Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period
covered by the annual report: 139,521,260 ordinary shares as of December 31, 2015, US$0.01 par value per share.
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
¨
No
x
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filed. See definition
of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to
follow.
¨
Item 17
¨
Item
18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act): Yes
¨
No
x
Silicon Motion, the Silicon Motion logo, FCI, the FCI logo, Shannon Systems, the Shannon Systems logo, airRF, basicRF, ezRF, ezSYS, powerRF,
twinRF, zipRF, zipSYS, VirtualZero, SSDLifeGuard, SSDLifeSaver, TurboMLC, FerriSSD, Ferri-eMMC, and NANDXtend are our trademarks or registered trademarks. We may also refer to trademarks of other corporations and organizations in this document.
Unless otherwise indicated, our financial information presented in this annual report has been prepared in accordance with U.S. GAAP.
This annual report contains forward-looking statements. These forward-looking statements include statements regarding our financial position;
our expectations concerning future operations, margins, profitability, liquidity and capital resources; our business strategy and other plans and objectives for future operations; and all other statements that are not historical facts. In some
cases, you can identify forward-looking statements by terminology such as may, will, should, expects, intends, plans, anticipates, believes,
thinks, estimates, seeks, predicts, potential, and similar expressions. Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors,
risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These factors, risks and uncertainties include those listed under Risk Factors and elsewhere in this annual report.
Those factors, among others, could cause our actual results and performance to differ materially from the results and performance projected in, or implied by, the forward-looking statements. They include:
One or
more of these factors could materially and adversely affect our operating results and financial condition in future periods. We cannot assure you that we will attain any meaningful estimates or maintain profitability or that the assumptions on which
they are based are reliable.
Except as required by law, we undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise after the date of this annual report. All forward-looking statements contained in this annual report are qualified by reference to this cautionary statement. As you read
and consider this annual report, you should carefully understand that the forward-looking statements are not guarantees of performance or results.
PART I
I
TEM
1.
|
I
DENTITY
OF
D
IRECTORS
, S
ENIOR
M
ANAGEMENT
AND
A
DVISERS
|
Not applicable.
I
TEM
2.
|
O
FFER
S
TATISTICS
AND
E
XPECTED
T
IMETABLE
|
Not applicable.
I
TEM
3.
|
K
EY
I
NFORMATION
|
Selected Consolidated Financial Data
You should read the following information with our consolidated financial statements and related notes and Item 5. Operating and
Financial Review and Prospects included elsewhere in this annual report.
The selected consolidated statements of income and cash
flow data for the years ended December 31, 2013, 2014 and 2015 and the selected consolidated balance sheet data as of December 31, 2014 and 2015 are derived from our audited consolidated financial statements included elsewhere in this
annual report and should be read in conjunction with, and are qualified in their entirety by reference to, these consolidated financial statements and related notes. The selected consolidated statements of income and cash flow data for the years
ended December 31, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011, 2012 and 2013 are derived from our audited consolidated financial statements which are not included in this annual report. These
consolidated financial statements are prepared in accordance with U.S. GAAP.
Effective January 1, 2012, we changed the reporting
currency of our consolidated financial statements from the NT dollar to the U.S. dollar because of a change in the functional currency of our largest subsidiary, SMI Taiwan. The business profile of SMI Taiwan had changed because the primary
factors affecting our business are now international in nature and the majority of our cash flows are now U.S. dollar denominated. We believe that this change provides greater alignment of our reporting currency with our most significant
functional currency and underlying financial performance. Unless otherwise specified, all financial information included in this Form 20-F has been stated in U.S. dollars.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
(in thousands, except for per share data)
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
223,845
|
|
|
|
281,370
|
|
|
|
225,308
|
|
|
|
289,323
|
|
|
|
361,297
|
|
Cost of sales
|
|
|
115,806
|
|
|
|
149,650
|
|
|
|
118,698
|
|
|
|
139,625
|
|
|
|
176,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
108,039
|
|
|
|
131,720
|
|
|
|
106,610
|
|
|
|
149,698
|
|
|
|
184,532
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
40,501
|
|
|
|
50,975
|
|
|
|
46,460
|
|
|
|
60,949
|
|
|
|
71,161
|
|
Sales and marketing
|
|
|
14,537
|
|
|
|
15,919
|
|
|
|
13,597
|
|
|
|
16,324
|
|
|
|
20,173
|
|
General and administrative
|
|
|
11,323
|
|
|
|
12,156
|
|
|
|
11,250
|
|
|
|
13,355
|
|
|
|
15,714
|
|
Amortization of intangible assets
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
67,055
|
|
|
|
79,050
|
|
|
|
71,307
|
|
|
|
90,628
|
|
|
|
108,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
40,984
|
|
|
|
52,670
|
|
|
|
35,303
|
|
|
|
59,070
|
|
|
|
76,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income
|
|
|
6,232
|
|
|
|
1,664
|
|
|
|
1,845
|
|
|
|
1,498
|
|
|
|
2,067
|
|
Income before income taxes
|
|
|
47,216
|
|
|
|
54,334
|
|
|
|
37,148
|
|
|
|
60,568
|
|
|
|
78,500
|
|
Income tax expense
|
|
|
5,747
|
|
|
|
7,116
|
|
|
|
9,772
|
|
|
|
16,101
|
|
|
|
18,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
41,469
|
|
|
|
47,218
|
|
|
|
27,376
|
|
|
|
44,467
|
|
|
|
60,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
(in thousands, except for per share data)
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
123,082
|
|
|
|
129,259
|
|
|
|
132,259
|
|
|
|
134,604
|
|
|
|
138,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
129,370
|
|
|
|
134,504
|
|
|
|
134,567
|
|
|
|
136,787
|
|
|
|
139,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.34
|
|
|
|
0.37
|
|
|
|
0.21
|
|
|
|
0.33
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
0.32
|
|
|
|
0.35
|
|
|
|
0.20
|
|
|
|
0.33
|
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per ADS
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.35
|
|
|
|
1.46
|
|
|
|
0.83
|
|
|
|
1.32
|
|
|
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1.28
|
|
|
|
1.40
|
|
|
|
0.81
|
|
|
|
1.30
|
|
|
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Each ADS represents four ordinary shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
88,763
|
|
|
|
154,734
|
|
|
|
161,720
|
|
|
|
194,211
|
|
|
|
180,519
|
|
Other current assets
|
|
|
89,739
|
|
|
|
101,309
|
|
|
|
83,541
|
|
|
|
96,229
|
|
|
|
134,657
|
|
Working capital
|
|
|
135,778
|
|
|
|
199,646
|
|
|
|
204,594
|
|
|
|
234,374
|
|
|
|
226,889
|
|
Long-term investments
|
|
|
178
|
|
|
|
178
|
|
|
|
133
|
|
|
|
133
|
|
|
|
133
|
|
Property and equipment, net
|
|
|
24,728
|
|
|
|
23,386
|
|
|
|
30,195
|
|
|
|
35,537
|
|
|
|
50,469
|
|
Goodwill and intangible assets, net
|
|
|
35,458
|
|
|
|
35,472
|
|
|
|
35,474
|
|
|
|
35,467
|
|
|
|
75,990
|
|
Other non-current assets
|
|
|
8,460
|
|
|
|
6,667
|
|
|
|
5,700
|
|
|
|
4,957
|
|
|
|
3,860
|
|
Total assets
|
|
|
247,326
|
|
|
|
321,746
|
|
|
|
316,763
|
|
|
|
366,534
|
|
|
|
445,628
|
|
Total liabilities
|
|
|
45,826
|
|
|
|
59,480
|
|
|
|
46,066
|
|
|
|
62,434
|
|
|
|
101,130
|
|
Total shareholders equity
|
|
|
201,500
|
|
|
|
262,266
|
|
|
|
270,697
|
|
|
|
304,100
|
|
|
|
344,498
|
|
|
|
|
Consolidated Cash Flow Data:
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
54,261
|
|
|
|
69,236
|
|
|
|
49,128
|
|
|
|
68,725
|
|
|
|
65,946
|
|
Net cash used in investing activities
|
|
|
(13,947
|
)
|
|
|
(4,749
|
)
|
|
|
(12,815
|
)
|
|
|
(15,413
|
)
|
|
|
(58,414
|
)
|
Net cash provided by (used in) financing activities
|
|
|
2,294
|
|
|
|
224
|
|
|
|
(29,493
|
)
|
|
|
(19,710
|
)
|
|
|
(20,271
|
)
|
Depreciation and amortization
|
|
|
5,580
|
|
|
|
5,881
|
|
|
|
6,429
|
|
|
|
6,917
|
|
|
|
8,987
|
|
Capital expenditures
|
|
|
(4,916
|
)
|
|
|
(4,280
|
)
|
|
|
(12,772
|
)
|
|
|
(11,596
|
)
|
|
|
(23,664
|
)
|
Risk Factors
Because our operating results for any period could be adversely affected by a number of factors and may therefore fluctuate
significantly, our annual and quarterly operating results are difficult to predict.
Our operating results have fluctuated in the
past and could do so in the future. Fluctuations in our operating results may be due to a number of factors, including, but not limited to, those listed below and those identified throughout this Risk Factors section:
|
|
|
competitive pressures and other factors such as the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products;
|
|
|
|
changes in demand for electronic devices into which our semiconductor solutions are directly or indirectly incorporated;
|
2
|
|
|
our customers sales outlook, purchasing patterns and inventory adjustments based on market demand, adoption of new technologies and general economic conditions;
|
|
|
|
the loss of one or more key customers or the significant reduction, timing or cancellation of orders from these customers;
|
|
|
|
seasonality or cyclical fluctuations in our markets;
|
|
|
|
our ability to develop or acquire, introduce, market and transition to volume production new or enhanced products and technologies in a cost-effective and timely manner;
|
|
|
|
changes in supply and availability of flash memory components used in our customers products;
|
|
|
|
changes in our product mix or customer mix and their effect on our gross margin;
|
|
|
|
changes in foreign currency exchange rates;
|
|
|
|
the availability and pricing of third party semiconductor foundry services;
|
|
|
|
unpredictable volume and timing of customer orders, which are not fixed by contract but vary on an order-to-order basis;
|
|
|
|
deferrals or reductions of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers of integrated circuits, or ICs;
|
|
|
|
our ability to timely and accurately predict market requirements and evolving industry trends and to identify and capitalize upon opportunities in new markets; and
|
|
|
|
the overall cyclicality of, and changing economic and market conditions in, the semiconductor industry.
|
These and other factors make it difficult for us to assess our future performance. Our sales and operating results are difficult to predict
and have in the past, and will likely in the future, fluctuate from period to period. We could fail to achieve the operating targets that we have announced, such as revenue growth, gross margin, and operating expense. In addition, our operating
results in the future may be below the expectations of securities analysts or investors, which would likely cause the market price of our ADSs to decline. Any variations in our period-to-period performance may also cause the market price of our ADSs
to fluctuate. Accordingly, you should not rely on the results of any prior periods as a reliable indicator of our future operating performance.
Our operating results and stock price may be adversely affected by worldwide economic uncertainties including political and social
instability and industry-specific conditions in the markets we operate.
Disruptions or uncertainties in the economy, including any
political and social instability may lead consumers and business to postpone spending. This in turn may cause our customers to cancel, decrease or delay their existing and future orders with us. Furthermore, we operate primarily in the semiconductor
industry, which is cyclical in nature and subject to evolving industry standards. In the past, the semiconductor industry has experienced significant downturns characterized by decreases in product demand, excess customer inventories and accelerated
erosion of prices. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to deliver products to our customers. Economic volatility can cause extreme difficulties
for our customers and vendors in accurately forecasting and planning future business activities. This unpredictability could cause our customers to reduce spending on our products and services, which would delay and lengthen sales cycles.
Furthermore, during challenging economic times our customers and vendors may face challenges in gaining timely access to sufficient credit, which could impact their ability to make timely payments to us. The accurate forecasting and planning for our
operations heavily rely on these worldwide economic and industry-specific conditions, and the volatility and uncertainties associated with these factors may adversely affect our results of operation in a material manner.
3
Since we have limited visibility as to the sales volume by our customers of devices using
our products, our ability to accurately forecast future demand for and sales of our products is limited.
The majority of our
products are integrated into devices that are sold directly or indirectly into consumer electronics markets which are difficult for us and our customers to accurately forecast as consumer electronics demand is subject to significant seasonality,
with higher net sales generally in the second half of each year, when our customers place orders to meet increased demand during year-end holiday seasons, and other fluctuations. Also, as a significant portion of our quarterly sales are from orders
received and fulfilled in that quarter, our visibility as to expected orders from our customers in subsequent periods and for any extended period of time is limited. Additionally, we depend upon our customers procurement forecasts in order to
forecast demand for our products, and our customers procurement forecast may be subject to change. Our failure to accurately forecast demand for our products may result in lost sales or excess inventory and associated reserves or write-downs
for our operations. Any of the aforementioned factors could affect sales of our products and thereby harm our business, financial condition and operating results.
If demand for our products declines in the major end-markets that we serve, our sales, net revenue and earnings will decrease.
Demand for our products is affected by a number of factors, including the general demand for the products in the end-markets that
we serve and price attractiveness of the devices incorporating our products that our customers and vendors offer to end-markets. A significant amount of our sales revenue is derived from customers who use our controllers in expandable and embedded
solid state storage solutions used in consumer electronics, such as smartphones, tablets, digital cameras, and notebook and desktop PCs. Any significant decrease in the demand for these devices in the end-market may decrease the demand for our
semiconductor solutions and may result in a significant decrease in our revenues and earnings. Consumer electronic devices that use our components rapidly change as product capabilities are upgraded or new classes of products are introduced, and
these changes may result in a significant reduction in demand for our products. We cannot give any assurance that there will not be any downturn in the future or that any future downturn will not affect our results of operations. Any significant
decrease in demand for end-user applications of semiconductors will negatively affect our sales, net revenue and earnings.
We may
make acquisitions that are dilutive to existing shareholders, resulting in unanticipated one-time charges or that may otherwise adversely affect our results of operations, and which may result in difficulties in assimilating and integrating the
operations, personnel, technologies, products and information systems of acquired companies or businesses.
We continually evaluate
and explore strategic opportunities as they arise, including business combinations and capital investments. If we issue equity securities in connection with an acquisition, the issuance may be dilutive to our existing shareholders. Alternatively,
acquisitions made entirely or partially for cash would reduce our cash reserves.
Mergers and acquisitions of high-technology companies
are inherently risky and subject to many factors outside of our control and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial
condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Even when an acquired company has already developed and marketed products, there can be no assurance that such products
will be successful after our acquisition, will not cannibalize sales of our existing products, that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues.
In April 2007 we completed the acquisition of FCI, a privately-held Korea-based fabless IC company focused on mobile TV and wireless
communications radio frequency, or RF, applications; in November 2007, we
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acquired select parts of the Centronix mobile TV business of Korea Information Engineering Services Co., Ltd. (Centronix) and in October 2011 we acquired select assets of BTL Systems,
Inc. (BTL). The products from our FCI, Centronix and BTL acquisitions are for the mobile communications market. In the fourth quarter of 2009, we determined that goodwill and certain long-lived assets relating to these products were
impaired and recorded an impairment charge of US$37.4 million. In July 2015 we completed the acquisition of Shannon Systems, a privately-held China-based supplier of enterprise-class PCIe SSD solutions to Chinas internet and other industries.
See
We are exposed to potential impairment charges on intangible assets relating to recent acquisitions and on investments if
business conditions deteriorate
below. Risks arising from these or other future acquisitions could include among other things:
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our ability to accurately assess the business and prospects of an acquisition or the anticipated benefits of an acquisition;
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delays in or failure to complete the development and application of the acquired technologies or products;
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timing of the rollout and adoption of new applications and technology standards;
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our ability to successfully integrate acquired technologies, operations and personnel;
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failure to achieve projected results of an acquisition or inability to realize the anticipated benefits of an acquisition;
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disruption of our ongoing business;
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diversion of management and employees attention from other business activities;
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risks associated with entering into a geographic region or business market in which we have little or no prior experience and specifically managing personnel in these regions;
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difficulties in establishing and maintaining uniform standards, controls, policies and procedures;
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deficiencies in the internal control of any acquired company resulting in a material weakness in our overall internal control;
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our ability to recover costs of the acquisition or investment;
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amortization expenses and large and immediate write-offs;
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impairment charges related to goodwill or other assets;
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negative impact on our relationships with customers, vendors, suppliers or contractors;
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inability to retain key employees of an acquired business; and
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potentially dilutive issuance of equity securities.
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In addition, future acquisitions could
result in the incurrence of debt or contingent liabilities, adverse tax consequences, deferred compensation charges, dilution to future earnings, and large fees for professional advisor services, any of which could negatively impact our financial
conditions or results of operations and could cause our stock price to decline. We may be unable to identify suitable acquisition candidates or investment opportunities or consummate any such transactions on terms and conditions that are acceptable
to us, if at all.
We depend on a small number of customers for a significant portion of our revenues and a loss of some of these
customers would result in the loss of a significant portion of our revenues.
We derived a substantial portion of our revenue from
sales to a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations. Sales to our five largest customers represented approximately
65%, 64% and 54% of our
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net revenue in 2013, 2014 and 2015, respectively. Sales to two customers in 2013 and 2014, and one customer in 2015 accounted for 10% or more of our net revenue, representing 46%, 47% and 30% of
our net revenue in 2013, 2014 and 2015, respectively. In 2013 and 2014, the significant customers were Samsung and SK Hynix and in 2015, SK Hynix. The identities of our largest customers and their respective contributions to our net revenue have
varied and will likely continue to vary from period to period.
We expect that we will continue to depend on a relatively limited number
of customers for a substantial portion of our net sales and our ability to maintain good relationships with these customers will be important to the ongoing success of our business. We cannot assure you that the revenue generated from these
customers, individually or in the aggregate, will reach or exceed historical levels in any future period. Our failure to meet the demands of these customers could lead to a cancellation or reduction of business from these customers. In addition,
loss, cancellation or reduction of business from, significant changes in scheduled deliveries to, or decreases in the prices of products sold to any of these customers could significantly reduce our revenues and adversely affect our financial
condition and operating results. Moreover, any difficulty in collecting outstanding amounts due from our customers particularly customers who place large orders, would harm our financial performance. In addition, if our relationships with our
largest customers are disrupted for any reason, it could have a significant impact on our business.
If the semiconductor industry
suffers a shortage of flash memory, which is a key component in many of our customers end products, our revenues could be adversely affected.
During many periods in past years, some of our customers have indicated that they were unable to acquire enough NAND flash memory to meet all
of the anticipated demand for their products. Several manufacturers of flash memory have increased or are planning to increase manufacturing capacity for flash memory. However, we cannot assure you that there will continue to be enough additional
capacity to satisfy worldwide demand for flash memory. Because flash memory is a key component in many of the products manufactured by our customers, if any shortage in the supply of flash memory occurs and is not remedied, our customers may not be
able to purchase enough flash memory to manufacture their products and may therefore purchase fewer controllers from us than they would have otherwise purchased. Our ability to increase revenues and grow our profits could be materially and adversely
affected as a result of any shortage or decrease in the supply of flash memory.
We operate in a rapidly changing industry where a
significant majority of our sales are controllers used in NAND flash memory storage devices, and our failure to anticipate and respond quickly to changing industry trends relating to technology, standards, and consumer demand could adversely affect
our growth and profitability.
We operate in an intensely competitive industry that experiences rapid technological developments,
changes in industry standards, changes in customer requirements, and frequent new product introductions and improvements. If we are unable to respond quickly and successfully to these developments, we may lose our competitive position, and our
products or technologies may become uncompetitive. To compete successfully, we must maintain a successful R&D effort, develop new products and production processes, and improve our existing products and processes at the same pace or ahead of our
competitors. Many types of events could have a variety of negative effects on our overall competitive position and our financial results, such as reducing our revenue, increasing our costs, lowering our gross margin percentage, lowering our
operating profitability and requiring us to recognize impairments on our assets. We may not be able to develop and market new products successfully, new markets at which our products target may not grow as expected, the products we invest in and
develop may not be well received by customers, and products developed and new technologies offered by others may affect demand for our products.
Currently, a significant majority of our sales are controllers used in NAND flash memory storage devices. If new technologies for storing
digital media are developed that compete with flash memory technology or render it obsolete and if we are not able to shift our product offerings accordingly, demand for our products would likely decline and our business would be materially and
adversely affected.
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In addition, we may not have sufficient management resources to manage, R&D capabilities to
address, and financial resources to fund all of the required research to develop future innovations and meet changing industry standards. Moreover, even if we have adequate management resources, R&D capabilities, and financial resources, our
future innovations may be outpaced by competing innovations. As a result, we may lose customers and significant sales, and our business and operating results may be materially and adversely affected.
We may be unsuccessful in developing and selling new products or in penetrating new markets required to maintain our competitiveness or
expand our business.
We expect that a high percentage of our future sales will come from sales of new products. We sell products
in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions and products with short life cycles. The markets for some of these products are extremely competitive and may entail
technologies that are new, immature and/or unpredictable to us. These markets and our endeavors to meet the markets may not develop into profitable opportunities and we have in the past invested substantial resources in emerging technologies that
did not achieve the market acceptance and generate returns that we had expected. Recently, we have made significant investments in embedded storage controller technologies, especially those relating to SSD. Failure to grow our embedded storage
products or to recoup on our investments in these and other technologies could materially adversely affect our results of operations and future business outlook. As a result, it is difficult to anticipate our future revenue streams from, or provide
assurances on the success and the sustainability of, our new products.
The average selling prices of our mobile storage products
have historically decreased rapidly and will likely do so in the future, which could harm our revenue and profitability.
The
products we develop and sell, especially those for expandable and embedded storage solutions, are used for high volume applications and many of them are subject to rapid declines in average selling prices. Our average selling prices have
historically decreased significantly, and we believe that it is possible they may also fall in the future. We may experience period-to-period fluctuations in future operating results if our average selling prices decline. We may be forced to reduce
the average unit price of our products in response to new product introductions by our competitors, competitive pricing pressures and other factors. The consumer electronics market is extremely cost sensitive, which may result in rapidly declining
average selling prices of electronic devices and components, such as those made by us, used in devices and create downward pressure on our average selling prices and operating results. To maintain acceptable operating results, we will need to
develop and introduce new products and product enhancements on a timely basis and continue to reduce our costs. We have also introduced products for the embedded storage market that typically experiences less intense competition. If we are unable to
offset any reductions in our average selling prices by increasing our sales volumes or reducing corresponding production costs, or if we fail to gain more successes with embedded products or if we fail to develop and introduce new products and
enhancements on a timely basis, our sales and operating results will be materially and adversely affected.
If we are unable to
accurately predict our future sales and to appropriately budget for our expenses, our results of operations could suffer.
The
rapidly changing nature of the global economy and the markets in which we sell our products limits our ability to accurately forecast quarterly and annual sales. Because many of our expenses are fixed in the short term or are incurred in advance of
anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales, or expand our R&D and other operating infrastructure in a timely manner to capture anticipated business opportunities. If we
expand our business operations and demand for our products does not increase as we may have projected, our operating results could be affected by our higher operating expense levels. Conversely, if we maintain or reduce our business operations and
related expenses in accordance with our projections and demand for our products increases more than expected, our operating results could be affected by lost business opportunity, less competitive economies of scale, and damaged relationships with
our customers.
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A failure to accurately forecast customer demand may result in excess or insufficient
inventory, which may increase our operating costs and harm our business.
To ensure the availability of our products for our
customers, in some cases we cause our manufacturers to begin manufacturing our products based on forecasts provided by these customers in advance of receiving purchase orders. However, these forecasts do not represent binding purchase commitments,
and we do not recognize revenue from these products until they are shipped to the customer. As a result, we incur inventory and manufacturing costs in advance of anticipated revenue. Because demand for our products may not materialize, manufacturing
based on forecasts subjects us to risks of high inventory carrying costs and increased obsolescence and may increase our costs. If we overestimate customer demand for our products or if purchase orders are cancelled or shipments delayed, we may end
up with excess inventory that we cannot sell, which could have a material and adverse effect on our financial results. Conversely, if we underestimate demand, we may not have sufficient product inventory and may lose market share and damage customer
relationships, which could also harm our business.
The loss of any of our key personnel or the failure to attract or retain
specialized technical and management personnel could impair our ability to grow our business.
We rely heavily on the services of
our key employees, including Wallace C. Kou, our President and Chief Executive Officer. In addition, our engineers and other key technical personnel are a significant asset and are the source of our technological and product innovations. We believe
our future success will depend upon our ability to retain these key employees and our ability to attract and retain other skilled managerial, engineering, technical and sales and marketing personnel. The competition for such personnel, particularly
technical personnel, is intense in our industry. We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our anticipated growth. These technical personnel are required to design and develop
integrated circuits, including firmware, and to introduce product enhancements for use in future applications. Despite the incentives we provide, our current employees may not continue to work for us, and if additional personnel were required for
our operations, we may not be able to obtain the services of additional personnel necessary for our growth. In addition, we do not maintain key person life insurance for any of our senior management or other key employees. The loss of
any of our key employees or our inability to attract or retain qualified personnel, including engineers, could delay the development and introduction of, and have an adverse effect on our ability to sell, our products as well as have an adverse
effect on our overall growth. In addition, if any other members of our senior management or any of our other key personnel join a competitor or form a competing company, we may not be able to replace them easily and we may lose customers, business
partners, key professionals and staff members. Substantially all of our senior executives and key personnel have entered into confidentiality and non-disclosure agreements. In the event of a dispute between any of our senior executives or key
personnel and our operating companies in Taiwan, China or Korea, we cannot assure you the extent, if any, to which these provisions may be enforceable in Taiwan, China, or Korea due to the constantly evolving nature of the Taiwanese, Chinese, and
Korean legal systems.
We may not be able to deliver our products on a timely basis if our relationships with our suppliers, our
semiconductor foundries or our assembly and test subcontractors are disrupted or terminated.
We do not own or operate
semiconductor fabrication facilities. Instead, we rely on third parties to manufacture our semiconductors. Two outside foundries, Taiwan Semiconductor Manufacturing Company (TSMC) and Semiconductor Manufacturing International Corporation
(SMIC), with fabs in Taiwan, Singapore, and China currently manufacture the majority of our semiconductors. As a result, we face several significant risks, including higher wafer prices, availability of wafers and other raw materials,
lack of manufacturing capacity, quality assurance, manufacturing yields and production costs, limited control over delivery schedules and product quality, increased exposure to potential misappropriation of our intellectual property, labor shortages
or strikes and actions taken by third party contractors that breach our agreements.
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The ability of each foundry to provide us with semiconductors is limited by its available
capacity and access to wafers. We do not have long-term agreements with any of these foundries and we place orders on a purchase order basis. We place our orders based on our customers purchase orders and sales forecasts. However, the
foundries can allocate capacity to the production of the products of their other customers and reduce deliveries to us on short notice or increase the price they charge us. It is possible that other foundry customers that are larger and better
financed than we are, or have long-term agreements with these foundries, may induce these foundries to reallocate capacity to them. Any reallocation could impair our ability to secure manufacturing capacity that we need for our products. In
addition, interruptions to the wafer manufacturing processes caused by a natural disaster or human error could result in partial or complete disruption in supply until manufacturing is re-started or we are able to shift manufacturing to another
fabrication facility. It may not be possible to obtain sufficient capacity or comparable production costs at another foundry. Migrating our design methodology to a new third-party foundry could involve increased costs, resources and development time
comparable to a new product development effort. Any reduction in the supply of semiconductors for our products could significantly delay our ability to ship our products and potentially have negative effects on our relationships with existing
customers and our results of operations. In addition, if our subcontractors terminate their relationships with us, we would be required to qualify new subcontractors, which could take at least six months, resulting in unforeseen operating problems,
and our operating results may be materially and adversely affected.
If the foundries that provide us with the products for our
operations do not achieve satisfactory yield or quality, or if the assembly and testing services fail us in the quality of their output, then our revenue, operating results and customer relationships will be affected.
The manufacture of semiconductors is a highly complex process. Minor deviations in the manufacturing process can cause substantial decreases in
yield. In some situations, such deviations may cause production to be suspended. The foundries that manufacture our semiconductors have from time to time experienced lower than anticipated manufacturing yields, including yields for our
semiconductors, typically during the production of new products or architectures or during the installation and start-up and ramp-up of new process technologies or equipment. If the foundries that manufacture our semiconductors do not achieve
planned yields, our product costs could increase and product availability would decrease.
After the wafer fabrication processes, our
wafers are shipped to our assembly and testing subcontractors. We have a system to maximize consistent product quality, reliability and yield that involves our quality assurance team working closely with subcontractors in the various phases of the
assembly and testing processes. Our supplier quality management includes procedures such as processes to pre-qualify our manufacturing suppliers and subcontractors. However, despite our efforts to strengthen supplier quality management, if our
foundries fail to deliver fabricated silicon wafers of satisfactory quality in the volume and at the price we require, or if our assembly and testing subcontractors fail to efficiently and accurately assemble and test our products, we will be unable
to meet our customers demand for our products or to sell those products at an acceptable profit margin, which would have a material and adverse effect on our sales and margins and damage our customer relationships.
Failure to protect our proprietary technologies or maintain the right to certain technologies may negatively affect our ability to
compete.
We believe that the protection of our intellectual property rights is and will continue to be important to the success of
our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees,
business partners and other third parties, and have implemented procedures to control access to and distribution of our documentation and other proprietary information. Despite these efforts, we cannot assure you that these measures will provide
meaningful protection of our intellectual property rights. Further, these agreements do not prevent others from independently developing technologies that are equivalent to or superior to our technology. In addition, unauthorized parties may attempt
to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult and we cannot be
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certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries such as Taiwan, Korea, and China where the laws may not protect our
proprietary rights as fully as do the laws of the United States. In addition, if the foundries that manufacture our semiconductors lose control of our intellectual property, it could be more difficult for us to take remedial measures because our
foundries are located in countries that do not have the same protection for intellectual property that is provided in the United States. Also, some of our contracts, including license agreements, are subject to termination upon certain types of
change-of-control transactions.
