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VLTR > SEC Filings for VLTR > Form 10-Q on 6-May-2013All Recent SEC Filings

Show all filings for VOLTERRA SEMICONDUCTOR CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for VOLTERRA SEMICONDUCTOR CORP


6-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this quarterly report on Form 10-Q. All statements in the following discussion that are not reports of historical information or descriptions of current accounting policy are forward-looking statements. Please see the "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this quarterly report and consider our forward-looking statements in light of the factors that may affect operating results set forth herein.

Overview

We design, develop, and market proprietary, high-performance analog and mixed-signal power management semiconductors. We sell integrated voltage regulator semiconductors, integrated power protection and distribution semiconductors and scalable voltage regulator semiconductor chipsets in the computing, storage, networking, and consumer markets, primarily to original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, contract equipment manufacturers, or CEMs, or merchant power supply manufacturers.

Our net revenue was $156.0 million and $168.0 million in 2011 and 2012, respectively, and $39.9 million for the three months ending March 31, 2013. We generated net income of $20.6 million and $22.8 million in 2011 and 2012, respectively, and $3.0 million in the three months ending March 31, 2013. As of March 31, 2013, we had retained earnings of $69.1 million.

Our net revenue consists primarily of sales of our power management semiconductor products. When evaluating our net revenue, we categorize our sales into three major markets: servers and storage; networking and communications; and consumer and portable. We are now developing products for the energy market, but such products did not generate any revenue as of March 31, 2013, and as such, this discussion and analysis will be focused on our sales in the three major markets described above. The electronics manufacturing industry is complex and disaggregated, and electronic system producers typically utilize distributors and outsourced suppliers to provide procurement, manufacturing, design, and other supply chain related services within the industry. We attempt to quantify the amount of sales within the major markets identified above, but such quantified amounts are approximations only, as we must rely upon estimates and assumptions regarding the incorporation of our products sold to distributors or other outsourced suppliers into the systems of the OEMs, ODMs, CEMs, or merchant power supply manufacturers for each particular market. In the first quarter of 2013, we estimate that 66% of our net revenue was derived from sales in the server and storage market, 28% from the consumer and portable market and 6% from the networking and communications market. We believe that the most significant portion of our revenues for the remainder of the current fiscal year will continue to be derived from sales in the server and storage market. We expect revenues in our consumer and portable market will decline over time as we de-emphasize our activities in that market, and focus our resources on other growth opportunities, such as the energy market.


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Our sales and accounts receivable are currently concentrated with a small group of customers, and we expect this to continue in the future. In the first quarter of 2013, four customers each accounted for more than 10% of our net revenue, and collectively accounted for 71% of our net revenue. In the first quarter of 2012, five customers each accounted for more than 10% of our net revenue, and collectively accounted for 85% of our net revenue. While we report revenue for direct sales to particular customers, our sales data may not accurately reflect the additional "indirect" demand from distributors and outsourced suppliers who purchase our products pursuant to their business relationships with these same customers. Because we have less visibility into and are not able to quantify this "indirect" demand, we are unable to determine how much additional revenue these customers may generate. In addition, our sales data also may not identify customers who do not directly account for 10% of our net revenue, but may be significant in that such customers also generate substantial "indirect" demand from distributors and outsourced suppliers. If any such customer were to stop incorporating our products or third party products containing our components into its designs, we would not only lose the direct revenue we receive from the customer, but we could also lose a portion of the indirect revenue from third parties who do business with such customer. If we were to lose or experience a significant reduction in demand from one or more of our key customers either to which we sell directly or which generates "indirect" demand or if we were to fail to collect our accounts receivable from one or more of our key customers, our operating results and financial position would be materially adversely impacted.

Because demand for our products is impacted by demand for our customers' products, our revenue depends on the timing, size, and speed of commercial introductions of systems that use our products, the continued acceptance of our customers' products, and our customers' ability to manage their inventory in relationship to such demand. We continue to expect a significant amount of our revenue to come from the commercial introduction of new systems, which is often more difficult to forecast than ongoing demand for previously introduced systems. A number of our customers' applications, particularly in the consumer and portable market, are subject to short product cycles and prone to delays in development and commercial introduction or significant changes in demand, making it inherently difficult to accurately forecast demand for such applications in any period. A number of our customers, such as ODMs, CEMs, and merchant power supply manufacturers, also are dependent upon the demand of other companies, which makes sales to such parties more difficult to forecast accurately. These fluctuations in demand could materially affect our operating results on a period by period basis.

