Monolithic Power Systems
Annual Report 2016

Plain-text annual report

2016 ANNUAL REPORT ON FORM 10-K 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, 2016 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, 2016 was 40,479,523. The closing price of the registrant’s common stock on the Nasdaq Global Select Market on June 30, 2016 was $68.32. 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, 2016 was $1.9 billion.* There were 41,171,970 shares of the registrant’s common stock issued and outstanding as of February 20, 2017. Portions of the registrant’s Proxy Statement for the registrant’s 2017 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, 2016. DOCUMENTS INCORPORATED BY REFERENCE * Excludes 12,062,909 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, 2016. 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. This page intentionally left blank MONOLITHIC POWER SYSTEMS, INC. TABLE OF CONTENTS PART I Page Item 1. Business ......................................................................................................................................................... 2 Executive Officers of the Registrant .............................................................................................................. 6 Item 1A. Risk Factors ................................................................................................................................................... 7 Item 1B. Unresolved Staff Comments .......................................................................................................................... 23 Properties ....................................................................................................................................................... 24 Item 2. Legal Proceedings ......................................................................................................................................... 24 Item 3. Mine Safety Disclosures ................................................................................................................................ 24 Item 4. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ....................................................................................................................................................... 25 Item 6. Selected Financial Data ................................................................................................................................. 27 Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 28 Item 7. Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................................... 38 Financial Statements and Supplementary Data ............................................................................................. 40 Item 8. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 76 Item 9A. Controls and Procedures ................................................................................................................................ 76 Item 9B. Other Information .......................................................................................................................................... 78 PART III Item 10. Directors, Executive Officers and Corporate Governance ............................................................................ 78 Executive Compensation ............................................................................................................................... 78 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...... 78 Item 12. Certain Relationships and Related Transactions, and Director Independence .............................................. 78 Item 13. Principal Accounting Fees and Services ........................................................................................................ 78 Item 14. Item 15. Exhibits and Financial Statement Schedules ................................................................................................. 79 Signatures ...................................................................................................................................................... 82 PART IV i This page intentionally left blank 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 may incur significant legal expenses that vary with the level of activity in each of our current or future legal proceedings, • the effect that liquidity of our investments has on our capital resources, • the continuing application of our products in the consumer, industrial, computing and storage, and communications markets, • estimates of our future liquidity requirements, • the cyclical nature of the semiconductor industry, • protection of our proprietary technology, • business outlook for 2017 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 the companies, businesses and products that we acquire 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. 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. 1 ITEM 1. BUSINESS General PART I Monolithic Power Systems (“MPS”) is a leading company that designs, develops and markets high-performance power solutions. Founded in 1997, MPS’s core strengths include deep system-level and applications knowledge, strong analog design expertise and innovative proprietary process technologies. These combined strengths enable MPS to deliver highly integrated monolithic products that offer energy efficient, cost-effective, easy-to-use 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 and compact solutions. MPS is headquartered in San Jose, California and has over 1,400 employees worldwide, with locations in China, India, Japan, Korea, Singapore, Taiwan, the United States and 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 integrated circuits (“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 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 growth over the long term, compared to the semiconductor industry as a whole. Market Segments and Applications We currently target our products at the communications, computing and storage, consumer and industrial markets, with the consumer market representing the largest portion of our revenue. The following is a brief summary of the various applications in each market segment and each market segment’s contribution as a percentage of our total revenue: Market Segments Applications ● Consumer ● Industrial ● Set-top boxes, monitors, gaming, lighting, chargers, home appliances, cellular handsets, digital video players, GPS, televisions, stereos and cameras. ● Automotive, power sources, security, point- of-sale systems, smart meters and other industrial equipment. Percentage of Total Revenue 2014 43.4% 2015 43.6% 2016 39.5% 23.1% 19.9% 17.4% ● Computing and storage ● Storage networks, computers and 20.7% 17.0% 16.3% notebooks, printers, servers and workstations. ● Communications ● Networking and telecommunication 16.7% 19.5% 22.9% infrastructure, routers and modems, wireless access points and voice over IP. 2 Product Families Our proprietary process technologies enable us to design and deliver smaller, single-chip power management ICs. These technologies simplify the design process, and are applicable across a wide range of analog applications within the consumer, industrial, computing and storage, and communications markets. Our product families 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. Our key product families include the following: 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 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 approximately 90% of our total revenue in 2016, 2015 and 2014. Lighting Control Products. 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, monitors, car navigation systems and televisions. Backlighting solutions are typically either white light emitting diode lighting sources or cold cathode fluorescent lamps. 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 approximately 10% of our total revenue in 2016, 2015 and 2014. In the future, we will continue to introduce additional new products within our existing product families, as well as expand our newer product families. 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. 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 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 22% of revenue in 2016, 24% of revenue in 2015 and 26% of revenue in 2014. No other distributors or end 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 has 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 China, Japan, Korea, Taiwan and the United States, and have marketing representatives in India, Singapore and Europe. 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 each of the years ended December 31, 2016, 2015 and 2014, 91% of our revenue was from customers in Asia. 3 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, all 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 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 $73.6 million, $65.8 million and $58.6 million for the years ended December 31, 2016, 2015 and 2014, 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, 2016, we had 1,123 patents/applications issued or pending, of which 319 patents have been issued in the United States. Our issued patents are scheduled to expire at various times through December 2036. 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 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 14 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 4 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 ICs. 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 technologies 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 ICs. We currently contract with four suppliers to manufacture our wafers in foundries located in China and Korea. 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 either for final testing at our Chengdu facility, or to other turnkey providers who perform final testing based on our standards 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 purchase the facility and the transaction was completed in January 2016. The facility has been fully operational since 2006 and we have benefitted from shorter manufacturing cycle times and lower labor and overhead costs compared to our operations prior to the use of the facility. We have expanded our product testing capabilities in this 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, 2016, we employed 1,417 employees primarily located in China, India, Japan, Korea, Singapore, Taiwan, the United States and Europe, compared with 1,260 employees as of December 31, 2015. Competition 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 both applications engineering and design engineering personnel, our ability to introduce new products, and our ability to maintain 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, Infineon Technologies, Intersil (recently acquired by Renesas Electronics), Linear Technology (pending acquisition by Analog Devices), Maxim Integrated Products, NXP Semiconductors (pending acquisition by Qualcomm), ON Semiconductor, Power Integrations, ROHM Semiconductor, Semtech and Texas Instruments. 5 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, there is no assurance 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. In addition, there has recently been a high level of consolidation in the semiconductor industry. If these or future acquisitions are successful, competition may intensify, and our competitors may have additional resources to compete against us. Geographical and Segment Information Please refer to the geographical and segment information in Note 17 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 March 1, 2017 is as follows: Name Age Position Michael Hsing ........... 57 President, CEO and Director Bernie Blegen ............ 59 Vice President and Chief Financial Officer Deming Xiao ............. 54 President of Asia Operations Maurice Sciammas .... 57 Senior Vice President of Worldwide Sales and Marketing Saria Tseng ................ 46 Vice President, Strategic Corporate Development, General Counsel and Corporate Secretary Michael 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. Bernie Blegen has served as our Chief Financial Officer since July 2016 and is responsible for finance, accounting, tax, treasury and investor relations. From August 2011 to June 2016, Mr. Blegen served as our Corporate Controller. Prior to joining MPS, Mr. Blegen held a number of executive finance and accounting positions for other publicly traded technology companies, including Xilinx, Inc. and Credence Systems. Mr. Blegen is a CPA and holds a B.A. from the University of California, Santa Barbara. 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. 6 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. 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 the Company from MaXXan Systems, Inc., where she was also 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). Ms. Tseng currently serves on the Board of Directors of Super Micro Computer, Inc., a global leader in high performance server technology. Ms. Tseng 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; 7 • • • • • • • • 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; government policies and regulations on international trade restrictions and corporate taxes; 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 over 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; 8 • • • • • • • • • • • • • • • • 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 consumer, industrial, computing and storage, and communications 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 have 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 9 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, 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. consumer, industrial, computing and storage, and communications); 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; • • • level of activity in our legal proceedings, which could result in significant legal expenses; 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 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 10 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. Industry consolidation may lead to increased competition and may harm our operating results. In recent years, there has been a trend toward semiconductor industry consolidation. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry, or become unable to continue operations unless they find an acquirer or consolidate with another company. In addition, companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that semiconductor industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition. 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 communications, computing and storage, consumer 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. 11 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 may face competition from customers developing products internally. Our customers generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop their own products internally. The future prospects for our products in these markets are dependent in part upon our customers' acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. Customers may in the future continue to use internally developed components. They also may decide to develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations could be materially and 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, 2016, 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 and other regions where we have significant operations; 12 • 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 22% of our total revenue for the year ended December 31, 2016. 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 or significant pricing pressure for our products from any of our major customers for any reason (including due to competitions, 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 the U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financial condition and results of operations. New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers. In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to conduct diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have undertaken the necessary diligence to determine whether such minerals are used in the manufacture of 13 our products. However, the implementation of these new requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, regardless of our findings, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. 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 22% of our total revenue for the year ended December 31, 2016. 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 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. 14 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 the supplier 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 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. 15 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 products. 