As of March 31, 2016, we had 692 patents and have 774 pending applications worldwide. We cannot be
certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be
circumvented or challenged and declared invalid or unenforceable or provide only limited protection for our technologies. We also cannot be certain that others will not design around our patented technology, independently develop our unpatented
proprietary technology or develop effective competing technologies on their own.
Failure to successfully defend against
intellectual property lawsuits brought against us may adversely affect our business.
Companies in and related to the semiconductor
industry often aggressively protect and pursue their intellectual property rights. From time to time, we have received, and may continue to receive, notices that claim we have infringed upon, misappropriated or misused other parties
proprietary rights. Moreover, in the past we have been engaged in litigation with parties that claim that we infringed their patents or misappropriated or misused their trade secrets. In addition, we or our customers may be sued by other parties
that claim that our products have infringed their patents or misappropriated or misused their trade secrets, or that may seek to invalidate one or more of our patents. An adverse determination in any of these types of disputes could prevent us from
manufacturing or selling some of our products, increase our costs of revenue and expose us to significant liability. Any of these claims may materially and adversely affect our business, financial condition and results of operations. For example, in
a patent or trade secret action, a court could issue a preliminary or permanent injunction that would require us or our customer(s) to withdraw or recall certain products from the market or redesign certain products offered for sales or under
development. We may also be liable for damages for past infringement and royalties for future use of certain technologies. See Legal Proceedings below.
In addition, any litigation to defend ourselves against claims that we have infringed the intellectual property rights of others, could,
regardless of the ultimate outcome, materially and adversely affect our operating results by requiring us to incur significant legal expenses and diverting the resources of the company and the attention of our management team.
Because the markets in which we compete are highly competitive and many of our competitors have greater resources than we have, we
cannot be certain that our products will compete favorably in the marketplace.
We face competition from a large number of
competitors in each of our target markets. Our competitors in our mobile storage market include Alcor Micro, ASolid, Marvell, and Phison. In the mobile communications market, the companies with whom we compete include Raontech and Socionext. We also
face competition from our customers internal products and expect to face increased competition in the future from our current and potential competitors. In addition, some of our customers have developed products and technologies that could
replace their need for our products or otherwise reduce their demand for our products.
Some of our current and potential competitors have
longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we have. As a result, they may be able to
respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of their
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products than we can. Our current and potential competitors may develop and introduce new products that will be priced lower, provide superior performance or achieve greater market acceptance
than our products. In addition, in the event of a manufacturing capacity shortage, these competitors may be able to obtain capacity when we are unable to do so.
The consumer electronics market, which is the principal end market for our products, has historically been subject to intense price
competition. In many cases, low-cost, high-volume semiconductor component producers have entered markets and driven down profit margins. If a low-cost, high-volume producer should develop products that compete with our products, our sales and profit
margins would suffer.
Our products must meet exacting specifications and undetected defects and failures may occur, which may cause
customers to return or stop buying our products and may expose us to product liability risk and risks of indemnification against defects in our products.
Our products are complex and may contain undetected hardware or software defects or failures, especially when first introduced or when new
versions are released. These errors could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts and materially affect our customer relations and business reputation. If
we deliver products with errors or defects, our credibility and the market acceptance and sales of our products could be harmed. Defects could also lead to liability for defective products as a result of lawsuits against us or against our customers.
We have agreed to indemnify some of our customers in some circumstances against liability from defects in our products. A successful warranty or product liability claim could require us to make significant payments.
Our intellectual property indemnification practices may adversely impact our business.
We may be required to indemnify our customers and our third-party intellectual property providers for certain costs and damages of intellectual
property infringement in circumstances where our products are a factor in creating infringement exposure. In the contracts under which we sell semiconductor products, we may have agreed to indemnify our customers against losses arising out of claims
of unauthorized use of intellectual property. In some of our licensing agreements, we have agreed to indemnify the licensee against losses arising out of or related to our conduct or services. We cannot assure you that claims for indemnification
will not be made or that these claims would not have a material and adverse effect on our business, operating results or financial condition.
We are exposed to potential impairment charges on intangible assets relating to recent acquisitions and on investments if business
conditions deteriorate.
We are required to perform testing for impairment losses relating to long-lived assets used in operations
when indicators of impairment, such as reductions in demand or significant economic slowdowns in our business, are present. Through our acquisitions of FCI and other assets, we acquired core technology, customer relationships, goodwill and other
intangible assets. The carry value of goodwill relating to these acquisitions must be assessed for impairment at least on an annual basis. In November 2009, we recorded US$6.6 million of impairment charges relating to our long-lived assets and
determined that our goodwill balance was impaired, and wrote down the goodwill balance by US$30.8 million. In July 2015, we recorded US$33.2 million of goodwill and US$ 8.4 million of developed technology and in-process research and development from
the acquisition of Shannon Systems. As of December 31, 2015, we had goodwill associated with our acquisitions of US$68.7 million and intangible assets of US$ 7.3 million. Although we recorded an impairment on goodwill and other long-lived
assets in 2009, we cannot be certain that these assets will not be subject to further write-downs in future periods and may record further impairment charges if sales of our specialty RF ICs and enterprise SSDs do not grow as expected.
We have not made any passive investments in private companies since February 2007. If the companies in which we have invested in are unable to
execute their plans and succeed in their respective markets, we may not
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benefit from such investments, and we could potentially lose the amounts we invested. We evaluate our investments on a regular basis to determine if impairments have occurred and have recorded
impairment charges in past years. These and future impairment charges could have a material and adverse impact on our operating results. In 2013, 2014 and 2015, there were no impairments recorded.
Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of
operations and the market price of our ADSs.
We are subject to reporting obligations under securities laws of the United States.
The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include in its annual report managements
assessment of the effectiveness of the companys internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the companys internal controls
over financial reporting.
Our management and independent registered public accounting firm have concluded that our internal controls as
of December 31, 2015 are effective, excluding the internal control over financial reporting of Shannon Systems, because Shannon Systems was acquired on July 1, 2015 and whose financial statements constitute 6.20% and 5.45% of net and total
assets, respectively, 2.50% of net sales, and 0.70% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2015. However, we cannot assure you that in the future we or our independent registered
public accounting firm will not identify material weakness during the audit process or for other reasons. In addition, because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. As a result, if we fail to maintain effective internal controls over financial reporting or should we be
unable to prevent or detect material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial statements, which in turn could harm our business and results of operations, negatively
impact the market price of our ADSs and harm our reputation.
Laws and regulations to which we are subject, as well as customer
requirements in the area of environmental protection and social responsibility, could impose substantial costs on us and may adversely affect our business.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence
of certain substances in electronic products. In addition, we are also subject to various industry requirements restricting the presence of certain substances in electronic products. Although our management systems are designed to maintain
compliance, we cannot assure you that we have been or will be at all times in complete compliance with such laws and regulations. If we violate or fail to comply with any of them, a range of consequences could result, including fines, import/export
restrictions, sales limitations, criminal and civil liabilities or other sanctions.
Recently there has been increased focus on
environmental protection and social responsibility initiatives. We may be required or choose to implement various standards or processes due to the adoption of rules or regulations that result from these initiatives, such as the recently adopted
United States rules on the disclosure of the use of conflict minerals. Our customers may also require us to implement environmental or social responsibility procedures or standards before they will continue to do business with us or
order new products from us. Our adoption of these procedures or standards could be costly, and our failure to adopt these standards or procedures could result in the loss of business, fines or other costs.
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Our stock price has been, and may continue to be, volatile, which could result in investors
losing all or part of their investments.
Since we completed our initial public offering in June 2005, the market price of our ADSs
has been and likely will continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, including the following:
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actual or anticipated variations in our quarterly operating results or those of our competitors, customers, or NAND flash vendors;
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actual or anticipated changes in NAND flash supply-demand dynamics;
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actual or anticipated changes in our market share or the market share of our competitors;
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the commencement or results of litigation;
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announcements by us, our competitors, our customers, or their other suppliers of new products or technological innovations;
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changes in financial estimates or recommendations by securities analysts;
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the payment or non-payment of cash dividends at the discretion of our board of directors;
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the announcement and implementation of share repurchase programs;
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announcements by us or our competitors of significant acquisitions, divestitures or partnerships; and
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actual or anticipated changes in the global economic or industry outlook.
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Many of these
factors are beyond our control and may negatively impact the market price of our ADSs, regardless of our performance. In addition, the stock market in general, and the market for technology and semiconductor companies in particular, have been highly
volatile. Our ADSs may not trade at the same price levels as that of other semiconductor and technology companies, and shares of semiconductor and technology companies, in general, may not sustain their current market prices. These fluctuations as
well as general economic, political, and market conditions may have an adverse effect on the market price of our ADSs.
There can be
no assurance that we will continue to declare cash dividends on a quarterly basis, if at all or in any particular amounts.
Our
Board of Directors declared payment of our first quarterly dividend on our common stock in January 2013 and the first dividend payment was made on March 4, 2013. Our Board of Directors has subsequently declared and paid dividends in each
successive quarter. On November 2, 2015, our Board of Directors, instead of declaring a quarterly dividend, declared an annual dividend payable in four quarterly installments. The continuation of declaring dividends or if at all, depends on, among
other things, that the dividend payment is in the best interests of our shareholders, our results of operations, capital availability and future capital requirements, financial condition, statutory requirements, and other factors that the board of
directors may deem relevant. The decision of any declaration of dividend payment, the amount and the frequency of such, if at all, is the discretion of our Board of Directors. Our dividend payments may change from time to time, and we cannot provide
assurance that we will continue to declare dividends, if at all or in any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on our share price.
If we are characterized as a passive foreign investment company, U.S. Holders may experience adverse tax consequences.
Based on the present and projected composition of our income and valuation of our assets, we believe we are not currently classified as a
passive foreign investment company (PFIC) for U.S. federal income tax purposes. We will generally be classified as a PFIC for any taxable year in which either (a) at least 75% of our gross income is passive income or (b) at
least 50% of the value (determined on the basis of a quarterly average)
13
of our assets is attributable to assets that produce or are held for the production of passive income. If we are characterized as a PFIC, U.S. Holders may experience adverse tax consequences. See
ITEM 10. ADDITIONAL INFORMATION -Taxation-United States Federal Income Taxation.
We are subject to risks
associated with international operations which may harm our business.
We conduct our business worldwide. We are a Cayman Islands
corporation headquartered in Taiwan and have most of our operations outside of the United States. We undertake our design and development activities primarily in China, Korea and Taiwan. Our integrated circuits are manufactured, assembled,
tested and packaged by third-parties located primarily in China, Korea, and Taiwan. We generated 90%, 91% and 89% of our revenue in 2013, 2014 and 2015, respectively, from sales to customers outside the United States, and for the year ended December
31, 2015, 81% of our revenue was from sales in three jurisdictions Taiwan, Korea and China. International operations are subject to many other inherent risks, including but not limited to
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international economic and political conditions, such as political tensions between countries in which we do business (please also refer to Risk Factors relating to China, Korea, and Taiwan);
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unexpected changes in, or impositions of, legislative or regulatory requirements;
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complying with a variety of foreign laws;
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differing legal standards with respect to protection of intellectual property and employment practices;
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cultural differences in the conduct of business;
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inadequate local infrastructure that could result in business disruptions;
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exporting or importing issues related to export or import restrictions, tariffs, quotas and other trade barriers and restrictions;
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financial risks such as longer payment cycles and difficulty in collecting accounts receivable;
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adverse taxes rules, regulations and penalties; and
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other factors beyond our control such as nature disasters, terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome, the Avian influenza, and the Swine influenza.
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Although our reporting currency is the U.S. dollar, and the majority of our sales and cost of sales are denominated in the U.S. dollar, the
majority of our operating expenses are denominated in the NT dollar, and to a lesser extent Korean won, Chinese yuan and U.S. dollar. The functional currencies of our Korean operations and our Chinese operations are the Korean Won and the Chinese
yuan, respectively. As a result, appreciation or depreciation of other currencies in relation to the U.S. dollar could result in material transaction and translation gains or losses that could adversely affect, or cause fluctuations in, our results
of operations. We do not currently engage in currency hedging activities.
Parts of the world, including Taiwan, Japan, China and the
United States are susceptible to earthquakes. In 1999, 2008, and 2011, Taiwan, China, and Japan respectively, experienced severe earthquakes that caused significant property damage and loss of life. Although the 1999, 2008 and 2011 earthquakes
did not have a material impact on our business, a major earthquake and consequent disruptive events could severely disrupt the normal operations of our business and have a material and adverse effect on our financial condition and operating results.
We face substantial political risks associated with doing business in Taiwan because of the tense political relationship between
Taiwan and the Peoples Republic of China.
Our principal executive offices and a majority of our employees and a significant
portion of our research and development and operations are based in Taiwan. In addition, most of our foundries and assembly and testing
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suppliers such as TSMC, SMIC, Advanced Semiconductor Engineering Group (ASE), Siliconware Precision Industries Co., Ltd. (SPIL), and King Yuan Electronics Corp.
(KYEC) are located in either Taiwan or China. Accordingly, our business and results of operations and the market price of our ADSs may be affected by changes in Taiwan or China governmental policies, taxation, inflation or interest rates
and by social instability and diplomatic and social developments in or affecting Taiwan that are outside of our control. Taiwan has a unique international political status. China does not recognize the sovereignty of Taiwan. Although there have been
significant economic and cultural ties between Taiwan and China in recent years, the political relations have often been strained. The government of China has indicated that it may use military force to gain control over Taiwan, particularly under
what it considers as highly provocative circumstances, such as a declaration of independence by Taiwan or the refusal by Taiwan to accept Chinas One China policy. On March 14, 2005, the National Peoples Congress of China
passed what is widely referred to as the anti-secession law, a law authorizing the Chinese military to attack Taiwan in order to block moves by Taiwan toward formalizing independence.
Past and recent developments in relations between Taiwan and China have on occasion depressed the market prices of the securities of Taiwanese
companies or companies with significant business activities in Taiwan. We cannot assure you any contentious situations between Taiwan and China will always resolve in maintaining the current status quo or remain peaceful. Relations between Taiwan
and China and other factors affecting military, political or economic conditions in Taiwan could have a material adverse effect on our financial condition and results of operations, as well as the market price and the liquidity of our ADSs.
We face substantial political risk associated from doing business in South Korea because of tensions in the political relationship
between South Korea and North Korea.
Relations between South Korea and North Korea have been tense over most of South Koreas
history. In recent years, there have been heightened security concerns stemming from North Koreas nuclear weapons and ballistic missile capabilities and uncertainty regarding North Koreas actions and possible responses from the
international community. More recent concerns over North Koreas nuclear and ballistic missile testing programs, hostile and threatened actions by North Korea against South Korea, North Koreas leadership succession, and relations between
the United States and North Korea, have created a global security issue that may adversely affect South Korean business and economic conditions. South Korea was not a signatory of the armistice agreement that ended the Korean War, and since no peace
treaty was signed between South Korea and North Korea, the two countries are technically still at war. We cannot assure you as to whether or when this situation will be resolved or change abruptly as a result of current or future events, including,
without limitation, the effects, if any, of (i) the transition of the Supreme Leader to Kim Jong Un that began after the passing of Kim Jong Il in 2011, (ii) recent increases to previously imposed UN sanctions on North Korea,
(iii) the effects of the denial of access to South Koreans who manage jointly run factories in the North Korean city of Kaesong and (iv) the general increase in overtures and rhetoric by the North Korean government with respect to its
nuclear capabilities and willingness to use such weapons as they see fit. We cannot give any assurance that the level of instability and tension in the Korean peninsula will not escalate in the future, or that the political regime in
North Korea may not suddenly collapse. An adverse change in economic or political conditions in South Korea or North Korea or in South Koreas relations with North Korea could have a material adverse effect on our South Korean
subsidiary and our company.
Our business depends on the support of the Taiwanese and South Korean governments, and a decrease in
this support may increase our tax liabilities and decrease our net income.
The Taiwanese and South Korean governments have
generally been supportive of technology companies such as ours. In particular, we, like many Taiwanese technology companies, have benefited from tax incentives provided by the Taiwanese government. For example, under the Statute for Upgrading
Industries of Taiwan, we were granted tax credits by the Taiwan Ministry of Finance for qualifying research and development costs and in qualifying employee training expenses. In addition, Taiwan law offers preferential tax treatments to industries
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that are encouraged by the government. In 2010, Statute for Industries Innovation was passed to replace the Statute for Upgrading Industries in tax incentives. However, we
are still eligible to use certain previously granted exemptions. See Operating and Financial Review and Prospects Principal Factors Affecting Our Results of Operations Provision for income taxes and Note 13 to our
consolidated financial statements for a more detailed description of our ability to enjoy these preferential tax treatments. If any of our tax credits or our ability to take advantage of these preferential tax treatments are curtailed or eliminated,
our net income may decrease materially.
The South Korean government provides a variety of tax incentives designed to promote designated
industries such as the technology industry. We, like many Korean technology companies, have benefited from certain tax incentives, including tax credits for applicable research and development expenses and tax credit for investments made to improve
business productivity. If these and other tax incentives are curtailed or eliminated, our net income may decrease materially.
I
TEM
4.
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I
NFORMATION
ON
THE
C
OMPANY
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History and
Development of the Company
Silicon Motion Technology Corporation (Silicon Motion) is a corporation which was incorporated
in the Cayman Islands in January 2005 and acquired Silicon Motion, Inc., a Taiwan corporation (SMI Taiwan), in April 2005. Originally SMI Taiwan was known as Feiya Technology Corporation (Feiya), a Taiwan corporation which
was incorporated in April 1997 but had changed its name to SMI Taiwan after acquiring in August 2002 Silicon Motion, Inc., a California corporation (SMI USA), which was incorporated in November 1995. Feiya was originally a flash memory
products company and SMI USA a graphics processor company. In April 2007, we acquired FCI Inc. (FCI), a leading designer of RF ICs for mobile TV and wireless communications based in Korea. In 2011, we established Silicon Motion BV in the
Netherlands with the purpose of expanding our business activities in Europe, as well as to provide supervisory, financing, legal support, accounting services and shareholding for our businesses in other parts of the world. In July 2015, we acquired
Shanghai Baocun Information Technology Co., Ltd (Shannon Systems), Chinas leading enterprise-class PCIe SSD company based in Shanghai, China.
Our principal executive offices are located at 8F-1, No. 36, Taiyuan St., Jhubei City, Hsinchu County 302, Taiwan. The address of our
United States subsidiary, Silicon Motion, Inc., is 1591 McCarthy Blvd., Milpitas, CA 95035. Our ADSs have been listed and traded on Nasdaq since June 2005.
Subsidiaries of the Company
Below is a
list of subsidiaries of the Company. All subsidiaries are wholly owned.
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Name of Entity
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Jurisdiction of Incorporation
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FCI Inc.
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Korea
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Silicon Motion BV
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The Netherlands
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Silicon Motion K.K.
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Japan
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Silicon Motion Korea Ltd.
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Korea
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Silicon Motion Technology (HK) Ltd.
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Hong Kong
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Silicon Motion, Inc.
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California
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Silicon Motion, Inc.
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Taiwan
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Silicon Motion, Inc. (Beijing)
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China
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Silicon Motion, Inc. (Shanghai)
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China
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Silicon Motion, Inc. (Shenzhen)
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China
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Shannon Systems
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China
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Overview
We are a global leader and pioneer in developing NAND flash controller ICs for solid-state storage devices and specialty RF ICs for mobile
devices. We supply more NAND flash controllers than any other company in the world and have one of the broadest portfolios of controller solutions and technologies. Our key products are controllers used in embedded storage products such as SSDs and
eMMCs, as well as in expandable storage products such as memory cards and USB flash drives. Our products are widely used in consumer devices such as smartphones, tablets and PCs and for industrial, enterprise, commercial and other applications. Our
customers include most of the NAND flash makers, leading technology OEMs, and the majority of storage device module makers. More NAND flash products, especially next-generation flash, produced by Intel, Micron, Samsung, SanDisk, SK Hynix and Toshiba
are supported by Silicon Motion controllers than any other company. We are the worlds leading merchant supplier of controllers for eMMC embedded memory used in smartphones and tablets, and the leading merchant supplier of controllers for
client SSDs used in PCs and other applications. The recent addition of Shannon Systems expands our product portfolio to now include enterprise-grade PCIe SSDs for the Chinese hyperscale data center market. For the mobile communications market, our
key products are mobile TV SoCs and handset RF ICs. We market our controllers under the SMI brand, our enterprise-grade SSDs under the Shannon Systems brand, our single-chip industrial-grade SSDs under the Ferri
SSD and Ferri-eMMC brands, and specially RF ICs under the FCI brand.
Industry Background
We operate in the semiconductor industry and primarily focus on designing, developing and marketing: (i) controllers for managing NAND
flash used in embedded storage applications such as eMMC embedded memory and SSDs and expandable storage applications such as flash memory cards and USB flash drives, (ii) specialty SSD such as customized enterprise-grade PCIe SSD solutions for the
China hyperscale data center market and single-chip SSD solutions for industrial and commercial equipment markets, and (iii) specialty RF ICs used in smartphones and tablets such as mobile TV SoCs.
Our Market and Products
Our products, primarily embedded storage products, expandable storage products and specialty radio frequency integrated circuits (RF ICs), are
designed, developed and marketed to mobile storage and mobile communications markets. The two general types of embedded storage and expandable storage products that we sell are (i) NAND flash controllers, such as embedded MultiMediaCard (eMMC),
client solid-state drive (SSD), flash memory card and Universal Serial Bus (USB) flash drive controllers, and (ii) specialty storage solutions, such as our customized enterprise-grade Shannon Systems Peripheral Component Interconnect Express (PCIe)
SSDs and industrial-grade and commercial-grade single-chip FerriSSDs and Ferri-eMMCs. NAND flash controllers account for a significant majority of sales. Our Ferri storage solutions all use our industry-proven controllers and beginning in 2016,
we anticipate that our Shannon Systems SSDs will also start using our controllers.
NAND Flash Controllers
NAND flash is a type of non-volatile digital data storage technology that does not require power to retain data and has become the primary
semiconductor technology for mass digital data storage. The benefits of NAND flash include high data storage capacity at low cost per bit, fast data read and write access time, low operating power requirements, and shock resistance. NAND flash is
widely used for embedded and expandable data storage in mobile consumer electronic devices such as smartphones, tablets, digital cameras, and notebook PCs and more recently is also being used in commercial-grade, industrial-grade, and
enterprise-grade equipment. The NAND flash market is large and has grown rapidly, and the leading suppliers of NAND flash are Intel, Micron, Samsung, SanDisk, SK Hynix, and Toshiba.
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All NAND flash storage devices require a controller and almost all storage devices use a discrete
controller IC. Key functions of a flash memory controller include:
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managing the interfacing of the NAND flash in the flash memory storage product with the host device;
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ensuring data reliability in NAND flash by detecting and correcting individual bit errors in the NAND flash caused by read/write disturbance and adjacent cell interference;
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ensuring data integrity in NAND flash by mapping bad blocks and preventing bad blocks from being used for storing data;
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maximizing the life of NAND flash with wear-leveling algorithms which spread out the use of the memory array and equalize the use of all the memory cells;
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enhancing the sequential and random read and write performance of NAND flash by utilizing multiple-plane architecture, interleaving, or other technologies;
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preventing data loss during sudden, unexpected host device power failures with advanced power cycling solutions;
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implementing security features to protect software code, personal data and multimedia digital rights; and
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ensuring that flash memory storage solutions are compatible with host devices.
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We believe
that our controllers are designed to meet the specifications of the majority of NAND flash components currently being produced by different flash memory manufacturers, including small and big block Single-Level Cell (SLC) and Multi-Level
Cell (MLC) NAND flash. Most of our controllers support planar and 3D two-bits per cell MLC or three-bits per cell MLC NAND flash, which is also known as Triple-Level Cell (TLC) NAND flash. Our controllers also support NAND
flash designed and fabricated at all the primary process geometries, including the most advanced process geometries.
Mobile Storage
Market
We provide embedded storage products and expandable storage products primarily for the mobile storage market, targeting
NAND flash makers and module makers that develop eMMCs, client SSDs, flash memory cards and USB flash drives for mobile electronics devices, such as smartphones and notebook and desktop PCs.
Embedded Storage Products
eMMC controllers.
We supply controllers for eMMC, an industry standard high-performance, low-power single-chip embedded memory
solution that is widely used in portable consumer electronic products, including smartphones, tablets, digital cameras and smart TVs. Our customers use our eMMC controllers with their NAND flash components to manufacture single-chip eMMC memory
modules and with their NAND flash and mobile dynamic random-access memory (DRAM) components to manufacture eMMC-based multi-chip package (eMCP) memory modules. Our eMMC controllers support all the current widely used standards, including eMMC
4.5, eMMC 5.0 and eMMC 5.1. We believe we are the worlds largest merchant supplier of eMMC controllers. Our largest eMMC controller customer is SK Hynix; we believe SK Hynix is manufacturing eMMCs and eMCPs with our controllers and
is supplying all of the global top 10
Android
smartphone original equipment manufacturers (OEMs) with these solutions.
Client
SSD controllers.
We believe we are the worlds largest merchant supplier of client SSD controllers and provide highly customizable hardware plus firmware turnkey SSD controller solutions to NAND flash manufacturers and module makers
that manufacture and supply to PC OEMs and the channel markets their SSDs with our controllers for use in notebook and desktop PCs, other client devices and in high-performance,
low-latency
non-mission
critical data center applications. Our client SSD controllers support interfaces that
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include Serial Advanced Technology Attachment (SATA) III and PCIe and the majority of the latest generation of NAND flash components. Our value-added technologies provided to our client SSD
controller customers include end-to-end data path protection, power-loss data security features, Opal-compliant AES advanced full-disk encryption, and active operating temperature monitoring.
Embedded flash storage controllers.
Our embedded flash controllers are designed to control NAND flash embedded on devices with
Compact Flash, USB, and SATA interfaces. Applications using our embedded flash storage controllers include industrial-grade Compact Flash (CF) cards, industrial-grade Secure Digital (SD) cards, disk-on-modules (DOMs), Integrated Drive
Electronics (IDE) SSDs (also known as Parallel Advanced Technology Attachment (PATA) SSDs), embedded USB flash drives, industrial-grade USB flash drives and
non-consumer-grade
3 Gigabit per second (Gp/s) and 6
Gb/s SATA SSDs. Our embedded flash controllers are offered in commercial temperature (0 °C to 70 °C) and industrial temperature (-40 °C to +85 °C) versions and backed by long term product support. We believe we are the
worlds largest supplier of embedded flash storage controllers and supply our controllers primarily to module makers that specialized in supplying the industrial and commercial applications markets.
Ferri storage solutions.
Our
FerriSSDs
and
Ferri-eMMCs
are highly reliable, industrial-grade and commercial-grade
single-chip SSDs, which are developed for a wide-range of embedded applications that require high data rate, small form factor and compliance with standard PATA, SATA and eMMC protocols. These single-chip SSDs are designed using our
industry-proven PATA, SATA and eMMC controller technologies with high-quality NAND flash components to simplify customers design work, and are offered to OEM customers that also require long supply continuity. For certain customers, we offer
options for firmware customization to meet their unique embedded storage requirements. We believe we are the worlds largest supplier of
industrial-grade
and commercial-grade single-chip SSDs.
Shannon Systems enterprise SSD solutions.
In China, we provide customized, high-performance
enterprise-grade
PCIe SSDs to internet companies for their hyperscale data centers and to other corporate customers. Our PCIe SSDs are developed for customers who require the largest storage capacity,
lowest latency, fastest input/output operations per second (IOPS) data rate, lowest power and unparalleled performance stability with end-to-end data path protection.
Expandable Storage Products
Flash memory card controllers.
Our controllers for flash memory card standards include microSD cards used primary with
smartphones and SD and CF cards used primarily with digital cameras and camcorders. For microSD and SD cards, we offer controllers for (i) different speed class, including the significantly faster Secure Digital High Capacity (SDHC) and Secure
Digital eXtended Capacity (SDXC) cards that use the Ultra High Speed (UHS) bus and (ii) different storage capacities, including the significantly higher capacity SDHC and SDXC cards, which also have faster speed and added capabilities.
USB flash drive controllers.
USB flash drives are NAND flash storage devices integrated with a standard USB interface, either USB
2.0 or the faster USB 3.0. USB flash drives are popular in computing and consumer electronics markets for the portable storage of files.
Mobile Communications Market
For the mobile communications market, a market that extends from smartphones to new devices that target the internet-of-things, we provide
specialty RF ICs, primarily mobile TV system-on-chips (SoCs) and certain handset RF ICs.
Mobile TV SoCs.
Our products include
integrated mobile TV tuner plus demodulator SoCs for mobile phones and other portable devices. Our solutions are designed for leading digital mobile TV broadcast standards,
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specifically Terrestrial-Digital Media Broadcast (T-DMB) for the Korean market and Integrated Services Digital Broadcasting-Terrestrial (ISDB-T) for the Japanese and certain Asian and South
American markets.
Handset RF ICs.
We provide multi-mode diversity fourth generation (4G) Long Term Evolution-Advanced
(LTE-Advanced) transceivers that also support most legacy third generation (3G) and second generation (2G) air interfaces, Code-Division Multiple Access (CDMA) transceivers and low-noise amplifier (LNA) components.
Our Customers
We sell our semiconductor
solutions to leading OEMs and module makers, worldwide. Most of our high performance flash memory storage controllers are supplied to NAND flash manufacturers. We are the leading merchant supplier of controllers used in client SSD for PCs and eMMC
used in smartphones and a leading supplier of controllers used in flash memory cards and USB flash drives. We provide our specialty RF ICs primarily to Samsung and other OEMs.
Sales to our five largest customers represented approximately 65%, 64% and 54% of our net revenue in 2013, 2014 and 2015, respectively. Sales
to two customers in 2013 and 2014, and one customer in 2015 accounted for 10% or more of our net revenue, representing 46%, 47% and 30% of our net revenue in 2013, 2014 and 2015, respectively. In 2013 and 2014, the significant customers were
Samsung and SK Hynix and in 2015, SK Hynix. The identities of our largest customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period.
The majority of our customers purchase our products through purchase orders, as opposed to entering into long-term contracts with us. The
price for our products is typically agreed upon at the time a purchase order is placed.
Sales and Marketing
We market and sell our products worldwide through a combination of direct sales personnel and independent electronics distributors. Our
direct sales personnel are strategically located near our major OEM and modular maker customers in Taiwan, Korea, China, the United States, and Japan. Approximately 83% of our sales in 2013, 81% of our sales in 2014, and 71% of our sales in
2015 were attributable to our direct sales force while the remainder was attributable to distributors.
To supplement our direct sales, we
have independent electronics distributors and sales reps with locations throughout the world. We selected these distributors and reps based on their ability to provide effective field sales, marketing communications and technical support for our
products to our customers.
Our marketing group focuses on our product strategy, product development road maps, new product introduction
process, demand assessment, competitive analysis, and product marketing. We seek to work with potential and existing customers early in their design process to best match our products to their needs, and more broadly, to ensure that product
development activities, product launches, and on-going demand and supply planning occur in a well-managed, timely basis in coordination with our research and development, operations, and sales groups, as well as our customers and
distributors. We also attend industry tradeshows and technical conferences to promote our products and solutions, maintain close contact with our existing customers to assess demand, and keep current with industry trends. Our participation
in industry standards associations, such as JEDEC and the SD Association for our embedded storage and expandable storage products, helps us monitor the latest industry developments and promote our corporate profile. Our marketing group also works
with our sales teams to identify new business opportunities.
We also have field application engineers (FAEs), who provide technical
support and assistance to existing and potential customers in designing, testing and qualifying systems that incorporate our products. Our FAE organization is segmented by product and market to support our customers.
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Research and Development
We devote a significant amount of resources to research and development for broadening and strengthening our portfolio of technology, products
and solutions. Our engineering team has expertise in NAND flash management algorithms, system architecture, digital, mixed-signal and RF IC design, and software engineering. As of March 31, 2016, we had 692 patents and have 774 pending
applications worldwide. We will continue to actively pursue the filing of additional patent applications in important jurisdictions.
We
believe technology research and product development are essential to our growth. Our primary research and development centers are located in Hsinchu and Taipei, Taiwan, Seoul, South Korea, Shanghai and Shenzhen, China and Milpitas, California. Our
facilities in Milpitas focus primarily on graphics products, our facilities in Seoul focus primarily on our specialty RF IC products, our facilities in Hsinchu and Taipei focus primarily on our NAND flash controller products, and our facilities in
Shanghai and Shenzhen focus primarily on specific product requirements of our customers in China.
Our research and development expenses
were approximately US$46.5 million, US$60.9 million and US$71.2 million for the years ended December 31, 2013, 2014 and 2015, respectively.
Manufacturing
We design and develop our
products and electronically transfer our proprietary designs to independent foundries for the manufacturing and processing of silicon wafers. Once the wafers are manufactured, they are then shipped to third-party assembly and testing subcontractors.
Individual dies on each wafer are assembled into finished chips and undergo several stages of testing before delivery to our customers. We also ship bare dies to our customers. We believe that our strategy of outsourcing wafer fabrication, packaging
and testing enables us to benefit from the research and development efforts of leading manufacturers without the requirement to commit our own substantial capital investments. Our fabless business model also provides us with the flexibility to
engage vendors who offer services that best complement our products and technologies.
Wafer fabrication
. TSMC and SMIC are
currently our primary foundries that manufacture most of our semiconductors. We use their fabs in Taiwan, Singapore, and China to fabricate our devices using mature and stable CMOS process technology, primarily with line-widths from 40 to 160
nanometers. We regularly evaluate the benefits and feasibility, on a product-by-product basis, of migrating to more cost efficient manufacturing process technologies.
Assembly and testing
. Following wafer fabrication, our wafers are shipped to our assembly and test subcontractors where they are
probed, singulated into individual dies, assembled into packaged chips, and undergo the process of electronic final testing. In order to minimize cost and maximize turn-around time, our products are designed to use low cost, industry standard
packages and can be tested with widely available automatic testing equipment. We currently engage companies such as ASE, SPIL, and KYEC as our primary subcontractors for the assembly and testing of our products. We have dedicated teams of
manufacturing engineers who maintain control over the process from the early stages of manufacturing. Our engineers work closely with our subcontractors to develop product testing and packaging programs to ensure these programs meet our product
specifications, thereby maintaining our ownership of the functional and parametric performance of our semiconductors.
Quality and
reliability assurance
. We have designed and implemented a quality assurance system that provides the framework for continual improvement of products, processes and customer service. To ensure consistent product quality, reliability and yield,
our quality assurance teams perform reliability engineering, quality control, international organization for standardization (ISO) system development, document control, subcontractor quality management and customer engineering services to closely
monitor the overall process from IC design to after-sale customer support. In particular, we rely on in-depth simulation studies, testing and
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practical application testing to validate and verify our products. We emphasize a strong supplier quality management practice in which our manufacturing suppliers and subcontractors are
pre-qualified by our quality assurance teams. Our suppliers are required to have a quality management system, certified to ISO 9000 standard. Our operations have been ISO 9001 certified since 1999.
Competition
The semiconductor industry
is characterized by intense competition. Our customers face supply shortages or oversupply, rapid technological changes, evolving industry standards and declining average selling prices.
Our competitors in our mobile storage market include Alcor Micro, ASolid, Marvell, and Phison. In the mobile communications market, the
companies with whom we compete include Raontech and Socionext. We also face competition from some of our customers.
Seasonality
See Risk Factors Because our operating results for any period could be adversely affected by a number of factors and therefore
fluctuate significantly, our annual and quarterly operating results are difficult to predict in Item 3 above and Operating and Financial Review and Prospects Principal Factors Affecting Our Results of Operations in
Item 5 below.
Intellectual Property
Our success and future revenue growth depends, in part, on our ability to protect our intellectual property. We rely on a portfolio of
intellectual property rights, registered in the United States, Taiwan, and other countries, including patents, copyrights, trademark registrations, trade secret laws, contractual provisions, licenses, and other methods to protect our intellectual
property.
As of March 31, 2016, we held 692 patents and have 774 pending applications worldwide. There can be no assurance that
patents will ever be issued with respect to these pending applications. Furthermore, it is possible that any patents held by us may be invalidated, circumvented, challenged or licensed to others. In addition, there can be no assurance that such
patents will provide us with competitive advantages or adequately safeguard our proprietary rights. While we continue to file new patent applications with respect to our recent developments, existing patents are granted for prescribed time periods
and will expire at various times in the future. We expect to continue to file patent applications where appropriate to protect our proprietary technologies.
Companies in the semiconductor industry have frequently demonstrated a readiness to commence litigation based on allegations of patent and
other intellectual property infringement. From time to time, third parties may assert infringement claims against us. We may not prevail in any such litigation or may not be able to license patents from third parties on commercially reasonable
terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our managements time. Any such litigation could materially adversely affect us. In addition, in the
contracts under which we sell semiconductor products, we may have agreed to indemnify our customers against losses arising out of claims of unauthorized use of intellectual property.
We intend to protect our intellectual property rights vigorously, but there can be no assurance that our efforts will be successful. In
addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States.
While our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that our
technical expertise, customer support capabilities, and ability to introduce new products in a timely and cost effective manner will be important factors in maintaining our competitive position.
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We claim copyright and trademark protection for proprietary documentation for our products and a
variety of branding marks. We have registered Silicon Motion and its logo (a three-dimensional cube depiction of the letters SM), FCI, the FCI logo, Shannon Systems, the Shannon Systems logo, airRF,
basicRF, ezRF, ezSYS, powerRF, twinRF, zipRF, zipSYS, VirtualZero, SSDLifeGuard, SSDLifeSaver, TurboMLC,
FerriSSD, Ferri-eMMC, and NANDXtend as trademarks in the United States, Taiwan, and other countries.
We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and
consultants, and through other customary security measures.
We have entered into license agreements with third party intellectual
property vendors for wafer fabrication tool libraries, semiconductor IP core, computer aided design tools, and software.
Facilities
Our corporate headquarters is located in Hsinchu, Taiwan. As of the date of this annual report, we own this 173,900 square feet facility,
which houses our management and administration, operations, and research and development departments. In Taiwan, we also lease premises in Taipei, occupying approximately 54,700 square feet of floor space, which houses our sales and marketing,
as well as research and development departments.
In addition to these facilities in Taiwan, in 2015 we purchased a facility in Shanghai,
China with an aggregate floor space of approximately 20,000 square feet, which houses our research and development, sales and marketing and administrative departments. We lease facilities in Seoul, Korea; Hong Kong, Shenzhen, Shanghai and Beijing,
China; Milpitas, California; and Yokohama, Japan for research and development, sales and marketing, and administration. These facilities in aggregate consist of approximately 77,300 square feet of floor space with lease terms expiring at
various dates between 2016 and 2019. We also own other commercial property in both Taipei and Shanghai of approximately 6,200 square feet and 15,900 square feet, respectively, which we currently do not use. It is our intention to sell these
properties as we currently do not use them for operating purposes.
Government Regulation
See Risk Factors We face substantial political risks associated with doing business in Taiwan because of the tense political
relationship between Taiwan and the Peoples Republic of China, Our business depends on the support of the Taiwanese and South Korean governments, and a decrease in this support may increase our tax liabilities and decrease our net
income, and We face substantial political risk associated from doing business in South Korea because of tensions in the political relationship between South Korea and North Korea in Item 3 above.
I
TEM
4A.
|
U
NRESOLVED
S
TAFF
C
OMMENTS
|
None.
I
TEM
5.
|
O
PERATING
AND
F
INANCIAL
R
EVIEW
AND
P
ROSPECTS
|
General Information
We are a global leader and pioneer in developing NAND flash controller ICs for solid-state storage devices and specialty RF ICs for mobile
devices. We supply more NAND flash controllers than any other company in the world and have one of the broadest portfolios of controller solutions and technologies. Our key products are controllers used in embedded storage products such as SSDs and
eMMCs, as well as in expandable storage products such as memory cards and USB flash drives. Our products are widely used in consumer devices such as smartphones, tablets and PCs and for industrial, enterprise, commercial and other applications. Our
customers
23
include most of the NAND flash makers, leading technology OEMs, and the majority of storage device module makers. More NAND flash products, especially next-generation flash, produced by Intel,
Micron, Samsung, SanDisk, SK Hynix and Toshiba are supported by Silicon Motion controllers than any other company. We are the worlds leading merchant supplier of controllers for eMMC embedded memory used in smartphones and tablets, and the
leading merchant supplier of controllers for client SSDs used in PCs and other applications. The recent addition of Shannon Systems expands our product portfolio to now include enterprise-grade PCIe SSDs for the Chinese hyperscale data center
market. For the mobile communications market, our key products are mobile TV SoCs and handset RF ICs. We market our controllers under the SMI brand, our enterprise-grade SSDs under the Shannon Systems brand, our single-chip
industrial-grade SSDs under the Ferri SSD and Ferri-eMMC brands, and mobile communications products under the FCI brand.
Our revenue growth and product mix have been constantly evolving due to continued technological advancement of solid state storage solutions
using NAND flash and demands from new applications. Historically, controllers for expandable storage products provided the majority of our revenue. Recently, a growing portion of our revenue growth has come from embedded storage products.
In 2014, our embedded storage product sales accounted for over half our total sales and exceeded the sales of our expandable storage products. In 2015, our embedded storage product sales grew to account for almost 60% of our total sales. We
believe that over the next few years, as the market for embedded storage products further expands, the proportion of our revenue from these new growth products will increase further. We continue to focus on adapting our business to the changing
end-markets for NAND flash memory and aligning our resources accordingly. We have no assurance that our embedded storage products sales will grow consistently over the next few years, or at all.
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our
consolidated financial statements and their related notes included in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. We caution you that our business and financial performance are
subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. See Special Note Regarding Forward-Looking Statements. In evaluating our business, you should
also carefully consider the information provided under the caption Risk Factors included in Item 3 of this annual report.
Principal Factors Affecting Our Results of Operations
Net sales.
Our net sales consist primarily of sales of our semiconductors, after deducting sales discounts and allowances for returns.
The semiconductors that we sell are primarily for mobile storage and mobile communications markets. Net sales generated by these product groups for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except percentage data)
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Storage
(1)
|
|
|
185,488
|
|
|
|
82
|
|
|
|
241,614
|
|
|
|
84
|
|
|
|
302,910
|
|
|
|
84
|
|
Mobile Communications
(2)
|
|
|
31,022
|
|
|
|
14
|
|
|
|
40,034
|
|
|
|
14
|
|
|
|
50,896
|
|
|
|
14
|
|
Others
(3)
|
|
|
8,798
|
|
|
|
4
|
|
|
|
7,675
|
|
|
|
2
|
|
|
|
7,491
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
225,308
|
|
|
|
100
|
|
|
|
289,323
|
|
|
|
100
|
|
|
|
361,297
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes embedded storage and expandable storage products.
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(2)
|
Includes mobile TV SoCs and handset RF ICs.
|
(3)
|
Includes embedded graphics processors, demo boards, and non-recurring engineering income.
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24
For the years ended December 31, 2013, 2014 and 2015 we derived approximately 21%, 20%, and
20%, respectively, of our net sales from customers located in Taiwan and approximately 10%, 9%, and 11% respectively, of our net sales from customers located in the United States. We anticipate that a majority of our net sales will continue to come
from customers located outside of the United States. The percentages of our net sales by geographic area for the periods indicated were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Country
|
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
|
21
|
%
|
|
|
20
|
%
|
|
|
20
|
%
|
Korea
|
|
|
51
|
%
|
|
|
52
|
%
|
|
|
42
|
%
|
China
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
19
|
%
|
United States
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
11
|
%
|
Others
|
|
|
5
|
%
|
|
|
7
|
%
|
|
|
8
|
%
|
Our net sales are denominated primarily in U.S. dollars. The percentages of our net sales by currency for the
periods indicated are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollars
|
|
|
97
|
%
|
|
|
95
|
%
|
|
|
89
|
%
|
Korean won
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
8
|
%
|
Japanese yen
|
|
|
|
|
|
|
2
|
%
|
|
|
1
|
%
|
Chinese yuan
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
The length of our sales cycle, from the day purchase orders are received until products are shipped to
customers, is dependent on the availability of our product inventories. If we do not have sufficient inventories on hand to meet customer demands, approximately three months are generally required from the day purchase orders are received until
finished goods are manufactured and shipped to customers. This cycle can take up to six months during times when capacity at independent foundries is being fully utilized. The potential delays inherent in the manufacturing process increase the risk
that we may not be able to fulfill a customers order on time. All of our sales are made by purchase orders. Because our practice, which is consistent with industry practice, allows customers to reschedule orders on relatively short notice,
order backlog may not be a good indicator of our future sales.
Because many of our semiconductor solutions are designed for the consumer
electronics market such as smartphones, tablets, digital cameras, and desktop and notebook PCs, we expect our business to be subject to seasonality, with higher net sales generally in the second half of each year, when customers place orders to meet
increased demand during year-end holiday seasons. However, our rapid sales growth in recent years could make assessment of the impact of seasonal factors on our business difficult.
Cost of sales. Our cost of sales consists primarily of the following costs:
|
|
|
cost of wafer fabrication;
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|
|
|
assembly, testing and shipping costs of our semiconductors;
|
|
|
|
personnel and equipment costs associated with manufacturing support;
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|
|
|
cost of raw materials; and
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|
|
|
write-off of inventory.
|
25
We engage independent foundries for the manufacturing and processing of our semiconductors. Our
manufacturing cost is subject to the cyclical supply and demand conditions typical of the semiconductor industry. Our cost per wafer generally fluctuates with the availability of capacity at independent foundries. We believe that our cost of sales
is substantially variable in nature, and will likely fluctuate as our market conditions change.
Research and development expenses.
Our research and development expenses consist primarily of employee salaries and related costs, stock-based compensation expense, fees paid for the use of intellectual properties and design tools developed by third parties, development cost of
software, expenses for the design, development and testing of system architecture, new product or product alternatives, costs for the construction of prototypes, occupancy costs and depreciation on research and development related equipment. We
expense research and development expenditures as they are incurred. We expect research and development expenses to increase in absolute terms in future periods as our net sales increase.
Sales and marketing expenses.
Our sales and marketing expenses consist primarily of employee salaries and related costs, stock-based
compensation expense, commissions paid to independent distributors and costs for our advertising and promotional activities. We expect that our sales and marketing expenses will increase in absolute terms over the next several years as our net sales
increase.
General and administrative expenses.
Our general and administrative expenses consist primarily of employee salaries and
related costs, stock-based compensation expense, insurance premiums, professional fees and allowance for doubtful accounts. We expect that general and administrative expenses will increase in absolute terms in future periods as our net sales
increase.
Amortization of acquired intangible assets.
Amortization of acquired intangible assets relates to intangible assets,
such as development technology, but excluding goodwill.
Accounting for stock-based compensation.
We grant both stock options and
restricted stock units to our employees and members of the Board of Directors. The value of our restricted stock units is expensed over the vesting period and based on the grant date share price, less the present value of expected dividends during
the vesting period, discounted at a risk-free interest rate. We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model and recognize stock compensation expense over the requisite service period of
the individual grantees, which generally equals the vesting period.
Non-operating income and expenses.
Our non-operating income
and expenses include gains or losses on the sales of investments, interest from deposited cash or short-term investments, gains or losses on foreign exchange rates, impairment of long-term investments, interest paid on loans and capital leases and
other non-operating income and expenses not categorized above. We conduct an assessment on the value of our long-term investments quarterly and make corresponding write-downs as required to the value of the long-term investments.
Provision for income taxes.
We must make certain estimates and judgments in determining income tax expenses for financial statement
purposes. These estimates and judgments occur in the calculation of tax credits, benefits, deductions and allowance, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue
and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
We have operations in several countries and determine income taxes for each of the jurisdictions where we operate. Taiwan, China and
Korea are our primary countries of operations.
In Taiwan, we have received tax exemptions from the government that are valid for a number
of years and for certain income streams relating to the expansion of production capacity or the development of new
26
technologies. We also receive significant amounts of tax credits for applicable research and development expenses incurred in Korea. Because of these and other tax benefits, the
effective tax rates of our Taiwan and Korea operations have been lower than statutory tax rates. See Risk Factors Our business depends on the support of the Taiwanese and South Korean governments, and a decrease in this support may
increase our tax liabilities and decrease our net income for the risks relating to our ability to enjoy favorable tax policies of the Taiwanese and Korean governments.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States.
The preparation of our consolidated
financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going
basis, including those related to product returns and pricing allowances, allowances for doubtful accounts, inventories, business combinations, goodwill, long-lived assets, income taxes, litigation and contingencies. We base our estimates and
judgments on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Because our estimates may vary in each situation, our actual results may differ from our
estimates under different assumptions and conditions.
Our management considers the following factors in reviewing our financial
statements:
|
|
|
the selection of critical accounting policies; and
|
|
|
|
the judgments and other uncertainties affecting the application of those critical accounting policies.
|
The selection of critical accounting policies, the judgments and other uncertainties affecting the application of those policies and the
sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 2 to our consolidated financial
statements included elsewhere in this annual report.
We believe the following critical accounting policies affect our more significant
judgments used in the preparation of our financial consolidated statements.
Revenue recognition
. Revenue from product sales are
generally recognized upon shipment to the customer provided that we have received a signed purchase order, the price has been fixed or is determinable, transfer of title has occurred in accordance with the shipping terms specified in the arrangement
with the customer, collectability from the customer is considered reasonably assured, product returns are reasonably estimable and there are no remaining significant obligations or customer acceptance requirements. Revenue on development service
orders is generally recognized upon completion and customer acceptance of contractually agreed milestones.
We record reserves to cover
the estimated returns from our customers. Certain of our distributors have limited rights of return and price protection rights on unsold inventory. The return rights are generally limited to five percent of the monetary value of products purchased
within the preceding six months, provided the distributor places a corresponding restocking order of equal or greater value. The allowance for sales returns for distributors and all customers is recorded at the time of sale based on historical
returns information available, managements judgment and any known factors at the time the financial statements are prepared that would significantly affect the allowance. However, because of the inherent nature of estimates, actual returns and
allowances could be significantly different from our estimates. To the extent rates of return change, our estimates for the reserves necessary to cover such returns would also change which could have a negative impact on our
27
recorded revenue and gross margin. We reserved approximately US$1.3 million, US$1.6 million and US$1.7 million in 2013, 2014 and 2015, respectively, for estimated sales returns and
discounts, representing approximately 0.6%, 0.5% and 0.5% of our gross sales for those respective periods.
Occasionally, we have reduced
our product pricing due to market conditions, competitive considerations and other factors. Price protection rights are granted to certain distributors under our distribution agreements. When we reduce the price of our products, price protection
allows the distributor to claim a credit against its outstanding accounts receivable balances based on the new price of the inventory it has on hand as of the date of the price reduction. A reserve for price adjustments is recorded at the time of
sale based on our historical experience. The amount of our reserve for price adjustments to distributors is minimal.
Allowance for
doubtful accounts.
We record an allowance for doubtful accounts based on our evaluation of the collectability of our accounts receivable. Normal payment terms are provided to customers and applied upon transfer of title. On an ongoing basis, we
analyze the payment history of customer accounts, including recent customer purchases. In circumstances where we are aware of a specific customers inability to meet its financial obligations to us, we record a specific allowance against
amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other accounts receivable due from customers, we categorize accounts receivable and make provisions based on a percentage of each
category. We determine these percentages by examining our historical collection experience and current trends in the credit quality of our customers as well as our internal credit policies. If the financial condition of our customers or economic
conditions in general were to deteriorate, additional allowances may be required in the future and such additional allowances would increase our operating expenses and therefore reduce our operating income and net income.
Our allowance for trade-related doubtful accounts were approximately US$1.3 million, US$1.2 million and US$0.8 million as of December 31,
2013, 2014 and 2015, respectively, representing approximately 3.8%, 3.7% and 1.3% of our gross accounts receivables at the end of each respective periods.
Inventory valuation.
We value inventories at the lower of cost or market value. Inventories are recorded at standard cost and adjusted
to the approximate weighted-average cost at the balance sheet date. Market value represents the current replacement cost for raw materials, finished goods and work in process. We write down our inventory for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those we projected,
additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are
recoverable. In estimating our reserves for obsolescence, we primarily evaluate estimates based on the timing of the introduction of our new products and the quantities remaining of our old products and write down the value of inventory on hand in
excess of the estimated demand. We wrote down US$2.5 million, US$4.6 million and US$2.5 million in 2013, 2014 and 2015, respectively, for estimated obsolete or unmarketable inventory.
Stock-based compensation.
All share-based payments, including grants of stock options and restricted stock units, are recognized in our
financial statements based upon their respective grant date fair values.
Calculating the fair value of stock option awards at the date of
grant requires the use of an appropriate valuation model and judgment. We use the Black-Scholes valuation formula to estimate the fair value of employee stock options. The Black-Scholes formula requires the use of input assumptions, including
expected volatility, expected term, expected dividend rate and expected risk-free rate of return. Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on historical
volatilities of our ADS prices. We estimated our options expected terms using our best estimate of the period of time from the grant date that we expect the options to remain outstanding. If we determined that another method for estimating
expected volatility or expected term is more reasonable than our current methods, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value
28
calculated for future stock option awards could change significantly from those used for past awards, even if the critical terms of the awards were similar. Higher volatility and expected term
will result in an increase to the fair value of stock option awards at the date of grant. The expected dividend rate and expected risk-free rate of return are not as significant to the calculation of fair value. Stock option awards are expensed over
the requisite service period of the individual grantees, which generally equals the vesting period.
Valuation of long-lived assets and
intangible assets with finite useful life.
We evaluate the recoverability of long-lived assets and intangible assets whenever events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a
long-lived asset is considered impaired when the sum of the anticipated undiscounted cash flows from such asset is separately identifiable and is less than the carrying value. If impairment occurs, a loss based on the excess of carrying value over
the fair market value of the long-lived asset is recognized. Fair market value is determined by reference to quoted market prices, if available, or discounted cash flows, as appropriate. The impairment evaluations and the estimate of fair market
value involve management estimates of assets useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management. This could have a material effect on our operating results and financial
condition. No impairment losses were recognized in 2013, 2014 and 2015.
Business combinations.
When we acquire businesses, we
allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates
in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on historical experience and information obtained from the management of the acquired companies. These
estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the synergistic benefits expected to be derived from the acquired business.
These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates.
Goodwill.
We record goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible
assets acquired.
We measure and test goodwill on an annual basis or more frequently if we believe indicators of impairment exist. Our
impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We determined that our reporting units are equivalent to our operating segments or components of an operating segment for
the purposes of completing our impairment test. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. In computing fair value of our reporting units, we
use estimates of future revenues, costs and cash flows from such units. The second step, if necessary, measures the amount of such impairment by comparing the implied fair value of goodwill to its carrying value. If the carrying amount of goodwill
exceeds its implied fair value, an impairment loss is recognized equal to that excess.
In 2013, 2014 and 2015, no impairment charges were
recorded. The assessment was based upon a discounted cash flow analysis and analysis of our market capitalization. The estimate of cash flow was based upon, among other things, certain assumptions about expected future operating performance such as
revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We based our fair value estimates on
assumptions we believed to be reasonable but that are unpredictable and inherently uncertain. The long-term financial forecast represented the best estimate that we had at that time and we believed that its underlying assumptions were reasonable.
However, actual performance in the near-term and longer-term could be materially different from the forecast, which could impact future estimates of fair value of our reporting units and may result in a charge to earnings in future periods due to
the potential for further write-down of goodwill in connection with future impairment tests.
29
Accounting for income taxes.
In preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future
taxable income within the relevant jurisdiction and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. The total amount of valuation allowance as of December 31, 2013, 2014 and 2015 was US$16.3
million, US$16.8 million and US$19.0 million, respectively. We provide for a valuation allowance to the extent we believe that it is more likely than not that the deferred tax assets will not be recovered from future taxable income. Realization of
the future tax benefits related to the deferred tax assets is dependent on many factors, including our ability to generate taxable income within the period during which the temporary differences reverse, the outlook for the economic environment in
which we operate, and the overall future industry outlook. Should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an additional allowance for the deferred tax asset would be charged to
income in the period the determination was made.
We utilize a two-step approach to recognizing and measuring uncertain tax positions. The
first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The total amount of unrecognized tax benefits as of December 31, 2013, 2014 and
2015 was US$5.8 million, US$4.7 million and US$5.6 million, respectively. As of December 31, 2014 and 2015, US$1.7 million and US$2.0 million, respectively, of interest and penalties were accrued. Fiscal years 2007 through 2014 remain
subject to examination by the US Internal Revenue Service. Fiscal years 2009 through 2014 remain subject to examination by other foreign tax jurisdictions. The ultimate outcome of tax matters may differ from our
estimates and assumptions. Unfavorable settlement of any particular issue would require the use of cash and could result in increased income tax expense. Favorable resolution could result in reduced income tax expense. Within the next
12 months, we do not expect that our unrecognized tax benefits would change significantly. See Note 13 to the Consolidated Financial Statements for further information regarding changes in unrecognized tax benefits during 2015.
Litigation and contingencies
. From time to time, we have been subject to legal proceedings and claims relating to intellectual property
rights and other actions arising out of the normal course of business, as well as other matters identified in Legal Proceedings, in Item 8 of this Annual Report. Our success and future revenue growth will depend, in part, on our
ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies. We have been issued patents
and may have additional patents in the future; however, we cannot provide assurance that any patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our technology. In
addition, it is possible that existing or future patents may be challenged, invalidated or circumvented. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop corresponding
technology independently or design around our patents. Effective copyright, trademark and trade secret protection may be unavailable or limited in foreign countries. These disputes may result in costly and time consuming litigation or the license of
additional elements of our intellectual property for free.
It is possible that other companies may pursue litigation with respect to any
claims such companies purport to have against us. The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products that could arise in
the future, we could be required to obtain licenses to the infringed technology, pay substantial damages under applicable laws, cease the use and sale of infringing products or to expend significant resources to develop non-infringing technology.
Litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail.
30
We have been or are currently involved in various claims and legal proceedings and have incurred
certain costs associated with defending litigation matters. Periodically, we review the status of each significant matter and assess the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable
and the amount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based only on the best information available at the time.
Given the uncertainties associated with litigation, if our assessments prove to be wrong, or if additional information becomes available such
that we estimate that there is a possible loss or possible range of losses associated with these contingencies, then we would record the reasonably estimated liability, which could have a material and adverse effect on our operations, financial
condition and cash flows.
Results of Operations
The following table sets forth our statements of operations as a percentage of net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
52.7
|
|
|
|
48.3
|
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
47.3
|
|
|
|
51.7
|
|
|
|
51.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
20.6
|
|
|
|
21.1
|
|
|
|
19.7
|
|
Sales and marketing
|
|
|
6.0
|
|
|
|
5.6
|
|
|
|
5.6
|
|
General and administrative
|
|
|
5.0
|
|
|
|
4.6
|
|
|
|
4.3
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
31.6
|
|
|
|
31.3
|
|
|
|
29.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15.7
|
|
|
|
20.4
|
|
|
|
21.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from disposal of short-term investments
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Unrealized holding gain (loss) on short-term investment
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.5
|
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
Foreign exchange gain (loss), net
|
|
|
(0.0
|
)
|
|
|
(0.2
|
)
|
|
|
0.0
|
|
Other income (loss), net
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
16.5
|
|
|
|
20.9
|
|
|
|
21.7
|
|
Income tax expense
|
|
|
4.3
|
|
|
|
5.6
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12.2
|
%
|
|
|
15.3
|
%
|
|
|
16.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014
Net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile storage
|
|
|
241,614
|
|
|
|
84
|
|
|
|
302,910
|
|
|
|
84
|
|
|
|
61,296
|
|
|
|
25
|
|
Mobile communications
|
|
|
40,034
|
|
|
|
14
|
|
|
|
50,896
|
|
|
|
14
|
|
|
|
10,862
|
|
|
|
27
|
|
Others
|
|
|
7,675
|
|
|
|
2
|
|
|
|
7,491
|
|
|
|
2
|
|
|
|
(184
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
289,323
|
|
|
|
100
|
|
|
|
361,297
|
|
|
|
100
|
|
|
|
71,974
|
|
|
|
25
|
|
Our net sales increased 25% year-over-year to approximately US$361.3 million in 2015, primarily because of
increasing mobile storage and mobile communications sales.