We recognize revenue on our sales upon shipment with a provision for estimated sales returns and allowances. A portion of our revenues comes from customer orders that are both received and shipped against within the same quarter, or "turns business," which is inherently difficult to forecast. We estimate turns business as a percent of net revenue as the ratio of net revenue less beginning backlog to net revenue making adjustments for the effect of sales return reserves or other adjustments to net revenue not included in backlog. Turns business was between 15% and 25% in the first quarter of 2013, the fourth quarter of 2012 and the first quarter of 2012. If our turns business increases, forecasting revenue becomes more difficult. Generally, our current sales practice allows customers to, and customers routinely do, revise and cancel orders and reschedule delivery dates on relatively short notice pursuant to changes in the customer's requirements. In addition, in circumstances where we have achieved our objectives in a period or when we have limited or insufficient inventory available, we may delay shipment of orders. For these reasons, backlog has limited value as a predictor of future revenues.

We typically sell directly through our internal sales force to customers in North America. We sell both directly and indirectly through distributors internationally, under agreements that generally do not provide for price adjustments after purchase and provide limited return rights in the event of product failure. We have made no U.S. sales to distributors. During the first quarter of 2013, sales to international distributors represented 24% of net revenue, compared to 22% in the fourth quarter of 2012 and 34% in the first quarter of 2012. We expect the sales channels we use and the mix of business between distribution and direct sales to change as our product offerings and customers evolve.


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Our cost of revenue consists primarily of purchases of silicon wafers and related costs of assembly, test and shipment of our products, and compensation and related costs of personnel and equipment associated with production management and quality assurance. Our gross margins have historically varied significantly, and may continue to vary, based on a variety of factors, including changes in the relative mix of the products we sell, the markets and geographies where we sell, the size and nature of our customers in these markets, the levels of sales to distributors, manufacturing volumes and yields, discounts or other financial incentives to customers and inventory and overhead costs. Generally, as we introduce new products, we initially incur higher unit production costs, and as the product ramp progresses, our overall unit production costs decrease as manufacturing efficiency improves. In addition, because our power management products are highly complex and the manufacturing process for our products is technically challenging, previously undetected design defects and minor deviations in the manufacturing process can cause substantial decreases in yields or quality. Such decreases in yields or quality can impact our gross margins due to a reduction in our revenue as a result of significant product returns, may cause us to incur product replacement costs, and may cause us to rework or scrap inventory that had been manufactured with the defect. If we are unable to manage these risks, our revenue and gross margins and financial position may be materially adversely impacted. Finally, consistent with the overall market for power management solutions, we expect to face price pressure over time. In order to maintain or improve our gross margins, we will need to introduce new, lower cost products, increase volumes, reduce unit costs or achieve a combination of these objectives.

We purchase our inventory pursuant to standard purchase orders. As lead times at our manufacturing vendors can be up to three months or more, we typically build inventory based on our sales forecasts rather than customers' orders, subjecting us to inventory risk. If, after initial orders are placed, we change certain features of our product to accommodate customer requirements, we may create additional inventory that we may not be able to sell. In the event of an inventory write-down either because the inventory exceeds demand, becomes obsolete, or contains previously undetected defects and must be reworked or scrapped, our gross margins could be materially adversely impacted. On the other hand, because our manufacturing lead times tend to be longer than our order lead times and capacity at our manufacturing vendors may be constrained, our net revenue and relationship with our customers could be adversely impacted if we do not have adequate inventory available to meet customer demand. Our inventory levels were $18.1 million at the end of the first quarter of 2013, and inventory turns, calculated as our annualized cost of revenue for the quarter divided by our inventories as of the end of such quarter, increased to 3.8 in the first quarter of 2013 compared to 3.7 turns in fourth quarter of 2012 and decreased from 5.2 turns in the first quarter of 2012. If the amount of inventory we are holding increases or our inventory turns decrease, the risk of a potential inventory write-down and adverse impact on our gross margins increases.

Our research and development expense consists primarily of compensation and related costs for employees involved in the design and development of our products, prototyping and other development expense, and the depreciation costs related to equipment being used for research and development. All research and development costs are expensed as incurred. Research and development expenses can fluctuate as a result of long design cycles with periods of relatively low expenses punctuated with increased expenditures for prototypes and product development toward the end of the design cycle.

