MONOLITHIC POWER SYSTEMS INC - Quarter Report: 2020 March (Form 10-Q)

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per-share amounts)

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements. 

MONOLITHIC POWER SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

MONOLITHIC POWER SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by Monolithic Power Systems, Inc. (the “Company” or “MPS”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted in accordance with these accounting principles, rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended  December 31, 2019, filed with the SEC on  February 28, 2020.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The financial statements contained in this Form 10-Q are not necessarily indicative of the results that  may be expected for the year ending  December 31, 2020 or for any other future periods.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions used in these condensed consolidated financial statements primarily include those related to revenue recognition, inventory valuation, valuation of share-based awards, contingencies and income tax valuation allowances. 

The coronavirus pandemic first identified in December 2019 (“COVID-19”) has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels, supply chains and other business operations for an unknown period of time until the disease is contained. These events could have a negative impact on the Company’s sales and results of operations for the remainder of 2020, but the Company is currently unable to predict the size and duration of such impact. As of the date of issuance of these condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require management to update the significant estimates and assumptions used in the preparation of the condensed consolidated financial statements, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019. As new events continue to evolve and additional information becomes available, these estimates and assumptions may change and will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and assumptions, and any such differences may be material to the Company’s financial statements. 

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which changes certain disclosure requirements, including those related to Level 3 fair value measurements. The Company adopted the standard in the first quarter of 2020 and the adoption did not have a material impact on its disclosures.

In  January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities continues to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The Company adopted the standard in the first quarter of 2020 and the adoption did not have a material impact on its annual goodwill impairment test.

In  June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities, the standard eliminates the concept of other-than-temporary impairment and entities are required to recognize an allowance for credit losses rather than reductions in the amortized cost of the securities. Entities are required to apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company adopted the standard in the first quarter of 2020, which did not have a material impact on its consolidated financial statements.

Recent Accounting Pronouncement Not Yet Adopted as of March 31, 2020

In  December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard will be effective for annual reporting periods beginning after  December 15, 2020. Early adoption is permitted. The standard will generally be applied prospectively, with certain exceptions. The Company is evaluating the impact of the adoption on its consolidated financial statements.

2. REVENUE RECOGNITION

Revenue from Product Sales

The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits (“ICs”), as well as dies in wafer form. These product sales were 98% and 99% of the Company’s total revenue for the three months ended  March 31, 2020 and 2019, respectively. The remaining revenue primarily includes royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periods presented. See Note 7 for the disaggregation of the Company’s revenue by geographic regions and by product families.

The Company sells its products primarily through third-party distributors, value-added resellers, original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and electronic manufacturing service (“EMS”) providers. For the three months ended  March 31, 2020 and 2019, 80% and 84%, respectively, of the Company’s product sales were made through distribution arrangements. These distribution arrangements contain enforceable rights and obligations specific to those distributors and not the end customers. Purchase orders, which are generally governed by sales agreements or the Company's standard terms of sale, set the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers purchase orders to be the contracts with customers. The unit price as stated on the purchase orders is considered the observable, stand-alone selling price for the arrangements.

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company excludes taxes assessed by government authorities, such as sales taxes, from revenue.

Product sales consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue from distributors and direct end customers when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. In accordance with the shipping terms specified in the contracts, these criteria are generally met when the products are shipped from the Company’s facilities (such as the “Ex Works” shipping term) or delivered to the customers’ locations (such as the “Delivered Duty Paid” shipping term).

Under certain consignment agreements, revenue is not recognized when the products are shipped and delivered to be held at customers’ designated locations because the Company continues to control the products and retain ownership, and the customers do not have an unconditional obligation to pay. The Company recognizes revenue when the customers consume the products from the consigned inventory locations or, in some cases, after a 60-day period from the delivery date has passed, at which time control transfers to the customers and the Company invoices them for payment.

