What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-04-28 · 77 added, 61 removed, 176 unchanged (44% of the section changed)

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Customers typically may cancel or reschedule orders on short notice without significant penalty and, conversely, often place orders with very short lead times to delivery.

Also, external factors such as global economic conditions and supply-chain dynamics can cause our operating results to be volatile.

Also, external factors such as global economic conditions, such as the current growing inflation, higher interest rates and potential recession and supply-chain dynamics can cause our operating results to be volatile.

In particular, the severe economic disruption caused by the global novel coronavirus pandemic (COVID-19) may affect the supply of and demand for our products and make our results more difficult to forecast.

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Recent Results

Our net revenues were $182.1 million and $173.7 million for the three months ended March 31, 2022 and 2021, respectively.

Revenues from industrial, consumer and computer applications increased substantially compared to the prior-year period, reflecting market-share gains for our products in a broad range of applications including consumer appliances, adapters for notebook computers and a range of industrial applications including home-and-building automation, electronic utility meters, battery-operated tools and broad-based industrial applications.

Revenues from communications applications decreased year-over-year reflecting very strong demand in the prior-year period from the cellphone market, as customers attempted to capitalize on economic sanctions affecting the mobile-phone business of a key competitor.

Our top ten customers, including distributors that resell to original equipment manufacturers, or OEMs, and merchant power supply manufacturers, accounted for 77% and 79% of net revenues in the three months ended March 31, 2022 and 2021, respectively.

In the three months ended March 31, 2022 and 2021, two customers, which are distributors of our products, each accounted for more than 10% of our net revenues .

International sales accounted for 96% and 98% of our net revenues in the three months ended March 31, 2022 and 2021, respectively.

Our gross margin was 55.3% and 48.6% in the three months ended March 31, 2022 and 2021, respectively.

Our net revenues were $184.0 million and $180.1 million for the three months ended June 30, 2022 and 2021, respectively, and $366.1 million and $353.8 million for the six months ended June 30, 2022 and 2021, respectively.

The increases for the three- and six-month periods were driven primarily by higher sales in the industrial and consumer end markets, reflecting higher demand as well as market-share gains for our products in a broad range of applications including consumer appliances and industrial applications such as home-and-building automation, electronic utility meters, battery-operated tools and broad-based industrial applications.

Revenues from communications applications decreased year-over-year in the three- and six-month periods reflecting weaker demand from customers serving Chinese smartphone OEMs compared to stronger demand in the prior year periods as customers attempted to capitalize on economic sanctions affecting the mobile-phone business of a key competitor.

We believe that demand for our products has been negatively affected by measures implemented in China to contain the spread of the COVID-19 virus, and is likely also being affected by a shift in consumer spending in favor of services rather than goods, as well as reduced consumer spending overall in response to inflation.

As a result, we expect our third-quarter revenues to decline compared to our second-quarter revenues.

Our top ten customers, including distributors that resell to original equipment manufacturers, or OEMs, and merchant power supply manufacturers, accounted for 77% of net revenues in both the three and six months ended June 30, 2022, and 80% in both the corresponding periods of 2021.

In the three and six months ended June 30, 2022 and 2021, two customers, distributors of our products, each accounted for more than 10% of our net revenues .

International sales accounted for 96% of our net revenues in both the three and six months ended June 30, 2022, and 98% in both of the corresponding periods of 2021.

Our gross margin was 58.1% and 50.7% in the three months ended June 30, 2022 and 2021, respectively, and 56.7% and 49.7% in the six months ended June 30, 2022 and 2021, respectively.

Our gross margin increased primarily due to favorable end-market mix, with a greater percentage of revenues coming from higher-margin end markets, as well as manufacturing efficiencies.

Total operating expenses were $49.6 million and $44.2 million for the three months ended March 31, 2022 and 2021, respectively.

The increase in operating expenses was due primarily to higher salary and related expenses driven by increased headcount and annual merit increases, higher stock-based compensation expense and product development expenses.

Total operating expenses were $46.7 million and $46.3 million in the three months ended June 30, 2022 and 2021, respectively, and $96.4 million and $90.6 million for the six months ended June 30, 2022 and 2021, respectively.

The increase in operating expenses for the three and six months ended June 30, 2022 was due primarily to our litigation settlement with Opticurrent LLC, higher salary and related expenses driven by increased headcount, and product development expenses offset by lower stock-based compensation expense and receipt of a distribution from the bankruptcy liquidation of SemiSouth Laboratories, Inc., of which we were a creditor as a result of investments made in SemiSouth in 2011.

