Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Form 10-K. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Part I, Item 1A “Risk Factors” and elsewhere in this report.
Business Overview
We design, develop and market analog and mixed-signal integrated circuits (ICs) and other electronic components and circuitry used in high-voltage power conversion. Our products are used in power converters that convert electricity from a high-voltage source to the type of power required for a specified downstream use. In most cases, this conversion entails, among other functions, converting alternating current (AC) to direct current (DC) or vice versa, reducing or increasing the voltage, and regulating the output voltage and/or current according to the customer’s specifications.
A large percentage of our products are ICs used in AC-DC power supplies, which convert the high-voltage AC from a wall outlet to the low-voltage DC required by most electronic devices. Power supplies incorporating our products are used with all manner of electronic products including mobile phones, computing and networking equipment, appliances, electronic utility meters, battery-powered tools, industrial controls, and “home-automation,” or “internet of things” applications such as networked thermostats, power strips and security devices. We also supply high-voltage LED drivers, which are AC-DC ICs specifically designed for lighting applications that utilize light-emitting diodes, and motor-driver ICs addressing brushless DC (BLDC) motors used in refrigerators, HVAC systems, ceiling fans and other consumer-appliance and light commercial applications.
We also offer high-voltage gate drivers—either standalone ICs or circuit boards containing ICs, electrical isolation components and other circuitry—used to operate high-voltage switches such as insulated-gate bipolar transistors (IGBTs) and silicon-carbide (SiC) MOSFETs. These combinations of switches and drivers are used for power conversion in high-power applications (i.e., power levels ranging from a few kilowatts up to gigawatts) such as industrial motors, solar- and wind-power systems, electric vehicles (EVs) and high-voltage DC transmission systems.
Our net revenues were $488.3 million, $420.7 million and $416.0 million in 2020, 2019 and 2018, respectively. In 2020, revenues increased by $67.6 million due to growth across all end markets reflecting increased adoption of higher-power chargers for mobile phones and tablets, increased sales for desktop computers and monitors, as well as a broad range of industrial and consumer-appliance applications. In 2019, revenues increased by $4.7 million due to growth in sales into the communications end-market, reflecting increased adoption of faster, higher-power chargers for mobile phones; this trend has resulted in both unit growth and higher average selling prices for our products in this market. Growth in revenues from the communications end-market was largely offset by lower sales into the consumer and industrial markets, primarily reflecting macroeconomic, cyclical and trade-related factors that have affected the broader semiconductor industry.
Our top ten customers, including distributors that resell to OEMs and merchant power supply manufacturers, accounted for approximately 62%, 54% and 56% of net revenues in 2020, 2019 and 2018, respectively. In 2020, two customers, distributors of our products, accounted for approximately 19% and 11% of net revenues. In 2019 and 2018, one of these customers accounted for approximately 11% and 14% of net revenues. International sales represented approximately 98%, 97% and 96% of net revenues in 2020, 2019 and 2018, respectively.
Because our industry is intensely price-sensitive, our gross margin (gross profit divided by net revenues) is subject to change based on the relative pricing of solutions that compete with ours. Variations in product mix, end-market mix and customer mix can also cause our gross margin to fluctuate. Also, because we purchase a large percentage of our silicon wafers from foundries located in Japan, our gross margin is influenced by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. All else being equal, a 10% change in the value of the U.S. dollar compared to the Japanese yen would eventually result in a corresponding change in our gross margin of approximately 1.0%; this sensitivity may increase or decrease depending on the percentage of our wafer supply that we purchase from Japanese suppliers. Also, although our wafer fabrication and assembly operations are outsourced, as are most of our test operations, a portion of our production costs are fixed in nature. As a result, our unit costs and gross profit margin are impacted by the volume of units we produce.
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Our gross profit, defined as net revenues less cost of revenues, was $243.6 million or 50% of net revenues in 2020, compared to $213.4 million or 51% of net revenues in 2019, and $214.8 million or 52% of net revenues in 2018. Our gross margin decreased in 2020 due primarily to an unfavorable change in end-market mix with a greater amount of revenues coming from lower-margin end markets . Our gross margin decreased in 2019 primarily due to increased wafer substrate costs.