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 potential future examinations of our income tax returns by the Internal Revenue Service (“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. In addition, our U.S. federal income tax return for the year ended December 31, 2014 was under examination by the IRS. No adjustments were made by the IRS upon conclusion of the examination. 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 third-party 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. System security risks, data protection or privacy breaches, cyber attacks and systems integration issues could disrupt our internal operations and/or harm our reputation, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, create system disruptions or cause shutdowns. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution or other critical functions. 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 16 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. Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation. 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 a 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 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. 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 17 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 could 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, 2016, $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 31 years. We have historically 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. 18 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. Our business is subject to various governmental laws and regulations, and compliance with these regulations may impact our revenue and cause us to incur significant expense. If we fail to maintain compliance with applicable regulations, we may be forced to recall products and cease their distribution, and we could be subject to civil or criminal penalties. Our business is subject to various significant laws and other legal requirements imposed by the U.S. and other countries we conduct business with, including export control laws such as the U.S. Export Administration Regulations. These laws and regulations are complex, change frequently and have generally become more stringent over time. We may be required to incur significant expense to comply with these regulations or to remedy violations of these regulations. In addition, if our customers fail to comply with these regulations, we may be required to suspend sales to these customers, which could negatively impact our results of operations. For example, on March 8, 2016, the U.S. Department of Commerce added ZTE Corporation, one of our customers, to its "Entity List" and placed certain export restrictions on ZTE and its suppliers. These restrictions are temporarily lifted until March 29, 2017. We must conform the manufacture and distribution of our products to various laws and adapt to regulatory requirements in many countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, we could be required to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products commercially until the products are brought into compliance. Environmental laws and regulations could cause a disruption in our business and operations. We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Union member countries and countries in Asia. There can be no assurance that similar laws and regulations will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive. 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- 19 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, 20 • 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 introduce 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 lose key personnel, the search for a qualified replacement and the transition could interrupt our operations as the search could take us longer than expected and divert management resources, and the newly hired employee 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. 21 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 (“Sensima”) 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, or 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. 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; 22 • • diversion of management’s attention from other business concerns; and, adverse effects on existing business relationships with customers. If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders. We may issue additional shares of common stock in the future in order to raise additional capital to fund our global operations or in connection with an acquisition. We also issue restricted stock units to employees, which convert into shares of common stock upon vesting. Any issuance of our common stock may result in immediate dilution of our stockholders. In addition, the issuance of a significant amount of our common stock may result in additional regulatory requirements, such as stockholder approval. 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. 23 ITEM 2. PROPERTIES Our main operations are located in San Jose, California, China and Taiwan. The following table summarizes our primary properties as of December 31, 2016: Location Owned: San Jose, California ....... Chengdu, China ............. Chengdu, China ............. Shanghai, China ............ Shenzhen, China ............ Taipei, Taiwan............... Leased: Chengdu, China ............. Hangzhou, China ........... Approximate Square Footage Primary Use 106,000 150,000 60,000 7,000 8,000 15,000 Corporate headquarters, research and development, sales and marketing Research and development, administrative offices Testing and manufacturing Sales and marketing Sales and marketing Sales and marketing 42,000 34,000 Inventory storage Research and development We also lease other sales and research and development offices in China, Japan, Korea, the United States and Europe. We believe that our existing facilities are adequate for our current operations. ITEM 3. LEGAL PROCEEDINGS We are a party to actions and proceedings in the ordinary course of business, including potential 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. 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. We defend ourselves vigorously against any such potential claims. Silergy In December 2016, we settled a patent infringement lawsuit with Silergy Corp. and were awarded a total of $3.0 million pursuant to a settlement and license agreement. Under the agreement, the parties agreed to a mutual release of past claims and covenant not to sue provisions, and grant of certain patent licenses for future use. Based on their relative fair values, we allocated approximately $0.6 million to the settlement which was recorded as a credit to litigation expense in the Consolidated Statement of Operations for the year ended December 31, 2016. The remaining $2.4 million was allocated to the grant of the patent licenses for future use and will be recognized ratably over five years. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 24 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: 2016: First quarter ...................................................................................................... $ Second quarter ................................................................................................. $ Third quarter .................................................................................................... $ Fourth quarter ................................................................................................... $ 2015: First quarter ...................................................................................................... $ Second quarter ................................................................................................. $ Third quarter .................................................................................................... $ Fourth quarter ................................................................................................... $ Holders of Our Common Stock High Low 63.64 $ 70.75 $ 80.50 $ 85.43 $ 56.12 $ 54.95 $ 52.12 $ 68.88 $ 56.21 60.93 66.11 76.44 45.80 49.96 45.28 50.42 As of February 20, 2017, there were 37 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. Based on our historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared by our Board of Directors, which are payable to the stockholders in the following month. Our Board of Directors declared the following cash dividends: Dividend Declared per Share Total Amount (in thousands) 2016: First quarter ...................................................................................................... $ Second quarter ................................................................................................ $ Third quarter ................................................................................................... $ Fourth quarter ................................................................................................... $ 2015: First quarter ...................................................................................................... $ Second quarter ................................................................................................ $ Third quarter ................................................................................................... $ Fourth quarter ................................................................................................... $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 8,047 8,096 8,132 8,159 7,854 7,925 7,901 7,938 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. 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 these funds to fund our U.S. operations. 25 Stock Performance Graph 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 and the PHLX Semiconductor Sector Index. An investment of $100 is assumed to have been made in our common stock on December 31, 2011 and its relative performance is tracked through December 31, 2016. Historic stock performance is not indicative of future performance. The information contained in this 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 Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934. Purchases of Equity Securities by the Issuer and Affiliated Purchasers In February 2016, the Board of Directors approved a stock repurchase program that authorized us to repurchase up to $50 million in the aggregate of our common stock through December 31, 2016. In December 2016, the Board of Directors approved an extension of the program through December 31, 2017. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934. Shares are retired upon repurchase. For the three months and year ended December 31, 2016, we did not repurchase any shares under the program. As of December 31, 2016, $50 million remained available for future repurchases under the program. 26 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, 2016 and 2015, and the consolidated statement of operations data for the years ended December 31, 2016, 2015 and 2014 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, 2014, 2013 and 2012, and the consolidated statement of operations data for each of the years ended December 31, 2013 and 2012 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: 2016 Year Ended December 31, 2014 (in thousands, except per share amounts) 2015 2013 2012 Revenue ............................................................... $ Cost of revenue ................................................... Gross profit ............................................... 388,665 $ 333,067 $ 152,898 177,792 180,169 210,873 282,535 $ 129,917 152,618 238,091 $ 110,190 127,901 213,813 100,665 113,148 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 .......................................................... $ Net income per share: 73,643 83,012 (229) 156,426 54,447 2,817 57,264 4,544 52,720 $ 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 Basic ......................................................... $ Diluted ....................................................... $ 1.30 $ 1.26 $ 0.89 $ 0.86 $ 0.92 $ 0.89 $ 0.61 $ 0.59 $ 0.45 0.43 Weighted-average shares outstanding: Basic .......................................................... Diluted ....................................................... 40,436 41,915 39,470 40,869 38,686 39,793 37,387 38,620 34,871 36,247 Cash dividends declared per common share ........ $ 0.80 $ 0.80 $ 0.45 $ - $ 1.00 Consolidated Balance Sheet Data: 2016 2015 December 31, 2014 (in thousands) 2013 2012 Cash and cash equivalents .................................... $ Short-term investments ........................................ $ Long-term investments ......................................... $ Total assets .......................................................... $ Common stock and additional paid-in capital ...... $ Total stockholders' equity .................................... $ Working capital ................................................... $ 5,354 $ 112,703 $ 90,860 $ 155,521 $ 144,103 $ 5,361 $ 511,126 $ 431,285 $ 315,969 $ 265,763 $ 431,116 $ 368,516 $ 330,063 $ 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 27 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 that designs, develops and markets high-performance power solutions. Founded in 1997, MPS’s core strengths include deep system-level and applications knowledge, strong analog design expertise and an innovative proprietary process technology. These combined strengths enable MPS to deliver highly integrated monolithic products that offer energy efficient, cost-effective, easy-to-use 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 and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories. We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term. We work with third parties to manufacture and assemble our 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. For each of the years ended December 31, 2016, 2015 and 2014, 91% of our revenue was from customers in Asia. We derive a majority of our revenue from the sales of our DC to DC converter products which serves the consumer, industrial, computing and storage, and communications 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 was 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. On December 31, 2016, management concluded that no contingent consideration was earned as the actual product revenue in 2016 did not meet the minimum target. 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 28 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 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 to most of the distributors, original equipment manufacturers and electronic manufacturing service providers. For the years ended December 31, 2016, 2015 and 2014, approximately 88%, 88% and 89% of our sales, respectively, were made through distribution arrangements with third parties. 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 (our normal payment terms are 30-45 days for our distributors) 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. 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. 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 and information related to products in the distribution channel. This reserve is recorded at the time of sale. As of December 31, 2016 and 2015, the reserve for stock rotation rights was $1.9 million and $2.4 million, respectively. If we enter into arrangements with distributors that have price adjustment or other rights that are not fixed or determinable, we recognize revenue under such arrangements only after the distributors have sold the products to end customers, at which time the price is no longer subject to adjustment and is fixed, and the products are no longer subject to return except pursuant to warranty terms. A small number of our U.S. distributors has such rights and accordingly, we defer revenue recognition on these shipments until the products are sold to the end customers by the distributors. The deferred revenue balance before the final price and other adjustments from these distributors as of December 31, 2016 and 2015 was $3.7 million and $2.8 million, respectively. The deferred costs as of December 31, 2016 and 2015 were $0.3 million and $0.2 million, respectively. 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, additional inventory write-downs may be required. Conversely, if market conditions are more favorable, inventory may be sold that was previously reserved. 29 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, 2016 and 2015, we had a valuation allowance of $27.4 million and $18.6 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 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 potential 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 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 30 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, shares issued under the employee stock purchase plan and restricted stock units with a purchase price feature 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 of each separate vesting tranche. For awards with only market conditions, compensation expense is not reversed if the market conditions are not satisfied. 