Variable Consideration

The Company accounts for price adjustment and stock rotation rights as variable consideration that reduces the transaction price and recognizes that reduction in the same period the associated revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell the Company’s products to their end customers at a price that is lower than the distribution price invoiced by the Company. When the Company receives claims from the distributors that products have been sold to the end customers at the lower price, the Company issues the distributors credit memos for the price adjustments. The Company estimates the price adjustments using the expected value method based on an analysis of historical claims, at both the distributor and product level, as well as an assessment of any known trends of product sales mix. Other U.S. distributors and non-U.S. distributors, which make up the majority of the Company’s total sales to distributors, do not have price adjustment rights. The Company records a credit against accounts receivable for the estimated price adjustments, with a corresponding reduction to revenue.

Certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases in accordance with the contract terms. The Company estimates the stock rotation returns using the expected value method based on an analysis of historical returns, and the current level of inventory in the distribution channel. The Company records a liability for the stock rotation reserve, with a corresponding reduction to revenue. In addition, the Company recognizes an asset for product returns which represents the right to recover products from the customers related to stock rotations, with a corresponding reduction to cost of revenue.

Contract Balances

Accounts Receivable:

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of  March 31, 2020 and December 31, 2019, accounts receivable totaled $54.3 million and $52.7 million, respectively. The Company's accounts receivable are short-term, with standard payment terms generally ranging from 30 to 60 days. The Company does not require its customers to provide collateral to support accounts receivable. To manage credit risk, management performs ongoing credit evaluations of the customers’ financial condition, monitors payment performance, and assesses current economic conditions, as well as reasonable and supportable forecasts of future economic conditions, that may affect collectability of the outstanding receivables. For certain high risk customers, the Company requires standby letters of credit or payment in advance prior to shipments of goods. For the three months ended March 31, 2020 and 2019, the Company did not recognize any write-offs of its accounts receivable. As of March 31, 2020, the Company did not record any allowance for credit losses, and as of December 31, 2019, the Company did not record any allowance for doubtful accounts.

Contract Liabilities:

For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of  March 31, 2020 and December 31, 2019, customer prepayments totaled $5.2 million and $3.4 million, respectively. The increase in the customer prepayment balance for the three months ended March 31, 2020 resulted from an increase in unfulfilled customer orders for which the Company has received payments. For the three months ended  March 31, 2020, the Company recognized $3.2 million of revenue that was included in the customer prepayment balance as of  December 31, 2019.

Practical Expedients

The Company has elected the practical expedient to expense sales commissions as incurred because the amortization period would have been one year or less. 

The Company’s standard payment terms generally require customers to pay 30 to 60 days after the Company satisfies the performance obligations. For those customers who are required to pay in advance, the Company satisfies the performance obligations generally within a quarter. The Company has elected not to determine whether contracts with customers contain significant financing components.

The Company’s unsatisfied performance obligations primarily include products held in consignment arrangements and customer purchase orders for products that the Company has not yet shipped. Because the Company expects to fulfill these performance obligations within one year, the Company has elected not to disclose the amount of these remaining performance obligations or the timing of recognition.

3. STOCK-BASED COMPENSATION

2014 Equity Incentive Plan (as amended, the “2014 Plan”)

The Board of Directors adopted the 2014 Plan in  April 2013, and the stockholders approved it in  June 2013. In  October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The 2014 Plan became effective on  November 13, 2014 and provides for the issuance of up to 5.5 million shares. The 2014 Plan will expire on  November 13, 2024. As of  March 31, 2020, 1.2 million shares remained available for future issuance under the 2014 Plan. 

Stock-Based Compensation Expense

The Company recognized stock-based compensation expenses as follows (in thousands):

_________________

Restricted Stock Units (“RSUs”)

The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company.

A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

The intrinsic value related to vested RSUs was $182.1 million and $57.7 million for the three months ended  March 31, 2020 and 2019, respectively. As of  March 31, 2020, the total intrinsic value of all outstanding RSUs was $517.6 million, based on the closing stock price of $167.46. As of  March 31, 2020, unamortized compensation expense related to all outstanding RSUs was $144.1 million with a weighted-average remaining recognition period of approximately three years. 