Total operating expenses in 2020 were $173.1 million, compared to a net gain of $3.6 million in 2019 stemming from the $169.0 million gain on settlement of our litigation with ON Semiconductor. In 2018, total operating expenses were $159.1 million. Apart from the effects of the 2019 legal settlement, the increase in operating expenses in 2020 was due primarily to higher stock-based compensation expense related mainly to performance-based awards, along with higher salary and related expenses from annual merit increases and the expansion of our workforce. These increases were partially offset by lower legal expenses following the conclusion of our litigation with ON Semiconductor as well as lower travel expenses, trade event and promotional activities due to COVID-19 pandemic-related restrictions.
COVID-19 Pandemic
The COVID-19 pandemic has disrupted everyday life and markets worldwide, and governments around the world have imposed restrictions aimed at controlling the spread of the virus, including shelter-in-place orders, travel restrictions, business shutdowns and border closures. Beginning March 16, 2020 our San Jose headquarters location was subject to a shelter-in-place order, under which most of our employees were required to work from home; other locations around the world have also been subject to such restrictions. We will begin a phased reopening of our San Jose headquarters when these restrictions are lifted. Some of our employees in other locations around the world have returned to the office under a phased reopening plan. We have implemented a variety of measures to protect the health and safety of our employees, including the provision of masks, gloves and sanitizers, social-distancing rules, and regular deep cleaning of our facilities.
While we have been able to conduct our day-to-day operations effectively in spite of the restrictions caused by the pandemic, the pandemic has caused disruptions in our supply chain. While the supply of wafers from our foundry partners has not been interrupted, government-mandated closures in China, Malaysia, Sri Lanka and the Philippines in the early stages of the pandemic caused temporary shutdowns at our assembly and test sub-contractors in those countries. All of the affected sub-contractors have now resumed operations. While these disruptions resulted in delayed shipments to some customers, our results were not materially affected due to a variety of mitigation measures including higher-than-normal inventories of wafers and finished goods, safety stocks of certain key inputs, and multiple sources for components for most of our products.
Despite the economic downturn stemming from the pandemic, demand for goods incorporating our products is strong. While the future trajectory of demand is highly uncertain, we believe our business is fundamentally sound with strong, long-term growth prospects. We have not reduced headcount and intend to continue investing in research and development and other functions necessary to support our future growth. We also intend to continue our cash dividend and stock repurchase programs; however, if the economy deteriorates more than we expect or our business outlook changes, our board of directors may choose to suspend or alter these programs at its discretion. For additional discussion regarding COVID-19 business risks refer to Part I, Item 1A “Risk Factors” in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those listed below. We base our estimates on historical facts and various other assumptions that we believe to be reasonable at the time the estimates are made. Actual results could differ from those estimates.
Our critical accounting policies are as follows:
● revenue recognition; and
● income taxes.
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Our critical accounting policies are important to the portrayal of our financial condition and results of operations, and require us to make judgments and estimates about matters that are inherently uncertain. A brief description of these critical accounting policies is set forth below. For more information regarding our accounting policies, see Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Revenue recognition
Product revenues consist of sales to original equipment manufacturers, or OEMs, merchant power supply manufacturers and distributors. Approximately 75% of our net product sales were made to distributors in 2020. We apply the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers , and all related appropriate guidance. We recognize revenue under the core principle to depict the transfer of control to our customers in an amount reflecting the consideration we expect to be entitled. In order to achieve that core principle, we apply the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
Product revenues consist of sales to original equipment manufacturers, or OEMs, merchant power supply manufacturers and distributors. We consider customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. In situations where sales are to a distributor, we have concluded that our contracts are with the distributor as we hold contracts bearing enforceable rights and obligations with only the distributor. As part of our consideration of the contract, we evaluate certain factors including the customer’s ability to pay (or credit risk). For each contract, we consider the promise to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. As our standard payment terms are less than one year, we elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. We allocate the transaction price to each distinct product based on their relative standalone selling price. We consider the product price as specified on the purchase order the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. We recognize revenue when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at shipment. Further, in determining whether control has transferred, we consider if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer.
Frequently, we receive orders for products to be delivered over multiple dates that may extend across several reporting periods. We invoice for each delivery upon shipment and recognize revenue for each distinct product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption provided by ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not disclosed. We have also elected the practical expedient under ASC 340-40-25-4 to expense commissions when incurred as the amortization period of the commission asset we would have otherwise recognized is less than one year.