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 achievement of 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 projected achievement was revised upward or if the actual achievement was higher than the projected achievement, 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. Conversely, if the projected achievement was revised downward or if the actual achievement was lower than the projected achievement, previously accrued compensation expense would be reversed for the performance-based awards, which would have a favorable impact on our results of operations. As a result, our stock-based compensation expense is subject to volatility and may fluctuate significantly each quarter due to changes in our probability assessment or actual results being different from projections made by management. Recent Accounting Pronouncements Refer to Note 1 to our consolidated financial statements regarding recently issued accounting pronouncements. 31 Results of Operations The following table summarizes our results of operations: Revenue ......................................... $ Cost of revenue ............................. Gross profit ................................... Operating expenses: Research and development ........ Selling, general and 2016 Year Ended December 31, 2015 (in thousands, except percentages) 2014 388,665 177,792 210,873 100.0 % $ 45.7 54.3 333,067 152,898 180,169 100.0 % $ 282,535 129,917 152,618 45.9 54.1 100.0 % 46.0 54.0 73,643 18.9 65,787 19.8 58,590 20.7 administrative .......................... 83,012 21.4 72,312 21.7 66,755 23.6 Litigation expense (benefit), net ............................................ Total operating expenses ........ Income from operations ................ Interest and other income, net ....... Income before income taxes .......... Income tax provision .................... Net income ................................... $ (229) 156,426 54,447 2,817 57,264 4,544 52,720 Revenue - 40.3 14.0 0.7 14.7 1.1 13.6 % $ 1,000 139,099 41,070 1,421 42,491 7,319 35,172 0.3 41.8 12.3 0.5 12.8 2.2 10.6 % $ (8,027) 117,318 35,300 1,092 36,392 897 35,495 (2.8 ) 41.5 12.5 0.4 12.9 0.3 12.6 % The following table summarizes our revenue by market segments: Year Ended December 31, Market Segment 2016 Revenue 2015 Revenue 2014 Revenue % of % of % of (in thousands, except percentages) Change From 2015 to 2016 From 2014 to 2015 Consumer ...................... $153,732 Industrial ....................... 89,639 Computing and storage.. 80,562 Communications ........... 64,732 Total ............................. $388,665 39.5% $ 145,090 23.1% 66,343 20.7% 56,568 16.7% 65,066 100.0% $ 333,067 43.6% $122,733 19.9% 49,037 17.0% 46,147 19.5% 64,618 100.0% $282,535 43.4% 17.4% 16.3% 22.9% 100.0% 6.0% 35.1% 42.4% (0.5)% 16.7% 18.2% 35.3% 22.6% 0.7% 17.9% Revenue for the year ended December 31, 2016 was $388.7 million, an increase of $55.6 million, or 16.7%, from $333.1 million for the year ended December 31, 2015. This increase was driven by higher sales in the computing and storage, industrial and consumer segments, as overall unit shipments increased 19% due to higher market demand with current customers and design wins with new customers, partially offset by a 2% decrease in average sales prices. Revenue from the consumer segment for the year ended December 31, 2016 increased $8.6 million, or 6.0%, from the same period in 2015. This increase was primarily driven by higher demand in battery management systems, home appliances and other high value consumer products. Revenue from the industrial segment for the year ended December 31, 2016 increased $23.3 million, or 35.1%, from the same period in 2015. This increase was primarily driven by higher sales in automotive applications, security products, smart meters and power sources. Revenue from the computing and storage segment for the year ended December 31, 2016 increased $24.0 million, or 42.4%, from the same period in 2015. This increase was primarily driven by strength in the high-performance notebook, server and solid-state drive storage markets. Revenue from the communications segment for the year ended December 31, 2016 was essentially flat compared to the same period in 2015. 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 driven by higher sales in all market segments, as overall unit shipments increased 17% due to higher market demand with current customers and design wins with new customers, coupled with an increase of 1% in average sales prices. 32 Revenue from the consumer segment for the year ended December 31, 2015 increased $22.4 million, or 18.2%, from the same period in 2014. This increase was primarily driven by higher demand in gaming, battery management systems, home appliances and other high value consumer products. Revenue from the industrial segment for the year ended December 31, 2015 increased $17.3 million, or 35.3%, from the same period in 2014. This increase was primarily driven by higher sales in automotive applications and other industrial equipment. Revenue from the computing and storage segment for the year ended December 31, 2015 increased $10.4 million, or 22.6%, from the same period in 2014. This increase was primarily driven by strength in the server and high-performance notebook markets. Revenue from the communications segment for the year ended December 31, 2015 was essentially flat compared to the same period in 2014. 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 for acquisition-related intangible assets. Year Ended December 31, Change 2016 2015 2014 (in thousands, except percentages) From 2015 to 2016 From 2014 to 2015 Cost of revenue ...................... $ As a percentage of revenue ..... Gross profit ............................. $ Gross margin ........................... 177,792 $ 45.7% 210,873 $ 54.3% 152,898 $ 45.9% 180,169 $ 54.1% 129,917 46.0% 152,618 54.0% 16.3% 17.0% 17.7% 18.1% Cost of revenue was $177.8 million, or 45.7% of revenue, for the year ended December 31, 2016, and $152.9 million, or 45.9% of revenue, for the year ended December 31, 2015. The $24.9 million increase in cost of revenue was primarily due to a 19% increase in overall unit shipments, which was partially offset by a 2% decrease in the average direct cost of units shipped. The increase in cost of revenue was also driven by an increase of $1.0 million in warranty expenses and inventory write-downs. Gross margin was 54.3% for the year ended December 31, 2016, compared with 54.1% for the year ended December 31, 2015. The increase in gross margin was primarily due to lower direct and overhead costs as a percentage of revenue, partially offset by the impact of certain manufacturing cost variances. 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 overall 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 an additional $1.1 million of amortization for intangible assets. Gross margin was 54.1% for the year ended December 31, 2015, compared with 54.0% for the year ended December 31, 2014. The increase in gross margin was primarily due to lower direct and overhead costs as a percentage of revenue, partially offset by increased sales of lower margin products and higher amortization for intangible assets compared to the same period in 2014. 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 2016 R&D expenses .......................... $ As a percentage of revenue ...... 73,643 $ 18.9% 2015 2014 (in thousands, except percentages) 65,787 $ 19.8% 58,590 20.7 % From 2015 to 2016 From 2014 to 2015 11.9% 12.3% R&D expenses were $73.6 million, or 18.9% of revenue, for the year ended December 31, 2016 and $65.8 million, or 19.8% of revenue, for the year ended December 31, 2015. The $7.8 million increase in R&D expenses was primarily due to an increase of $2.9 million in stock-based compensation expenses mainly associated with the performance and market-based equity awards, an increase of $2.2 million in cash compensation expenses, which include salary, benefits and bonuses, an increase of $1.6 million in new product development expenses, and an increase of $0.5 million in expenses related to changes 33 in the value of the employee deferred compensation plan liabilities. Our R&D headcount was 578 employees as of December 31, 2016, compared with 506 employees as of December 31, 2015. 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 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. 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 2016 SG&A expenses ........................ $ As a percentage of revenue ....... 83,012 $ 21.4% 2015 2014 (in thousands, except percentages) 72,312 $ 21.7% 66,755 23.6% From 2015 to 2016 From 2014 to 2015 14.8% 8.3% SG&A expenses were $83.0 million, or 21.4% of revenue, for the year ended December 31, 2016 and $72.3 million, or 21.7% of revenue, for the year ended December 31, 2015. The $10.7 million increase in SG&A expenses was primarily due to an increase of $3.0 million in stock-based compensation expenses mainly associated with the performance and market-based equity awards, an increase of $2.9 million in cash compensation expenses, which include salary, benefits and bonuses, an increase of $2.1 million in commission expenses due to higher revenue, and an increase of $0.8 million in expenses related to changes in the value of the employee deferred compensation plan liabilities. In addition, contributing to the increase in SG&A expenses in 2016 was a credit of $2.5 million related to the release of a contingent consideration liability which reduced SG&A expenses in 2015 (see below). These increases were partially offset by a stock-based compensation credit recorded in 2016 due to the retirement of our then Chief Financial Officer. As the service or performance conditions for certain of her restricted stock units had not been satisfied at the time of her departure, we reversed previously accrued stock- based compensation expenses of approximately $2.9 million associated with the unvested shares and recorded the credit in SG&A expenses for the three months ended March 31, 2016. Our SG&A headcount was 355 employees as of December 31, 2016, compared with 306 employees as of December 31, 2015. 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 required us to pay up to an additional $8.9 million to former Sensima shareholders if Sensima achieved 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 determined that the projected product revenue in 2016 would likely not meet the minimum target required to earn the contingent consideration, primarily because the product adoption process by customers would 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 released the liability of $2.5 million and recorded the credit in SG&A expenses. On December 31, 2016, 34 management concluded that no contingent consideration was earned as the actual product revenue in 2016 did not meet the minimum target. Litigation Expense (Benefit), Net Litigation benefit, net was $0.2 million for the year ended December 31, 2016, compared with litigation expense of $1.0 million for the year ended December 31, 2015. The net litigation benefit in 2016 was attributable to the recognition of $0.7 million of benefit in connection with two litigation settlements, partially offset by $0.5 million of litigation expenses. 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 in 2014 was attributable to 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 and $1.0 million of litigation expenses in other matters. For a description of our material litigation matters, see Note 14 “Litigation” of the Notes to Consolidated Financial Statements. Interest and Other Income, Net Interest and other income, net, was $2.8 million for the year ended December 31, 2016, compared with $1.4 million for the year ended December 31, 2015. The increase was primarily due to an increase of $1.6 million in income related to changes in the value of the employee deferred compensation plan assets and an increase of $0.9 million in interest income, partially offset by an increase of $0.6 million in amortization of premium on investments and a decrease of $0.5 million in foreign currency exchange gains. 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 an increase of $0.5 million in foreign currency exchange gains and an increase of $0.5 million in interest income, partially offset by an increase of $0.5 million in expenses related to changes in the value of the employee deferred compensation plan assets. Income Tax Provision The income tax provision for the year ended December 31, 2016 was $4.5 million, or 7.9% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation and deferred compensation. 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 generated by our subsidiaries in Bermuda and China was taxed at lower rates 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 primarily related to stock-based compensation and deferred compensation. The income tax provision for the year ended December 31, 2014 was $0.9 million, or 2.5% of pre-tax income. The effective tax rate differed from the federal statutory rate primarily because our foreign income generated by our subsidiaries in Bermuda and China 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 primarily related to stock-based compensation and deferred compensation. For additional information on the income tax provision and the resolution of the income tax audits, see Note 12 “Income Taxes” of the Notes to Consolidated Financial Statements. 35 Liquidity and Capital Resources Cash and cash equivalents ................................................................................... $ Short-term investments ....................................................................................... Total cash, cash equivalents and short-term investments............................. $ Percentage of total assets ............................................................................. Total current assets ............................................................................................. $ Total current liabilities ........................................................................................ Working capital ............................................................................................ $ December 31, 2016 2015 (in thousands, except percentages) 112,703 $ 155,521 268,224 $ 52.5% 382,984 $ (52,921) 330,063 $ 90,860 144,103 234,963 54.5% 331,928 (43,283) 288,645 As of December 31, 2016, we had cash and cash equivalents of $112.7 million and short-term investments of $155.5 million, compared with cash and cash equivalents of $90.9 million and short-term investments of $144.1 million as of December 31, 2015. As of December 31, 2016, $87.6 million of cash and cash equivalents and $52.1 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 these funds to fund our U.S. operations. The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of December 31, 2016, we had working capital of $330.1 million, compared with working capital of $288.6 million as of December 31, 2015. The $41.5 million increase in working capital was due to a $51.1 million increase in current assets, partially offset by a $9.6 million increase in current liabilities. The increase in current assets was primarily due to an increase in cash and cash equivalents, short-term investments, accounts receivable, inventories and prepaid expenses. The increase in current liabilities was primarily due to an increase in accounts payable, accrued compensation and related benefits and other accrued liabilities. Summary of Cash Flows The following table summarizes our cash flow activities: 2016 Year Ended December 31, 2015 (in thousands) 2014 Net cash provided by operating activities .......................................... $ Net cash used in investing activities ................................................... Net cash used in financing activities .................................................. Effect of exchange rate changes on cash and cash equivalents .......... Net increase (decrease) in cash and cash equivalents ............. $ 107,786 $ (55,726) (28,127) (2,090) 21,843 $ 69,736 $ (57,197 ) (46,652 ) (1,293 ) (35,406 ) $ 74,133 (9,367 ) (39,227 ) (486 ) 25,053 For the year ended December 31, 2016, net cash provided by operating activities was $107.8 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 $2.9 million from the changes in our operating assets and liabilities. The increase in other assets was primarily due to a prepaid wafer purchase agreement we funded during the year. The increase in inventories was primarily driven by increased purchases to meet current demand and future growth. 