Selling, general and administrative expense consists primarily of compensation and related costs for employees involved in sales and marketing, applications engineering, general management, finance, human resources and information technology, as well as expenses related to professional services, insurance and business travel.

Litigation expenses consist primarily of attorneys' fees and costs and expenses associated with our litigation matters described in Item 1 of Part II-Legal Proceedings, and such legal proceedings may continue for the current year and beyond. Our litigation expenses were approximately $0.8 million in the first quarter of 2013.

Our income tax provision is dependent on our estimated annual effective tax rate. Our annual effective tax rate has fluctuated and is dependent on the mix of income and losses between domestic and international operations. Additionally, our annual effective tax rate may be impacted by any future


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utilization of available net operating loss and carryforwards to offset taxable income, the utilization of tax credit carry forwards to offset income tax in the U.S. and changing statutory income tax rates. Our domestic deferred tax assets are fully offset by a valuation allowance because, based on the available objective evidence, we believe it is more likely than not that the net deferred tax assets will not be realized. If we later determine that it is more likely than not that the deferred tax assets would be realized, we may revise this assessment, which could result in a favorable adjustment to the reported income tax provision in the period of re-assessment followed by higher reported tax rates in subsequent periods. Our foreign income is typically subject to lower statutory rates than our domestic income. We expect that both our geographical mix of taxable income and losses as well as the statutory rates we are subject to internationally may change over time, resulting in changes to our effective tax rate and reported income tax provision.

Element Energy Acquisition

On December 31, 2012, we completed the acquisition of Element Energy, Inc., a privately held company that has developed technology that improves the performance, lifetime, reliability and cost of large battery packs used in a wide range of applications including hybrid and electric vehicles and stationary and renewable energy storage. Element Energy, Inc. was acquired for $4.5 million cash consideration, of which $500,000 is being held in escrow as recourse for indemnifiable claims and expenses that may arise in the first 12 months following the closing.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies during the three months ended March 31, 2013 as compared to the previous disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the SEC on March 6, 2013.

Results of Operations

The following table sets forth our results of operations as a percentage of net
revenue for the periods indicated:



                                                    Three Months Ended
                                                         March 31,
                                                    2013            2012
            Net revenue                                100 %          100 %
            Cost of revenue                             43             42

            Gross margin                                57             58

            Operating expenses:
            Research and development                    29             25
            Selling, general and administrative         18             16
            Litigation                                   2              2

            Total operating expenses                    49             43

            Income from operations                       8             15
            Non-operating expense (income), net         -              -

            Income before income taxes                   8             15
            Income tax expense                          -              -

            Net income                                   8             15

Comparison of Three Months Ended March 31, 2013 to Three Months Ended March 31, 2012

Net Revenue. Net revenue was $39.9 million in the three months ended March 31, 2013 and $42.1 million in the three months ended March 31, 2012, a decrease of 5%. Revenues increased approximately $1.9 million in server and storage, increased $0.1 million in networking and communications, and decreased $4.1 million in consumer and portable.


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Cost of Revenue and Gross Margin. Cost of revenue was $17.2 million for the three months ended March 31, 2013 and $17.9 million for the three months ended March 31, 2012, a decrease of 4%. Gross margin was $22.7 million for the three months ended March 31, 2013 and $24.2 million for the three months ended March 31, 2012, a decrease of 6%. Gross margin as a percentage of net revenue was 57% for the three months ended March 31, 2013 compared to 58% for the three months ended March 31, 2012. The decrease in gross margin as a percentage of revenue was primarily due to lower yields.

Research and Development. Research and development expenses were $11.5 million for the three months ended March 31, 2013 and $10.4 million for the three months ended March 31, 2012, an increase of 11%. The increase was primarily $0.6 million wages and related expenses,$0.3 million product development expenses and $0.1 million stock-based compensation expense.

Selling, General and Administrative. Selling, general and administrative expenses were $7.2 million for the three months ended March 31, 2013 and $6.9 million for the three months ended March 31, 2012, an increase of 4%. The increase was primarily $0.3 million stock-based compensation expense.

Litigation. Litigation expenses were approximately $0.8 million for the three months ended March 31, 2013 and $0.7 million for the three months ended March 31, 2012, an increase of 14%. The increase was primarily due to an increase in activity related to the litigation described in Item 1 of

Part II-Legal Proceedings.

Provision for Income Tax. Income tax provision was $95 thousand and $57 thousand for the three months ended March 31, 2013 and 2012, respectively.