Our mobile storage revenue increased 25% year-over-year primarily because of
increasing eMMC and SSD controller sales partially offset by declining expandable storage controller sales. Mobile communications revenue increased 27% primarily because of increasing mobile TV SoC sales.
Gross profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Gross profit
|
|
|
149,698
|
|
|
|
52
|
|
|
|
184,532
|
|
|
|
51
|
|
|
|
34,834
|
|
|
|
23
|
|
Gross profit as a percentage of net sales decreased to 51% in 2015 as compared to 2014 primarily because of
lower gross margin mobile communications product sales. Our gross profit excluding obsolete and unmarketable inventory write-downs as a percentage of revenue decreased from 53% in 2014 to 52% in 2015.
Research and development expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Salary and benefits
|
|
|
31,356
|
|
|
|
11
|
|
|
|
39,925
|
|
|
|
11
|
|
|
|
8,569
|
|
|
|
27
|
|
Stock-based compensation
|
|
|
6,773
|
|
|
|
2
|
|
|
|
6,565
|
|
|
|
2
|
|
|
|
(208
|
)
|
|
|
(3
|
)
|
Other research and development
|
|
|
22,820
|
|
|
|
8
|
|
|
|
24,671
|
|
|
|
7
|
|
|
|
1,851
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
60,949
|
|
|
|
21
|
|
|
|
71,161
|
|
|
|
20
|
|
|
|
10,212
|
|
|
|
17
|
|
Our research and development expenses increased 17% year-over-year to approximately US$71.2 million in
2015. Salary and benefits increased 27% year-over-year to approximately US$39.9 million, primarily because of more headcount and compensation expenses in 2015. Stock-based compensation decreased 3% year-over-year to approximately US$6.6
million. Other research and development expenses increased 8% year-over-year to approximately US$24.7 million, primarily because of higher IC tape-out and other project expenses in 2015.
32
Sales and marketing expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Salary and benefits
|
|
|
9,453
|
|
|
|
3
|
|
|
|
12,494
|
|
|
|
3
|
|
|
|
3,041
|
|
|
|
32
|
|
Stock-based compensation
|
|
|
1,746
|
|
|
|
1
|
|
|
|
1,790
|
|
|
|
1
|
|
|
|
44
|
|
|
|
3
|
|
Other sales and marketing
|
|
|
5,125
|
|
|
|
2
|
|
|
|
5,889
|
|
|
|
2
|
|
|
|
764
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
16,324
|
|
|
|
6
|
|
|
|
20,173
|
|
|
|
6
|
|
|
|
3,849
|
|
|
|
24
|
|
Our sales and marketing expenses increased 24% year-over-year to approximately US$20.2 million in
2015. Salary and benefits increased 32% year-over-year to approximately US$12.5 million, primarily because of more headcount and compensation expenses in 2015. Stock-based compensation increased 3% year-over-year to approximately US$1.8 million
in 2015. Other sales and marketing expenses increased 15% year-over-year to approximately US$5.9 million primarily because of more travel expenses in 2015.
General and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Salary and benefits
|
|
|
7,933
|
|
|
|
3
|
|
|
|
8,568
|
|
|
|
2
|
|
|
|
635
|
|
|
|
8
|
|
Stock-based compensation
|
|
|
1,546
|
|
|
|
1
|
|
|
|
1,802
|
|
|
|
1
|
|
|
|
256
|
|
|
|
17
|
|
Other general and administrative
|
|
|
3,876
|
|
|
|
1
|
|
|
|
5,344
|
|
|
|
1
|
|
|
|
1,468
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
13,355
|
|
|
|
5
|
|
|
|
15,714
|
|
|
|
4
|
|
|
|
2,359
|
|
|
|
18
|
|
Our general and administrative expenses increased 18% year-over-year to approximately US$15.7 million in
2015. Salary and benefits increased 8% year-over-year to approximately US$8.6 million, primarily because of more headcount and compensation expenses in 2015. Stock-based compensation increased 17% year-over-year to approximately US$1.8 million
in 2015. Other general and administrative expenses increased 38% year-over-year to approximately US$5.3 million primarily because of more professional service fees in 2015.
Stock-based compensation.
The following table presents details of total stock-based compensation expense that is included in each functional line item in our
consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Cost of sales
|
|
|
282
|
|
|
|
|
|
|
|
261
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
(7
|
)
|
Research and development
|
|
|
6,773
|
|
|
|
2
|
|
|
|
6,565
|
|
|
|
2
|
|
|
|
(208
|
)
|
|
|
(3
|
)
|
Sales and marketing
|
|
|
1,746
|
|
|
|
1
|
|
|
|
1,790
|
|
|
|
1
|
|
|
|
44
|
|
|
|
3
|
|
General and administrative
|
|
|
1,546
|
|
|
|
1
|
|
|
|
1,802
|
|
|
|
1
|
|
|
|
256
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
10,347
|
|
|
|
4
|
|
|
|
10,418
|
|
|
|
4
|
|
|
|
71
|
|
|
|
1
|
|
Total stock-based compensation increased 1% primarily because of higher RSU expenses in 2015.
33
See Note 15 of Notes to Consolidated Financial Statements for a discussion of activity related to
share-based awards.
Amortization of intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, expect percentage data)
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
1,051
|
|
|
|
|
|
|
|
1,051
|
|
|
|
100
|
|
Our amortization of intangible asset increased 100% year-over-year to approximately US$1.1 million because of
amortization of intangible assets relating to our acquisitions of Shannon Systems in July 2015.
Interest income
. Our interest
income decreased to approximately US$2.0 million for the year ended December 31, 2015 from approximately US$2.2 million for the year ended December 31, 2014.
Interest expense.
Our interest expense decreased to approximately US$47 thousand for the year ended December 31, 2015 from
approximately US$114 thousand for the year ended December 31, 2014.
Foreign exchange gain (loss)
. For the year ended
December 31, 2015, we had a foreign exchange gain of less than US$0.1 million compared to the foreign exchange loss of approximately US$0.6 million for the year ended December 31, 2014. We do not engage in any hedging activities.
Income tax expense (benefit)
. Our income tax expense was approximately US$18.2 million for the year ended December 31, 2015
compared to an income tax expense of approximately US$16.1 million for the year ended December 31, 2014.
Net income (loss)
.
Net income was approximately US$60.3 million for the year ended December 31, 2015 compared to a net income of approximately US$44.5 million for the year ended December 31, 2014.
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
Net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile storage
|
|
|
185,488
|
|
|
|
82
|
|
|
|
241,614
|
|
|
|
84
|
|
|
|
56,126
|
|
|
|
30
|
|
Mobile communications
|
|
|
31,022
|
|
|
|
14
|
|
|
|
40,034
|
|
|
|
14
|
|
|
|
9,012
|
|
|
|
29
|
|
Others
|
|
|
8,798
|
|
|
|
4
|
|
|
|
7,675
|
|
|
|
2
|
|
|
|
(1,123
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
225,308
|
|
|
|
100
|
|
|
|
289,323
|
|
|
|
100
|
|
|
|
64,015
|
|
|
|
28
|
|
Our net sales increased 28% year-over-year to approximately US$289.3 million in 2014, primarily because of
increasing mobile storage and mobile communications sales.
Our mobile storage revenue increased 30% year-over-year primarily because of
increasing eMMC and SSD controller sales partially offset by declining expandable storage controller sales. Mobile communications revenue increased 29% because of increasing mobile TV SoC sales.
34
Gross profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Gross profit
|
|
|
106,610
|
|
|
|
47
|
|
|
|
149,698
|
|
|
|
52
|
|
|
|
43,088
|
|
|
|
40
|
|
Gross profit as a percentage of net sales increased to 52% in 2014 as compared to 2013 primarily because of a
higher mix of higher gross margin embedded storage product sales. Our gross profit excluding obsolete and unmarketable inventory write-downs as a percentage of revenue increased from 48% in 2013 to 53% in 2014.
Research and development expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Salary and benefits
|
|
|
19,333
|
|
|
|
9
|
|
|
|
31,356
|
|
|
|
11
|
|
|
|
12,023
|
|
|
|
62
|
|
Stock-based compensation
|
|
|
6,351
|
|
|
|
3
|
|
|
|
6,773
|
|
|
|
2
|
|
|
|
422
|
|
|
|
7
|
|
Other research and development
|
|
|
20,776
|
|
|
|
9
|
|
|
|
22,820
|
|
|
|
8
|
|
|
|
2,044
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
46,460
|
|
|
|
21
|
|
|
|
60,949
|
|
|
|
21
|
|
|
|
14,489
|
|
|
|
31
|
|
Our research and development expenses increased 31% year-over-year to approximately US$60.9 million in
2014. Salary and benefits increased 62% year-over-year to approximately US$31.4 million, primarily because of more headcount and compensation expenses in 2014. Stock-based compensation increased 7% year-over-year to approximately US$6.8
million, primarily because of more RSU cost in 2014. Other research and development expenses increased 10% year-over-year to approximately US$22.8 million, primarily because of higher IC
tape-out
and
other project expenses in 2014.
Sales and marketing expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Salary and benefits
|
|
|
7,411
|
|
|
|
3
|
|
|
|
9,453
|
|
|
|
3
|
|
|
|
2,042
|
|
|
|
28
|
|
Stock-based compensation
|
|
|
2,197
|
|
|
|
1
|
|
|
|
1,746
|
|
|
|
1
|
|
|
|
(451
|
)
|
|
|
(21)
|
|
Other sales and marketing
|
|
|
3,989
|
|
|
|
2
|
|
|
|
5,125
|
|
|
|
2
|
|
|
|
1,136
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
13,597
|
|
|
|
6
|
|
|
|
16,324
|
|
|
|
6
|
|
|
|
2,727
|
|
|
|
20
|
|
Our sales and marketing expenses increased 20% year-over-year to approximately US$16.3 million in
2014. Salary and benefits increased 28% year-over-year to approximately US$9.5 million, primarily because of more headcount and compensation expenses in 2014. Stock-based compensation decreased 21% year-over-year to approximately US$1.7
million, primarily because of less RSU cost in 2014 expenses. Other sales and marketing expenses increased 28% year-over-year to approximately US$5.1 million primarily because of more travel expenses and testing fees in 2014.
35
General and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Salary and benefits
|
|
|
6,330
|
|
|
|
3
|
|
|
|
7,933
|
|
|
|
3
|
|
|
|
1,603
|
|
|
|
25
|
|
Stock-based compensation
|
|
|
1,406
|
|
|
|
1
|
|
|
|
1,546
|
|
|
|
1
|
|
|
|
140
|
|
|
|
10
|
|
Other general and administrative
|
|
|
3,514
|
|
|
|
1
|
|
|
|
3,876
|
|
|
|
1
|
|
|
|
362
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
11,250
|
|
|
|
5
|
|
|
|
13,355
|
|
|
|
5
|
|
|
|
2,105
|
|
|
|
19
|
|
Our general and administrative expenses increased 19% year-over-year to approximately US$13.4 million in
2014. Salary and benefits increased 25% year-over-year to approximately US$7.9 million, primarily because of more headcount and compensation expenses in 2014. Stock-based compensation increased 10% year-over-year to approximately US$1.5
million, primarily because of more RSU cost in 2014.
Stock-based compensation.
The following table presents details of total stock-based compensation expense that is included in each functional line item in our
consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
% of net sales
|
|
|
US$
|
|
|
% of net sales
|
|
|
$ change
|
|
|
% change
|
|
|
|
(in thousands, except percentage data)
|
|
Cost of sales
|
|
|
308
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
(8
|
)
|
Research and development
|
|
|
6,351
|
|
|
|
3
|
|
|
|
6,773
|
|
|
|
2
|
|
|
|
422
|
|
|
|
7
|
|
Sales and marketing
|
|
|
2,197
|
|
|
|
1
|
|
|
|
1,746
|
|
|
|
1
|
|
|
|
(451
|
)
|
|
|
(21
|
)
|
General and administrative
|
|
|
1,406
|
|
|
|
1
|
|
|
|
1,546
|
|
|
|
1
|
|
|
|
140
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
10,262
|
|
|
|
5
|
|
|
|
10,347
|
|
|
|
4
|
|
|
|
85
|
|
|
|
1
|
|
Total stock-based compensation increased 1% primarily because of higher RSU cost in 2014.
See Note 15 of Notes to Consolidated Financial Statements for a discussion of activity related to share-based awards.
Interest income
. Our interest income increased to approximately US$2.2 million for the year ended December 31, 2014 from
approximately US$1.8 million for the year ended December 31, 2013 because of higher levels of cash and cash equivalents.
Interest
expense.
Our interest expense increased to approximately US$114 thousand for the year ended December 31, 2014 from approximately US$110 thousand for the year ended December 31, 2013.
Foreign exchange gain (loss)
. For the year ended December 31, 2014, we had a foreign exchange loss of approximately US$0.6 million
for the year ended December 31, 2014 compared to the foreign exchange loss of less than US$0.1 million for the year ended December 31, 2013. We do not engage in any hedging activities.
Income tax expense (benefit)
. Our income tax expense was approximately US$16.1 million for the year ended December 31, 2014
compared to an income tax expense of approximately US$9.8 million for the year ended December 31, 2013.
Net income (loss)
.
Net income was approximately US$44.5 million for the year ended December 31, 2014 compare to a net income of approximately US$27.4 million for the year ended December 31, 2013.
36
Liquidity and Capital Resources
As of December 31, 2015, we had approximately US$180.5 million in cash and cash equivalents and approximately US$4.7 million in short-term
investments. We maintain our cash balances in bank deposits and in money market instruments. We do not engage in any currency hedging activities. Our short-term investments consist primarily of bond funds and senior notes that we trade.
We believe our existing cash balances and short-term investments, together with cash we expect to generate from operating activities, will be
sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including the level of our net sales, the timing and extent of spending to support product development
efforts, the expansion of sales and marketing activities, the timing of introductions of new products, the costs to ensure access to adequate manufacturing capacity, the continuing market acceptance of our products, availability of attractive
acquisition opportunities, dividend payments, and share repurchases. We could be required, or could elect, to seek additional funding through public or private equity or debt financing, and additional funds may not be available on terms acceptable
to us or at all.
The following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Consolidated Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
49,128
|
|
|
|
68,725
|
|
|
|
65,946
|
|
Net cash used in investing activities
|
|
|
(12,815
|
)
|
|
|
(15,413
|
)
|
|
|
(58,414
|
)
|
Net cash used in financing activities
|
|
|
(29,493
|
)
|
|
|
(19,710
|
)
|
|
|
(20,271
|
)
|
Depreciation and amortization
|
|
|
6,429
|
|
|
|
6,917
|
|
|
|
8,987
|
|
Capital expenditures
|
|
|
(12,772
|
)
|
|
|
(11,596
|
)
|
|
|
(23,664
|
)
|
Operating activities
Our net cash provided by operating activities was approximately US$65.9 million for the year ended December 31, 2015, compared to net cash
provided by operating activities of approximately US$68.7 million and US$49.1 million during 2014 and 2013, respectively.
For the
year ended December 31, 2015, cash flow provided by operations of US$65.9 million resulted primarily from our net income of US$60.3 million and the following reasons:
|
|
|
Our net income includes substantial non-cash charges, namely US$9.0 million of depreciation and amortization and US$10.4 million of stock-based compensation.
|
|
|
|
We reduced working capital by US$14.6 million. Inventory increased by US$0.4 million, notes and accounts receivable increased by US$29.2 million, notes and accounts payable increased by US$7.7 million, income
tax payable decreased by US$4.3 million, and other assets net of other liabilities provided US$11.6 million of cash.
|
For
the year ended December 31, 2014, cash flow provided by operations of US$68.7 million resulted primarily from our net income of US$44.5 million and the following reasons:
|
|
|
Our net income includes substantial non-cash charges, namely US$6.9 million of depreciation and amortization and US$10.3 million of stock-based compensation.
|
|
|
|
We increased working capital by US$6.5 million due to increasing sales. Inventory increased by US$10.4 million, notes and accounts receivable decreased by US$2.4 million, notes and accounts payable decreased
by US$0.4 million, income tax payable increased by US$9.5 million, and other assets net of other liabilities provided US$5.4 million of cash.
|
37
Investing activities
Our net cash used in investing activities was approximately US$58.4 million for the year ended December 31, 2015, compared to net cash
used in investing activities of approximately US$15.4 million for the year ended December 31, 2014. In 2015, we paid $30.3 million for the acquisition of Shannon Systems and paid US$14.9 million to purchase additional facilities in Hsinchu,
Taiwan and Shanghai, China.
Our net cash used in investing activities was approximately US$15.4 million for the year ended
December 31, 2014, compared to net cash used in investing activities of approximately US$12.8 million for the year ended December 31, 2013. In 2014, we increased restricted cash by US$3.8 million, which was used as collateral for obtaining
additional semiconductor fabrication capacity.
Financing activities
Our net cash used in financing activities was approximately US$20.3 million for the year ended December 31, 2015, compared to net cash
used by financing activities of approximately US$19.7 million for the year ended December 31, 2014. Our cash used in financing activities in 2015 was primarily for US$20.8 million of dividend payments.
Our net cash used in financing activities was approximately US$19.7 million for the year ended December 31, 2014, compared to net cash
used by financing activities of approximately US$29.5 million for the year ended December 31, 2013. Our cash used in financing activities in 2014 was primarily for US$20.2 million of dividend payments.
Contractual Obligations
The following
table sets forth our commitments to settle contractual obligations in cash as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Maturing by Year
|
|
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More Than
5 Years
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Operating leases
|
|
|
3,321
|
|
|
|
1,771
|
|
|
|
1,366
|
|
|
|
184
|
|
|
|
|
|
Capital leases
|
|
|
6
|
|
|
|
4
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
2,031
|
|
|
|
2,031
|
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
Long-term payable
|
|
|
348
|
|
|
|
270
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
5,735
|
|
|
|
|
|
|
|
|
|
|
|
5,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual cash obligations
|
|
|
11,441
|
|
|
|
4,076
|
|
|
|
1,446
|
|
|
|
5,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Our pension obligation after one year has not been estimated.
|
We increased long-term taxes
payable of US$984 thousand related to uncertain tax positions as of December 31, 2015. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the
timing and outcome of a potential tax audit.
Off-balance Sheet Arrangements
We currently do not have any outstanding derivative financial instruments, off-balance sheet guarantees or arrangements, interest rate swap
transactions, or foreign currency forward contracts. We do not engage in any trading activities involving non-exchange traded contracts.
38
Recent Accounting Pronouncements
In April 10, 2014, the FASB issued an accounting update, which changes the criteria for reporting discontinued operations for all public
and nonpublic entities. The guidance requires only disposals that represent a strategic shift that has (or will have) a major effect on the entitys results and operations would qualify as discontinued operations. The guidance also requires
entities 1) to expand their disclosures about discontinued operations to include more information about assets, liabilities, income, and expenses and 2) to disclose the pre-tax income attributable to a disposal of of an individually
significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The guidance is effective for fiscal years beginning after December 15, 2014 and early adoption is prohibited.
The adoption of this guidance did not have a material impact on the Companys results of operations, financial position or cash flow.
In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a
customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires disclosure of the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued an amendment to defer the effective date. The new standard is effective for fiscal years beginning after December 15,
2017 and early adoption is permitted for annual reporting periods beginning after December 15, 2016. In March and April 2016, the FASB issued two accounting updates to clarify the implementation guidance on principal versus agent considerations,
performance obligations and the licensing. The new guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial
application. The Company is in the process of evaluating this guidance to determine the impact it will have on the consolidated financial statements.
In June 2014, the FASB issued an accounting update, which clarifies the accounting for share-based payments. The guidance requires that a
performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. The guidance is effective for fiscal years beginning after December 15, 2015 and early adoption is
permitted. The adoption of this guidance is not expected to have a material impact on the Companys results of operations, financial position or cash flow.
In August 2014, the FASB issued new standard related to the presentation of financial statements when there may be conditions or events that
raise substantial doubt about the entitys ability to continue as a going concern. This standard sets forth managements responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as
a going concern, and if so, to provide related footnote disclosures. The standard is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. The adoption of this guidance is not expected to have a material
impact on the Companys results of operations, financial position or cash flow.
In February 2015, the FASB issued an accounting
update to amend the consolidation analysis. All legal entities are subject to reevaluation under the revised consolidation model. The amendment is effective for fiscal years beginning after December 15, 2015 and early adoption is permitted. The
adoption of this amendment is not expected to have a material impact on the Companys results of operations, financial position or cash flow.
In April 2015, the FASB issued an accounting update regarding the measurement date of a defined benefit obligation and plan assets. The
amendment permits the entity with a fiscal year-end that does not coincide with a month-end to measure defined benefit plan assets and obligations using the month-end that is closest to the entitys fiscal year-end. If a contribution or
significant event (such as a plan amendment, settlement, or curtailment that calls for a remeasurement in accordance with existing requirements) occurs between the month-end date used to measure defined benefit plan assets and obligations and an
entitys fiscal year-end, the entity should adjust the measurement of defined benefit plan assets and obligations to reflect the effects of those contributions or significant events. This amendment is effective for fiscal years beginning after
December 15,
39
2016 and early application is permitted. The adoption of this amendment is not expected to have a material impact on the Companys results of operations, financial position or cash flow.
In May 2015, the FASB issued an accounting update regarding disclosures for investments that calculate net asset value per share. The
amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Instead, an entity is required to include those investments as
a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Further, the amendment removes the requirement to make certain disclosures for all investments that are
eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using the practical expedient. The
amendment is effective for fiscal years beginning after December 15, 2015. The amendment must be applied retrospectively and early adoption is permitted. The adoption of this amendment is not expected to have a material impact on the Companys
financial statement disclosure.
In July 2015, the FASB issued an accounting update to simplify the measurement of inventory. The
amendment requires the measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. The amendment applies to inventories for which cost is determined by methods other than the last-in first-out and the retail inventory methods. This amendment is effective prospectively for annual periods beginning after December 15,
2016 and early application is permitted. The adoption of this amendment is not expected to have a material impact on the Companys results of operations, financial position or cash flow.
In September 2015, the FASB issued an accounting update regarding simplifying the accounting for measurement period adjustments attributable
to an acquisition. The amendment requires an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adjustments should
reflect the impact on earnings of changes in depreciation, amortization, or other income effects, if any, as if the accounting had been completed as of the acquisition date. Additionally, amounts recorded in the current period that would have been
reflected in prior reporting periods if the adjustments had been recognized as of the acquisition date must be disclosed either on the face of the income statement or in the notes to financial statements. This amendment is effective prospectively
for annual periods beginning after December 15, 2015 and early application is permitted. The adoption of this guidance is not expected to have a material effect on the Companys financial condition, results of operations, cash flow and
financial statement disclosures.
In November 2015, the FASB issued an accounting update to simplify the presentation of deferred income
taxes. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected by the amendments in this guidance. This amendment is effective prospectively or retrospectively for annual periods beginning after December 15, 2016 and early application is
permitted. The Company has elected to adopt the amendment as of December 31, 2015, and the retrospective adoption is applied to prior reporting period presented. The adoption of this amendment did not have a material impact on the Companys
financial position.
Prior to the adoption, noncurrent deferred income tax assets and current deferred income tax liabilities for the year
ended December 31, 2014 are US$1,909 thousand and US$388 thousand, respectively. To early adopt ASU 2015-17, the Company has reclassified current deferred income tax liabilities of US$388 thousand to noncurrent deferred tax liabilities by presenting
against the noncurrent deferred income tax assets of US$1,909 thousand. After the adjustment, the noncurrent deferred income tax assets are US$1,521 thousand as of December 31, 2014.
40
In February 2016, the FASB issued a new standard regarding leases. The new standard requires an
entity to recognize assets and liabilities arising from a lease for both financing and operating leases other than that the entity elects the short-term lease recognition and measurement exemption. Qualitative and quantitative disclosures will be
enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. This standard is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is in the process of
evaluating this guidance to determine the impact it will have on the consolidated financial statements.
In March 2016, the FASB issued an
accounting update to simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. The amendment is effective for fiscal years beginning after December 15, 2016, and earlier adoption is permitted. The Company is currently evaluating the impact that the adoption will have on its results of operations, financial position,
cash flow and disclosures.
I
TEM
6.
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D
IRECTORS
, S
ENIOR
M
ANAGEMENT
AND
E
MPLOYEES
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Executive Officers and Directors
Members
of our board of directors are elected by our shareholders. Our board of directors consists of seven directors.
Our executive officers are
appointed by, and serve at the discretion of, our board of directors. The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
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Name
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Age
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Position
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James Chow
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65
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Chairman of the Board
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Wallace C. Kou
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57
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President, Chief Executive Officer and Director
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Steve Chen
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44
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Director
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Tsung-Ming Chung
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66
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Director
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Lien-Chun Liu
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58
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Director
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Yung-Chien Wang
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53
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Director
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Han-Ping D. Shieh
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62
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Director
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Riyadh Lai
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47
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Chief Financial Officer
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Nelson Duann
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47
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Senior VP of Marketing & OEM Business, Mobile Storage
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Gihyun Bae
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57
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Senior VP and General Manager, SMK
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Sangwoo Han
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47
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Senior VP and General Manager, Mobile Communications
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Xueshi Yang
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39
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Senior VP and General Manager, Shannon Systems
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Arthur Yeh
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55
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VP of Sales, Mobile Storage
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Robert Fan
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52
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VP and General Manager, SMI U.S.
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John (Chun-O) Kim
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55
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VP of Sales, Mobile Communications
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David Yu
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41
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VP of Sales & Marketing, Shannon Systems
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Frank Chang
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50
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VP of R&D, Mobile Storage
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Ken Chen
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54
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VP of Operations
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Kevin Yeh
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52
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VP of R&D, Algorithm & Technology
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John (Jong Ryul) Lee
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52
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VP of R&D, Mobile Communications
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Derek Zhou
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39
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VP of R&D, Shannon Systems
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Jason Chiang
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48
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VP of HR and Administration, and Special Assistant to CEO
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Frank Shu
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59
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VP of R&D, Verification Engineering & Compatibility Test
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41
Executive Officers and Directors
James Chow, Chairman of the Board of Directors
Mr. Chow has served as the Chairman of our board of directors since April 2005. Mr. Chow has been the Chairman of Concord Financial
Co., Ltd. since 1993. Concord Financial Co., Ltd. is an investment holding company and was one of our significant shareholders. Mr. Chow has an MBA from Columbia University.
Wallace C. Kou, President, Chief Executive Officer, Director
Mr. Kou founded Silicon Motion in 1995 and has been our President and Chief Executive Officer since our founding. Prior to founding
Silicon Motion, Mr. Kou was the Vice President and Chief Architect at the Multimedia Products Division of Western Digital Corporation, which developed graphics processors for notebook PCs and was sold to Philips Semiconductor in 1995. Before
Western Digital, Mr. Kou worked for Wyse Technology. Mr. Kou has a BS in Electrical & Control Engineering from the National Chiao Tung University in Taiwan and an MS in Electrical & Computer Engineering from the
University of California at Santa Barbara.
Steve Chen, Director
Mr. Chen joined our board of directors in 2012. Mr. Chen is the chairman of Mercuries Co., Ltd.. Mr. Chen has two Master of
Engineering degrees from Cornell University.
Tsung-Ming Chung, Director
Mr. Chung joined our board of directors in June 2005. Mr. Chung is the Chairman of Dynapack International Technology Corp, a leading
provider of battery packs for notebook PCs and tablets. From 1985 to 2000, Mr. Chung was an audit partner at Arthur Andersen. He is also a director at Far East International Bank and Taiwan Mobile Corporation. Mr. Chung has a BA in
Business Administration from the National Taiwan University and an MBA from the National Cheng-chi University in Taiwan.
Lien-Chun Liu, Director
Ms. Liu joined our board of directors in June 2005. Ms. Liu is a research fellow at the Taiwan Research Institute. She also
currently serves on the board of supervisors of Concord VIII Venture Capital Co., Ltd, the board of directors of New Tamsui Golf Course, and the international Council of Women. From 2000 to 2004, she also served on the board of supervisors of China
Television Corp. Ms. Liu has a BA from Wellesley College and a JD from Boston College Law School.
Yung-Chien Wang, Director
Mr. Wang joined our board of directors in June 2005. Mr. Wang has over 20 years of working experience in the human resource and legal
services industries. Mr. Wang has been a consultant of Professional Trust Co., Ltd., a human resource consulting firm in Taiwan since August 1998 and is currently its Vice President. Mr. Wang has a law degree from Fu Jen Catholic
University in Taiwan.
Han-Ping D. Shieh, Director
Mr. Shieh is currently a National Chiao Tung University Chair professor and teaches at the Display Institute and Department of Photronics,
National Chiao Tung University, Taiwan. He also serves as a Vice Chancellor of the University System of Taiwan. Mr. Shieh was a Changjiang Scholar at Shanghai Jiao Tong University in 2010, Senior Vice President from 2011 to 2013 and Dean of the
College of Electrical & Computer Engineering from 2006 to 2010 at National Chiao Tung University, and was a Research Staff Member at IBM Thomas J. Watson Research Center from 1988 to 1992. He is currently on the Board of Directors at Young
Optics, Jia-
42
Chang Co., First Panel Co., and Tianma Microelectronics and is a Fellow of the Institute of Electrical and Electronics Engineers (IEEE), Optical Society of America, and Society for Information
Display. Mr. Shieh received his PhD in Electrical & Computer Engineering from Carnegie Mellon University.
