Monolithic Power Systems Annual Report 2015

FY2015 Annual Report · Monolithic Power Systems

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2015 ANNUAL REPORT ON FORM 10-K

To Our Stockholders, Customers, Partners and Employees:

Monolithic Power Systems concluded 2015 with record revenue and non-GAAP earnings. We
continued to execute our business plan which is predicated on market diversification, new
product offerings and market share gains. We grew revenue by 18% in 2015, clearly
outperforming the 2% analog industry growth rate estimated by the Semiconductor Industry
Association. The strength of our financial performance allowed us to continue to pursue our
long-term strategy of balanced capital allocation, which includes dividend payments, stock
buybacks and technology investments.

Financial Highlights

In 2015, many of MPS’s key financial metrics improved over 2014. Revenue grew by 18% to
$333 million. Non-GAAP gross margin expanded 40 basis points to 55.0%. Non-GAAP
operating income and non-GAAP EPS grew 17% and 15%, respectively, over 2014.

In terms of market segments:



Industrial sales grew 35% from prior year fueled by product sales for applications in
automotive, smart meters, security and power sources.

 Consumer sales grew 18% from prior year driven by high-value consumer applications

such as battery management, home appliances, gaming and LED lighting.

 Storage and computing sales grew 23% from prior year due to growth in cloud

computing, high-end personal computers and storage networks.

Business and Product Highlights

We continued to invest in research and development and create diverse and compelling growth
opportunities across our product portfolio and market segments, some of which are highlighted
below:

 Monolithic Power Module (MPM) Solutions. The MPMs are highly integrated modules
that offer high performance, efficiency, and ease of use. The modules incorporate a
controller, together with field-effect transistors, inductors and passive components, all in
one single integrated circuit package. The MPMs serve various markets, including
industrial, automotive, networking and communications, and are used in a wide range of
applications, such as enterprise storage solutions, servers, broadband wireless, drones,
video endpoints, household appliances and automobiles.

 Cloud Computing. We expect a growing number of connected devices, such as servers,
notebooks, tablets and smart TVs, over the next few years to be a significant driver in
computing demand. Our quantum state modulators, QS-MOD, are fully integrated power
devices that remove the requirement to monitor capacitor power level, significantly
reducing the complexity of powering cloud computing servers. We have won over 100

sockets and expect further market share gains and penetration in Intel’s next generation
Purley server platform.

 Battery Management. Our battery management technologies offer a higher level of
performance, integration and accurate current sensing. Compared with a traditional three-
chip solution, our single chip package reduces cost, optimizes space efficiency and
flexibility, and extends battery life. We are well-positioned to succeed in new market
opportunities such as the 2-in-1 solution laptops and notebooks.

 e.Motion. Our e.Motion solutions represent a new approach to conventional motor
encoder by combining patented Sensima 3D magnetic field measurement technologies
with our organically grown motor driver algorithm. The e.Motion platform integrates
rotor position sensors and motor drivers to determine the motor’s speed and track its
position, replacing less accurate, high cost hall-effect sensor and optical encoder
solutions. We believe e.Motion represents a new $2 billion market for MPS serving a
wide array of applications such as drones, robotics, automobiles, printers, medical
devices and security cameras.

We are proud of our achievements in 2015. We are excited about our proprietary leading edge
technologies and product and market diversification strategy, which will enable us to create
sustainable and consistent growth opportunities going forward. We are confident in MPS’s future
and will continue our commitment to enhance value to our stockholders and strengthen business
relationships with our customers and partners.

Sincerely,

Michael R. Hsing
Chairman of the Board, President and Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015
or

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-51026

Monolithic Power Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

77-0466789
(I.R.S. Employer Identification Number)

79 Great Oaks Boulevard, San Jose, CA 95119 (408) 826-0600
(Address of principal executive offices, including zip code and telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, $0.001 Par Value

Name of each exchange on which registered
The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. ☒ Yes ☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of

1934 (the “Exchange Act”). ☐ Yes ☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ☐ 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 ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting

company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of the registrant’s stock outstanding as of June 30, 2015 was 39,617,037. The closing price of the registrant’s common
stock on the Nasdaq Global Select Market on June 30, 2015 was $50.71. The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant based upon the closing price of the Common Stock on the Nasdaq Global Select Market on June 30, 2015 was $1.3 billion.*

There were 40,199,618 shares of the registrant’s common stock issued and outstanding as of February 22, 2016.

Portions of the registrant’s Proxy Statement for the registrant’s 2016 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended December 31, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

Excludes 14,609,199 shares of the registrant’s common stock held by executive officers, directors and stockholders whose ownership exceeds 5%
(“affiliates”) of the Common Stock outstanding at June 30, 2015. Exclusion of such shares should not be construed to indicate that any such person
possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled
by or under common control with the registrant.

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MONOLITHIC POWER SYSTEMS, INC.
TABLE OF CONTENTS

PART I

Page

Item 1.

Item 1A
Item 1B
Item 2.
Item 3.
Item 4.

Business ......................................................................................................................................................... 2
Executive Officers of the Registrant .............................................................................................................. 6
Risk Factors ................................................................................................................................................... 7
Unresolved Staff Comments .......................................................................................................................... 22
Properties ....................................................................................................................................................... 22
Legal Proceedings ......................................................................................................................................... 23
Mine Safety Disclosures ................................................................................................................................ 23

PART II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ....................................................................................................................................................... 24
Item 6.
Selected Financial Data ................................................................................................................................. 26
Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 27
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................................... 37
Financial Statements and Supplementary Data ............................................................................................. 39
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 74
Item 9A. Controls and Procedures ................................................................................................................................ 74
Item 9B. Other Information .......................................................................................................................................... 76

PART III

Item 10. Directors, Executive Officers and Corporate Governance ............................................................................ 76
Executive Compensation ............................................................................................................................... 76
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...... 76
Item 12.
Certain Relationships and Related Transactions, and Director Independence .............................................. 76
Item 13.
Principal Accounting Fees and Services ........................................................................................................ 76
Item 14.

PART IV

Item 15.

Exhibits and Financial Statement Schedules ................................................................................................. 77
Signatures ...................................................................................................................................................... 80

Except as the context otherwise requires, the terms “Monolithic Power Systems”, “MPS”, “Registrant”, “Company”,

“we”, “us”, or “our” as used herein are references to Monolithic Power Systems, Inc. and its consolidated subsidiaries.

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FORWARD-LOOKING STATEMENTS

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

•

the above-average industry growth of product and market areas that we have targeted,

• our plan to increase our revenue through the introduction of new products within our existing product families as well

as in new product categories and families,

• our belief that we will continue to incur significant legal expenses that vary with the level of activity in each of

our legal proceedings,

•

the effect that liquidity of our investments has on our capital resources,

•

the continuing application of our products in the communications, storage and computing, consumer and industrial
markets, which account for a majority of our revenue,

• estimates of our future liquidity requirements,

•

the cyclical nature of the semiconductor industry,

• protection of our proprietary technology,

• near-term business outlook for 2016 and beyond,

•

the factors that we believe will impact our ability to achieve revenue growth,

•

the percentage of our total revenue from various market segments,

• our ability to identify, acquire and integrate acquisitions and achieve the anticipated benefits from such acquisitions,

• our intention and ability to continue our stock repurchase program and pay future cash dividends, and

•

the factors that differentiate us from our competitors.

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

ITEM 1. BUSINESS

General

PART I

Monolithic Power Systems (“MPS”) is a leading company in high performance power solutions. Founded in 1997, MPS
designs and provides small, highly energy efficient, easy-to-use power solutions for systems found in industrial applications,
telecommunication infrastructures, cloud computing, automotive, and consumer applications. MPS's mission is to reduce
total energy consumption in its customers' systems with green, practical, compact solutions. MPS is headquartered in San
Jose, California and has over 1,200 employees worldwide, with locations in the United States, China, Taiwan, Korea, Japan,
Singapore and across Europe.

Industry Overview

Semiconductors comprise the basic building blocks of electronic systems and equipment. Within the semiconductor industry,
components can be classified either as discrete devices, such as individual transistors, or as ICs, in which a number of
transistors and other elements are combined to form a more complicated electronic circuit. ICs can be further divided into
three primary categories: digital, analog, and mixed-signal. Digital ICs, such as memory devices and microprocessors, can
store or perform arithmetic functions on data that is represented by a series of ones and zeroes. Analog ICs, in contrast, handle
real world signals such as temperature, pressure, light, sound, or speed. In addition, analog ICs also perform power
management functions, such as regulating or converting voltages, for electronic devices. Mixed-signal ICs combine digital
and analog functions onto a single chip and play an important role in bridging real world phenomena to digital systems.

Analog and Mixed-Signal Markets. We focus on the market for ‘high performance’ analog and mixed-signal ICs. ‘High
performance’ products generally are differentiated by functionality and performance factors which include integration of
higher levels of functionality onto a single chip, greater precision, higher speed and lower heat and noise. There are several
key factors that distinguish analog and mixed-signal IC markets, and in particular the high performance portion of the analog
and mixed signal IC market, from digital IC markets. These factors include longer product life cycles, numerous market
segments, technology that is difficult to replicate, relative complexity of design and process technology, importance of
experienced design engineers, lower capital requirements and diversity of end markets. We have, however, targeted product
and market areas that we believe have the ability to offer above average industry growth over the long term.

Acquisition

In July 2014, we completed the acquisition of Sensima Technology SA (“Sensima”), a company based in Switzerland that
develops magnetic sensors for angle measurement as well as three-dimensional magnetic field sensing. Sensima became a
subsidiary of MPS and changed its name to MPS Tech Switzerland Sarl. Sensima’s products are based on Hall devices that
are directly integrated with the signal treatment and instantaneously detect and deliver the angle value in digital format.
Sensima’s angle sensors are used in rotary encoders, electronically commutated motors and a broad range of products. By
combining Sensima’s real time precision magnetic angle sensing with our motor control technologies, we are creating new
opportunities with customers by offering enhanced solutions, such as our integrated e.Motion solutions, in power
management for a wide array of end products such as cars, robots, and security cameras in automotive, industrial and cloud
computing industries.

For a detailed discussion of the terms of the acquisition, please refer to Note 2 to our consolidated financial statements under
Item 8 of this Annual Report on Form 10-K.

Products and Applications

We currently have two primary product families that address multiple applications within the communications, storage and
computing, consumer and industrial markets. Our products are differentiated with respect to their high degree of integration
and strong levels of accuracy and efficiency, making them cost-effective relative to many competing solutions. These product
families include:

Direct Current (DC) to DC Products. DC to DC ICs are used to convert and control voltages within a broad range of
electronic systems, such as portable electronic devices, wireless LAN access points, computers, and monitors, automobiles
and medical equipment. We believe that our DC to DC products are differentiated in the market, particularly with respect to
their high degree of integration, high voltage operation, high load current, high switching speed and small footprint. These
2

features are important to our customers as they result in fewer components, a smaller form factor, more accurate regulation
of voltages, and, ultimately, lower system cost and increased reliability through the elimination of many discrete components
and power devices. The DC to DC product family accounted for 90%, 90% and 89% of our total revenue in 2015, 2014 and
2013, respectively.

Lighting Control Products and AC/DC Offline Solutions. Lighting control ICs are used in backlighting and general
illumination products. Lighting control ICs for backlighting are used in systems that provide the light source for LCD panels
typically found in notebook computers, LCD monitors, car navigation systems, and LCD televisions. Backlighting solutions
are typically either white light emitting diode (WLED) lighting sources or cold cathode fluorescent lamps (CCFL). In addition
to AC/DC offline solutions for lighting illumination applications, we also offer AC/DC power conversion solutions for a
diverse number of end products that plug into a wall outlet. The Lighting Control product family accounted for 10%, 10%
and 11% of our total revenue in 2015, 2014 and 2013, respectively.

We currently target our products at the communications, storage and computing, consumer and industrial markets, with the
consumer market representing the largest portion of our revenue. The following is a summary of our products for various
applications:

● Communications:
Networking and telecommunication infrastructure, routers and modems, wireless access points and voice over IP.

● Storage and Computing:

Storage networks, computers and notebooks, printers, servers and workstations.

● Consumer:

Set-top boxes, televisions, monitors, gaming, lighting, chargers, home appliances, cellular handsets, digital video
players, GPS and infotainment systems, stereos and cameras.

Industrial:

●
Automotive, power sources, security, point-of-sale systems and industrial meters.

We derive a majority of our revenue from our DC to DC IC product family sold to these market segments. In the future, we
will continue to introduce additional new products within our existing product families, such as high current, high voltage,
small form factor switching voltage regulators, as well as expand our newer product families in battery chargers, voltage
references and low dropout regulators. Our ability to achieve revenue growth will depend in part upon our ability to enter
new market segments, gain market share, grow in regions outside of China, Taiwan and other Asian markets, expand our
customer base and successfully secure manufacturing capacity.

For a detailed discussion of our revenue by product family, please refer to Note 16 to our consolidated financial statements
under Item 8 of this Annual Report on Form 10-K.

Customers, Sales and Marketing

We sell our products through third party distributors, value-added resellers and directly to original equipment manufacturers
(OEMs), original design manufacturers (ODMs), and electronic manufacturing service (EMS) providers. Our third party
distributors are subject to distribution agreements with us which allow the distributor to sell our products to end customers
and other resellers. Distributors may distribute our products to end customers which include OEMs, ODMs or EMS
providers. Our value-added resellers may second source our products and provide other services to customers. ODMs
typically design and manufacture electronic products on behalf of OEMs, and EMS providers typically provide manufacturing
services for OEMs and other electronic product suppliers.

Sales to our largest distributor accounted for approximately 24% of revenue in 2015, 26% of revenue in 2014, and 32% of
revenue in 2013. In addition, one other distributor accounted for 10% of revenue in 2013. No other customers accounted for
more than 10% of revenue in any of the periods presented.

Current distribution agreements with several of our major distributors provide that each distributor shall have the non-
exclusive right to sell and use its best efforts to promote and develop a market for our products. These agreements provide
that payment for purchases from us will generally occur within 30 to 45 days from the date of invoice. In addition, we allow
for limited stock rotation in certain agreements.

We have sales offices located in the United States, Taiwan, China, Korea and Japan and have marketing representatives in
Europe and Singapore. Our products typically require a highly technical sales and applications engineering effort where we
assist our customers in the design and use of our products in their application. We maintain a staff of applications engineers
who work directly with our customers’ engineers in the development of their systems’ electronics containing our products.

Because our sales are primarily billed and payable in United States dollars, our sales are generally not subject to fluctuating
currency exchange rates. However, because a majority of our revenue is attributable to direct or indirect sales to customers
in Asia, changes in the relative value of the dollar may create pricing pressures for our products. For the years ended
December 31, 2015, 2014 and 2013, approximately 91%, 91% and 90% of our revenue was from customers in Asia,
respectively.

Our sales are made primarily pursuant to standard individual purchase orders. Our backlog consists of orders that we have
received from customers which have not yet shipped. Our manufacturing lead times are generally 8 to 16 weeks and we often
build inventory in advance of customer orders based on our forecast of future customer orders. This subjects us to certain
risks, most notably the possibility that sales will not meet our forecast, which could lead to inventories in excess of demand.
If excess inventory exists, it may be necessary for us to sell it at a substantial discount, take a significant write-down or
dispose of it altogether, either of which would negatively affect our profit margins.

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

Research and Development

We have assembled a qualified team of engineers in the United States and China with core competencies in analog and mixed-
signal design. Through our research and development efforts, we have developed a collection of intellectual property and
know-how that we are able to leverage across our products and markets. These include the development of high efficiency
power devices, the design of precision analog circuits, expertise in mixed-signal integration and the development of
proprietary semiconductor process technologies.

Our research and development efforts are generally targeted at three areas: systems architecture, circuit design and
implementation, and process technology. In the area of systems architecture, we are exploring new ways of solving our
customers’ system design challenges and are investing in the development of systems expertise in new markets and
applications that align well with our core capabilities. In the area of circuit design and implementation, our initiatives include
expanding our portfolio of products and adding new features to our products. In the area of process technology, we are
investing research and development resources to provide leading-edge analog power processes for our next generation of
integrated circuits. Process technology is a key strategic component to our future growth.

Our research and development expenses totaled $65.8 million, $58.6 million and $49.7 million for the years ended December
31, 2015, 2014 and 2013, respectively.

Patents and Intellectual Property Matters

We rely on our proprietary technologies, which include both our proprietary circuit designs for our products and our
proprietary manufacturing process technologies. Our future success and competitive position depend in part upon our ability
to obtain and maintain protection of our proprietary technologies.

In general, we have elected to pursue patent protection for aspects of our circuit and device designs that we believe are
patentable and to protect our manufacturing process technologies by maintaining those process technologies as trade secrets.
As of December 31, 2015, we had approximately 1,142 patents/applications issued or pending, of which 244 patents have
been issued in the United States. Our issued patents are scheduled to expire at various times through December 2035. Our
patents are material to our business, but we do not rely on any one particular patent for our success. We also rely on a
combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to
confidentiality and loyalty, to protect our technology, know-how, and processes. We also seek to register certain of our
trademarks as we deem appropriate. We have not registered any of our copyrights and do not believe registration of copyrights
is material to our business. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects
of our current or future technology or products or to obtain and use information that we regard as proprietary. There can be
no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to
issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not
4

be challenged, invalidated, or circumvented by others. Furthermore, the laws of the countries in which our products are or
may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as
laws in the United States. Our failure to adequately protect our proprietary technologies could materially harm our business.

The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other
intellectual property rights. For a more complete description of our legal matters, please read Note 13 to our consolidated
financial statements under Item 8 of this Annual Report on Form 10-K. Patent infringement is an ongoing risk, in part because
other companies in our industry could have patent rights that may not be identifiable when we initiate development efforts.
Litigation may be necessary to enforce our intellectual property rights, and we may have to defend ourselves against
infringement claims. Any such litigation could be very costly and may divert our management resources. Further, we have
agreed to indemnify certain of our customers and suppliers in some circumstances against liability from infringement by our
products. In the event any third party were to make an infringement claim against us or our customers, we could be enjoined
from selling selected products or could be required to indemnify our customers or suppliers or pay royalties or other damages
to third parties. If any of our products is found to infringe and we are unable to obtain necessary licenses or other rights on
acceptable terms, we would either have to change our product so that it does not infringe or stop making the infringing
product, which could have a material adverse effect on our operating results, financial condition and cash flows.

Manufacturing

We utilize a fabless business model, working with third parties to manufacture and assemble our integrated circuits. This
fabless approach allows us to focus our engineering and design resources on our strengths and to reduce our fixed costs and
capital expenditures. In contrast to many fabless semiconductor companies, who utilize standard process technologies and
design rules established by their foundry partners, we have developed our own proprietary process technology and collaborate
with our foundry partners to install our technologies on their equipment in their facilities for use solely on our behalf. This
close collaboration and control over the manufacturing process has historically resulted in favorable yields and product
performance for our integrated circuits.

We currently contract with three suppliers to manufacture our wafers in foundries located in China. Once our silicon wafers
have been produced, they are shipped to our facility in Chengdu, China for wafer sort. Our semiconductor products are then
assembled and packaged by independent subcontractors in China and Malaysia. The assembled ICs are then sent for final
testing at our Chengdu facility and other turnkey providers prior to shipping to our customers.

In September 2004, we entered into a lease arrangement for a 60,000 square-foot manufacturing facility located in Chengdu,
China. In September 2015, we exercised our option to acquire the facility and expect to close the transaction in the first half
of 2016. The facility has been fully operational since 2006 and we have benefitted from shorter manufacturing cycle times
and lower labor and overhead costs. We have expanded our product testing capabilities in our China facility and are able to
take advantage of the rich pool of local engineering talent to expand our manufacturing support and engineering operations.

In addition, we constructed a 150,000 square-foot research and development facility in Chengdu, China which was put into
operation in October 2010.

Key Personnel and Employees

Our performance is substantially dependent on the performance of our executive officers and key employees. Due to the
relative complexity of the design of our analog and mixed-signal ICs, our engineers generally have more years of experience
and greater circuit design aptitude than the more prevalent digital circuit design engineer. Analog engineers with advanced
skills are limited in number and difficult to replace. The loss of the services of key officers, managers, engineers and other
technical personnel would materially harm our business. Our future success will depend, in part, on our ability to attract,
train, retain, and motivate highly qualified technical and managerial personnel. We may not be successful in attracting and
retaining such personnel. Our employees are not represented by a collective bargaining organization, and we have never
experienced a work stoppage or strike. Our management considers employee relations to be good. As of December 31, 2015,
we employed 1,260 employees located in China, Europe, Japan, Korea, Singapore, Taiwan and the United States, compared
with 1,178 employees as of December 31, 2014.

Competition

the rate at which we introduce these new products. Our industry is characterized by decreasing unit selling prices over the
life of a product. We compete with domestic and international semiconductor companies, many of which have substantially
greater financial and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their
products. We are in direct and active competition, with respect to one or more of our product lines, with at least 10
manufacturers of such products, of varying size and financial strength. We consider our primary competitors to include
Analog Devices, Fairchild Semiconductor, Intersil Corporation, Linear Technology, Maxim Integrated Products, Microchip
Technology, Microsemi Corporation, O2 Micro International, ON Semiconductor, Power Integrations, Inc., Richtek
Technology Corporation, Rohm Co., Ltd., Semtech Corporation, STMicroelectronics N.V., and Texas Instruments Inc.

We expect continued competition from existing competitors as well as competition from new entrants into the semiconductor
market. We believe that we are competitive in the markets in which we sell, particularly because our ICs typically are smaller
in size, are highly integrated, possess higher levels of power management functionalities and achieve high performance
specifications at lower price points than most of our competition. However, we cannot assure you that our products will
continue to compete favorably or that we will be successful in the face of increasing competition from new products and
enhancements introduced by existing competitors or new companies entering this market.

Geographical and Segment Information

Please refer to the geographical and segment information in Note 16 to our consolidated financial statements in the section
entitled “Item 8. Financial Statements and Supplemental Data.”

Please refer to the discussion of risks related to our foreign operations in the section entitled “Item 1A: Risk Factors.”

Available Information

We were incorporated in California in 1997 and reincorporated in Delaware in November 2004. Our executive offices are
located at 79 Great Oaks Boulevard, San Jose, California 95119. Our telephone number is (408) 826-0600. Our e-mail address
is investors@monolithicpower.com, and our website is www.monolithicpower.com. Our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those filed or furnished pursuant to
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge. They may be
obtained from our website as soon as reasonably practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission, or at the SEC website at www.sec.gov. Information contained on our website is
not a part of this Annual Report on Form 10-K.

Executive Officers of the Registrant

Information regarding our executive officers as of February 29, 2016 is as follows:

Name
Michael R. Hsing ..........
Meera P. Rao (1) ...........
Deming Xiao .................
Maurice Sciammas ........
Saria Tseng ....................

Age
56
55
53
56
45

Position

President, CEO and Director
CFO and Principal Financial and Accounting Officer
President of Asia Operations
Senior Vice President of Worldwide Sales and Marketing
Vice President, Strategic Corporate Development, General Counsel and Corporate
Secretary

(1) On February 23, 2016, we announced that Ms. Rao has informed us of her intention to retire from MPS as CFO and
Principal Financial and Accounting Officer, effective March 31, 2016. Ms. Rao will remain available in an advisory
capacity until a successor is secured and the transition is complete.

Michael R. Hsing has served on our board of directors and has served as our President and Chief Executive Officer since
founding MPS in August 1997. Prior to founding MPS, Mr. Hsing was a Senior Silicon Technology Developer at several
analog IC companies, where he developed and patented key technologies, which set new standards in the power electronics
industry. Mr. Hsing is an inventor on numerous patents related to the process development of bipolar mixed-signal
semiconductor manufacturing. Mr. Hsing holds a B.S.E.E. from the University of Florida.

Meera P. Rao has served as our Chief Financial Officer since January 2011. Ms. Rao joined MPS in January 2009 and served
as our Vice President of Finance and Corporate Controller. Prior to joining MPS, she was the principal in her own consulting
practice, working with various semiconductor companies, including MPS, where she set up our business operations in
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Chengdu, China in 2006. Ms. Rao has more than 20 years of experience with semiconductor and high technology companies
and has held various senior executive positions, including CFO of Integration Associates, Vice President of Finance and
Interim CFO at Atrica, Vice President of Finance at Raza Foundries, Corporate Controller and Interim CFO at nVIDIA, as
well as various positions at Advanced Micro Devices. Ms. Rao is a CPA and holds an MBA from the University of Rochester.

Maurice Sciammas has served as our Senior Vice President of Worldwide Sales and Marketing since 2007. Mr. Sciammas
joined MPS in July 1999 and served as Vice President of Products and Vice President of Sales (excluding greater China)
until he was appointed to his current position. Before joining MPS, he was Director of IC Products at Supertex from 1990
to 1999. He has also held positions at Micrel, Inc. He holds a B.S.E.E. degree from San Jose State University.

Deming Xiao has served as our President of Asia Operations since January 2008. Since joining us in May 2001, Mr. Xiao has
held several executive positions, including Foundry Manager and Senior Vice President of Operations. Before joining MPS,
from June 2000 to May 2001, Mr. Xiao was Engineering Account Manager at Chartered Semiconductor Manufacturing, Inc.
Prior to that, Mr. Xiao spent six years as the Manager of Process Integration Engineering at Fairchild Imaging Sensors. Mr.
Xiao holds a B.S. in Semiconductor Physics from Sichuan University, Chengdu, China and an M.S.E.E. from Wayne State
University.

Saria Tseng has served as our Vice President, General Counsel and Corporate Secretary since 2004 and additionally as our
Vice President, Strategic Corporate Development since 2009. Ms. Tseng joined MPS from MaXXan Systems, Inc. where she
was Vice President and General Counsel from 2001 to 2004. Previously, Ms. Tseng was an attorney at Gray Cary Ware &
Freidenrich LLP and Jones, Day, Reavis & Pogue. Ms. Tseng is a member of the state bar in both California and New York
and is a member of the bar association of the Republic of China (Taiwan). She holds Masters of Law degrees from the
University of California at Berkeley and the Chinese Culture University in Taipei.