COVID-19 Pandemic

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These disruptions have not materially affected our results due to a variety of mitigation measures including higher-than-normal inventories of wafers and finished goods in the early stages of the pandemic, safety stocks of certain key inputs and multiple sources for components for most of our products.

Although there are signs of improvement in the US and many areas around the world, the potential for new lockdowns and other mitigation efforts to deal with an increase in infection rates due to the emergence of new variants in certain areas remains a key risk for our supply chain and the results of our business.

While the continuing pandemic brings a greater-than-normal level of uncertainty with respect to the demand for our products, we believe our business is fundamentally sound with strong, long-term growth prospects.

Although there are signs of improvement in the US and many areas around the world, the potential for disruptions caused by ongoing mitigation efforts remains a risk for our supply chain and the results of our business;

for instance, we believe that recent lockdowns in China have had a negative impact on demand for our products.

While the continuing pandemic brings a greater-than-normal level of uncertainty with respect to the supply of and demand for our products, we believe our business is fundamentally sound with strong, long-term growth prospects.

We have increased headcount and intend to continue investing in research and development and other functions necessary to support our future growth.

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The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“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.

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.

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Three Months Ended

Six Months Ended

Cost of revenues

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General and administrative

Other operating expenses, net

Total operating expenses

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Provision for income taxes

Comparison of the Three Months Ended March 31, 2022 and 2021

Comparison of the three and six months ended June 30, 2022 and 2021

Net revenues.

Net revenues consist of revenues from product sales, which are calculated net of returns and allowances.

Net revenues for the three months ended March 31, 2022 and 2021 were $182.1 million and $173.7 million, respectively.

Our revenue mix by end market for the three months ended March 31, 2022 and 2021 was as follows:

Net revenues for the three and six months ended June 30, 2022, were $184.0 million and $366.1 million, respectively, and $180.1 million and $353.8 million for the corresponding periods of 2021, respectively.

The increases for the three- and six-month periods were driven primarily by higher sales into the industrial and consumer end markets, reflecting higher demand as well as market-share gains for our products in a broad range of applications including consumer appliances and industrial applications such as home-and-building automation, electronic utility meters, battery-operated tools and broad-based industrial applications.

Revenues from communications applications

decreased year-over-year in the three- and six-month periods reflecting weaker demand from customers serving Chinese smartphone OEMs compared to stronger demand in the prior year periods, as customers attempted to capitalize on economic sanctions affecting the mobile-phone business of a key competitor.

Our revenue mix by end market for the three and six months ended June 30, 2022 and 2021, was as follows:

Three Months Ended

Six Months Ended

Communications

International sales, consisting of sales outside of the United States of America based on “bill to” customer locations, were $175.2 million and $169.6 million in the three months ended March 31, 2022 and 2021, respectively.

International sales, consisting of sales outside of the United States of America based on “bill to” customer locations, were $176.4 million and $351.7 million in the three and six months ended June 30, 2022, respectively, and $176.3 million and $345.9 million, respectively, in the corresponding periods of 2021.

Although power converters using our products are distributed to end markets worldwide, most are manufactured in Asia.

As a result, sales to this region represented 80% and 85% of our net revenues in the three months ended March 31, 2022 and 2021, respectively.

As a result, sales to this region represented 76% and 78% of our net revenues in the three and six months ended June 30, 2022, respectively, and 85% in both the corresponding periods of 2021.

We expect international sales, and sales to the Asia region in particular, to continue to account for a large portion of our net revenues in the future.

Sales to distributors accounted for 75% and 77% in the three months ended March 31, 2022 and 2021, respectively.

Sales to distributors accounted for 73% and 74% in the three and six months ended June 30, 2022, respectively, and 76% and 77%, respectively, in the corresponding periods of 2021.

Direct sales to OEMs and power-supply manufacturers accounted for the remainder.

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Three Months Ended

Six Months Ended

Honestar Technologies Co., Ltd.

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Gross margin is gross profit divided by net revenues.

The table below compares gross profit and gross margin for the three months ended March 31, 2022 and 2021:

The table below compares gross profit and gross margin for the three and six months ended June 30, 2022 and 2021:

Three Months Ended

Six Months Ended

(dollars in millions)

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Research and development (“R&D”) expenses consist primarily of employee-related expenses, including stock-based compensation, and expensed material and facility costs associated with the development of new technologies and new products.

We also record R&D expenses for prototype wafers related to new products until such products are released to production.

The table below compares R&D expenses for the three months ended March 31, 2022 and 2021:

We also record R&D expenses for prototype wafers related to

new products until such products are released to production.

The table below compares R&D expenses for the three and six months ended June 30, 2022 and 2021:

Three Months Ended

Six Months Ended

(dollars in millions)

Headcount (at period end)

R&D expenses increased for the three months ended March 31, 2022, as compared to the corresponding period of 2021, primarily due to higher salary and related expenses driven by increased headcount and annual merit increases, product development expenses and higher stock-based compensation expense.

R&D expenses increased for the three and six months ended June 30, 2022, as compared to the corresponding periods of 2021, primarily due to higher salary and related expenses driven by increased headcount and increased product development expenses.

These increases were partially offset by reduced stock-based compensation expense related to performance-based awards.

Sales and marketing expenses.

Sales and marketing (“S&M”) expenses consist primarily of employee-related expenses, including stock-based compensation, commissions to sales representatives, amortization of intangible assets and facilities expenses, including expenses associated with our regional sales and support offices.

The table below compares S&M expenses for the three months ended March 31, 2022 and 2021:

The table below compares S&M expenses for the three and six months ended June 30, 2022 and 2021:

Three Months Ended

Six Months Ended

(dollars in millions)

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Headcount (at period end)

S&M expenses increased in the three months ended March 31, 2022, as compared to the corresponding period of 2021, due primarily to higher salary and related expenses stemming from higher headcount and annual merit increases in addition to higher stock-based compensation expense.

S&M expenses increased in the three and six months ended June 30, 2022, as compared to the corresponding periods of 2021, due to higher salary and related expenses stemming from higher headcount and increased travel and tradeshow related expenses.

General and administrative expenses.

General and administrative (“G&A”) expenses consist primarily of employee-related expenses, including stock-based compensation expenses, for administration, finance, human resources and general management, as well as consulting, professional services, legal and audit expenses.

The table below compares G&A expenses for the three months ended March 31, 2022 and 2021:

The table below compares G&A expenses for the three and six months ended June 30, 2022 and 2021:

Three Months Ended

Six Months Ended

(dollars in millions)

Headcount (at period end)

G&A expenses decreased for the three months ended March 31, 2022, as compared to the corresponding period of 2021, due to lower professional services.

G&A expenses decreased for the three and six months ended as compared to the corresponding periods of 2021, due to lower stock-based compensation expense related to performance-based awards.

Other operating expenses, net.

Other operating expenses, net were $1.1 million in the three and six months ended June 30, 2022.

This amount consisted of a $2.9 million expense stemming from the settlement of our litigation with Opticurrent LLC (refer to Note 12, Legal Proceedings and Contingencies , in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q), offset by receipt of a $1.7 million distribution related to SemiSouth Laboratories, Inc.’s bankruptcy liquidation of which we were a creditor as a result of investments made in SemiSouth in 2011.

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 table below compares other income for the three months ended March 31, 2022 and 2021:

The table below compares other income for the three and six months ended June 30, 2022 and 2021:

Three Months Ended

Six Months Ended

(dollars in millions)

Other income increased for the three and six months ended June 30, 2022 as compared to the corresponding periods of 2021, primarily due to gains on foreign currency exchange.

Provision for income taxes .

Provision for income taxes represents federal, state and foreign taxes.

The table below compares income-tax expense for the three months ended March 31, 2022 and 2021:

The table below compares income-tax expense for the three and six months ended June 30, 2022 and 2021:

Three Months Ended

Six Months Ended

(dollars in millions)

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Accordingly, the interim effective tax rate may not be reflective of the annual estimated effective tax rate.

Our effective tax rates for the three months ended March 31, 2022 and 2021 were 10.4% and 2.4%, respectively.

Our effective tax rates for the three and six months ended June 30, 2022, were 8.1% and 9.2%, respectively, and 7.2% and 4.9%, respectively, in the corresponding periods of 2021.

The effective tax rate in these periods was lower than the statutory federal income-tax rate of 21% due to the geographic distribution of our world-wide earnings in lower-tax jurisdictions and the impact of federal research tax credits.

Additionally, in the three months ended March 31, 2021, our effective tax rate was favorably impacted by a discrete item associated with the release of an unrecognized tax benefit and the recognition of excess tax benefits related to share-based payments.

Additionally, in the three months ended June 30, 2022 and 2021, our effective tax rate was favorably impacted by the recognition of excess tax benefits related to share-based payments.

In the six months ended June 30, 2022 and 2021, our effective tax rate was favorably impacted by discrete items associated with the release of unrecognized tax benefits and recognition of excess tax benefits related to share-based payments.

These benefits were partially offset by U.S.

tax on foreign income, known as global intangible low-taxed income.

The primary jurisdiction from which our foreign earnings are derived is the Cayman Islands, which is a non-taxing

jurisdiction.

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.

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Liquidity and Capital Resources

As of March 31, 2022, we had $444.0 million in cash, cash equivalents and short-term marketable securities, an decrease of approximately $86.4 million from $530.4 million as of December 31, 2021.

As of March 31, 2022, we had working capital, defined as current assets less current liabilities, of $523.3 million, a decrease of approximately $91.2 million from $614.5 million as of December 31, 2021.

As of June 30, 2022, we had $327.6 million in cash, cash equivalents and short-term marketable securities, a decrease of approximately $202.8 million from $530.4 million as of December 31, 2021.

As of June 30, 2022, we had working capital, defined as current assets less current liabilities, of $410.9 million, a decrease of approximately $203.6 million from $614.5 million as of December 31, 2021.

We have a Credit Agreement with Wells Fargo Bank, National Association (the "Credit Agreement") that provides us with a $75 million revolving line of credit to use for general corporate purposes with a $20 million sub-limit for the issuance of standby and trade letters of credit.

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all advances under the revolving line of credit will become due on such date, or earlier in the event of a default.

No advances were outstanding under the agreement as of March 31, 2022.

No advances were outstanding under the agreement as of June 30, 2022.

Cash From Operating Activities

Operating activities generated $74.6 million of cash in the three months ended March 31, 2022.

Operating activities generated $141.4 million of cash in the six months ended June 30, 2022.

Net income for this period was $102.1 million;

we also incurred non-cash stock-based compensation expense, depreciation and intangibles amortization of $9.0 million, $8.4 million and $0.7 million, respectively.

Sources of cash also included a $10.7 million decrease in accounts receivable due to timing of collections, a $3.4 million increase in taxes payable and accrued liabilities and a $1.6 million decrease in prepaid expenses and other assets.

These sources of cash were partially offset by a $3.8 million increase in inventories, a $1.7 million decrease in accounts payable (excluding payables related to property and equipment).

Operating activities generated $58.1 million of cash in the three months ended March 31, 2021.

we also incurred depreciation, non-cash stock-based compensation expense, premium amortization on marketable securities and intangibles amortization of $17.2 million, $12.7 million, $1.9 million and $1.3 million, respectively.

Sources of cash also included a $13.2 million decrease in accounts receivable due to the timing of collections, a $5.6 million increase in accounts payable (excluding payables related to property and equipment) and a

$4.1 million decrease in prepaid expenses and other assets.

These sources of cash were partially offset by a $12.0 million increase in inventories and a $2.5 million decrease in taxes payable and accrued liabilities.

Operating activities generated $125.0 million of cash in the six months ended June 30, 2021.

Net income for this period was $81.7 million;

we also incurred non-cash stock-based compensation expense, depreciation, deferred income taxes and intangibles amortization of $8.5 million, $7.5 million, $1.4 million and $1.0 million, respectively.

Sources of cash also included an $12.4 million decrease in inventory reflecting strong demand for the period and a $3.3 million increase in accounts payable (excluding payables related to property and equipment) due to the timing of payments.

These sources of cash were partially offset by $6.3 million decrease in taxes payable and accrued liabilities, $6.3 million increase in accounts receivable due to increased customer shipments, and a $3.3 million increase in prepaid expense and other assets, primarily due to prepaid insurances and income taxes.

we also incurred non-cash stock-based compensation expense, depreciation, intangibles amortization, and deferred income taxes of $17.7 million, $15.3 million, $1.9 million, and $1.2 million, respectively.

Sources of cash also included a $13.2 million decrease in inventory reflecting strong demand for the period and a $8.1 million increase in accounts payable (excluding payables related to property and equipment) due to the timing of payments.

These sources of cash were partially offset by a $5.5 million increase in accounts receivable due to increased customer shipments, a $4.5 million increase in prepaid expenses and other assets, primarily due to prepaid income taxes, and a $4.4 million decrease in taxes payable and accrued liabilities.

Cash From Investing Activities

Our investing activities in the three months ended March 31, 2022, generated $80.2 million of cash, primarily consisting of $93.7 million from sales and maturities of marketable securities, net of purchases, offset by $14.7 million for purchases of property and equipment, primarily production-related machinery and equipment, partially offset by proceeds of $1.2 million from the sale of an office building.

Our investing activities provided $30.5 million of cash in the three months ended March 31, 2021, primarily consisting of $41.5 million from sales and maturities of marketable securities, net of purchases, offset by $11.1 million for purchases of property and equipment, primarily production-related machinery and equipment as well as construction of a new office building in Switzerland.

Our investing activities in the six months ended June 30, 2022, generated $78.1 million of cash, primarily consisting of $104.8 million from sales and maturities of marketable securities, net of purchases, offset by $27.9 million for purchases of property and equipment, primarily production-related machinery and equipment, partially offset by proceeds of $1.2 million from the sale of an office building.

Our investing activities in the six months ended June 30, 2021, resulted in a $47.9 million net use of cash, primarily consisting of $28.7 million for the purchase of marketable securities, net of sales and maturities, and $19.3 million for purchases of property and equipment, primarily production-related machinery and equipment as well as construction of a new office building in Switzerland.

Cash From Financing Activities

Our financing activities in the three months ended March 31, 2022, resulted in a $142.3 million net use of cash, consisting of $134.7 million for the repurchase of our common stock and $10.7 million for the payment of dividends to stockholders, partially offset by $3.1 million from the issuance of common stock from the exercise of employee stock options and the issuance of shares through our employee stock purchase plan.

Our financing activities in the three months ended March 31, 2021, resulted in a $4.2 million net use of cash, consisting of $7.8 million for the payment of dividends to stockholders, partially offset by $3.7 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 six months ended June 30, 2022, resulted in a $310.2 million net use of cash, consisting of $292.3 million for the repurchase of our common stock and $20.9 million for the payment of dividends to stockholders, partially offset by $3.1 million from the issuance of shares through our employee stock purchase plan.

Our financing activities in the six months ended June 30, 2021, resulted in a $38.4 million net use of cash, consisting of $26.4 million for the repurchase of our common stock and $15.7 million for the payment of dividends to stockholders, partially offset by $3.7 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.

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.

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In January 2022, our board of directors raised the quarterly cash dividend by an additional $0.03 per share with the declaration of four cash dividends of $0.18 per share (in lieu of the $0.15 per share announced in October 2021) to be paid to stockholders of record at the end of each quarter in 2022.

A dividend payout of $10.7 million occurred on March 31, 2022.

A dividend payout of $10.7 million and $10.3 million occurred on March 31, 2022 and June 30, 2022, respectively.

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 other factors, as well as a determination that cash dividends are in the best interests of our stockholders.

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As of December 31, 2021, we had $67.3 million remaining under our stock-repurchase program .

In January and February 2022, our board of directors authorized the use of an additional $100 million and $50 million, respectively, for the repurchase of our common stock, with repurchases to be executed according to pre-defined price/volume guidelines.

In the three months ended March 31, 2022, we repurchased 1,584,340 shares of our common stock for $134.7 million, leaving $82.7 million remaining on the repurchase authorization as of March 31, 2022.

The program has no expiration date.

In April 2022, our board of directors authorized the use of an additional $75 million for the repurchase of our common stock, with repurchases to be executed according to pre-defined price/volume guidelines.

In January, February and April 2022, our board of directors authorized the use of an additional $100 million, $50 million and $75 million, respectively, for the repurchase of our common stock, with repurchases to be executed according to pre-defined price/volume guidelines.

In the six months ended June 30, 2022, we repurchased 3.5 million shares of our common stock for $292.3 million, leaving no funds authorized as of June 30, 2022.

Authorization of future repurchase programs is at the discretion of the board of directors and will depend on our financial condition, results of operations, capital requirements, business conditions and other factors.

Contractual Commitments

As of March 31, 2022 we had a contractual obligation related to income tax, which consisted primarily of unrecognized tax benefits of approximately $21.1 million.

As of June 30, 2022, we had a contractual obligation related to income tax, which consisted primarily of unrecognized tax benefits of approximately $22.3 million.

A portion of the tax obligation is classified as long-term income taxes payable and a portion is recorded in deferred tax assets in our condensed consolidated balance sheet.

As of March 31, 2022, there were no material changes in our contractual commitments from those reported in our Annual Report on Form 10-K for the year ended December 31, 2021.

As of June 30, 2022, there were no material changes in our contractual commitments from those reported in our Annual Report on Form 10-K for the year ended December 31, 2021.

Other Information

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federal taxes.

Accordingly, as of March 31, 2022, 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 additional U.S.

Accordingly, as of June 30, 2022, 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 additional U.S.

federal income taxes.

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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 March 31, 2022, 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.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis