Monolithic Power Systems
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2017 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) Delaware77-0466789(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification 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 className of each exchange on which registeredCommon Stock, $0.001 Par ValueThe 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 of1934 (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 thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor 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 DataFile 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 suchshorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ 1Table of Contents Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Kor 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, smaller reporting company,or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growthcompany” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying withany new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price ofthe Common Stock on the Nasdaq Global Select Market on June 30, 2017 was $3.1 billion.* There were 42,132,242 shares of the registrant’s common stock issued and outstanding as of February 21, 2018. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the registrant’s 2018 Annual Meeting of Stockholders are incorporated by reference into Part IIIof 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, 2017. *Excludes 8,933,704 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, 2017. Exclusion of such shares should not be construed to indicate that any such personpossesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person iscontrolled by or under common control with the registrant. 2Table of Contents MONOLITHIC POWER SYSTEMS, INC.TABLE OF CONTENTS Page PART I Item 1.Business5 Executive Officers of the Registrant9Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments25Item 2.Properties26Item 3.Legal Proceedings26Item 4.Mine Safety Disclosures26 PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities27Item 6.Selected Financial Data29Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations30Item 7A.Quantitative and Qualitative Disclosures About Market Risk41Item 8.Financial Statements and Supplementary Data43Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure77Item 9A.Controls and Procedures77Item 9B.Other Information79 PART III Item 10.Directors, Executive Officers and Corporate Governance79Item 11.Executive Compensation79Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters79Item 13.Certain Relationships and Related Transactions, and Director Independence79Item 14.Principal Accountant Fees and Services79 PART IV Item 15.Exhibits and Financial Statement Schedules80 Signatures83 3Table of Contents 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, andSection 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the PrivateSecurities 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 productcategories 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, computing and storage, industrial, automotive and communications markets, •estimates of our future liquidity requirements, •the cyclical nature of the semiconductor industry, •protection of our proprietary technology, •business outlook for 2018 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 fromsuch acquisitions, •the impact of the U.S. tax reform enacted in December 2017 on our income tax provision and cash flows, •our intention and ability to repurchase shares under 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 tothe 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 anduncertainties. Actual events or results could differ materially and adversely from those expressed in any such forward-looking statements. Risks anduncertainties that could cause actual results to differ materially include those set forth throughout this Annual Report on Form 10-K and, in particular, inthe 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 ofany future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence ofunanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report onForm 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 hereinare references to Monolithic Power Systems, Inc. and its consolidated subsidiaries. 4Table of Contents PART I ITEM 1. BUSINESS General Monolithic Power Systems (“MPS”) is a leading semiconductor company that designs, develops and markets high-performance power solutions. Foundedin 1997, MPS’s core strengths include deep system-level and applications knowledge, strong analog design expertise and innovative proprietary processtechnologies. 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 consumer, computing and storage, industrial, automotive and communications applications. MPS's mission is to reducetotal energy consumption in its customers' systems with green, practical and compact solutions. MPS is headquartered in San Jose, California and has over 1,500 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 beclassified either as discrete devices, such as individual transistors or integrated circuits (“ICs”), in which a number of transistors and other elements arecombined 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 andzeroes. Analog ICs, in contrast, handle real world signals such as temperature, pressure, light, sound, or speed. In addition, analog ICs also perform powermanagement functions, such as regulating or converting voltages, for electronic devices. Mixed-signal ICs combine digital and analog functions onto asingle 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 aredifferentiated 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 the analog and mixed-signal IC markets, and in particular the highperformance portion of the analog and mixed signal IC market, from digital IC markets. These factors include longer product life cycles, numerous marketsegments, 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 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. End Markets and Applications We currently target our products in the consumer, computing and storage, industrial, automotive and communications markets, with the consumer marketrepresenting the largest portion of our revenue. The following is a brief summary of the various applications of our products in each end market, and suchmarket's contribution as a percentage of our total revenue: Percentage of Total RevenueEnd Markets Applications 2017 2016 2015● Consumer●Set-top boxes, monitors, gaming, lighting, chargers, homeappliances, cellular handsets, digital video players, GPS,televisions, stereos and cameras. 40.3% 39.5% 43.6%● Computing and storage●Storage networks, computers and notebooks, printers,servers and workstations. 21.4% 20.7% 17.0%● Industrial●Power sources, security, point-of-sale systems, smart metersand other industrial equipment. 13.4% 14.4% 13.8%● Automotive●Infotainment, safety and connectivity applications 11.4% 8.7% 6.1%● Communications●Networking and telecommunication infrastructure, routersand modems, wireless access points and voice over IP. 13.5% 16.7% 19.5% 5Table of Contents Product Families Our proprietary process technologies enable us to design and deliver smaller, single-chip power management ICs. These technologies simplify the designprocess, and are applicable across a wide range of analog applications within the consumer, computing and storage, industrial, automotive andcommunications markets. Our product families are differentiated with respect to their high degree of integration and strong levels of accuracy andefficiency, 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 portableelectronic devices, wireless LAN access points, computers, and monitors, automobiles and medical equipment. We believe that our DC to DC products aredifferentiated in the market, particularly with respect to their high degree of integration, high voltage operation, high load current, high switching speedand small footprint. These features are important to our customers as they result in fewer components, a smaller form factor, more accurate regulation ofvoltages, and, ultimately, lower system cost and increased reliability through the elimination of many discrete components and power devices. The DC toDC product family accounted for 92%, 90% and 90% of our total revenue in 2017, 2016 and 2015, respectively. Lighting Control Products. Lighting control ICs are used in backlighting and general illumination products. Lighting control ICs for backlighting areused 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 alternatingcurrent/direct current, or AC/DC, offline solutions for lighting illumination applications, we also offer AC/DC power conversion solutions for a diversenumber of end products that plug into a wall outlet. The Lighting Control product family accounted for 8%, 10% and 10% of our total revenue in 2017,2016 and 2015, respectively. In the future, we plan to 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 ofChina, Taiwan and other Asian markets, expand our customer base and continue to 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 designmanufacturers (ODMs), and electronic manufacturing service (EMS) providers. Our third-party distributors are subject to distribution agreements with uswhich allow the distributor to sell our products to end customers and other resellers. Distributors sell 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 andmanufacture electronic products on behalf of OEMs, and EMS providers typically provide manufacturing services for OEMs and other electronic productsuppliers. Sales to our largest distributor accounted for 17% of our total revenue in 2017, 22% in 2016, and 24% in 2015. In addition, one other distributoraccounted for 10% of our total revenue in 2017. No other distributors or end customers accounted for more than 10% of our total revenue in any of theperiods presented. Current distribution agreements with several of our major distributors provide that each distributor has the non-exclusive right to sell and use its bestefforts to promote and develop a market for our products. These agreements provide that payment for purchases from us will generally occur within 30 to45 days from the date of invoice. In addition, we allow for limited stock rotation in certain agreements. We have sales offices located in China, India, Japan, Korea, Singapore, Taiwan, the United States and Europe. Our products typically require a highlytechnical sales and applications engineering effort where we assist our customers in the design and use of our products in their application. We maintaina staff of applications engineers who work directly with our customers’ engineers in the development of their systems’ electronics containing ourproducts. 