ITEM 1A. RISK FACTORS

Our business involves risks and uncertainties. You should carefully consider the risks described below, together with all of
the other information in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission
in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results,
and growth prospects would likely be materially and adversely affected. In such an event, the trading price of our common
stock could decline, and you could lose all or part of your investment in our common stock. Our past financial performance
should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to
anticipate results or trends in future periods. These risks involve forward-looking statements and our actual results may differ
substantially from those discussed in these forward-looking statements.

The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors.

The future trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in
response to various factors, many of which are beyond our control, including:

•

our results of operations and financial performance;

general economic, industry and market conditions worldwide;

our ability to outperform the market, and outperform at a level that meets or exceeds our investors’ expectations;

• whether our forward guidance meets the expectations of our investors;

•

the depth and liquidity of the market for our common stock;

developments generally affecting the semiconductor industry;

commencement of or developments relating to our involvement in litigation;

investor perceptions of us and our business strategies;

changes in securities analysts’ expectations or our failure to meet those expectations;

•

actions by institutional or other large stockholders;

terrorist acts or acts of war;

actual or anticipated fluctuations in our results of operations;

actual or anticipated manufacturing capacity limitations;

developments with respect to intellectual property rights;

introduction of new products by us or our competitors;

our sale of common stock or other securities in the future;

conditions and trends in technology industries;

our loss of key customers;

changes in market valuation or earnings of our competitors;

any mergers, acquisitions or divestitures of assets undertaken by us;

government debt default;

our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify
our customer base and successfully secure manufacturing capacity;

•

our ability to increase our gross margins;

• market reactions to guidance from other semiconductor companies or third-party research groups;

• market reactions to merger and acquisition activities in the semiconductor industry, and rumors or expectations of

further consolidation in the industry;

•

investments in sales and marketing resources to enter new markets;

costs of increasing wafer capacity and qualifying additional third-party wafer fabrication facilities;

our ability to continue the stock repurchase program and pay quarterly cash dividends to stockholders; and

changes in the estimation of the future size and growth rate of our markets.

In addition, the stock market often experiences substantial volatility that is seemingly unrelated to the operating performance
of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

We expect our operating results to fluctuate from quarter to quarter and year to year, which may make it difficult to
predict our future performance and could cause our stock price to decline and be volatile.

Our revenue, expenses, and results of operations are difficult to predict, have varied significantly in the past and will continue
to fluctuate significantly in the future due to a number of factors, many of which are beyond our control. We expect
fluctuations to continue for a number of reasons, including:

•

changes in general demand for electronic products as a result of worldwide macroeconomic conditions;

changes in business conditions at our distributors, value-added resellers and/or end-customers;

changes in general economic conditions in the countries where our products are sold or used;

•

the timing of developments and related expenses in our litigation matters;

the loss of key customers or our inability to attract new customers due to customer and prospective customer
concerns about being litigation targets;

continued dependence on turns business (orders received and shipped within the same fiscal quarter);

continued dependence on the Asian markets for our customer base;

increases in assembly costs due to commodity price increases, such as the price of gold;

the timing of new product introductions by us and our competitors;

changes in our revenue mix between original equipment manufacturers (“OEMs”), original design manufacturers
(“ODMs”), distributors and value-added resellers;

changes in product mix, product returns, and actual and potential product liability;

the acceptance of our new products in the marketplace;

our ability to develop new process technologies and achieve volume production;

our ability to meet customer product demand in a timely manner;

the scheduling, rescheduling, or cancellation of orders by our customers;

the cyclical nature of demand for our customers’ products;

fluctuations in our estimate for stock rotation reserves;

our ability to manage our inventory levels, including the levels of inventory held by our distributors;

product obsolescence;

seasonality and variability in the communications, storage and computing, consumer and industrial markets;

the availability of adequate manufacturing capacity from our outside suppliers;

increases in prices for finished wafers due to general capacity shortages;

the potential loss of future business resulting from capacity issues;

changes in manufacturing yields;

• movements in foreign exchange rates, interest rates or tax rates; and

•

stock-based compensation charges primarily resulting from performance and market-based equity awards granted
to our employees.

Due to the factors noted above and other risks described in this section, many of which are beyond our control, you should
not rely on quarter-to-quarter or year-over-year comparisons to predict our future financial performance. Unfavorable
changes in any of the above factors may seriously harm our business and results of operations, and may cause our stock price
to decline and be volatile.

Our business has been and may continue to be significantly impacted by worldwide economic conditions, and
uncertainty in the outlook for the global economy makes it more likely that our actual results will differ materially
from expectations.

In recent years, global credit and financial markets experienced disruptions, and may continue to experience disruptions in
the future, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic
growth, increases in unemployment rates, and continued uncertainty about economic stability. These economic uncertainties
affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business
activities. The continued or further tightening of credit in financial markets may lead consumers and businesses to postpone
spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition,
financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable
defaults and inventory challenges. Volatility in the credit markets could severely diminish liquidity and capital availability.
Demand for our products is a function of the health of the economies in the United States, Europe, China and the rest of the
world. We cannot predict the timing, strength or duration of any economic disruption or subsequent economic recovery
worldwide, in the United States, in our industry, or in the different markets that we serve. These and other economic factors
have had, and may in the future have, a material adverse effect on demand for our products and on our financial condition
and operating results.

We may not be profitable on a quarterly or annual basis.

Our profitability is dependent on many factors, including:

•

our sales, which because of our turns business (i.e., orders received and shipped within the same fiscal quarter), are
difficult to accurately forecast;

the cancellation or rescheduling of our customers’ orders, which may occur without significant penalty to our
customers;

changes in general demand for electronic products as a result of worldwide macroeconomic conditions;

changes in revenue mix between OEMs, ODMs, distributors and value-added resellers;

changes in product mix, and actual and potential product liability;

changes in revenue mix between end market segments (i.e. communications, storage and computing, consumer and
industrial);

our competition, which could adversely impact our selling prices and our potential sales;

our manufacturing costs, including our ability to negotiate with our vendors and our ability to efficiently run our
test facility in China;

• manufacturing capacity constraints;

•

stock-based compensation charges primarily resulting from performance and market-based equity awards granted
to our employees; and

our operating expenses, including general and administrative expenses, selling and marketing expenses, and research
and development expenses relating to products that will not be introduced and will not generate revenue until later
periods, if at all.

We may not achieve profitability on a quarterly or annual basis in the future. Unfavorable changes in our operations, including
any of the factors noted above, may have a material adverse effect on our quarterly or annual profitability.

We may not experience growth rates comparable to past years.

In the past, our revenue increased significantly in certain years due to increased sales of certain of our products. Due to
various factors, including increased competition, loss of certain of our customers, unfavorable changes in our operations,
reduced global electronics demand, end-customer market downturn, market acceptance and penetration of our current and
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future products and ongoing litigation, we may not experience growth rates comparable to past periods, which could
materially and adversely affect our stock price and results of operations.

There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts.

In June 2014, the Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash
dividends on our common stock. We anticipate the cash used for future dividends will come from our current domestic cash
and cash generated from ongoing U.S. operations. If cash held by our international subsidiaries is needed for the payment of
dividends, we may be required to accrue and pay U.S. taxes to repatriate these funds, which may have a material adverse
effect on our financial condition and results of operations.

The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other
things, our financial condition, results of operations, capital requirements, business conditions, statutory requirements of
Delaware law, compliance with the terms of future indebtedness and credit facilities and other factors that our Board of
Directors may deem relevant, as well as a determination that cash dividends are in the best interests of our stockholders. Our
dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends
at all or in any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on
the price of our common stock.

We may be unsuccessful in developing and selling new products with margins similar to or better than what we have
experienced in the past, which would impact our overall gross margin and financial performance.

Our success depends on products that are differentiated in the market, which result in gross margins that have historically
been above industry averages. Should we fail to improve our gross margin in the future, and accordingly develop and
introduce sufficiently differentiated products that result in higher gross margins than industry averages, our financial
condition and results of operations could be materially and adversely affected.

The highly cyclical nature of the semiconductor industry, which has produced significant and sometimes prolonged
downturns, could materially adversely affect our operating results, financial condition and cash flows.

Historically, the semiconductor industry has been highly cyclical and, at various times, has experienced significant downturns
and wide fluctuations in supply and demand. These conditions have caused significant variances in product demand and
production capacity, as well as rapid erosion of average selling prices. The industry may experience severe or prolonged
downturns in the future, which could result in downward pressure on the price of our products as well as lower demand for
our products. Because significant portions of our expenses are fixed in the short term or incurred in advance of anticipated
sales, we may not be able to decrease our expenses in a timely manner to offset any sales shortfall. These conditions could
have a material adverse effect on our operating results, financial condition and cash flows.

If demand for our products declines in the major end markets that we serve, our revenue will decrease and our results
of operations and financial condition would be materially and adversely affected.

We believe that the application of our products in the storage and computer, consumer electronics, communications and
industrial markets will continue to account for the majority of our revenue. If the demand for our products declines in the
major end markets that we serve, our revenue will decrease and our results of operations and financial condition would be
materially and adversely affected. In addition, as technology evolves, the ability to integrate the functionalities of various
components, including our discrete semiconductor products, onto a single chip and/or onto other components of systems
containing our products increases. Should our customers require integrated solutions that we do not offer, demand for our
products could decrease, and our business and results of operations would be materially and adversely affected.

We may be unsuccessful in developing and selling new products or in penetrating new markets required to maintain
or expand our business.

Our competitiveness and future success depend on our ability to design, develop, manufacture, assemble, test, market, and
support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of
our product markets could have a material adverse effect on our competitive position within these markets. Our failure to
timely develop new technologies or to react quickly to changes in existing technologies could materially delay our
development of new products, which could result in product obsolescence, decreased revenue, and/or a loss of market share
to competitors.

As we develop new product lines, we must adapt to market conditions that are unfamiliar to us, such as competitors and
distribution channels that are different from those we have known in the past. Some of our new product lines require us to
re-equip our labs to test parameters we have not tested in the past. If we are unable to adapt rapidly to these new and additional
conditions, we may not be able to successfully penetrate new markets.

The success of a new product depends on accurate forecasts of long-term market demand and future technological
developments, as well as on a variety of specific implementation factors, including:

•

timely and efficient completion of process design and device structure improvements;

timely and efficient implementation of manufacturing, assembly, and test processes;

the ability to secure and effectively utilize fabrication capacity in different geometries;

product performance;

product availability;

product quality and reliability; and

effective marketing, sales and service.

To the extent that we fail to timely introduce new products or to quickly penetrate new markets, our revenue and financial
condition could be materially adversely affected.

We derive most of our revenue from direct or indirect sales to customers in Asia and have significant operations in
Asia, which may expose us to political, cultural, regulatory, economic, foreign exchange, and operational risks.

We derive most of our revenue from customers located in Asia through direct sales or indirect sales through distribution
arrangements and value-added reseller agreements with parties located in Asia. As a result, we are subject to increased risks
due to this geographic concentration of business and operations. For the year ended December 31, 2015, approximately 91%
of our revenue was from customers in Asia. There are risks inherent in doing business in Asia, and internationally in general,
including:

•

changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States and in
the countries in which we manufacture or sell our products;

trade restrictions, including restrictions imposed by the United States on trading with parties in foreign countries;

currency exchange rate fluctuations impacting intra-company transactions;

the fluctuations in the value of the U.S. Dollar relative to other foreign currencies, which could affect the
competitiveness of our products;

transportation delays;

changes in tax regulations in China that may impact our tax status in Chengdu, where we have significant operations;

• multi-tiered distribution channels that lack visibility to end customer pricing and purchase patterns;

•

international political relationships and threats of war;

terrorism and threats of terrorism;

epidemics and illnesses;

• work stoppages and infrastructure problems due to adverse weather conditions or natural disasters;

• work stoppages related to employee dissatisfaction;

•

economic, social and political instability;

longer accounts receivable collection cycles and difficulties in collecting accounts receivables;

enforcing contracts generally; and

less effective protection of intellectual property and contractual arrangements.

If we fail to expand our customer base and significantly reduce the geographic concentration of our customers, we will
continue to be subject to the foregoing risks, which could materially and adversely affect our revenue and financial condition.

We depend on a limited number of customers, including distributors, for a significant percentage of our revenue.

Historically, we have generated most of our revenue from a limited number of customers, including distributors. For example,
sales to our largest distributor accounted for approximately 24% of our total revenue for the year ended December 31,
2015. We continue to rely on a limited number of customers for a significant portion of our revenue. Because we rely on a
limited number of customers for significant percentages of our revenue, a decrease in demand for our products from any of
our major customers for any reason (including due to market conditions, catastrophic events or otherwise) could have a
materially adverse impact on our financial conditions and results of operations.

We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt
Practices Act, or the FCPA. Our failure to comply with these laws could result in penalties which could harm our
reputation and have a material adverse effect on our business, results of operations and financial condition.

We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments
to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-
corruption laws. Although we have implemented policies and procedures designed to ensure that we, our employees and
other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject, there is no assurance that
such policies or procedures will work effectively all of the time or protect us against liability under the FCPA or other laws
for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may
acquire. We have significant operations in Asia, which places us in frequent contact with persons who may be considered
“foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance
with the FCPA and other laws governing the conduct of business with government entities (including local laws), we may be
subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business,
financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other
anti-corruption laws by U.S. or foreign authorities could harm our reputation and have an adverse impact on our business,
financial condition and results of operations.

We receive a significant portion of our revenue from distribution arrangements, value-added resellers and direct
customers, and the loss of any one of these distributors, value-added resellers or direct customers or failure to collect
a receivable from them could adversely affect our operations and financial position.

We market our products through distribution arrangements and value-added resellers and through our direct sales and
applications support organization to customers that include OEMs, ODMs and electronic manufacturing service providers
(“EMSs”). Receivables from our customers are generally not secured by any type of collateral and are subject to the risk of
being uncollectible. Sales to our largest distributor accounted for approximately 24% of our total revenue for the year ended
December 31, 2015. Significant deterioration in the liquidity or financial condition of any of our major customers or any
group of our customers could have a material adverse impact on the collectability of our accounts receivable and our future
operating results. We primarily conduct our sales on a purchase order basis, and we do not have any long-term supply
commitments.

Moreover, we believe a high percentage of our products are eventually sold to a number of OEMs. Although we communicate
with OEMs in an attempt to achieve “design wins,” which are decisions by OEMs and/or ODMs to incorporate our products,
we do not have purchase commitments from these end users. Therefore, there can be no assurance that the OEMs and/or
ODMs will continue to incorporate our ICs into their products. OEM technical specifications and requirements can change
rapidly, and we may not have products that fit new specifications from an end-customer for whom we have had previous
design wins. We cannot be certain that we will continue to achieve design wins from large OEMs, that our direct customers
13

will continue to be successful in selling to the OEMs, or that the OEMs will be successful in selling products which
incorporate our ICs. The loss of any significant customer, any material reduction in orders by any of our significant customers
or by their OEM customers, the cancellation of a significant customer order, or the cancellation or delay of a customer’s or
an OEM’s significant program or product could reduce our revenue and adversely affect our results of operations and financial
condition.

Due to the nature of our business as a component supplier, we may have difficulty both in accurately predicting our
future revenue and appropriately managing our expenses.

Because we provide components for end products and systems, demand for our products is influenced by our customers’ end
product demand. As a result, we may have difficulty in accurately forecasting our revenue and expenses. Our revenue depends
on the timing, size, and speed of commercial introductions of end products and systems that incorporate our products, all of
which are inherently difficult to forecast, as well as the ongoing demand for previously introduced end products and systems.
In addition, demand for our products is influenced by our customers’ ability to manage their inventory. Our sales to
distributors are subject to higher volatility because they service demand from multiple levels of the supply chain which, in
itself, is inherently difficult to forecast. If our customers, including distributors, do not manage their inventory correctly or
misjudge their customers’ demand, our shipments to and orders from our customers may vary significantly on a quarterly
basis.

Our ability to increase product sales and revenue may be constrained by the manufacturing capacity of our suppliers.

Although we provide our suppliers with rolling forecasts of our production requirements, their ability to provide wafers to us
is limited by the available capacity, particularly capacity in the geometries we require, at the facilities in which they
manufacture wafers for us. As a result, this lack of capacity has at times constrained our product sales and revenue growth. In
addition, an increased need for capacity to meet internal demands or demands of other customers could cause our suppliers
to reduce capacity available to us. Our suppliers may also require us to pay amounts in excess of contracted or anticipated
amounts for wafer deliveries or require us to make other concessions in order to acquire the wafer supply necessary to meet
our customer requirements. If our suppliers extend lead times, limit supplies or the types of capacity we require, or increase
prices due to capacity constraints or other factors, our revenue and gross margin may materially decline. In addition, if we
experience supply delays or limitations, our customers may reduce their purchase levels with us and/or seek alternative
solutions to meet their demand, which could materially and adversely impact our business and results of operations. Delays
in increasing third-party manufacturing capacity may also limit our ability to meet customer demand.

We currently depend on third-party suppliers to provide us with wafers for our products. If any of our wafer suppliers
become insolvent or capacity constrained and are unable and/or fail to provide us sufficient wafers at acceptable yields
and at anticipated costs, our revenue and gross margin may decline or we may not be able to fulfill our customer
orders.

We have a supply arrangement with certain suppliers for the production of wafers. Should any of our suppliers become
insolvent or capacity constrained, we may not be able to fulfill our customer orders, which would likely cause a decline in
our revenue.

While certain aspects of our relationship with these suppliers are contractual, many important aspects of this relationship
depend on our suppliers’ continued cooperation and our management of relationships. In addition, the fabrication of ICs is a
highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be
rejected or numerous ICs on each wafer to be non-functional. This could potentially reduce yields. The failure of our suppliers
to supply us wafers at acceptable yields could prevent us from fulfilling our customer orders for our products and would
likely cause a decline in our revenue.

Further, as is common in the semiconductor industry, our customers may reschedule or cancel orders on relatively short
notice. If our customers cancel orders after we submit a committed forecast to our suppliers for the corresponding wafers, we
may be required to purchase wafers that we may not be able to resell, which would adversely affect our operating results,
financial condition and cash flows.

We might not be able to deliver our products on a timely basis if our relationships with our assembly and test
subcontractors are disrupted or terminated.

We do not have direct control over product delivery schedules or product quality because all of our products are assembled
by third-party subcontractors and a portion of our testing is currently performed by third-party subcontractors. Also, due to
14

the amount of time typically required to qualify assembly and test subcontractors, we could experience delays in the shipment
of our products if we were forced to find alternate third parties to assemble or test our products. In addition, events such as
global economic crises may materially impact our assembly suppliers’ ability to operate. Any future product delivery delays
or disruptions in our relationships with our subcontractors could have a material adverse effect on our operating results,
financial condition and cash flows.

There may be unanticipated costs associated with adding to or supplementing our third-party suppliers’
manufacturing capacity.

We anticipate that future growth of our business will require increased manufacturing capacity on the part of third-party
supply foundries, assembly shops, and testing facilities for our products. In order to facilitate such growth, we may need to
enter into strategic transactions, investments and other activities. Such activities are subject to a number of risks, including:

•

the costs and expense associated with such activities;

the availability of modern foundries to be developed, acquired, leased or otherwise made available to us or our third-
party suppliers;

the ability of foundries and our third-party suppliers to obtain the advanced equipment used in the production of our
products;

delays in bringing new foundry operations online to meet increased product demand; and

unforeseen environmental, engineering or manufacturing qualification problems relating to existing or new foundry
facilities, including delays in qualification of new foundries by our customers.

These and other risks may affect the ultimate cost and timing of any expansion of our third-party suppliers’ capacity.

We purchase inventory in advance based on expected demand for our products, and if demand is not as expected, we
may have insufficient or excess inventory, which could adversely impact our financial position.

As a fabless semiconductor company, we purchase our inventory from third party manufacturers in advance of selling our
product. We place orders with our manufacturers based on existing and expected orders from our customers for particular
products. While most of our contracts with our customers and distributors include lead time requirements and cancellation
penalties that are designed to protect us from misalignment between customer orders and inventory levels, we must
nonetheless make some predictions when we place orders with our manufacturers. In the event that our predictions are
inaccurate due to unexpected increases in orders or unavailability of product within the timeframe that is required, we may
have insufficient inventory to meet our customer demands. In the event that we order products that we are unable to sell due
to a decrease in orders, unexpected order cancellations, injunctions due to patent litigation, or product returns, we may have
excess inventory which, if not sold, may need to be disposed of or would result in a decrease in our revenue in future periods
as the excess inventory at our distributors is sold. If any of these situations were to arise, it could have a material impact on
our business and financial position.

Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could
adversely affect our results.

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we
have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the
valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or
interpretations thereof and discrete items such as future exercises or dispositions of stock options and restricted stock releases.
In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. For
example, our U.S. federal income tax returns for the years ended December 31, 2005 through December 31, 2007 were
examined by the IRS. We reached a resolution on the audits in April 2015 and recorded a one-time net charge of $2.7 million
to our income tax provision in the second quarter of 2015. We assess the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from
any examinations will not have an adverse effect on our operating results and financial condition.

The complexity of calculating our tax provision may result in errors that could result in restatements of our financial
statements.

Due to the complexity associated with the calculation of our tax provision, we have hired independent tax advisors to assist
us in the calculation. If we or our independent tax advisors fail to resolve or fully understand certain issues that we may have
had in the past and issues that may arise in the future, we could be subject to errors, which, if material, would result in us
having to restate our financial statements. Restatements are generally costly and could adversely impact our results of
operations and/or have a negative impact on the trading price of our common stock.

If we experience security breaches of our information technology systems that materially damage sensitive
information on our networks, our business partner and customer relationships may be harmed, and our business and
operating results may be adversely impacted.

In the ordinary course of business, we store sensitive data on our internal systems, network and servers, such as proprietary
business and financial information, and confidential data pertaining to our customers, suppliers and business partners. The
secure maintenance of sensitive information on our networks and the protection features of our solutions are both critical to
our operations and business strategy. We devote significant resources to network security, data encryption, and other security
measures to protect our systems and data. However, these security measures cannot provide absolute security. Although we
make significant efforts to maintain the security and integrity of our systems and solutions, any destructive or intrusive breach
could compromise our networks, creating system disruptions or slowdowns, and the information stored on our networks
could be accessed, publicly disclosed, lost or stolen. If any of these types of security breaches were to occur and we were
unable to protect sensitive data, our relationships with our business partners and customers could be materially damaged, our
reputation could be materially harmed, and we could be exposed to a risk of litigation and possible significant liability.

If we are unsuccessful in legal proceedings brought against us or any of our customers, we could be prevented from
selling many of our products and/or be required to pay substantial damages. An unfavorable outcome or an additional
award of damages, attorneys’ fees or an injunction could cause our revenue to decline significantly and could severely
harm our business and operating results.

From time to time we are party to various legal proceedings. If we are not successful in litigation that could be brought against
us or our customers, we could be ordered to pay monetary fines and/or damages. If we are found liable for willful patent
infringement, damages could be significant. We and/or our customers could also be prevented from selling some or all of our
products. Moreover, our customers and end-users could decide not to use our products, and our products and our customers’
accounts payable to us could be seized. Finally, interim developments in these proceedings could increase the volatility in
our stock price as the market assesses the impact of such developments on the likelihood that we will or will not ultimately
prevail in these proceedings.

Given our inability to control the timing and nature of significant events in our legal proceedings that either have
arisen or may arise, our legal expenses are difficult to forecast and may vary substantially from our publicly disclosed
forecasts with respect to any given quarter, which could contribute to increased volatility in our stock price and
financial condition.

Historically, we have incurred significant expenses in connection with various legal proceedings that vary with the level of
activity in the proceeding. It is difficult for us to forecast our legal expenses for any given quarter, which adversely affects
our ability to forecast our expected results of operations in general. We may also be subject to unanticipated legal proceedings,
which would result in us incurring unexpected legal expenses. If we fail to meet the expectations of securities or industry
analysts as a result of unexpected changes in our legal expenses, our stock price could be materially impacted.

Future legal proceedings may divert our financial and management resources.

The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other
intellectual property rights. Patent infringement is an ongoing risk, in part because other companies in our industry could
have patent rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to enforce
our intellectual property rights, and we may have to defend ourselves against additional infringement claims. Such litigation
is very costly. In the event any third party makes a new infringement claim against us or our customers, we could incur
additional ongoing legal expenses. In addition, in connection with these legal proceedings, we may be required to post bonds
to defend our intellectual property rights in certain countries for an indefinite period of time, until such dispute is resolved.
If our legal expenses materially increase or exceed anticipated amounts, our capital resources and financial condition could
be adversely affected. Further, if we are not successful in any of our intellectual property defenses, our financial condition
16

could be adversely affected and our business could be harmed. Our management team may also be required to devote a great
deal of time, effort and energy to these legal proceedings, which could divert management’s attention from focusing on our
operations and adversely affect our business.

We will continue to vigorously defend and enforce our intellectual property rights around the world, especially as it
relates to patent litigation.

From time to time, we are faced with having to defend our intellectual property rights throughout the world. Should we
become engaged in such proceedings, it could divert management’s attention from focusing on and implementing our
business strategy. Further, should we not be successful in any of our intellectual property enforcement actions, our revenue
may be affected and our business could be harmed.

Failure to protect our proprietary technologies or maintain the right to certain technologies may negatively affect our
ability to compete.

We rely heavily on our proprietary technologies. Our future success and competitive position depend in part upon our ability
to obtain and maintain protection of certain proprietary technologies used in our products. We pursue patents for some of our
new products and unique technologies, and we also rely on a combination of nondisclosure agreements and other contractual
provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our technology, know-how, and
processes. Despite the precautions we take, it may be possible for unauthorized third parties to copy aspects of our current or
future technologies or products or to obtain and use information that we regard as proprietary. We intend to continue to
protect our proprietary technologies, including through patents. However, there can be no assurance that the steps we take
will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not
develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated, or
circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured,
or sold may not protect our products and intellectual property rights to the same extent as laws in the United States. Our
failure to adequately protect our proprietary technologies would materially harm our business.

The market for government-backed student loan auction-rate securities has suffered a decline in liquidity which may
impact the liquidity and potential value of our investment portfolio.

The market for government-backed student loan auction-rate securities with interest rates that reset through a Dutch auction
every 7 to 35 days became illiquid in 2008. We experienced our first failed auction in mid-February 2008. Since 2008, we
have redeemed 87% of the original portfolio at par. At December 31, 2015, $5.6 million of our auction-rate securities have
failed to reset through successful auctions and it is unclear as to when these investments will regain their liquidity. The
underlying maturity of these auction-rate securities is up to 32 years.

We recorded temporary and other-than-temporary impairment charges on these investments. The valuation is subject to
fluctuations in the future, which will depend on many factors, including the quality of underlying collateral, estimated time
for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market
conditions, among others.

Should there be further deterioration in the market for auction-rate securities, the value of our portfolio may decline, which
may have an adverse impact on our cash position and our earnings. If the accounting rules for these securities change, there
may be an adverse impact on our earnings.

We face risks in connection with our internal control over financial reporting.

Effective internal control over financial reporting is necessary for us to provide reliable and accurate financial reports. If we
cannot provide reliable financial reports or prevent fraud or other financial misconduct, our business and operating results
could be harmed. Our failure to implement and maintain effective internal control over financial reporting could result in a
material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations.
This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which
could have an adverse effect on our results of operations and/or have a negative impact on the trading price of our common
stock, and could subject us to stockholder litigation. In addition, we cannot assure you that we will not in the future identify
material weaknesses in our internal control over financial reporting that we have not discovered to date, which may impact
the reliability of our financial reporting and financial statements.

Our products must meet 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.

Our customers generally establish demanding specifications for quality, performance, and reliability that our products must
meet. Integrated circuits as complex as ours often encounter development delays and may contain undetected defects or
failures when first introduced or after commencement of commercial shipments, which might require product replacement
or recall. Further, our third-party manufacturing processes or changes thereof, or raw material used in the manufacturing
processes may cause our products to fail. We have from time to time in the past experienced product quality, performance or
reliability problems. Our standard warranty period is generally one to two years, which exposes us to significant risks of
claims for defects and failures. If defects and failures occur in our products, we could experience lost revenue, increased
costs, including warranty expense and costs associated with customer support, cancellations or rescheduling of orders or
shipments, and product returns or discounts, any of which would harm our operating results.

In addition, product liability claims may be asserted with respect to our technology or products. Although we currently have
insurance, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that asserted claims
will be within the scope of coverage of the insurance, or that we will have sufficient resources to satisfy any asserted claims.

The price and availability of commodities (e.g., gold, copper and silicon) may adversely impact our ability to deliver
our products in a timely and cost-effective manner, and may adversely affect our business and results of operations.

Our products incorporate commodities such as gold, copper and silicon. An increase in the price or a decrease in the
availability of these commodities and similar commodities that we use could negatively impact our business and results of
operations.

Fluctuations in the value of the U.S. Dollar relative to other foreign currencies, including the Renminbi, may adversely
affect results of operations.

Our manufacturing and packaging suppliers are and will continue to be primarily located in China for the foreseeable future.
If the value of the Renminbi rises against the U.S. Dollar, there could be an increase in our manufacturing costs relative to
competitors who have manufacturing facilities located in the U.S., which could adversely affect our operations. In addition,
our sales are primarily denominated in the U.S. Dollar. If the value of the U.S Dollar rises against other currencies, it may
adversely affect the demand for our products in international markets, which could negatively impact our business and results
of operations.

We incur foreign currency exchange gains or losses related to the timing of payments for transactions between the U.S. and
our foreign subsidiaries, which are reported in interest and other income in the statements of operations. Fluctuations in the
value of the U.S. Dollar relative to the foreign currencies could increase the amount of foreign currency exchange losses we
record, which could have an adverse impact on our results of operations.

We and our manufacturing partners are or will be subject to extensive Chinese government regulation, and the benefit
of various incentives from Chinese governments that we and our manufacturing partners receive may be reduced or
eliminated, which could increase our costs or limit our ability to sell products and conduct activities in China.

Most of our manufacturing partners are located in China. In addition, we have established manufacturing and testing facilities
in China. The Chinese government has broad discretion and authority to regulate the technology industry in China. China’s
government has implemented policies from time-to-time to regulate economic expansion in China. It also exercises
significant control over China’s economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or
companies. New regulations or the readjustment of previously implemented regulations could require us and our
manufacturing partners to change our business plans, increase our costs, or limit our ability to sell products and conduct
activities in China, which could adversely affect our business and operating results.

In addition, the Chinese government and provincial and local governments have provided, and continue to provide, various
incentives to encourage the development of the semiconductor industry in China. Such incentives include tax rebates, reduced
tax rates, favorable lending policies and other measures, some or all of which may be available to our manufacturing partners
and to us with respect to our facilities in China. Any of these incentives could be reduced or eliminated by governmental
authorities at any time. Any such reduction or elimination of incentives currently provided to our manufacturing partners
could adversely affect our business and operating results.

There are inherent risks associated with the operation of our manufacturing and testing facilities in China, which
could increase product costs or cause a delay in product shipments.

We have manufacturing and testing facilities in China that began operations in 2006. We face the following risks, among
others, with respect to our operations in China:

•

inability to hire and maintain a qualified workforce;

inability to maintain appropriate and acceptable manufacturing controls; and

higher than anticipated overhead and other costs of operation.

If we are unable to maintain our facilities in China at fully operational status with qualified workers, appropriate
manufacturing controls and reasonable cost levels, we may incur higher costs than our current expense levels, which would
affect our gross margins. In addition, if capacity restraints result in significant delays in product shipments, our business and
results of operations would be adversely affected.

The average selling prices of products in our markets have historically decreased over time and will likely do so in the
future, which could harm our revenue and gross profits.

Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our gross
profits and financial results will suffer if we are unable to offset any reductions in our average selling prices by reducing our
costs, developing new or enhanced products on a timely basis with higher selling prices or gross profits, or increasing our
sales volumes. Additionally, because we do not operate our own wafer manufacturing or assembly facilities, we may not be
able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which
could also reduce our profit margins.

Because of the lengthy sales cycles for our products and the fixed nature of a significant portion of our expenses, we
may incur substantial expenses before we earn associated revenue and may not ultimately achieve our forecasted sales
for our products.

The introduction of new products presents significant business challenges because product development plans and
expenditures may be made up to two years or more in advance of any sales. It generally takes us up to 12 months or more to
design and manufacture a new product prototype. Only after we have a prototype do we introduce the product to the market
and begin selling efforts in an attempt to achieve design wins. This sales process requires us to expend significant sales and
marketing resources without any assurance of success. Volume production of products that use our ICs, if any, may not be
achieved for an additional period of time after an initial sale. Sales cycles for our products are lengthy for a number of reasons,
including:

•

our customers usually complete an in-depth technical evaluation of our products before they place a purchase order;

the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of their
product to evaluate product performance and consumer demand;

our products must be designed into our customers’ products or systems; and

the development and commercial introduction of our customers’ products incorporating new technologies frequently
are delayed.

As a result of our lengthy sales cycles, we may incur substantial expenses before we earn associated revenue because a
significant portion of our operating expenses is relatively fixed and based on expected revenue. The lengthy sales cycles of
our products also make forecasting the volume and timing of orders difficult. In addition, the delays inherent in lengthy sales
cycles raise additional risks that customers may cancel or change their orders. Our sales are made by purchase orders. Because
industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog is not always a good
indicator of our future sales. If customer cancellations or product changes occur, we could lose anticipated sales and not have
sufficient time to reduce our inventory and operating expenses.

Our success depends on our investment of significant resources in research and development. We may have to invest
more resources in research and development than anticipated, which could increase our operating expenses and
negatively impact our operating results.

Our success depends on us investing significant amounts of resources into research and development. We expect to have to
continue to invest heavily in research and development in the future in order to continue to innovate and come to market with
new products in a timely manner and increase our revenue and profitability. If we have to invest more resources in research
and development than we anticipate, we could see an increase in our operating expenses which may negatively impact our
operating results. Also, if we are unable to properly manage and effectively utilize our research and development resources,
we could see material adverse effects on our business, financial condition and operating results.

In addition, if new competitors, technological advances by existing competitors, our entry into new markets, or other
competitive factors require us to invest significantly greater resources than anticipated in our research and development
efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in
research and development efforts without a corresponding increase in revenue, our operating results could decline. Research
and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments
in research and development and these investments may be independent of our level of revenue, which could negatively
impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources
to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the
increased complexity and the greater number of products under development.

The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel
could affect our operations or impair our ability to grow our business.

Our future success depends upon our ability to attract and retain highly qualified technical and managerial personnel. We are
particularly dependent on the continued services of our key executives, including Michael Hsing, our President and Chief
Executive Officer, who founded our company and developed our proprietary process technology. In addition, personnel with
highly skilled analog and mixed-signal design engineering expertise are scarce and competition for personnel with these skills
is intense. There can be no assurance that we will be able to retain existing key employees or that we will be successful in
attracting, integrating or retaining other highly qualified personnel with critical capabilities in the future. If we are unable to
retain the services of existing key employees or are unsuccessful in attracting new highly qualified employees quickly enough
to meet the demands of our business, including design cycles, our business could be harmed. Furthermore, if we experience
loss of a member of key personnel, the search for a qualified replacement and the transition could cause interruptions to our
operations as it could take us take longer than expected on the search and divert management resources, or the newly hired
member could take longer than expected to integrate into the team.

If we fail to retain key employees in our sales, applications, finance and legal staff or to make continued improvements
to our internal systems, particularly in the accounting and finance area, our business may suffer.

If we fail to continue to adequately staff our sales, applications, financial and legal staff, maintain or upgrade our business
systems and maintain internal control that meet the demands of our business, our ability to operate effectively will suffer.
The operation of our business also depends upon our ability to retain these employees, as these employees hold a significant
amount of institutional knowledge about us and our products, and, if they were to terminate their employment, our sales and
internal control over financial reporting could be adversely affected.

We intend to continue to expand our operations, which may strain our resources and increase our operating expenses.

We plan to continue to expand our domestic and foreign operations through internal growth, strategic relationships, and/or
acquisitions. We expect that any such expansion will strain our systems and operational and financial controls. In addition,
we are likely to incur significantly higher operating costs. To manage our growth effectively, we must continue to improve
and expand our systems and controls, as well as hire experienced administrative and financial personnel. If we fail to do so,
our growth will be limited. If we fail to effectively manage our planned expansion of operations, our business and operating
results may be harmed.

We may not realize the anticipated benefits of any company or business that we acquire. In addition, acquisitions
could result in diluting the ownership interests of our stockholders, reduce our cash balances, and cause us to incur
debt or to assume contingent liabilities, which could adversely affect our business.

As a part of our business strategy, from time to time we review acquisition prospects that would complement our current
product offerings, enhance our design capability or offer other competitive opportunities. For example, we completed our
acquisition of Sensima Technology SA in July 2014 to further our diversification strategy and create new opportunities with
key customers. As a result of completing acquisitions, we could use a significant portion of our available cash, cash
equivalents and short-term investments, issue equity securities that would dilute current stockholders’ percentage ownership,
incur substantial debt or contingent liabilities, and incur impairment charges related to goodwill or other acquisition-related
intangibles. Such actions could impact our operating results and the price of our common stock. For example, as part of the
contingent consideration arrangement that was part of our acquisition of Sensima, we may have to pay up to an additional
$8.9 million to former Sensima shareholders if Sensima achieves a new product introduction as well as certain product
revenue and direct margin targets in 2016. The fair value of the contingent consideration at the acquisition date of $2.5 million
was recorded in other long-term liabilities in our financial statements and is remeasured at the end of each reporting period.
During the fourth quarter of 2015, we determined the fair value of the contingent consideration was $0 and released the
liability of $2.5 million, as we currently do not expect the milestones will be achieved. We will continue to assess the
probability of former Sensmia shareholders earning the contingent consideration in 2016 and may record additional
adjustment to the fair value.

In addition, we may be unable to identify or complete prospective acquisitions for various reasons, including competition
from other companies in the semiconductor industry, the valuation expectations of acquisition candidates and applicable
antitrust laws or related regulations. If we are unable to identify and complete acquisitions, we may not be able to successfully
expand our business and product offerings.

We cannot guarantee that the Sensima acquisition or any future acquisitions will improve our results of operations or that we
will otherwise realize the anticipated benefits of any acquisitions. In addition, if we are unsuccessful in integrating any
acquired company or business into our operations or if integration is more difficult than anticipated, we may experience
disruptions that could harm our business and result in our failure to realize the anticipated benefits of the acquisitions. Some
of the risks that may adversely affect our ability to integrate or realize any anticipated benefits from the acquired companies,
businesses or assets include those associated with:

•

unexpected losses of key employees or customers of the acquired companies or businesses;

conforming the acquired company’s standards, processes, procedures and controls with our operations;

coordinating new product and process development;

hiring additional management and other critical personnel;

increasing the scope, geographic diversity and complexity of our operations;

difficulties in consolidating facilities and transferring processes and know-how;

difficulties in the assimilation of acquired operations, technologies or products;

the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or
stockholders of acquired companies;

our inability to commercialize acquired technologies;

the risk that the future business potential as projected is not realized and as a result, we may be required to take a
charge to earnings that would impact our profitability;

the need to take impairment charges or write-downs with respect to acquired assets and technologies;

difficulties in assessing the fair value of earn-out arrangements;

•

diversion of management’s attention from other business concerns; and

adverse effects on existing business relationships with customers.

We compete against many companies with substantially greater financial and other resources, and our market share
may be reduced if we are unable to respond to our competitors effectively.

The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue.
Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit applications
and design talent, our ability to introduce new products, and our ability to maintain the rate at which we introduce these new
products. We compete with domestic and non-domestic semiconductor companies, many of which have substantially greater
financial and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products.
We are in direct and active competition, with respect to one or more of our product lines, with many manufacturers of such
products, of varying size and financial strength. The number of our competitors has grown due to the expansion of the market
segments in which we participate.

We cannot assure you that our products will continue to compete favorably, or that we will be successful in the face of
increasing competition from new products and enhancements introduced by existing competitors or new companies entering
this market, which would materially and adversely affect our results of operations and our financial condition.

If securities or industry analysts downgrade our stock or do not continue to publish research or reports about our
business, our stock price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that industry or securities analysts
publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover
us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to
regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or
trading volume to decline.

Major earthquakes or other natural disasters and resulting systems outages may cause us significant losses.

Our corporate headquarters, the production facilities of our third-party wafer suppliers, our IC testing and manufacturing
facilities, a portion of our assembly and research and development activities, and certain other critical business operations
are located in or near seismically active regions and are subject to periodic earthquakes. We do not maintain earthquake
insurance and could be materially and adversely affected in the event of a major earthquake. Much of our revenue, as well as
our manufacturers and assemblers, are concentrated in Asia, particularly in China. Such concentration increases the risk that
other natural disasters, labor strikes, terrorism, war, political unrest, epidemics, and/or health advisories could disrupt our
operations. In addition, we rely heavily on our internal information and communications systems and on systems or support
services from third parties to manage our operations efficiently and effectively. Any of these are subject to failure due to a
natural disaster or other disruption. System-wide or local failures that affect our information processing could have material
adverse effects on our business, financial condition, operating results and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our primary operations are located in San Jose, California and Chengdu, China. We occupy an owned facility located at 79
Great Oaks Boulevard in San Jose, California, which serves as our corporate headquarters, and research and development
and sales offices. The property consists of a building with approximately 106,000 square feet and 5.5 acres of land.

We lease a facility with approximately 60,000 square feet in Chengdu, China, which serves as our test facility and
manufacturing hub. In September 2015, we exercised our option to purchase this facility and expect to close the transaction
in the first half of 2016. In addition, we constructed a 150,000 square-foot research and development facility in Chengdu,
China, which was put into operation in October 2010. We also lease a warehouse facility with approximately 42,000 square
feet in Chengdu, China, which is primarily used for inventory storage.

In November 2015, we entered into an agreement to purchase three units of an office building with approximately 6,600
square feet in Shanghai, China. The space is primarily used for sales and marketing and research and development functions.
The transaction was closed in January 2016.

We also lease other sales and research and development offices in China, Europe, Japan, Korea, Singapore, Taiwan and the
United States. We believe that our existing facilities are adequate for our current operations.

ITEM 3. LEGAL PROCEEDINGS

As of December 31, 2015, there were no material pending legal proceedings to which we were a party.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

PART II

Securities.

Market Price of Our Common Stock

Our common stock is traded on the Nasdaq Global Select Market under the symbol “MPWR.” The following table sets forth
the high and low closing sales price per share of our common stock:

2015
First quarter ...................................................................................................... $
Second quarter ................................................................................................. $
Third quarter .................................................................................................... $
Fourth quarter ................................................................................................... $

2014:
First quarter ...................................................................................................... $
Second quarter ................................................................................................. $
Third quarter .................................................................................................... $
Fourth quarter ................................................................................................... $

Holders of Our Common Stock

High

Low

56.12 $
54.95 $
52.12 $
68.88 $

38.86 $
42.48 $
47.78 $
50.44 $

45.80
49.96
45.28
50.42

31.36
35.14
40.77
34.47

As of February 22, 2016, there were 11 registered holders of record of our common stock. A substantially greater number of
holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other
financial institutions.

Dividend Policy

In June 2014, our Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash
dividends on our common stock. Stockholders of record as of the last day of the quarter are entitled to receive the quarterly
cash dividends when and if declared by our Board of Directors, which are generally payable on the 15th of the following
month. Our Board of Directors declared the following cash dividends (in thousands, except per-share amounts):

Dividend Declared
per Share

Total
Amount

2015:
First quarter ...................................................................................................... $
Second quarter ................................................................................................ $
Third quarter ................................................................................................... $
Fourth quarter ................................................................................................... $

2014:
Second quarter ................................................................................................ $
Third quarter ................................................................................................... $
Fourth quarter ................................................................................................... $

0.20 $
0.20 $
0.20 $
0.20 $

0.15 $
0.15 $
0.15 $

7,854
7,925
7,901
7,938

5,817
5,823
5,826

The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other
things, our financial condition, results of operations, capital requirements, business conditions, statutory requirements of
Delaware law, compliance with the terms of future indebtedness and credit facilities and other factors that our Board of
Directors may deem relevant, as well as a determination that cash dividends are in the best interests of our stockholders. We
anticipate that the cash used for future dividends will come from our current domestic cash and cash generated from ongoing
U.S. operations. If cash held by our international subsidiaries is needed for the payment of dividends, we may be required to
accrue and pay U.S. taxes to repatriate the funds.

Performance of Our Common Stock

The following graph compares the cumulative five-year total return on our common stock relative to the cumulative total
returns of the Nasdaq Composite Index, the S&P 500 Index and the Philadelphia Semiconductor Index. An investment of
$100 (with reinvestment of all dividends) is assumed to have been made in our common stock on December 31, 2010 and its
relative performance is tracked through December 31, 2015.

The information contained in the stock performance graph section shall not be deemed to be “soliciting material” or “filed”
or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act,
except to the extent that the Company specifically incorporates it by reference into a document filed under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Stock repurchase activity during the three months ended December 31, 2015 was as follows (in thousands, except per-share
amount):

Total Number of
Shares Purchased
(a)

Average Price
Paid per Share

Total Number of
Shares Purchased
as Part of
Publicly
Announced
Program

Dollar Value of
Shares That May
Yet
Be Purchased
Under
the Program (b)

October 1 - October 31.........................................
November 1 - November 30 .................................
December 1 - December 31..................................
Total .....................................................................

11 $
- $
- $
11 $

52.14
-
-
-

11
-
-
11 $

(a) In July 2013, the Board of Directors approved a stock repurchase program that authorized us to repurchase up to $100 million in the
aggregate of our common stock through June 30, 2015. In April 2015, the Board of Directors approved an extension of the program
through December 31, 2015. Under the program, shares may be repurchased in privately negotiated or open market transactions,
including under a Rule 10b5-1 plan. Shares were retired upon repurchase.

(b) The stock repurchase program expired on December 31, 2015, with a remaining balance of $5.9 million. In February 2016, the Board
of Directors approved a new stock repurchase program that authorizes us to repurchase up to $50 million in the aggregate of our
common stock through December 31, 2016.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with ''Management's Discussion and
Analysis of Financial Condition and Results of Operations'' and the consolidated financial statements and the notes thereto
included elsewhere in this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the
information presented below. We derived the selected consolidated balance sheet data as of December 31, 2015 and 2014,
and the consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 from our audited
consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K. The consolidated
balance sheet data as of December 31, 2013, 2012 and 2011, and the consolidated statement of operations data for each of
the years ended December 31, 2012 and 2011 are derived from our audited consolidated financial statements which are not
included in this report. Operating results for any year are not necessarily indicative of results to be expected for any future
periods.

Consolidated Statement of Operations Data:

2015

Year Ended December 31,
2013
(in thousands, except per share amounts)

2014

2012

2011

Revenue ................................................................... $
Cost of revenue .......................................................
Gross profit ..................................................

333,067 $
152,898
180,169

282,535 $
129,917
152,618

238,091 $
110,190
127,901

213,813 $
100,665
113,148

196,519
94,925
101,594

Operating expenses:

Research and development ..................................
Selling, general and administrative .....................
Litigation expense (benefit), net ...........................
Total operating expenses ..............................
Income from operations ..........................................
Interest and other income, net ..................................
Income before income taxes ....................................
Income tax provision ................................................
Net income .............................................................. $

65,787
72,312
1,000
139,099
41,070
1,421
42,491
7,319
35,172 $

58,590
66,755
(8,027)
117,318
35,300
1,092
36,392
897
35,495 $

49,733
54,624
(371)
103,986
23,915
92
24,007
1,109
22,898 $

48,796
50,018
(2,945)
95,869
17,279
611
17,890
2,134
15,756 $

44,518
40,280
3,379
88,177
13,417
309
13,726
425
13,301

Net income per share:

Basic ............................................................ $
Diluted .......................................................... $

0.89 $
0.86 $

0.92 $
0.89 $

0.61 $
0.59 $

0.45 $
0.43 $

0.39
0.38

Weighted-average shares outstanding:

Basic .............................................................
Diluted ..........................................................

39,470
40,869

38,686
39,793

37,387
38,620

34,871
36,247

34,050
35,160

Cash dividends declared per common share ............ $

0.80 $

0.45 $

- $

1.00 $

Consolidated Balance Sheet Data:

2015

2014

December 31,
2013
(in thousands)

2012

2011

Cash and cash equivalents ....................................... $
Short-term investments ........................................... $
Long-term investments ............................................ $
Total assets ............................................................. $
Common stock ........................................................ $
Total stockholders' equity ....................................... $
Working capital (1) ................................................. $

90,860 $
144,103 $
5,361 $
431,285 $
265,763 $
368,516 $
288,645 $

126,266 $
112,452 $
5,389 $
399,366 $
240,500 $
346,425 $
271,051 $

101,213 $
125,126 $
9,860 $
368,908 $
234,201 $
323,399 $
253,304 $

75,104 $
85,521 $
11,755 $
287,162 $
194,079 $
258,294 $
190,840 $

96,371
77,827
13,675
273,867
159,336
242,877
185,014

(1) In November 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-17, Balance
Sheet Classification of Deferred Taxes, which requires that all deferred tax assets and liabilities, including related valuation
allowance, be classified as non-current on the balance sheets. We early adopted this standard retrospectively and reclassified
the current deferred tax assets to non-current deferred tax assets on our consolidated balance sheets data for all periods
presented.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and related notes which
appear under Item 8 in this Annual Report on Form 10-K.

Overview

We are a leading company in high performance power solutions. Founded in 1997, we design and provide small, highly
energy efficient, easy-to-use power solutions for systems found in industrial applications, telecommunication infrastructures,
cloud computing, automotive, and consumer applications. Our mission is to reduce total energy consumption in our
customers' systems with green, practical, compact solutions. We believe that we differentiate ourselves by offering solutions
that are more highly integrated, smaller in size, more energy efficient, more accurate with respect to performance
specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new
products within our existing product families, as well as in new innovative product categories.

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

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

Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial
customer order for a new product to ramp up. Typical lead time for orders is fewer than 90 days. These factors, combined
with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty
to the customer, make the forecasting of our orders and revenue difficult.

We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where the
products we produce are incorporated into end-user products. Our revenue from direct or indirect sales to customers in Asia
was 91%, 91% and 90% for the years ended December 31, 2015, 2014 and 2013, respectively. We derive a majority of our
revenue from the sales of our DC to DC converter product family which serves the communications, storage and computing,
consumer and industrial markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to
develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base
and successfully secure manufacturing capacity.

In July 2014, we completed the acquisition of Sensima Technology SA (“Sensima”), a company located in Switzerland that
develops magnetic sensors for angle measurements as well as three-dimensional magnetic field sensing. Sensima became a
subsidiary of MPS and changed its name to MPS Tech Switzerland Sarl. The acquisition creates new opportunities with
customers by offering enhanced solutions in power management for key industries such as automotive, industrial and cloud
computing. The purchase consideration consisted of an upfront cash payment of $11.7 million and additional consideration
that is contingent upon Sensima achieving a new product introduction and certain revenue and direct margin goals in 2016,
with a fair value of $2.5 million at the date of acquisition. In addition, key employees received $1.7 million of time-based
restricted stock units and up to $8.0 million of performance-based restricted stock units in connection with the transaction.
These equity awards are considered arrangements for post-acquisition services and the related compensation expense is
recognized over the requisite service period if it is probable that the performance goals will be met. The results of operations
of Sensima have been included in our consolidated financial statements subsequent to the acquisition date.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of
assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates
on an on-going basis, including those related to revenue recognition, stock-based compensation, inventories, income taxes,
valuation of goodwill and intangible assets, and contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates
and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend
27

upon, among other things, many factors outside of our control, such as demand for our products and economic
conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps
significantly, from these estimates.