Cash proceeds from vested PSUs with a purchase price totaled $11.8 million and $10.4 million for the three months ended March 31, 2020 and 2019, respectively. 

Time-Based RSUs:

For the three months ended  March 31, 2020, the Compensation Committee granted 47,000 RSUs with service conditions to non-executive employees and non-employee directors. The RSUs generally vest over four years for employees and one year for directors, subject to continued service with the Company.

2020 PSUs:

In  February 2020, the Compensation Committee granted 100,000 PSUs to the executive officers, which represent a target number of shares to be earned based on the Company’s average two-year (2020 and 2021) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2020 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2020 Executive PSUs. 50% of the 2020 Executive PSUs will vest in the first quarter of 2022 if the pre-determined performance goals are met during the performance period. The remaining 2020 Executive PSUs will vest over the following two years on a quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2020 Executive PSUs is $51.1 million.

In  February 2020, the Compensation Committee granted 30,000 PSUs to certain non-executive employees, which represent a target number of shares to be earned based on the Company’s 2021 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2020 and 2021) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2020 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2020 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2020 Non-Executive PSUs will vest in the first quarter of 2022 if the pre-determined performance goals are met during the performance period. The remaining 2020 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2020 Non-Executive PSUs is $12.9 million.

The 2020 Executive PSUs and the 2020 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. The Company will waive the $30 purchase price requirement if the average stock price for 20 consecutive trading days at any time during the performance period is $30 higher than the grant date stock price of $182.62. The Company determined the grant date fair value using a Monte Carlo simulation model with the following assumptions: stock price of $182.62, simulation term of 2.0 years, expected volatility of 33.6%, risk-free interest rate of 1.4% and expected dividend yield of 1.1%. 

2004 Employee Stock Purchase Plan (“ESPP”)

For the three months ended March 31, 2020 and 2019, 15,000 and 14,000 shares, respectively, were issued under the ESPP. As of March 31, 2020, 4.5 million shares were available for future issuance under the ESPP.

The intrinsic value of the shares issued was $1.0 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the unamortized expense was $0.4 million, which will be recognized through the third quarter of 2020. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 

Cash proceeds from the shares issued under the ESPP were $1.9 million and $1.6 million for the three months ended March 31, 2020 and 2019, respectively.  

4. BALANCE SHEET COMPONENTS

Inventories 

Inventories consist of the following (in thousands): 

Other Current Assets

Other current assets consist of the following (in thousands):

Other Long-Term Assets

Other long-term assets consist of the following (in thousands):

Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands): 

Other Long-Term Liabilities

Other long-term liabilities consist of the following (in thousands):

5. LEASES

Lessee

The Company has operating leases primarily for administrative and sales and marketing offices, manufacturing operations and research and development facilities, employee housing units and certain equipment. These leases have remaining lease terms from less than a year to four years. Some of these leases include options to renew the lease term for up to five years or on a month-to-month basis. The Company does not have finance lease arrangements.

As of  March 31, 2020 and December 31, 2019, operating lease ROU assets totaled $2.7 million and $2.9 million, respectively. As of March 31, 2020 and December 31, 2019, operating lease liabilities totaled $2.2 million and $2.4 million, respectively. The following tables summarize certain information related to the leases (in thousands, except percentages):

As of March 31, 2020, the maturities of the lease liabilities were as follows (in thousands):

Lessor 

The Company owns certain office buildings and leases a portion of these properties to third parties under arrangements that are classified as operating leases. These leases have remaining lease terms from one year to five years. Some of these leases include options to renew the lease term for up to five years.

For the three months ended March 31, 2020 and 2019, income related to lease payments was $0.4 million and $0.2 million, respectively. As of  March 31, 2020, future income related to lease payments was as follows (in thousands):

6. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common shares, and calculated using the treasury stock method. Contingently issuable shares, including equity awards with performance conditions or market conditions, are considered outstanding common shares and included in the basic net income per share as of the date that all necessary conditions to earn the awards have been satisfied. Prior to the end of the contingency period, the number of contingently issuable shares included in the diluted net income per share is based on the number of shares, if any, that would be issuable under the terms of the arrangement at the end of the reporting period.