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, 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 driven by increased purchases to meet current demand and future growth. The increase in accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensation plan. 36 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. The increase in inventories was primarily driven by increased purchases to meet current demand and 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, 2016, net cash used in investing activities was $55.7 million, primarily due to purchases of property and equipment of $37.1 million, net purchases of investments of $13.6 million, and net contributions to the employee deferred compensation plan of $5.0 million. 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, 2014, net cash used in investing activities was $9.4 million, primarily due to $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 maturities and 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, 2016, we funded the purchases of a previously leased manufacturing facility in Chengdu, China and building units in Shenzhen, China and Taipei, Taiwan for approximately $17.5 million. For the year ended December 31, 2015, we spent $5.4 million to purchase building units located in Shanghai, China. For the year ended December 31, 2016, net cash used in financing activities was $28.1 million, primarily reflecting $33.1 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $3.8 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan. 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. 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. The program expired on December 31, 2015. In February 2016, our Board of Directors approved a new stock repurchase program that authorized us to repurchase up to $50 million in the aggregate of our common stock through December 31, 2016. The program was extended by the Board of Directors to December 31, 2017. For the year ended December 31, 2016, we did not repurchase any shares. 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. 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. 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 and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. For the year ended December 31, 2016, we paid dividends and dividend equivalents totaling $33.1 million. 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 changes in our circumstance or unforeseen events or conditions, or fund our growth, we may need to discontinue paying dividends and dividend equivalents or repurchasing shares, and may need to raise 37 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. Accordingly, we cannot ensure that we will continue to pay dividends and dividend equivalents or repurchase shares in the future, and 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 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, 2016: 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 1,700 $ 46,263 22,277 70,240 $ 969 $ 44,663 - 45,632 $ 617 $ 300 3,167 4,084 $ 114 $ 300 9,312 9,726 $ - 1,000 9,798 10,798 (1) Outstanding purchase commitments primarily consist of wafer purchases from our foundries, assembly services and license arrangements. (2) Other long-term obligations include long-term liabilities reflected in our Consolidated Balance Sheets, which primarily consist of the 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 $0.9 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 $3.9 million from the table above. Off Balance Sheet Arrangements As of December 31, 2016, 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 management and approved by our Board of Directors. 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 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 (loss), a component of stockholders’ equity. 38 Long-Term Investments As of December 31, 2016, our holdings in auction-rate securities, which have a fair value of $5.4 million, have failed to reset as a result of current market conditions. 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 through our subsidiary in Bermuda. Accordingly, our sales are not generally impacted by foreign currency rate changes. The functional currency of the Company’s offshore operations is generally the local currency, including the Renminbi, the New Taiwan Dollar and the Euro. In addition, we incur foreign currency exchange gains or losses related to certain intercompany transactions between the U.S. and our foreign subsidiaries that are denominated in a currency other than the functional currency. Gains or losses from the settlement and remeasurement of the balances 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. 39 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 41 42 43 44 45 46 47 40 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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, 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 March 1, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP San Jose, California March 1, 2017 41 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 .................................................................................................................... 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 12, 13 and 14) Stockholders' equity: Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 40,793 and 39,689 as of December 31, 2016 and December 31, 2015, respectively .............................................................. Retained earnings ........................................................................................................ Accumulated other comprehensive income (loss) ........................................................ Total stockholders’ equity ......................................................................................... Total liabilities and stockholders’ equity .................................................................. $ See accompanying notes to consolidated financial statements. December 31, 2016 2015 112,703 $ 155,521 34,248 71,469 9,043 382,984 85,171 5,354 6,571 3,002 633 27,411 511,126 $ 17,427 $ 12,578 22,916 52,921 3,870 23,219 80,010 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 62,769 315,969 119,362 (4,215 ) 431,116 511,126 $ 265,763 101,287 1,466 368,516 431,285 42 MONOLITHIC POWER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2015 2016 2014 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 ........................................................................................ $ 388,665 $ 177,792 210,873 73,643 83,012 (229) 156,426 54,447 2,817 57,264 4,544 52,720 $ 333,067 $ 152,898 180,169 65,787 72,312 1,000 139,099 41,070 1,421 42,491 7,319 35,172 $ Net income per share: Basic ........................................................................................ $ Diluted ..................................................................................... $ 1.30 $ 1.26 $ 0.89 $ 0.86 $ Weighted-average shares outstanding: Basic ........................................................................................ Diluted ..................................................................................... 40,436 41,915 39,470 40,869 282,535 129,917 152,618 58,590 66,755 (8,027 ) 117,318 35,300 1,092 36,392 897 35,495 0.92 0.89 38,686 39,793 Cash dividends declared per common share ...................................... $ 0.80 $ 0.80 $ 0.45 See accompanying notes to consolidated financial statements. 43 MONOLITHIC POWER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Net income ........................................................................................ $ Other comprehensive loss, net of tax: Foreign currency translation adjustments, net of $0 tax in 2016, Year Ended December 31, 2015 2016 2014 52,720 $ 35,172 $ 35,495 2015 and 2014 .......................................................................... (5,033) (4,166 ) (609 ) Change in unrealized gain (loss) on available-for-sale securities, net of $0 tax in 2016, 2015 and 2014....................... Total other comprehensive loss, net of tax ......................................... Comprehensive income ..................................................................... $ (648) (5,681) 47,039 $ (179 ) (4,345 ) 30,827 $ 160 (449 ) 35,046 See accompanying notes to consolidated financial statements. 44 MONOLITHIC POWER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock and Additional Paid-in Capital Retained Accumulated Other Comprehensive Shares Amount Earnings Income (Loss) Total Stockholders’ Equity Balance as of January 1, 2014 ........................... Net income ........................................................... Other comprehensive loss .................................... Dividends and dividend equivalents declared ...... Exercise of stock options ..................................... Release of restricted stock units ........................... Repurchase of common shares ............................. Shares issued under the employee stock purchase plan ..................................................... Stock-based compensation expense ..................... Tax benefits from equity awards .......................... Balance as of December 31, 2014 ...................... Net income ........................................................... Other comprehensive loss .................................... Dividends and dividend equivalents declared ...... Exercise of stock options ..................................... Release of restricted stock units ........................... Repurchase of common shares ............................. Shares issued under the employee stock purchase plan ..................................................... Stock-based compensation expense ..................... Tax benefits from equity awards .......................... Balance as of December 31, 2015 ...................... Net income ........................................................... Other comprehensive loss .................................... Dividends and dividend equivalents declared ...... Exercise of stock options ..................................... Release of restricted stock units ........................... Shares issued under the employee stock purchase plan ..................................................... Stock-based compensation expense ..................... Tax benefits from equity awards .......................... Balance as of December 31, 2016 ...................... 38,291 $ 234,201 $ - - - 11,941 - (41,198) - - - 742 772 (1,051) 82,938 $ 35,495 - (18,319 ) - - - 78 - - 2,078 33,459 19 - - - 38,832 240,500 100,114 35,172 - (33,999 ) - - - - - - 7,744 - (32,286) - - - 498 948 (645) 56 - - - 2,227 - 41,650 - 5,928 39,689 265,763 101,287 52,720 - (34,645 ) - - - - - 1,344 - - - - 76 975 53 - - - 2,463 - 44,934 - 1,465 40,793 $ 315,969 $ 119,362 $ 6,260 $ - (449) - - - - - - - 5,811 - (4,345) - - - - - - - 1,466 - (5,681) - - - - - - (4,215) $ 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 52,720 (5,681) (34,645) 1,344 - 2,463 44,934 1,465 431,116 See accompanying notes to consolidated financial statements. 45 MONOLITHIC POWER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2015 2016 2014 52,720 $ 35,172 $ 35,495 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 .................................... (Gain) loss on sales or write-off of property and equipment ...................... Amortization of premium on available-for-sale investments, net ............. (Gain) loss on employee deferred compensation plan investments ............ Change in fair value of contingent consideration ....................................... Deferred taxes, net ..................................................................................... Excess tax benefits from equity awards ..................................................... Stock-based compensation expense ........................................................... Changes in operating assets and liabilities, net of effects of an acquisition: Accounts receivable ............................................................................... Inventories ............................................................................................. 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 maturities and sales of short-term investments ................... Proceeds from sales of long-term investment ............................................ 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 benefits from equity awards ..................................................... Net cash 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 ....................................................... $ Supplemental disclosures for cash flow information: 14,674 57 1,019 (1,257) - (5) (1,465) 44,989 (3,421) (8,323) (11,021) 5,483 8,035 3,165 3,136 107,786 (37,112) - (236,912) 223,344 - (5,046) - (55,726) (300) 1,344 2,463 - (33,099) 1,465 (28,127) (2,090) 21,843 90,860 112,703 $ 13,783 (339 ) 463 133 (2,507 ) 42 (5,928 ) 41,563 (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 $ Cash paid for taxes and interest.................................................................. $ 1,234 $ 3,322 $ 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 ................ $ 787 $ 10,416 $ - $ 2,184 $ 10,109 $ - $ See accompanying notes to consolidated financial statements. 46 13,130 - 237 (141 ) - 17 (10 ) 33,454 (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 1,235 1,487 6,660 2,507 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 consumer, industrial, computing and storage, and communications market segments. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. 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, corporate debt securities, 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 government policies and regulations on trade restrictions and corporate taxes; 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 In general, the functional currency of the Company’s international subsidiaries is 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 (loss) in stockholders’ equity in the Consolidated Balance Sheets. In addition, the Company incurs foreign currency exchange gains or losses related to certain intercompany transactions between the U.S. and its foreign subsidiaries that are denominated in a currency other than 47 the functional currency. In connection with the settlement and remeasurement of the balances, the Company recorded gains of $0.1 million, $0.6 million and $0.1 million for the years ended December 31, 2016, 2015 and 2014, respectively, which were reported in interest and other income, net, in the Consolidated Statements of Operations. 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. Premiums and discounts are amortized or accreted over the life of the related available-for-sale securities. Interest income is recognized when earned. 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 (loss) 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, 2016 and 2015, 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. Production equipment and software 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. Land is not depreciated. 48 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. Impairment of Long-Lived Assets The Company evaluates its long-lived assets other than goodwill 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. Other Long-Term Assets Other assets primarily consist of investments related to the employee deferred compensation plan, intangible assets for the land use rights in Chengdu, China, certain prepaid wafer purchases and purchased patents. The Company amortizes the land use rights over 50 years and the purchased patents over five years. 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. 49 The liabilities for compensation deferred under the plan are recorded at fair value in each reporting period. 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 at the cash surrender value of the corporate-owned life insurance policies and at 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. The following table summarizes the deferred compensation plan amounts in the Consolidated Balance Sheets (in thousands): December 31, 2016 2015 Cash surrender value of corporate-owned life insurance policies .................................... $ Fair value of mutual funds ............................................................................................... Total deferred compensation plan assets .......................................................................... $ 8,180 $ 12,108 20,288 $ 5,706 8,279 13,985 Deferred compensation plan assets reported in: Other long-term assets .................................................................................................. $ 20,288 $ 13,985 Deferred compensation plan liabilities reported in: Accrued compensation and related benefits (short-term) ............................................. $ Other long-term liabilities............................................................................................. Total .............................................................................................................................. $ 479 $ 19,836 20,315 $ - 14,147 14,147 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 to most of the distributors, original equipment manufacturers and electronic manufacturing service providers. For the years ended December 31, 2016, 2015 and 2014, approximately 88%, 88% and 89% of the Company’s sales, respectively, were made through distribution arrangements with third parties. 