Sales to international customers that are shipped from our facility outside of the United States are pursuant to EX Works, or EXW, shipping terms, meaning that control of the product transfers to the customer upon shipment from our foreign warehouse. Sales to international customers that we ship from our facility in California are pursuant to Delivered at Frontier, or DAF, shipping terms. As such, control of the product passes to the customer when the shipment reaches the destination country and we recognize revenue upon the arrival of the product in that country. Shipments to customers in the Americas are pursuant to Free on Board, or FOB, point of origin shipping terms meaning that we pass control to the customer upon shipment.
Sales to most distributors are made under terms allowing certain price adjustments and limited rights of return (known as “stock rotation”) of our products held in their inventory or upon sale to their end customers. We recognize revenue from sales to distributors upon the transfer of control to the distributor. Frequently, distributors need to sell at a price lower than the standard distribution price in order to win business. At the time the distributor invoices its customer or soon thereafter, the distributor submits a “ship and debit” price adjustment claim to us to adjust the distributor’s cost from the standard price to the pre-approved lower price. After we verify that the claim was pre-approved, we issue a credit memo to the distributor for the ship and debit claim. In determining the transaction price, we consider ship and debit price adjustments to be variable consideration. Such price adjustments are estimated using the expected value method based on an analysis of actual ship and debit claims, at the distributor and product level, over a period of time considered adequate
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to account for current pricing and business trends. Historically, actual price adjustments for ship and debit claims relative to those estimated and included when determining the transaction price have not materially differed. To the extent future ship and debit claims significantly exceed amounts estimated, there could be a material impact on our revenues and results of operations. Stock rotation rights grant the distributor the ability to return certain specified amounts of inventory. Stock rotation adjustments are an additional form of variable consideration and are also estimated using the expected value method based on historical return rates. Historically, these distributor stock rotation adjustments have not been material.
Sales to certain distributors are made under terms that do not include rights of return or price concessions after the product is shipped to the distributor. Accordingly, upon application of steps one through five above, product revenue is recognized upon shipment and transfer of control.
We generally provide an assurance warranty that our products will substantially conform to the published specifications for twelve months from the date of shipment. Our liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial. As such, we do not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate performance obligation.
Income taxes
We account for income taxes under the provisions of ASC 740, Income Taxes . Under the provisions of ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize valuation allowances to reduce any deferred tax assets to the amount that we estimate will more likely than not be realized based on available evidence and management’s judgment. In the event that we determine, based on available evidence and management judgment, that all or part of the net deferred tax assets will not be realized in the future, we would record a valuation allowance in the period the determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position.
As of December 31, 2020, we continue to maintain a valuation allowance on our California, New Jersey and Canada deferred tax assets as we believe that it is not more likely than not that the deferred tax assets will be fully realized.
Results of Operations
The following table sets forth statement of income data as a percentage of net revenues for the periods indicated:
Year Ended December 31,
2020
2019
2018
Net revenues
100.0
%
100.0
%
100.0
%
Cost of revenues
50.1
49.3
48.4
Gross profit
49.9
50.7
51.6
Operating expenses:
Research and development
16.7
17.5
17.0
Sales and marketing
11.2
12.9
12.8
General and administrative
7.6
8.9
8.4
Litigation settlement
—
(40.2)
—
Total operating expenses
35.4
(0.9)
38.2
Income from operations
14.4
51.6
13.4
Other income
1.0
1.3
1.0
Income before income taxes
15.4
52.9
14.4
Provision (benefit) for income taxes
0.8
6.9
(2.4)
Net income
14.6
%
46.0
%
16.8
%
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Comparison of Years Ended December 31, 2020, 2019 and 2018
Net revenues. Net revenues consist of revenues from product sales, which are calculated net of returns and allowances. In 2020 revenues increased by $67.6 million compared to 2019 due to growth across all end markets reflecting increased adoption of higher-power chargers for mobile phones and tablets, increased sales for desktop computers and monitors, as well as a broad range of consumer appliance and industrial applications. In 2019 revenues increased by $4.7 million compared to 2018 as growth in the communications end-market more than offset a broad-based decline in demand across the consumer and industrial end markets.