Liquidity and Capital Resources

As of March 31, 2013, we had working capital of $179.8 million, including cash, cash equivalents and short-term investments of $152.4 million, compared to working capital of $175.6 million, including cash and cash equivalents of $150.4 million, as of December 31, 2012. Our cash, cash equivalents and short-term investments increased by $2.0 million in the three months ended March 31, 2013. We currently have no debt and believe that our current cash, cash equivalents, and short-term investments as well as expected cash flows from operations will be sufficient to continue to fund our operations and meet our capital needs for the current fiscal year and the foreseeable future.

Cash provided by operating activities is net income adjusted for certain non-cash and changes in operating assets and liabilities. Our operating activities provided net cash of $8.1 million and $10.1 million for the three months ended March 31, 2013 and 2012, respectively.

Cash provided from operating activities for the three months ended March 31, 2013 was primarily due to net income of $3.0 million, adjustments for non-cash items of $3.7 million and a decrease in accounts receivable of $2.9 million. The primary non-cash items were stock-based compensation of $2.8 million and depreciation and amortization of $0.9 million. The above increases in cash were partially offset by decreases in accounts payable and accrued liabilities and long-term liabilities of $1.4 million and $1.1 million, respectively. The decrease in accounts payable was primarily due to the timing of payments and the decrease in accrued liabilities and long-term liabilities was primarily due to a decrease in profit-dependent accruals.

The primary sources of cash from operations for the three months ended March 31, 2012 were primarily due to net income of $6.2 million due to an increase in net revenue, adjustments for non-cash items of $3.1 million and a decrease in inventories of $0.9 million, which was primarily due to improvements in inventory management. The primary non-cash items were stock-based compensation of $2.4 million and depreciation of $0.8 million. The above increases in cash were partially offset by an increase in accounts receivable of $0.8 million, which was primarily due to increased net revenue.


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Our investing activities used net cash of $5.8 million and $2.4 million in the three months ended March 31, 2013 and 2012, respectively. The primary use of cash for the three months ended March 31, 2013 was cash paid for acquisitions of $3.9 million, the purchase of short-term investments of $3.0 million and purchases of property and equipment of $1.0 million, partially offset by maturities of short-term investments of $2.0 million. The primary use of cash for the three months ended March 31, 2012 was the purchase of short-term investments of $2.0 million and purchases of property and equipment of $0.4 million.

Our financing activities used net cash of $1.2 million in the three months ended March 31, 2013, and provided net cash of $5.6 million for the three months ended March 31, 2012. The primary use of cash for the three months ended March 31, 2013 was the repurchase of our common stock of $1.9 million, partially offset by proceeds from the sale of securities under the stock option and employee stock purchase plan of $0.7 million. The sources of cash for the three months ended March 31, 2012 were from proceeds from the exercise of employee stock options of $6.7 million, partially offset by offset by repurchases of our common stock of $1.0 million.

As March 31, 2013, the cash, cash equivalents and short-term investments held by our foreign subsidiaries was approximately $83.3 million. If these funds were repatriated to the U.S., under current tax law, we could be required to accrue and pay U.S. taxes on a portion of these funds. Our current plan is to permanently reinvest these funds outside the U.S.

Contractual Obligations

The following table sets forth our contractual obligations as of March 31, 2013
(in thousands) and the periods in which such obligations are expected to be
settled:



                                  Purchase         Operating lease
                  Fiscal Year    obligations         obligations
                  2013          $       5,041     $           1,161
                  2014                     -                  1,317
                  2015                     -                  1,213
                  2016                     -                    968
                  2017                     -                    927
                  Thereafter                                    155

                  Total         $       5,041     $           5,741

Operating lease obligations consist of the estimated obligations under our real property or facility leases. Purchase obligations are comprised of the estimated obligation for non-cancellable in-process silicon wafers. We depend entirely upon third-party foundries to manufacture our silicon wafers. Due to lengthy foundry lead times, we typically order these materials up to three months or more in advance of required delivery dates, and we are obligated to pay for the materials in accordance with the contractual payment terms, which typically require payment within one month of delivery.

The amounts in the table above exclude $1.4 million of non-current income tax liabilities as we are unable to reasonably estimate the timing of settlement.

Recent Accounting Pronouncements

We have determined that there were no recent accounting pronouncements issued during the three months ended March 31, 2013 that are expected to have a material impact on the our financial position or results of operations.


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