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 (the Company’s normal payment terms are 30-45 days for its distributors) 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. 50 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. 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 and information related to products in the distribution channel. This reserve is recorded at the time of sale. As of December 31, 2016 and 2015, the reserve for stock rotation rights was $1.9 million and $2.4 million, respectively. If the Company enters into arrangements with distributors that have price adjustment or other rights that are not fixed or determinable, the Company recognizes revenue under such arrangements only after the distributors have sold the products to end customers, at which time the price is no longer subject to adjustment and is fixed, and the products are no longer subject to return except pursuant to warranty terms. A small number of the Company’s U.S. distributors has such rights and accordingly, the Company defers revenue recognition on these shipments until the products are sold to the end customers by the distributors. The deferred revenue balance before the final price and other adjustments from these distributors as of December 31, 2016 and 2015 was $3.7 million and $2.8 million, respectively. The deferred costs as of December 31, 2016 and 2015 were $0.3 million and $0.2 million, respectively. 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 (“RSUs”) with service conditions or performance conditions is based on the grant date share price. The fair value of RSUs with market conditions, as well as RSUs containing both market conditions and performance conditions, is estimated using a Monte Carlo simulation model. The fair value of stock options, shares issued under the employee stock purchase plan and RSUs with a purchase price feature 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 only market conditions, compensation expense is not reversed if the market conditions are not satisfied. 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 achievement of 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. The Company recognized stock-based compensation expense less an estimate for forfeitures. Effective January 1, 2017, the Company elected to account for forfeitures when they occur upon the adoption of Accounting Standards Update (“ASU”) No. 2016-09 (see “Recent Accounting Pronouncements” for further discussion). 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 51 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. Litigation and Contingencies The Company is a party to actions and proceedings in the ordinary course of business, including potential 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, 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), net in the Consolidated Statements of Operations includes primarily patent infringement litigation and other business matters. The Company records litigation costs in the period in which they are incurred. Proceeds resulting from settlement of litigation or favorable judgments are recorded as a reduction against litigation expense. 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 RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. 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 (loss) 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 Stock-Based Compensation: In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how entities account for certain aspects of share-based payment awards, including the accounting for excess tax benefits and tax deficiencies, forfeitures, statutory tax withholding requirements, as well as classification of excess tax benefits in the 52 statements of cash flows. The standard is effective for annual reporting periods beginning after December 15, 2016. The manner of application varies by the different provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. The Company adopted the standard on January 1, 2017 and the primary impact of the adoption on its Consolidated Financial Statements is as follows: ● The Company elected to account for forfeitures of equity awards when they occur. The change was applied on a modified retrospective basis with a cumulative-effect adjustment of approximately $5.1 million to retained earnings as of January 1, 2017. ● All excess tax benefits and deficiencies will be recognized in the income tax provision in the Consolidated Statements of Operations prospectively, rather than in additional paid-in-capital in the Consolidated Balance Sheets. In addition, the standard eliminates the requirement to defer recognition of excess tax benefits until they are realized through a reduction to income taxes payable. The Company applied the modified retrospective method and there was no adjustment to retained earnings as of January 1, 2017, as the deferred tax assets would be fully offset by a valuation allowance. ● The Company will present excess tax benefits as an operating activity in the Consolidated Statements of Cash Flows on a prospective basis. In addition, the Company will present cash payments made to tax authorities in connection with shares withheld to meet statutory tax withholding requirements as a financing activity in the Consolidated Statements of Cash Flows on a retrospective basis. Revenue Recognition: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), 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. The standard defines a five-step process in order to achieve this core principle and requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used by management. 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 Company does not plan to early adopt, and accordingly, the Company will adopt the new standard effective January 1, 2018. While the Company continues to assess the new standard on its accounting policies, processes and system requirements, the primary impact includes the timing of recognition of revenue with certain distributors in the U.S. Currently, sales to these distributors are made under agreements which provide these distributors with price adjustment and other rights. The Company determines that uncertainties on the sales price exist under these arrangements primarily because the amount of price adjustments to be claimed by the distributors is not fixed or determinable. As a result, revenue and costs related to these sales are deferred until the Company receives notification from the distributors that products have been sold to the end customers and the amount of price adjustments is finalized. Under the new standard, the transaction price takes into consideration the effect of variable consideration, which is estimated at the time the promised goods are transferred to the customers. Accordingly, the Company will be required to recognize revenue at the time of shipments to the distributors, adjusted for an estimate of the price adjustments based on the information available at the time. This change will only impact the Company’s accounting for arrangements with certain distributors in the U.S. Revenue from non-U.S. distributors, which make up the majority of the total distributor sales, is currently recognized at the time of shipments to the distributors because these arrangements do not contain price adjustments, or other amounts that are not fixed or determinable. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. A final decision regarding the adoption method has not been finalized at this time. While the Company continues to assess the potential impact of the provisions in the new standard, including the areas described above, the Company cannot reasonably estimate quantitative information related to the impact of the new standard on its financial statements at this time. 53 Others: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires entities to recognize a right-of- use asset and a lease liability on the balance sheets for substantially all leases with a lease term greater than 12 months, including leases currently accounted for as operating leases. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. Entities will apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted after January 1, 2017. The Company is evaluating the impact of the adoption on its annual goodwill impairment test. 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. 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 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 Statement of Operations for the year ended December 31, 2014. 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 required the Company to pay up to an additional $8.9 million to former Sensima shareholders if Sensima achieved 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 initially 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. As part of the quarterly assessment in the fourth quarter of 2015, management reviewed the sales forecast for the products and determined that the projected product revenue in 2016 would likely not meet the minimum target required to earn the 54 contingent consideration, primarily because the product adoption process by customers would 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 released the liability of $2.5 million and recorded the credit in selling, general and administrative expenses in the Consolidated Statement of Operations. On December 31, 2016, management concluded that no contingent consideration was earned as the actual product revenue in 2016 did not meet the minimum target. 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 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 IPR&D was determined using the income approach. During the third quarter of 2015, management determined that the R&D projects were completed and the IPR&D amount was reclassified into developed technologies 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 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 four equal tranches totaling $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 and approved by the Board of Directors. The remaining shares will vest over the following two years. The 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. As of December 31, 2016, stock-based compensation expense of $2.0 million for the first tranche was being recognized over the requisite service period. 55 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 ............................................................................... Corporate debt securities ........................................................................... U.S. treasuries and government agency bonds .......................................... Auction-rate securities backed by student-loan notes ............................... Total ................................................................................................................. $ December 31, 2016 2015 87,747 $ 24,956 - 109,644 45,877 5,354 273,578 $ 58,217 31,640 21,574 - 123,532 5,361 240,324 December 31, 2016 2015 Reported as: Cash and cash equivalents ........................................................................ $ Short-term investments ............................................................................. Long-term investments ............................................................................. Total ................................................................................................................. $ 112,703 $ 155,521 5,354 273,578 $ 90,860 144,103 5,361 240,324 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 ................................................................................................................. $ 47,568 $ 107,953 5,354 160,875 $ 110,898 33,205 5,361 149,464 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, 2016 2015 December 31, 2016 Amortized Cost Unrealized Gains Unrealized Losses Total Fair Value Fair Value of Investments in Unrealized Loss Position - 91,938 Money market funds ......................... $ Corporate debt securities ................... U.S. treasuries and government 24,956 $ 110,429 - $ 65 - $ (850) 24,956 $ 109,644 agency bonds .................................. 45,899 - (22) 45,877 39,275 Auction-rate securities backed by student-loan notes ........................... Total .................................................. $ 5,570 186,854 $ - 65 $ (216) (1,088) $ 5,354 185,831 $ 5,354 136,567 56 December 31, 2015 Amortized 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 31,640 $ 21,574 agency bonds .................................. 123,698 Auction-rate securities backed by student-loan notes ........................... Total .................................................. $ 5,570 182,482 $ - $ - 4 - 4 $ - $ - 31,640 $ 21,574 (170) 123,532 110,720 (209) (379) $ 5,361 182,107 $ 5,361 116,081 There were no redemptions of auction-rate securities for the years ended December 31, 2016 and 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 31 years. As of December 31, 2016 and 2015, the impairment of $0.2 million was determined to be temporary based on the following management assessment: ● 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; ● 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; ● 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; ● The majority of the securities remain AAA or AA+ rated; ● All scheduled interest payments have been made pursuant to the reset terms and conditions; and ● All redemptions of these securities to date, representing 87% of the original portfolio, have been at par. 4. FAIR VALUE MEASUREMENT The following table details the fair value measurement of the financial assets (in thousands): Fair Value Measurement at December 31, 2016 Quoted Prices in Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3 Total Money market funds .................................... $ Corporate debt securities .............................. U.S. treasuries and government agency 24,956 $ 109,644 24,956 $ - - $ 109,644 bonds .......................................................... 45,877 Auction-rate securities backed by student- loan notes ................................................... 5,354 - - 45,877 - Mutual funds under deferred compensation plan ............................................................ Total ............................................................. $ 12,108 197,939 $ 12,108 37,064 $ - 155,521 $ - - - 5,354 - 5,354 57 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 - - - Money market funds ..................................... $ Certificates of deposit.................................... U.S. treasuries and government agency 31,640 $ 21,574 31,640 $ - - $ 21,574 bonds ........................................................... 123,532 Auction-rate securities backed by student- loan notes .................................................... 5,361 Mutual funds under deferred compensation - - 123,532 - 5,361 8,279 190,386 $ plan ............................................................. Total .............................................................. $ _________________ ● Level 1—includes instruments with quoted prices in active markets for identical assets. ● Level 2—includes instruments for which the valuations are based upon quoted market prices in active markets involving similar assets or inputs other than quoted prices that are observable for the assets. The market inputs used to value these instruments generally consist of market yields, recently executed transactions, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources may include industry standard data providers, security master files from large financial institutions, and other third party sources used to determine a daily market value. - 145,106 $ 8,279 39,919 $ - 5,361 ● Level 3—includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement. 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, 2015 ........................................................................................................................ $ Change in unrealized loss included in other comprehensive loss .............................................................. Balance at December 31, 2015 .................................................................................................................. Change in unrealized loss included in other comprehensive loss .............................................................. Balance at December 31, 2016 .................................................................................................................. $ 5,389 (28) 5,361 (7) 5,354 The Company determined the fair value of the auction-rate securities using a discounted cash flow model with the following assumptions: December 31, Time-to-liquidity (months) .............................................................................................. Discount rate ................................................................................................................... 