We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our
consolidated financial statements.

Revenue Recognition

We recognize revenue when the following four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably
assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of the fees
charged for products delivered and the collectability of those fees. The application of these criteria has resulted in us generally
recognizing revenue upon shipment (when title and risk of loss have transferred to customers), including distributors, original
equipment manufacturers and electronic manufacturing service providers.

Our revenue consists primarily of sales of assembled and tested finished goods. We also sell die in wafer form to our
customers and value-added resellers, and we receive royalty revenue from third parties and value-added resellers.

For the years ended December 31, 2015, 2014 and 2013, approximately 96%, 92% and 91% of our distributor sales,
respectively, including sales to our value-added resellers, were made through distribution arrangements with third parties.
These arrangements generally do not include any special payment terms (our normal payment terms are 30-45 days for our
distributors), price protection or exchange rights. Returns are limited to our standard product warranty. Certain of our large
distributors have contracts that include limited stock rotation rights that permit the return of a small percentage of the previous
six months’ purchases.

For the years ended December 31, 2015, 2014 and 2013, approximately 4%, 8% and 9% of our distributor sales, respectively,
were made through small distributors primarily based on purchase orders. These distributors typically have no stock rotation
rights.

We generally recognize revenue upon shipment of products to the distributors based on the following considerations:

(1) The price is fixed or determinable at the date of sale. We do not offer special payment terms, price protection or

price adjustments to distributors when we recognize revenue upon shipment.

(2) The distributors are obligated to pay us and this obligation is not contingent on the resale of our products.
(3) The distributors’ obligation is unchanged in the event of theft or physical destruction or damage to the products.
(4) The distributors have stand-alone economic substance apart from our relationship.
(5) We do not have any obligations for future performance to directly bring about the resale of our products by the

distributors.

(6) The amount of future returns can be reasonably estimated. We have the ability and the information necessary to
track inventory sold to and held at our distributors. We maintain a history of returns and have the ability to estimate
the stock rotation returns on a quarterly basis.

We maintain a sales reserve for stock rotation rights, which is based on historical experience of actual stock rotation returns
on a per distributor basis, where available, and information related to products in the distribution channel. This reserve is
recorded at the time of sale. Historically, these returns were not material to our consolidated financial statements.

If we enter into arrangements that have rights of return that are not estimable, we recognize revenue under such arrangements
only after the distributors have sold the products to end customers. Four of our distributors have distribution agreements
where revenue is recognized upon sale by these distributors to their end customers because these distributors have certain
rights of return which management believes are not estimable. The deferred revenue balance from these distributors as of
December 31, 2015 and 2014 was $2.8 million and $2.0 million, respectively. The deferred costs as of December 31, 2015
and 2014 were $0.2 million.

Inventory Valuation

We value our inventory at the lower of the standard cost (which approximates actual cost on a first-in, first-out basis) or its
current estimated market value. We write down inventory for obsolescence or lack of demand, based on assumptions about
future demand and market conditions. If actual market conditions are less favorable than those projected by management,
28

additional inventory write-downs may be required. Conversely, if market conditions are more favorable, inventory may be
sold that was previously reserved.

Valuation of Goodwill and Acquisition-Related Intangible Assets

We evaluate intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that an
impairment may exist. We perform an annual impairment assessment for goodwill and intangible assets with indefinite lives
in the fourth quarter, or more frequently if indicators of potential impairment exist. Impairment of intangible assets is
recognized based on the difference between the fair value of the assets and their carrying value. Impairment for goodwill
occurs if the fair value of a reporting unit including goodwill is less than its carrying value and is recognized based on the
difference between the implied fair value of the reporting unit’s goodwill and the carrying value of the goodwill. The
assumptions and estimates used to determine future value of goodwill and intangible assets are complex and subjective. They
can be affected by various factors, including external factors such as industry and economic trends, and internal factors such
as changes in our business strategy and revenue forecasts. If there is a significant adverse change in our business in the future,
including macroeconomic and market conditions, we may be required to record impairment charges on our goodwill and
acquisition-related intangible assets.

Accounting for Income Taxes

We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable
in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities for
our estimate of future tax effects attributable to temporary differences and carryforwards. We record a valuation allowance
to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not
expected to be realized.

Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves
dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and
liabilities may change based, in part, on added certainty or finality or uncertainty to an anticipated outcome, changes in
accounting or tax laws in the U.S. or foreign jurisdictions where we operate, or changes in other facts or circumstances. In
addition, we recognize liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on our
tax returns if it has less than a 50% likelihood of being sustained. If we determine that payment of these amounts is
unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income
tax benefit or additional income tax expense in our financial statements in the period such determination is made. We have
calculated our uncertain tax positions which were attributable to certain estimates and judgments primarily related to transfer
pricing, cost sharing and our international tax structure exposure.

As of December 31, 2015 and 2014, we had a valuation allowance of $18.6 million and $19.1 million, respectively,
attributable to management’s determination that it is more likely than not that most of the deferred tax assets in the U.S. will
not be realized. Should it be determined that additional amounts of the net deferred tax asset will not be realized in the future,
an adjustment to increase the deferred tax asset valuation allowance will be charged to income in the period such
determination is made. Likewise, in the event we were to determine that it is more likely than not that we would be able to
realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance
for the deferred tax asset would increase income in the period such determination was made.

As a result of the cost sharing arrangements with our international subsidiaries (cost share arrangements), relatively small
changes in costs that are not subject to sharing under the cost share arrangements can significantly impact the overall
profitability of the U.S. entity. Because of the U.S. entity’s inconsistent earnings history and uncertainty of future earnings,
we have determined that it is more likely than not that the U.S. deferred tax benefits will not be realized.

Contingencies

We are a party to actions and proceedings in the ordinary course of business, including litigation regarding our shareholders
and our intellectual property, challenges to the enforceability or validity of our intellectual property, claims that our products
infringe on the intellectual property rights of others, and employment matters. The pending proceedings involve complex
questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute
and defend. In addition, from time to time, we become aware that we are subject to other contingent liabilities. When this
occurs, we will evaluate the appropriate accounting for the potential contingent liabilities to determine whether a contingent
liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult
with internal and external legal counsel and technical experts. Based on the facts and circumstances in each matter, we use
29

our judgment to determine whether it is probable that a contingent loss has occurred and whether the amount of such loss can
be estimated. If we determine a loss is probable and estimable, we record a contingent loss. In determining the amount of a
contingent loss, we take into account advice received from experts for each specific matter regarding the status of legal
proceedings, settlement negotiations, prior case history and other factors. Should the judgments and estimates made by
management need to be adjusted as additional information becomes available, we may need to record additional contingent
losses that could materially and adversely impact our results of operations. Alternatively, if the judgments and estimates
made by management are adjusted, for example, if a particular contingent loss does not occur, the contingent loss recorded
would be reversed which could result in a favorable impact on our results of operations.

Stock-Based Compensation

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date
fair value of the award. The fair value of restricted stock units with service conditions or performance conditions is based on
the grant date share price. The fair value of restricted stock units with market conditions, as well as restricted stock units with
both market conditions and performance conditions, is estimated using a Monte Carlo simulation model. The fair value of
options and shares issued under the employee stock purchase plan is estimated using the Black-Scholes model.

We recognize compensation expense equal to the grant-date fair value for all share-based payment awards that are expected
to vest. This expense is recorded on a straight-line basis over the requisite service period of the entire awards, unless the
awards are subject to market conditions or performance conditions, in which case we recognize compensation expense over
the requisite service period for each separately vesting tranche. For awards with performance conditions, as well as awards
with both market conditions and performance conditions, we recognize compensation expense when it becomes probable that
the performance criteria set by the Board of Directors will be achieved. This assessment is performed on a quarterly basis
and requires significant assumptions and estimates made by management related to the projected achievement of the
performance goals, which can be affected by external factors, such as macroeconomic conditions and the analog industry
forecasts, and internal factors, such as our business and operations strategy, product roadmaps and revenue forecasts. Changes
in the probability assessment of achieving the performance conditions are accounted for in the period of change by recording
a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. If the actual
performance targets achieved differ significantly from those projected by management, additional compensation expense
may be recorded for the performance-based awards due to the cumulative catch-up adjustment, which could have an adverse
impact on our results of operations. Furthermore, the amount of compensation expense that we recognize is based on an
expected forfeiture rate. If there is a difference between the forfeiture assumptions used in determining stock-based
compensation costs and the actual forfeitures which become known over time, we may change the forfeiture rate, which
could have a significant impact on our stock-based compensation expense.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-
09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when
it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year deferral of the effective
date. The standard will be effective for annual reporting periods beginning after December 15, 2017. Early adoption is
permitted for reporting periods beginning after December 15, 2016. The standard may be applied retrospectively to each prior
period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are evaluating the
impact of the adoption on our consolidated financial position, results of operations, cash flows and disclosures.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that
all deferred tax assets and liabilities, including related valuation allowance, be classified as non-current on the balance sheets.
We have elected to early adopt the standard as of December 31, 2015 on a retrospective basis. As of December 31, 2014, we
reclassified $0.2 million of current deferred tax assets to non-current deferred tax assets on the Consolidated Balance Sheet.
The adoption did not affect our operating results, comprehensive income or cash flows for the periods presented.

Results of Operations

The following table summarizes our results of operations:

2015

Year Ended December 31,
2014
(in thousands, except percentages)

2013

333,067
152,898
180,169

100.0 % $
45.9
54.1

282,535
129,917
152,618

100.0 % $ 238,091
110,190
127,901

46.0
54.0

100.0 %
46.3
53.7

65,787

19.8

58,590

20.7

49,733

20.9

72,312
1,000
139,099
41,070
1,421
42,491
7,319
35,172

21.7
0.3
41.8
12.3
0.5
12.8
2.2
10.6 % $

66,755
(8,027)
117,318
35,300
1,092
36,392
897
35,495

23.6
(2.8)
41.5
12.5
0.4
12.9
0.3
12.6 % $

54,624
(371)
103,986
23,915
92
24,007
1,109
22,898

22.9
(0.2 )
43.6
10.1
0.0
10.1
0.5
9.6 %

Revenue ......................................... $
Cost of revenue .............................
Gross profit ...................................
Operating expenses:

Research and development ........
Selling, general and

administrative ..........................
Litigation expense (benefit), net
Total operating expenses ........
Income from operations ................
Interest and other income, net .......
Income before income taxes ..........
Income tax provision .....................
Net income ................................... $

Revenue

The following table summarizes our revenue by product family:

Year Ended December 31,

Product Family

2015

Revenue

2014

Revenue

2013

Revenue

% of

Change

From
2014 to
2015

From
2013 to
2014

DC to DC products ........ $ 299,726
Lighting control

products ...................... 33,341
Total ............................. $ 333,067

(In thousands, except percentages)

90.0% $ 253,083

89.6% $ 211,337

88.8%

18.4%

19.8%

10.0% 29,452
100.0% $ 282,535

10.4% 26,754
100.0% $ 238,091

11.2%
100.0%

13.2%
17.9%

10.1%
18.7%

Revenue for the year ended December 31, 2015 was $333.1 million, an increase of $50.6 million, or 17.9%, from $282.5
million for the year ended December 31, 2014. This increase was due to higher sales of both DC to DC and lighting control
products, as unit shipments increased 17% due to higher market demand with current customers and additional design wins
with new customers, coupled with an increase of 1% in average sales prices. Revenue from our DC to DC products was
$299.7 million for the year ended December 31, 2015, an increase of $46.6 million, or 18.4%, from the same period in 2014.
This increase was primarily due to higher sales of our DC to DC converters and battery chargers, which were offset in part
by lower sales of our Mini-Monsters products. Revenue from our lighting control products was $33.3 million for the year
ended December 31, 2015, an increase of $3.9 million, or 13.2%, compared with the same period in 2014.

Revenue for the year ended December 31, 2014 was $282.5 million, an increase of $44.4 million, or 18.7%, from $238.1
million for the year ended December 31, 2013. This increase was due to higher sales of both DC to DC and lighting control
products, as unit shipments increased 37% due to higher market demand with current customers and additional design wins
with new customers, which were offset in part by a 13% decrease in average sales prices. Revenue from our DC to DC
products was $253.1 million for the year ended December 31, 2014, an increase of $41.7 million, or 19.8%, from the same
period in 2013. This increase was primarily due to higher sales of our DC to DC converters, offset in part by lower sales of
our Mini-Monsters products. Revenue from our lighting control products was $29.5 million for the year ended December 31,
2014, an increase of $2.7 million, or 10.1%, compared with the same period in 2013.

Cost of Revenue and Gross Margin

Cost of revenue primarily consists of costs incurred to manufacture, assemble and test our products, as well as warranty costs,
inventory-related and other overhead costs, and stock-based compensation expenses. In addition, cost of revenue includes
amortization of intangible assets from the Sensima acquisition beginning in the third quarter of 2014.

Year Ended December 31,

Change

2015

Cost of revenue ......................................... $
Cost of revenue as a percentage of revenue
Gross profit ................................................ $
Gross margin ..............................................

152,898 $
45.9%
180,169 $
54.1%

2014

2013
(in thousands, except percentages)
129,917 $
46.0%
152,618 $
54.0%

110,190
46.3%
127,901
53.7%

From
2014 to
2015

From
2013 to
2014

17.7%

17.9%

18.1%

19.3%

Cost of revenue was $152.9 million, or 45.9% of revenue, for the year ended December 31, 2015, and $129.9 million, or
46.0% of revenue, for the year ended December 31, 2014. The $23.0 million increase in cost of revenue was primarily due
to a 17% increase in unit shipments, coupled with a 4% increase in the average direct cost of units shipped. The increase in
cost of revenue was also driven by additional amortization of intangible assets of $1.1 million.

Gross margin was 54.1% for the year ended December 31, 2015, compared with 54.0% for the year ended December 31,
2014. For the year ended December 31, 2015, gross margin was favorably impacted by lower labor and overhead costs as a
percentage of revenue, partially offset by increased sales of lower margin products and higher amortization of intangible
assets compared to the same period in 2014.

Cost of revenue was $129.9 million, or 46.0% of revenue, for the year ended December 31, 2014, and $110.2 million, or
46.3% of revenue, for the year ended December 31, 2013. The $19.7 million increase in cost of revenue was primarily due
to a 37% increase in unit shipments, which was partially offset by a 14% decrease in the average direct cost of units shipped.
The increase in cost of revenue was also driven by an increase of $0.8 million in the provision for inventory reserve and
additional amortization of intangible assets of $0.7 million.

Gross margin was 54.0% for the year ended December 31, 2014, compared to 53.7% for the year ended December 31, 2013.
The increase in gross margin was primarily due to lower labor and overhead costs as a percentage of revenue compared to
the same period in 2013. This increase was partially offset by an increase in the provision for inventory reserve and higher
amortization of intangible assets.

Research and Development

Research and development (“R&D”) expenses primarily consist of salary and benefit expenses, bonuses and stock-based
compensation expenses for design and product engineers, expenses related to new product development and supplies, and
facility costs.

Year Ended December 31,

Change

2015

R&D expenses .................................. $
As a percentage of revenue ..............

65,787 $
19.8 %

2014

2013
(in thousands, except percentages)
58,590 $
20.7%

49,733
20.9%

From
2014 to 2015

From
2013 to 2014

12.3%

17.8%

R&D expenses were $65.8 million, or 19.8% of revenue, for the year ended December 31, 2015 and $58.6 million, or 20.7%
of revenue, for the year ended December 31, 2014. The $7.2 million increase in R&D expenses was primarily due to an
increase of $3.7 million in cash compensation expenses, which include salary, benefits and bonuses, an increase of $2.1
million in stock-based compensation expenses primarily associated with the performance-based equity awards, an increase
of $0.5 million in new product development expenses, and an increase of $0.3 million in manufacturing and laboratory
supplies. These increases were partially offset by a decrease of $0.2 million related to the changes in the value of the employee
deferred compensation plan liabilities. Our R&D headcount was 506 employees as of December 31, 2015, compared with
476 employees as of December 31, 2014.

R&D expenses were $58.6 million, or 20.7% of revenue, for the year ended December 31, 2014 and $49.7 million, or 20.9%
of revenue, for the year ended December 31, 2013. The $8.9 million increase in R&D expenses was primarily due to an
increase of $2.8 million in stock-based compensation expenses primarily associated with the performance-based and market-
based equity awards, an increase of $2.4 million in new product development expenses, an increase of $2.0 million in cash
compensation expenses, which include salary, benefits and bonuses, and an increase of $0.6 million in manufacturing and
laboratory supplies. Our R&D headcount was 476 employees as of December 31, 2014, compared with 449 employees as of
December 31, 2013.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses primarily include salary and benefit expenses, bonuses and stock-
based compensation expenses for sales, marketing and administrative personnel, sales commissions, travel expenses, facilities
costs, and professional service fees.

Year Ended December 31,

Change

SG&A expenses ......................................... $
As a percentage of revenue ........................

72,312 $
21.7%

2015

2014

2013
(in thousands, except percentages)
66,755 $
23.6%

54,624
22.9%

From
2014 to
2015

From
2013 to
2014

8.3%

22.2%

SG&A expenses were $72.3 million, or 21.7% of revenue, for the year ended December 31, 2015 and $66.8 million, or 23.6%
of revenue, for the year ended December 31, 2014. The $5.5 million increase in SG&A expenses was primarily due to an
increase of $5.7 million in stock-based compensation expenses primarily associated with the performance-based equity
awards, an increase of $2.0 million in cash compensation expenses, which include salary, benefits and bonuses, and an
increase of $0.6 million in commission expenses due to higher revenue. These increases were partially offset by a credit of
$2.5 million related to the release of a contingent consideration liability (see below), a decrease of $0.6 million in professional
service fees due to the transaction costs incurred in the Sensima acquisition in 2014 but not in 2015, and a gain of $0.3 million
from sales of certain operating equipment. Our SG&A headcount was 306 employees as of December 31, 2015,
compared with 274 employees as of December 31, 2014.

Our acquisition of Senisma in July 2014 included a contingent consideration arrangement which requires us to pay up to $8.9
million to certain former Sensima shareholders if Sensima achieves a new product introduction as well as certain product
revenue and direct margin targets in 2016. The fair value of the contingent consideration at the acquisition date was $2.5
million, which was estimated based on a probability-weighted analysis of possible future revenue outcomes. As part of the
quarterly assessment in the fourth quarter of 2015, management reviewed the sales forecast for the products and concluded
that the projected product revenue in 2016 will not likely meet the minimum target required to earn the contingent
consideration, primarily because the product adoption process by customers will take longer than we had originally
anticipated. Accordingly, the fair value of the contingent consideration was deemed to be $0 as of December 31, 2015, and
we recorded the release of the liability of $2.5 million as a credit to SG&A expenses. We will continue to assess the probability
of former Sensima shareholders earning the contingent consideration in 2016 and may record additional adjustment to the
fair value.

SG&A expenses were $66.8 million, or 23.6% of revenue, for the year ended December 31, 2014 and $54.6 million, or 22.9%
of revenue, for the year ended December 31, 2013. The $12.2 million increase in SG&A expenses was primarily due to an
increase of $9.7 million in stock-based compensation expenses primarily associated with the performance-based and market-
based equity awards, an increase of $0.9 million in professional service fees primarily due to the transaction costs of $0.6
million incurred in the Sensima acquisition, an increase of $0.5 million in cash compensation expenses, which include salary,
benefits and bonuses, and an increase of $0.3 million in commission expenses due to higher revenue. Our SG&A headcount
was 274 employees as of December 31, 2014, compared to 249 employees as of December 31, 2013.

Litigation Expense (Benefit), Net

Litigation expense was $1.0 million for the year ended December 31, 2015, compared with a litigation benefit, net, of $(8.0)
million for the year ended December 31, 2014. The net litigation benefit for the year ended December 31, 2014 included the
recognition of a $9.5 million award from the O2 Micro litigation, partially offset by $0.5 million of additional legal fees
incurred in connection with the final resolution of the litigation.

Litigation benefit, net, was $(8.0) million for the year ended December 31, 2014, compared with a litigation benefit, net, of
$(0.4) million for the year ended December 31, 2013. The net litigation benefit for the year ended December 31, 2014
included the recognition of a $9.5 million award from the O2 Micro litigation, partially offset by $0.5 million of additional
legal fees incurred in connection with the final resolution of the litigation. The net litigation benefit for the year ended
December 31, 2013 included $0.8 million of proceeds received in connection with the legal settlement with Silergy
Corporation. The increase in net litigation benefit for the year ended December 31, 2014 was partially offset by higher
expenses we incurred in other litigation matters, compared to the same period in 2013.

For a complete description of our material litigation matters, see Note 13 “Litigation” of the Notes to Consolidated Financial
Statements.

Interest and Other Income, Net

Interest and other income, net, was $1.4 million for the year ended December 31, 2015, compared with $1.1 million for the
year ended December 31, 2014. The increase was primarily due to higher foreign currency exchange gains and higher interest
income, partially offset by higher expenses related to the changes in the value of the employee deferred compensation plan
assets.

Interest and other income, net, was $1.1 million for the year ended December 31, 2014, compared with $0.1 million for the
year ended December 31, 2013. The increase was primarily due to higher foreign currency exchange gains and higher interest
income.

Income Tax Provision

The income tax provision for the year ended December 31, 2015 was $7.3 million, or 17.2% of pre-tax income. We recorded
a one-time net charge of $2.7 million to the income tax provision related to the resolution of the income tax audits in the
second quarter of 2015. In addition to the impact of this charge, the effective tax rate differed from the federal statutory rate
primarily because foreign income was taxed at lower rates, and because of the benefit that we realized from stock option
exercises and the release of RSUs, and from the release of an income tax reserve where the statute of limitations expired. In
addition, the effective tax rate was impacted by changes in the valuation allowance.

The income tax provision for the year ended December 31, 2014 was $0.9 million, or 2.5% of pre-tax income. The income
tax provision for the year ended December 31, 2013 was $1.1 million, or 4.6% of pre-tax income. The effective tax rate
differed from the federal statutory rate in both 2014 and 2013 primarily because our foreign income was taxed at lower rates,
and because of the benefit that we realized from stock options exercises and the release of RSUs, and changes in our valuation
allowance during the year.

For additional information on the income tax provision and the resolution of the income tax audits, see Note 11 “Income
Taxes” of the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

December 31,

2015

2014

(in thousands, except percentages)

Cash and cash equivalents ............................................................................... $
Short-term investments ...................................................................................
Total cash, cash equivalents and short-term investments ........................ $
Percentage of total assets .........................................................................

90,860
144,103
234,963

$
54.5%

Total current assets (1) .................................................................................... $
Total current liabilities ....................................................................................
Working capital ........................................................................................ $

331,928
$
(43,283)
$
288,645

126,266
112,452
238,718

59.8%

307,912
(36,861)
271,051

___________________
(1) In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires
that all deferred tax assets and liabilities, including related valuation allowance, be classified as non-current on the
balance sheets. We early adopted this standard retrospectively and reclassified $0.2 million of the current deferred tax
assets to non-current deferred tax assets on our consolidated balance sheet as of December 31, 2014.

As of December 31, 2015, we had cash and cash equivalents of $90.9 million and short-term investments of $144.1 million,
compared with cash and cash equivalents of $126.3 million and short-term investments of $112.5 million as of December 31,
2014. As of December 31, 2015, $55.5 million of cash and cash equivalents and $36.8 million of short-term investments
were held by our international subsidiaries. If these funds are needed for our operations in the U.S., we may be required to
accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the
U.S. and our current plans do not demonstrate a need to repatriate them to fund the U.S. operations.

The significant components of our working capital are cash and cash equivalents, short-term investments, accounts
receivable, inventories, prepaid expenses and other current assets, reduced by accounts payable, accrued compensation and
related benefits, and other accrued liabilities. As of December 31, 2015, we had working capital of $288.6 million, compared
with working capital of $271.1 million as of December 31, 2014. The $17.5 million increase in working capital was due to a
$24.0 million increase in current assets, partially offset by a $6.5 million increase in current liabilities. The increase in current
assets was primarily due to an increase in short-term investments, accounts receivable and inventories, partially offset by a
decrease in cash and cash equivalents. The increase in current liabilities was primarily due to an increase in other accrued
liabilities.

Summary of Cash Flows

The following table summarizes our cash flow activities:

2015

Year Ended December 31,
2014
(in thousands)

2013

Net cash provided by operating activities .......................................... $
Net cash used in investing activities ...................................................
Net cash provided by (used in) financing activities ...........................
Effect of exchange rate changes on cash and cash equivalents ..........
Net increase (decrease) in cash and cash equivalents .............. $

69,736 $
(57,197)
(46,652)
(1,293)
(35,406) $

74,133 $
(9,367 )
(39,227 )
(486 )
25,053 $

60,686
(54,324 )
18,850
897
26,109

For the year ended December 31, 2015, net cash provided by operating activities was $69.7 million, primarily due to our net
income adjusted for certain non-cash items, including depreciation and amortization, stock-based compensation, change in
fair value of contingent consideration and a net decrease of $12.6 million from the changes in our operating assets and
liabilities. The increase in accounts receivable was primarily driven by increased sales. The increase in inventories was
primarily due to an increase in strategic wafer and die bank inventories as well as an increase in finished goods to meet future
demand. The increase in accrued liabilities was primarily driven by an increase in employee contributions to the deferred
compensation plan.

For the year ended December 31, 2014, net cash provided by operating activities was $74.1 million, primarily due to our net
income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a
net decrease of $8.0 million from the changes in our operating assets and liabilities. The increase in accounts receivable was
primarily due to increased sales and higher shipments in the fourth quarter of 2014. The increase in accounts payable was
primarily driven by increased inventory and capital asset purchases to meet future growth. The decrease in accrued liabilities
was primarily driven by the release of a liability related to the O2 Micro litigation, partially offset by an increase in employee
contributions to the deferred compensation plan.

