with working capital of $288.6 million as of December 31, 2015. The $11.6 million increase in working capital was due to a $13.6 million increase in current assets, partially offset by a $2.0 million increase in current liabilities. The increase in current assets was primarily due to an increase in short-term investments, partially offset by a decrease in cash and cash equivalents and accounts receivable. The increase in current liabilities was primarily due to an increase in accounts payable.

 

Summary of Cash Flows 

 

The following table summarizes our cash flow activities: 

 

		Three Months Ended March 31,
		2016				2015
		(in thousands)
Net cash provided by operating activities		$	28,870			$	15,681
Net cash used in investing activities			(35,826	)			(32,107	)
Net cash used in financing activities			(6,225	)			(13,851	)
Effect of exchange rate changes on cash and cash equivalents			129				(23	)
Net decrease in cash and cash equivalents		$	(13,052	)		$	(30,300	)

 

For the three months ended March 31, 2016, net cash provided by operating activities was $28.9 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net increase of $6.1 million from the changes in our operating assets and liabilities. The increase in accounts payable was primarily driven by increased inventory and capital asset purchases to meet future growth. The decrease in accounts receivable was primarily driven by lower shipments during the quarter. For the three months ended March 31, 2015, net cash provided by operating activities was $15.7 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $3.0 million from the changes in our operating assets and liabilities. The increase in inventories was primarily due to an increase in strategic wafer and die bank inventories as well as an increase in finished goods necessary to meet future growth. The increase in accounts payable was primarily driven by increased inventory and capital asset purchases to meet future growth. 

 

For the three months ended March 31, 2016, net cash used in investing activities was $35.8 million, primarily due to net purchases of investments of $29.5 million, purchases of property and equipment of $5.3 million, and net contributions to the employee deferred compensation plan of $1.0 million. For the three months ended March 31, 2015, net cash used in investing activities was $32.1 million, primarily due to net purchases of investments of $27.4 million and purchases of property and equipment of $4.7 million.

 

During the first quarter of 2016, we completed the purchase of a previously leased manufacturing facility in Chengdu, China for approximately $1.6 million. In addition, in 2015, our Board of Directors approved a plan to spend up to $17 million to purchase additional office space in China in 2016 and beyond to accommodate future growth. No related purchases or commitments were made in the first quarter of 2016.

 

For the three months ended March 31, 2016, net cash used in financing activities was $6.2 million, primarily reflecting $8.0 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $1.7 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan. For the three months ended March 31, 2015, net cash used in financing activities was $13.9 million, primarily reflecting $10.4 million used in repurchases of our common stock pursuant to our stock repurchase program and $5.9 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $2.4 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan.

 

In July 2013, our Board of Directors approved a stock repurchase program that authorized us to repurchase up to $100 million in the aggregate of our common stock. The program expired on December 31, 2015. In February 2016, our Board of Directors approved a new stock repurchase program that authorized us to repurchase up to $50 million in the aggregate of our common stock through December 31, 2016. For the three months ended March 31, 2016, we did not repurchase any shares. For the three months ended March 31, 2015, we repurchased a total of 0.2 million shares for $10.4 million, at an average price of $51.33 per share.

 

   

In June 2014, our Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock, beginning in July 2014. In addition, outstanding RSU awards contain rights to receive dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated quarterly during the vesting periods of the RSUs and are payable to the employees when the awards vest. Dividend equivalents accumulated on the RSUs are forfeited if the employees do not fulfill their service requirement during the vesting periods. For the three months ended March 31, 2016, we paid dividends and dividend equivalents totaling $8.0 million.  For the three months ended March 31, 2015, we paid dividends and dividend equivalents totaling $5.9 million.

 

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 balances and short-term investments, will be sufficient to satisfy our liquidity requirements for the next 12 months. We anticipate the cash used for future dividends, dividend equivalents and the stock repurchase program will come from our current domestic cash and cash generated from ongoing U.S. operations. If cash held by our international subsidiaries is needed for these payments, we may be required to accrue and pay U.S. taxes to repatriate these funds.

 

In the future, in order to strengthen our financial position, respond to unforeseen circumstances, or fund our growth in future financial periods, we may need to raise additional funds by any one or a combination of the following: issuing equity securities, issuing debt or convertible debt securities, incurring indebtedness secured by our assets, or selling certain product lines and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.

 

From time to time, we have engaged in discussions with third parties concerning potential acquisitions of product lines, technologies, businesses and companies, and we continue to consider potential acquisition candidates. Any such transactions could involve the issuance of a significant number of new equity securities, assumptions of debt, and/or payment of cash consideration. We may also be required to raise additional funds to complete any such acquisitions, through either the issuance of equity and debt securities or incurring indebtedness secured by our assets. If we raise additional funds or acquire businesses or technologies through the issuance of equity securities or convertible debt securities, our existing stockholders may experience significant dilution. 