4.3% - 9.3% 4.3% - 7.3% 2016 24 2015 24 5. BALANCE SHEET COMPONENTS Inventories Inventories consist of the following (in thousands): Raw materials .................................................................................................. $ Work in process ............................................................................................... Finished goods ................................................................................................. Total ................................................................................................................. $ 14,599 $ 26,048 30,822 71,469 $ 14,907 21,177 27,125 63,209 December 31, 2016 2015 58 Other Current Assets Other current assets consist of the following (in thousands): Prepaid wafer purchase .................................................................................... $ Other prepaid expense ...................................................................................... Other ............................................................................................................... Total ................................................................................................................. $ 5,000 $ 2,249 1,794 9,043 $ - 2,128 798 2,926 December 31, 2016 2015 Property and Equipment, Net Property and equipment, net, consist of the following (in thousands): December 31, 2016 2015 Production equipment and software ................................................................. $ Buildings and improvements ........................................................................... Transportation equipment ................................................................................ Land ................................................................................................................. Furniture and fixtures ....................................................................................... Leasehold improvements ................................................................................. Property and equipment, gross ......................................................................... Less: accumulated depreciation and amortization ............................................ Total ................................................................................................................. $ 95,565 $ 48,964 11,291 8,285 3,518 2,838 170,461 (85,290) 85,171 $ 92,208 34,736 4,694 5,600 2,962 2,283 142,483 (77,124) 65,359 Depreciation and amortization expense was $12.6 million, $12.0 million and $12.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. Other Long-Term Assets Other long-term assets consist of the following (in thousands): Deferred compensation plan assets .................................................................. $ Prepaid wafer purchase .................................................................................... Other prepaid expense ...................................................................................... Other ................................................................................................................ Total ................................................................................................................. $ 20,288 $ 5,000 1,117 1,006 27,411 $ December 31, 2016 2015 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2016 2015 Dividends and dividend equivalents ................................................................ $ Deferred revenue and customer prepayments .................................................. Stock rotation reserve ....................................................................................... Income tax payable .......................................................................................... Warranty .......................................................................................................... Commissions .................................................................................................... Sales rebate ...................................................................................................... Other ................................................................................................................ Total ................................................................................................................. $ 8,946 $ 6,799 1,937 1,239 1,030 1,008 441 1,516 22,916 $ 59 13,985 - 1,257 1,099 16,341 8,675 5,236 2,372 465 289 763 268 1,916 19,984 Other Long-Term Liabilities Other long-term liabilities consist of the following (in thousands): December 31, 2016 2015 Deferred compensation plan liabilities ............................................................. $ Dividend equivalents........................................................................................ Other ................................................................................................................ Total ................................................................................................................. $ 19,836 $ 3,294 89 23,219 $ 14,147 2,019 379 16,545 6. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET There have been no changes in the goodwill balance for the years ended December 31, 2016 and 2015. The Company did not identify any goodwill impairment for the years ended December 31, 2016, 2015 and 2014. Acquisition-related intangible assets consist of the following (in thousands): Know-how ........................................................................ $ Developed technologies ................................................... Total ................................................................................. $ 1,018 $ 6,466 7,484 $ (500) $ (3,982) (4,482) $ 518 2,484 3,002 Gross Amount December 31, 2016 Accumulated Amortization Net Amount Gross Amount December 31, 2015 Accumulated Amortization Net Amount Know-how ........................................................................ $ Developed technologies ................................................... Total ................................................................................. $ 1,018 $ 6,466 7,484 $ (297) $ (2,134) (2,431) $ 721 4,332 5,053 Amortization expense is recorded in cost of revenue in the Consolidated Statements of Operations and totaled $2.1 million, $1.8 million and $0.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. The estimated future amortization expense as of December 31, 2016 is as follows (in thousands): 2017 ...................................................................................................................................................... $ 2018 ...................................................................................................................................................... 2019 ...................................................................................................................................................... Total ...................................................................................................................................................... $ 2,051 841 110 3,002 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, 60 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, 2016, 3.8 million shares remained available for future issuance under the 2014 Plan. 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 ................................................................................. $ 1,575 $ 14,041 29,373 44,989 $ 1,166 $ 11,156 29,241 41,563 $ 903 9,019 23,532 33,454 2016 Year Ended December 31, 2015 2014 In the first quarter of 2016, the Company’s then Chief Financial Officer retired. As the service or performance conditions for certain of her RSUs had not been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested shares and recorded the credit in selling, general and administrative expenses for the three months ended March 31, 2016. RSUs The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market and performance conditions (“MPSUs”), and RSUs with market conditions (“MSUs”). Vesting of all awards requires continued service for 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 RSU activity is presented in the table below (in thousands, except per-share amounts): Weighted- Average Grant Date Fair Value Per Share Time- Based RSUs PSUs and MPSUs Weighted- Average Grant Date Fair Value Per Share Weighted- Average Grant Date Fair Value Per Share Weighted- Average Grant Date Fair Value Per Share MSUs Total Outstanding at January 1, 2014 ......... Granted ....................... Released ...................... Forfeited ...................... Outstanding at December 31, 2014 ... Granted ....................... Released ...................... Forfeited ...................... Outstanding at December 31, 2015 ... Granted ....................... Released ...................... Forfeited ...................... Outstanding at 754 $ 335 $ (468 ) $ (32 ) $ 589 $ 271 $ (319 ) $ (42 ) $ 499 $ 133 $ (239 ) $ (27 ) $ 19.41 36.71 20.36 19.75 1,028 $ 952 (1) $ $ (304) $ (17) 23.02 34.65 18.12 19.79 1,800 $ - $ - $ - $ 23.57 - - - 3,582 $ 1,287 $ (772 ) $ (49 ) $ 28.48 49.82 26.56 35.60 1,659 $ 927 (1) $ $ (629) $ (24) 28.11 47.61 23.40 28.68 1,800 $ - $ - $ - $ 23.57 - - - 4,048 $ 1,198 $ (948 ) $ (66 ) $ 40.75 63.00 36.43 45.35 1,933 $ 1,216 (1) $ $ (736) $ (129) 38.99 41.12 29.71 36.82 1,800 $ - $ - $ (180) $ 23.57 - - 23.57 4,232 $ 1,349 $ (975 ) $ (336 ) $ 22.53 35.19 19.48 19.77 26.14 48.11 24.47 33.06 32.64 43.28 31.36 30.38 December 31, 2016 ... 366 $ 51.35 2,284 $ 43.24 1,620 $ 23.57 4,270 $ 36.47 _________________ (1) Amount reflects the number of PSUs and MPSUs that may ultimately be earned based on management’s probability assessment of the performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions. The intrinsic value related to awards released was $62.9 million, $49.2 million and $28.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, the total intrinsic value of all outstanding awards 61 was $332.9 million, based on the closing stock price of $81.93. As of December 31, 2016, unamortized compensation expense related to all outstanding awards was approximately $84.8 million with a weighted-average remaining recognition period of approximately four years. Time-Based RSUs: For the years ended December 31, 2016, 2015 and 2014, the Board of Directors granted 133,000, 271,000 and 335,000 RSUs, respectively, with service conditions primarily to employees and non-employee directors. The RSUs generally vest over four years for employees and one year for non-employee directors, subject to continued employment with the Company. 2016 PSUs: In February 2016, the Board of Directors granted 285,000 PSUs to the executive officers, which represent a target number of shares to be awarded based on the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2016 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the 2016 Executive PSUs. 50% of the 2016 Executive PSUs will vest in the first quarter of 2018 if the pre-determined performance goals are met during the performance period and approved by the Board of Directors. The remaining 2016 Executive PSUs will vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In March 2016, the Company cancelled 32,000 2016 Executive PSUs as a result of the departure of its then Chief Financial Officer. In July 2016, the Board of Directors granted 12,000 2016 Executive PSUs to the Company’s new Chief Financial Officer. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2016 Executive PSUs is approximately $31.8 million. In February 2016, the Board of Directors granted 64,000 PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s 2017 revenue goals for certain regions or product line divisions, or the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two- year revenue growth rate as published by the Semiconductor Industry Association (“2016 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2016 Non- Executive PSUs, depending on the job classification of the employee. 50% of the 2016 Non-Executive PSUs will vest in the first quarter of 2018 if the pre-determined performance goals are met during the performance period and approved by the Board of Directors. The remaining 2016 Non-Executive PSUs 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 2016 Non-Executive PSUs is approximately $6.0 million. The 2016 Executive PSUs and the 2016 Non-Executive 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. The Company determined the grant date fair value of the 2016 Executive PSUs and the 2016 Non-Executive PSUs granted in February 2016 using the Black-Scholes model with the following assumptions: stock price of $58.98, expected term of 2.6 years, expected volatility of 31.1% and risk-free interest rate of 0.9%. For the 2016 Executive PSUs granted in July 2016, the Company used the following assumptions: stock price of $70.98, expected term of 2.3 years, expected volatility of 29.6% and risk-free interest rate of 0.7%. 2015 MPSUs: On December 31, 2015, the Board of Directors granted 127,000 MPSUs to the executive officers and certain key employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2015 MPSUs. 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: 62  1. 2. Successful implementation of full digital solutions vs. current analog topology for certain products. Successful implementation, and adoption by a key player, of integrated, software-based field-oriented-control with sensors to motor drivers. Successful implementation of certain advanced power analog processes. Successful design wins and achievement of a specific level of revenue with a global networking customer. 3. 4. 5. Achievement of a specific level of revenue with a global electronics manufacturer. 6. 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 and approved by the Board of Directors. In addition, the 2015 MPSUs contain post-vesting sales restrictions on 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%, and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. In March 2016, the Company cancelled 13,000 2015 MPSUs as a result of the departure of its then Chief Financial Officer. Assuming the achievement of all of the required performance goals, the total stock-based compensation cost for the 2015 MPSUs is approximately $24.6 million to be recognized as follows: $8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for the third tranche, and $6.6 million for the fourth tranche. For the first tranche, stock-based compensation expense is recognized over the requisite service period even if the market conditions are not satisfied. For the second, third and fourth tranches, stock-based compensation expense for each tranche is recognized depending upon the number of the operating metrics management deems probable of being achieved in each reporting period. As of December 31, 2016, based on management’s assessment, three of the six operating metrics were considered probable of being achieved during the performance period. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranches over the requisite service period. 2015 PSUs: In February 2015, the Board of Directors granted 172,000 PSUs to the executive officers, which represented a target number of shares that would 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 published by the Semiconductor Industry Association (“2015 Executive PSUs”). The maximum number of shares that an executive officer could earn was 300% of the target number of the 2015 Executive PSUs. 50% of the 2015 Executive PSUs would vest in the first quarter of 2017 if the pre- determined performance goals were met during the performance period and approved by the Board of Directors. The remaining 2015 Executive PSUs would vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In March 2016, the Company cancelled 19,000 2015 Executive PSUs as a result of the departure of its then Chief Financial Officer. In February 2017, the Board of Directors approved the revenue achievement for the 2015 Executive PSUs and a total of 432,000 shares were earned by the executive officers. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the 2015 Executive PSUs is approximately $21.0 million. In February 2015, the Board of Directors granted 58,000 PSUs to certain non-executive employees, which represented a target number of shares that would be awarded based on the Company’s 2016 revenue goals for certain regions or product line divisions, or 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 published by the Semiconductor Industry Association (“2015 Non- Executive PSUs”). The maximum number of shares that an employee could earn was either 200% or 300% of the target number of the 2015 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2015 Non- Executive PSUs would vest in the first quarter of 2017 if the pre-determined performance goals were met during the performance period and approved by the Board of Directors. The remaining 2015 Non-Executive PSUs would 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 2017, the Board of Directors approved the revenue achievement for the 2015 Non-Executive PSUs and a total of 118,000 shares were earned by the employees. Based on the actual achievement of the performance goals, the total stock- based compensation cost for the 2015 Non-Executive PSUs is approximately $5.7 million. 63 2014 PSUs: In February 2014, the Board of Directors granted 252,000 PSUs to the executive officers, which represented a target number of shares 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 published by the Semiconductor Industry Association (“2014 Executive PSUs”). The maximum number of shares that an executive officer could earn was 300% of the target number of the 2014 Executive PSUs. In February 2016, the Board of Directors approved the revenue achievement for the 2014 Executive PSUs and a total of 694,000 shares were earned by the executive officers. 50% of the 2014 Executive PSUs vested in the first quarter of 2016. The remaining 2014 Executive PSUs vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In March 2016, the Company cancelled 37,000 2014 Executive PSUs as a result of the departure of its then Chief Financial Officer. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the 2014 Executive PSUs is approximately $20.7 million. In April 2014, the Board of Directors granted 61,000 PSUs to certain non-executive employees, which represented a target number of shares 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 published by the Semiconductor Industry Association (“2014 Non-Executive PSUs”). The maximum number of shares that an employee could earn was either 200% or 300% of the target number of the 2014 Non-Executive PSUs, depending on the job classification of the employee. In February 2016, the Board of Directors approved the revenue achievement for the 2014 Non-Executive PSUs and a total of 103,000 shares were earned by the non- executive employees. 50% of the 2014 Non-Executive PSUs vested in the second quarter of 2016. The remaining 2014 Non- Executive PSUs 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 2014 Non-Executive PSUs is approximately $3.7 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 PSUs: In February 2013, the Board of Directors granted 220,000 PSUs 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 shares that an executive officer could earn was 300% of the target number of the 2013 Executive PSUs. In February 2015, the Board of Directors 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. In March 2016, the Company cancelled 18,000 2013 Executive PSUs as a result of the departure of its then Chief Financial Officer. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the 2013 Executive PSUs is approximately $15.0 million. In February 2013, the Board of Directors granted 91,000 PSUs 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 shares that an employee could earn was either 200% or 300% of the target number of 2013 Non-Executive PSUs, depending on the job classification of the employee. In February 2015, the Board of Directors 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. 2013 MSUs: In December 2013, the Board of Directors granted 360,000 MSUs to the executive officers and certain key employees, which represented a target number of shares 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 shares that an employee could earn was 500% of the target number of the 2013 MSUs. The 2013 MSUs 64 will vest quarterly from January 1, 2019 to December 31, 2023 if the pre-determined performance goals were met during the performance period and approved by the Board of Directors. 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. In March 2016, the Company cancelled 36,000 2013 MSUs as a result of the departure of its then Chief Financial Officer. 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% and risk-free interest rate of 1.6%. The total stock-based compensation cost for the 2013 MSUs is approximately $38.2 million. Stock Options No stock options were granted for the years ended December 31, 2016, 2015 and 2014. A summary of stock option activity is presented in the table below: Outstanding at January 1, 2014 .................... Exercised .................................................. Forfeited and expired ................................ Outstanding at December 31, 2014 .............. Exercised .................................................. Forfeited and expired ................................ Outstanding at December 31, 2015 .............. Exercised .................................................. Outstanding at December 31, 2016 .............. Options exercisable at December 31, 2016 Shares (in thousands) 1,356 $ (742) $ (24) $ 590 $ (498) $ (2) $ 90 $ (76) $ 14 $ and expected to vest ................................... Options exercisable at December 31, 2016 . 14 $ 14 $ Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) 25,506 1.9 $ 1.2 $ 20,039 1.3 $ 4,134 1.0 $ 1.0 $ 1.0 $ 921 921 921 15.86 16.09 10.07 15.80 15.55 6.10 17.50 17.80 15.88 15.88 15.88 Total intrinsic value of options exercised was $3.7 million, $18.6 million and $17.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. Proceeds from stock option exercises were $1.3 million, $7.7 million and $11.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. At December 31, 2016, there was no unamortized compensation expense. 2004 Employee Stock Purchase Plan (“ESPP”) Under 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 annual increase by an amount equal to the least 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, 2016, approximately 4.6 million shares were available for future issuance. 65 For the years ended December 31, 2016, 2015 and 2014, 53,000, 56,000 and 78,000 shares, respectively, were issued under the ESPP. The intrinsic value of the shares issued was $1.0 million, $0.6 million and $0.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. The unamortized expense as of December 31, 2016 was $93,000, which will be recognized through the first quarter of 2017. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions: 2016 Year Ended December 31, 2015 2014 Expected term (years) ................................................ Expected volatility ..................................................... Risk-free interest rate ................................................. Dividend yield ............................................................ 0.5 28.6% 0.4% 1.2% 0.5 30.3% 0.2% 1.4% 0.5 29.4% 0.1% 0.7% Cash proceeds from the shares issued under the ESPP were $2.5 million, $2.2 million and $2.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. 8. STOCK REPURCHASE PROGRAMS In July 2013, the Board of Directors approved a stock repurchase program (the “2013 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 2013 Program through December 31, 2015. The 2013 Program expired as of December 31, 2015 with a remaining unused balance of $5.9 million. Shares were retired upon repurchase under the 2013 Program. In February 2016, the Board of Directors approved a stock repurchase program (the “2016 Program”) that authorized the Company to repurchase up to $50 million in the aggregate of its common stock through December 31, 2016. In December 2016, the Board of Directors approved an extension of the 2016 Program through December 31, 2017. The following table summarizes the repurchase activity under the programs (in thousands, except per-share amounts): 2016 Year Ended December 31, 2015 2014 Shares repurchased ..................................................... Average price per share .............................................. $ Total amount .............................................................. $ - - $ - $ 645 50.05 $ 32,286 $ 1,051 39.19 41,198 As of December 31, 2016, $50 million remained available for future repurchases under the 2016 Program. Shares will be retired upon repurchase. 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. Based on the Company’s historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared by our Board of Directors, which are payable to the stockholders in the following month. The Board of Directors declared the following cash dividends (in thousands, except per-share amounts): 2016 Year Ended December 31, 2015 2014 Dividend declared per share ....................................... $ Total amount .............................................................. $ 0.80 $ 32,434 $ 0.80 $ 31,618 $ 0.45 17,466 As of December 31, 2016 and 2015, accrued dividends totaled $8.2 million and $7.9 million, respectively. The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other things, the Company’s financial condition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, compliance with the terms of future indebtedness and credit facilities and other factors that 66 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 plans, outstanding RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. As of December 31, 2016 and 2015, accrued dividend equivalents totaled $4.1 million and $2.8 million, respectively. 10. INTEREST AND OTHER INCOME, NET The components of interest and other income, net are as follows (in thousands): Interest income ................................................................................... $ Amortization of premium on available-for-sale investments ............. Gain (loss) on employee deferred compensation plan investments .... Foreign currency exchange gain ........................................................ Other................................................................................................... Total ................................................................................................... $ 2,488 $ (1,019) 1,257 65 26 2,817 $ 1,608 $ (463 ) (375 ) 608 43 1,421 $ 1,112 (237 ) 141 80 (4 ) 1,092 Year Ended December 31, 2015 2016 2014 11. 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, 2015 2016 2014 Numerator: Net income ...................................................................................... $ 52,720 $ 35,172 $ 35,495 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 net 40,436 1,479 39,470 1,399 38,686 1,107 income per share .......................................................................... 41,915 40,869 39,793 Net income per share: Basic .............................................................................................. $ Diluted ............................................................................................ $ 1.30 $ 1.26 $ 0.89 $ 0.86 $ 0.92 0.89 Anti-dilutive common stock equivalents were not material in any of the periods presented. 67 12. INCOME TAXES The components of income before income taxes are as follows (in thousands): Year Ended December 31, 2015 2014 2016 United States ................................................................................ $ International ................................................................................. Total income before income taxes ................................................ $ (14,431) $ 71,695 57,264 $ (247) $ 42,738 42,491 $ 3,173 33,219 36,392 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, 2016 and 2015, the unremitted earnings of foreign subsidiaries were $284.8 million and $214.3 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, 2015 2014 2016 Current: Federal ...................................................................................... $ State .......................................................................................... Foreign ...................................................................................... Deferred: Foreign ...................................................................................... Total income tax provision ........................................................... $ 2,527 $ - 2,013 4 4,544 $ 6,042 $ 2 1,213 62 7,319 $ The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows: Year Ended December 31, 2015 2014 2016 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 .......................................................................... 34.0 % - (41.1) 11.0 2.2 1.8 7.9 % 34.0 % 6.2 (43.1) 17.6 - 2.5 17.2 % The components of net deferred tax assets consist of the following (in thousands): 18 (28 ) 943 (36 ) 897 34.0% - (27.7) 5.9 (9.3) (0.4) 2.5% Deferred tax assets: Research tax credits .................................................................................. $ Deferred compensation ............................................................................. Stock-based compensation ........................................................................ Other expenses not currently deductible ................................................... Depreciation and amortization .................................................................. Total deferred tax assets ................................................................................... Valuation allowance ......................................................................................... Net deferred tax assets ..................................................................................... $ December 31, 2016 2015 9,817 $ 6,752 7,283 3,974 161 27,987 (27,354) 633 $ 8,869 5,038 1,912 3,519 (52) 19,286 (18,614) 672 68 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, 2016 and 2015, the Company had a valuation allowance of $27.4 million and $18.6 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, 2016, the Company did not have federal net operating loss carryforwards. As of December 31, 2016, the state net operating loss carryforwards for income tax purposes were approximately $20.3 million, which will expire beginning in 2017. $20.3 million of the state net operating loss carryforwards were related to excess tax benefits as a result of stock option exercises and RSU releases and therefore was recorded in additional paid-in-capital in the period that they became realized. The Company has elected to follow the “with and without” approach to account for excess tax benefits from stock options exercises and RSU releases. In addition, the Company only considered the direct effects of stock option exercises and RSU releases when calculating the amount of windfalls or shortfalls. As of December 31, 2016, the Company had research tax credit carryforwards of $17.8 million for federal income tax purposes, which will begin to expire in 2026, and $18.3 million for state income tax purposes, which can be carried forward indefinitely. $8.1 million of the federal research tax credit and $1.8 million of the state research tax credit carryforwards were related to excess tax benefits as a result of stock option exercises and RSU releases and therefore were recorded in additional paid-in-capital in the period that they became realized. Upon adoption of ASU No. 2016-09 on January 1, 2017, all excess tax benefits and deficiencies related to equity awards will be recognized in the income tax provision in the Consolidated Statements of Operations prospectively, rather than in additional paid-in-capital in the Consolidated Balance Sheets. In addition, the standard eliminates the requirement to defer recognition of excess tax benefits until they are realized through a reduction to income taxes payable. The Company applied the modified retrospective method and there was no adjustment to retained earnings as of January 1, 2017, as the deferred tax assets would be fully offset by a valuation allowance. The Company expects increased volatility to the income tax provision in future periods dependent upon, among other variables, the price of its common stock and the timing and volume of equity award vesting. 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 Protecting Americans from Tax Hikes (“PATH”) Act of 2015 permanently extends the R&D credit retroactively as of January 1, 2015. The Company had an increase to its federal R&D credits of approximately $2.2 million for qualifying amounts incurred in 2016. 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, 2016. The Company will continue to monitor developments related to this opinion and the potential impact on its financial statements. 69 At December 31, 2016, the Company had $14.4 million of unrecognized tax benefits, $3.5 million of which would affect its effective tax rate if recognized after considering the valuation allowance. 