For the year ended December 31, 2013, net cash provided by operating activities was $60.7 million, primarily due to our net
income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a
net increase of $4.5 million from the changes in our operating assets and liabilities. The increase in accounts receivable
resulted primarily from an increase in shipments. The increase in inventories was primarily due to an increase in strategic
wafer and die bank inventories as well as an increase in finished goods to meet future demand. The increase in accrued
liabilities was primarily due to a cash award received in connection with the O2 Micro litigation that was recorded as a
liability as of December 31, 2013.

For the year ended December 31, 2015, net cash used in investing activities was $57.2 million, primarily due to net purchases
of investments of $33.5 million, purchases of property and equipment of $16.0 million, and net contributions to the employee
deferred compensation plan of $8.0 million.

For the year ended December 31, 2015, we spent $5.4 million to purchase three units of an office building located in Shanghai,
China. We also exercised the option to purchase a leased manufacturing facility in Chengdu, China for approximately $1.7
million, which we expect to close in the first half of 2016. In addition, our Board of Directors approved a plan to spend up to
$17 million to purchase additional office space in China in 2016 to accommodate future growth.

For the year ended December 31, 2014, net cash used in investing activities was $9.4 million, primarily due to net cash of
$11.6 million paid to acquire Sensima, purchases of property and equipment of $9.5 million, and net contributions to the
employee deferred compensation plan of $5.3 million, partially offset by net proceeds from sales of investments of $12.4
million and proceeds of $4.7 million from the redemption of auction-rate securities. For the year ended December 31, 2013,
net cash used in investing activities was $54.3 million, primarily due to net purchases of investments of $40.1 million and
purchases of property and equipment of $15.8 million, partially offset by proceeds from the redemption of auction-rate
securities of $2.0 million.

For the year ended December 31, 2015, net cash used in financing activities was $46.7 million, primarily reflecting $32.3
million used in repurchases of our common stock pursuant to our stock repurchase program and $30.0 million used to pay
dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $10.0 million
of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan. For the
year ended December 31, 2014, net cash used in financing activities was $39.2 million, primarily reflecting $41.2 million
used in repurchases of our common stock pursuant to our stock repurchase program and $11.7 million used to pay dividends
to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $14.0 million of cash
proceeds from stock option exercises and issuance of shares through our employee stock purchase plan. For the year ended
December 31, 2013, net cash provided by financing activities was $18.9 million, primarily reflecting $40.0 million of cash
proceeds from stock option exercises and issuance of shares through our employee stock purchase plan, partially offset by
$20.6 million used in repurchases of our common stock pursuant to our stock repurchase program.

In July 2013, our Board of Directors approved a stock repurchase program that authorized us to repurchase up to $100 million
in the aggregate of our common stock through June 30, 2015. In April 2015, our Board of Directors approved an extension
of the program through December 31, 2015. All shares were retired upon repurchase. For the year ended December 31, 2015,
we repurchased a total of 0.6 million shares for $32.3 million, at an average price of $50.05 per share. For the year ended
December 31, 2014, we repurchased a total of 1.1 million shares for $41.2 million, at an average price of $39.19 per share.
For the year ended December 31, 2013, we repurchased a total of 0.7 million shares for $20.6 million, at an average price of
$31.06 per share. In February 2016, our Board of Directors approved a new stock repurchase program that authorizes us to
repurchase up to $50 million in the aggregate of our common stock through December 31, 2016.

In June 2014, our Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash
dividends on our common stock, beginning in July 2014. In addition, outstanding RSU awards contain rights to receive
dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common
stock. The dividend equivalents are accumulated quarterly during the vesting periods of the RSUs and are payable to the
employees when the awards vest. Dividend equivalents accumulated on the RSUs are forfeited if the employees do not fulfill
their service requirement during the vesting periods. For the year ended December 31, 2015, we paid dividends and dividend
equivalents totaling $30.0 million. For the year ended December 31, 2014, we paid dividends and dividend equivalents
totaling $11.7 million.

Although cash requirements will fluctuate based on the timing and extent of many factors such as those discussed above, we
believe that cash generated from operations, together with the liquidity provided by existing cash balances and short-term
investments, will be sufficient to satisfy our liquidity requirements for the next 12 months. We anticipate the cash used for
future dividends, dividend equivalents and the stock repurchase program will come from our current domestic cash and cash
generated from ongoing U.S. operations. If cash held by our international subsidiaries is needed for these payments, we may
be required to accrue and pay U.S. taxes to repatriate these funds.

In the future, in order to strengthen our financial position, respond to unforeseen circumstances, or fund our growth in future
financial periods, we may need to raise additional funds by any one or a combination of the following: issuing equity
securities, issuing debt or convertible debt securities, incurring indebtedness secured by our assets, or selling certain product
lines and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms
acceptable to us, or at all.

From time to time, we have engaged in discussions with third parties concerning potential acquisitions of product lines,
technologies, businesses and companies, and we continue to consider potential acquisition candidates. Any such transactions
could involve the issuance of a significant number of new equity securities, assumptions of debt, and/or payment of cash
36

consideration. We may also be required to raise additional funds to complete any such acquisitions, through either the
issuance of equity and debt securities or incurring indebtedness secured by our assets. If we raise additional funds or acquire
businesses or technologies through the issuance of equity securities or convertible debt securities, our existing stockholders
may experience significant dilution.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2015:

Operating leases ................................................... $
Outstanding purchase commitments (1) ...............
Other long-term obligations (2) ............................
Total ..................................................................... $
______________

Total

Less Than
1 Year

Payment Due by Period

1 - 3 Years
(in thousands)

3 - 5 Years

More Than
5 years

2,528 $
32,705
15,843
51,076 $

1,354 $
30,875
-
32,229 $

889 $
380
1,738
3,007 $

285 $
300
5,503
6,088 $

-
1,150
8,602
9,752

(1) Outstanding purchase commitments primarily consist of wafer purchases from our foundries, assembly services and
license arrangements. In addition, the amounts include the estimated purchase price of $1.7 million for a
manufacturing facility in Chengdu, China. We exercised the option to purchase this leased facility in September
2015 and expect to close the transaction in the first half of 2016.

(2) Other long-term obligations include long-term liabilities reflected on our Consolidated Balance Sheets, which
primarily consist of employee deferred compensation plan liabilities and accrued dividend equivalents. Because of
the uncertainty as to the timing of distributions related to a portion of the employee deferred compensation plan
liabilities, we have excluded estimated obligations of $0.7 million from the table above. In addition, because of the
uncertainty as to the timing of payments related to our liabilities for unrecognized tax benefits, we have excluded
estimated obligations of $2.9 million from the table above.

Off Balance Sheet Arrangements

As of December 31, 2015, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and
Exchange Commission’s Regulation S-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our cash equivalents and investments are subject to market risk, primarily interest rate and credit risk. Our investments are
managed by outside professional managers within investment guidelines set by us. Such guidelines include security type,
credit quality and maturity and are intended to limit market risk by restricting our investments to high quality debt instruments
with relatively short-term maturities. Fluctuations in interest rates of 10% would not have a material impact on our results of
operations.

We do not use derivative financial instruments in our investment portfolio. Investments in debt securities are classified as
available-for-sale. For available-for-sale investments, no gains or losses are recognized by us in our results of operations due
to changes in interest rates unless such securities are sold prior to maturity or are determined to be other-than-temporarily
impaired. Available-for-sale investments are reported at fair value with the related unrealized gains or losses being included
in accumulated other comprehensive income, a component of stockholders’ equity.

Long-Term Investments

As of December 31, 2015, all of our holdings in auction-rate securities, which have a face value of $5.6 million, have failed
to reset as a result of current market conditions. Should these auctions continue to fail and if the credit rating for these
securities decline, a 10% decline in the fair value could impact our results of operations by approximately $0.5 million if we
determine the decline in value to be other-than-temporary.

Foreign Currency Exchange Risk

Our sales outside the United States are primarily transacted in U.S. dollars. Accordingly, our sales are not generally impacted
by foreign currency rate changes. The functional currency of the Company’s offshore operations is the local currency,
primarily the Renminbi, the New Taiwan Dollar and the Euro. In addition, we incur foreign currency exchange gains or losses
related to the timing of payments for transactions between the U.S. and our foreign subsidiaries, which are reported in interest
and other income. To date, fluctuations in foreign currency exchange rates have not had a material impact on our results of
operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS

Contents

Report of Independent Registered Public Accounting Firm ........................................................................................
Consolidated Balance Sheets ......................................................................................................................................
Consolidated Statements of Operations ......................................................................................................................
Consolidated Statements of Comprehensive Income ..................................................................................................
Consolidated Statements of Stockholders’ Equity ......................................................................................................
Consolidated Statements of Cash Flows .....................................................................................................................
Notes to Consolidated Financial Statements ...............................................................................................................

Page
40
41
42
43
44
45
46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Monolithic Power Systems, Inc.
San Jose, California

We have audited the accompanying consolidated balance sheets of Monolithic Power Systems, Inc. and subsidiaries (the
"Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive
income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Monolithic Power Systems, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles
generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated February 29, 2016 expressed an unqualified opinion on the Company's internal control over financial
reporting.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
February 29, 2016

MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)

ASSETS
Current assets:

Cash and cash equivalents ............................................................................................ $
Short-term investments .................................................................................................
Accounts receivable, net ..............................................................................................
Inventories ....................................................................................................................
Prepaid expenses and other current assets ....................................................................
Total current assets ....................................................................................................
Property and equipment, net .............................................................................................
Long-term investments .....................................................................................................
Goodwill ...........................................................................................................................
Acquisition-related intangible assets, net .........................................................................
Deferred tax assets, net.....................................................................................................
Other long-term assets ......................................................................................................
Total assets ................................................................................................................ $

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable .......................................................................................................... $
Accrued compensation and related benefits .................................................................
Accrued liabilities .........................................................................................................
Total current liabilities ..............................................................................................
Income tax liabilities ........................................................................................................
Other long-term liabilities ................................................................................................
Total liabilities ..........................................................................................................

Commitments and contingencies (notes 11, 12 and 13)
Stockholders' equity:

Common stock and additional paid-in capital, $0.001 par value; shares authorized:
150,000; shares issued and outstanding: 39,689 and 38,832 as of December 31,
2015 and December 31, 2014, respectively ..............................................................
Retained earnings ........................................................................................................
Accumulated other comprehensive income ..................................................................
Total stockholders’ equity .........................................................................................
Total liabilities and stockholders’ equity .................................................................. $

December 31,

2015

2014

90,860 $
144,103
30,830
63,209
2,926
331,928
65,359
5,361
6,571
5,053
672
16,341
431,285 $

13,487 $
9,812
19,984
43,283
2,941
16,545
62,769

126,266
112,452
25,630
40,918
2,646
307,912
62,942
5,389
6,571
6,812
1,283
8,457
399,366

13,138
9,020
14,703
36,861
5,876
10,204
52,941

265,763
101,287
1,466
368,516
431,285 $

240,500
100,114
5,811
346,425
399,366

See accompanying notes to consolidated financial statements.

MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

Year Ended December 31,
2014

2013

2015

Revenue ............................................................................................... $
Cost of revenue ...................................................................................
Gross profit ...............................................................................

Operating expenses:

Research and development ..............................................................
Selling, general and administrative ..................................................
Litigation expense (benefit), net .......................................................
Total operating expenses ..........................................................
Income from operations ......................................................................
Interest and other income, net ..............................................................
Income before income taxes ................................................................
Income tax provision ...........................................................................
Net income .......................................................................................... $

333,067 $
152,898
180,169

65,787
72,312
1,000
139,099
41,070
1,421
42,491
7,319
35,172 $

282,535 $
129,917
152,618

58,590
66,755
(8,027)
117,318
35,300
1,092
36,392
897
35,495 $

Net income per share:

Basic .......................................................................................... $
Diluted ....................................................................................... $

0.89 $
0.86 $

0.92 $
0.89 $

Weighted-average shares outstanding:

Basic ..........................................................................................
Diluted .......................................................................................

39,470
40,869

38,686
39,793

238,091
110,190
127,901

49,733
54,624
(371)
103,986
23,915
92
24,007
1,109
22,898

0.61
0.59

37,387
38,620

Cash dividends declared per common share ........................................ $

0.80 $

0.45 $

See accompanying notes to consolidated financial statements.

MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Net income ........................................................................................ $
Other comprehensive income (loss), net of tax:

Change in unrealized losses on auction-rate securities, net of $0

Year Ended December 31,
2014

2015

2013

35,172 $

35,495 $

22,898

tax in 2015, 2014 and 2013 .....................................................

(28)

179

130

Change in unrealized gains/losses on other available-for-sale

securities, net of $0 tax in 2015, 2014 and 2013 .....................
Foreign currency translation adjustments ...................................
Total other comprehensive income (loss), net of tax ..........................
Comprehensive income ..................................................................... $

(151)
(4,166)
(4,345)
30,827 $

(19 )
(609 )
(449 )
35,046 $

(33 )
1,988
2,085
24,983

See accompanying notes to consolidated financial statements.

MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

Common Stock and
Additional Paid-in
Capital

Retained

Amount Earnings

Accumulated
Other
Comprehensive
Income

Total
Stockholders’
Equity

Balance as of January 1, 2013 ...........................
Net income ...........................................................
Other comprehensive income ...............................
Exercise of stock options .....................................
Repurchase of common shares .............................
Shares issued under the employee stock

purchase plan ....................................................
Stock-based compensation expense .....................
Release of restricted stock ...................................
Balance as of December 31, 2013 ......................
Net income ...........................................................
Other comprehensive loss ....................................
Dividends and dividend equivalents declared ......
Exercise of stock options .....................................
Repurchase of common shares .............................
Shares issued under the employee stock

purchase plan ....................................................
Stock-based compensation expense .....................
Tax benefits from equity awards ..........................
Release of restricted stock ...................................
Balance as of December 31, 2014 ......................
Net income ...........................................................
Other comprehensive loss ....................................
Dividends and dividend equivalents declared ......
Exercise of stock options .....................................
Repurchase of common shares .............................
Shares issued under the employee stock

35,673 $ 194,079 $
-
-
37,877
(20,615)

-
-
2,446
(664)

60,040 $
22,898
-
-
-

111
-
725

2,145
20,715
-
38,291 234,201
-
-
-
11,941
(41,198)

-
-
-
742
(1,051)

-
-
-
82,938
35,495
-
(18,319 )
-
-

78
-
-
772

2,078
33,459
19
-

-
-
-
-
38,832 240,500 100,114
35,172
-
(33,999 )
-
-

-
-
-
7,744
(32,286)

-
-
-
498
(645)

56
-
-
948

-
-
-
-
39,689 $ 265,763 $ 101,287 $

2,227
41,650
5,928
-

4,175 $
-
2,085
-
-

-
-
-
6,260
-
(449)
-
-
-

-
-
-
-
5,811
-
(4,345)
-
-
-

-
-
-
-
1,466 $

258,294
22,898
2,085
37,877
(20,615)

2,145
20,715
-
323,399
35,495
(449)
(18,319)
11,941
(41,198)

2,078
33,459
19
-
346,425
35,172
(4,345)
(33,999)
7,744
(32,286)

2,227
41,650
5,928
-
368,516

See accompanying notes to consolidated financial statements.

MONOLITHIC POWER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Year Ended December 31,
2014

2015

2013

35,172 $

35,495 $

22,898

Cash flows from operating activities:
Net income .................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating

activities:
Depreciation and amortization of intangible assets ....................................
Loss (gain) on sales of property and equipment .........................................
Premium amortization and loss on investments .........................................
Change in fair value of contingent consideration .......................................
Deferred taxes, net .....................................................................................
Stock-based compensation expense ...........................................................
Excess tax benefit from equity awards .......................................................
Changes in operating assets and liabilities, net of effects of an

acquisition:
Accounts receivable ...............................................................................
Inventories .............................................................................................
Prepaid expenses and other assets ..........................................................
Accounts payable ...................................................................................
Accrued liabilities ..................................................................................
Income tax liabilities ..............................................................................
Accrued compensation and related benefits ...........................................
Net cash provided by operating activities...........................................

Cash flows from investing activities:

Property and equipment purchases .............................................................
Proceeds from sales of property and equipment .........................................
Purchases of short-term investments ..........................................................
Proceeds from sales of short-term investments ..........................................
Proceeds from sales of long-term investments ...........................................
Contributions to employee deferred compensation plan, net .....................
Cash paid for an acquisition, net of cash acquired .....................................
Net cash used in investing activities ...................................................

Cash flows from financing activities:

Property and equipment purchased on extended payment terms ................
Proceeds from exercise of stock options ....................................................
Proceeds from shares issued under the employee stock purchase plan ......
Repurchases of common shares .................................................................
Dividends and dividend equivalents paid ...................................................
Excess tax benefit from equity awards .......................................................
Net cash provided by (used in) financing activities ............................
Effect of change in exchange rates .................................................................
Net increase (decrease) in cash and cash equivalents .....................................
Cash and cash equivalents, beginning of period ............................................
Cash and cash equivalents, end of period ....................................................... $

13,783
(339)
596
(2,507)
42
41,563
(5,928)

(5,201)
(22,210)
(390)
147
9,942
3,998
1,068
69,736

(16,024)
340
(223,018)
189,549
-
(8,044)
-
(57,197)

(300)
7,744
2,227
(32,286)
(29,965)
5,928
(46,652)
(1,293)
(35,406)
126,266
90,860 $

13,130
-
96
-
17
33,454
(10 )

(1,870 )
(1,142 )
(2,029 )
1,632
(3,102 )
(248 )
(1,290 )
74,133

(9,511 )
-
(136,872 )
149,291
4,650
(5,335 )
(11,590 )
(9,367 )

(400 )
11,941
2,078
(41,198 )
(11,658 )
10
(39,227 )
(486 )
25,053
101,213
126,266 $

Supplemental disclosures for cash flow information:

Cash paid for taxes and interest.................................................................. $

3,322 $

1,235 $

Supplemental disclosures of non-cash investing and financing activities:

Liability accrued for property and equipment purchases ........................... $
Liability accrued for dividends and dividend equivalents ......................... $
Fair value of contingent consideration related to an acquisition ................ $

2,184 $
10,109 $
- $

1,487 $
6,660 $
2,507 $

See accompanying notes to consolidated financial statements.

12,160
31
443
-
(81 )
20,701
-

(4,347 )
(7,606 )
121
1,440
12,149
86
2,691
60,686

(15,764 )
88
(125,756 )
85,700
2,025
(617 )
-
(54,324 )

(557 )
37,877
2,145
(20,615 )
-
-
18,850
897
26,109
75,104
101,213

1,116

1,941
-
-

MONOLITHIC POWER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Monolithic Power Systems, Inc. (“MPS” or the “Company”) was incorporated in the State of California on August 22, 1997.
On November 17, 2004, the Company was reincorporated in the State of Delaware. MPS designs, develops and markets
integrated power semiconductor solutions and power delivery architectures. MPS's mission is to provide innovative power
solutions in communications, storage and computing, consumer and industrial market segments.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Certain Significant Risks and Uncertainties

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and
cash equivalents, short-term and long-term investments and accounts receivable. The Company’s cash consists of checking
and savings accounts. The Company’s cash equivalents include short-term, highly liquid investments purchased with
remaining maturities at the date of purchase of three months or less. The Company’s short-term investments consist of
certificates of deposit, government agency bonds and treasuries, and the long-term investments consist of government-backed
student loan auction-rate securities. The Company generally does not require its customers to provide collateral or other
security to support accounts receivable. To manage credit risk, management performs ongoing credit evaluations of its
customers’ financial condition. The Company requires cash in advance for certain customers in addition to ongoing credit
evaluations for those where credit has been extended. Accounts receivable allowances were not material in any of the periods
presented.

The Company participates in the dynamic high technology industry and believes that changes in any of the following areas
could have a material adverse effect on its future financial position, results of operations or cash flows: advances and trends
in new technologies and industry standards; competitive pressures in the form of new products or price reductions on current
products; changes in product mix; changes in the overall demand for products offered by the Company; changes in third-
party manufacturers; changes in key suppliers; changes in certain strategic relationships or customer relationships; litigation
or claims against the Company based on intellectual property, patent, product, regulatory or other factors; fluctuations in
foreign currency exchange rates; risk associated with changes in domestic and international economic and/or political
regulations; availability of necessary components or sub-assemblies; availability of foundry capacity; ability to integrate
acquired companies; and the Company’s ability to attract and retain employees necessary to support its growth.

Foreign Currency

The functional currency of the Company’s international subsidiaries is generally the local currency. The primary subsidiaries
are located in China and Taiwan, which utilize the Renminbi and the New Taiwan Dollar as their currencies,
respectively. Accordingly, assets and liabilities of the foreign subsidiaries are translated using exchange rates in effect at the
end of the period. Revenue and costs are translated using average exchange rates for the period. The resulting translation
adjustments are presented as a separate component of accumulated other comprehensive income in stockholders’ equity in
the Consolidated Balance Sheets. In addition, the Company incurs foreign currency exchange gains or losses related to the
timing of payments for transactions between the U.S. and its foreign subsidiaries. Foreign currency transaction gains (losses)
46

are reported in interest and other income, net, in the Consolidated Statements of Operations and totaled $0.6 million, $0.1
million and $(0.6) million for the years ended December 31, 2015, 2014 and 2013, respectively.

Cash and Cash Equivalents

The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as
cash equivalents.

Fair Value of Financial Instruments

Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three
levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the
fair value measurement:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2: Inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3: Significant unobservable inputs

The Company’s financial instruments include cash and cash equivalents, and short-term and long-term investments. Cash
equivalents are stated at cost, which approximates fair market value. The Company’s short-term and long-term investments
are classified as available-for-sale securities and are stated at their fair market value.

The Company determines whether an impairment is temporary or other-than temporary. Unrealized gains or losses that are
deemed to be temporary are recorded as a component of accumulated other comprehensive income in stockholders’ equity
in the Consolidated Balance Sheets, and changes in unrealized gains or losses are recorded in the Consolidated Statements
of Comprehensive Income. The Company records an impairment charge in interest and other income, net, in the Consolidated
Statements of Operations when an available-for-sale investment has experienced a decline in value that is deemed to be other-
than-temporary. Other-than-temporary impairment exists when the Company either has the intent to sell the security, it will
more likely than not be required to sell the security before anticipated recovery, or it does not expect to recover the entire
amortized cost basis of the security.

As of December 31, 2015 and 2014, the fair value of the Company’s holdings in auction-rate securities was $5.4 million, all
of which was classified as long-term available-for-sale investments. The valuation of the auction-rate securities is subject to
fluctuations in the future, which will depend on many factors, including the quality of the underlying collateral, estimated
time to liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market
conditions, among others.

Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost determined on a first-in first-out basis)
or current market value. Market is based on estimated net realizable value. The Company writes down excess and obsolete
inventory based on its age and forecasted demand, which includes estimates taking into consideration the Company’s outlook
on market and economic conditions, technology changes, new product introductions and changes in strategic direction. Actual
demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values.
When the Company records a write-down on inventory, it establishes a new, lower cost basis for that inventory, and
subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost
basis.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets. Buildings and building improvements have estimated useful lives of 30 to 40 years. Leasehold
improvements are amortized over the shorter of the estimated useful lives or the lease period. Computer, software and
production equipment have estimated useful lives of three to seven years. Transportation equipment has estimated useful
lives of 5 to 15 years. Furniture and fixtures have estimated useful lives of three to five years.

Goodwill and Acquisition-Related Intangible Assets

Goodwill represents the excess of the fair value of purchase consideration over the fair value of net tangible and identified
intangible assets as of the date of acquisition. In-process research and development (“IPR&D”) assets represent the fair value
of incomplete R&D projects that had not reached technological feasibility as of the date of acquisition. The IPR&D assets are
initially capitalized at fair value as intangible assets with indefinite lives and assessed for impairment at each reporting period.
When the IPR&D projects are completed, they are reclassified as amortizable intangible assets and are amortized over their
estimated useful lives. Alternatively, if the IPR&D projects are abandoned, they are impaired and expensed to research and
development.

Acquisition-related intangible assets with finite lives consist of know-how and developed technologies. These assets are
amortized on a straight-line basis over the estimated useful lives of three to five years and the amortization expense is recorded
in cost of revenue in the Consolidated Statements of Operations.

Other Long-Term Assets

Other assets primarily consist of intangible assets for the land use rights in Chengdu, China, purchased patents, long-term
lease deposits and investments related to the employee deferred compensation plan. The Company amortizes the land use
rights over 50 years and the purchased patents over five years.

Impairment of Long-Lived Assets

The Company evaluates long-lived assets, other than goodwill and acquisition-related intangible assets with indefinite useful
lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be
measured as the difference between the carrying amount of the asset and its fair value based on the present value of estimated
future cash flows.

The Company tests goodwill for impairment at least annually in the fourth quarter of the year, or whenever events or changes
in circumstances indicate that goodwill may be impaired. The Company has elected to first assess the qualitative factors to
determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the
Company determines that it is more likely than not that its fair value is less than the carrying amount, then the two-step
goodwill impairment test is performed. The first step compares the fair value of the reporting unit with its carrying amount.
If the carrying amount exceeds its fair value, the second step measures the impairment loss by comparing the implied fair
value of the goodwill with the carrying amount. No impairment of goodwill has been identified in any of the periods
presented.

Deferred Compensation Plan

The Company has a non-qualified, unfunded deferred compensation plan, which provides certain key employees, including
executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a
tax deferred basis. The Company does not make contributions to the plan or guarantee returns on the investments. The
Company is responsible for the plan’s administrative expenses. Participants’ deferrals and investment gains and losses remain
as the Company’s liabilities and the underlying assets are subject to claims of general creditors.