The Company’s RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill the requisite service requirement and, as a result, the awards do not vest. Accordingly, these awards are not treated as participating securities in the net income per share calculation. 

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per-share amounts): 

Anti-dilutive common stock equivalents were not material in any of the periods presented.

7. SEGMENT, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION

The Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance analog solutions for the computing and storage, automotive, industrial, communications and consumer markets. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company derives a majority of its revenue from sales to customers located outside North America, with geographic revenue based on the customers’ ship-to locations.  

The Company sells its products primarily through third-party distributors and value-added resellers, and directly to OEMs, ODMs and EMS providers. The following table summarizes those customers with sales equal to 10% or more of the Company's total revenue, or with accounts receivable balances equal to 10% or more of the Company’s total accounts receivable: 

* Represents less than 10%.

The Company’s agreements with these third-party customers were made in the ordinary course of business and  may be terminated with or without cause by these customers with advance notice. Although the Company  may experience a short-term disruption in the distribution of its products and a short-term decline in revenue if its agreement with any of the distributors or the value-added reseller was terminated, the Company believes that such termination would not have a material adverse effect on its financial statements because it would be able to engage alternative distributors, resellers and other distribution channels to deliver its products to end customers within a short period following the termination of the agreement with the customer. If the Company's agreement with the direct customer was terminated, or if sales to such customer decrease significantly in future periods, the Company's operating results could be materially and adversely affected.

The following is a summary of revenue by geographic regions (in thousands):

 The following is a summary of revenue by product family (in thousands):

 The following is a summary of property and equipment, net, by geographic regions (in thousands):

8. COMMITMENTS AND CONTINGENCIES

Product Warranties

The Company generally provides one to two-year warranties against defects in materials and workmanship and will either repair the products, provide replacements at no charge to customers or issue a refund. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations. Warranty reserve requirements are generally based on a specific assessment of the products sold with warranties when a customer asserts a claim for warranty or a product defect. 

The changes in warranty reserves are as follows (in thousands):

Purchase Commitments

The Company has outstanding purchase commitments with its suppliers and other parties that require the future purchases of goods or services, which primarily consist of wafer and other inventory purchases, assembly and other manufacturing services, construction or purchases of property and equipment, and license arrangements. As of  March 31, 2020, the Company’s outstanding purchase obligations totaled approximately $102.6 million.

Litigation

The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its stockholders, challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and  may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The Company defends itself vigorously against any such claims. As of  March 31, 2020, there were no material pending legal proceedings to which the Company was a party. 

9. CASH, CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH

The following is a summary of the Company’s cash, cash equivalents and investments (in thousands): 

The following table summarizes the contractual maturities of the short-term and long-term available-for-sale investments as of March 31, 2020 (in thousands):

Realized gains and losses recognized on the sale of the available-for-sale investments were not material for any of the periods presented. 

The following tables summarize the unrealized gain and loss positions related to the available-for sale investments (in thousands):

The following tables present information about the available-for-sale investments that had been in a continuous unrealized loss position for less than 12 months and for greater than 12 months (in thousands):

An impairment exists when the fair value of an investment is less than its amortized cost basis. As of March 31, 2020, the Company did not consider the impairment of its investments to be a result of credit losses. As of December 31, 2019, the Company did not consider the impairment of its investments to be other-than-temporary. The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. When evaluating a debt security for impairment, management reviews factors such as the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis, the extent to which the fair value of the security is less than its cost, the financial condition of the issuer and the credit quality of the investment.

The Company’s auction-rate securities are backed by pools of student loans supported by guarantees by the U.S. Department of Education. The underlying maturities of these securities are up to 26 years.  The Company has received all scheduled interest payments on a timely basis pursuant to the terms and conditions of the securities. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities, before recovery of its amortized cost basis. To date, the Company has redeemed $40.1 million, or 93% of the original portfolio in these auction-rate securities, at par without any realized losses.