Riyadh Lai, Chief Financial Officer
Mr. Lai joined us in April 2007 from ING Corporate Finance, Asia, where he was the Head of the Technology Group. Previously, he
was also an investment banker at Morgan Stanley and ABN AMRO and finance manager at PepsiCo in Hong Kong and New York. Mr. Lai has over two decades of finance and financial management experience. He has a BA in Economics from Georgetown
University and an MBA from New York University.
Nelson Duann, Senior VP of Marketing & OEM Business, Mobile Storage
Mr. Duann became our Senior Vice President in charge of our mobile storage marketing and OEM business in July 2015. He joined Silicon
Motion in August 2007 as a product marketing director and R&D team leader. Mr. Duann has almost 15 years of experience in the semiconductor industry in product design, development and marketing. Prior to Silicon Motion, he worked for Sun
Microsystems Inc., focusing on UltraSPARC micro Processor projects. He has an MS in Communications Engineering from National Chiao Tung University in Taiwan and an MS in Electrical Engineering from Stanford University.
Gihyun Bae, Senior VP and General Manager, SMK
Mr. Bae became our Senior Vice President of Silicon Motion Korea in Jan 2016. He Joined Silicon Motion in January 2015 as a Senior Vice
President for Product Planning and Strategic Business Development. Mr. Bae has 30 years of memory semiconductor experience, including 15 years in the NAND flash industry. Before joining Silicon Motion, he served as Senior Vice President at SK
Hynix in charge of its Flash Solution Development division and spearheaded SK Hynixs very successful eMMC/eMCP sales growth and market share expansion. Prior to this role, Mr. Bae was Senior Vice President of SK Hynixs Flash
Development division, responsible for directing the engineering of several generations of NAND flash technology. Mr. Bae was previously the President of the Korean operations of Anobit, the Israeli controller company. Mr. Bae has a BS in
Electronic Material Engineering from Kyungpook National University.
Sangwoo Han, Senior VP and General Manager, Mobile Communications
Mr. Han became the General Manager of our Mobile Communications product line in July 2008. He was formerly the Chief Technology Officer at
FCI, a company that we acquired in April 2007. Mr. Han joined FCI in 2003 and had been in charge of product design, development, production and marketing. In 1997, he co-founded RF Solutions Inc. in Atlanta, Georgia, which became the Anadigics
Wireless LAN Center of Excellence. Mr. Han has a BS in Electrical Engineering from Carnegie-Mellon University, an MS in Electrical Engineering from the University of Pennsylvania, and a PhD in Electrical Engineering from the Georgia Institute
of Technology.
Xueshi Yang, Senior VP and General Manager, Shannon Systems
Dr. Yang joined us in July 2015 as General Manager of Shannon Systems, our enterprise SSD product line, following our acquisition of this
business. He co-founded Shannon Systems in 2011 and as CEO, led the development and commercialization of enterprise-grade PCIe SSDs that were the industrys first in terms of storage capacity and scalability, ultra-low latency and
low-power envelope. Prior to Shannon, Dr. Yang was the chief architect at Marvell of its first generations of SSD controllers, a research staff at Seagate and postdoctoral researcher at Princeton University. He holds a PhD in Electrical
Engineering from Drexel University and a BS in Electrical Engineering from Tsinghua University in China. Dr. Yang has more than 100 US patents granted or pending relating to SSDs.
43
Arthur Yeh, VP of Sales, Mobile Storage
Mr. Yeh has served as our Vice President in charge of our mobile storage sales since November 2004. Mr. Yeh has over 15 years of
sales experience managing marketing strategies, including product promotions and sales activities for semiconductor products. Mr. Yeh previously served in management positions at VIA Technologies for 10 years and joined us in 2004. Mr. Yeh
holds an MS degree in Management Business Administration from the National Chung Hsing University, Taiwan.
Robert Fan, VP and General Manager, SMI
U.S.
Mr. Fan has served as our Vice President and General Manager of SMI U.S. since May 2013. He manages Silicon
Motions business operations in the U.S. and Europe and has over 20 years of sales and marketing experience. Prior to Silicon Motion, Mr. Fan served in executive management roles at Spansion, Entorian, Berkana Wireless (acquired by
Qualcomm) and Resonext (acquired by RF Micro Devices). He also spent over nine years at Intel in sales, marketing and management positions. Mr. Fan holds a BS in Electrical Engineering from the University of California, Berkeley and MSEE from
Santa Clara University, and completed the General Management Executive Program at McCombs School of Business, University of Texas.
John (Chun-O) Kim,
VP of Sales, Mobile Communications
Mr. Kim became the Vice President of our Mobile Communications product line in July
2008. He was formerly the Vice President of Sales at FCI, a company that we acquired in April 2007. Mr. Kim joined FCI in 2006 and had previously served in management positions at Hewlett-Packards semiconductor division (now Avago
Technologies) and as a CEO of a private company. Mr. Kim has over 16 years of semiconductor sales leadership experience, including managing marketing strategies, product promotions and sales activities. He has an MS in Electrical Engineering
from Ajou University in Korea.
David Yu, VP of Sales & Marketing, Shannon Systems
Mr. Yu joined us in July 2015 as VP of Sales & Marketing of Shannon Systems, our enterprise SSD product line, following our acquisition of
this business. He joined Shannon Systems in 2014 and has been instrumental in managing its rapid sales growth. Previously and for over 10 years, he held sales leadership positions at Infineon and RF Micro Devices in China. He holds an MS
in Management from the University of Ottawa and a BS in Electrical Engineering from Tsinghua University in China.
Frank Chang, VP of R&D, Mobile
Storage
Mr. Chang has served as our Vice President of research and development since 2008. Mr. Chang is head of research and
development for our mobile storage products and has around 20 years of experience in the integrated circuit design industry. He was previously a project manager of firmware development at Holtek Semiconductors. Mr. Chang has a BS in Electrical
Engineering from the National Changhua University of Education in Taiwan.
Ken Chen, VP of Operations
Mr. Chen has served as our Vice President in charge of operations since November 2003. Mr. Chen has over 20 years of manufacturing
and operations experience in the semiconductor industry, managing supply chain and virtual manufacturing systems including wafer fabrication, mask tooling, as well as assembly and testing. Mr. Chen previously served in management positions at
Faraday Technology and UMC, and joined us in 2003. Mr. Chen has a BS in Industrial Engineering from Chung Yuan Christian University in Taiwan and an MS in Industrial Engineering and Engineering Management from the National Tsing Hua University,
Taiwan.
44
Kevin Yeh, VP of R&D, Algorithm & Technology
Mr. Yeh became our Vice President of research and development in August 2012. He joined Silicon Motion in September 2003 as a product
marketing director and then he led the Algorithm and Technology R&D team. Mr. Yeh has more than 20 years of experience in semiconductor product design, development and marketing. Prior to Silicon Motion, Mr. Yeh worked in Taiwan
Semiconductor Manufacturing Company, Neo Magic, VLSI Technology and LSI. Mr. Yeh holds a BS degree in Control Engineering from National Chiao Tung University in Taiwan and an MS degree in Electronic Engineering from Syracuse University.
John (Jong Ryul) Lee, VP of R&D, Mobile Communications
Mr. Lee became the Vice President of our Mobile Communications product line in July 2008. He was formerly the Vice President of R&D at
FCI, a company that we acquired in April 2007. Mr. Lee joined FCI in 2000 and had been in charge of product design, development, production and quality systems. In 2013, he became a director of the Semiconductor & Device Society of The
Institute of Electronics Engineers of Korean (IEEK). He was previously a senior engineer at the Electronics and Telecommunications Research Institute (ETRI) in Korea. Mr. Lee has a BS and an MS in Electronics Engineering from Chung Ang
University in Korea.
Derek Zhou, VP of R&D, Shannon Systems
Mr. Zhou joined us in July 2015 as VP of R&D of Shannon Systems, our enterprise SSD product line, following our acquisition of this
business. He co-founded Shannon Systems in 2011 with Dr. Yang and as CTO, managed the development of enterprise-grade PCIe SSDs that were the industrys first in terms of storage capacity and scalability, ultra-low latency and low-power
envelope. Prior to Shannon, he was a senior ASIC design engineer with 10 years of experience at Nvidia and Chrontel. He holds an MS in Electrical Engineering from Binghamton University and a BS in Electrical Engineering from Tsinghua
University in China.
Jason Chiang, VP of HR and Administration and Special Assistant to CEO
Mr. Chiang joined Silicon Motion in 2002 and has been serving as our Vice President of HR and Administration and Special Assistant to our
CEO since 2005. Mr. Chiang has more than 18 years of finance and business administration experience. Prior to joining Silicon Motion, Mr. Chiang was a Director at Concord Venture Capital. Mr. Chiang has a BS in Economics from the
National Taiwan University and an MS degree in Business Administration from Rochester University.
Frank Shu, VP of R&D, Verification Engineering
& Compatibility Test
Mr. Shu has served as our Vice President of SSD System Technology since July 2012. Mr. Shu has more
than 20 years of experience in the storage and PC system industry. Before joining Silicon Motion, Mr. Shu was the VP of R&D in charge of SSD testing at Allion Test Lab Inc. Mr. Shu also worked for Microsoft and played a key role in
defining and developing the software storage stack for the Windows operating system. Prior to Microsoft, Mr. Shu worked for Fujitsu, Seagate and Everex. Mr. Shu has a BS in Electronic Engineering from Nanjing Aeronautical Institute in
China and an MS degree in Computer Science from the Oregon Graduate Institution of Science & Technology.
There is no arrangement
or understanding with major shareholders, customers, suppliers or others pursuant to which any person referred to above was selected as a director or member of senior management.
Board Practices
Board Committees
Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance
committee.
45
Audit Committee
. The audit committee is responsible for reviewing the financial
information that will be provided to shareholders and others, reviewing the systems of internal controls that management and the board of directors have established, appointing, retaining and overseeing the performance of the independent registered
public accounting firm, overseeing our accounting and financial reporting processes and the audits of our financial statements, and pre-approving audit and permissible non-audit services provided by the independent registered public accounting firm.
Tsung-Ming Chung, Lien-Chun Liu, and Yung-Chien Wang are members of our audit committee. Our board of directors has determined that Mr. Chung, the Chairman of the audit committee, is the committees Audit Committee Financial
Expert as required by Nasdaq and U.S. Securities and Exchange Commission (SEC) rules.
Compensation Committee
.
The compensation committees basic responsibility is to review the performance and development of management in achieving corporate goals and objectives and to assure that our senior executives are compensated effectively in a manner consistent
with our strategy, competitive practice and the requirements of the appropriate regulatory bodies. Toward that end, this committee oversees, reviews and administers all of our compensation, equity and employee benefit plans and programs. Lien-Chun
Liu, Steve Chen, and Yung-Chien Wang are members of our compensation committee, with Mr. Chen serving as the Chairman of the committee.
Nominating and Corporate Governance Committee
. The nominating and corporate governance committee is responsible for overseeing,
reviewing and making periodic recommendations concerning our corporate governance policies, and for recommending to the full board of directors candidates for election to the board of directors. Lien-Chun Liu, Steve Chen, and Yung-Chien Wang are
members of our nominating and corporate governance committee, with Ms. Liu serving as the Chairman of the committee.
Our board of
directors has adopted a code of ethics, which is applicable to all of our employees. Our Code of Ethics is posted on our website at
www.siliconmotion.com
.
Duties of Directors
Under Cayman Islands
law, our directors have a duty to act honestly, in good faith and with a view to the best interests of our company. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to our company, our directors must ensure compliance with our memorandum and articles of association. The functions and powers of our board of directors include, among others:
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convening shareholders meetings and reporting its work to shareholders at such meetings;
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implementing shareholders resolutions;
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determining our business plans and investment proposals;
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formulating our profit distribution plans and loss recovery plans;
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determining our debt and finance policies and proposals for the increase or decrease in our registered capital and the issuance of debentures;
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formulating our major acquisition and disposition plans, and plans for merger, division or dissolution;
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proposing amendments to our amended and restated memorandum and articles of association; and
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exercising any other powers conferred by the shareholders meetings or under our amended and restated memorandum and articles of association.
|
Terms of Directors and Officers
Under
Cayman Islands law and our articles of association, our directors hold office until a successor has been duly elected and qualified. Our articles of association provide that our directors serve for a term of three
46
years, with one-third of the directors (or, if their number is not a multiple of three, the number nearest to but not greater than one-third) subject to re-election at each annual general meeting
of shareholders (chairman and managing director not subject to retirement by rotation nor to be taken into account in determining the number of directors to retire), unless the director was appointed by the board of directors, in which case such
director holds office until the next annual meeting of shareholders at which time such director is eligible for re-election. One of our seven directors is currently subject to re-election at our next annual general meeting of shareholders. All of
our executive officers are appointed by and serve at the discretion of our board of directors.
Limitation on Liability and Other Indemnification
Matters
Cayman Islands law and our articles of association allow us to indemnify our directors, secretary and other officers acting in
relation to any of our affairs against actions, costs, charges, losses, damages and expenses incurred by reason of any act done or omitted in the execution of their duties as our directors, secretary and other officers. Under our memorandum and
articles of association, indemnification is not available to any matter in respect of any fraud, dishonesty, willful misconduct or bad faith which may attach to any of them.
Compensation of Directors and Executive Officers
For the year ended December 31, 2015, the aggregate compensation to our directors and senior executive officers was approximately US$4.53
million. In 2015, we granted options and restricted stock units to our executive officers as a group to acquire an aggregate of 312,600 ordinary shares. The options and restricted stock units granted to our executive officers and non-executive
directors are subject to the same vesting conditions as those of our employees.
Service Contracts
We currently do not have service contracts with our directors.
Share-Based Compensation Plans and Option Grants
In April 2005, our board of directors and shareholders adopted our 2005 Incentive Plan. Our shareholders approved our Amended and Restated 2005
Incentive Plan (referred to in this report as the 2005 Plan) at our Annual General Meeting in August 2006, including an amendment to increase the authorized number of shares available for issuance under the plan from 10,000,000 shares to
25,000,000 shares. In 2009, the board of directors amended the 2005 Plan to increase the authorized shares available for issuance under the 2005 Plan to 40,000,000 shares. The 2005 Plan expired by its terms on April 22, 2015. On June 3, 2015, the
board of directors adopted the 2015 Incentive Plan (the 2015 Plan and together with the 2005 Plan, the Plans). The 2015 Plan reserved 20,000,000 shares of ordinary shares for issuance upon exercise of stock options and
restricted stock units. The Plans provide for the grant of stock options, stock bonuses, restricted stock awards, restricted stock units and stock appreciation rights, which may be granted to our employees (including officers), directors and
consultants.
Share Reserve.
The aggregate number of ordinary shares that may be issued pursuant to awards granted under the 2005
Plan could not exceed 40,000,000 shares and the aggregate number of ordinary shares that may be issued pursuant to awards granted under the 2015 Plan will not exceed 20,000,000, inclusive of ordinary shares issuable upon exercise of awards
previously granted under the Silicon Motion, Inc. Guidelines for Issuance and Subscription of Employee Stock Option, which options we have, subject to the consent of the respective option-holders, agreed to assume in the share exchange.
The following types of shares issued under the Plans may again become available for the grant of new awards under the Plans: restricted stock
issued under the Plans that is forfeited or repurchased by us prior to it becoming fully vested; shares withheld for taxes; shares tendered to us to pay the exercise price of an option; and shares subject to awards issued under the Plans that have
expired or otherwise terminated without having been exercised in full.
47
Administration
. The board of directors will administer the Plans and may delegate this
authority to administer the plan to a committee. Subject to the terms of the Plans, the plan administrator, which is our board of directors or its authorized committee, determines recipients, grant dates, the numbers and types of stock awards to be
granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to certain limitations, the plan administrator will also determine the exercise price of options granted, the purchase price
for restricted stock and restricted stock units, and, if applicable, the strike price for stock appreciation rights.
Capitalization
adjustments
. In the event of a dividend or other distribution (whether in the form of cash, ordinary shares, other securities, or other property), recapitalization, stock split, reorganization, merger, consolidation, exchange of our ordinary
shares or our other securities, or other change in our corporate structure, the board of directors may adjust the number and class of shares that may be delivered under the Plans and the number, class and price of the shares covered by each
outstanding stock award.
Changes in control
. In the event of a change in control of the company, all outstanding options and other
awards under the Plans may be assumed, continued or substituted for by any surviving or acquiring entity. If the surviving or acquiring entity elects not to assume, continue or substitute for such awards, the vesting of such awards held by award
holders whose service with us or any of our affiliates has not terminated will be accelerated and such awards will be fully vested and exercisable immediately prior to the consummation of such transaction, and the stock awards shall automatically
terminate upon consummation of such transaction if not exercised prior to such event.
Amendments to 2005 Plan in 2009 and 2010
. In
2009, our board of directors amended the 2005 Plan to (i) increase the authorized shares to 40,000,000 as discussed above and (ii) allow certain unilateral amendments to outstanding options and RSU grants. Shareholder approval for such
amendments was not required under Cayman law and we used the home-country exemption for foreign private issuers under Nasdaq rules to effect such amendments without a shareholder vote. In 2009, the Company cancelled 1,221,875 RSUs. There were no
changes to outstanding options in 2009. In 2010, the Company exchanged 4,369 thousand stock options for 3,785 thousand new stock options with a similar value.
Future amendments and termination.
The board of directors may amend (subject to shareholder approval as required by applicable law),
suspend or terminate the 2015 Plan at any time. The 2015 Incentive Plan will terminate pursuant to its terms on June 3, 2025.
Employees
The
following table sets forth the number of our employees categorized by function as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Management and administration
|
|
|
100
|
|
|
|
105
|
|
|
|
117
|
|
Operations
|
|
|
24
|
|
|
|
28
|
|
|
|
37
|
|
Research and development
|
|
|
468
|
|
|
|
549
|
|
|
|
640
|
|
Sales and marketing
|
|
|
139
|
|
|
|
142
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
731
|
|
|
|
824
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015, we had 973 total employees, including 615 in Taiwan, 34 in the United States,
179 in China, 139 in Korea, and 6 in Japan. 759 of our total employees are engineers.
We do not have any collective bargaining
arrangements with our employees and consider our relations with our employees to be good.
48
Share Ownership
Under U.S. securities law, a person is deemed to be a beneficial owner of a security if that person has or shares voting
power, which includes the power to vote or to direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be the
beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of securities as to which such person has no economic
interest.
There were 141,061,384 of our ordinary shares outstanding as of March 31, 2016. The following table sets forth information
with respect to the beneficial ownership of our ordinary shares as of March 31, 2016, less otherwise indicated in the footnotes, by each of our directors and officers:
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
Owned
|
|
|
|
Number
|
|
|
%
|
|
Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
James Chow
(1)
|
|
|
2,427,546
|
|
|
|
1.72
|
|
Wallace C. Kou
(2)
|
|
|
3,442,994
|
|
|
|
2.44
|
|
Steve Chen
(3)
|
|
|
10,000
|
|
|
|
*
|
|
Tsung-Ming Chung
(4)
|
|
|
94,280
|
|
|
|
*
|
|
Lien-Chun Liu
(5)
|
|
|
194,280
|
|
|
|
*
|
|
Yung-Chien Wang
(6)
|
|
|
808,674
|
|
|
|
*
|
|
Han-Ping D. Shieh
(7)
|
|
|
22,120
|
|
|
|
*
|
|
Riyadh Lai
(8)
|
|
|
1,750,380
|
|
|
|
1.24
|
|
Nelson Duann
(9)
|
|
|
50,000
|
|
|
|
*
|
|
Gihyun Bae
(10)
|
|
|
16,000
|
|
|
|
*
|
|
Sangwoo Han
(11)
|
|
|
181,808
|
|
|
|
*
|
|
Xueshi Yang
(12)
|
|
|
987,732
|
|
|
|
*
|
|
Arthur Yeh
(13)
|
|
|
305,628
|
|
|
|
*
|
|
Robert Fan
(14)
|
|
|
52,000
|
|
|
|
*
|
|
John (Chun-O) Kim
(15)
|
|
|
100,400
|
|
|
|
*
|
|
David Yu
|
|
|
|
|
|
|
*
|
|
Frank Chang
(16)
|
|
|
165,040
|
|
|
|
*
|
|
Ken Chen
(17)
|
|
|
292,869
|
|
|
|
*
|
|
Kevin Yeh
(18)
|
|
|
219,000
|
|
|
|
*
|
|
John (Jong Ryul) Lee
(19)
|
|
|
65,704
|
|
|
|
*
|
|
Derek Zhou
(20)
|
|
|
571,844
|
|
|
|
*
|
|
Jason Chiang
(21)
|
|
|
490,060
|
|
|
|
*
|
|
Frank Shu
(22)
|
|
|
36,000
|
|
|
|
*
|
|
(1)
|
Represents 2,427,546 shares owned by Mr. Chow. Mr. Chow is the chairman of Concord Consulting Inc. and Concord Financial Co. Ltd. which owned 42,445 and 196,491 shares, respectively. Mr. Chow disclaims
any beneficial ownership of these shares.
|
(2)
|
Represents 3,150,500 shares owned by Mr. Kou, 35,094 shares owned by his spouse and 257,400 shares that Mr. Kou has the right to acquire within the next 60 days upon the exercise of RSUs or options.
|
(3)
|
Represents 10,000 shares owned by Mr. Chen.
|
(4)
|
Represents 94,280 shares owned by Mr. Chung.
|
(5)
|
Represents 194,280 shares owned by Ms. Liu.
|
(6)
|
Represents 808,674 shares owned by Mr. Wang.
|
(7)
|
Represents 22,120 shares owned by Mr. Shieh.
|
(8)
|
Represents 688,400 shares owned by Mr. Lai, 819,880 shares owned by his spouse, 242,100 shares that Mr. Lai has the right to acquire within the next 60 days upon the exercise of options or RSUs.
|
49
(9)
|
Represents 50,000 shares owned by Mr. Duann.
|
(10)
|
Represents 16,000 shares owned by Mr. Bae.
|
(11)
|
Represents 181,808 shares owned by Mr. Han.
|
(12)
|
Represents 987,732 shares owned by Mr. Yangs holding company.
|
(13)
|
Represents 305,628 shares owned by Mr. Yeh.
|
(14)
|
Represents 52,000 shares owned by Mr. Fan.
|
(15)
|
Represents 100,400 shares owned by Mr. Kim.
|
(16)
|
Represents 165,040 shares owned by Mr. Chang.
|
(17)
|
Represents 287,144 shares owned by Mr. Chen and 5,725 shares owned by his spouse.
|
(18)
|
Represents 219,000 shares owned by Mr. Yeh.
|
(19)
|
Represents 65,704 shares owned by Mr. Lee.
|
(20)
|
Represents 571,844 shares owned by Mr. Zhous holding company.
|
(21)
|
Represents 478,612 shares owned by Mr. Chiang and 11,448 shares owned by his spouse.
|
(22)
|
Represents 36,000 shares owned by Mr. Shu.
|
I
TEM
7.
|
M
AJOR
S
HAREHOLDERS
AND
R
ELATED
P
ARTY
T
RANSACTIONS
|
Major Shareholders
As of March 31,
2016, there were 141,061,384 of our ordinary shares outstanding. The Bank of New York Mellon, the depositary under our ADS deposit agreement, has advised us that as of March 31, 2016, we had 35,184,031 ADSs, representing 140,736,124 ordinary
shares.
The following table sets forth information with respect to the beneficial ownership of more than 5% of our ordinary shares as of
March 31, 2016:
|
|
|
|
|
|
|
|
|
Identity of person or group
|
|
Number of
shares owned
|
|
|
Percentage
Owned
(1)
|
|
BlackRock, Inc.
|
|
|
8,853,664
|
(2)
|
|
|
6.3
|
%
|
Lazard Asset Management LLC
|
|
|
7,718,544
|
(3)
|
|
|
5.5
|
%
|
Notes:
(1)
|
Based on 141,061,384 ordinary shares outstanding as of March 31, 2016.
|
(2)
|
According to a Schedule 13G dated January 22, 2016 and filed by BlackRock, Inc. (BlackRock) with the SEC on January 28, 2016, BlackRock exercised sole voting power over 8,602,320 of our
ordinary shares, sole dispositive power over 8,853,664 of our ordinary shares and shared voting or dispositive power over none of our ordinary shares. Such Schedule 13G indicates that the Blackrock subsidiaries that acquired the reported
securities are BlackRock (Luxembourg) S.A., BlackRock Advisors, LLC, BlackRock Asset Management North Asia Limited, BlackRock Financial Management, Inc., BlackRock Fund Managers Ltd, BlackRock Investment Management (Australia) Limited, BlackRock
Life Limited and Xulu, Inc.
|
(3)
|
According to a Schedule 13G dated December 31, 2015 and filed by Lazard Asset Management LLC (Lazard) with the SEC on February 11, 2016, Lazard exercised sole voting power over 932,423 of our
ADSs (representing 3,729, 692 of our ordinary shares), sole dispositive power over 1,929,636 of our ADSs (representing 7,718,544 of our ordinary shares) and shared voting or dispositive power over none of our ADSs or ordinary shares.
|
To our knowledge, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government
or by any other natural or legal persons, severally or jointly. We are not aware of any arrangement which may at a later date result in a change of control of our company.
No holder of our ordinary shares has preferential voting rights.
Related Party Transactions
No related
party transactions occurred between January 1, 2013 and April 20, 2016 (other than ordinary course compensation paid to employees, officers and directors and described elsewhere in this annual report).
50
I
TEM
8.
|
F
INANCIAL
I
NFORMATION
|
Consolidated Financial Statements
See Item 18. Financial Statements and pages F-1 through F-35 of this annual report.
Legal Proceedings
As an operating active
company, we are subject to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Although the outcome of such proceedings and claims cannot be predicted with certainty, management does not
believe that the outcome of any of these matters will have a material adverse effect on our business, results of operations, financial position or cash flows. Any litigation, however, involves potential risk and potentially significant litigation
costs, and therefore there can be no assurance that any litigation which is now pending or which may arise in the future would not have such material adverse effect on our business, financial position, results of operations or cash flows.
All American Semiconductor, Inc. (All American or AASI) was a former distributor for
the Company. On April 25, 2007, All American filed for Chapter 11 bankruptcy protection. At the time of the filing, we had US$256 thousand of unpaid accounts receivable from All American. On April 17, 2009, SMI USA
and related entities were named as defendants in an adversary proceeding filed by the AASI Creditor Liquidating Trust (CLT) in the bankruptcy case pending in the U.S. Bankruptcy Court for the Southern District of
Florida. The CLT was seeking the return of allegedly avoidable transfers in the amount of US$854 thousand. SMI USA filed an answer and affirmative defenses. In March 2010, SMI USA settled with the CLT by paying the amount of
US$220 thousand and on April 1, 2010, the Bankruptcy Court granted the motion to approve stipulations to compromise controversy. On August 23, 2010, the Court entered an order dismissing the adversary proceeding. In June 2011, Liquidating
Trustee for the CLT filed the AASI Creditor Liquidating Trustees Seventeenth Omnibus Objection to Claims but in August 2011, withdrew it with respect to SMI USAs proof of claim. According to the CLTs letter dated September 9,
2011, it is currently finalizing its claims review process and preparing for distribution to beneficiaries who are holders of allowed claims and have rights to a distribution pursuant to the bankruptcy plan. In January 2012, January 2014,
December 2014, July 2015 and October 2015, we received distributions of US$21 thousand, US$36 thousand, US$12 thousand, US$51 thousand and US$31 thousand, respectively. On March 29, 2016, we received a final distribution of US$112 thousand.
In 2006, FCI joined with other technology companies and invested in the Pangyo Silicon Park Construction Project Cooperative
(Pangyo Cooperative) in Korea. In July 2010, FCI, TLi Inc. (TLI), OCI Materials Co., Ltd (OCI) and other companies withdrew from the Pangyo Cooperative and forfeited 10% of their total investment. FCI believes its
loss was caused by bad will actions taken by TLI. In December 2011, FCI and OCI together filed a complaint against TLI at the Suwon District Court in Korea. In April 2013, the court dismissed the plaintiffs complaints. The plaintiffs have
decided not to appeal the courts decision.
Policy on Dividend Distributions
Pursuant to the laws and regulations of the ROC and the Articles of Incorporation of SMI Taiwan, our subsidiary in Taiwan must make
appropriations from annual earnings to a non-distributable reserve which could affect our ability to pay cash or stock dividends, if any. The Taiwan subsidiary may only distribute dividends after it has made allowances as determined under ROC GAAP
at each year-end for:
|
b.
|
Recovery of prior years deficits, if any;
|
|
c.
|
10% of remaining balance after deduction for a and b as legal reserve;
|
|
d.
|
Special reserve based on relevant laws or regulations or 10% of remaining balance for deduction from above a to c as special reserve when necessary;
|
51
|
e.
|
Cash or stock bonus to employees at 0.01% of any remaining earnings after the above reserves have been appropriated, based on a resolution of the board of directors. If bonus to employees is in the form of stock, the
bonus may also be appropriated to employees of subsidiaries under the board of directors approval.
|
The existing
Articles of Incorporation of SMI Taiwan stipulates to distribute bonus to employees at 0.01% of net income (net of the bonus and remuneration). In accordance with the amendments to the Company Act in May 2015, the recipients of dividends and bonuses
are limited to shareholders and do not include employees. The consequential amendments to the Articles of Incorporation of SMI Taiwan will be approved by the SMI Taiwans board of directors by June 30, 2016. The proposed amended Articles of
Incorporation of SMI Taiwan will stipulate to distribute employees compensation and remuneration to directors and supervisors at rates no less than certain percentage or amount and no higher than certain percentage or amount, respectively, of
net profit before income tax, employees compensation, and remuneration to directors and supervisors.
Dividends
We announced a total of $20.3 million and $36.5 million in dividends during 2014 and 2015, respectively. On November 2, 2015, our Board of
Directors, instead of declaring a quarterly dividend, declared an annual dividend payable in four quarterly installments. Future dividends, if any, on our outstanding ADSs and ordinary shares will be declared by and subject to the discretion of our
board of directors. If our board of directors decides to distribute dividends, the form, frequency and amount of such dividends will depend upon our future operations and earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors our board of directors may deem relevant.
Any future dividend we declare will be paid to the
holders of ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our ordinary shares, to the extent permitted by applicable laws and regulations, less the fees and expenses payable under the deposit agreement. Any
dividend we declare will be distributed by the depositary bank to the holders of our ADSs. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
Significant Changes
No significant
changes have occurred since the date of our audited consolidated financial statements.
52
I
TEM
9.
|
T
HE
O
FFER
AND
L
ISTING
|
Market and Share
Price Information
Our ADSs, each representing four of our ordinary shares, have been listed on Nasdaq since June 30, 2005. Our
ADSs trade under the symbol SIMO. The Nasdaq Global Select Market is the principal trading market for our ADSs, which are not listed on any other exchanges in or outside the United States. The high and low sales prices of our ADSs on
Nasdaq since 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Price per ADS (US$)
|
|
|
|
High
|
|
|
Low
|
|
Annual:
|
|
|
|
|
|
|
|
|
2011
|
|
|
21.60
|
|
|
|
4.14
|
|
2012
|
|
|
24.98
|
|
|
|
11.32
|
|
2013
|
|
|
16.19
|
|
|
|
9.90
|
|
2014
|
|
|
28.96
|
|
|
|
12.92
|
|
2015
|
|
|
37.60
|
|
|
|
20.01
|
|
|
|
|
Quarterly:
|
|
|
|
|
|
|
|
|
First Quarter, 2014
|
|
|
18.44
|
|
|
|
12.92
|
|
Second Quarter, 2014
|
|
|
20.48
|
|
|
|
15.16
|
|
Third Quarter, 2014
|
|
|
28.96
|
|
|
|
20.30
|
|
Fourth Quarter, 2014
|
|
|
28.10
|
|
|
|
21.04
|
|
|
|
|
First Quarter, 2015
|
|
|
30.50
|
|
|
|
23.50
|
|
Second Quarter, 2015
|
|
|
37.60
|
|
|
|
26.50
|
|
Third Quarter, 2015
|
|
|
35.58
|
|
|
|
20.01
|
|
Fourth Quarter, 2015
|
|
|
33.98
|
|
|
|
26.96
|
|
|
|
|
Monthly
|
|
|
|
|
|
|
|
|
November 2015
|
|
|
33.50
|
|
|
|
30.34
|
|
December 2015
|
|
|
33.98
|
|
|
|
30.89
|
|
January 2016
|
|
|
31.95
|
|
|
|
27.35
|
|
February 2016
|
|
|
33.95
|
|
|
|
29.50
|
|
March 2016
|
|
|
39.98
|
|
|
|
32.45
|
|
April 2016
|
|
|
41.87
|
|
|
|
35.53
|
|
I
TEM
10.
|
A
DDITIONAL
I
NFORMATION
|
Memorandum and Articles of Association
The information called for by Item 10B (Memorandum and Articles of Association) is incorporated by reference to the
information under the heading Description of Share Capital in our Registration Statement on Form F-1, as amended (Registration Number 333-125673) and as filed with the SEC on June 5, 2005.
Material Contracts
We have not entered
into any material contracts within the past two fiscal years other than in the ordinary course of business and other than those described in Item 4, Information on the Company or elsewhere in this annual report.
Exchange Controls
See Policy on
Dividend Distributions above.
53
Taxation
United States Federal Income Taxation
The
following discussion summarizes certain U.S. federal income tax consequences to a U.S. Holder, as defined below, who purchases our ADSs and ordinary shares. This discussion assumes that investors will hold their ADSs or ordinary shares as capital
assets (generally, property held for investment). This discussion does not discuss all aspects of U.S. federal income taxation which may be important to particular investors in light of their individual circumstances, including investors subject to
special taxation, such as:
|
|
|
banks and financial institutions;
|
|
|
|
brokers and dealers in securities or currencies;
|
|
|
|
tax-exempt organizations and retirement plans;
|
|
|
|
persons holding ADSs or ordinary shares as part of hedging, conversion, constructive sale, straddle or other integrated transactions;
|
|
|
|
persons who acquired their ordinary shares upon the exercise of employee stock options or otherwise as compensation;
|
|
|
|
persons who have elected the mark-to-market method of accounting;
|
|
|
|
persons who own 10% or more of our ADSs or shares;
|
|
|
|
real estate investment trusts or regulated investment companies;
|
|
|
|
U.S. persons whose functional currency is not the U.S. dollar;
|
|
|
|
certain former citizens or long-term residents of the United States; and
|
|
|
|
Non-U.S. Holders (as defined below).
|
This discussion is based in part on representations by
the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of
1986, as amended (the Code), and U.S. Treasury regulations, rulings and judicial decisions hereunder as of the date hereof. Such authorities are subject to change, possibly on a retroactive basis, which may result in U.S. federal income
tax consequences different from those discussed below.
A person considering an investment in our ADSs or ordinary shares is urged to
consult its tax advisor concerning U.S. federal, state, local and non-U.S. income and other tax consequences.
A U.S. Holder is a
beneficial owner of ADSs or ordinary shares that is for U.S. federal income tax purposes:
|
|
|
a citizen or resident individual of the United States;
|
|
|
|
a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
|
|
|
|
an estate the income of which is subject to U.S. federal income taxation, regardless of its source; or
|
|
|
|
a trust if it is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or has a valid election in effect
under applicable U.S. Treasury regulations to be treated as a U.S. person.
|
54
A beneficial owner of ADSs or ordinary shares that is not a U.S. Holder is referred to herein as
a
Non-U.S. Holder.
If a partnership or limited liability company treated as a
partnership for U.S. federal income tax purposes holds ADSs or ordinary shares, the tax treatment of a partner or member will generally depend on the status of the partner or member and the activities of the partnership or such limited liability
company. A partner of a partnership or a member of such a limited liability company holding ADSs or ordinary shares is urged to consult its tax advisors regarding an investment in our ADSs or ordinary shares.
ADSs
. In general, for U.S. federal income tax purposes, a U.S. Holder of ADSs will be treated as the owner of the underlying ordinary
shares that are represented by such ADSs. Deposits and withdrawals of ordinary shares in exchange for ADSs will not be subject to U.S. federal income taxation.
Distributions on ADSs or ordinary shares
. Unless the passive foreign investment company rules, as discussed below, apply, the gross
amount of the distributions in respect of the ADSs or ordinary shares will be subject to tax as dividend income to the extent of our current and accumulated earnings and profits, as determined under U.S. federal income tax principles. Subject to
certain limitations, dividends paid to
non-corporate
U.S. Holders, including individuals, may be eligible for a reduced rate of taxation if we are deemed to be a qualified foreign corporation for
U.S. federal income tax purposes, provided that such holder satisfies certain holding period requirements with respect to the ownership of our ADSs or ordinary shares. Subject to the exceptions discussed below, a corporation is a qualified foreign
corporation if it is:
|
|
|
a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States that includes an exchange of information program; or
|
|
|
|
a foreign corporation if its stock with respect to which a dividend is paid or its ADSs backed by such stock are readily tradable on an established securities market within the United States.
|
The Cayman Islands does not currently have a comprehensive income tax treaty with the United States. A foreign corporation (even if it is
described above) does not constitute a qualified foreign corporation if, for the taxable year in which the dividend is paid or the preceding taxable year, the foreign corporation is or was a passive foreign investment company. Although we believe
that we are a qualified foreign corporation because the ADSs will be traded on an established U.S. securities market and, as discussed below, we believe that we were not a passive foreign investment company for our 2015 tax year, no assurance can be
given in this regard. In addition, our status as a qualified foreign corporation may change. A U.S. Holder that exchanges its ADSs for ordinary shares may not be eligible for the reduced rate of taxation on dividends if the ordinary shares are not
deemed to be readily tradable on an established securities market within the United States.
Dividends will be includable in a U.S.
Holders gross income on the date actually or constructively received by the depositary, in the case of ADSs or, in the case of ordinary shares, by such U.S. Holder. These dividends will not be eligible for the dividends-received deduction
generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
To the extent we pay dividends on
the ADSs or ordinary shares in a currency other than the U.S. dollar, the U.S. dollar value of such dividends should be calculated by reference to the exchange rate prevailing on the date of actual or constructive receipt of the dividend, regardless
of whether the foreign currency is converted into U.S. dollars at that time. If the foreign currency is converted into U.S. dollars on the date of actual or constructive receipt of such dividends, the tax basis of the U.S. Holder in such
foreign currency will be equal to its U.S. dollar value on that date and, as a result, the U.S. Holder generally should not be required to recognize any foreign currency exchange gain or loss. Dividends paid in respect of the ADSs or ordinary shares
generally will be treated as income from sources outside the United States.
55
To the extent that the amount of any distribution exceeds our current and accumulated earnings
and profits, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs or ordinary shares, and the balance in excess of adjusted basis will be taxed as capital gain.
Sale, exchange or other disposition of ADSs or ordinary shares
. Unless the passive foreign investment company rules, as discussed
below, apply, upon the sale, exchange or other disposition of ADSs or ordinary shares a U.S. Holder generally will recognize capital gain or loss equal to the difference between the amount realized upon the sale, exchange or other disposition and
the adjusted tax basis of the U.S. Holder in the ADSs or ordinary shares. The capital gain or loss generally will be long-term capital gain or loss if, at the time of sale, exchange or other disposition, the U.S. Holder has held the ADS or ordinary
share for more than one year. Net long-term capital gains of non-corporate U.S. Holders, including individuals, are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss that a U.S.
Holder recognizes generally will be treated as gain or loss from sources within the United States for U.S. foreign tax credit limitation purposes.
Additional tax on net investment income
. An additional 3.8% federal income tax may be assessed on net investment income (including
dividends, other distributions, and gain realized on the sale of ADSs or ordinary shares) earned by certain U.S. Holders. This tax does not apply to U.S. Holders who hold ADSs or ordinary shares in the ordinary course of certain trades or
businesses.
Passive foreign investment company rules
. In general, we will be classified as a passive foreign investment company
for any taxable year in which either (a) at least 75% of our gross income is passive income or (b) at least 50% of the value (determined on the basis of a quarterly average) of our assets is attributable to assets that produce or are held
for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties, rents (other than rents and royalties derived in the active conduct of a trade or business and not derived from a related
person), annuities and gains from assets that produce passive income. If we own directly or indirectly at least 25% by value of the equity shares of another corporation, we will be treated for purposes of the passive foreign investment company tests
as owning a proportionate share of the assets of the other corporation, and as receiving directly a proportionate share of the other corporations income.
We believe, based on our present and projected composition of our income and valuation of our assets, we were not classified as a passive
foreign investment company for U.S. federal income tax purposes for our 2015 tax year, although no assurance can be given in this regard. Whether we are a passive foreign investment company for any particular taxable year is determined on an annual
basis and will depend on the composition of our income and assets, including goodwill. The calculation of goodwill will be based, in part, on the then market value of our capital stock, which is subject to fluctuation. Accordingly, there can be no
assurance that we will not be classified as a passive foreign investment company in the current or any future taxable year.
If we are a
passive foreign investment company for any taxable year during which a U.S. Holder has an equity interest in our company, unless the U.S. Holder makes a mark-to-market election as discussed below, such U.S. Holder will be subject to special tax
rules in any future taxable year regardless of whether we are classified as a passive foreign investment company in such future years with respect to (a) excess distributions and (b) gain from the disposition of stock. Excess
distributions are defined generally as the excess of the amount received with respect to the equity interests in the taxable year over 125% of the average annual distributions received in the shorter of either the three previous years or a U.S.
Holders holding period before the taxable year and must be allocated ratably to each day of the U.S. Holders holding period. The amount allocated to the current taxable year or any year before we became a passive foreign investment
company will be included as ordinary income in a U.S. Holders gross income for that year. The amount allocated to other prior taxable years will be taxed as ordinary income at the highest rate in effect for a U.S. Holder in that prior year and
the tax is subject to an interest charge at the rate applicable to deficiencies in income taxes. The entire amount of any gain realized upon the sale or other disposition of the equity interests will be treated as an excess distribution made in the
year of sale or other disposition and as a consequence will be treated as ordinary income and, to the extent
56
allocated to years prior to the year of sale or disposition with respect to which we were a passive foreign investment company, will be subject to the interest charge described above.
In certain circumstances, instead of being subject to the excess distribution rules discussed above, a U.S. Holder may make an election
to include gain on the ADSs or ordinary shares of a passive foreign investment company as ordinary income under a mark-to-market method, provided that the ADSs or ordinary shares are regularly traded on a qualified exchange. Under current law, the
mark-to-market election is only available for ADSs or ordinary shares that are regularly traded within the meaning of U.S. Treasury regulations on certain designated U.S. exchanges and foreign exchanges that meet trading, listing, financial
disclosure and other requirements to be treated as a qualified exchange under applicable U.S. Treasury regulations. The Nasdaq Stock Market is a qualified exchange. The ordinary shares may not be eligible for mark-to-market treatment under the
foregoing rule even if the ADSs otherwise satisfy the applicable requirement.
If a U.S. Holder makes a mark-to-market election, the U.S.
Holder will include each year as ordinary income, rather than capital gain, the excess, if any, of the fair market value of the U.S. Holders ADSs or ordinary shares at the end of the taxable year over such U.S. Holders adjusted basis in
the ADSs (or ordinary shares, if applicable) and will be permitted an ordinary loss in respect of the excess, if any, of the adjusted basis of these ADSs or ordinary shares over their fair market value at the end of the taxable year, but only to the
extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holders basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. Any gain or loss on the sale of
the ADSs or ordinary shares will be ordinary income or loss, except that this loss will be ordinary loss only to the extent of the previously included net mark-to-market gain.
If we are a passive foreign investment company, then under certain circumstances a U.S. Holder must file Internal Revenue Service Form 8621.
Information Reporting and Back-up Withholding
. The Foreign Account Tax Compliance Act (FATCA) generally requires that
individuals that hold certain specified foreign financial assets worth in excess of certain thresholds of $50,000 or more, depending on the individuals circumstances, report such ownership to the IRS using IRS Form 8938. The definition of
specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any
financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. A U.S. Holder may be subject to this reporting requirement unless such holders ADSs or
ordinary shares are held in an account at a domestic financial institution. The penalty for failing to file Form 8938 is substantial.
U.S. holders generally are subject to information reporting requirements with respect to dividends on, or proceeds from the disposition of,
our ordinary shares. In addition, a U.S. holder may be subject, under certain circumstances, to backup withholding at a rate of up to 28% with respect to dividends paid on, or proceeds from the disposition of, our ordinary shares unless the
U.S. holder provides proof of an applicable exemption or correct taxpayer identification number, and otherwise complies with the applicable requirements of the backup withholding rules. A U.S. holder of our ordinary shares who provides an
incorrect taxpayer identification number may be subject to penalties imposed by the IRS. Amounts withheld under the backup withholding rules are not an additional tax and may be refunded or credited against the U.S. holders U.S. federal
income tax liability, provided the required information is furnished to the IRS.
A U.S. Holder is urged to consult its tax advisor
concerning the U.S. federal income tax consequences of an investment in our ADSs or ordinary shares if we are or become a passive foreign investment company, including the possibility of making a mark-to-market election.
57
Cayman Islands Taxation
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no
taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to our company levied by the Government of the Cayman Islands except for stamp duties that may be applicable on instruments executed in, or
after execution brought within the jurisdiction of, the Cayman Islands. The Cayman Islands are not party to any double taxation treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
We have, pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, obtained an undertaking from the
Governor-in-Council that:
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no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation applies to us or our operations; and
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the aforesaid tax or any tax in the nature of estate duty or inheritance tax are not payable on our ordinary shares, debentures or other obligations.
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The undertaking that we have obtained is for a period of 20 years from March 1, 2005.
Documents on Display
We have previously
filed with the SEC our registration statement on Form F-6 under the Securities Act of 1933, as amended (the Securities Act) with respect to our ADSs.
We are subject to the periodic reporting and other informational requirements of the U.S. Securities Exchange Act of 1934, as amended (the
Exchange Act). Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than four months after the close of each fiscal year, which is
December 31. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our officers, directors, and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act.
Copies of reports and other
information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at the SECs public reference room in Washington D.C. at
100 F Street, N.E., Room 1580, Washington D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. The SEC also maintains a Website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.
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Interest rate risk
. Our exposure to changes in interest rates is limited to interest income generated by our cash deposited with banks
and short-term investments maintained in bond funds, structured notes and senior notes. We have not entered into any interest rate swap transactions. We do not believe that a 1% change in interest rates would have a significant impact on our
operations.
Foreign currency risk.
Since 2012, we consider our direct exposure to foreign exchange rate fluctuations to be
minimal. Prior to 2012, we reported our financial results in NT dollars and our direct exposure to foreign exchange rate fluctuations was more significant. Gains or losses from foreign currency re-measurement are included in Non-Operating
Income (Expenses) in our Consolidated Financial Statements. The impact of
58
foreign currency transaction gain or loss included in determining net income (loss) for 2013, 2014 and 2015 was nil, US$(0.6) million and US$0.1 million, respectively. Currently, the majority of
our revenue, cost of sales, accounts receivable, and accounts payable are denominated in U.S. dollars. Increases in the value of the U.S. dollar relative to other currencies would make our products more expensive, which could negatively impact
our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. Fluctuations in currency exchange rates could
harm our business in the future. We do not utilize foreign exchange derivatives contracts to protect against changes in foreign exchange rates.
Also refer to Risk Factors We are subject to risks associated with international operations which may harm our business.
Investment Risk.
Prior to March 2007, we invested in equity instruments of privately held companies. We have minority stake equity
investments in Cashido and Vastview Technology, private companies related to semiconductor and other technology industries. These investments are accounted for under the cost method because our ownership is less than 20% and we do not have the
ability to exercise significant influence over the operations of these companies. As of December 31, 2015, the aggregate carrying value of these investments on our balance sheet was US$0.1 million. We monitor these investments for impairment
and make appropriate reductions in carrying value when an impairment is deemed to be other than temporary. There were no impairments for the years ended on December 31, 2013, 2014 and 2015, respectively.
As of December 31, 2015, we also had the short-term investments of US$4.0 million in senior notes and of US$0.7 million in bond funds.
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Depositary Fees and Charges.
For the year-ended December 31, 2015, we received from our depositary bank a reimbursement of US$0.6
million, net of withholding tax, for our continuing annual stock exchange listing fees and our other expenses incurred in connection with maintaining and promoting our ADS program. In addition, the depositary bank has agreed to reimburse us annually
for a fixed number of years for our continuing annual stock exchange listing fees and our other expenses incurred in connection with maintaining and promoting our ADS program. The amount of annual reimbursements is subject to certain limits.
59
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. ORGANIZATION AND OPERATIONS
Silicon Motion Technology Corporation (SMTC, collectively with its subsidiaries the Company) was
incorporated in the Cayman Islands on January 27, 2005. The Company is a fabless semiconductor company that designs, develops and markets, high-performance, low-power semiconductor solutions to OEMs and other customers in the mobile storage and
mobile communications markets. In the mobile storage market, the Companys key products are controllers used in embedded storage products such as SSDs, and eMMCs, as well as expandable storage products such as flash memory cards and USB flash
drives. For the mobile communications market, the Companys key products are handset transceivers and mobile TV SoCs.
The Company
acquired SMI Taiwan in April 2005. Originally SMI Taiwan was known as Feiya Technology Corporation (Feiya), a Taiwan corporation which was incorporated in April 1997 but had changed its name to SMI Taiwan after acquiring in August 2002
Silicon Motion, Inc., a California corporation (SMI USA), which was incorporated in November 1995. Feiya was originally a flash memory products company and SMI USA a graphics processor company. In April 2007, the Company acquired FCI, a
leading designer of RF ICs for mobile TV and wireless communications based in South Korea. The Company established Silicon Motion BV in the Netherlands in 2011 with the purpose of expanding its business activities in Europe, as well as providing
supervisory, financing, legal support, accounting services and shareholding for the Companys businesses in other parts of the world. In July 2015, the Company acquired Shanghai Baocun Information Technology Co., Ltd. (Shannon
Systems), Chinas leading enterprise-class PCIe SSD company based in Shanghai, China.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP). The consolidated financial statements include the accounts of SMTC and its wholly-owned subsidiaries. The Company owns 100% of the outstanding shares in all of its subsidiaries, except for FCI which the Company owns over 99.9%.
All significant intercompany balances and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. The actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, investment in
debt securities and accounts receivable. Cash is deposited with high credit-quality financial institutions. For accounts receivable, the Company performs ongoing credit evaluations of its customers financial condition and the Company maintains
an allowance for doubtful accounts receivable based upon a review of the expected collectibility of individual accounts.
The Company
sells the semiconductor solutions to leading OEMs and module makers, worldwide. Most of the Companys solid state storage controllers are supplied to NAND flash manufacturers. The Company is the leading merchant supplier of controllers used in
client SSD for PCs and eMMC used in smartphones and a
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leading supplier of controllers used in flash memory cards and USB flash drives. The Company provides the specialty RF ICs primarily to Samsung and other OEMs. Sales to two customers in 2013 and
2014, and one customer in 2015 accounted for 10% or more of the Companys net sales, represented 46%, 47% and 30% of the Companys net sales in 2013, 2014 and 2015, respectively. In 2013 and 2014, the significant customers were Samsung and
SK Hynix and in 2015, SK Hynix. The Companys top ten customers in 2013, 2014 and 2015 accounted for approximately 76%, 76% and 72% of net sales.
Fair Value of Financial Instruments
The carrying amount of the Companys financial instruments, including cash and cash equivalents, notes and accounts receivable and notes
and accounts payables approximates fair value due to the short-term maturity of the instruments. Fair values of short-term investments represent quoted market prices, if available. If no quoted market prices are available, fair values are estimated
based on discounted cash flow, or other valuation techniques. Long-term investments are privately-held companies where there is no readily determinable market value and are recorded using the cost method, since the cost of obtaining verifiable fair
value is unreasonably high. The Company periodically evaluates these investments for impairment. If it is determined that an other-than-temporary decline has occurred in the carrying value, an impairment loss is recorded for that period. The
Companys long-term liabilities approximate their fair values as they contain interest rates that vary according to market interest rates.
Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between
market participants at the measurement date and in the principal or most advantageous market for that assets or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability,
not on assumptions specific to the Company. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value. The hierarchy prioritizes the inputs
into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is
significant to the fair value measurement in its entirety. These levels are:
Level 1 Use unadjusted quoted prices in active markets
for identical assets or liabilities.
Level 2 Use observable inputs other than Level 1 prices such as quoted prices for identical or
similar instruments in markets that are not active, quoted prices for similar instruments in active markets, and model-based valuation in which all significant inputs are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
Level 3 Use inputs that are generally unobservable and reflect the use of significant
management judgments and estimates.
See Note 18, Fair Value Measurement, for the related disclosure.
Cash Equivalents
The Company
considers all highly liquid investments to be cash equivalents.
Short-term Investments
The Companys short-term investments are short-term income yielding investments with original maturities greater than three months from
the purchase date and remaining maturities less than one year. These short-term investments consist primarily of bond funds that are bought and held principally for the purpose of selling them in the near term and are classified as trading
securities, structured notes designated at the fair value and senior notes classified as held-to-maturity investment with maturities less than one year. Trading securities and
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structured notes are reported at fair value with the subsequent changes in fair value recorded in earnings as unrealized gains and losses. Senior notes are measured at amortized cost using the
effective interest method less any impairment.
Allowance for Doubtful Receivables
An allowance for doubtful receivables is provided based on a review of the collectability of accounts receivables. The Company determines the
amount of allowance for doubtful receivables by examining the historical collection experience and current trends in the credit quality of its customers as well as its internal credit policies.
Inventories
Inventories are
stated at the lower of cost or market value. Inventories are recorded at standard cost and adjusted to the approximate weighted-average cost at the balance sheet date. Market value represents the current replacement cost for raw materials, work in
process and finished goods. The Company assesses its inventory for estimated obsolescence or unmarketable inventory based upon managements assumptions about future demand and market conditions. In estimating reserves for obsolescence, the
Company primarily evaluates estimates based on the timing of the introduction of new products and the quantities remaining of old products and provides reserves for inventory on hand in excess of the estimated demand. Estimated losses on slow-moving
items are recognized and included in the allowance for losses.
Long-term Investments
The Company has long-term investments in companies that it does not exercise significant influence and accounts for these investments under the
cost method. Management regularly evaluates financial information related to these investments to determine whether an other than temporary decline in their value exists. Factors indicative of an other than temporary decline include recurring
operating losses, credit defaults and subsequent rounds of financings at an amount below the cost basis of the investment. Management periodically weighs all quantitative and qualitative factors in determining if any impairment loss exists. When a
decline in value is deemed to be other-than-temporary, the Company recognizes an impairment loss in other income and expense.
Property and
Equipment
Property and equipment are stated at cost less accumulated depreciation. Significant additions, renewals and betterments
are capitalized, while maintenance and repairs are expensed as incurred.
Depreciation is computed using the straight-line method over
estimated useful lives that range as follows: buildings 25 to 50 years; machinery and equipment 3 to 6 years; furniture and fixtures 3 to 8 years; software 1 to 5 years; leasehold and buildings improvement the
shorter of the estimated useful life or lease term, which is generally 2 to 6 years. Depreciation expense recognized for the years ended December 31, 2013, 2014 and 2015 was approximately US$6,429 thousand, US$6,917 thousand and US$7,936
thousand, respectively.
Upon the sale or other disposal of property and equipment, the related cost and accumulated depreciation are
removed from the accounts, and any gain or loss is credited or charged to operating income.
Government Grants
Grants received by the Company from the Korean government to assist with specific research and development activities are deducted from those
research and development costs incurred, in the period in which the related expenses are incurred, to the extent that they are non-refundable. Government grants that were used
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for the acquisition of fixed assets are deducted from the acquisition costs of the acquired assets and amortized over the useful lives of the related assets. The Company recognizes refundable
government grants as long-term payable and current portion of long-term payable on its consolidated balance sheet.
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price paid over the fair value of the net tangible and intangible assets acquired in a
business combination. Intangible assets, which consist primarily of development technology, are amortized over their estimated useful lives, of 3.5 to 4.5 years.
Impairment of Goodwill and Long-Lived Assets
The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying value may not
be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance, growth rates and other factors. Estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to the
business model or changes in operating performance. If the sum of the undiscounted cash flows is less than the carrying value, an impairment loss is recognized, measured as the amount by which the carrying value exceeds the fair value of the asset.
Fair value is determined by reference to quoted market prices, if available, or discounted cash flows, as appropriate. See Note 10, Goodwill and Acquired Intangible Assets, regarding impairment testing in fiscal year 2013, 2014 and 2015.
The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or sooner if
events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company conducts its annual impairment test of goodwill on November 30. Reporting units may be operating segments as a whole or an operation one
level below an operating segment, referred to as a component. Goodwill impairment is tested using a two-step approach. The first step compares the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the
reporting unit is greater than its carrying amount, goodwill is not considered impaired and the second step is not required. If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test measures
the amount of the impairment loss, if any, by comparing the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. The implied
fair value of goodwill is calculated in the same manner that goodwill is calculated in a business combination, whereby the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit, with the excess purchases
price over the amounts assigned to assets and liabilities. Estimating fair value is performed by utilizing various valuation approaches, such as income approach or market approach. The total of all reporting unit fair values was also compared to the
Companys market capitalization plus control premium for reasonableness. See Note 10, Goodwill and Acquired Intangible Assets, regarding impairment testing.
Other Assets
Other assets
primarily consist of industrial property right and deposits for office leases.
Restricted Assets
Restricted assets consist of deposits required for litigation and restricted cash. Restricted cash represents cash set aside as collateral for
obtaining capacity and borrowings as well as cash received from government grants with restriction on its usage.
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Other long-term liabilities
Other long-term liabilities primarily consist of payable to former shareholders of Shannon Systems and unrecognized tax benefit.
Pension Costs
For employees under
defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees individual pension accounts. For employees under defined benefit pension plans, pension costs are recorded based on actuarial
calculations.
Revenue Recognition
Revenue from product sales is generally recognized upon shipment to the customer provided that the Company has received a signed purchase
order, the price is fixed or determinable, transfer of title has occurred in accordance with the shipping terms specified in the arrangement with the customer, collectibility from the customer is considered reasonably assured, product returns are
reasonably estimable and there are no remaining significant obligations or customer acceptance requirements. Revenue on development service orders is generally recognized upon completion and customer acceptance of contractually agreed milestones.
The Company grants certain distributors limited rights of return and price protection rights on unsold products. The return rights are
generally limited to five percent of the monetary value of products purchased within the preceding six months, provided that the distributor places a corresponding restocking order of equal or greater value. An allowance for sales returns for
distributors and all customers is recorded at the time of sale based on historical returns information available, managements judgment and any known factors at the time the financial statements are prepared that would significantly affect the
allowance. Price protection rights are based on the inventory products the distributors have on hand at the date the price protection is offered. A reserve for price adjustments is recorded based on the estimated products on hand at the distributors
and historical experience. The Company incurred actual price adjustments to distributors are minimal.
The Company provides a warranty
period of one year for manufacturing defects of its products. Warranty returns have been infrequent and relate to defective or off-specification parts. The Company estimates a reserve for warranty based on historical experience and records this
amount to cost of sales. For the years ended December 31, 2013, 2014 and 2015, the Company did not experience significant costs associated with warranty returns.