The liabilities for compensation deferred under the plan are recorded at fair value in each reporting period and are included
in other long-term liabilities in the Consolidated Balance Sheets. Changes in the fair value of the liabilities are recorded as
an operating expense (credit) in the Consolidated Statements of Operations. The Company manages the risk of changes in
the fair value of the liabilities by electing to match the liabilities with investments in corporate-owned life insurance policies
and mutual funds that offset a substantial portion of the exposure. The investments are recorded in other long-term assets in
the Consolidated Balance Sheets at the cash surrender value of the corporate-owned life insurance policies and the fair value
of the mutual funds, which are classified as trading securities. Changes in the cash surrender value of the corporate-owned
life insurance policies and the fair value of mutual fund investments are included in interest and other income, net in the
Consolidated Statements of Operations. As of December 31, 2015 and 2014, the plan assets totaled $14.0 million and $6.1
million, and the plan liabilities totaled $14.1 million and $6.2 million, respectively.

Warranty Reserves

The Company generally provides a one to two-year warranty against defects in materials and workmanship and will either
repair the goods or provide replacement products at no charge to the customer for defective products. Reserve requirements
are recorded in the period of sale and are based on an assessment of the products sold with warranty and historical warranty
costs incurred. Historically, the warranty expenses have not been material to the Company’s consolidated financial
statements.

Revenue Recognition

The Company recognizes revenue when the following four basic criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is
reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of
the fees charged for products delivered and the collectability of those fees. The application of these criteria has resulted in
the Company generally recognizing revenue upon shipment (when title and risk of loss have transferred to customers),
including distributors, original equipment manufacturers and electronic manufacturing service providers.

The Company’s revenue consists primarily of sales of assembled and tested finished goods. The Company also sells die in
wafer form to its customers and value-added resellers, and the Company receives royalty revenue from third parties and
value-added resellers.

For the years ended December 31, 2015, 2014 and 2013, approximately 96%, 92% and 91% of the Company’s distributor
sales, respectively, including sales to the Company’s value-added resellers, were made through distribution arrangements
with third parties. These arrangements generally do not include any special payment terms (the Company’s normal payment
terms are 30-45 days for its distributors), price protection or exchange rights. Returns are limited to the Company’s standard
product warranty. Certain of the Company’s large distributors have contracts that include limited stock rotation rights that
permit the return of a small percentage of the previous six months’ purchases.

For the years ended December 31, 2015, 2014 and 2013, approximately 4%, 8% and 9% of the Company’s distributor sales,
respectively, were made through small distributors primarily based on purchase orders. These distributors typically have no
stock rotation rights.

The Company generally recognizes revenue upon shipment of products to the distributors based on the following
considerations:

(1) The price is fixed or determinable at the date of sale. The Company does not offer special payment terms, price

protection or price adjustments to distributors when the Company recognizes revenue upon shipment.

(2) The distributors are obligated to pay the Company and this obligation is not contingent on the resale of the

Company’s products.

(3) The distributors’ obligation is unchanged in the event of theft or physical destruction or damage to the products.
(4) The distributors have stand-alone economic substance apart from the Company’s relationship.
(5) The Company does not have any obligations for future performance to directly bring about the resale of its products

by the distributors.

(6) The amount of future returns can be reasonably estimated. The Company has the ability and the information
necessary to track inventory sold to and held at its distributors. The Company maintains a history of returns and
has the ability to estimate the stock rotation returns on a quarterly basis.

The Company maintains a sales reserve for stock rotation rights, which is based on historical experience of actual stock
rotation returns on a per distributor basis, where available, and information related to products in the distribution channel.
This reserve is recorded at the time of sale. Historically, these returns were not material to the Company’s consolidated
financial statements.

If the Company enters into arrangements that have rights of return that are not estimable, the Company recognizes revenue
under such arrangements only after the distributors have sold the products to end customers. Four of the
Company’s distributors have distribution agreements where revenue is recognized upon sale by these distributors to their end
customers because these distributors have certain rights of return which management believes are not estimable. The
deferred revenue balance from these distributors as of December 31, 2015 and 2014 was $2.8 million and $2.0 million,
respectively. The deferred costs as of December 31, 2015 and 2014 were $0.2 million.

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The fair value of restricted stock units with service conditions or performance conditions
is based on the grant date share price. The fair value of restricted stock units with market conditions, as well as restricted
stock units containing both market conditions and performance conditions, is estimated using a Monte Carlo simulation
model. The fair value of options and shares issued under the employee stock purchase plan is estimated using the Black-
Scholes model.

The Company recognizes compensation expense equal to the grant-date fair value for all share-based payment awards that
are expected to vest. Compensation expense related to awards with service conditions is recorded on a straight-line basis over
the requisite service period. Compensation expense related to awards subject to market conditions or performance conditions
is recognized over the requisite service period for each separately vesting tranche.

For awards with performance conditions, as well as awards containing both market conditions and performance conditions,
the Company recognizes compensation expense when it becomes probable that the performance criteria set by the Board of
Directors will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external
factors, such as macroeconomic conditions and the analog industry forecasts, and internal factors, such as the Company’s
business and operations strategy, product roadmaps and revenue forecasts. Changes in the probability assessment of achieving
the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the
new estimate had been applied since the service inception date. Any previously recognized compensation expense is reversed
if the performance conditions are not expected to be satisfied. For awards with only market conditions, compensation expense
is not reversed if the market conditions are not satisfied. The amount of compensation expense that the Company recognizes
is based on an expected forfeiture rate. If there is a difference between the forfeiture assumptions used in determining stock-
based compensation costs and the actual forfeitures which become known over time, the Company may change the forfeiture
rate, which could have a significant impact on its stock-based compensation expense.

Research and Development

Costs incurred in research and development are expensed as incurred.

Accounting for Income Taxes

The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable or
refundable in the current fiscal year by tax jurisdiction. The Company also recognizes federal, state and foreign deferred tax
assets or liabilities for its estimate of future tax effects attributable to temporary differences and carryforwards. The Company
records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available
evidence and judgment, are not expected to be realized.

The Company’s calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and
involves dealing with uncertainties in the application of complex tax laws. The Company’s estimates of current and deferred
tax assets and liabilities may change based, in part, on added certainty or finality or uncertainty to an anticipated outcome,
changes in accounting or tax laws in the U.S. or foreign jurisdictions where the Company operates, or changes in other facts
or circumstances. In addition, the Company recognizes liabilities for potential U.S. and foreign income tax for uncertain
income tax positions taken on its tax returns if it has less than a 50% likelihood of being sustained. If the Company determines
that payment of these amounts is unnecessary or if the recorded tax liability is less than its current assessment, the Company
may be required to recognize an income tax benefit or additional income tax expense in its financial statements in the period
such determination is made. The Company has calculated its uncertain tax positions which were attributable to certain
estimates and judgments primarily related to transfer pricing, cost sharing and its international tax structure exposure.

Contingencies

The Company is a party to actions and proceedings in the ordinary course of business, including litigation regarding its
shareholders and its intellectual property, challenges to the enforceability or validity of its intellectual property, claims that
the Company’s products infringe on the intellectual property rights of others, and employment matters. The pending
proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion
of other resources to prosecute and defend. In addition, from time to time, the Company becomes aware that it is subject to
other contingent liabilities. When this occurs, the Company will evaluate the appropriate accounting for the potential
contingent liabilities to determine whether a contingent liability should be recorded. In making this determination,
50

management may, depending on the nature of the matter, consult with internal and external legal counsel and technical
experts. Based on the facts and circumstances in each matter, the Company uses its judgment to determine whether it is
probable that a contingent loss has occurred and whether the amount of such loss can be estimated. If the Company determines
a loss is probable and estimable, the Company records a contingent loss. In determining the amount of a contingent loss, the
Company takes into account advice received from experts for each specific matter regarding the status of legal proceedings,
settlement negotiations, prior case history and other factors. Should the judgments and estimates made by management need
to be adjusted as additional information becomes available, the Company may need to record additional contingent losses.
Alternatively, if the judgments and estimates made by management are adjusted, for example, if a particular contingent loss
does not occur, the contingent loss recorded would be reversed.

Litigation Expense (Benefit)

The Company records litigation costs in the period in which they are incurred. Due to the uncertainties inherent in litigation
proceedings, the Company generally recognizes the proceeds resulting from settlement of litigation or favorable judgments
when the cash is received and there is no further contingency related to the litigation. The proceeds are recorded as a reduction
against litigation expense to the extent that litigation costs were previously incurred in the related case. Proceeds in excess of
cumulative costs incurred for the case is recorded in interest and other income, net, in the Consolidated Statements of
Operations. Litigation expense (benefit), net, includes primarily patent litigation and other contract-related matters.

Net Income per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding
securities or other contracts to issue common stock were exercised or converted into common stock, and calculated using the
treasury stock method.

Contingently issuable shares, including equity awards with performance conditions or market conditions, are considered
outstanding common shares and included in the basic net income per share as of the date that all necessary conditions to earn
the awards have been satisfied. Prior to the end of the contingency period, the number of contingently issuable shares included
in the diluted net income per share is based on the number of shares, if any, that would be issuable under the terms of the
arrangement at the end of the reporting period.

The Company’s outstanding restrict stock units contain forfeitable rights to receive dividend equivalents, which are
accumulated quarterly during the vesting periods of the restricted stock units and are payable to the employees when the
awards vest. Dividend equivalents accumulated on the restricted stock units are forfeited if the employees do not fulfill their
service requirement during the vesting periods. Accordingly, these awards are not treated as participating securities in the net
income per share calculation.

Comprehensive Income

Comprehensive income represents the change in the Company’s net assets during the period from non-owner sources.
Accumulated other comprehensive income presented in the Consolidated Balance Sheets primarily consists of unrealized
gains and losses related to available-for-sale investments and foreign currency translation adjustments.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-
09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when
it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year deferral of the effective
date. The standard will be effective for annual reporting periods beginning after December 15, 2017. Early adoption is
permitted for reporting periods beginning after December 15, 2016. The standard may be applied retrospectively to each prior
period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is
evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

2014, the Company reclassified $0.2 million of current deferred tax assets to non-current deferred tax assets on the
Consolidated Balance Sheet. The adoption did not affect the Company's operating results, comprehensive income or cash
flows for the periods presented.

2. ACQUISITION

On July 22, 2014 (the “Acquisition Date”), the Company acquired 100% of the outstanding capital stock of Sensima
Technology SA (“Sensima”), a company based in Switzerland that develops magnetic sensor technologies for angle
measurements as well as three-dimensional magnetic field sensing. The acquisition creates new opportunities with customers
by offering enhanced solutions in power management for key industries such as automotive, industrial and cloud computing.
As a result of the acquisition, Sensima became a subsidiary of the Company and changed its name to MPS Tech Switzerland
Sarl. Its results of operations have been included in the Company’s consolidated financial statements subsequent to the
acquisition.

Purchase Consideration

The fair value of the purchase consideration as of the Acquisition Date consisted of the following (in thousands):

Cash paid at the Acquisition Date ......................................................................................................... $
Contingent consideration ......................................................................................................................
Total ...................................................................................................................................................... $

11,735
2,507
14,242

Cash paid at the Acquisition Date included $1.2 million that was held in an escrow account for a one-year period, which was
subject to Sensima’s satisfaction of certain representations and warranties. The full amount was released from the escrow
account on July 22, 2015.

The contingent consideration arrangement requires the Company to pay up to an additional $8.9 million to former Sensima
shareholders if Sensima achieves a new product introduction as well as certain product revenue and direct margin targets in
2016. The fair value of the contingent consideration at the Acquisition Date was $2.5 million, which was estimated based on
a probability-weighted analysis of possible future revenue outcomes. The fair value of the contingent consideration was
recorded in other long-term liabilities in the Consolidated Balance Sheets and was remeasured at the end of each reporting
period, with any changes in fair value recorded in operating expense in the Consolidated Statements of Operations. During
the fourth quarter of 2015, the Company determined the fair value of contingent consideration was $0 and recorded the release
of the liability of $2.5 million as a credit to selling, general and administrative expenses (see Note 4).

The Company incurred $0.6 million of transaction costs that were expensed as incurred and included in selling, general and
administrative expenses in the Consolidated Statements of Operations.

Purchase Consideration Allocation

The fair value of assets acquired and liabilities assumed as of the Acquisition Date was as follows (in thousands):

Cash ...................................................................................................................................................... $
Other tangible assets acquired, net of liabilities assumed .....................................................................
Intangible assets:

Know-how .........................................................................................................................................
Developed technologies .....................................................................................................................
IPR&D ...............................................................................................................................................
Total identifiable net assets acquired ....................................................................................................
Goodwill ...............................................................................................................................................
Total net assets acquired ....................................................................................................................... $

145
42

1,018
4,421
2,045
7,671
6,571
14,242

Intangible assets with finite lives included know-how and developed technologies with estimated useful lives of three to five
years. The fair value of know-how was determined using the relief from royalty method, and the fair value of the developed
technologies was determined using the income approach. Intangible assets with indefinite lives included in-process research
and development (“IPR&D”), which consisted of incomplete R&D projects that had not reached technological feasibility as
of the Acquisition Date. The fair value of the IPR&D assets was determined using the income approach. During the third

quarter of 2015, management determined that the acquired IPR&D was completed and reclassified it as a finite-lived
intangible asset with an estimated useful life of four years.

Goodwill arising from the acquisition was primarily attributed to synergies which will enable the Company to develop
advanced solutions in power management by integrating Sensima’s magnetic sensor technologies. Goodwill is not deductible
for tax purposes.

Equity Awards

On the Acquisition Date, the Board of Directors granted $1.7 million of time-based RSUs (or 40,000 shares) to key Sensima
employees who became employees of the Company. These awards vest over four years. In addition, the Board of Directors
granted $2.0 million of PSUs (or 47,000 shares) to these employees, with the right to earn up to a maximum of $8.0 million
based on the achievement of certain cumulative Sensima product revenue targets during the performance period from the
Acquisition Date to July 22, 2019. 50% of the awards subject to each revenue goal will vest immediately when the revenue
goal is met during the performance period. The remaining shares will vest over the following two years. Vesting is subject
to the employees’ continued employment with the Company. These equity awards are considered arrangements for post-
acquisition services and the related compensation cost is recognized over the requisite service period if it is probable that the
performance goals will be met.

Pro Forma Information (Unaudited)

Supplemental information of the Company’s results of operations on a pro forma basis, as if the Sensima acquisition had
been consummated on January 1, 2013, is presented as follows (in thousands, except per-share amounts):

Year Ended December 31,
2013
2014

Revenue .................................................................................................................... $
Net income ............................................................................................................... $
Diluted net income per share .................................................................................... $

282,584 $
33,777 $
0.85 $

238,181
20,187
0.52

These pro forma results are not necessarily indicative of the Company’s consolidated results of operations in future periods
or the results that would have been realized had the Company acquired Sensima during the periods presented. The pro forma
results include adjustments primarily related to Sensima’s results of operations, amortization of intangible assets, stock-based
compensation expense and the related tax effects.

3. CASH, CASH EQUIVALENTS AND INVESTMENTS

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

Cash, cash equivalents and investments:

Cash ......................................................................................................... $
Money market funds .................................................................................
Certificates of deposit ...............................................................................
U.S. treasuries and government agency bonds ..........................................
Auction-rate securities backed by student-loan notes ...............................
Total ................................................................................................................. $

Reported as:

Cash and cash equivalents ............................................................................ $
Short-term investments .................................................................................
Long-term investments .................................................................................
Total ................................................................................................................. $

December 31,

2015

2014

58,217 $
31,640
21,574
123,532
5,361
240,324 $

66,188
60,078
22,778
89,674
5,389
244,107

December 31,

2015

2014

90,860 $
144,103
5,361
240,324 $

126,266
112,452
5,389
244,107

The contractual maturities of the Company’s short-term and long-term available-for-sale investments are as follows (in
thousands):

Due in less than 1 year ..................................................................................... $
Due in 1 - 5 years .............................................................................................
Due in greater than 5 years ..............................................................................
Total ................................................................................................................. $

110,898 $
33,205
5,361
149,464 $

91,335
21,117
5,389
117,841

The following tables summarize the unrealized gain and loss positions related to the Company’s investments in marketable
securities designated as available-for sale (in thousands):

December 31,

2015

2014

December 31, 2015

Adjusted
Cost

Unrealized
Gains

Unrealized
Losses

Total Fair
Value

Fair
Value of
Investments
in
Unrealized
Loss
Position

Money market funds .................................. $
Certificates of deposit.................................
U.S. treasuries and government agency

31,640 $
21,574

- $
-

31,640 $
21,574

-
-

bonds ........................................................

123,698

(170 )

123,532

110,720

Auction-rate securities backed by student-

loan notes .................................................
Total ........................................................... $

5,570
182,482 $

-
4 $

(209 )
(379 ) $

5,361
182,107 $

5,361
116,081

December 31, 2014

Adjusted
Cost

Unrealized
Gains

Unrealized
Losses

Total Fair
Value

Fair
Value of
Investments
in
Unrealized
Loss
Position

Money market funds .................................. $
Certificates of deposit.................................
U.S. treasuries and government agency

60,078 $
22,778

- $
-

60,078 $
22,778

-
-

bonds ........................................................

89,689

(29 )

89,674

35,062

Auction-rate securities backed by student-

loan notes .................................................
Total ........................................................... $

5,570
178,115 $

-
14 $

(181 )
(210 ) $

5,389
177,919 $

5,389
40,451

Except for the auction-rate securities, there were no individual securities that had been in a continuous loss position for 12
months or longer as of December 31, 2015 and 2014.

There were no redemptions of auction-rate securities for the year ended December 31, 2015. For the year ended December
31, 2014, the Company redeemed $4.7 million of auction-rate securities at par. The underlying maturities of the outstanding
auction-rate securities are up to 32 years. As of December 31, 2015 and 2014, the impairment of $0.2 million was determined
to be temporary based on the following management assessment:

(1) The decline in the fair value of these securities is not largely attributable to adverse conditions specifically related

to these securities or to specific conditions in an industry or in a geographic area;

(2) Management possesses both the intent and ability to hold these securities for a period of time sufficient to allow for

any anticipated recovery in fair value;

(3) Management believes that it is more likely than not that the Company will not have to sell these securities before

recovery of its cost basis;

(4) Except for the credit loss of $70,000 recognized in the year ended December 31, 2009, the Company does not
believe that there is any additional credit loss associated with these securities because the Company expects to
recover the entire amortized cost basis;

(5) There have been no further downgrades on these securities since 2009;
(6) All scheduled interest payments have been made pursuant to the reset terms and conditions; and
(7) All redemptions of these securities to date, representing 87% of the original portfolio, have been at par.

4. FAIR VALUE MEASUREMENT

The following tables detail the fair value measurement of the financial assets and liabilities (in thousands):

Fair Value Measurement at December 31, 2015

Quoted Prices
in Active
Markets for
Identical
Assets
Level 1

Significant
Other
Observable
Inputs
Level 2

Significant

Unobservable
Inputs
Level 3

Total

Assets:

Money market funds ......................................... $
Certificates of deposit .......................................
U.S. treasuries and government agency bonds .
Auction-rate securities backed by student-loan

notes ...............................................................

Mutual funds under deferred compensation

31,640 $
21,574
123,532

31,640 $
-
-

- $
21,574
123,532

5,361

plan .................................................................
Total ..................................................................... $

8,279
190,386 $

8,279
39,919 $

-
145,106 $

-
-
-

5,361

-
5,361

Fair Value Measurement at December 31, 2014

Quoted Prices
in Active
Markets for
Identical
Assets
Level 1

Significant
Other
Observable
Inputs
Level 2

Significant

Unobservable
Inputs
Level 3

Total

Assets:

notes ...............................................................

Mutual funds under deferred compensation

60,078 $
22,778
89,674

60,078 $
-
-

- $
22,778
89,674

5,389

plan .................................................................
Total ..................................................................... $

2,236
180,155 $

2,236
62,314 $

-
112,452 $

Liabilities:

Contingent consideration .................................. $
Total ..................................................................... $

2,507 $
2,507 $

- $
- $

-
-
-

5,389

-
5,389

2,507
2,507

The Company’s level 3 assets consist of government-backed student loan auction-rate securities, with interest rates that reset
through a Dutch auction every 7 to 35 days and which became illiquid in 2008. The following table provides a rollforward
of the fair value of the auction-rate securities (in thousands):

Balance at January 1, 2014 ................................................................................................................... $
Sales and settlement at par ....................................................................................................................
Change in unrealized loss included in other comprehensive income ....................................................
Ending balance at December 31, 2014 ..................................................................................................
Change in unrealized loss included in other comprehensive income ....................................................
Ending balance at December 31, 2015 .................................................................................................. $

9,860
(4,650)
179
5,389
(28)
5,361

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

Time-to-liquidity (months) .............................................................................
Expected return ..............................................................................................
Discount rate ..................................................................................................

December 31,

2015
24
2.9%
4.3% - 7.3%

2014
24
2.9%
4.0% - 7.0%

The Company’s level 3 liabilities consisted of contingent consideration related to the acquisition of Sensima in July 2014. The
arrangement requires the Company to pay up to $8.9 million to certain former Sensima shareholders if Sensima achieves a
new product introduction as well as certain product revenue and direct margin targets in 2016. The fair value of the contingent
consideration at the Acquisition Date was $2.5 million, which was estimated based on a probability-weighted analysis of
possible future revenue outcomes. The fair value was calculated using the following assumptions:

Projected revenue (in millions) ............................................................................................................
Discount rate ........................................................................................................................................
Probability of occurrence .....................................................................................................................

$2.1

- $3.8

9.0%
20% - 50%

December 31, 2014

As part of the quarterly assessment in the fourth quarter of 2015, management reviewed the sales forecast for the products
and concluded that the projected product revenue in 2016 will not likely meet the minimum target required to earn the
contingent consideration, primarily because the product adoption process by customers will take longer than the Company
had originally anticipated. Accordingly, the fair value of the contingent consideration was deemed to be $0 as of December
31, 2015, and the Company recorded the release of the liability of $2.5 million as a credit to selling, general and administrative
expenses in the Consolidated Statement of Operations. The Company will continue to assess the probability of former
Sensima shareholders earning the contingent consideration in 2016 and may record additional adjustment to the fair value.

5. BALANCE SHEET COMPONENTS

Inventories

Inventories consist of the following (in thousands):

Raw materials .................................................................................................. $
Work in process ...............................................................................................
Finished goods .................................................................................................
Total ................................................................................................................. $

14,907 $
21,177
27,125
63,209 $

7,298
18,950
14,670
40,918

December 31,

2015

2014

Property and Equipment, Net

Property and equipment, net, consist of the following (in thousands):

December 31,

2015

2014

Production equipment and software ................................................................. $
Buildings and improvements ...........................................................................
Land .................................................................................................................
Transportation equipment ................................................................................
Furniture and fixtures .......................................................................................
Leasehold improvements .................................................................................
Property and equipment, gross .........................................................................
Less: accumulated depreciation and amortization ............................................
Total ................................................................................................................. $

92,208 $
34,736
5,600
4,694
2,962
2,283
142,483
(77,124)
65,359 $

88,929
29,386
5,600
4,694
2,883
2,350
133,842
(70,900)
62,942

Depreciation and amortization expense was $12.0 million, $12.4 million and $12.1 million for the years ended December 31,
2015, 2014 and 2013, respectively.

Other Long-Term Assets

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

Deferred compensation plan assets .................................................................. $
Prepaid expense ...............................................................................................
Other ................................................................................................................
Total ................................................................................................................. $

13,985 $
1,257
1,099
16,341 $

6,084
1,418
955
8,457

December 31,

2015

2014

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

December 31,

2015

2014

Dividends and dividend equivalents ................................................................ $
Deferred revenue and customer prepayments ..................................................
Stock rotation reserve .......................................................................................
Commissions ....................................................................................................
Income tax payable ..........................................................................................
Warranty ..........................................................................................................
Sales rebate ......................................................................................................
Other ................................................................................................................
Total ................................................................................................................. $

8,675 $
5,236
2,372
763
465
289
268
1,916
19,984 $

Other Long-Term Liabilities

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

Deferred compensation plan liabilities ............................................................. $
Dividend equivalents........................................................................................
Contingent consideration .................................................................................
Other ................................................................................................................
Total ................................................................................................................. $

14,147 $
2,019
-
379
16,545 $

December 31,

2015

2014

6,080
3,908
1,757
767
-
240
586
1,365
14,703

6,177
580
2,507
940
10,204

6. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET

There have been no changes in the balance of goodwill from the Acquisition Date to December 31, 2015. The Company did
not identify any goodwill impairment in 2015 and 2014.

Acquisition-related intangible assets consist of the following (in thousands):

Gross Amount

December 31, 2015
Accumulated
Amortization

Net Amount

Subject to amortization:

Know-how .......................................................... $
Developed technologies ......................................
Total ........................................................................... $

1,018 $
6,466
7,484 $

(297) $
(2,134)
(2,431) $

721
4,332
5,053

Gross Amount

December 31, 2014
Accumulated
Amortization

Net Amount

Subject to amortization:

Know-how .......................................................... $
Developed technologies ......................................

Not subject to amortization:

IPR&D ................................................................
Total ........................................................................... $

1,018 $
4,421

2,045
7,484 $

(93) $
(579)

-
(672) $

925
3,842

2,045
6,812

During the third quarter of 2015, management determined that the acquired IPR&D from the Sensima acquisition was
completed and the products incorporating the technologies were ready to be commercially introduced. Accordingly, the
acquired IPR&D was reclassified into developed technologies as a finite-lived intangible asset and is being amortized over
its estimated useful life.

Amortization expense is recorded in cost of revenue in the Consolidated Statements of Operations and totaled $1.8 million
and $0.7 million for the years ended December 31, 2015 and 2014, respectively.