Restricted Cash

 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the Condensed Consolidated Balance Sheets to the amounts reported on the Condensed Consolidated Statements of Cash Flows (in thousands):  

As of  March 31, 2020 and December 31, 2019, restricted cash included a security deposit that is set aside in a bank account and cannot be withdrawn by the Company under the terms of a lease agreement. The restriction will end upon the expiration of the lease.    

 10. FAIR VALUE MEASUREMENTS  

The following tables summarize the fair value measurement of the financial assets (in thousands): 

The Company’s level 3 assets consist of government-backed student loan auction-rate securities. The following table provides a rollforward of the fair value of the auction-rate securities (in thousands): 

The Company determined the fair value of the auction-rate securities using a discounted cash flow model with the following assumptions: 

The fair value measurement involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities and independent pricing services. The valuation of the auction-rate securities is subject to significant management judgment regarding projected future cash flows, which will depend on many factors, including the quality of the underlying collateral, estimated time to liquidity including potential to be called or restructured, underlying final maturity, and market conditions, among others. Changes in any of the unobservable inputs used in the fair value measurement of auction-rate securities in isolation would result in a lower or higher fair value measurement. For example, an increase in the time-to-liquidity assumption or estimated discount rate would result in a lower fair value measurement.

11. DEFERRED COMPENSATION PLAN

The following table summarizes the deferred compensation plan balances on the Condensed Consolidated Balance Sheets (in thousands):

12. OTHER INCOME (EXPENSE), NET

The components of other income (expense), net, are as follows (in thousands):

13. INCOME TAXES

The income tax provision or benefit for interim periods is generally determined using an estimate of the Company’s annual effective tax rate and adjusted for discrete items, if any, in the relevant period. Each quarter the estimate of the annual effective tax rate is updated, and if the Company’s estimated tax rate changes, a cumulative adjustment is made.

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law to provide economic relief to individuals and businesses to combat the COVID-19 pandemic and stimulate the U.S. economy. The CARES Act includes certain temporary changes to tax laws, such as the utilization of net operating loss carryforwards and interest expense deductions. The Company reviewed the provisions of the CARES Act and does not believe the CARES Act will have a material impact on its income tax provisions, results of operations or financial condition for the year ending December 31, 2020. The Company will continue to monitor any new developments related to the CARES Act and evaluate their impact on its financial statements.

The income tax benefit for the three months ended  March 31, 2020 was $6.5 million, or 22.2% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily due to excess tax benefits from stock-based compensation, and foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the global intangible low-taxed income (“GILTI”) tax.

The income tax benefit for the three months ended  March 31, 2019 was $1.1 million, or 4.5% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily due to foreign income from the Company’s subsidiaries in Bermuda and China being taxed at lower statutory tax rates, and excess tax benefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the GILTI tax.

The Company’s uncertain tax positions relate to the allocation of income and deductions among its global entities and to the determination of the research and development tax credit. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means,  may occur and would require the Company to increase or decrease its reserves and effective income tax rate over the next twelve months. However, it is not possible to determine either the magnitude or the range of increases or decreases at this time.

In  July 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, invalidating the Treasury regulations that require participants in qualified intercompany cost-sharing arrangements to share stock-based compensation costs. A final decision was issued by the Tax Court in  December 2015, and the Internal Revenue Service (“IRS”) appealed the decision in  June 2016. In  June 2019, the Ninth Circuit Court of Appeals upheld the cost-sharing regulations. In  July 2019, Altera filed a petition for rehearing en banc in the Ninth Circuit Court of Appeals. In  November 2019, the Ninth Circuit Court of Appeals declined to rehear the case. In February 2020, Altera filed a petition with the Supreme Court to review the case. Due to the uncertainty surrounding the status of the current regulations, the Company has not recorded any adjustments as of  March 31, 2020. The Company will continue to monitor and evaluate the impact of any new developments on its financial statements.  

14. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the changes in accumulated other comprehensive loss (in thousands):

The amounts reclassified from accumulated other comprehensive loss were recorded in other income (expense), net, on the Condensed Consolidated Statements of Operations.

15. DIVIDENDS AND DIVIDEND EQUIVALENTS

Cash Dividend Program

The Company has a dividend program approved by the Board of Directors, pursuant to which the Company intends to pay quarterly cash dividends on its common stock. Based on the Company’s historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared by the Board of Directors, which are payable to the stockholders in the following month. The Board of Directors declared the following cash dividends (in thousands, except per-share amounts):   

As of  March 31, 2020 and December 31, 2019, accrued dividends totaled $22.3 million and $17.4 million, respectively.

The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other things, the Company’s financial condition, results of operations, capital requirements, business conditions, and other factors that the Board of Directors  may deem relevant, as well as a determination that cash dividends are in the best interests of the stockholders.

The Company anticipates that cash used for future dividend payments will come from its domestic cash, cash generated from ongoing U.S. operations, and cash repatriated from its Bermuda subsidiary. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested.

Cash Dividend Equivalent Rights

The Company's RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill the requisite service requirement and, as a result, the awards do not vest. As of  March 31, 2020 and December 31, 2019, accrued dividend equivalents totaled $12.0 million and $10.6 million, respectively.    

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

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

In some cases, words such as “would,” “could,” “may,” “should,” “predict,” “potential,” “targets,” “continue,” “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “will,” the negative of these terms or other variations of such terms and similar expressions relating to the future identify forward-looking statements. All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans or objectives about our business and our industry, including our expectations regarding the potential impacts of the COVID-19 pandemic on our business. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events or results could differ materially and adversely from those expressed in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this Quarterly Report on Form 10-Q and, in particular, in the section entitled “Item 1A. Risk Factors.” Except as required by law, we disclaim any duty to, and undertake no obligation to, update any forward-looking statements, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that we file from time to time with the SEC, such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 

Overview

We are a leading semiconductor company that designs, develops and markets high-performance power solutions. Incorporated in 1997, our core strengths include deep system-level and applications knowledge, strong analog design expertise and an innovative proprietary process technology. These combined strengths enable us to deliver highly integrated monolithic products that offer energy-efficient, cost-effective, easy-to-use solutions for systems found in computing and storage, automotive, industrial, communications and consumer applications. Our mission is to reduce total energy consumption in our customers’ systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy-efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.

We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term.

We work with third parties to manufacture and assemble our ICs. This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.

Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up. Typical lead times for orders are generally 8 to 16 weeks. These factors, combined with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer, make the forecasting of our orders and revenue difficult.

We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where our products are incorporated into end-user products. Our revenue from direct or indirect sales to customers in Asia was 90% and 87% for the three months ended March 31, 2020 and 2019, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the computing and storage, automotive, industrial, communications and consumer markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and continue to secure manufacturing capacity.

Impact of COVID-19 on Our Business

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, which continues to spread rapidly in the U.S. and globally. Governmental authorities have implemented numerous containment measures, including travel bans and restrictions, quarantines, shelter-in-place orders, and business restrictions and shutdowns. These measures have resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels, supply chains and other business operations for an unknown period of time until the disease is contained.

Our primary focus is to continue to execute our business plan and mitigate the effect of the pandemic on our financial position and operations, while actively taking all necessary precautions to ensure the safety of our employees, our suppliers and our customers. The impact of the pandemic on our business operations was minimal in the first quarter of 2020.  Some of the key developments and initiatives we implemented include, but are not limited to, the following:

Our top priority during the pandemic is protecting the health and safety of our employees. As governments institute new restrictions on commercial operations, we are working to ensure our compliance while also maintaining business continuity for essential operations. In Asia, the United States and Europe, we have implemented work-from-home arrangements in accordance with local regulations. To date, these arrangements have allowed us to successfully maintain business operations and customer relations.   