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. A reconciliation of the gross unrecognized tax benefits is as follows (in thousands): Balance as at January 1, 2014 ............................................................................................................... $ Increase for tax position of prior year ............................................................................................... Increase for tax position of current year ........................................................................................... Decrease due to lapse of statue of limitation ..................................................................................... Balance as of December 31, 2014 ......................................................................................................... Increase for tax position of current year ............................................................................................ Decrease related to settlement with tax authorities ........................................................................... Decrease due to lapse of statue of limitation ..................................................................................... Decrease for tax position of prior year .............................................................................................. Balance as of December 31, 2015 ......................................................................................................... Increase for tax position of prior year ............................................................................................... Increase for tax position of current year ........................................................................................... Balance as of December 31, 2016 ......................................................................................................... $ 14,922 584 1,760 (860) 16,406 1,964 (4,162) (669) (1,446) 12,093 243 2,095 14,431 The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2016 and 2015, the Company has approximately $0.3 million and $0.2 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. The Company currently has reduced tax rates in its subsidiaries in Chengdu and Hangzhou, China for performing research and development activities through 2017 and 2019, respectively. In addition, the Company currently has a tax holiday in Switzerland, which allows for tax-free operations through 2018. The tax holiday and tax incentives had an insignificant impact on earnings per share for the periods presented. Income Tax Examinations The Company is subject to examination of its income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. The Company’s U.S. Federal income tax return for the year ended December 31, 2014 was under examination by the IRS in 2016. In January 2017, the IRS completed its examination with no adjustments. 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. 70 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 was final and no additional payment would 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. 13. COMMITMENTS AND CONTINGENCIES Lease Obligations As of December 31, 2016, future minimum payments under the non-cancelable operating leases were as follows (in thousands): 2017 ...................................................................................................................................................... $ 2018 ...................................................................................................................................................... 2019 ...................................................................................................................................................... 2020 ...................................................................................................................................................... Total ...................................................................................................................................................... $ 969 368 249 114 1,700 The Company leases warehouse space, sales and marketing, and research and development offices in China, Japan, Korea, the United States and Europe. Certain of the Company’s facility leases provide for periodic rent increases. Rent expense for the years ended December 31, 2016, 2015 and 2014 was $1.7 million, $1.8 million and $1.5 million, respectively. Warranty and Indemnification Provisions The changes in warranty reserves are as follows (in thousands): 2016 Year Ended December 31, 2015 2014 Balance at beginning of period ......................................... $ Warranty provision for product sales ............................... Settlements made ............................................................. Unused warranty provision .............................................. Balance at end of period ................................................... $ 289 $ 1,102 (68) (293) 1,030 $ 240 $ 333 (158) (126) 289 $ 451 282 (42 ) (451 ) 240 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. 71 14. LITIGATION The Company is a party to actions and proceedings in the ordinary course of business, including potential 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 potential claims. Silergy In December 2016, the Company settled a patent infringement lawsuit with Silergy Corp. and was awarded a total of $3.0 million pursuant to a settlement and license agreement. Under the agreement, the parties agreed to a mutual release of past claims and covenant not to sue provisions, and grant of certain patent licenses for future use. Based on their relative fair values, the Company allocated approximately $0.6 million to the settlement which was recorded as a credit to litigation expense in the Consolidated Statement of Operations for the year ended December 31, 2016. The remaining $2.4 million was allocated to the grant of the patent licenses for future use and will be recognized ratably over five years. 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 United States 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 credit to litigation expense in the Consolidated Statement 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. 15. 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 for the years ended December 31, 2016, 2015 and 2014. 72 16. SIGNIFICANT CUSTOMERS The Company sells its products primarily through third-party distributors and value-added resellers, and directly to original equipment manufacturers, original design manufacturers and electronic manufacturing service providers. The following table summarizes the only customer with sales greater than 10% of the Company's total revenue: Customer Distributor A ...................................... 2016 Year Ended December 31, 2015 2014 22% 24 % 26% The following table summarizes those customers with accounts receivable balances greater than 10% of the Company’s total accounts receivable: Customer Distributor A ................................................................................ Distributor B ................................................................................ December 31, 2016 2015 19% 17% 28% 17% 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 an agreement with the distributor. 17. 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 consumer, industrial, computing and storage, and communications 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 ............................................................................. Korea ............................................................................... Europe ............................................................................. Southeast Asia .................................................................. Japan ................................................................................ United States .................................................................... Other ................................................................................ Total ................................................................................ $ 2016 Year Ended December 31, 2015 2014 245,169 $ 45,414 27,710 27,554 19,645 14,318 8,567 288 388,665 $ 213,119 $ 41,521 20,519 22,603 18,592 9,727 6,732 254 333,067 $ 181,050 38,460 14,362 19,830 13,993 8,251 6,392 197 282,535 73 The following is a summary of revenue by market segments (in thousands): Market Segment Consumer ......................................................................... $ Industrial .......................................................................... Computing and storage..................................................... Communications .............................................................. Total ................................................................................ $ 2016 Year Ended December 31, 2015 2014 153,732 $ 89,639 80,562 64,732 388,665 $ 145,090 $ 66,343 56,568 65,066 333,067 $ 122,733 49,037 46,147 64,618 282,535 The following is a summary of revenue by major product families (in thousands): Product Family DC to DC ........................................................................ $ Lighting Control .............................................................. Total ................................................................................ $ 2016 Year Ended December 31, 2015 2014 350,930 $ 37,735 388,665 $ 299,726 $ 33,341 333,067 $ 253,083 29,452 282,535 The following is a summary of long-lived assets by geographic regions (in thousands): Country United States .................................................................................................... $ China ................................................................................................................ Bermuda ........................................................................................................... Taiwan ............................................................................................................. Other ................................................................................................................ Total ................................................................................................................. $ 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) December 31, 2016 2015 50,242 $ 45,728 9,573 8,919 571 115,033 $ 40,405 40,738 11,624 126 431 93,324 The following table summarizes the changes in accumulated other comprehensive income (loss) (in thousands): Unrealized Losses on Available- for-Sale Securities Foreign Currency Translation Adjustments Balance as of January 1, 2015 ............................................................ $ Other comprehensive loss before reclassifications ......................... Amounts reclassified from accumulated other comprehensive income .......................................................................................... Net current period other comprehensive loss .................................. Balance as of December 31, 2015 ...................................................... Other comprehensive loss before reclassifications ......................... Amounts reclassified from accumulated other comprehensive income (loss) ................................................................................ Net current period other comprehensive loss .................................. Balance as of December 31, 2016 ...................................................... $ (196) $ (174) (5) (179) (375) (623) (25) (648) (1,023) $ 6,007 $ (4,166 ) - (4,166 ) 1,841 (5,033 ) - (5,033 ) (3,192 ) $ Total 5,811 (4,340 ) (5 ) (4,345 ) 1,466 (5,656 ) (25 ) (5,681 ) (4,215 ) The amounts reclassified from accumulated other comprehensive income (loss) were recorded in interest and other income, net, in the Consolidated Statements of Operations. 74 19. QUARTERLY FINANCIAL DATA (UNAUDITED) Three Months Ended December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 (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 ........................................ Net income ....................................................... $ 103,618 $ 47,107 56,511 106,456 $ 48,531 57,925 17,974 21,316 (321) 38,969 17,542 897 18,439 1,866 16,573 $ 20,472 22,397 55 42,924 15,001 780 15,781 1,408 14,373 $ 94,079 $ 43,153 50,926 17,876 21,531 (8) 39,399 11,527 597 12,124 926 11,198 $ Net income per share: Basic ....................................................... $ Diluted .................................................... $ 0.41 $ 0.39 $ 0.35 $ 0.34 $ 0.28 $ 0.27 $ Weighted-average shares outstanding: Basic ....................................................... Diluted .................................................... 40,739 42,404 40,590 41,895 40,387 41,716 84,512 39,002 45,510 17,321 17,768 45 35,134 10,376 543 10,919 344 10,575 0.26 0.25 40,028 41,646 Cash dividends declared per common share ..... $ 0.20 $ 0.20 $ 0.20 $ 0.20 Three Months Ended December 31, 2015 September 30, 2015 June 30, 2015 March 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 ....................................................... $ 86,918 $ 40,001 46,917 16,734 18,107 283 35,124 11,793 550 12,343 2,233 10,110 $ 91,194 $ 41,754 49,440 17,272 18,722 136 36,130 13,310 (6) 13,304 2,103 11,201 $ 81,416 $ 37,287 44,129 15,743 17,964 311 34,018 10,111 235 10,346 2,447 7,899 $ Net income per share: Basic ....................................................... $ Diluted .................................................... $ 0.26 $ 0.24 $ 0.28 $ 0.28 $ 0.20 $ 0.19 $ Weighted-average shares outstanding: Basic ....................................................... Diluted .................................................... 39,615 41,445 39,592 40,689 39,570 40,745 73,538 33,855 39,683 16,038 17,518 270 33,826 5,857 642 6,499 536 5,963 0.15 0.15 39,105 40,596 Cash dividends declared per common share ..... $ 0.20 $ 0.20 $ 0.20 $ 0.20 75 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, 2016, 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, 2016. 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, 2016 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. 76 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, 2016, 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, 2016, 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, 2016 of the Company and our report dated March 1, 2017 expressed an unqualified opinion on those financial statements. /s/ DELOITTE & TOUCHE LLP San Jose, California March 1, 2017 77 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 Annual Meeting of Stockholders (the “2017 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 “Executive Officer Compensation” in the Company’s Proxy Statement for the 2017 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 2017 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 2017 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 2017 Annual Meeting, and is incorporated herein by reference. 78 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. 79 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. 10.17+(25) Employment Agreement with Bernie Blegen 21.1 23.1 24.1 31.1 31.2 Subsidiaries of Monolithic Power Systems, Inc. Consent of Independent Registered Public Accounting Firm. Power of Attorney (included on Signature page to this Form 10-K). 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 XBRL Taxonomy Extension Presentation 101.PRE __________ + † 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. * (1) (2) 80 (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) 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. 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), 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.), 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.), filed with the Securities and Exchange Commission on November 3, 2014. 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 July 22, 2016. 81 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: March 1, 2017 MONOLITHIC POWER SYSTEMS, INC. By: /s/ MICHAEL HSING Michael Hsing President and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael Hsing and T. Bernie Blegen, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him 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 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 March 1, 2017 by the following persons on behalf of the registrant and in the capacities indicated: /S/ MICHAEL HSING MICHAEL R. HSING /S/ T. BERNIE BLEGEN T. BERNIE BLEGEN /S/ HERBERT CHANG HERBERT CHANG /S/ EUGEN ELMIGER EUGEN ELMIGER /S/ VICTOR K. LEE VICTOR K. LEE /S/ JAMES C. MOYER JAMES C. MOYER /S/ JEFF ZHOU JEFF ZHOU President, Chief Executive Officer, and Director (Principal Executive Officer) Chief Financial Officer (Principal Financial and Accounting Officer) Director Director Director Director Director 82 This page intentionally left blank This page intentionally left blank 

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