The estimated future amortization expense as of December 31, 2015 is as follows (in thousands):

2016 ...................................................................................................................................................... $
2017 ......................................................................................................................................................
2018 ......................................................................................................................................................
2019 ......................................................................................................................................................
Total ...................................................................................................................................................... $

2,051
2,051
841
110
5,053

7. STOCK-BASED COMPENSATION

2004 Equity Incentive Plan (the “2004 Plan”)

The Board of Directors adopted the 2004 Plan in March 2004, and the stockholders approved it in November 2004. The 2004
Plan provided for annual increases in the number of shares available for issuance equal to the least of 5% of the outstanding
shares of common stock on the first day of the year, 2.4 million shares, or a number of shares determined by the Board of
Directors. The 2004 Plan expired on November 12, 2014 and equity awards can no longer be granted under the 2004 Plan.
As of November 12, 2014, 2.9 million shares that were available for issuance expired under the 2004 Plan.

2014 Equity Incentive Plan (the “2014 Plan”)

The Board of Directors adopted the 2014 Plan in April 2013, and the stockholders approved it in June 2013. In October 2014,
the Board of Directors approved certain amendments to the 2014 Plan. The 2014 Plan became effective on November 13,
2014 and provides for the issuance of up to 5.5 million shares. The 2014 Plan will expire on November 13, 2024. As of
December 31, 2015, 4.7 million shares remained available for future issuance.

Stock-Based Compensation Expense

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

Cost of revenue .......................................................... $
Research and development .........................................
Selling, general and administrative ............................
Total ........................................................................... $

1,166 $
11,156
29,241
41,563 $

903 $
9,019
23,532
33,454 $

631
6,219
13,851
20,701

2015

Year Ended December 31,
2014

2013

RSUs

The Company’s restricted stock units (“RSUs”) include time-based RSUs, RSUs with performance conditions (“PSUs”),
RSUs with market conditions and performance conditions (“MPSUs”), and RSUs with market conditions (“MSUs”). Vesting
of all awards requires continued employment with the Company. In addition, vesting of awards with performance conditions
or market conditions is subject to the achievement of pre-determined performance goals. A summary of the RSUs is presented
in the table below:

Weighted-
Average
Grant
Date Fair
Value Per
Share

Time-
Based
RSUs
(in thousands)

PSUs and
MPSUs
(in thousands)

Weighted-
Average
Grant
Date Fair
Value Per
Share

MSUs
(in thousands)

Total
(in thousands)

Outstanding at

January 1, 2013 .............
Granted ...........................
Performance adjustment ..
Released ...........................
Forfeited ...........................
Outstanding at

December 31, 2013 .......
Granted ...........................
Performance adjustment ..
Released ...........................
Forfeited ...........................
Outstanding at

December 31, 2014 .......
Granted ...........................
Performance adjustment ..
Released ...........................
Forfeited ...........................
Outstanding at

December 31, 2015 .......

1,099 $
299 $
- $
(519) $
(125) $

754 $
335 $
- $
(468) $
(32) $

589 $
271 $
- $
(319) $
(42) $

16.96
24.25
-
17.57
17.06

19.41
36.71
-
20.36
19.75

28.48
49.82
-
26.56
35.60

531
$
875 (1) $
(124)(2) $
$
(206)
$
(48)

1,028
$
1,091 (1) $
(139)(2) $
$
(304)
$
(17)

1,659
$
1,291 (1) $
(364)(2) $
$
(629)
$
(24)

18.49
24.43
21.98
18.90
19.06

23.02
34.23
31.40
18.12
19.79

28.11
45.24
39.20
23.40
28.68

- $
1,800 $
- $
- $
- $

1,800 $
- $
- $
- $
- $

-
23.57
-
-
-

23.57
-
-
-
-

1,630 $
2,974 $
(124) $
(725) $
(173) $

3,582 $
1,426 $
(139) $
(772) $
(49) $

4,048 $
1,562 $
(364) $
(948) $
(66) $

17.46
23.89
21.98
17.95
17.61

22.53
34.82
31.40
19.48
19.77

26.14
46.03
39.20
24.47
33.06

499 $

40.75

1,933

38.99

1,800 $

23.57

4,232 $

32.64

_________________
(1) Amount reflects the maximum number of PSUs and MPSUs that can be earned assuming the achievement of the highest

level of performance conditions.

(2) Amount reflects the number of PSUs and MPSUs that have not been earned or may not be earned based on management’s

probability assessment at each reporting period.

The intrinsic value related to awards released for the years ended December 31, 2015, 2014 and 2013 was $49.2 million,
$28.9 million and $18.6 million, respectively. As of December 31, 2015, the total intrinsic value of all outstanding awards
was $269.6 million, based on the closing stock price of $63.71. As of December 31, 2015, unamortized compensation expense
related to all outstanding awards was approximately $86.0 million with a weighted-average remaining recognition period of
approximately five years.

Time-Based RSUs:

For the years ended December 31, 2015, 2014 and 2013, the Board of Directors granted 271,000, 335,000 and 299,000 shares
with service conditions, respectively, to employees and non-employee directors. The RSUs generally vest over one to four
years, subject to continued employment with the Company.

2015 MPSUs:

On December 31, 2015, the Board of Directors granted 127,000 shares to the executive officers and certain key employees,
which represent a target number of RSUs to be awarded upon achievement of both market conditions and performance
conditions (“2015 MPSUs”). The maximum number of 2015 MPSUs that an employee can earn is 500% of the target shares.
The 2015 MPSUs consist of four separate tranches with various performance periods ending on December 31, 2019. The
first tranche contains market conditions only, which require the achievement of five MPS stock price targets ranging from
$71.36 to $95.57 over a four-year period. The second, third and fourth tranches contain both market conditions and
performance conditions. Each tranche requires the achievement of five MPS stock price targets to be measured against a base
price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading days immediately before
the start of the measurement period for that tranche, or (2) the closing stock price immediately before the start of the
measurement period for that tranche. In addition, each of the second, third and fourth tranches requires the achievement of
one of following six operating metrics:

● Successful implementation of full digital solutions vs. current analog topology for certain products.
● Successful implementation and adoption by a key player of an integrated, software-based, field-oriented-control with

3D hall sensor to motor drive.

● Successful implementation of certain advanced power analog processes.
● Successful design wins and achievement of a specific level of revenues with a global networking customer.
● Achievement of a specific level of revenues with a global electronics manufacturer.
● Achievement of a specific level of market share with certain core power products.

Subject to the employees’ continued employment with the Company, the 2015 MPSUs will fully vest on January 1, 2020 if
the pre-determined individual market and performance goals in each tranche are met during the performance periods. In
addition, the 2015 MPSUs contain post-vesting restrictions on sales of the vested shares by employees for up to two years.

The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the
following weighted-average assumptions: stock price of $61.35, expected volatility of 33.2%, risk-free interest rate of 1.3%,
dividend yield of 0.0% and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. Assuming the
achievement of all of the required performance goals, the total stock-based compensation cost for the 2015 MPSUs is
approximately $26.4 million to be recognized for each tranche as follows: $9.2 million for the first tranche, $4.6 million for
the second tranche, $5.3 million for the third tranche, and $7.3 million for the fourth tranche.

For the first tranche, stock-based compensation expense will be recognized over four years even if the market conditions are
not satisfied. For the second, third and fourth tranches, stock-based compensation expense for each tranche will be recognized
over one to four years depending upon the number of the operating metrics management deems probable of achievement in
each reporting period. If it becomes probable in a reporting period that more than one operating metric is expected to be
achieved during the performance periods, the Company will recognize stock-based compensation expense for more than one
tranche in the reporting period.

2015 PSUs:

In February 2015, the Board of Directors granted 172,000 shares to the executive officers, which represent a target number
of RSUs to be awarded based on the Company’s average two-year (2015 and 2016) revenue growth rate compared against
the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2015
Executive PSUs”). The maximum number of 2015 Executive PSUs that an executive officer can earn is 300% of the target
shares. 50% of the 2015 Executive PSUs will vest in the first quarter of 2017 if the pre-determined performance goals are
met during the performance period. The remaining shares will vest over the following two years on a quarterly basis. Vesting
is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of
performance goals, the total stock-based compensation cost for the 2015 Executive PSUs is approximately $25.0 million.

In February 2015, the Board of Directors granted 58,000 shares to certain non-executive employees, which represent a target
number of RSUs to be awarded based on the Company’s 2016 revenue goals for certain regions or product line divisions, or
60

the Company’s average two-year (2015 and 2016) revenue growth rate compared against the analog industry’s average two-
year revenue growth rate as determined by the Semiconductor Industry Association (“2015 Non-Executive PSUs”). The
maximum number of 2015 Non-Executive PSUs that an employee can earn is either 200% or 300% of the target shares,
depending on the job classification of the employee. 50% of the 2015 Non-Executive PSUs will vest in the first quarter of
2017 if the pre-determined performance goals are met during the performance period. The remaining shares will vest over
the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the
Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for
the 2015 Non-Executive PSUs is approximately $7.0 million.

2014 PSUs:

In February 2014, the Board of Directors granted 252,000 shares to the executive officers, which represented a target number
of RSUs that would be awarded based on the Company’s average two-year (2014 and 2015) revenue growth rate compared
against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association
(“2014 Executive PSUs”). The maximum number of 2014 Executive PSUs that an executive officer could earn was 300% of
the target shares. 50% of the 2014 Executive PSUs vest in the first quarter of 2016 if the pre-determined performance goals
are met during the performance period. The remaining shares vest over the following two years on a quarterly basis. Vesting
is subject to the employees’ continued employment with the Company.

In February 2016, the Compensation Committee approved the revenue achievement for the 2014 Executive PSUs and a total
of 694,000 shares were earned by the executive officers. Based on the actual achievement of the performance goals, the total
stock-based compensation cost for the 2014 Executive PSUs is approximately $21.9 million.

In April 2014, the Board of Directors granted 61,000 shares to certain non-executive employees, which represented a target
number of RSUs that would be awarded based on the Company’s 2015 revenue goals for certain regions or product line
divisions, or the Company’s average two-year (2014 and 2015) revenue growth rate compared against the analog industry’s
average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2014 Non-Executive
PSUs”). The maximum number of 2014 Non-Executive PSUs that an employee could earn was either 200% or 300% of the
target shares, depending on the job classification of the employee. 50% of the 2014 Non-Executive PSUs vest in the second
quarter of 2016 if the pre-determined performance goals are met during the performance period. The remaining shares will
vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment
with the Company.

In February 2016, the Compensation Committee approved the revenue achievement for the 2014 Non-Executive PSUs and a
total of 103,000 shares were earned by the non-executive employees. Based on the actual achievement of the performance
goals, the total stock-based compensation cost for the 2014 Non-Executive PSUs is approximately $3.8 million.

In connection with the acquisition of Sensima in July 2014, the Board of Directors granted PSUs to key Sensima employees
who became employees of the Company. See Note 2 for further discussion.

2013 MSUs:

In December 2013, the Board of Directors granted 360,000 shares to the executive officers and certain key employees, which
represented a target number of RSUs that would be awarded upon achievement of five MPS stock price targets ranging from
$40.00 to $56.00 during a five-year performance period from January 1, 2014 to December 31, 2018 (“2013 MSUs”). The
maximum number of 2013 MSUs that an employee could earn was 500% of the target shares. The 2013 MSUs will vest
quarterly from January 1, 2019 to December 31, 2023 if the pre-determined performance goals are met during the
performance period. Vesting is subject to the employees’ continued employment with the Company. As of December 31,
2015, all five MPS stock price targets have been achieved and the employees earned a total of 1.8 million shares.

The Company determined the grant date fair value of the 2013 MSUs using a Monte Carlo simulation model with the
following assumptions: stock price of $31.73, expected volatility of 38.7%, risk-free interest rate of 1.6% and dividend yield
of 0.0%. The total stock-based compensation cost for the 2013 MSUs is approximately $42.4 million.

2013 PSUs:

In February 2013, the Board of Directors granted 220,000 shares to the executive officers, which represented a target number
of RSUs that would be awarded upon achievement of certain pre-determined revenue targets in 2014 (“2013 Executive
PSUs”). The maximum number of 2013 Executive PSUs that an executive officer could earn was 300% of the target shares.
61

In February 2015, the Compensation Committee approved the revenue achievement for the 2013 Executive PSUs and a total
of 622,000 shares were earned by the executive officers. 50% of the 2013 Executive PSUs vested in the first quarter of 2015
and the remaining shares vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued
employment with the Company. Based on the actual achievement of the performance goals, the total stock-based
compensation cost for the 2013 Executive PSUs is approximately $15.5 million.

In February 2013, the Board of Directors granted 91,000 shares to certain non-executive employees, which represented a
target number of RSUs that would be awarded upon achievement of certain pre-determined revenue targets for the Company
as a whole, certain regions or product-line divisions in 2014 (“2013 Non-Executive PSUs”). The maximum number of 2013
Non-Executive PSUs that an employee could earn was either 200% or 300% of the target shares, depending on the job
classification of the employee. In February 2015, the Compensation Committee approved the revenue achievement for the
2013 Non-Executive PSUs and a total of 154,000 shares were earned by the non-executive employees. 50% of the 2013 Non-
Executive PSUs vested in the first quarter of 2015 and the remaining shares vest over the following two years on an annual
or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Based on the actual
achievement of the performance goals, the total stock-based compensation cost for the 2013 Non-Executive PSUs is
approximately $3.0 million.

Stock Options

A summary of stock option activity is presented in the table below:

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value

(in thousands)
25,380

2.6 $

Outstanding at January 1, 2013 ....................................................
Exercised ..................................................................................
Forfeited and expired ................................................................
Outstanding at December 31, 2013 ..............................................
Exercised ..................................................................................
Forfeited and expired ................................................................
Outstanding at December 31, 2014 ..............................................
Exercised ..................................................................................
Forfeited and expired ................................................................
Outstanding at December 31, 2015 ..............................................
Options exercisable at December 31, 2015 and expected to vest .
Options exercisable at December 31, 2015 .................................

Shares
(in thousands)
3,813 $
(2,446) $
(11) $
1,356 $
(742) $
(24) $
590 $
(498) $
(2) $
90 $
90 $
89 $

15.62
15.49
15.27
15.86
16.09
10.07
15.80
15.55
6.10
17.50
17.50
17.50

1.9 $

25,506

1.2 $

20,039

1.3 $
1.3 $
1.3 $

4,134
4,134
4,126

The following table summarizes certain information related to outstanding and exercisable options as of December 31, 2015:

Options Outstanding

Options Exercisable

Weighted-
Average
Exercise Price

Shares
(in thousands)

Weighted-
Average
Remaining
Contractual
Term
(in years)

Weighted-
Average
Exercise Price

Shares
(in thousands)

69 $
21 $
90 $

16.25
21.76
17.50

1.5
0.7
1.3

69 $
20 $
89 $

16.25
21.76
17.50

Range of
Exercises Prices

$11.09- $19.29
$19.56- $23.02

Total intrinsic value of options exercised was $18.6 million, $17.3 million and $27.8 million for the years ended December
31, 2015, 2014 and 2013, respectively. Proceeds from the exercise of stock options were $7.7 million, $11.9 million and
$37.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, unamortized
compensation expense related to unvested options was not material.

Employee Stock Purchase Plan

Under the 2004 Employee Stock Purchase Plan (the “ESPP”), eligible employees may purchase common stock through
payroll deductions. Participants may not purchase more than 2,000 shares in a six-month offering period or stock having a
value greater than $25,000 in any calendar year as measured at the beginning of the offering period in accordance with the
Internal Revenue Code and applicable Treasury Regulations. The ESPP provides for an automatic annual increase by an
amount equal to the lesser of 1.0 million shares, 2% of the outstanding shares of common stock on the first day of the year,
or a number of shares as determined by the Board of Directors. As of December 31, 2015, approximately 4.7 million shares
were available for future issuance.

For the years ended December 31, 2015, 2014 and 2013, 56,000, 78,000 and 111,000 shares, respectively, were issued under
the ESPP. The intrinsic value of shares issued was $0.6 million, $0.9 million and $0.8 million for the years ended December
31, 2015, 2014 and 2013, respectively. The unamortized expense as of December 31, 2015 was $78,000. The Black-Scholes
model was used to value the employee stock purchase rights with the following weighted-average assumptions:

2015

Year Ended December 31,
2014

2013

Expected term (years) ................................................
Expected volatility .....................................................
Risk-free interest rate .................................................
Dividend yield ............................................................

0.5
30.3%
0.2%
1.4%

0.5
29.4%
0.1%
0.7%

0.5
28.0%
0.1%
-

Cash proceeds from the ESPP were $2.2 million, $2.1 million and $2.1 million for the years ended December 31, 2015, 2014
and 2013, respectively.

8. STOCK REPURCHASE PROGRAM

In July 2013, the Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to
$100 million in the aggregate of its common stock through June 30, 2015. In April 2015, the Board of Directors approved an
extension of the program through December 31, 2015. All shares were retired upon repurchase. The following table
summarizes the repurchase activity under the program (in thousands, except per-share amounts):

Shares
Repurchased

Average Price
Per Share

Total Amount

Cumulative balance at January 1, 2013 ........................................
Repurchases ................................................................................
Cumulative balance at December 31, 2013 ..................................
Repurchases ................................................................................
Cumulative balance at December 31, 2014 ..................................
Repurchases ................................................................................
Cumulative balance at December 31, 2015 ..................................

- $
664 $
664 $
1,051 $
1,715 $
645 $
2,360 $

- $
31.06
31.06
39.19
36.04
50.05
39.87 $

-
20,615
20,615
41,198
61,813
32,286
94,099

As of December 31, 2015, the stock repurchase program expired with a remaining balance of $5.9 million.

9. DIVIDENDS AND DIVIDEND EQUIVALENTS

Cash Dividend Program

In June 2014, the Board of Directors approved a dividend program pursuant to which the Company intends to pay quarterly
cash dividends on its common stock. Stockholders of record as of the last day of the quarter are entitled to receive the quarterly
cash dividends when and if declared by the Board of Directors, which are generally payable on the 15th of the following
month. The Board of Directors declared the following cash dividends (in thousands, except per-share amounts):

Dividend Declared
per Share

Total
Amount

0.20 $
0.20 $
0.20 $
0.20 $

0.15 $
0.15 $
0.15 $

7,854
7,925
7,901
7,938

5,817
5,823
5,826

As of December 31, 2015, accrued dividends totaled $7.9 million, which were paid to stockholders on January 15, 2016.

The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other
things, the Company’s financial condition, results of operations, capital requirements, business conditions, statutory
requirements of Delaware law, compliance with the terms of future indebtedness and credit facilities and other factors that
the Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of the
stockholders. The Company anticipates that the cash used for future dividends will come from its current domestic cash and
cash generated from ongoing U.S. operations. If cash held by the Company’s international subsidiaries is needed for the
payment of dividends, the Company may be required to accrue and pay U.S. taxes to repatriate the funds.

Cash Dividend Equivalent Rights

Under the Company’s stock plan, outstanding RSU awards contain rights to receive cash dividend equivalents, which entitle
employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are
accumulated during the vesting periods of the RSUs and are payable to the employees when the awards vest. Dividend
equivalents accumulated on the RSUs are forfeited if the employees do not fulfill their service requirement during the vesting
periods. As of December 31, 2015 and 2014, accrued dividend equivalents totaled $2.8 million and $0.8 million, respectively,
which will be paid to the employees when the RSUs vest.

10. NET INCOME PER SHARE

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

Year Ended December 31,
2014

2015

2013

Numerator:

Net income .................................................................................. $

35,172 $

35,495 $

22,898

Denominator:

Weighted-average outstanding shares used to compute basic

net income per share .................................................................
Effect of dilutive securities .........................................................
Weighted-average outstanding shares used to compute diluted

39,470
1,399

38,686
1,107

37,387
1,233

net income per share .................................................................

40,869

39,793

38,620

Net income per share:

Basic ........................................................................................... $
Diluted ........................................................................................ $

0.89 $
0.86 $

0.92 $
0.89 $

0.61
0.59

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

11. INCOME TAXES

The components of income before income taxes are as follows (in thousands):

Year Ended December 31,
2014

2013

2015

United States ................................................................................ $
International .................................................................................
Total income before income taxes ................................................ $

(247) $
42,738
42,491 $

3,173 $
33,219
36,392 $

(2,309 )
26,316
24,007

Management’s intent is to indefinitely reinvest any undistributed earnings from its foreign subsidiaries. Accordingly, no
provision for Federal and state income or foreign withholding taxes has been provided thereon, nor is it practical to determine
the amount of this liability. Upon distribution of those earnings in the form of dividends or otherwise, the Company will be
subject to U.S. income taxes and potential foreign withholding taxes. As of December 31, 2015 and 2014, the unremitted
earnings of foreign subsidiaries were $214.3 million and $172.7 million, respectively. The Company has sufficient cash
reserves in the U.S. and intends to use the undistributed foreign earnings to fund foreign operations and research and
development needs, planned capital outlay and expansion.

The components of the income tax provision are as follows (in thousands):

Year Ended December 31,
2014

2013

2015

Current:

Federal ...................................................................................... $
State ..........................................................................................
Foreign ......................................................................................

Deferred:

Foreign ......................................................................................
Total income tax provision ........................................................... $

6,042 $
2
1,213

62
7,319 $

18 $
(28)
943

(36)
897 $

77
67
1,053

(88 )
1,109

The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:

U.S. statutory federal tax rate .................................................
Settlement with tax authorities ...............................................
Foreign income at lower rates ................................................
Changes in valuation allowance .............................................
Stock-based compensation .....................................................
Reserves and other .................................................................
Effective tax rate ....................................................................

2015

Year Ended December 31,
2014

2013

34.0 %
6.2
(43.1)
17.6
-
2.5
17.2 %

34.0 %
-
(27.7)
5.9
(9.3)
(0.4)
2.5 %

34.0 %
-
(33.8)
16.8
(13.7)
1.3
4.6 %

The components of net deferred tax assets consist of the following (in thousands):

Deferred tax assets:

Research tax credits .................................................................................. $
Deferred compensation .............................................................................
Other expenses not currently deductible ...................................................
Stock-based compensation ........................................................................
Net operating losses ..................................................................................
Depreciation and amortization ..................................................................
Total deferred tax assets ...................................................................................
Valuation allowance .........................................................................................
Net deferred tax assets ..................................................................................... $

December 31,

2015

2014

8,869 $
5,038
3,519
1,912
-
(52)
19,286
(18,614)
672 $

10,393
2,326
2,535
4,068
298
181
19,801
(19,051)
750

As a result of the cost sharing arrangements with the Company’s international subsidiaries (cost share arrangements),
relatively small changes in costs that are not subject to sharing under the cost share arrangements can significantly impact
the overall profitability of the U.S. entity. Because of the U.S. entity’s inconsistent earnings history and uncertainty of future
earnings, the Company has determined that it is more likely than not that the U.S. deferred tax benefits would not be realized.
The Company will continue to evaluate if its facts and circumstances warrant a reversal of the valuation allowance against
the U.S. deferred tax benefits in future periods.

As of December 31, 2015 and 2014, the Company had a valuation allowance of $18.6 million and $19.1 million, respectively,
attributable to management’s determination that it is more likely than not that most of the deferred tax assets in the U.S. will
not be realized. Should it be determined that additional amounts of the net deferred tax asset will not be realized in the future,
an adjustment to increase the deferred tax asset valuation allowance will be charged to income in the period such
determination is made. Likewise, in the event the Company were to determine that it is more likely than not that it would be
able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the valuation
allowance for the deferred tax asset would increase income in the period such determination was made.

As of December 31, 2015, the federal and state net operating loss carryforwards for income tax purposes were approximately
$0.7 million and $22.8 million, respectively. The federal net operating loss carryforwards will begin to expire in 2034 and
the state net operating loss carry forwards will expire beginning in 2017. $0.7 million of the federal net operating loss carry
forwards and $22.8 million of the state operating loss carry forwards are related to excess tax benefits as a result of stock
option exercises and therefore will be recorded in additional paid-in-capital in the period that they become realized. The
Company has elected to follow the “with and without” approach to account for excess tax benefits from stock options
exercises. In addition, the Company only considers the direct effects of stock option exercises when calculating the amount
of windfalls or shortfalls.

As of December 31, 2015, the Company had research tax credit carryforwards of $16.3 million for federal income tax
purposes, which will begin to expire in 2026, and $15.6 million for state income tax purposes, which can be carried forward
indefinitely. $7.4 million of the federal research tax credit and $1.6 million of the state research tax credit carryforwards are
related to excess tax benefits as a result of stock option exercises and therefore will be recorded in additional paid-in-capital
in the period that they become realized.

In the event of a change in ownership, as defined under federal and state tax laws, the Company's net operating loss and tax
credit carryforwards could be subject to annual limitations. The annual limitations could result in the expiration of the net
operating loss and tax credit carryforwards prior to utilization.

The R&D credit extension, part of the Protecting Americans from Tax Hikes (“PATH”) Act of 2015, was signed into law by
the President on December 18, 2015. Under prior law, R&D credit was extended as of December 31 2014. The PATH Act
of 2015 permanently extends the R&D credit retroactively as of January 1, 2015. As a result of the retroactive extension, the
Company had an increase to its federal R&D credits of approximately $1.9 million for qualifying amounts incurred in 2015.
However, due to the Company’s current valuation allowance position, the credit did not result in a tax benefit.

On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-
based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued in December 2015,
and the IRS appealed the decision in February 2016. At this time, the U.S. Department of the Treasury has not withdrawn
the requirement from its regulations to include stock-based compensation. Due to the uncertainty surrounding the status of
the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being
overturned upon appeal, the Company has not recorded any adjustments as of December 31, 2015. The Company will
continue to monitor developments related to this opinion and the potential impact on its financial statements.

At December 31, 2015, the Company had $12.1 million of unrecognized tax benefits, $2.7 million of which would affect its
effective tax rate if recognized after considering the valuation allowance. At December 31, 2014, the Company had $16.4
million of unrecognized tax benefits, $4.8 million of which would affect its effective tax rate if recognized after considering
the valuation allowance.

A reconciliation of the gross unrecognized tax benefits is as follows (in thousands):

Balance as at January 1, 2013 ............................................................................................................... $
Increases for tax position of prior year .............................................................................................
Increases for tax position of current year .........................................................................................
Decreases due to lapse of statue of limitations ..................................................................................
Balance as of December 31, 2013 .........................................................................................................
Increases for tax position of prior year ..............................................................................................
Increases for tax position of current year ..........................................................................................
Decreases due to lapse of statue of limitations ..................................................................................
Balance as of December 31, 2014 .........................................................................................................
Increases for tax position of current year ..........................................................................................
Decreases related to settlement with tax authorities ..........................................................................
Decreases due to lapse of statue of limitations ..................................................................................
Decreases for tax position of prior year .............................................................................................
Balance as of December 31, 2015 ......................................................................................................... $

13,081
646
1,528
(333)
14,922
584
1,760
(860)
16,406
1,964
(4,162)
(669)
(1,446)
12,093

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of
December 31, 2015 and 2014, the Company has approximately $0.2 million and $0.5 million, respectively, of accrued interest
related to uncertain tax positions, which were recorded in long-term income tax liabilities in the Consolidated Balance Sheets.

Uncertain tax positions relate to the allocation of income and deductions among the Company’s global entities and to the
determination of the research and development tax credit. It is reasonably possible that over the next twelve-month period,
the Company may experience increases or decreases in its unrecognized tax benefits. However, it is not possible to determine
either the magnitude or the range of increases or decreases at this time.

In Switzerland where the Company designs and sells certain of its products, the Company’s earnings are currently subject to
a tax holiday through 2018. The benefit resulting from the tax holiday had an insignificant impact on earnings per share for
the periods presented.

On September 13, 2013, the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in
acquiring, producing, or improving tangible property (the "tangible property regulations"). The tangible property regulations
are effective for tax years beginning on or after January 1, 2014. Given its full valuation allowance, the regulations did not
have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Income Tax Audits

The Company is subject to examination of its income tax returns by the IRS and other tax authorities. The Company’s U.S.
Federal income tax returns for the years ended December 31, 2005 through December 31, 2007 were under examination by
the IRS. In April 2011, the Company received from the IRS a Notice of Proposed Adjustment ("NOPA") relating to a cost-
sharing agreement entered into by the Company and its international subsidiaries on January 1, 2004. In the NOPA, the IRS
objected to the Company’s allocation of certain litigation expenses between the Company and its international subsidiaries
and the amount of "buy-in payments" made by the international subsidiaries to the Company in connection with the cost-
sharing agreement, and proposed to increase the Company’s U.S. taxable income according to a few alternative
methodologies. In February 2012, the Company received a revised NOPA from the IRS (“Revised NOPA”). In this Revised
NOPA, the IRS raised the same issues as in the NOPA issued in April 2011 but under a different methodology. Under the
Revised NOPA, the largest potential federal income tax payment, if the IRS were to prevail on all matters in dispute, was
$10.5 million, plus interest and penalties, if any. The Company responded to the Revised NOPA in May 2012. In June 2013,
the IRS responded and continued to disagree with the Company’s rebuttal. The Company met with the IRS Office of Appeals
in 2014 and both parties engaged in continuous discussions for a resolution of the matter in the first quarter of 2015.
Meanwhile, the Company granted the IRS an extension of the statute of limitations for taxable years 2005 through 2007 to
September 30, 2015.

The IRS also audited the research and development credits carried forward into year 2005 and the credits generated in the
years 2005 through 2007. The Company received a NOPA from the IRS in February 2011, proposing to reduce the research
and development credits generated in years 2005 through 2007 and the carryforwards, which would then reduce the value of
such credits carried forward to subsequent tax years.

In April 2015, the Company reached a final resolution with the IRS in connection with the income tax audits for the years
2005 through 2007. Under the agreement, the Company made a one-time buy-in payment of $1.2 million for taxes related
primarily to the revaluation of a license for certain intellectual property rights of the Company to one of its international
subsidiaries. This buy-in payment is final and no additional payment will be required with respect to the intellectual property
license for the years under examination or for a previous or subsequent tax year. In addition, the Company made an interest
payment of $1.0 million as well as a tax payment of $0.1 million for the tax years 2008 to 2013 in 2015. There were no
penalties assessed on the Company as a result of the audits.

For the second quarter of 2015, the Company's income tax provision included a one-time net charge of approximately $2.7
million reflecting the taxes and interest, partially offset by the reversal of previously accrued tax liabilities and valuation
allowances. Of the $2.7 million charge, approximately $1.6 million was related to taxes and $1.1 million was related to
interest.

12. COMMITMENTS AND CONTINGENCIES

Lease Obligations

As of December 31, 2015, future minimum payments under the non-cancelable operating leases were as follows (in
thousands):

2016 ...................................................................................................................................................... $
2017 ......................................................................................................................................................
2018 ......................................................................................................................................................
2019 ......................................................................................................................................................
2020 ......................................................................................................................................................
Total ...................................................................................................................................................... $

1,354
631
258
169
116
2,528

In September 2004, the Company entered into a lease arrangement for its manufacturing facility located in Chengdu, China.
In September 2015, the Company exercised the option to acquire the facility for approximately $1.7 million, which consists
of total construction costs minus total rent paid by the Company during the lease term. The Company expects to close the
transaction in the first half of 2016.

The Company also leases sales and research and development offices in China, Europe, Japan, Korea, Taiwan, and the
United States. Certain of the Company’s facility leases provide for periodic rent increases. Rent expense for the years ended
December 31, 2015, 2014 and 2013 was $1.8 million, $1.5 million and $1.2 million, respectively.

Warranty and Indemnification Provisions

The Company generally provides a standard one to two-year warranty against defects in materials and workmanship and will
either repair the goods or provide replacements at no charge to the customer for defective units. In such cases, the Company
accrues for the related costs at the time the decision to permit the return is made. Reserve requirements are recorded in the
period of sale and are based on an assessment of the products sold with warranty and historical warranty costs incurred.

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

2015

Year Ended December 31,
2014

2013

Balance at beginning of period ............................................... $
Warranty provision for product sales .....................................
Settlements made ...................................................................
Unused warranty provision ....................................................
Balance at end of period ......................................................... $

240 $
333
(158)
(126)
289 $

451 $
282
(42 )
(451 )
240 $

331
476
(117)
(239)
451

The Company provides indemnification agreements to certain direct or indirect customers. The Company agrees to reimburse
these parties for any damages, costs and expenses incurred by them as a result of legal actions taken against them by third
parties for infringing upon their intellectual property rights as a result of using the Company’s products and technologies.
These indemnification provisions are varied in their scope and are subject to certain terms, conditions, limitations and
exclusions. In addition, the Company has entered into indemnification agreements with its directors and officers.

It is not possible to predict the maximum potential amount of future payments under these agreements due to the limited
history of indemnification claims and the unique facts and circumstances involved in each particular agreement. There were
no indemnification liabilities incurred in any of the periods presented. However, there can be no assurances that the Company
will not incur any financial liabilities in the future as a result of these obligations.

13. LITIGATION

The Company is a party to actions and proceedings in the ordinary course of business, including litigation regarding its
shareholders and its intellectual property, challenges to the enforceability or validity of its intellectual property, claims that
the Company’s products infringe on the intellectual property rights of others, and employment matters. These proceedings
often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of
other resources to prosecute and defend. The Company defends itself vigorously against any such claims.

O2 Micro

In May 2012, the United States District Court for the Northern District of California (the “District Court”) issued an order
finding O2 Micro International, Ltd. (“O2 Micro”) liable for approximately $9.1 million in attorneys’ fees and non-taxable
costs, plus interest, in connection with the patent litigation that the Company won in 2010. This award was in addition to the
approximately $0.3 million in taxable costs that the District Court had earlier ordered O2 Micro to pay to the Company in
connection with the same lawsuit. In October 2012, O2 Micro appealed the District Court’s judgment to the United States
Court of Appeals for the Federal Circuit (the “Federal Circuit”). In August 2013, the Federal Circuit affirmed O2 Micro’s
liability for the full amount of the award. In September 2013, O2 Micro filed a petition for rehearing of that ruling, but the
Federal Circuit denied O2 Micro’s petition for rehearing in October 2013.

In November 2013, the Company received a cash payment of $9.5 million from O2 Micro. In January 2014, O2 Micro filed
an appeal with the United States Supreme Court. Had O2 Micro been successful in obtaining a favorable ruling against the
Company, the Company could have been liable to return a portion or all of the $9.5 million to O2 Micro. Accordingly, the
Company recorded the $9.5 million as a current liability as of December 31, 2013.

In March 2014, the Supreme Court declined to hear the case. As O2 Micro had no further legal avenues to appeal, the
Company released the current liability of $9.5 million and recorded the award as a litigation benefit in the Consolidated
Statements of Operations in the first quarter of 2014. In addition, the Company incurred additional legal fees of $0.5 million
in connection with the final resolution of the lawsuit.

Silergy

In December 2011, the Company entered into a settlement and license agreement with Silergy Corp. and Silergy Technology
for infringement of the Company’s patent whereby the Company would receive a total of $2.0 million. The first $1.2 million
was paid in equal installments of $0.3 million in each quarter of 2012 and the remainder was paid in two equal installments
in the first two quarters of 2013. All amounts were recorded as litigation benefits in the Consolidated Statements of Operations
in the periods the proceeds were received.

14. EMPLOYEE 401(k) PLAN

The Company sponsors a 401(k) retirement savings plan for all employees in the United States who meet certain eligibility
requirements. Participants may contribute up to the amount allowable as a deduction for federal income tax purposes. The
Company is not required to contribute and did not contribute to the plan in 2015, 2014 and 2013.

15. SIGNIFICANT CUSTOMERS

The Company sells its products primarily through third-party distributors, value-added resellers and directly to original
equipment manufacturers, original design manufacturers, and electronic manufacturing service providers. The following table
summarizes those customers with sales greater than 10% of the Company's total revenue:

Customers
Distributor A
Distributor B

Year Ended December 31,
2014

2013

2015

24%
*

26%
*

32%
10%

____________
* Represents less than 10%.

The following table summarizes those customers with accounts receivable balances greater than 10% of the Company’s total
accounts receivable:

Customers
Distributor A
Distributor B

December 31,

2015

2014

28%
17%

31 %
10 %

Both of the customers are third-party distributors. The Company’s agreements with these distributors were made in the
ordinary course of business and may be terminated with or without cause by these distributors with advance notice. Although
the Company may experience a short-term disruption in the distribution of its products and a short-term decline in revenue if
its agreement with either of these distributors was terminated, the Company believes that such termination would not have a
material adverse effect on its financial statements because it would be able to engage alternative distributors, resellers and
other distribution channels to deliver its products to end customers within a few quarters following the termination of the
agreement with the distributor.

16. SEGMENT AND GEOGRAHPIC INFORMATION

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

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

Country or Region
China ......................................................................... $
Taiwan .......................................................................
Europe .......................................................................
Korea .........................................................................
Southeast Asia ............................................................
Japan ..........................................................................
United States ..............................................................
Other ..........................................................................
Total .......................................................................... $

2015

Year Ended December 31,
2014

2013

213,119 $
41,521
22,603
20,519
18,592
9,727
6,732
254
333,067 $

181,050 $
38,460
19,830
14,362
13,993
8,251
6,392
197
282,535 $

141,400
34,248
15,351
9,992
21,760
7,495
7,525
320
238,091

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

Product Family
DC to DC products ..................................................... $
Lighting control products ...........................................
Total .......................................................................... $

2015

Year Ended December 31,
2014

2013

299,726 $
33,341
333,067 $

253,083 $
29,452
282,535 $

211,337
26,754
238,091

The following is a summary of long-lived assets by geographic regions (in thousands):

Country
China ................................................................................................................ $
United States ....................................................................................................
Bermuda ...........................................................................................................
Other ................................................................................................................
Total ................................................................................................................. $

17. ACCUMULATED OTHER COMPREHENSIVE INCOME

December 31,

2015

2014

40,738 $
40,405
11,624
557
93,324 $

37,147
33,913
13,383
339
84,782

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

Unrealized
Losses
on Auction-
Rate
Securities

Unrealized
Gains (Losses)
on Other
Available-for-
Sale
Securities

Foreign
Currency
Translation
Adjustments

Total

Balance as of January 1, 2014 .............................. $

(360 ) $

4 $

6,616 $

6,260

Other comprehensive income (loss) before

reclassifications ..............................................

179

(17)

(609 )

(447)

Amounts reclassified from accumulated other

comprehensive income ...................................

Net current period other comprehensive

income (loss) ..................................................
Balance as of December 31, 2014 ........................

Other comprehensive loss before

179
(181 )

(2)

(19)
(15)

(2)

(609 )
6,007

(449)
5,811

reclassifications ..............................................

(28 )

(146)

(4,166 )

(4,340)

Amounts reclassified from accumulated other

comprehensive income ...................................
Net current period other comprehensive loss ....
Balance as of December 31, 2015 ........................ $

-
(28 )
(209 ) $

(5)
(151)
(166) $

-
(4,166 )
1,841 $

(5)
(4,345)
1,466

The amounts reclassified from accumulated other comprehensive income were recorded in interest and other income, net, in
the Consolidated Statements of Operations.

18. SUBSEQUENT EVENTS

Stock Repurchase Program

In February 2016, the Board of Directors approved a new stock repurchase program that authorizes the Company to
repurchase up to $50.0 million in the aggregate of its common stock through December 31, 2016.

2016 PSUs

In February 2016, the Board of Directors granted a total of 349,000 shares to the executive officers and certain non-executive
employees, which represent a target number of RSUs to be awarded upon achievement of certain performance conditions.
The maximum number of shares that an employee can earn is either 200% or 300% of the target shares. The PSUs contain a
purchase price feature, which requires the employees to pay the Company $20 per share upon vesting of the shares. Shares
that do not vest will not be subject to the purchase price payment.

19. QUARTERLY FINANCIAL DATA (UNAUDITED)

Three Months Ended

March 31,
2015

June 30,
2015

September 30,
2015

December 31,
2015

(in thousands, except per share amounts)

Revenue ............................................................. $
Cost of revenue .................................................
Gross profit .............................................

Operating expenses:

Research and development ............................
Selling, general and administrative ................
Litigation expense ...........................................
Total operating expenses ........................
Income from operations ....................................
Interest and other income (expense), net ............
Income before income taxes ..............................
Income tax provision .........................................
Net income ........................................................ $

73,538 $
33,855
39,683

16,038
17,518
270
33,826
5,857
642
6,499
536
5,963 $

81,416 $
37,287
44,129

15,743
17,964
311
34,018
10,111
235
10,346
2,447
7,899 $

91,194 $
41,754
49,440

17,272
18,722
136
36,130
13,310
(6)
13,304
2,103
11,201 $

Net income per share:

Basic ........................................................ $
Diluted ..................................................... $

0.15 $
0.15 $

0.20 $
0.19 $

0.28 $
0.28 $

Weighted-average shares outstanding:

Basic ........................................................
Diluted .....................................................

39,105
40,596

39,570
40,745

39,592
40,689

86,918
40,001
46,917

16,734
18,107
283
35,124
11,793
550
12,343
2,233
10,110

0.26
0.24

39,615
41,445

Cash dividends declared per common share ...... $

0.20 $

0.20

Three Months Ended

March 31,
2014

June 30,
2014

September 30,
2014

December 31,
2014

(in thousands, except per share amounts)

Revenue .............................................................. $
Cost of revenue ..................................................
Gross profit ..............................................

Operating expenses:

Research and development .............................
Selling, general and administrative .................
Litigation expense (benefit), net ......................
Total operating expenses .........................
Income from operations .....................................
Interest and other income, net .............................
Income before income taxes ...............................
Income tax provision (benefit) ............................
Net income ......................................................... $

60,061 $
27,964
32,097

15,603
16,109
(8,700)
23,012
9,085
190
9,275
257
9,018 $

68,436 $
31,337
37,099

13,368
16,853
274
30,495
6,604
295
6,899
502
6,397 $

78,335 $
35,872
42,463

14,679
17,006
332
32,017
10,446
202
10,648
(573)
11,221 $

Net income per share:

Basic ......................................................... $
Diluted ...................................................... $

0.23 $
0.23 $

0.17 $
0.16 $

0.29 $
0.28 $

Weighted-average shares outstanding:

Basic .........................................................
Diluted ......................................................

38,470
39,517

38,684
39,608

38,785
39,727

75,703
34,744
40,959

14,941
16,787
66
31,794
9,165
407
9,572
712
8,860

0.23
0.22

38,807
40,321

Cash dividends declared per common share ....... $

- $

0.15 $

0.15

ITEM 9. CHANGES IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures pursuant to Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act
of 1934 as of the end of the period covered by this Annual Report on Form 10-K.

Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2015, our
disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable
assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our
management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting
was effective as of December 31, 2015. Management reviewed the results of its assessment with our Audit Committee.

Our independent registered public accounting firm, Deloitte & Touche LLP, which audited the consolidated financial
statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal
control over financial reporting.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31,
2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that
management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their
costs.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Monolithic Power Systems, Inc.
San Jose, California

We have audited the internal control over financial reporting of Monolithic Power Systems, Inc. and subsidiaries (the
"Company") as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

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. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated
February 29, 2016 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
February 29, 2016

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Reference is made to the information regarding directors and nominees, code of ethics, corporate governance matters and
disclosure relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 appearing under the captions
“Election of Directors” and “Compliance with Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s
Proxy Statement for its 2016 Annual Meeting of Stockholders (the “2016 Annual Meeting”), which information is
incorporated in this Annual Report on Form 10-K by reference. Information regarding executive officers is set forth under
the caption “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be set forth under the caption “Executive Officer Compensation” in the Company’s
Proxy Statement for the 2016 Annual Meeting, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED STOCKHOLDER MATTERS

The information required by this item will be set forth under the captions “Security Ownership of Certain Beneficial Owners
and Management” and “Equity Compensation Plan Information” in the Company’s Proxy Statement for the 2016 Annual
Meeting, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The information required by this item will be set forth under the captions “Certain Relationships and Related Transactions”
and “Election of Directors” in the Company’s Proxy Statement for the 2016 Annual Meeting, and is incorporated herein by
reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item will be set forth under the caption “Audit and Other Fees” in the Company’s Proxy
Statement for the 2016 Annual Meeting, and is incorporated herein by reference.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

PART IV

(a) Documents filed as part of this report

(1) All financial statements

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

All schedules have been omitted because the required information is not present or not present in amounts sufficient to require
submission of the schedules, or because the information required is included in the consolidated financial statements or notes
thereto.

(3) Exhibits

Exhibit
Number

Description

3.1 (1)

Amended and Restated Certificate of Incorporation.

3.2 (2)

Amended and Restated Bylaws.

10.1+ (3) Registrant’s 1998 Stock Plan and form of option agreement.

10.2+ (4) Registrant’s 2004 Employee Stock Purchase Plan and form of subscription agreement.

10.3+ (5) Form of Directors’ and Officers’ Indemnification Agreement.

10.4† (6)

Foundry Agreement between the Registrant and Advanced Semiconductor Manufacturing Corp. of Shanghai,

dated August 14, 2001.

10.5+ (7) Employment Agreement with Michael Hsing and Amendment thereof.

10.6+ (8) Employment Agreement with Maurice Sciammas and Amendment thereof.

10.7+ (9) Employment Agreement with Jim Moyer.

10.8+(10) Employment Agreement with Deming Xiao and Amendment thereof.

10.9 (11)

Distribution Agreement with Asian Information Technology Inc. Ltd., dated March 1, 2004.

10.10†(12) Investment and Cooperation Contract, dated August 19, 2004.

10.11+(13) Form of Performance Unit Agreement.

10.12+(14) Letter Agreement with Victor Lee.

10.13+(15) Letter Agreement with Douglas McBurnie.

10.14+(16) Letter Agreement with Karen A. Smith Bogart.

10.15+(17) Registrant’s Employee Bonus Plan, as amended effective March 6, 2008.

10.16+(18) Form of Restricted Stock Award Agreement.

10.17+(19) Letter Agreement with Jeff Zhou.

10.18+(20) Employment Agreement with Meera P. Rao and Saria Tseng and Amendments thereof.

10.19+(21) Monolithic Power Systems, Inc. Master Cash Performance Bonus Plan.

10.20+(22) Letter Agreement with Eugen Elmiger.

10.21+(23) Monolithic Power Systems, Inc. 2004 Equity Incentive Plan, as Amended, and Form of Grant Agreement.

10.22+(24) Monolithic Power Systems, Inc. 2014 Equity Incentive Plan and Form of Grant Agreement.

21.1

Subsidiaries of Monolithic Power Systems, Inc.

23.1

Consent of Independent Registered Public Accounting Firm.

24.1

Power of Attorney (included on Signature page to this Form 10-K).

31.1

31.2

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance

101.SCH

XBRL Taxonomy Extension Schema

101.CAL XBRL Taxonomy Extension Calculation

101.DEF

XBRL Taxonomy Extension Definition

101.LAB XBRL Taxonomy Extension Labels

101.PRE

XBRL Taxonomy Extension Presentation

+
†

(1)

(2)

(3)

Management contract or compensatory plan or arrangement.
Confidential treatment requested for portions of this agreement, which portions have been omitted and filed
separately with the Securities and Exchange Commission
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings
under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any filings.
Incorporated by reference to Exhibit 3.2 of the Registrant’s Registration Statement on Form S-1/A (Registration
No. 333-117327), filed with the Securities and Exchange Commission on November 15, 2004.
Incorporated by reference to Exhibit 3.4 of the Registrant’s Registration Statement on Form S-1/A (Registration
No. 333-117327), filed with the Securities and Exchange Commission on November 15, 2004.
Incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-1 (Registration No.
333-117327), filed with the Securities and Exchange Commission on July 13, 2004.

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

(14)

(15)

(16)

(17)

(18)

(19)

(20)

(21)

(22)

(23)

(24)

Incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1 (Registration No.
333-117327), filed with the Securities and Exchange Commission on July 13, 2004.
Incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1/A (Registration
No. 333-117327), filed with the Securities and Exchange Commission on November 15, 2004.
Incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement on Form S-1/A (Registration
No. 333-117327), filed with the Securities and Exchange Commission on November 2, 2004.
Incorporated by reference to Exhibit 10.7 of the Registrant’s annual report on Form 10-K (File No. 000-51026),
filed with the Securities and Exchange Commission on March 11, 2008 and Exhibit 10.1 of the Registrant’s current
report on Form 8-K (File No. 000-51026), filed with the Securities and Exchange Commission on December 19,
2008.
Incorporated by reference to Exhibit 10.8 of the Registrant’s annual report on Form 10-K (File No. 000-51026),
filed with the Securities and Exchange Commission on March 11, 2008 and Exhibit 10.3 of the Registrant’s current
report on Form 8-K (File No. 000-51026), filed with the Securities and Exchange Commission on December 19,
2008.
Incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 (Registration No.
333-117327), filed with the Securities and Exchange Commission on July 13, 2004.
Incorporated by reference to Exhibit 10.10 of the Registrant’s annual report on Form 10-K (File No. 000-51026),
filed with the Securities and Exchange Commission on March 11, 2008 and Exhibit 10.4 of the Registrant’s current
report on Form 8-K (File No. 000-51026), filed with the Securities and Exchange Commission on December 19,
2008.
Incorporated by reference to Exhibit 10.11 of the Registrant’s Registration Statement on Form S-1/A (Registration
No. 333-117327), filed with the Securities and Exchange Commission on September 10, 2004.
Incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1/A (Registration
No. 333-117327), filed with the Securities and Exchange Commission on September 10, 2004.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed
with the Securities and Exchange Commission on November 1, 2006.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed
with the Securities and Exchange Commission on September 14, 2006.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed
with the Securities and Exchange Commission on May 25, 2007.
Incorporated by reference to Exhibit 10.2 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed
with the Securities and Exchange Commission on May 25, 2007.
Incorporated by reference to Exhibit 10.31 of the Registrant’s annual report on Form 10-K (File No. 000-51026),
filed with the Securities and Exchange Commission on March 11, 2008.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed
with the Securities and Exchange Commission on February 15, 2008.
Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed
with the Securities and Exchange Commission on February 3, 2010.
Incorporated by reference to Exhibit 10.33 of the Registrant’s annual report on Form 10-K (File No. 000-51026),
filed with the Securities and Exchange Commission on March 4, 2011.
Incorporated by reference to Annexure C of the Registrant’s Proxy Statement on Schedule 14A (File No. 000-
51026), filed with the Securities and Exchange Commission on April 30, 2013.
Incorporated by reference to Exhibit 10.36 of the Registrant’s annual report on Form 10-K (File No. 000-51026),
filed with the Securities and Exchange Commission on March 10, 2014.
Incorporated by reference to Exhibit 4.4 of the Registrant’s Registration Statement on Form S-8 (Registration No.
333-199782), filed with the Securities and Exchange Commission on November 3, 2014.
Incorporated by reference to Exhibit 4.6 of the Registrant’s Registration Statement on Form S-8 (Registration No.
333-199782), filed with the Securities and Exchange Commission on November 3, 2014.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly

caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

Date: February 29, 2016

MONOLITHIC POWER SYSTEMS, INC.

By: /s/ MICHAEL R. HSING
Michael R. Hsing

President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Michael R. Hsing and Meera P. Rao, jointly and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes,
may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed

below on February 29, 2016 by the following persons on behalf of the registrant and in the capacities indicated:

/S/ MICHAEL R. HSING
MICHAEL R. HSING

/S/ MEERA P. RAO
MEERA P. RAO

President, Chief Executive Officer, and Director (Principal Executive Officer)

Chief Financial Officer (Principal Financial and Accounting Officer)

/S/ KAREN A. SMITH BOGART Director

KAREN A. SMITH BOGART

/S/ HERBERT CHANG
HERBERT CHANG

Director

/S/ EUGEN ELMIGER
EUGEN ELMIGER

Director

/S/ VICTOR K. LEE
VICTOR K. LEE

Director

/S/ JAMES C. MOYER
JAMES C. MOYER

Director

/S/ JEFF ZHOU
JEFF ZHOU

Director

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