Our manufacturing facilities in China and South Korea are fully operational and have experienced minimal disruptions, as we continue to follow the proper guidance issued by local and national government authorities. In addition, we have not experienced any major supply chain issues.

We did not experience a decrease in customer demand specifically due to the pandemic, and our ability to secure and fulfill customer demand was not affected in the first quarter of 2020.  Furthermore, there were no significant delays in payments by our customers. 

Our cash and investment balances remain strong and we continue to generate positive operating cash flows. We believe we have sufficient liquidity to satisfy our cash needs as we manage through the current uncertain environment. However, we will continue to monitor, evaluate and take action, as necessary, to preserve adequate liquidity to support our business for the remainder of 2020. 

We are actively working with our stakeholders, including customers, suppliers and employees, to address the impact of the pandemic. We will continue to monitor the situation, to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences. However, we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on the global economy, the semiconductor industry and our business. A prolonged economic slowdown as a result of the pandemic could materially and adversely impact our business, results of operations and financial condition for the remainder of 2020 and beyond.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements in accordance with GAAP, we are required to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying disclosures. Estimates and judgments used in the preparation of our condensed consolidated financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products, economic conditions and other future events. As of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance due to the COVID-19 pandemic that would require us to update our critical accounting policies and estimates used in the preparation of the condensed consolidated financial statements, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019. As new events evolve and additional information becomes available, these estimates and assumptions may change and will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to our condensed consolidated financial statements. 

Results of Operations

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

Revenue

The following table summarizes our revenue by end market:

Revenue for the three months ended March 31, 2020 was $165.8 million, an increase of $24.4 million, or 17.3%, from $141.4 million for the three months ended March 31, 2019. This increase was driven by higher sales in all of our end markets except for the consumer market where we experienced a decline in sales. Overall unit shipments increased by 5% due to higher market demand and average sales prices increased by 11% compared to the same period in 2019. 

For the three months ended March 31, 2020, revenue from the computing and storage market increased $12.8 million, or 32.6%, from the same period in 2019. This increase was primarily driven by strength in the cloud computing and the solid-state drive storage markets, which was partially offset by lower demand in the high-performance notebook market. Revenue from the communications market increased $5.7 million, or 25.6%, from the same period in 2019. This increase was primarily driven by higher demand in infrastructure sales including the 5G network. Revenue from the industrial market increased $3.9 million, or 18.3%, from the same period in 2019. This increase was primarily driven by higher sales in power source, security and meter products. Revenue from the automotive market increased $2.8 million, or 13.6%, from the same period in 2019. This increase was primarily driven by higher sales of products for infotainment applications. Revenue from the consumer market decreased $0.7 million, or 1.9%, from the same period in 2019. This decrease was primarily due to a decrease in demand for high volume consumer-related products, as well as lower sales from specialty lighting products. This decrease was partially offset by higher demand for wearables and charger products. 

Cost of Revenue and Gross Margin

Cost of revenue primarily consists of costs incurred to manufacture, assemble and test our products, as well as warranty costs, inventory-related and other overhead costs, and stock-based compensation expenses.

Cost of revenue was $74.3 million, or 44.8% of revenue, for the three months ended March 31, 2020, and $63.4 million, or 44.8% of revenue, for the three months ended March 31, 2019. The $10.9 million increase in cost of revenue was primarily due to a 5% increase in overall unit shipments and a 7% increase in the average direct cost of units shipped. The increase in cost of revenue was also driven by an increase in manufacturing overhead costs and inventory write-downs.

Gross margin was 55.2% for the three months ended March 31, 2020, compared with 55.2% for the three months ended March 31, 2019. For the three months ended March 31, 2020, gross margin was favorably impacted by increased sales of higher margin products compared to the same period in 2019. This increase was primarily offset by higher manufacturing overhead costs and inventory write-downs as a percentage of revenue.

Research and Development (“R&D”)