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 sales to customers in Asia, changes in the relative value of the dollar may create pricingpressures for our products. For the years ended December 31, 2017, 2016 and 2015, our revenue from sales to customers in Asia was 89%, 91% and 91%,respectively. Our sales are made primarily pursuant to standard individual purchase orders. Our backlog consists of orders that we have received from customers whichhave not yet shipped. Because orders in backlog are subject to cancellation or postponement, and backlog at any particular date is not necessarilyrepresentative of actual sales for any succeeding period, we believe that our backlog is not necessarily a reliable indicator of future revenues. 6Table of Contents 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 futurecustomer orders. This subjects us to certain risks, most notably the possibility that sales will not meet our forecast, which could lead to inventories inexcess 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 italtogether, 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 andfuture industry downturns, we have targeted product and market areas that we believe have the ability to offer above average industry performance overthe 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 ourresearch and development efforts, we have developed a collection of intellectual property and know-how that we are able to leverage across our productsand markets. These include the development of high efficiency power devices, the design of precision analog circuits, expertise in mixed-signalintegration 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 processtechnology. In the area of systems architecture, we are exploring new ways of solving our customers’ system design challenges and are investing in thedevelopment of systems expertise in new markets and applications that align well with our core capabilities. In the area of circuit design andimplementation, 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 $82.4 million, $73.6 million and $65.8 million for the years ended December 31, 2017, 2016 and 2015,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 processtechnologies. Our future success and competitive position depend in part upon our ability to obtain and maintain protection of our proprietarytechnologies. 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 ourmanufacturing process technologies by maintaining those process technologies as trade secrets. As of December 31, 2017, we had 1,145patents/applications issued or pending, of which 360 patents have been issued in the United States. Our issued patents are scheduled to expire at varioustimes through December 2037. Our patents are material to our business, but we do not rely on any one particular patent for our success. We also rely on acombination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, toprotect our technology, know-how and processes. We also seek to register certain of our trademarks as we deem appropriate. We have not registered any ofour copyrights and do not believe registration of copyrights is material to our business. Despite precautions that we take, it may be possible forunauthorized 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 circumventedby others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products andintellectual property rights to the same extent as laws in the United States. Our failure to adequately protect our proprietary technologies could materiallyharm our business. 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 weinitiate development efforts. Litigation may be necessary to enforce our intellectual property rights, and we may have to defend ourselves againstinfringement claims. Any such litigation could be very costly and may divert our management resources. Further, we have agreed to indemnify certain ofour customers and suppliers in some circumstances against liability from infringement by our products. In the event any third party were to make aninfringement claim against us or our customers, we could be enjoined from selling selected products, could be required to indemnify our customers orsuppliers, or could pay royalties or other damages to third parties. If any of our products are found to infringe and we are unable to obtain necessarylicenses 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. 7Table of Contents Manufacturing We utilize a fabless business model, working with third parties to manufacture and assemble our ICs. This fabless approach allows us to focus ourengineering and design resources on our strengths and to reduce our fixed costs and capital expenditures. In contrast to many fabless semiconductorcompanies, which utilize standard process technologies and design rules established by their foundry partners, we have developed our own proprietaryprocess technologies and collaborate with our foundry partners to install our technologies on their equipment in their facilities for use solely on ourbehalf. This close collaboration and control over the manufacturing process has historically resulted in favorable yields and product performance for ourICs. 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, which is a testing process performed to identify non-functioning dies. Oursemiconductor products are then assembled and packaged by independent subcontractors in China and Malaysia. The assembled ICs are then sent eitherfor 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 2006and we have benefitted from shorter manufacturing cycle times and lower labor and overhead costs compared to our operations prior to the use of thefacility. We have expanded our product testing capabilities in this facility and are able to take advantage of the rich pool of local engineering talent toexpand our manufacturing support and engineering operations. In addition, we constructed a 150,000 square-foot research and development facility inChengdu, 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 designof our analog and mixed-signal ICs, our engineers generally have more years of experience and greater circuit design aptitude than the more prevalentdigital circuit design engineer. Analog engineers with advanced skills are limited in number and difficult to replace. The loss of the services of keyofficers, managers, engineers and other technical personnel would materially harm our business. Our future success will depend, in part, on our ability toattract, train, retain, and motivate highly qualified technical and managerial personnel. We may not be successful in attracting and retaining suchpersonnel. Our employees are not represented by a collective bargaining organization, and we have never experienced a work stoppage or strike. Ourmanagement considers employee relations to be good. As of December 31, 2017, we employed 1,534 employees primarily located in China, India, Japan,Korea, Singapore, Taiwan, the United States and Europe, compared with 1,417 employees as of December 31, 2016. Competition The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue. Our ability to competeeffectively 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 bydecreasing unit selling prices over the life of a product. We compete with domestic and international semiconductor companies, many of which havesubstantially greater financial and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products and, insome cases, have a broader product offerings that may enable them to more effectively market and sell to customers. We are in direct and activecompetition, with respect to one or more of our product lines, with at least 10 manufacturers of such products, of varying size and financial strength. Weconsider our primary competitors to include Analog Devices, Infineon Technologies, Intersil (acquired by Renesas Electronics in 2017), LinearTechnology (acquired by Analog Devices in 2017), Maxim Integrated Products, NXP Semiconductors (pending acquisition by Qualcomm), ONSemiconductor, Power Integrations, ROHM Semiconductor, Semtech and Texas Instruments. We expect continued competition from existing competitors as well as competition from new entrants into the semiconductor market. We believe that weare competitive in the markets in which we sell, particularly because our ICs typically are smaller in size, are highly integrated, possess higher levels ofpower management functionalities and achieve high performance specifications at lower price points than most of our competition. However, there is noassurance that our products will continue to compete favorably or that we will be successful in the face of increasing competition from new products andenhancements introduced by existing competitors or new companies entering this market. In addition, there has recently been a high level ofconsolidation in the semiconductor industry. If these or future acquisitions are successful, competition may intensify, and our competitors may haveadditional resources to compete against us. 8Table of Contents 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. FinancialStatements 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 OaksBoulevard, San Jose, California 95119. Our telephone number is (408) 826-0600. Our e-mail address is investors@monolithicpower.com, and our websiteis www.monolithicpower.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments tothose 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 beobtained from our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and ExchangeCommission, 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, 2018 is as follows: Name Age PositionMichael Hsing 58 President, CEO and DirectorBernie Blegen 60 Vice President and Chief Financial OfficerDeming Xiao 55 President of Asia OperationsMaurice Sciammas 58 Senior Vice President of Worldwide Sales and MarketingSaria Tseng 47 Vice President, Strategic Corporate Development, General Counsel and Corporate SecretaryMichael 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 keytechnologies, which set new standards in the power electronics industry. Mr. Hsing is an inventor on numerous patents related to the process developmentof 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 financeand accounting positions for other publicly traded technology companies, including Xilinx, Inc. and Credence Systems. Mr. Blegen is a CPA and holds aB.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 executivepositions, including Foundry Manager and Senior Vice President of Operations. Before joining MPS, from June 2000 to May 2001, Mr. Xiao wasEngineering Account Manager at Chartered Semiconductor Manufacturing, Inc. Prior to that, Mr. Xiao spent six years as the Manager of ProcessIntegration Engineering at Fairchild Imaging Sensors. Mr. Xiao holds a B.S. in Semiconductor Physics from Sichuan University, Chengdu, China and anM.S.E.E. from Wayne State University. Maurice Sciammas has served as our Senior Vice President of Worldwide Sales and Marketing since 2007. Mr. Sciammas joined MPS in July 1999 andserved as Vice President of Products and Vice President of Sales (excluding greater China) until he was appointed to his current position. Before joiningMPS, 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 JoseState University. Saria Tseng has served as our Vice President, General Counsel and Corporate Secretary since 2004 and additionally as our Vice President, StrategicCorporate Development since 2009. Ms. Tseng joined the Company from MaXXan Systems, Inc., where she was also Vice President and General Counselfrom 2001 to 2004. Previously, Ms. Tseng was an attorney at Gray Cary Ware & Freidenrich, LLP and Jones, Day, Reavis & Pogue. Ms. Tseng is a memberof 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 onthe Board of Directors of Super Micro Computer, Inc., a global leader in high performance server technology. Ms. Tseng holds Masters of Law degreesfrom the University of California at Berkeley and the Chinese Culture University in Taipei. 9Table of Contents ITEM 1A. RISK FACTORS Our business involves numerous risks and uncertainties. You should carefully consider the risks described below, together with all of the otherinformation in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission in evaluating our business. If any of thefollowing risks actually occur, our business, financial condition, operating results, and growth prospects would likely be materially and adverselyaffected. 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 toanticipate results or trends in future periods. These risks involve forward-looking statements and our actual results may differ substantially from thosediscussed 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, manyof 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 guidance meets the expectations of our investors; •the depth and liquidity of the market for our common stock; •developments generally affecting the semiconductor industry; •commencement of or developments relating to our involvement in litigation; •investor perceptions of us and our business strategies; •changes in securities analysts’ expectations or our failure to meet those expectations; •actions by institutional or other large stockholders; •terrorist acts or acts of war; •actual or anticipated fluctuations in our results of operations; •actual or anticipated manufacturing capacity limitations; •developments with respect to intellectual property rights; •introduction of new products by us or our competitors; •our sale of common stock or other securities in the future; •conditions and trends in technology industries; •our loss of key customers; •changes in market valuation or earnings of our competitors; •any mergers, acquisitions or divestitures of assets undertaken by us; •government debt default; •government policies and regulations on international trade restrictions and corporate taxes, including the impact of the tax legislation,commonly referred to as the U.S. Tax Cuts and Jobs Act, enacted in December 2017 (the “2017 Tax Act”); •our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base andsuccessfully secure manufacturing capacity; •our ability to increase our gross margins; 10Table of Contents •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 theindustry; •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 repurchase shares under our 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 may be unrelated to the operating performance of particular companies. Thesebroad 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 futureperformance 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 inthe 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 litigationtargets; •continued dependence on turns business (orders received and shipped within the same fiscal quarter); •continued dependence on the Asian markets for our customer base; •increases in assembly costs due to commodity price increases, such as the price of gold; •the timing of new product introductions by us and our competitors; •changes in our revenue mix between original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”), distributors andvalue-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; 11Table of Contents •product obsolescence; •seasonality and variability in the consumer, computing and storage, industrial, automotive 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; •the impact of the 2017 Tax Act on our income tax provision and cash flows; 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-quarteror year-over-year comparisons to predict our future financial performance. Unfavorable changes in any of the above factors may seriously harm ourbusiness and results of operations, and may cause our stock price to decline and be volatile. Our business has been and may be significantly impacted by worldwide economic conditions. In recent years, global credit and financial markets experienced disruptions, and may experience disruptions in the future, including diminished liquidityand credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economicstability. Economic uncertainty affects businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future businessactivities. The tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers tocancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors couldresult in product delays, increased accounts receivable defaults and inventory challenges. Volatility in the credit markets could severely diminishliquidity 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 ofthe world. We cannot predict the timing, strength or duration of any economic disruption or subsequent economic recovery worldwide, in the UnitedStates, in our industry, or in the different markets that we serve. These and other economic factors have had, and may in the future have, a material adverseeffect 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, computing and storage, industrial, automotive 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; 12Table of Contents •manufacturing capacity constraints; •level of activity in our legal proceedings, which could result in significant legal expenses; •the impact of the 2017 Tax Act on our income tax provision and cash flows; and, •stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees; •our operating expenses, including general and administrative expenses, selling and marketing expenses, and research and developmentexpenses 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 notedabove, 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. We are subject to numerous risks andfactors that could cause a decrease in our growth rates compared to past periods, 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 ourcurrent and future products and litigation. A material decrease in our growth rates could 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.The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other things, our financialcondition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, compliance with the terms of futureindebtedness and credit facilities and other factors that our Board of Directors may deem relevant, as well as a determination that cash dividends are in thebest interests of our stockholders. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue todeclare 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 ofour 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, whichwould 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 highergross 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 materiallyadversely 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 insupply and demand. These conditions have caused significant variances in product demand and production capacity, as well as rapid erosion of averageselling prices. The industry may experience severe or prolonged downturns in the future, which could result in downward pressure on the price of ourproducts as well as lower demand for our products. Because significant portions of our expenses are fixed in the short term or incurred in advance ofanticipated sales, we may not be able to decrease our expenses in a timely manner to offset any sales shortfall. These conditions could have a materialadverse 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 improvethe leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry, or become unable to continueoperations unless they find an acquirer or consolidate with another company. In addition, companies that are strategic alliance partners in some areas ofour business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that semiconductor industryconsolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variabilityin our operating results and could have a material adverse effect on our business, operating results and financial condition. 13Table of Contents If demand for our products declines in the major end markets that we serve, our revenue will decrease and our results of operations and financialcondition would be materially and adversely affected. We believe that the application of our products in the consumer, computing and storage, industrial, automotive and communications markets willcontinue 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 willdecrease and our results of operations and financial condition would be materially and adversely affected. In addition, as technology evolves, the abilityto integrate the functionalities of various components, including our discrete semiconductor products, onto a single chip and/or onto other componentsof systems containing our products increases. Should our customers require integrated solutions that we do not offer, demand for our products coulddecrease, 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 andenhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our product markets could have a material adverse effecton our competitive position within these markets. Our failure to timely develop new technologies or to react quickly to changes in existing technologiescould materially delay our development of new products, which could result in product obsolescence, decreased revenue, and/or a loss of market share tocompetitors. As we develop new product lines, we must adapt to market conditions that are unfamiliar to us, such as competitors and distribution channels that aredifferent 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 thepast. 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 ofspecific 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 materiallyadversely 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 todevelop their own products internally. The future prospects for our products in these markets are dependent in part upon our customers' acceptance of ourproducts as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing forproducts as an alternative to in-house development. Customers may in the future continue to use internally developed components. They also may decideto develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our customers fail to acceptour products as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or ifwe are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations could bematerially and adversely affected. 14Table of Contents 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 topolitical, 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-addedreseller agreements with parties located in Asia. As a result, we are subject to increased risks due to this geographic concentration of business andoperations. For the year ended December 31, 2017, 89% of our revenue was from customers in Asia. There are risks inherent in doing business in Asia, andinternationally in general, including: •changes in, or impositions of, legislative or regulatory requirements, including tax laws in the U.S. and in the countries in which wemanufacture 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, Hangzhou and other regions where wehave significant operations; •multi-tiered distribution channels that lack visibility to end customer pricing and purchase patterns; •international political relationships and threats of war; •terrorism and threats of terrorism; •epidemics and illnesses; •work stoppages and infrastructure problems due to adverse weather conditions or natural disasters; •work stoppages related to employee dissatisfaction; •economic, social and political instability; •longer accounts receivable collection cycles and difficulties in collecting accounts receivables; •enforcing contracts generally; and, •less effective protection of intellectual property and contractual arrangements. If we fail to expand our customer base and significantly reduce the geographic concentration of our customers, we will continue to be subject to theforegoing 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 largestdistributor accounted for 17% of our total revenue for the year ended December 31, 2017. We continue to rely on a limited number of customers for asignificant portion of our revenue. Because we rely on a limited number of customers for significant percentages of our revenue, a decrease in demand orsignificant pricing pressure for our products from any of our major customers for any reason (including due to competition, market conditions,catastrophic events or otherwise) could have a materially adverse impact on our financial conditions and results of operations. 15Table of Contents 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. Ourfailure 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 thepurpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. Although we have implemented policiesand procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we aresubject, 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 otherlaws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. We have significantoperations in Asia, which places us in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevatedrisk 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 a material adverse impact on ourbusiness, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption lawsby the U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financial condition and results of operations. We receive a significant portion of our revenue from distribution arrangements, value-added resellers and direct customers, and the loss of any oneof these distributors, value-added resellers or direct customers or failure to collect a receivable from them could adversely affect our operations andfinancial position. We market our products through distribution arrangements and value-added resellers and through our direct sales and applications support organizationto customers that include OEMs, ODMs and electronic manufacturing service providers (“EMSs”). Receivables from our customers are generally notsecured by any type of collateral and are subject to the risk of being uncollectible. Sales to our largest distributor accounted for 17% of our total revenuefor the year ended December 31, 2017. Significant deterioration in the liquidity or financial condition of any of our major customers or any group of ourcustomers could have a material adverse impact on the collectability of our accounts receivable and our future operating results. We primarily conductour 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 toachieve “design wins,” which are decisions by OEMs and/or ODMs to incorporate our products, we do not have purchase commitments from these endusers. Therefore, there can be no assurance that the OEMs and/or ODMs will continue to incorporate our ICs into their products. OEM technicalspecifications and requirements can change rapidly, and we may not have products that fit new specifications from an end-customer for whom we havehad previous design wins. We cannot be certain that we will continue to achieve design wins from large OEMs, that our direct customers will continue tobe successful in selling to the OEMs, or that the OEMs will be successful in selling products which incorporate our ICs. The loss of any significantcustomer, any material reduction in orders by any of our significant customers or by their OEM customers, the cancellation of a significant customerorder, 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 ofoperations 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 andappropriately 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 commercialintroductions of end products and systems that incorporate our products, all of which are inherently difficult to forecast, as well as the ongoing demandfor previously introduced end products and systems. In addition, demand for our products is influenced by our customers’ ability to manage theirinventory. 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 availablecapacity, particularly capacity in the geometries we require, at the facilities in which they manufacture wafers for us. As a result, this lack of capacity hasat times constrained our product sales and revenue growth. In addition, an increased need for capacity to meet internal demands or demands of othercustomers could cause our suppliers to reduce capacity available to us. Our suppliers may also require us to pay amounts in excess of contracted oranticipated amounts for wafer deliveries or require us to make other concessions in order to acquire the wafer supply necessary to meet our customerrequirements. If our suppliers extend lead times, limit supplies or the types of capacity we require, or increase prices due to capacity constraints or otherfactors, our revenue and gross margin may materially decline. In addition, if we experience supply delays or limitations, our customers may reduce theirpurchase levels with us and/or seek alternative solutions to meet their demand, which could materially and adversely impact our business and results ofoperations. Delays in increasing third-party manufacturing capacity may also limit our ability to meet customer demand. 16Table of Contents We currently depend on third-party suppliers to provide us with wafers for our products. If any of our wafer suppliers become insolvent or capacityconstrained and are unable and/or fail to provide us sufficient wafers at acceptable yields and at anticipated costs, our revenue and gross marginmay 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. Thiscould potentially reduce yields. The failure of our suppliers to supply us wafers at acceptable yields could prevent us from fulfilling our customer ordersfor 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 cancelorders 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 ableto 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 orterminated. We do not have direct control over product delivery schedules or product quality because all of our products are assembled by third-party subcontractorsand a portion of our testing is currently performed by third-party subcontractors. Also, due to the amount of time typically required to qualify assemblyand 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 ourproducts. In addition, events such as global economic crises may materially impact our assembly suppliers’ ability to operate. Any future product deliverydelays or disruptions in our relationships with our subcontractors could have a material adverse effect on our operating results, financial condition andcash 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, assemblyshops, and testing facilities for our products. In order to facilitate such growth, we may need to enter into strategic transactions, investments and otheractivities. 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, includingdelays in qualification of new foundries by our customers. These and other risks may affect the ultimate cost and timing of any expansion of our third-party suppliers’ capacity. We purchase inventory in advance based on expected demand for our products, and if demand is not as expected, we may have insufficient or excessinventory, 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 withour manufacturers based on existing and expected orders from our customers for particular products. While most of our contracts with our customers anddistributors include lead time requirements and cancellation penalties that are designed to protect us from misalignment between customer orders andinventory levels, we must nonetheless make some predictions when we place orders with our manufacturers. In the event that our predictions areinaccurate due to unexpected increases in orders or unavailability of product within the timeframe that is required, we may have insufficient inventory tomeet 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 written down or would result in adecrease 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 materialimpact on our business and financial position. 17Table of Contents The 2017 Tax Act is expected to have significant effects on our income tax expense, which could result in a material adverse impact on our results ofoperations, financial condition and cash flows. In December 2017, the 2017 Tax Act was enacted and includes a broad range of tax reforms, including changes to corporate tax rates, business deductionsand international tax provisions. Many of these provisions significantly differ from prior U.S. tax law, resulting in material tax accounting implicationsfor us. Some of the significant new requirements include, but are not limited to, a one-time mandatory deemed repatriation transition tax on previouslydeferred foreign earnings, a remeasurement of our deferred taxes due to the change in the corporate tax rate, taxation of certain global intangible low-taxed income under the international tax provisions, and limitations on the deductibility of performance-based compensation for officers. Some of theseprovisions, such as the deemed repatriation transition tax and remeasurement of deferred tax assets, had immediate accounting implications whichresulted in a significant increase in our tax expenses for the year ended December 31, 2017. As we continue to evaluate the potential implications of the2017 Tax Act on our financial statements, any increase in our income tax expense in future periods could have a material negative impact on our resultsof operations. In addition, the deemed repatriation transition tax liability, which will be payable over eight years, will adversely impact our cash flowsand financial condition in future periods. Any changes to our corporate tax planning and strategies as a result of the 2017 Tax Act may not result in afavorable impact on our income tax expense in future periods. The calculation of the tax impact and exposures under the 2017 Tax Act is complex. It requires the collection of information not regularly produced byus, the use of estimates and the exercise of significant judgment in determining our tax provision. As regulations and guidance evolve with respect to the2017 Tax Act, and as we gather more information and perform more analysis, our results may differ from previous estimates and may materially affect ourfinancial position. Furthermore, we will need to evaluate whether changes to our existing processes and controls are necessary to address the financialreporting effects. If we fail to correctly interpret the tax law or implement effective internal controls on gathering, analyzing and reviewing data used inour calculations, our income tax provision could be misstated, which could have a material adverse impact on our results of operations and financialcondition. 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, including the effects of the 2017 Tax Act, we engage third-party tax advisorsto assist us in the calculation. If we or our tax advisors fail to resolve or fully understand certain issues that we may have had in the past and issues thatmay arise in the future, we could be subject to errors, which, if material, would result in us having to restate our financial statements. Restatements aregenerally costly and could adversely impact our results of operations, damage our reputation, and/or have a negative impact on the trading price of ourcommon stock. 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 andhigher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or bychanges in tax laws such as the 2017 Tax Act, regulations, accounting principles or interpretations thereof and discrete items such as future exercises ordispositions of stock options and restricted stock releases. In addition, we are subject to potential future examinations of our income tax returns by theInternal Revenue Service (“IRS”) and other tax authorities. For example, our U.S. federal income tax returns for the years ended December 31, 2005through December 31, 2007 were examined by the IRS. We reached a resolution with the IRS in April 2015 and recorded a one-time net charge of $2.7million to our income tax provision in the second quarter of 2015. We assess the likelihood of adverse outcomes resulting from these examinations todetermine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from any examinations will not have an adverseeffect on our operating results and financial condition. Implementation of an enterprise resource planning (“ERP”) or other information technology systems could result in significant disruptions to ouroperations. From time to time, we may implement new ERP software solutions or upgrade existing systems. Implementation of these solutions and systems is highlydependent on coordination of system providers and internal business teams. We may experience difficulties as we transition to these new or upgradedsystems and processes, including loss or corruption of financial, business or customer data. In addition, transitioning to these new systems requiressignificant capital investments and personnel resources. Difficulties in implementing new or upgraded information systems or significant system failurescould disrupt our operations, which could have a material adverse effect on our capital resources, financial condition or results of operations. 18Table of Contents System security risks, data protection or privacy breaches, cyber attacks and systems integration issues could disrupt our internal operations and/orharm our reputation, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impactour 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 andproprietary 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 besuccessful 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 financialinformation, and confidential data pertaining to our customers, suppliers and business partners. The secure maintenance of sensitive information on ournetworks and the protection features of our solutions are both critical to our operations and business strategy. We devote significant resources to networksecurity, data encryption, and other security measures to protect our systems and data. However, these security measures cannot provide absolutesecurity. Although we make significant efforts to maintain the security and integrity of our systems and solutions, any destructive or intrusive breachcould compromise our networks, creating system disruptions or slowdowns, and the information stored on our networks could be accessed, publiclydisclosed, 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 ourbusiness partners and customers could be materially damaged, our reputation could be materially harmed, and we could be exposed to a risk of litigationand possible significant liability. Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systemsintegration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, whichcould cause business disruptions and our remediation efforts may be expensive, time consuming, disruptive and resource-intensive. Such disruptionscould adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions couldadversely 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 productsand/or be required to pay substantial damages. An unfavorable outcome or an additional award of damages, attorneys’ fees or an injunction couldcause 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, wecould be ordered to pay monetary fines and/or damages. If we are found liable for willful patent infringement, damages could be significant. We and/orour customers could also be prevented from selling some or all of our products. Moreover, our customers and end-users could decide not to use ourproducts, and our products and our customers’ accounts payable to us could be seized. Finally, interim developments in these proceedings could increasethe 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 inthese 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 legalexpenses are difficult to forecast and may vary substantially from our publicly disclosed forecasts with respect to any given quarter, which couldcontribute 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. Itis difficult for us to forecast our legal expenses for any given quarter, which adversely affects our ability to forecast our expected results of operations ingeneral. We may also be subject to unanticipated legal proceedings, which would result in us incurring unexpected legal expenses. If we fail to meet theexpectations of securities or industry analysts as a result of unexpected changes in our legal expenses, our stock price could be materially impacted. 19Table of Contents 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 weinitiate development efforts. Litigation may be necessary to enforce our intellectual property rights, and we may have to defend ourselves againstadditional infringement claims. Such litigation is very costly. In the event any third party makes a new infringement claim against us or our customers, wecould incur additional ongoing legal expenses. In addition, in connection with these legal proceedings, we may be required to post bonds to defend ourintellectual property rights in certain countries for an indefinite period of time, until such dispute is resolved. If our legal expenses materially increase orexceed anticipated amounts, our capital resources and financial condition could be adversely affected. Further, if we are not successful in any of ourintellectual property defenses, our financial condition could be adversely affected and our business could be harmed. Our management team may also berequired to devote a great deal of time, effort and energy to these legal proceedings, which could divert management’s attention from focusing on ouroperations 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 maintainprotection of certain proprietary technologies used in our products. We pursue patents for some of our new products and unique technologies, and we alsorely on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality andloyalty, to protect our technology, know-how and processes. Despite the precautions we take, it may be possible for unauthorized third parties to copyaspects of our current or future technologies or products, or to obtain and use information that we regard as proprietary. We intend to continue to protectour proprietary technologies, including through patents. However, there can be no assurance that the steps we take will be adequate to protect ourproprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products ortechnologies, or that our patents will not be challenged, invalidated or circumvented by others. Furthermore, the laws of the countries in which ourproducts are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in theUnited 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 liquidityand potential value of our investment portfolio. The market for government-backed student loan auction-rate securities became illiquid in 2008. Since 2008, we have redeemed 87% of the originalportfolio of our auction-rate securities at par and continue to hold $5.6 million in principal amount as of December 31, 2017. It is unclear as to when theremaining balance of our auction-rate securities will regain their liquidity. The underlying maturity of these auction-rate securities is up to 30 years. Wehave historically recorded temporary and other-than-temporary impairment charges on these investments. The valuation is subject to fluctuations in thefuture, which will depend on many factors, including the quality of underlying collateral, estimated time for liquidity including potential to be called orrestructured, underlying final maturity, insurance guaranty and market conditions, among others. Should there be further deterioration in the market forauction-rate securities, the value of our portfolio may decline, which may have an adverse impact on our cash position and our earnings. If the accountingrules 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 reliablefinancial reports or prevent fraud or other financial misconduct, our business and operating results could be harmed. Our failure to implement andmaintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to failto meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financialreports, 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, andcould subject us to stockholder litigation. In addition, we cannot assure you that we will not in the future identify material weaknesses in our internalcontrol 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 ourproducts and may expose us to product liability risk. Our customers generally establish demanding specifications for quality, performance, and reliability that our products must meet. ICs as complex as oursoften encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercialshipments, which might require product replacement or recall. Further, our third-party manufacturing processes or changes thereof, or raw material used inthe manufacturing processes may cause our products to fail. We have from time to time in the past experienced product quality, performance or reliabilityproblems. Our standard warranty period is generally one to two years, which exposes us to significant risks of claims for defects and failures. If defects andfailures 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. 20Table of Contents In addition, product liability claims may be asserted with respect to our technology or products. Although we currently have insurance, there can be noassurance that we have obtained a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, orthat we will have sufficient resources to satisfy any asserted claims. The price and availability of commodities (e.g., gold, copper and silicon) may adversely impact our ability to deliver our products in a timely andcost-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 andsimilar 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 Renminbirises against the U.S. Dollar, there could be an increase in our manufacturing costs relative to competitors who have manufacturing facilities located in theU.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 risesagainst other currencies, it may adversely affect the demand for our products in international markets, which could negatively impact our business andresults 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, whichare reported in interest and other income in the statements of operations. Fluctuations in the value of the U.S. Dollar relative to the foreign currenciescould 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 usto incur significant expense. If we fail to maintain compliance with applicable regulations, we may be forced to recall products and cease theirdistribution, 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 havegenerally become more stringent over time. We may be required to incur significant expense to comply with these regulations or to remedy violations ofthese regulations. In addition, if our customers fail to comply with these regulations, we may be required to suspend sales to these customers, which couldnegatively impact our results of operations. We must conform the manufacture and distribution of our products to various laws and adapt to regulatoryrequirements in many countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of ourproducts, we could be required to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our productscommercially 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 ofcertain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling anddisposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Unionmember countries and countries in Asia. There can be no assurance that similar laws and regulations will not be implemented in other jurisdictionsresulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements ifthe 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 fromChinese governments that we and our manufacturing partners receive may be reduced or eliminated, which could increase our costs or limit ourability to sell products and conduct activities in China. We have manufacturing and testing facilities in China and most of our manufacturing partners are located in China. The Chinese government has broaddiscretion and authority to regulate the technology industry in China. Additionally, China’s government has implemented policies from time to time toregulate economic expansion in China. It exercises significant control over China’s economic growth through the allocation of resources, controllingpayment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. 21Table of Contents Personal privacy, cyber security, and data protection are becoming increasingly significant issues in China. To address these issues, the StandingCommittee of the National People’s Congress promulgated the Cyber Security Law of the People’s Republic of China (the “Cyber Security Law”), whichtook effect on June 1, 2017. The Cyber Security Law sets forth various requirements relating to the collection, use, storage, disclosure and security ofdata, among other things. Various Chinese agencies are expected to issue additional regulations in the future to define these requirements more precisely.These requirements may increase our costs of compliance. We cannot assure you that we will be able to comply with all of these regulatoryrequirements. Any failure to comply with the Cyber Security Law and the relevant regulations and policies could result in further cost and liability to usand could adversely affect our business and results of operations. Additionally, increased costs to comply with, and other burdens imposed by, the CyberSecurity Law and relevant regulations and policies that are applicable to the businesses of our suppliers, vendors and other service providers, as well asour customers, could adversely affect our business and results of operations. Any additional new regulations or the amendment or modification of previously implemented regulations could require us and our manufacturingpartners to change our business plans, increase our costs, or limit our ability to sell products and conduct activities in China, which could adversely affectour business and operating results. The Chinese government and provincial and local governments also have provided, and continue to provide, various incentives to encourage thedevelopment of the semiconductor industry in China. Such incentives include tax rebates, reduced tax rates, favorable lending policies and othermeasures, 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 incentivescould be reduced or eliminated by governmental authorities at any time. Any such reduction or elimination of incentives currently provided to ourmanufacturing 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 orcause 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 ouroperations 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 reasonablecost levels, we may incur higher costs than our current expense levels, which would affect our gross margins. In addition, if capacity restraints result insignificant 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 could do so in the future, which could harm ourrevenue 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 willsuffer 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 basiswith higher selling prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own wafer manufacturing orassembly 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 expensesbefore 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 twoyears 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 wehave 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 usto expend significant sales and marketing resources without any assurance of success. Volume production of products that use our ICs, if any, may not beachieved 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; 22Table of Contents •the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of their product to evaluateproduct performance and consumer demand; •our products must be designed into our