 

Contractual Obligations

 

We lease our sales and research and development offices in China, Europe, Japan, Korea, Singapore, Taiwan and the United States. Certain of our facility leases provide for periodic rent increases. During the first quarter of 2016, we completed the purchase of a previously leased manufacturing facility in Chengdu, China for approximately $1.6 million.

 

Our outstanding purchase commitments primarily consist of wafer purchases from our foundries, assembly services and license arrangements. As of March 31, 2016, the outstanding balance under our purchase commitments was $40.6 million, compared with $32.7 million as of December 31, 2015.

  

Our other contractual obligations have not changed significantly from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For a discussion of market risks, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2015. During the three months ended March 31, 2016, there were no material changes or developments that would materially alter the market risk assessment performed as of December 31, 2015.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and interim chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. 

 

  

Based on this evaluation, our chief executive officer and interim chief financial officer concluded that, as of March 31, 2016, 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 the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and interim 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 quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

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.   

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are a party to actions and proceedings in the ordinary course of business, including litigation regarding our shareholders and our intellectual property, challenges to the enforceability or validity of our intellectual property, claims that our products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. We defend ourselves vigorously against any such claims.

 

As of March 31, 2016, there were no material pending legal proceedings to which we were a party.

 

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 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 materially and 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 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 response to various factors, many of which are beyond our control, including:

 

	•	our results of operations and financial performance;
	•	general economic, industry and market conditions worldwide;
	•	our ability to outperform the market, and outperform at a level that meets or exceeds our investors’ expectations;
	•	whether our forward guidance meets the expectations of our investors;
	•	the depth and liquidity of the market for our common stock;

  

 

	•	developments generally affecting the semiconductor industry;
	•	commencement of or developments relating to our involvement in litigation;
	•	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;
	•	actual or anticipated manufacturing capacity limitations;
	•	developments with respect to intellectual property rights;
	•	introduction of new products by us or our competitors;
	•	our sale of common stock or other securities in the future;
	•	conditions and trends in technology industries;
	•	our loss of key customers;
	•	changes in market valuation or earnings of our competitors;

  

	•	any mergers, acquisitions or divestitures of assets undertaken by us;
	•	government debt default;
	•	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;
	•	our ability to increase our gross margins;
	•	market reactions to guidance from other semiconductor companies or third-party research groups;
	•	market reactions to merger and acquisition activities in the semiconductor industry, and rumors or expectations of further consolidation in the industry;
	•	investments in sales and marketing resources to enter new markets;
	•	costs of increasing wafer capacity and qualifying additional third-party wafer fabrication facilities;
	•	our ability to continue the stock repurchase program and pay quarterly cash dividends to stockholders; and
	•	changes in the estimation of the future size and growth rate of our markets.

 

In addition, the stock market often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

 

  

We expect our operating results to fluctuate from quarter to quarter and year to year, which may make it difficult to predict our future performance and could cause our stock price to decline and be volatile.

 

Our revenue, expenses, and results of operations are difficult to predict, have varied significantly in the past and will continue to fluctuate significantly in the future due to a number of factors, many of which are beyond our control. We expect fluctuations to continue for a number of reasons, including:

 

	•	changes in general demand for electronic products as a result of worldwide macroeconomic conditions;
	•	changes in business conditions at our distributors, value-added resellers and/or end-customers;
	•	changes in general economic conditions in the countries where our products are sold or used;
	•	the timing of developments and related expenses in our litigation matters;
	•	the loss of key customers or our inability to attract new customers due to customer and prospective customer concerns about being litigation targets;
	•	continued dependence on turns business (orders received and shipped within the same fiscal quarter);
	•	continued dependence on the Asian markets for our customer base;
	•	increases in assembly costs due to commodity price increases, such as the price of gold;
	•	the timing of new product introductions by us and our competitors;
	•	changes in our revenue mix between original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), distributors and value-added resellers;
	•	changes in product mix, product returns, and actual and potential product liability;
	•	the acceptance of our new products in the marketplace;
	•	our ability to develop new process technologies and achieve volume production;
	•	our ability to meet customer product demand in a timely manner;

 

	•	the scheduling, rescheduling, or cancellation of orders by our customers;
	•	the cyclical nature of demand for our customers’ products;
	•	fluctuations in our estimate for stock rotation reserves;
	•	our ability to manage our inventory levels, including the levels of inventory held by our distributors;
	•	product obsolescence;
	•	seasonality and variability in the communications, storage and computing, consumer and industrial markets;
	•	the availability of adequate manufacturing capacity from our outside suppliers;
	•	increases in prices for finished wafers due to general capacity shortages;
	•	the potential loss of future business resulting from capacity issues;
	•	changes in manufacturing yields;
	•	movements in foreign exchange rates, interest rates or tax rates; and
	•	stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees.