What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-03 · 84 added, 65 removed, 174 unchanged (46% of the section changed)

58 unchanged sentences

Recent Results

Our net revenues were $123.2 million and $184.0 million for the three months ended June 30, 2023 and 2022, respectively, and $229.5 million and $366.1 million for the six months ended June 30, 2023 and 2022, respectively.

We believe that demand for our products has been negatively affected by an array of macroeconomic and geopolitical factors including reduced consumer spending in response to inflation and higher interest rates, softer housing markets, restrictions on economic activity in China driven by the COVID-19 pandemic, and a shift in consumer spending toward travel and services following a period of elevated spending on goods during the pandemic.

Our net revenues were $125.5 million and $160.2 million for the three months ended September 30, 2023 and 2022, respectively, and $355.0 million and $526.4 million in the nine months ended September 30, 2023 and 2022, respectively.

We believe that demand for our products has been negatively affected by an array of macroeconomic and geopolitical factors including reduced consumer spending in response to inflation and higher interest rates, softer housing markets, weaker demand for mobile phones, general economic weakness in China, the conflict in Ukraine and a shift in consumer spending toward travel and services following a period of elevated spending on goods during the COVID-19 pandemic.

We believe these factors have exacerbated the effects of an ongoing cyclical downturn in the semiconductor industry;

such downturns are commonly experienced in our industry following periods of strong growth during which supply-chain participants tend to accumulate excess inventories.

Our top ten customers, including distributors that resell to original equipment manufacturers (“OEMs”) and merchant power supply manufacturers, accounted for 82% and 79% of net revenues for the three and six months ended June 30, 2023, respectively and 77% of net revenues in both the three and six months ended June 30, 2022.

International sales accounted for 98% of our net revenues in both the three and six months ended June 30, 2023, and 96% of our net revenues in both the three and six months ended June 30, 2022.

Our gross margin was 51% and 58% in the three months ended June 30, 2023 and 2022, respectively, and 51% and 57% for the six months ended June 30, 2023 and 2022, respectively.

Our top ten customers, including distributors that resell to original equipment manufacturers (“OEMs”) and merchant power supply manufacturers, accounted for 83% and 81% of net revenues for the three and nine months ended September 30, 2023, respectively, and 72% and 75% in the corresponding periods of 2022, respectively.

International sales accounted for 98% of our net revenues in both the three and nine months ended September 30, 2023, and 95% and 96% of our net revenues in the corresponding periods of 2022, respectively.

Our gross margin was 52.5% and 57.4% in the three months ended September 30, 2023 and 2022, respectively, and 51.5% and 56.9% for the nine months ended September 30, 2023 and 2022, respectively.

The decrease was primarily due to unfavorable end-market mix and lower manufacturing volume slightly offset by the favorable impact of the dollar/yen exchange rate on our wafer costs.

Total operating expenses were $50.2 million and $46.7 million in the three months ended June 30, 2023 and 2022, respectively, and $98.4 million and $96.4 million for the six months ended June 30, 2023 and 2022, respectively.

The increase in operating expenses for the three- and six-month periods were due primarily to higher stock-based compensation expense related to performance-based awards, increased salary and related expenses, and increased travel-related expenses.

Total operating expenses were $48.2 million and $43.7 million in the three months ended September 30, 2023 and 2022, respectively, and $146.6 million and $140.0 million for the nine months ended September 30, 2023 and 2022, respectively.

The increases in operating expenses for the three-month and nine-month periods were primarily due to higher stock-based compensation expense related to performance-based awards, increased salary and related expenses and increased travel-related expenses partially offset by lower bad-debt expense and lower professional fees.

Critical Accounting Policies and Estimates

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of revenues

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Provision for income taxes

Comparison of the three and six months ended June 30, 2023 and 2022

Comparison of the three and nine months ended September 30, 2023 and 2022

Net revenues.

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

Net revenues for the three and six months ended June 30, 2023 were $123.2 million and $229.5 million, respectively, and $184.0 million and $366.1 million for the three and six months ended June 30, 2022, respectively.

The decrease in revenue for the three-month period ended June 30, 2023 was driven primarily by the consumer and industrial end-markets, reflecting reduced demand and elevated inventories related to consumer-appliances and a broad range of industrial applications.

Revenues from the communications and computer markets increased slightly compared to the prior-year period.

For the six-month period, revenues for all four end-market categories decreased compared to the corresponding prior-year period.

We believe that demand for our products in recent periods has been negatively affected by an array of macroeconomic and geopolitical factors including reduced consumer spending in response to inflation and higher interest rates, softer housing markets, restrictions on economic activity in China driven by the COVID-19 pandemic, and a shift in consumer spending toward travel and services following a period of elevated spending on goods during the pandemic.

Net revenues for the three and nine months ended September 30, 2023 were $125.5 million and $355.0 million, respectively, and $160.2 million and $526.4 million, in the corresponding periods of 2022, respectively.

The decrease in revenue for the three-month period ended September 30, 2023 was driven primarily by the industrial and consumer end-markets.

Inventories of our products at distributors and end customers in these end markets remained at elevated levels, while demand for consumer appliances and a variety of industrial products decreased reflecting such factors as general macroeconomic weakness and lower home sales.

Revenues from the communications end-market increased compared to the prior-year period reflecting new design wins and improved inventory levels in the smartphone supply chain.

Revenues from the computer end-market category decreased due to lower sales related to tablets and notebook computers.

For the nine-month period, revenues for all four end-market categories decreased compared to the corresponding prior-year period.

We believe that demand for our products in recent periods has been negatively affected by an array of macroeconomic and geopolitical factors including reduced consumer spending in response to inflation and higher interest rates, softer housing markets, weaker demand for mobile phones, general economic weakness in China, the conflict in Ukraine and a shift in consumer spending toward travel and services following a period of elevated spending on goods during the COVID-19 pandemic.

We believe these factors have exacerbated the effects of an ongoing cyclical downturn in the semiconductor industry;

such downturns are commonly experienced in our industry following periods of strong growth during which supply-chain participants tend to accumulate excess inventories.

Our revenue mix by end market for the three and six months ended June 30, 2023 and 2022 was as follows:

Our revenue mix by end market for the three and nine months ended September 30, 2023 and 2022 was as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Communications

International sales, consisting of sales outside of the United States of America based on “bill to” customer locations, were $121.1 million and $224.8 million in the three and six months ended June 30, 2023, respectively, and $176.4 million and $351.7 million in the three and six months ended June 30, 2022, respectively.

International sales, consisting of sales outside of the United States of America based on “bill to” customer locations, were $123.3 million and $348.1 million in the three and nine months ended September 30, 2023, respectively, and $151.8 million and $503.5 million in the corresponding periods of 2022, respectively.

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 86% and 83% of our net revenues in the three and six months ended June 30, 2023, respectively, and 80% and 82%, in the three and six months ended June 30, 2022, respectively.

As a result, sales to this region represented 84% of our net revenues in both the three and nine months ended September 30, 2023, respectively, and 74% and 79%, in the corresponding periods of 2022, respectively.

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 64% and 63% in the three and six months ended June 30, 2023, respectively, and 73% and 74%, in the three and six months ended June 30, 2022, respectively.

Sales to distributors accounted for 74% and 67% in the three and nine months ended September 30, 2023, respectively, and 65% and 71%, in the corresponding periods of 2022, respectively.

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

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Honestar Technologies Co., Ltd.

Salcomp Group

Flextronics Group

*Total customer revenue was less than 10% of net revenues.

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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 and six months ended June 30, 2023 and 2022:

The table below compares gross profit and gross margin for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in millions)

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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, 2023 and 2022:

The table below compares R&D expenses for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in millions)

Headcount (at period end)

R&D expenses increased for the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022, primarily due to increased product development costs and equipment-related expenses.

R&D expenses increased for the three and nine months ended September 30, 2023 as compared to the corresponding periods of 2022 primarily due to increased stock-based compensation expense related to performance-based awards and, for the nine months ended September 30, 2023, increased equipment-related expenses and increased salaries and related expenses.

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 and six months ended June 30, 2023 and 2022:

The table below compares S&M expenses for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in millions)

1 unchanged sentence

Headcount (at period end)

S&M expenses increased in the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022, due to higher stock-based compensation expenses, higher salary and related expenses stemming from higher headcount and increased travel-related expenses.

S&M expenses increased in the three and nine months ended September 30, 2023, as compared to the corresponding periods of 2022, primarily due to higher stock-based compensation expense related to performance-based awards, increased salaries and related expenses and increased travel-related expenses;

for the nine-month period these increases were partially offset by lower commissions expense.

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 and six months ended June 30, 2023 and 2022:

General and administrative (“G&A”) expenses consist primarily of employee-related expenses, including stock-based compensation expense, 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 and nine months ended September 30, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in millions)

Headcount (at period end)

G&A expenses increased for the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, due to higher stock-based compensation expense related to performance-based awards, increased salary and related expenses driven by increased headcount, and increased professional services;

these increases were partially offset by decreased patent-litigation expenses and, for the six months ended June 30, 2023, recovery of bad debt.

G&A expenses increased for the three and nine months ended September 30, 2023 as compared to the corresponding periods of 2022, primarily due to higher stock-based compensation expense related to performance-based awards partially offset by lower bad-debt expense and lower professional fees.

Other operating expenses, net.

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

Other operating expenses, net were $1.1 million in the nine months ended September 30, 2022.

This amount consisted of a $2.9 million expense resulting from the settlement of our litigation with Opticurrent LLC on May 16, 2022, in which we agreed to pay Opticurrent $2.9 million to end all outstanding legal disputes, partially offset by receipt of a $1.7 million distribution related to the bankruptcy liquidation of SemiSouth Laboratories, Inc., of which we were a creditor as a result of investments made in SemiSouth in 2011.

1 unchanged sentence

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 and six months ended June 30, 2023 and 2022:

The table below compares other income for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in millions)

Other income increased for the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, primarily due to higher interest income.

Other income increased for the three and nine months ended September 30, 2023, as compared to the corresponding periods of 2022, primarily due to higher interest income driven by higher interest rates on investments.

Provision for income taxes .

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

The table below compares income-tax expense for the three and six months ended June 30, 2023 and 2022:

The table below compares income-tax expense for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(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 and six months ended June 30, 2023 were 3.7% and 5.1%, respectively, and 8.1% and 9.2%, in the three and six months ended June 30, 2022, respectively.

Our effective tax rate for both the three and nine months ended September 30, 2023 was 5.1%, as compared to 6.9% and 8.5%, respectively, for the corresponding periods of 2022.

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 June 30, 2023, our effective tax rate was favorably impacted by a discrete item associated with recognition of excess tax benefits related to share-based payments.

In the six months ended June 30, 2023, 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.

Additionally, in the three months ended September 30, 2023, our effective tax rate was favorably impacted by the recognition of excess tax benefits related to share-based payments.

In the nine months ended September 30, 2023, 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.

This benefit was 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 June 30, 2023, we had $346.3 million in cash, cash equivalents and short-term marketable securities, a decrease of $7.5 million from $353.8 million as of December 31, 2022.

As of June 30, 2023, we had working capital, defined as current assets less current liabilities, of $486.2 million, an increase of approximately $19.5 million from $466.7 million as of December 31, 2022.

As of September 30, 2023, we had $356.6 million in cash, cash equivalents and short-term marketable securities, an increase of $2.8 million from $353.8 million as of December 31, 2022.

As of September 30, 2023, we had working capital, defined as current assets less current liabilities, of $502.7 million, an increase of approximately $36.0 million from $466.7 million as of December 31, 2022.

We have a credit agreement with Wells Fargo Bank, National Association (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.

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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 June 30, 2023.

No advances were outstanding under the agreement as of September 30, 2023.

Cash From Operating Activities

Operating activities generated $22.8 million of cash in the six months ended June 30, 2023.

Operating activities generated $49.5 million of cash in the nine months ended September 30, 2023.

Net income for this period was $41.5 million;

we also incurred depreciation, non-cash stock-based compensation expense, amortization of intangibles and amortization premiums on marketable securities of $17.7 million, $14.1 million, $1.1 million, and $0.4 million, respectively.

Sources of cash also included a $8.8 million increase in accounts payable (excluding payables related to property and equipment) due to timing of payments.

These sources of cash were partially offset by a $14.3 million increase in inventories, a $7.2 million increase in prepaid expenses and other assets primarily due to federal income tax prepayments, a $10.8 million increase in accounts receivable, a $5.4 million decrease in taxes payable and accrued liabilities primarily due to timing of customer rebate payments, and a $2.8 million increase in deferred income taxes.

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

we also incurred depreciation, non-cash stock-based compensation expense, increase in deferred tax assets and amortization of intangibles of $26.3 million, $21.0 million, $10.0 million and $1.6 million, respectively.

Sources of cash were partially offset by a $14.8 million increase in inventories reflecting a slowdown in sales driven by factors described above, a $7.2 million increase in accounts receivable, a $5.0 million decrease in taxes payable and accrued liabilities primarily due to timing of customer rebate payments, a $2.9 million decrease in accounts payable (excluding payables related to property and equipment) due to timing of payments and a $0.8 million increase in prepaid expenses and other assets primarily due to federal income tax prepayments.

Operating activities generated $191.2 million of cash in the nine months ended September 30, 2022.

Net income for this period was $148.0 million;

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.

we also incurred depreciation, non-cash stock-based compensation expense, amortization premiums on marketable securities and amortization of intangibles of $26.1 million, $15.7 million, $2.6 million and $1.9 million, respectively.

Sources of cash also included a $24.6 million decrease in accounts receivable due to decreased customer shipments and $8.4 million decrease in prepaid expenses and other assets.

These sources of cash were partially offset by a $20.8 million increase in inventories due to decreased demand during the year, a $5.9 million decrease in accounts payable (excluding payables related to property and equipment) due to timing of payments and a $3.9 million decrease in taxes payable and accrued liabilities.

Cash From Investing Activities

Our investing activities in the six months ended June 30, 2023 resulted in a $19.4 million net use of cash, primarily consisting of $12.2 million used for purchases of marketable securities net of proceeds from sales and maturities, and $7.2 million used for purchases of property and equipment, primarily production-related machinery and equipment.

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 nine months ended September 30, 2023 resulted in a $25.9 million net use of cash, primarily consisting of $11.1 million used for purchases of marketable securities net of proceeds from sales and maturities, and $14.7 million used for purchases of property and equipment, primarily production-related machinery and equipment.

Our investing activities in the nine months ended September 30, 2022 generated $101.5 million of cash, primarily consisting of $133.8 million from sales and maturities of marketable securities, net of purchases, and by proceeds of $1.2 million from the sale of an office building, partially offset by $33.4 million for purchases of property and equipment, primarily production-related machinery and equipment.

Cash From Financing Activities

Our financing activities in the six months ended June 30, 2023 resulted in a $24.7 million net use of cash, consisting of $6.0 million for the repurchase of our common stock and $21.8 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, 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 nine months ended September 30, 2023 resulted in a $34.3 million net use of cash, consisting of $32.7 million for the payment of dividends to stockholders and $7.8 million for the repurchase of our common stock, partially offset by $6.2 million from the issuance of shares through our employee stock purchase plan.

Our financing activities in the nine months ended September 30, 2022 resulted in a $317.4 million net use of cash, consisting of $292.3 million for the repurchase of our common stock and $31.2 million for the payment of dividends to stockholders, partially offset by $6.2 million from the issuance of shares through our employee stock purchase plan.

In January 2022, our board of directors declared dividends of $0.18 per share to be paid to stockholders of record at the end of each quarter in 2022.

In February 2023, our board of directors declared dividends of $0.19 per share to be paid to stockholders of record at the end of each quarter in 2023.

Dividend payouts of $10.9 million occurred on each of March 31, 2023 and June 30, 2023.

In October 2023, our board of directors raised the quarterly cash dividend again with the declaration of five cash dividends of $0.20 per share to be paid to stockholders of record at the end of the fourth quarter in 2023 (in lieu of the $0.19 per share announced in February 2023) and at the end of each quarter in 2024.

Dividend payouts of $10.9 million occurred on each of March 31, 2023, June 30, 2023 and September 29, 2023.

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.

1 unchanged sentence

As of December 31, 2022, we had $81.3 million remaining under our stock-repurchase program .

In the six months ended June 30, 2023, we repurchased approximately 80,000 shares of our common stock for $6.0 million, leaving $75.3 million remaining on the repurchase authorization as of June 30, 2023.

In the nine months ended September 30, 2023, we repurchased approximately 104,000 shares of our common stock for $7.8 million, leaving $73.4 million remaining on the repurchase authorization as of September 30, 2023.

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

1 unchanged sentence

Contractual Commitments

As of June 30, 2023 we had a contractual obligation related to income tax, which consisted primarily of unrecognized tax benefits of approximately $23.7 million.

As of September 30, 2023 we had a contractual obligation related to income tax, which consisted primarily of unrecognized tax benefits of approximately $24.6 million and interest associated with those benefits of approximately $1.5 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 June 30, 2023, 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, 2022.

As of September 30, 2023, 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, 2022.

Other Information

2 unchanged sentences

federal taxes.

Accordingly, as of June 30, 2023, 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 September 30, 2023, 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.

6 unchanged sentences

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