Our approximate net revenue mix by end-markets served in 2020, 2019 and 2018 is as follows:
End Market
2020
2019
2018
Communications
30
%
26
%
20
%
Computer
7
%
5
%
5
%
Consumer
33
%
35
%
38
%
Industrial
30
%
34
%
37
%
Sales to customers outside of the United States were $477.3 million in 2020, compared to $410.0 million in 2019 and $400.6 million in 2018, representing approximately 98%, 97% and 96% of net revenues in 2020, 2019 and 2018, respectively. Although power supplies using our products are designed and distributed worldwide, most of these power supplies are manufactured by our customers in Asia. As a result, sales to this region accounted for approximately 81% of our net revenues in 2020, and 77% of our net revenues in each of 2019 and 2018. We expect international sales to continue to account for a large portion of our net revenues for the foreseeable future.
Sales to distributors accounted for 75%, 72% and 75% of our net revenues in 2020, 2019 and 2018, respectively, with direct sales to OEMs and merchant power supply manufacturers accounting for the remainder in each of the corresponding years.
The following customers represented 10% or more of our net revenues for the respective years:
Customer
2020
2019
2018
Avnet
19
%
11
%
14
%
Honestar Technologies Co., Ltd.
11
%
*
*
________________________
*Total customer revenue was less than 10% of net revenues.
No other customers accounted for 10% or more of net revenues during these years.
Gross profit. Gross profit is net revenues less cost of revenues. Our cost of revenues consists primarily of the purchase of wafers from our contracted foundries, the assembly, packaging and testing of our products by sub-contractors, product testing performed in our own facility, overhead associated with the management of our supply chain and the amortization of acquired intangible assets. Gross margin is gross profit divided by net revenues. The following table compares gross profit and gross margin for the years ended December 31, 2020, 2019 and 2018:
(dollars in millions)
2020
Change
2019
Change
2018
Gross profit
$
243.6
14.1
%
$
213.4
(0.7)
%
$
214.8
Gross margin
49.9
%
50.7
%
51.6
%
Our gross margin decreased in 2020 as compared to 2019 primarily due to an unfavorable change in end-market mix with a greater amount of revenues coming from lower-margin end markets. Our gross margin decreased in 2019 as compared to 2018 primarily due to increased wafer substrate costs.
Research and development expenses. Research and development (R&D) expenses consist primarily of employee-related expenses including salaries and stock-based compensation, as well as expensed material and facility costs associated with the development of new processes and products. We also record R&D expenses for prototype wafers related to new products until the products are released to production. The following table compares R&D expenses for the years ended December 31, 2020, 2019 and 2018:
(dollars in millions)
2020
Change
2019
Change
2018
R&D expenses
$
81.7
11.2
%
$
73.5
4.1
%
$
70.6
Percentage of net revenues
16.7
%
17.5
%
17.0
%
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R&D expenses increased in 2020 compared to 2019 due to higher salary and related expenses driven by expansion of headcount and annual merit increases, increased equipment-related expenses in support of product development as well as higher stock-based compensation expense primarily related to performance-based awards. R&D expenses increased in 2019 compared to 2018 due to higher salary and related expenses driven by increased headcount as well as increased equipment-related expenses.
Sales and marketing expenses. Sales and marketing (S&M) expenses consist primarily of employee-related expenses, including salaries and stock-based compensation, and commissions to sales representatives, as well as amortization of acquired intangible assets and facilities expenses, including expenses associated with our regional sales and support offices. The following table compares sales and marketing expenses for the years ended December 31, 2020, 2019 and 2018:
(dollars in millions)
2020
Change
2019
Change
2018
Sales and marketing expenses
$
54.5
0.4
%
$
54.3
2.3
%
$
53.1
Percentage of net revenues
11.2
%
12.9
%
12.8
%
S&M expenses increased in 2020 compared to 2019 due to higher salary and related expenses from the expansion of headcount and higher stock-based compensation expense primarily related to performance-based awards. These factors were partially offset by lower travel expenses, trade event and promotional activities resulting from restrictions associated with the COVID-19 pandemic, as well as lower amortization of intangibles. S&M expenses increased in 2019 as compared to 2018 due primarily to expansion of our sales force, resulting in higher salary and related expenses, partially offset by lower amortization of intangibles.
General and administrative expenses. General and administrative (G&A) expenses consist primarily of employee-related expenses, including salaries and stock-based compensation expenses for administration, finance, human resources and general management, as well as consulting, professional services, legal and auditing expenses. The table below compares G&A expenses for the years ended December 31, 2020, 2019 and 2018:
(dollars in millions)
2020
Change
2019
Change
2018
G&A expenses
$
36.9
(1.9)
%
$
37.6
5.9
%
$
35.5
Percentage of net revenues
7.6
%
8.9
%
8.4
%
G&A expenses decreased in 2020 due to lower patent-litigation expenses partially offset by higher stock-based compensation expense primarily related to performance-based awards. G&A expenses increased in 2019 as a result of increased expenses related to patent litigation and higher salary and related expenses due to expansion of headcount.
Litigation settlement. Litigation settlement in fiscal 2019 represents a $169.0 million gain net of direct legal fees due to a favorable legal settlement with ON Semiconductor Corporation, pursuant to which all outstanding legal and administrative disputes were dismissed, withdrawn, and/or terminated.
Other income . Other income consists primarily of interest income earned on cash and cash equivalents, marketable securities and other investments, and the impact of foreign exchange gains or losses. The following table compares other income for the years ended December 31, 2020, 2019 and 2018:
(dollars in millions)
2020
Change
2019
Change
2018
Other income
$
4.8
(11.8)
%
$
5.4
32.0
%
$
4.1
Percentage of net revenues
1.0
%
1.3
%
1.0
%
Other income decreased in 2020 due primarily to lower interest income, reflecting lower yields earned on our cash and investments despite higher cash and investment balances . Other income increased in 2019 due primarily to an increase in interest income reflecting an increase in our cash and investments along with higher yields earned on those balances.
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Provision (benefit) for income taxes. Provision (benefit) for income taxes represents federal, state and foreign taxes. The following table compares the provision (benefit) for income taxes for the years ended December 31, 2020, 2019 and 2018:
(dollars in millions)
2020
Change
2019
Change
2018
Provision (benefit) for income taxes
$
4.1
(85.9)
%
$
28.9
383.2
%
$
(10.2)
Percentage of net revenues
0.8
%
6.9
%
(2.4)
%
Effective tax rate
5.4
%
13.0
%
(17.1)
%
In 2020, 2019 and 2018, the effective tax rate was lower than the statutory U.S. federal income-tax rates of 21% due to the geographic distribution of our world-wide earnings in lower tax jurisdictions, the impact of federal research tax credits and the recognition of excess tax benefits related to share-based compensation. These benefits were partially offset by U.S. tax on foreign income, known as global intangible low-taxed income. Additionally, in 2018 the effective tax rate was favorably impacted by revisions to our provisional estimate for the enactment of the U.S. Tax Cuts and Jobs Act (Tax Act). The primary jurisdiction from which our foreign earnings are derived is the Cayman Islands, which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not material. We have not been granted any incentivized tax rates and do not operate under any tax holidays in any jurisdiction. For additional details, refer to Note 11, Provision (Benefit) for Income Taxes , in our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Liquidity and Capital Resources
We had approximately $449.2 million in cash, cash equivalents and short-term marketable securities at December 31, 2020 compared to $411.1 million at December 31, 2019, and $228.6 million at December 31, 2018. As of December 31, 2020, 2019 and 2018, we had working capital, defined as current assets less current liabilities, of approximately $538.7 million, $490.9 million and $284.1 million, respectively.
We have a credit agreement with a bank (the "Credit Agreement") that provides us with a $75.0 million revolving line of credit to use for general corporate purposes with a $20.0 million sub-limit for the issuance of standby and trade letters of credit. Our ability to borrow under the revolving line of credit is conditioned upon our compliance with specified covenants, including reporting and financial covenants, primarily a minimum liquidity measure and a debt to earnings ratio, with which we are currently in compliance. The Credit Agreement terminates on April 30, 2022; all advances under the revolving line of credit will become due on such date, or earlier in the event of a default. As of December 31, 2020, and 2019, we had no advances outstanding under the Credit Agreement.
Our operating activities generated cash of $125.6 million, $224.5 million, and $84.0 million in the years ended December 31, 2020, 2019 and 2018, respectively. We generate cash primarily from operating activities in the ordinary course of business. In addition, in 2019 our cash generated from operating activities was favorably impacted by the settlement of our patent litigation with ON Semiconductor Corporation.
Cash Provided by Operating Activities
In 2020, our net income was $71.2 million, which reflected non-cash charges of $30.9 million of stock-based compensation expenses, $23.7 million of depreciation and $4.4 million of intangibles amortization. Sources of cash also included a $9.1 million decrease in prepaid expenses and other assets, primarily driven by taxes refunded , a $5.7 million increase in accounts payable (excluding payables related to property and equipment) and a $4.1 million increase in taxes payable and accrued liabilities, in each case due to the timing of payments. These sources of cash were partially offset by an $11.3 million increase in accounts receivable due to increased shipments and the timing of collections, a $12.5 million increase in inventories, reflecting impact of a market slowdown during the first half of the year and higher inventory levels to support anticipated future demand.
In 2019, our net income was $193.5 million, which included a $169.0 million gain, net of direct legal fees, from a favorable litigation settlement, $23.3 million of stock-based compensation expenses, $19.2 million of depreciation and $5.2 million of intangibles amortization. Sources of cash also included a $10.6 million increase in taxes payable and accrued liabilities due primarily to increased taxes payable as result of favorable litigation settlement. These sources of cash were partially offset by a $13.3 million increase in accounts receivable due to increased shipments and the timing of collections, a $9.5 million increase in inventories in anticipation of future demand, and a $6.6 million decrease in accounts payable due to the timing of payments.
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In 2018, our net income was $70.0 million, which included stock-based compensation expenses, depreciation and intangibles amortization of $21.6 million, $18.9 million, and $5.3 million, respectively. Sources of cash also included a $5.8 million decrease in accounts receivable due to decreased shipments and the timing of collections. These sources of cash were partially offset by a $23.8 million increase in inventories, partially reflecting lower-than-normal inventory levels at the beginning of the year, but also driven by lower-than-expected sales, particularly in the latter half of the year, and a $9.9 million decrease in taxes payable and accrued liabilities due primarily to a decrease in taxes payable related to the enactment of the Tax Act.
Cash Provided by (Used in) Investing Activities
Our investing activities in the year ended December 31, 2020 resulted in a $28.3 million net use of cash, consisting primarily of $41.7 million from purchases of marketable securities, net of sales and maturities, and $70.6 million for purchases of property and equipment, primarily machinery and equipment for use in the manufacture of our products and a building for our design center in Germany.
Our investing activities in the year ended December 31, 2019 resulted in a $162.0 million net use of cash, consisting primarily of $136.9 million from purchases of marketable securities, net of sales and maturities, and $24.1 million for purchases of property and equipment, primarily machinery and equipment for use in the manufacture of our products.
Our investing activities provided $69.1 million of cash in the year ended December 31, 2018, consisting primarily of $94.7 million from sales and maturities of marketable securities, net of purchases, partially offset by $24.7 million for purchases of property and equipment, primarily machinery and equipment for use in the manufacture of our products.
Cash Used in Financing Activities
Our financing activities in the year ended December 31, 2020, resulted in a net use of $17.2 million of cash. Financing activities consisted primarily of $25.1 million for the payment of dividends to stockholders and $2.6 million for the repurchase of our common stock, partially offset by proceeds of $10.5 million from the issuance of common stock, including the exercise of employee stock options and the issuance of shares through our employee stock purchase plan.
Our financing activities in the year ended December 31, 2019, resulted in a net use of $17.9 million of cash. Financing activities consisted primarily of $20.5 million for the payment of dividends to stockholders and $7.3 million for the repurchase of our common stock, partially offset by proceeds of $9.9 million from the issuance of common stock, including the exercise of employee stock options and the issuance of shares through our employee stock purchase plan.
Our financing activities in the year ended December 31, 2018, resulted in a net use of $112.6 million of cash. Financing activities consisted primarily of $103.2 million for the repurchase of our common stock and $18.8 million for the payment of dividends to stockholders, partially offset by proceeds of $9.4 million from the issuance of common stock, including the exercise of employee stock options and the issuance of shares through our employee stock purchase plan.