Research and Development
Research
and development costs consist of expenditures incurred during the course of planned research and investigation aimed at the discovery of new knowledge that will be useful in developing new products or at significantly enhancing existing products as
well as expenditures incurred for the design and testing of product alternatives. All expenditures related to research and development activities of the Company are charged to operating expenses when incurred. Third-party research and development
costs are expensed when the contracted work has been performed or as milestone results have been achieved.
Income Taxes
The provision for income tax represents income tax paid and payable for the current year plus the changes in the deferred income tax assets and
liabilities during the years. Deferred income tax assets are recognized for net operating loss carryforwards, research and development credits, and temporary differences. The Company believes that uncertainty exists regarding the realizability of
certain deferred income tax assets and, accordingly, has established a valuation allowance for those deferred income tax assets to the extent the realizability is not
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deemed to be more likely than not. Deferred income tax assets and liabilities are measured using enacted tax rates. The Company has classified deferred tax assets and liabilities as noncurrent on
the consolidated balance sheets as of December 31, 2015 and 2014 as the Company has early adopted Accounting Standards Update (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes, on a retrospective basis.
The Company utilizes a two step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained in a dispute with taxing authorities, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.
SMI Taiwan, the Companys largest operating company is a Taiwan registered company. Under Taiwan tax regulations, the current years
earnings, on an after tax basis, that are not distributed in the following year are subject to a 10% surtax income tax. This 10% surtax income tax is recognized in the period during which the related earnings are generated.
The Taiwan government enacted the Income Basic Tax Act (the IBT Act), which became effective on January 1, 2006. The
alternative minimum tax (AMT) imposed under the IBT Act is a supplemental tax levied at a rate of 10% which is payable if the income tax payable determined pursuant to the Income Tax Law is below the minimum amount prescribed under the
IBT Act. The taxable income for calculating the AMT includes most of the income that is exempted from income tax under various laws and statutes. The Company has considered the impact of the IBT Act in the determination of its tax liabilities. Under
the IBT Act amended in August 2012, the standard deduction and the tax rate of AMT were amended from NT$1,000 thousand to be NT$500 thousand and from 10% to 12%, respectively. The amended IBT Act is effective on January 1, 2013.
Foreign Currency Transactions
Foreign currency transactions are recorded at the rates of exchange in effect when the transaction occurs. Gains or losses, resulting from the
application of different foreign exchange rates when cash in foreign currency is converted into the entities functional currency, or when foreign currency receivables and payables are settled, are credited or charged to income in the period of
conversion or settlement. At the balance sheet date, assets and liabilities denominated in foreign currencies are remeasured based on prevailing exchange rates and any resulting gains or losses are credited or charged to income.
Translation of Foreign Currency Financial Statements
The reporting currency of the Company is the U.S. dollars. The functional currency of some of the Companys subsidiaries is the local
currency of the respective entity. Accordingly, the financial statements of the foreign subsidiaries were translated into U.S. dollars at the following exchange rates: assets and liabilities current rate on the balance sheet date;
shareholders equity historical rates; income and expenses average rate during the period. The resulting translation adjustment is recorded as a separate component of comprehensive income.
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Comprehensive Income (Loss)
Comprehensive income and loss represents net income (loss) plus the results of certain changes in shareholders equity during a period
from non-owner sources. The following table presents the components of accumulated other comprehensive income (loss) as of December 31, 2013, 2014 and 2015:
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Year Ended December 31, 2013
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Year Ended December 31, 2014
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Year Ended December 31, 2015
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|
|
|
US$
|
|
|
|
Foreign
currency
items
|
|
|
Defined
benefit
pension
plans
|
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
Foreign
currency
items
|
|
|
Defined
benefit
pension
plans
|
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
Foreign
currency
items
|
|
|
Defined
benefit
pension
plans
|
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Beginning balance
|
|
|
3,923
|
|
|
|
(258
|
)
|
|
|
3,665
|
|
|
|
4,556
|
|
|
|
(461
|
)
|
|
|
4,095
|
|
|
|
3,354
|
|
|
|
(849
|
)
|
|
|
2,505
|
|
Current-period change
|
|
|
633
|
|
|
|
(203
|
)
|
|
|
430
|
|
|
|
(1,202
|
)
|
|
|
(388
|
)
|
|
|
(1,590
|
)
|
|
|
(1,868
|
)
|
|
|
(4
|
)
|
|
|
(1,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
4,556
|
|
|
|
(461
|
)
|
|
|
4,095
|
|
|
|
3,354
|
|
|
|
(849
|
)
|
|
|
2,505
|
|
|
|
1,486
|
|
|
|
(853
|
)
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Contingencies
The Company is currently involved in various claims and legal proceedings. Periodically, the Company reviews the status of each significant
matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Because of uncertainties
related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to the pending claims and litigation and revises
these estimates as appropriate. Such revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial position.
Earnings Per Share
Basic earnings
per share are computed by dividing net earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if
stock options and other dilutive securities were exercised. Dilutive securities are excluded from the computation of the diluted income per share in periods when their effect is anti-dilutive. The Companys dilutive securities consist of
employee stock options and restricted stock units. The effect of dilutive securities including employee stock options and restricted stock units were 2,308 thousand shares (577 thousand ADSs), 2,183 thousand shares (546 thousand ADSs) and
1,534 thousand shares (384 thousand ADSs) for the years ended December 31, 2013, 2014 and 2015, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718 Compensation Stock Compensation. The Company
uses the Black-Scholes valuation model for the valuation of stock options and recognizes compensation expense on a straight-line basis over the requisite service period of the award. The value of our restricted stock units is based on the fair value
of our shares on the date of grant and expensed over the vesting period.
Prior to the initial declaration of a quarterly cash dividend on
January 22, 2013, the fair value of restricted stock units (RSUs) was measured based on the grant date share price, as the Company did not historically pay cash dividends on our common stock. For awards granted on or subsequent to
January 22, 2013, the fair value of RSUs was measured based on the grant date share price, less the present value of expected dividends during the vesting period, discounted at a risk-free interest rate.
Treasury Stock
Treasury stock is
stated at cost and shown as a reduction to shareholders equity.
F-14
The Company retires ordinary shares repurchased under a share repurchase plan. Accordingly, upon
retirement the excess of the purchase price over par value is allocated between additional paid-in capital and retained earnings based on the average issuance price of the shares repurchased. A repurchase of ADSs is recorded as treasury stock until
the Company completes the withdrawal of the underlying ordinary shares from the ADS program.
Dividends
Our Board of Directors declared payment of our first quarterly dividend on our common stock in January 2013 and the first dividend payment was
made on March 4, 2013. Our Board of Directors has subsequently declared and paid dividends in each successive quarter. On November 2, 2015, our Board of Directors, instead of declaring a quarterly dividend, declared an annual dividend
payable in four quarterly installments. The payment of future cash dividends are subject to the Boards continuing determination that the payment of dividends are in the best interests of the Companys shareholders and are in compliance
with all laws and agreements of the Company applicable to the declaration and payment of cash dividends.
Recent Accounting Pronouncements
In April 10, 2014, the FASB issued an accounting update, which changes the criteria for reporting discontinued operations for
all public and nonpublic entities. The guidance requires only disposals that represent a strategic shift that has (or will have) a major effect on the entitys results and operations would qualify as discontinued operations. The guidance also
requires entities 1) to expand their disclosures about discontinued operations to include more information about assets, liabilities, income, and expenses and 2) to disclose the pre-tax income attributable to a disposal of of an individually
significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The guidance is effective for fiscal years beginning after December 15, 2014 and early adoption is prohibited.
The adoption of this guidance did not have a material impact on the Companys results of operations, financial position or cash flow.
In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a
customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires disclosure of the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued an amendment to defer the effective date. The new standard is effective for fiscal years beginning after
December 15, 2017 and early adoption is permitted for annual reporting periods beginning after December 15, 2016. In March and April 2016, the FASB issued two accounting updates to clarify the implementation guidance on principal versus
agent considerations, performance obligations and the licensing. The new guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at
the date of initial application. The Company is in the process of evaluating this guidance to determine the impact it will have on the consolidated financial statements.
In June 2014, the FASB issued an accounting update, which clarifies the accounting for share-based payments. The guidance requires that a
performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. The guidance is effective for fiscal years beginning after December 15, 2015 and early adoption is
permitted. The adoption of this guidance is not expected to have a material impact on the Companys results of operations, financial position or cash flow.
In August 2014, the FASB issued new standard related to the presentation of financial statements when there may be conditions or events that
raise substantial doubt about the entitys ability to continue as a going concern. This standard sets forth managements responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as
a going concern, and if so, to provide related footnote disclosures. The standard is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. The adoption of this guidance is not expected to have a material
impact on the Companys results of operations, financial position or cash flow.
F-15
In February 2015, the FASB issued an accounting update to amend the consolidation analysis. All
legal entities are subject to reevaluation under the revised consolidation model. The amendment is effective for fiscal years beginning after December 15, 2015 and early adoption is permitted. The adoption of this amendment is not expected to
have a material impact on the Companys results of operations, financial position or cash flow.
In April 2015, the FASB issued an
accounting update regarding the measurement date of a defined benefit obligation and plan assets. The amendment permits the entity with a fiscal year-end that does not coincide with a month-end to measure defined benefit plan assets and obligations
using the month-end that is closest to the entitys fiscal year-end. If a contribution or significant event (such as a plan amendment, settlement, or curtailment that calls for a remeasurement in accordance with existing requirements) occurs
between the month-end date used to measure defined benefit plan assets and obligations and an entitys fiscal year-end, the entity should adjust the measurement of defined benefit plan assets and obligations to reflect the effects of those
contributions or significant events. This amendment is effective for fiscal years beginning after December 15, 2016 and early application is permitted. The adoption of this amendment is not expected to have a material impact on the
Companys results of operations, financial position or cash flow.
In May 2015, the FASB issued an accounting update regarding
disclosures for investments that calculate net asset value per share. The amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical
expedient. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Further, the amendment removes
the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has
elected to measure the fair value using the practical expedient. The amendment is effective for fiscal years beginning after December 15, 2015. The amendment must be applied retrospectively and early adoption is permitted. The adoption of this
amendment is not expected to have a material impact on the Companys financial statement disclosure.
In July 2015, the FASB issued
an accounting update to simplify the measurement of inventory. The amendment requires the measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. The amendment applies to inventories for which cost is determined by methods other than the last-in first-out and the retail inventory methods. This amendment
is effective prospectively for annual periods beginning after December 15, 2016 and early application is permitted. The adoption of this amendment is not expected to have a material impact on the Companys results of operations, financial
position or cash flow.
In September 2015, the FASB issued an accounting update regarding simplifying the accounting for measurement
period adjustments attributable to an acquisition. The amendment requires an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are
determined. The adjustments should reflect the impact on earnings of changes in depreciation, amortization, or other income effects, if any, as if the accounting had been completed as of the acquisition date. Additionally, amounts recorded in the
current period that would have been reflected in prior reporting periods if the adjustments had been recognized as of the acquisition date must be disclosed either on the face of the income statement or in the notes to financial statements. This
amendment is effective prospectively for annual periods beginning after December 15, 2015 and early application is permitted. The adoption of this guidance is not expected to have a material effect on the Companys financial condition,
results of operations, cash flow and financial statement disclosures.
In November 2015, the FASB issued an accounting update to simplify
the presentation of deferred income taxes. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets
of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this
F-16
guidance. This amendment is effective prospectively or retrospectively for annual periods beginning after December 15, 2016 and early application is permitted. The Company has elected to
adopt the amendment as of December 31, 2015, and the retrospective adoption is applied to prior reporting period presented. The adoption of this amendment did not have a material impact on the Companys financial position.
Prior to the adoption, noncurrent deferred income tax assets and current deferred income tax liabilities for the year ended December 31,
2014 are US$1,909 thousand and US$388 thousand, respectively. To early adopt ASU 2015-17, the Company has reclassified current deferred income tax liabilities of US$388 thousand to noncurrent deferred tax liabilities by presenting against the
noncurrent deferred income tax assets of US$1,909 thousand. After the adjustment, the noncurrent deferred income tax assets are US$1,521 thousand as of December 31, 2014.
In February 2016, the FASB issued a new standard regarding leases. The new standard requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases other than that the entity elects the short-term lease recognition and measurement exemption. Qualitative and quantitative disclosures will be enhanced to better understand the amount,
timing and uncertainty of cash flows arising from leases. This standard is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. The Company is in the process of evaluating this guidance to determine the
impact it will have on the consolidated financial statements.
In March 2016, the FASB issued an accounting update to simplify several
aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendment is effective for
fiscal years beginning after December 15, 2016, and earlier adoption is permitted. The Company is currently evaluating the impact that the adoption will have on its results of operations, financial position, cash flow and disclosures.
3. BUSINESS ACQUISITION
On July 1, 2015, the Company completed its acquisition of Shannon Systems, Chinas leading enterprise-class PCIe
SSD company based in Shanghai, China. In exchange for 100% of outstanding shares of common stock of Shannon Systems, the Company issued 1,560 thousand ordinary shares with fair value of US$7,640 thousand and paid approximately US$37,925
thousand in cash. The value of the 1,560 thousand ordinary shares issued was determined based on the average market price of the Companys ordinary shares over the 20-day period before the terms of the acquisition were agreed to and
announced. In 2015, the Company incurred US$359 thousand of acquisition costs which comprise primarily of transaction fees and direct acquisition costs, including legal, accounting, and other professional fees. These costs are included in the line
item of operating expenses - general and administrative on the consolidated statements of income. The acquisition will expand the Companys portfolio of embedded storage products.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
US$
|
|
Cash and cash equivalents
|
|
|
1,903
|
|
Accounts receivable, net
|
|
|
946
|
|
Inventories
|
|
|
2,624
|
|
Other current assets
|
|
|
289
|
|
Property and equipment
|
|
|
71
|
|
Goodwill
|
|
|
33,204
|
|
Identifiable intangible assets
|
|
|
8,381
|
|
Accounts payable
|
|
|
(644
|
)
|
Accrued expenses and other current liabilities
|
|
|
(1,209
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
45,565
|
|
|
|
|
|
|
F-17
As of December 31, 2015, of the cash consideration of approximately US$37,925 thousand,
US$5,735 thousand has not been paid to the former shareholders of Shannon Systems as of December 31, 2015 and are included in other long-term liabilities on the consolidated balance sheets.
The excess of the purchase price over the fair value of the net tangible assets acquired has been reflected as identifiable intangible assets.
The identifiable intangible assets and respective useful lives are as follows:
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
Useful Life
|
|
Developed technology
|
|
|
3,789
|
|
|
|
3.5
|
|
In-process research and development (IPR&D)
|
|
|
4,592
|
|
|
|
indefinite
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible assets
|
|
|
8,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology represented the existing know-how in enterprise-class PCIe SSD including all the
developed and in-process products for the Shannon Systems business.
The estimated fair value of IPR&D was defined as research and
development projects related to enterprise-class PCIe SSDs in-process at the time of the transaction that had not demonstrated their technological feasibility and that do not have an alternative future use.
Goodwill represents the excess of the purchase price over the estimated fair values of the net tangible and intangible assets. The factors
that contributed to the recognition of goodwill primarily relate to expansion into new product areas and potential synergies created from combined capabilities, and goodwill is not expected to be deductible for tax purposes.
The results of Shannon Systems since the acquisition date included on the consolidated statement of income for the year ended
December 31, 2015 were as follows:
|
|
|
|
|
|
|
US$
|
|
Net sales
|
|
|
9,049
|
|
Net income
|
|
|
421
|
|
The operating results of Shannon Systems have been included in the Companys operations beginning
July 1, 2015. The following unaudited pro forma information represents a summary of the results of operations as if the acquisition occurred on January 1, 2014 and 2015 and includes certain pro forma adjustments, including amortization of
identifiable intangibles from that date (in thousands except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2014
|
|
|
2015
|
|
Net sales
|
|
|
293,562
|
|
|
|
364,670
|
|
Net income
|
|
|
42,483
|
|
|
|
58,468
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.31
|
|
|
|
0.42
|
|
Diluted
|
|
|
0.31
|
|
|
|
0.42
|
|
Weighted average ordinary shares outstanding (thousand)
|
|
|
|
|
|
|
|
|
Basic
|
|
|
136,164
|
|
|
|
138,880
|
|
Diluted
|
|
|
138,347
|
|
|
|
140,414
|
|
The pro forma results are based on various assumptions and are not necessarily indicative of what would have
occurred had the acquisition closed on January 1, 2014 and 2015.
F-18
4. CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
Cash and deposits in bank
|
|
|
38,851
|
|
|
|
28,780
|
|
Time deposits
|
|
|
155,360
|
|
|
|
151,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,211
|
|
|
|
180,519
|
|
|
|
|
|
|
|
|
|
|
5. SHORT-TERM INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
Trading securities
|
|
|
703
|
|
|
|
681
|
|
Held-to-maturity investments
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
|
|
4,681
|
|
|
|
|
|
|
|
|
|
|
The Company classified certain short-term investments as trading securities in 2013, 2014 and 2015. Realized
gains on sales of these trading securities were US$4 thousand, US$4 thousand and US$3 thousand for the years ended December 31, 2013, 2014 and 2015, respectively. The amount of unrealized losses related to trading securities at year end was nil
for the years ended December 31, 2013, 2014 and 2015, respectively. Structured notes matured in May 2013 and the Company recognized the gain of US$118 thousand.
The held-to-maturity investments are senior notes. In July 2015, the Company purchased senior notes which will be matured in July 2016 with a
coupon rate of 1.65% and an effective interest rate of 1.65%, at par value of US$4,000 thousand.
6. NOTES AND ACCOUNTS RECEIVABLE
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
Notes receivable
|
|
|
192
|
|
|
|
16
|
|
Trade accounts receivable
|
|
|
31,256
|
|
|
|
61,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,448
|
|
|
|
61,309
|
|
Allowance for doubtful accounts
|
|
|
(1,167
|
)
|
|
|
(775
|
)
|
Allowance for sales returns and discounts
|
|
|
(1,427
|
)
|
|
|
(1,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
28,854
|
|
|
|
58,979
|
|
|
|
|
|
|
|
|
|
|
The changes in the allowances are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Allowances for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1,634
|
|
|
|
1,275
|
|
|
|
1,167
|
|
Reversals charged to expense, net
|
|
|
(359
|
)
|
|
|
(108
|
)
|
|
|
(392
|
)
|
Write-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,275
|
|
|
|
1,167
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Allowances for sales returns and discounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1,919
|
|
|
|
1,059
|
|
|
|
1,427
|
|
Additions charged to expense, net
|
|
|
1,320
|
|
|
|
1,600
|
|
|
|
1,753
|
|
Actual sales return and discount
|
|
|
(2,180
|
)
|
|
|
(1,232
|
)
|
|
|
(1,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,059
|
|
|
|
1,427
|
|
|
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
Finished goods
|
|
|
9,787
|
|
|
|
13,860
|
|
Work in process
|
|
|
20,835
|
|
|
|
21,201
|
|
Raw materials
|
|
|
13,454
|
|
|
|
12,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,076
|
|
|
|
47,110
|
|
|
|
|
|
|
|
|
|
|
The Company wrote down US$2,503 thousand, US$4,561 thousand and US$2,525 thousand in 2013, 2014 and 2015,
respectively, for estimated obsolete or unmarketable inventory.
8. LONG-TERM INVESTMENTS
As of December 31, 2014 and 2015, the Company held equity investments in several privately-held companies with the
carrying value as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of
Ownership
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
Cost method:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashido Corp. (Cashido)
|
|
|
2.1
|
%
|
|
|
2.1
|
%
|
|
|
104
|
|
|
|
104
|
|
Vastview Technology, Corp. (Vastview)
|
|
|
2.9
|
%
|
|
|
2.9
|
%
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2001, the Company invested in the common stock of Cashido. At the time of our investment, Cashido
manufactured flash memory storage devices. Cashido currently focuses on the manufacture of computer accessories and ozone based sterilization devices.
In December 2006 and February 2007, the Company invested US$3,360 thousand in the common stock of Vastview. Vastview is a fabless
semiconductor company that develops and markets driver ICs and other ICs for the TFT-LCD industry. In 2009 and 2013, the Company received US$808 thousand and US$46 thousand from Vastview which reduced its share capital. From 2008 to 2010, the
Company had recognized impairment charges of US$2,462 thousand in its investment in Vastview. No impairment charges were incurred since 2011.
The Company accounts for these investments using the cost method. These investments are evaluated for impairment on an annual basis or as
circumstances warrant. The Company believed there was no other than temporary impairment for the years ended December 31, 2013, 2014 and 2015, respectively.
F-20
9. PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
Cost:
|
|
|
|
|
|
|
|
|
Land
|
|
|
8,058
|
|
|
|
8,813
|
|
Buildings
|
|
|
19,813
|
|
|
|
21,254
|
|
Machinery and equipment
|
|
|
13,443
|
|
|
|
15,995
|
|
Furniture and fixtures
|
|
|
5,131
|
|
|
|
6,446
|
|
Leasehold and buildings improvement
|
|
|
4,229
|
|
|
|
4,656
|
|
Software
|
|
|
29,796
|
|
|
|
17,505
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
80,470
|
|
|
|
74,669
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
2,240
|
|
|
|
2,648
|
|
Machinery and equipment
|
|
|
10,573
|
|
|
|
11,983
|
|
Furniture and fixtures
|
|
|
3,492
|
|
|
|
3,980
|
|
Leasehold and buildings improvement
|
|
|
3,064
|
|
|
|
3,358
|
|
Software
|
|
|
25,807
|
|
|
|
14,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,176
|
|
|
|
36,390
|
|
Prepayment and construction in progress
|
|
|
243
|
|
|
|
12,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,537
|
|
|
|
50,469
|
|
|
|
|
|
|
|
|
|
|
In April 2006, the Company leased properties located in Taipei, Taiwan, to a third party under a three-year
operating lease. Net carrying value of the properties as of December 31, 2015 was US$746 thousand. The lessee renewed the three year operating lease with the Company in March 2012 and 2015. Annual rental income from the lease is about US$41
thousand each year.
10. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Intangible assets:
The intangible assets acquired from the Companys acquisition of FCI and Centronix in 2007
and Shannon Systems in 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
|
Cost
|
|
|
Accumulated
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Cost
|
|
|
Accumulated
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Core technology
|
|
|
15,809
|
|
|
|
(4,474
|
)
|
|
|
(11,335
|
)
|
|
|
|
|
|
|
15,809
|
|
|
|
(4,474
|
)
|
|
|
(11,335
|
)
|
|
|
|
|
Customer relationship
|
|
|
8,325
|
|
|
|
|
|
|
|
(8,325
|
)
|
|
|
|
|
|
|
8,325
|
|
|
|
|
|
|
|
(8,325
|
)
|
|
|
|
|
Order backlog
|
|
|
1,243
|
|
|
|
|
|
|
|
(1,243
|
)
|
|
|
|
|
|
|
1,243
|
|
|
|
|
|
|
|
(1,243
|
)
|
|
|
|
|
Developed technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,381
|
|
|
|
|
|
|
|
(1,051
|
)
|
|
|
7,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,377
|
|
|
|
(4,474
|
)
|
|
|
(20,903
|
)
|
|
|
|
|
|
|
33,758
|
|
|
|
(4,474
|
)
|
|
|
(21,954
|
)
|
|
|
7,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No impairment losses were recognized in 2013, 2014 and 2015. Amortization expense of acquisition-related
intangible assets for the years ended December 31, 2013, 2014 and 2015 was nil, nil and US$ 1,051 thousand, respectively.
F-21
Goodwill:
Goodwill is not amortized, but instead is reviewed and tested for impairment at
least annually and whenever events or circumstances occur which indicate that goodwill might be impaired. Impairment of goodwill is tested at the Companys reporting unit level by comparing the carrying amount, including goodwill, to the fair
value. In performing the analysis, the Company uses the best information available, including reasonable and supportable assumptions and projections. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment loss, if any. The Company performed its annual impairment test on November 30. The goodwill that resulted from the Companys acquisition of FCI and Centronix in
2007 and purchased BTLs assets in 2011 was US$66,300 thousand. The Companys fiscal 2013, 2014 and 2015 impairment test concluded there was no impairment. The goodwill that resulted from the Companys acquisition of Shannon Systems
in 2015 was US$33,204 thousand. Total goodwill was US$35,467 thousand and US$68,660 thousand as of December 31, 2014 and 2015, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
|
Cost
|
|
|
Accumulated
Impairment
|
|
|
Foreign
Currency
Adjustment
|
|
|
Net
Carrying
Amount
|
|
|
Cost
|
|
|
Accumulated
Impairment
|
|
|
Foreign
Currency
Adjustment
|
|
|
Net
Carrying
Amount
|
|
Goodwill
|
|
|
66,300
|
|
|
|
(30,808
|
)
|
|
|
(25
|
)
|
|
|
35,467
|
|
|
|
99,504
|
|
|
|
(30,808
|
)
|
|
|
(36
|
)
|
|
|
68,660
|
|
11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
Wages and bonus
|
|
|
12,093
|
|
|
|
20,365
|
|
Dividends
|
|
|
153
|
|
|
|
15,839
|
|
Research and development payable
|
|
|
2,468
|
|
|
|
2,953
|
|
License fees and royalties
|
|
|
2,982
|
|
|
|
4,173
|
|
Professional fees
|
|
|
1,714
|
|
|
|
2,126
|
|
Equipment
|
|
|
1,170
|
|
|
|
1,285
|
|
Others
|
|
|
3,066
|
|
|
|
5,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,646
|
|
|
|
52,081
|
|
|
|
|
|
|
|
|
|
|
12. PENSION PLAN
SMI Taiwan, the Companys largest operating company is a Taiwan registered company and subject to Taiwans Labor
Pension Act (the Act), which became effective on July 1, 2005, and the pension mechanism under the Act is deemed a defined contribution plan. The employees who were subject to the Labor Standards Law prior to July 1, 2005 were
allowed to choose to be subject to the pension mechanism under the Act or continue to be subject to the pension mechanism under the Labor Standards Law. For those employees who were subject to the Labor Standards Law prior to July 1, 2005 and
still work for the same company after July 1, 2005 and have chosen to be subject to the pension mechanism under the Act, their seniority as of July 1, 2005 were maintained. The Act prescribes that the rate of contribution by an employer to
employees pension accounts per month will not be less than 6% of each employees monthly salary. According to the Act, SMI Taiwan made monthly contributions and recognized pension costs of US$788 thousand, US$872 thousand and US$1,015
thousand for the years ended December 31, 2013, 2014 and 2015, respectively.
The Company provides a defined benefit plan to the
employees of SMI Taiwan under the Labor Standards Law that offers benefits based on an employees length of service and average monthly salary for the six-month period prior to retirement. The Company contributes an amount equal to 2% of
salaries paid each month to a pension funds (the Funds), which is administered by the Labor Pension Fund Supervisory Committee
F-22
established by the government (the Committee) and deposited in the Committees name in the Bank of Taiwan. Before the end of each year, the Company assesses the balance in the
Funds. If the amount of the balance in the Funds is inadequate to pay retirement benefit for employees who conform to retirements in the next year, the Company is required to fund the difference in one appropriation that should be made before the
end of March of the next year. The government is responsible for the administration of all the defined benefit plans for the companies in Taiwan under the Labor Standards Law. The government also sets investment policies and strategies, determines
investment allocation and selects investment managers. As of December 31, 2014 and 2015, the asset allocation was primarily in cash, equity securities and debt securities. Furthermore, under the Labor Standards Law, the rate of return on assets
shall not be less than the average interest rate on a two-year time deposit published by the local banks. The government is responsible for any shortfall in the event that the rate of return is less than the required rate of return. However,
information on how investment allocation decisions are made, inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the
period and significant concentrations of risk within plan assets is not fully made available to the Company by the government. Therefore, the Company is unable to provide the required fair value disclosures related to pension plan assets. Future
contributions will be based on 2% of the employee salaries at that time. The Company estimates its contribution for the year ending December 31, 2016 to be US$57 thousand which was determined based on 2% of estimated salaries in 2016.
Starting in 2010, the Company provides a defined benefit pension plan to the Korean employees of FCI, the Companys second largest
operating subsidiary with at least one year of service. FCIs overall investment strategy is to avoid a negative return on plan assets. FCI estimates its contribution for the year ending December 31, 2016 to be US$745 thousand.
For employees under defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees
individual pension accounts. For employees under defined benefit pension plans, pension costs are recorded based on actuarial calculations. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including
discount rate, expected return on plan assets, compensation increase, employee mortality and turnover rates. The Company reviewed its actuarial assumptions at the measurement date on December 31 every year. The effect of modifications to
assumptions is recorded in accumulated other comprehensive loss and amortized to net periodic cost over future periods using the corridor method. The Company believes that assumptions utilized in recording its obligations under its plans are
reasonable based on its experience and market conditions. Independent actuaries perform the required calculations to determine expense in accordance with U.S. GAAP. Actual results may differ from the actuarial assumptions and are generally
accumulated and amortized into earnings over future periods. The net periodic costs are recognized as employees render services necessary to earn the benefits.
F-23
The changes in benefits obligation and plan assets and the reconciliation of funded status are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
|
1,897
|
|
|
|
2,098
|
|
|
|
3,320
|
|
Service cost
|
|
|
440
|
|
|
|
437
|
|
|
|
273
|
|
Interest cost
|
|
|
58
|
|
|
|
58
|
|
|
|
57
|
|
Actuarial loss(gain)
|
|
|
(202
|
)
|
|
|
814
|
|
|
|
79
|
|
Benefits paid
|
|
|
(95
|
)
|
|
|
(87
|
)
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
|
2,098
|
|
|
|
3,320
|
|
|
|
3,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
1,925
|
|
|
|
2,319
|
|
|
|
2,556
|
|
Actual return on plan assets
|
|
|
43
|
|
|
|
31
|
|
|
|
33
|
|
Employer contributions
|
|
|
433
|
|
|
|
282
|
|
|
|
328
|
|
Benefits paid
|
|
|
(82
|
)
|
|
|
(76
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
2,319
|
|
|
|
2,556
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status recognized as an other asset (liabilities)
|
|
|
221
|
|
|
|
(764
|
)
|
|
|
(832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net loss
|
|
|
460
|
|
|
|
848
|
|
|
|
852
|
|
Transition obligation
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in accumulated other comprehensive income
|
|
|
461
|
|
|
|
849
|
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit pension plans was US$1,369 thousand, US$1,762
thousand and US$2,098 thousand at December 31, 2013, 2014 and 2015, respectively.