Dividends
In January 2018, our board of directors declared four quarterly cash dividends in the amount of $0.08 per share to be paid to stockholders of record at the end of each quarter in 2018. In January 2019, our board of directors declared four quarterly cash dividends of $0.085 per share to be paid to stockholders of record at the end of each quarter in 2019. In October 2019, our board of directors raised the cash dividends per share with the declaration of five cash dividends, consisting of (a) a dividend of $0.01 per share to be paid to stockholders of record at the end of the fourth quarter in 2019, that was in addition to the dividend of $0.085 per share to be paid to stockholders of record at the end of the fourth quarter in 2019 previously declared by the board in January 2019, and (b) a dividend of $0.095 per share to be paid to stockholders of record at the end of each quarter in 2020. In April 2020, our board of directors raised the cash dividends with the declaration of three cash dividends of $0.105 per share (in lieu of the $0.095 per share previously announced in October 2019) to be paid to stockholders of record at the end of each of the second, third and fourth quarter in 2020. In July 2020, our board of directors raised the cash dividends further with the declaration of two cash dividends of $0.11 per share (in lieu of the $0.105 per share announced in April 2020) to be paid to stockholders of record at the end of each of the third and fourth quarter in 2020. In January 2021, our board of directors raised the quarterly cash dividend by an additional $0.02 per share with the declaration of four cash dividends of $0.13 per share to be paid to stockholders of record at the end of each quarter in 2021. The declaration of any future cash dividend is at the discretion of the board of directors and will depend on our financial condition, results of operations, capital requirements, business conditions and
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other factors, as well as a determination that cash dividends are in the best interest of our stockholders. The dividends per share presented above reflect the 2-for-1 stock split implemented as a stock dividend in August 2020.
Stock Repurchases
Over the years our board of directors has authorized the use of funds to repurchase shares of our common stock, including $80.0 million in October 2018 with repurchases to be executed according to pre-defined price/volume guidelines. In 2018, we purchased 3,144,000 shares for approximately $103.2 million. In 2019, we purchased 242,000 shares for approximately $7.3 million. In 2020, we purchased 63,000 shares for approximately $2.6 million. As of December 31, 2020, $41.3 million was available for future stock repurchases, which has no expiration date. Authorization of future stock repurchase programs is at the discretion of the board of directors and will depend on our financial condition, results of operations, capital requirements and business conditions as well as other factors.
As of December 31, 2020, we had a contractual obligation related to income tax, consisting primarily of unrecognized tax benefits of approximately $21.1 million. The tax obligation was classified as long-term income taxes payable or recorded as contra deferred tax assets in our consolidated balance sheet.
Other Information
Our cash, cash equivalents and investment balances may change in future periods due to changes in our planned cash outlays, including changes in incremental costs such as direct and integration costs related to future acquisitions. The Tax Act signed into law on December 22, 2017 subjects U.S. companies to a one-time transition tax on total post-1986 earnings and profits of their foreign subsidiaries and generally allows companies to repatriate accumulated foreign earnings without incurring additional U.S. federal taxes beginning after December 31, 2017. Accordingly, as of December 31, 2020, our worldwide cash and marketable securities are available to fund capital allocation needs, including capital and internal investments, acquisitions, stock repurchases and/or dividends without incurring significant U.S. federal income taxes.
If our operating results deteriorate in future periods, either as a result of a decrease in customer demand or pricing pressures from our customers or our competitors, or for other reasons, our ability to generate positive cash flow from operations may be jeopardized. In that case, we may be forced to use our cash, cash equivalents and short-term investments, use our current financing or seek additional financing from third parties to fund our operations. We believe that cash generated from operations, together with existing sources of liquidity, will satisfy our projected working capital and other cash requirements for at least the next 12 months.
Off-Balance-Sheet Arrangements
As of December 31, 2020 and 2019, we did not have any off-balance-sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations
As of December 31, 2020, we had the following contractual obligations:
Payments Due by Period
Less than 1
(in thousands)
Total
Year
1 - 3 Years
4 - 5 Years
Over 5 Years
Operating lease obligations (1)
$
8,220
$
2,909
$
4,478
$
833
$
—
Purchase obligations (2)
$
60,084
$
60,084
—
—
—
________________________
(1) Operating lease obligations represent undiscounted non-cancelable remaining lease payments.
(2) Purchase obligations represent commitments to our suppliers and other parties for the purchases of goods and services, which primarily consist of wafer and other inventory purchases, assembly and other manufacturing services, and purchases of property and equipment.
In addition to our contractual obligations noted above we have a contractual obligation related to income tax as of December 31, 2020, which primarily comprises unrecognized tax benefits of approximately $21.1 million, and was classified as contra deferred tax assets or long-term income taxes payable in our consolidated balance sheet. As of
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December 31, 2020 we also had approximately $4.5 million classified as long-term income taxes payable related to the estimated one-time transition tax from the enactment of the Tax Act which will be payable in five annual installments.
Recently Issued Accounting Pronouncements
For recently issued accounting announcements, see “Recently Issued Accounting Pronouncements” in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements , in our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.