The components of net periodic benefit cost are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Service cost
|
|
|
440
|
|
|
|
437
|
|
|
|
273
|
|
Interest cost
|
|
|
58
|
|
|
|
58
|
|
|
|
57
|
|
Projected return on plan assets
|
|
|
(47
|
)
|
|
|
(51
|
)
|
|
|
(47
|
)
|
Amortization of unrecognized net transition obligation and unrecognized net actuarial
gain
|
|
|
(3
|
)
|
|
|
(19
|
)
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
448
|
|
|
|
425
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
Other changes in plan assets and benefit obligation recognized in other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Recognize the decrease in net gain
|
|
|
203
|
|
|
|
388
|
|
|
|
4
|
|
Amortization of net gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive loss
|
|
|
203
|
|
|
|
388
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net gain for the defined benefit pension plans that will be amortized from accumulated other
comprehensive income into net periodic benefit cost over the next fiscal year is US$19 thousand.
Expected benefit payments:
|
|
|
|
|
|
|
US$
|
|
2016
|
|
|
146
|
|
2017
|
|
|
290
|
|
2018
|
|
|
175
|
|
2019
|
|
|
140
|
|
2020
|
|
|
120
|
|
2021 and thereafter
|
|
|
748
|
|
The actuarial assumptions to determine the benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
Taiwan
|
|
|
Korea
|
|
|
Taiwan
|
|
|
Korea
|
|
|
Taiwan
|
|
|
Korea
|
|
Weighted-average assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
1.88
|
%
|
|
|
5.20
|
%
|
|
|
2.00
|
%
|
|
|
4.10
|
%
|
|
|
1.75
|
%
|
|
|
3.90
|
%
|
Rate of compensation increase
|
|
|
4.25
|
%
|
|
|
2.60
|
%
|
|
|
4.25
|
%
|
|
|
5.00
|
%
|
|
|
4.25
|
%
|
|
|
4.00
|
%
|
Weighted-average assumptions used to determine net projected benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
1.88
|
%
|
|
|
5.20
|
%
|
|
|
2.00
|
%
|
|
|
4.10
|
%
|
|
|
1.75
|
%
|
|
|
3.90
|
%
|
Expected long-term return on plan assets
|
|
|
2.00
|
%
|
|
|
3.00
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
1.20
|
%
|
Rate of compensation increase
|
|
|
4.25
|
%
|
|
|
2.60
|
%
|
|
|
4.25
|
%
|
|
|
5.00
|
%
|
|
|
4.25
|
%
|
|
|
4.00
|
%
|
In 2014 and 2015, FCIs pension plan assets were invested in principal guaranteed interest insurance
contracts and fixed bank deposits, which are principal and interest guaranteed products and are classified as Level 2. These Level 2 securities were valued by discounting future cash flows using benchmark yield rates.
The fair values of FCIs pension plan assets at December 31, 2014 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
Guaranteed interest contract
|
|
|
|
|
|
|
|
|
Kyobo Life Insurance Co. Ltd.
|
|
|
730
|
|
|
|
823
|
|
Fixed deposit
|
|
|
|
|
|
|
|
|
Industrial Bank of Korea
|
|
|
875
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,605
|
|
|
|
1,803
|
|
|
|
|
|
|
|
|
|
|
F-25
13. INCOME TAXES
The components of income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Current
|
|
|
8,591
|
|
|
|
15,630
|
|
|
|
17,338
|
|
Deferred
|
|
|
1,181
|
|
|
|
471
|
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
9,772
|
|
|
|
16,101
|
|
|
|
18,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income (loss) before income taxes for domestic and foreign entities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Domestic
|
|
|
(8,080
|
)
|
|
|
(12,761
|
)
|
|
|
(12,037
|
)
|
Foreign
|
|
|
45,228
|
|
|
|
73,329
|
|
|
|
90,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,148
|
|
|
|
60,568
|
|
|
|
78,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the Company is based in the Cayman Islands, a British overseas territory with no corporate income tax,
domestic tax on pretax income is calculated at the Cayman Islands statutory rate of zero for each year.
The Company and its subsidiaries
file separate income tax returns. A reconciliation of income tax expense on pretax income at statutory rate and income tax expense is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Cayman statutory rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax on pretax income at statutory rate
|
|
|
6,788
|
|
|
|
15,727
|
|
|
|
18,765
|
|
Tax-exempt income
|
|
|
(4,325
|
)
|
|
|
(2,573
|
)
|
|
|
(906
|
)
|
Permanent differences
|
|
|
1,730
|
|
|
|
(396
|
)
|
|
|
(1,065
|
)
|
Temporary differences
|
|
|
1,732
|
|
|
|
(344
|
)
|
|
|
(330
|
)
|
Alternative minimum tax
|
|
|
2,203
|
|
|
|
1,170
|
|
|
|
4
|
|
Income tax (10%) on undistributed earnings
|
|
|
3,396
|
|
|
|
2,491
|
|
|
|
2,460
|
|
Net changes in income tax credit
|
|
|
708
|
|
|
|
(899
|
)
|
|
|
(897
|
)
|
Net changes in valuation allowance of deferred income tax assets
|
|
|
(2,364
|
)
|
|
|
733
|
|
|
|
1,621
|
|
Net operating loss carryforwards
|
|
|
(189
|
)
|
|
|
(1,298
|
)
|
|
|
(2,052
|
)
|
Liabilities related to unrealized tax benefits
|
|
|
(39
|
)
|
|
|
91
|
|
|
|
672
|
|
Adjustment of prior years taxes and others
|
|
|
132
|
|
|
|
1,399
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
9,772
|
|
|
|
16,101
|
|
|
|
18,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
Deferred income tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2014
|
|
|
2015
|
|
|
|
As Adjusted
(Note 2)
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
Notes and accounts receivable
|
|
|
141
|
|
|
|
82
|
|
Stock-based compensation
|
|
|
615
|
|
|
|
544
|
|
Allowance for sales return
|
|
|
105
|
|
|
|
173
|
|
Inventory reserve
|
|
|
814
|
|
|
|
1,478
|
|
Foreign currency translation
|
|
|
(1,273
|
)
|
|
|
(1,949
|
)
|
Property and equipment
|
|
|
452
|
|
|
|
360
|
|
Investment tax credits
|
|
|
7,823
|
|
|
|
8,295
|
|
Net operating loss carryforwards
|
|
|
9,621
|
|
|
|
10,651
|
|
Others
|
|
|
14
|
|
|
|
20
|
|
Valuation allowance
|
|
|
(16,791
|
)
|
|
|
(19,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,521
|
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance shown in the table above relates to net operating loss carryforwards, tax credits and
temporary differences for which the Company believes that realization is uncertain. The change in the valuation allowance was an increase of US$1,075 thousand, an increase of US$515 thousand, and an increase of US$2,253 thousand for the years
ended December 31, 2013, 2014, and 2015, respectively. The increase in valuation allowance in 2013, 2014 and 2015 are primarily due to the uncertainty in generating sufficient taxable income in the future and utilization of operating loss
carryforwards and research and development credits before they expire. In addition, profits generated from certain products of SMI Taiwan are exempted from income tax for five years beginning January 1, 2010 and January 1, 2012.
As of December 31, 2015, FCI had unused research and development tax credits of approximately US$4,139 thousand which will expire in the
period from 2015 to 2019.
As of December 31, 2015, the Companys United States federal net operating loss carryforwards for
federal income tax purposes were approximately US$9,427 thousand. If not utilized, the federal net operating loss carryforwards will expire in 2035.
As of December 31, 2015, the Companys United States federal and state research and development tax credit carryforwards for federal
and state income tax purposes were approximately US$2,444 thousand and US$1,711 thousand, respectively. If not utilized, the federal tax credit carryforwards will expire starting in 2035 while the state tax credit carryforward has no expiration
date.
Current United States federal and California state laws include substantial restrictions on the utilization of net operating losses
and credits in the event of an ownership change of a corporation. Accordingly, the Companys ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such ownership change. Such a
limitation could result in the expiration of carryforwards before they are utilized.
As of December 31, 2015, the Company had
accumulated undistributed earnings from a foreign subsidiary of US$242 million. No deferred tax liability was recorded in respect of those amounts as these earnings are considered indefinitely reinvested. It is not practicable to estimate the amount
of unrecognized deferred tax liabilities for these undistributed foreign earnings.
F-27
Unrecognized Tax Benefit
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Balance, beginning of year
|
|
|
3,520
|
|
|
|
5,815
|
|
|
|
4,655
|
|
Increases in tax positions taken in current year
|
|
|
2,947
|
|
|
|
446
|
|
|
|
2,337
|
|
Decrease in tax position taken in prior year primarily related to the resolution of tax
audit
|
|
|
(652
|
)
|
|
|
(1,606
|
)
|
|
|
(1,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
5,815
|
|
|
|
4,655
|
|
|
|
5,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015, the Company had US$5,639 thousand of unrecognized tax benefits that if recognized
would affect the effective tax rate. For the years ended December 31, 2013, 2014 and 2015, the total amount of interest expense and penalties related to uncertain tax positions recorded in the provision for income tax expense was approximately
US$627 thousand, US$343 thousand and US$363 thousand, respectively. The total amount of accrued interest and penalties recognized as of December 31, 2014 and 2015 was US$1,674 thousand and US$1,977 thousand, respectively. The Company does not
expect uncertain tax positions to change in the next twelve months, except in the case of settlements with tax authorities, the likelihood and timing of which are difficult to estimate.
The Company files income tax returns in United States and foreign jurisdictions. The following table summarizes the Companys major
jurisdictions and tax year that remain subject to examination by tax authorities as of December 31, 2015:
|
|
|
Tax Jurisdiction
|
|
Tax Years
|
Hong Kong
|
|
2013 and onward
|
Taiwan
|
|
2010 and onward
|
Korea
|
|
2010 and onward
|
United States
|
|
2007 onward
|
14. SHAREHOLDERS EQUITY
Appropriations from Earnings
Pursuant to the laws and regulations of the ROC and the respective Articles of Incorporation, SMI Taiwan, the Companys largest
subsidiary, must make appropriations from annual earnings to non-distributable reserve which could affect the Companys ability to pay cash or stock dividends, if any. SMI Taiwan subsidiary may only distribute dividends after it has made
allowances as determined under ROC GAAP at each year-end for:
|
b.
|
Recovery of prior years deficits, if any;
|
|
c.
|
10% of remaining balance after deduction for a and b as legal reserve;
|
|
d.
|
Special reserve based on relevant laws or regulations or 10% of remaining balance for deduction from above a to c as special reserve when necessary;
|
|
e.
|
Cash or stock bonus to employees at 0.01% of any remaining earnings after the above reserves have been appropriated, based on a resolution of the board of directors. If bonus to employees is in the form of stock, the
bonus may also be appropriated to employees of subsidiaries under the board of directors approval;
|
The existing
Articles of Incorporation of SMI Taiwan stipulates to distribute bonus to employees at 0.01% of net income (net of the bonus and remuneration). In accordance with the amendments to the Company Act in
F-28
May 2015, the recipients of dividends and bonuses are limited to shareholders and do not include employees. The consequential amendments to the Articles of Incorporation of SMI Taiwan will be
approved by the SMI Taiwans board of directors by June 30, 2016. The proposed amended Articles of Incorporation of SMI Taiwan will stipulate to distribute employees compensation and remuneration to directors and supervisors at rates
no less than certain percentage or amount and no higher than certain percentage or amount, respectively, of net profit before income tax, employees compensation, and remuneration to directors and supervisors.
Dividends
The Company declared cash
dividends per ordinary share during the periods presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
|
Dividends
Per Share
(US$)
|
|
|
Amount
(in US$
thousands)
|
|
|
Dividends
Per Share
(US$)
|
|
|
Amount
(in US$
thousands)
|
|
First quarter
|
|
$
|
0.0375
|
|
|
$
|
5,056
|
|
|
$
|
0.0375
|
|
|
$
|
5,156
|
|
Second quarter
|
|
$
|
0.0375
|
|
|
|
5,060
|
|
|
$
|
0.0375
|
|
|
|
5,166
|
|
Third quarter
|
|
$
|
0.0375
|
|
|
|
5,081
|
|
|
$
|
0.0375
|
|
|
|
5,230
|
|
Fourth quarter
|
|
$
|
0.0375
|
|
|
|
5,084
|
|
|
$
|
0.0375
|
|
|
|
5,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,281
|
|
|
|
|
|
|
$
|
20,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 2, 2015, our Board of Directors, instead of declaring a quarterly dividend, declared an annual
dividend of US$0.6 per ADS, equivalent to US$0.15 per ordinary share, which will be paid in four quarterly installments staring the forth quarter of 2015. Future dividends, if any, on the Companys outstanding ADSs and ordinary shares will be
declared by and subject to the discretion of the Companys board of directors. If the Companys board of directors decides to distribute dividends, the form, frequency and amount of such dividends will depend upon the Companys future
operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors our board of directors may deem relevant.
Any future dividend the Company declares will be paid to the holders of ADSs, subject to the terms of the deposit agreement, to the same
extent as holders of the Companys ordinary shares, to the extent permitted by applicable laws and regulations, less the fees and expenses payable under the deposit agreement. Any dividend the Company declares will be distributed by the
depositary bank to the holders of our ADSs. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
Treasury Stock
On January 21, 2013, our Board of Directors approved share buyback plans to repurchase up to US$40 million of the Companys ADSs
during the period from January 22, 2013 to January 21, 2014. The program did not obligate the Company to acquire any particular amount of ADS and the program may be modified or suspended at any time at the Companys discretion. All
the treasury stock under this share repurchase program was retired in July 2013.
In the year ended December 31, 2013, the Company
repurchased 891 thousand of ADSs for a total cost of US$10.0 million. The weighted average purchase price per ADS repurchased was US$11.24.
15. EQUITY INCENTIVE PLAN
2005 Equity Incentive Plan and 2015 Equity Incentive Plan
On April 22, 2005, the Company adopted its 2005 Equity Incentive Plan (the 2005 Plan). The 2005 Plan provides for the grant of
stock options, stock bonuses, restricted stock awards, restricted stock units and stock appreciation rights, which may be granted to employees (including officers), directors and consultants. The 2005 Plan reserved 10,000 thousand shares of
ordinary shares, inclusive of the number of assumed share options under the 2004 Plan, for issuance upon the exercise of stock options.
F-29
In 2006, the Company amended the 2005 Plan to reserve an additional 15,000 thousand ordinary
shares for issuance upon exercise of stock options and restricted stock units. In 2009, the Company amended the Plan to reserve an additional 15,000 thousand ordinary shares for issuance upon exercise of stock options and restricted stock
units.
Restricted stock units are converted into shares of the Companys ordinary shares upon vesting on one-for-one basis. The
vesting of restricted stock unit is subject to the employees continuing service to the Company. The cost of these awards is determined using the fair value of the Companys ordinary share on the date of the grant, and compensation is
recognized on a straight-line basis over the requisite service period. The Companys restricted stock units are considered non-vested share awards as defined under ASC 718.
In April 2010, the Companys Board of Directors and Compensation Committee approved an employee stock option exchange program that
required certain employees to exchange eligible stock options for a lesser number of new stock options that have approximately the same fair values as the options surrendered. Eligible options included stock options granted between
August 17, 2005 and July 31, 2008 that had an exercised price above US$1.85. In 2010, 4,369 thousand eligible stock options were exchanged for 3,785 thousand new stock options granted. The new stock options have an
exercise price of US$1.47, which was equal to the market price of the Companys ordinary share on April 26, 2010, the date eligible stock options were surrendered and new stock options granted. The new stock options were issued under
the 2005 Plan and are subject to its terms and conditions. The new stock options will continue to vest according to the original vesting schedule. Using the Black-Scholes option pricing model, the Company determined that the fair value of
the surrendered stock options on a grant-by-grant basis was approximately equal, as of the date of the exchange, to the fair value of the new stock options granted, resulting in insignificant incremental share-based compensation.
On June 3, 2015, the Company adopted its 2015 Equity Incentive Plan (the 2015 Plan). The 2015 Plan provides for the grant of
stock options, stock bonuses, restricted stock awards, restricted stock units and stock appreciation rights, which may be granted to employees (including officers), directors and consultants. The 2015 Plan reserved 20,000 thousand shares of
ordinary shares for issuance upon exercise of stock options and restricted stock units.
Stock Option and Restricted Stock Units Activity
The following is a summary of, the 2005 Plan and the 2015 Plan, which includes stock options and restricted stock units:
|
|
|
|
|
|
|
Unit
(in Thousands)
|
|
Available for grant at January 1, 2013
|
|
|
5,336
|
|
Restricted stock units granted
|
|
|
(1,893
|
)
|
Option and restricted stock units forfeited
|
|
|
123
|
|
|
|
|
|
|
Available for grant at December 31, 2013
|
|
|
3,566
|
|
Restricted stock units granted
|
|
|
(1,923
|
)
|
Option and restricted stock units forfeited
|
|
|
44
|
|
|
|
|
|
|
Available for grant at December 31, 2014
|
|
|
1,687
|
|
Authorized
|
|
|
20,000
|
|
Restricted stock units granted
|
|
|
(2,000
|
)
|
Option and restricted stock units forfeited
|
|
|
175
|
|
|
|
|
|
|
Available for grant at December 31, 2015
|
|
|
19,862
|
|
|
|
|
|
|
F-30
Stock Options
A summary of the stock option activity and related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
Shares
(in Thousands)
|
|
|
Weighted
Average
Exercise
Price
(US$)
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Outstanding at January 1, 2013
|
|
|
1,697
|
|
|
|
1.47
|
|
|
|
|
|
Options forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(287
|
)
|
|
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
1,410
|
|
|
|
1.47
|
|
|
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest after December 31, 2013
|
|
|
1,410
|
|
|
|
1.47
|
|
|
|
2.14
|
|
Options forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(352
|
)
|
|
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
1,058
|
|
|
|
1.47
|
|
|
|
1.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest after December 31, 2014
|
|
|
1,058
|
|
|
|
1.47
|
|
|
|
1.35
|
|
Options forfeited
|
|
|
(143
|
)
|
|
|
1.47
|
|
|
|
|
|
Options exercised
|
|
|
(336
|
)
|
|
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
579
|
|
|
|
1.47
|
|
|
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest after December 31, 2015
|
|
|
579
|
|
|
|
1.47
|
|
|
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2015
|
|
|
579
|
|
|
|
1.47
|
|
|
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No stock options were granted in 2013, 2014 and 2015. The intrinsic value of options exercised, determined as
of the date of option exercise, was US$594, US$1,565 and US$3,688 thousand in 2013, 2014 and 2015, respectively.
As of December 31,
2015, total unrecognized compensation cost related to non-vested share-based compensation awards granted under the Companys stock option plans, net of estimated forfeitures, was nil.
The aggregate intrinsic value represents the total intrinsic value (the difference between the Companys closing stock price on the last
trading day of fiscal year 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2015. Intrinsic value
will change in future periods based on the fair market value of the Companys stock and the number of shares outstanding.
The total
cash received from employees as a result of employee stock option exercises were US$422, US$514 and US$494 thousand for the years ended December 31, 2013, 2014 and 2015, respectively.
The related tax effect for stock-based compensation benefit (expense) were US$343 thousand, (US$24) thousand, and US$561 thousand for
2013, 2014 and 2015, respectively. The related tax effect for stock-based compensation expense for option and restricted stock units exercised during 2013, 2014 and 2015 was US$1,599 thousand, US$1,231 thousand and US$1,647 thousand, respectively.
The related tax effect was determined using the applicable tax rates in jurisdictions to which this expense relates.
F-31
Determining Fair Value
The Company estimated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model. The Black-Scholes
option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, the option valuation model requires the input of highly subjective assumptions, including
the expected stock price volatility.
Risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
Expected volatilities are determined based on historical volatilities of the stock prices of the Company. Expected life represents the periods that the Companys share-based awards are expected to be outstanding and was determined based on
historical experience regarding similar awards, giving consideration to the contractual term of the share based awards. The dividend yield is zero for the options granted prior to 2013 as the Company has never declared or paid dividends on the
ordinary shares or other securities prior to 2013.
Restricted Stock Units
A summary of the status of restricted stock units and changes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Non-vested
Stock Units
(in Thousands)
|
|
|
Weighted
Average
Grant
Date
Fair
Value
(US$)
|
|
|
Weight
Average
Remaining
Recognition
Period
(Years)
|
|
Non-vested at January 1, 2013
|
|
|
7,018
|
|
|
|
2.68
|
|
|
|
|
|
Restricted stock units granted
|
|
|
1,893
|
|
|
|
3.13
|
|
|
|
|
|
Restricted stock units vested
|
|
|
(4,867
|
)
|
|
|
2.60
|
|
|
|
|
|
Restricted stock units forfeited
|
|
|
(123
|
)
|
|
|
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2013
|
|
|
3,921
|
|
|
|
2.90
|
|
|
|
0.43
|
|
Restricted stock units granted
|
|
|
1,923
|
|
|
|
5.13
|
|
|
|
|
|
Restricted stock units vested
|
|
|
(3,640
|
)
|
|
|
2.96
|
|
|
|
|
|
Restricted stock units forfeited
|
|
|
(44
|
)
|
|
|
4.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2014
|
|
|
2,160
|
|
|
|
4.90
|
|
|
|
0.31
|
|
Restricted stock units granted
|
|
|
2,000
|
|
|
|
6.83
|
|
|
|
|
|
Restricted stock units vested
|
|
|
(2,003
|
)
|
|
|
4.96
|
|
|
|
|
|
Restricted stock units forfeited
|
|
|
(32
|
)
|
|
|
5.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2015
|
|
|
2,125
|
|
|
|
6.65
|
|
|
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015, there was US$5,112 thousand of total unrecognized compensation cost related to
restricted stock units granted under the 2005 Plan and the 2015 Plan.
Stock-based Compensation Expense
The following table shows total stock-based compensation expense included in the Consolidated Statements of Income for the years ended
December 31, 2013, 2014 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Cost of sales
|
|
|
308
|
|
|
|
282
|
|
|
|
261
|
|
Research and development
|
|
|
6,351
|
|
|
|
6,773
|
|
|
|
6,565
|
|
Sales and marketing
|
|
|
2,197
|
|
|
|
1,746
|
|
|
|
1,790
|
|
General and administrative
|
|
|
1,406
|
|
|
|
1,546
|
|
|
|
1,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,262
|
|
|
|
10,347
|
|
|
|
10,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
16. COMMITMENTS AND CONTINGENCIES
FCI provided their employees with collateral for personal loans which is deposited at a designated bank and the amount
deposited was US$455 thousand and US$425 thousand at December 31, 2014 and 2015, respectively. Such amounts were accounted for as restricted cash.
Operating Leases
The Company entered
into various operating lease agreements for office space that expire on various dates through April 2019. The Company recognized rent expense for the years ended December 31, 2013, 2014 and 2015 of US$1,763 thousand, US$1,981 thousand and
US$2,453 thousand, respectively. The minimum operating lease payments expected under these leases as of December 31, 2015 were US$1,771 thousand, US$786 thousand, US$580 thousand, US$184 thousand, and nil for the years ending
December 31, 2016, 2017, 2018, 2019 and 2020, respectively.
Litigation
The Company is subject to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Although
the outcome of such proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these matters will have a material adverse effect on our business, results of operations, financial position or
cash flows. Any litigation, however, involves potential risk and potentially significant litigation costs, and therefore there can be no assurance that any litigation which is now pending or which may arise in the future would not have such a
material adverse effect on our business, financial position, results of operations or cash flows.
All American Semiconductor, Inc.
(All American or AASI) was a former distributor for the Company. On April 25, 2007, All American filed for Chapter 11 bankruptcy protection. At the time of the filing, the Company had
US$256 thousand of unpaid accounts receivable from All American. On April 17, 2009, SMI USA and related entities were named as defendants in an adversary proceeding filed by the AASI Creditor Liquidating Trust (CLT) in the
bankruptcy case pending in the U.S. Bankruptcy Court for the Southern District of Florida. The CLT was seeking the return of allegedly avoidable transfers in the amount of US$854 thousand. The Company filed answer and
affirmative defenses. In March 2010, SMI USA settled with the CLT by paying the amount of US$220 thousand and on April 1, 2010, the Bankruptcy Court granted the motion to approve stipulations to compromise controversy. On August 23,
2010, the Court entered an order dismissing the adversary proceeding. In June 2011, Liquidating Trustee for the CLT filed the AASI Creditor Liquidating Trustees Seventeenth Omnibus Objection to Claims but in August 2011, withdrew it with
respect to SMI USAs proof of claim. According to the CLTs letter dated September 9, 2011, it was finalizing its claims review process and preparing for distribution to beneficiaries who are holders of allowed claims and have rights
to a distribution pursuant to the bankruptcy plan. In January 2012, January 2014, December 2014, July 2015 and October 2015, the Company received distributions of US$21 thousand, US$36 thousand, US$12 thousand,
US$51 thousand and US$31 thousand, respectively. On March 29, 2016, we received a final distribution of US$112 thousand.
In
2006, FCI joined with other technology companies and invested in the Pangyo Silicon Park Construction Project Cooperative (Pangyo Cooperative) in Korea. In July 2010, FCI, TLi Inc. (TLI), OCI Materials Co., Ltd
(OCI) and other companies withdrew from the Pangyo Cooperative and forfeited 10% of their total investment. FCI believes its loss was caused by bad will actions taken by TLI. In December 2011, FCI and OCI together filed a complaint
against TLI at the Suwon District Court in Korea. In April 2013, the court dismissed the plaintiffs complaints. The plaintiffs have decided not to appeal the courts decision.
F-33
17. SEGMENT INFORMATION
The Company designs, develops and markets high performance, low-power semiconductor products for the multimedia consumer
electronics market. The Company currently operates as one reportable segment. The chief operating decision maker is the Chief Executive Officer.
The Company groups its products into three categories, based on the markets in which they may be used. The following summarizes the
Companys revenue by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Mobile Storage
|
|
|
185,488
|
|
|
|
241,614
|
|
|
|
302,910
|
|
Mobile Communications
|
|
|
31,022
|
|
|
|
40,034
|
|
|
|
50,896
|
|
Others
|
|
|
8,798
|
|
|
|
7,675
|
|
|
|
7,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,308
|
|
|
|
289,323
|
|
|
|
361,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is attributed to a geographic area based on the bill-to location. The following summarizes the
Companys revenue by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Taiwan
|
|
|
47,653
|
|
|
|
57,244
|
|
|
|
71,387
|
|
United States
|
|
|
22,528
|
|
|
|
26,265
|
|
|
|
39,558
|
|
Japan
|
|
|
3,936
|
|
|
|
11,180
|
|
|
|
19,636
|
|
Korea
|
|
|
115,287
|
|
|
|
150,557
|
|
|
|
150,118
|
|
China
|
|
|
29,129
|
|
|
|
35,008
|
|
|
|
69,623
|
|
Others
|
|
|
6,775
|
|
|
|
9,069
|
|
|
|
10,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,308
|
|
|
|
289,323
|
|
|
|
361,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major customers representing at least 10% of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
|
US$
|
|
|
%
|
|
SK Hynix
|
|
|
67,977
|
|
|
|
30
|
|
|
|
107,227
|
|
|
|
37
|
|
|
|
108,645
|
|
|
|
30
|
|
Samsung
|
|
|
36,037
|
|
|
|
16
|
|
|
|
30,065
|
|
|
|
10
|
|
|
|
*
|
|
|
|
*
|
|
Long-lived assets (property and equipment, net) by geographic area were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Taiwan
|
|
|
24,066
|
|
|
|
28,739
|
|
|
|
32,014
|
|
United States
|
|
|
54
|
|
|
|
142
|
|
|
|
274
|
|
Korea
|
|
|
1,773
|
|
|
|
2,477
|
|
|
|
1,891
|
|
China
|
|
|
4,266
|
|
|
|
4,163
|
|
|
|
16,268
|
|
Japan
|
|
|
36
|
|
|
|
16
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,195
|
|
|
|
35,537
|
|
|
|
50,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
18. FAIR VALUE MEASUREMENT
The following section describes the valuation methodologies the Company uses to measure assets and liabilities at fair
value.
The Company uses quoted prices in active markets for identical assets to determine fair value where applicable. This pricing
methodology applies to Level 1 investments such as bond funds. For the years ended December 31, 2014 and 2015, none of the Companys assets measured on a recurring basis was determined by using significant unobservable inputs.
The following table presents our assets measured at fair value on a recurring basis as of December 31, 2014 and 2015:
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments trading bond funds
|
|
|
703
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments trading bond funds
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
681
|
|
The carrying amount of the held-to-maturity investments purchased in July 2015 that will be matured in July
2016 approximates their fair value due to the short-term maturity of the investments.
Those assets required to be measured at fair value
on a nonrecurring basis were nil during the years ended December 31, 2013, 2014 and 2015 and please refer to Note 2, Summary of Significant Accounting Policy and Note 10, Goodwill and Acquired Intangible Assets for the
significant assumption were used.
The Company reviews the carrying values of financial assets carried at cost when impairment indicators
are present. The fair values of assets without quoted market price are determined based on management judgment with the best available information. Any impairment charge determined is based on the difference between the Companys carrying value
and the proportionate ownership of the investees net assets at year end.
F-35