customers’ products or systems; and, •the development and commercial introduction of our customers’ products incorporating new technologies frequently are delayed. As a result of our lengthy sales cycles, we may incur substantial expenses before we earn associated revenue because a significant portion of our operatingexpenses is relatively fixed and based on expected revenue. The lengthy sales cycles of our products also make forecasting the volume and timing oforders difficult. In addition, the delays inherent in lengthy sales cycles raise additional risks that customers may cancel or change their orders. Our salesare made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog is not always agood indicator of our future sales. If customer cancellations or product changes occur, we could lose anticipated sales and not have sufficient time toreduce 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 anddevelopment 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 inresearch and development in the future in order to continue to innovate and introduce new products in a timely manner and increase our revenue andprofitability. If we have to invest more resources in research and development than we anticipate, we could see an increase in our operating expenseswhich may negatively impact our operating results. Also, if we are unable to properly manage and effectively utilize our research and developmentresources, 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 toinvest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are requiredto invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operatingresults could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incrementalinvestments in research and development and these investments may be independent of our level of revenue, which could negatively impact our financialresults. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expectthese expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products underdevelopment. The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could affect our operationsor 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 onthe continued services of our key executives, including Michael Hsing, our President and Chief Executive Officer, who founded our company anddeveloped our proprietary process technology. In addition, personnel with highly skilled analog and mixed-signal design engineering expertise arescarce 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 thatwe will be successful in attracting, integrating or retaining other highly qualified personnel with critical capabilities in the future. If we are unable toretain the services of existing key employees or are unsuccessful in attracting new highly qualified employees quickly enough to meet the demands ofour business, including design cycles, our business could be harmed. Furthermore, if we lose key personnel, the search for a qualified replacement and thetransition could interrupt our operations as the search could take us longer than expected and divert management resources, and the newly hiredemployee 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 internalcontrol that meet the demands of our business, our ability to operate effectively will suffer. The operation of our business also depends upon our ability toretain these employees, as these employees hold a significant amount of institutional knowledge about us and our products, and, if they were to terminatetheir employment, our sales and internal control over financial reporting could be adversely affected. 23Table of Contents 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 thatany 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 andfinancial 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 andoperating 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 theownership interests of our stockholders, reduce our cash balances, and cause us to incur debt or to assume contingent liabilities, which couldadversely affect our business. We may also be the target of strategic transactions, which could divert our management’s attention and otherwisedisrupt our operations and 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 ourdesign capability or offer other competitive opportunities. 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 debtor contingent liabilities, or incur impairment charges related to goodwill or other acquisition-related intangibles. Such actions could impact our operatingresults 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 thesemiconductor industry, the valuation expectations of acquisition candidates and applicable antitrust laws or related regulations. If we are unable toidentify and complete acquisitions, we may not be able to successfully expand our business and product offerings. We cannot guarantee that any future acquisitions will improve our results of operations or that we will otherwise realize the anticipated benefits of anyacquisitions. In addition, if we are unsuccessful in integrating any acquired company or business into our operations or if integration is more difficultthan anticipated, we may experience disruptions that could harm our business and result in our failure to realize the anticipated benefits of theacquisitions. 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 wouldimpact our profitability; •the need to take impairment charges or write-downs with respect to acquired assets and technologies; •difficulties in assessing the fair value of earn-out arrangements; •diversion of management’s attention from other business concerns; and •adverse effects on existing business relationships with customers. 24Table of Contents In addition, third parties may be interested in acquiring us. We will consider and discuss such transactions as we deem appropriate. Such potentialtransactions may diver the attention of management, and cause us to incur various costs and expenses in investigating and evaluating such transactions,whether or not they are consummated. 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 anacquisition. We also issue restricted stock units to employees, which convert into shares of common stock upon vesting. Any issuance of our commonstock may result in immediate dilution of our stockholders. In addition, the issuance of a significant amount of our common stock may result inadditional 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 areunable 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 competeeffectively and to expand our business will depend on our ability to continue to recruit applications and design talent, our ability to introduce newproducts, and our ability to maintain the rate at which we introduce these new products. We compete with domestic and non-domestic semiconductorcompanies, many of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing, anddistribution of their products. We are in direct and active competition, with respect to one or more of our product lines, with many manufacturers of suchproducts, of varying size and financial strength. The number of our competitors has grown due to the expansion of the market segments in which weparticipate. 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 newproducts and enhancements introduced by existing competitors or new companies entering this market, which would materially and adversely affect ourresults 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 andtrading 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 ourbusiness. 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 likelydecline. 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 ourassembly and research and development activities, and certain other critical business operations are located in or near seismically active regions and aresubject to periodic earthquakes. We do not maintain earthquake insurance and could be materially and adversely affected in the event of a majorearthquake. Much of our revenue, as well as our manufacturers and assemblers, are concentrated in Asia, particularly in China. Such concentrationincreases the risk that other natural disasters, labor strikes, terrorism, war, political unrest, epidemics, and/or health advisories could disrupt ouroperations. In addition, we rely heavily on our internal information and communications systems and on systems or support services from third parties tomanage our operations efficiently and effectively. Any of these are subject to failure due to a natural disaster or other disruption. System-wide or localfailures 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. 25Table of Contents ITEM 2. PROPERTIES The following table summarizes our primary properties as of December 31, 2017: Location ApproximateBuildingSquare Footage Primary UseOwned: San Jose, California 106,000 Corporate headquarters, research and development, sales and marketingChengdu, China 150,000 Research and development, administrative officesChengdu, China 60,000 Testing and manufacturingHangzhou, China 68,000 Research and developmentShanghai, China 23,000 Sales and marketingShenzhen, China 8,000 Sales and marketingTaipei, Taiwan 47,000 Sales and marketing, research and developmentLeased: Chengdu, China 45,000 Inventory storage warehouseHangzhou, China 34,000 Research and developmentSeattle, Washington 9,000 Sales and marketing, research and development We also lease other sales and research and development offices in China, India, Japan, Korea, Singapore, the United States and Europe. We believe thatour 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 initiated by our shareholders, challenges to theenforceability or validity of our intellectual property, claims that our products infringe on the intellectual property rights of others, and employmentmatters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion ofother resources to prosecute and defend. We defend ourselves vigorously against any such claims. As of December 31, 2017, there were no material pending legal proceedings to which we were a party. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 26Table of Contents PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity 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 sales priceper share of our common stock: High Low 2017: First quarter $94.49 $81.84 Second quarter $103.92 $88.19 Third quarter $107.87 $94.24 Fourth quarter $126.80 $105.01 2016: First quarter $63.64 $56.21 Second quarter $70.75 $60.93 Third quarter $80.50 $66.11 Fourth quarter $85.43 $76.44 Holders of Our Common Stock As of February 21, 2018, there were nine registered holders of record of our common stock. A substantially greater number of holders of our commonstock 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 whenand if declared by our Board of Directors, which are payable to the stockholders in the following month. Our Board of Directors declared the followingcash dividends: Dividend Declared Total per Share Amount (in thousands) 2017: First quarter $0.20 $8,248 Second quarter $0.20 $8,273 Third quarter $0.20 $8,301 Fourth quarter $0.20 $8,323 2016: First quarter $0.20 $8,047 Second quarter $0.20 $8,096 Third quarter $0.20 $8,132 Fourth quarter $0.20 $8,159 In February 2018, our Board of Directors approved an increase in our quarterly cash dividends from $0.20 per share to $0.30 per share, effective for thefirst quarter of 2018. The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other things, our financialcondition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, compliance with the terms of futureindebtedness and credit facilities and other factors that our Board of Directors may deem relevant, as well as a determination that cash dividends are in thebest interests of the stockholders. 27Table of Contents We anticipate that cash used for future dividend payments will come from our current domestic cash and cash generated from ongoing U.S. operations. Inaddition, we currently plan to repatriate cash from our Bermuda subsidiary on an ongoing basis to fund future dividends and continue to indefinitelyreinvest our earnings from other foreign subsidiaries. See Note 12 of Notes to Consolidated Financial Statements under Item 8 for further discussion. 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 NasdaqComposite Index and the PHLX Semiconductor Sector Index. An investment of $100 is assumed to have been made in our common stock on December31, 2012 and its relative performance is tracked through December 31, 2017, assuming the reinvestment of dividends. Historic stock performance is notindicative of future performance. The information contained in this stock performance graph section shall not be deemed to be “soliciting material,” or “filed” or incorporated byreference 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 wespecifically 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 ourcommon 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 Rule10b5-1 under the Securities Exchange Act of 1934. For the three months and year ended December 31, 2017, we did not repurchase any shares under the program. The program expired on December 31,2017 with a remaining unused balance of $50 million. 28Table of Contents ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with ''Management's Discussion and Analysis of Financial Conditionand Results of Operations'' and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K tofully understand factors that may affect the comparability of the information presented below. We derived the selected consolidated balance sheet data asof December 31, 2017 and 2016, and the consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 from ouraudited consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K. The consolidated balance sheet data asof December 31, 2015, 2014 and 2013, and the consolidated statement of operations data for the years ended December 31, 2014 and 2013 are derivedfrom our audited consolidated financial statements which are not included in this report. Operating results for any year are not necessarily indicative ofresults to be expected for any future periods. Consolidated Statement of Operations Data: Year Ended December 31, 2017 2016 2015 2014 2013 (in thousands, except per share amounts) Revenue $470,929 $388,665 $333,067 $282,535 $238,091 Cost of revenue 212,646 177,792 152,898 129,917 110,190 Gross profit 258,283 210,873 180,169 152,618 127,901 Operating expenses: Research and development 82,359 73,643 65,787 58,590 49,733 Selling, general and administrative 97,257 83,012 72,312 66,755 54,624 Litigation expense (benefit), net 1,243 (229) 1,000 (8,027) (371)Total operating expenses 180,859 156,426 139,099 117,318 103,986 Income from operations 77,424 54,447 41,070 35,300 23,915 Interest and other income, net 5,520 2,817 1,421 1,092 92 Income before income taxes 82,944 57,264 42,491 36,392 24,007 Income tax provision 17,741 4,544 7,319 897 1,109 Net income $65,203 $52,720 $35,172 $35,495 $22,898 Net income per share: Basic $1.58 $1.30 $0.89 $0.92 $0.61 Diluted $1.50 $1.26 $0.86 $0.89 $0.59 Weighted-average shares outstanding: Basic 41,350 40,436 39,470 38,686 37,387 Diluted 43,578 41,915 40,869 39,793 38,620 Cash dividends declared per common share $0.80 $0.80 $0.80 $0.45 $- Consolidated Balance Sheet Data: December 31, 2017 2016 2015 2014 2013 (in thousands) Cash and cash equivalents $82,759 $112,703 $90,860 $126,266 $101,213 Short-term investments $216,331 $155,521 $144,103 $112,452 $125,126 Long-term investments $5,256 $5,354 $5,361 $5,389 $9,860 Total assets $652,569 $511,126 $431,285 $399,366 $368,908 Common stock and additional paid-in capital $376,586 $315,969 $265,763 $240,500 $234,201 Total stockholders' equity $522,007 $431,116 $368,516 $346,425 $323,399 Working capital $383,253 $330,063 $288,645 $271,051 $253,304 29Table of Contents 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 thisAnnual Report on Form 10-K. Overview We are a leading semiconductor company that designs, develops and markets high-performance power solutions. Founded in 1997, MPS’s core strengthsinclude deep system-level and applications knowledge, strong analog design expertise and an innovative proprietary process technology. Thesecombined strengths enable MPS to deliver highly integrated monolithic products that offer energy efficient, cost-effective, easy-to-use solutions forsystems found in consumer, computing and storage, industrial, automotive and communications applications. Our mission is to reduce total energyconsumption in our customers' systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions thatare 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 newinnovative product categories. We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and futureindustry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance over thelong term. We work with third parties to manufacture and assemble our integrated circuits (“ICs”). This has enabled us to limit our capital expenditures and fixedcosts, 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 productto ramp up. Typical lead time for orders is fewer than 90 days. These factors, combined with the fact that orders in the semiconductor industry cantypically be cancelled or rescheduled without significant penalty to the customer, make the forecasting of our orders and revenue difficult. We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where our products are incorporatedinto end-user products. For the years ended December 31, 2017, 2016 and 2015, our revenue from sales to customers in Asia was 89%, 91% and 91%,respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the consumer, computing and storage,industrial, automotive and communications markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop newproducts, enter new market segments, gain market share, manage litigation risk, diversify our customer base and continue to secure manufacturingcapacity. 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 beenprepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets andliabilities. 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 otherassumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about the carryingvalues of assets and liabilities that are not readily apparent from other sources. Estimates and judgments used in the preparation of our financialstatements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demandfor our products and economic conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhapssignificantly, from these estimates. We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financialstatements. Revenue Recognition Our revenue consists primarily of product sales of assembled and tested integrated circuits and dies in wafer form to the consumer, computing and storage,industrial, automotive and communications markets. The remaining revenue has not been significant historically and primarily includes royalties fromlicensing arrangements and revenue from wafer testing services for third parties. 30Table of Contents We recognize revenue based on the following four criteria: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services havebeen rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) is based onmanagement’s judgment regarding the fixed nature of the fees charged for products delivered and the collectability of those fees. The application of thesecriteria has resulted in us generally recognizing revenue upon shipment or delivery (when title and risk of loss have transferred to customers), including tomost of the distributors, original equipment manufacturers and electronic manufacturing service providers. For each of the years ended December 31, 2017, 2016 and 2015, 88% of our sales, respectively, were made through distribution arrangements with thirdparties. We generally recognize revenue upon shipment or delivery 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 ourdistributors) or price adjustments to distributors when we recognize revenue upon shipment or delivery. (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. Certain of our large distributors have contracts that include limited stock rotation rights that permit the return of a small percentage of the previous sixmonths’ 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, 2017 and2016, our reserve for stock rotation rights was $2.6 million and $1.9 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 undersuch arrangements only after the distributors have sold the products to end customers, at which time the price is no longer subject to adjustment and isfixed. Three of our U.S.-based distributors have such price adjustment rights and accordingly, we defer revenue recognition on these shipments until theproducts are sold to the end customers by the distributors. As of December 31, 2017 and 2016, our deferred revenue balance before the price adjustmentsfrom these distributors was $1.9 million and $3.7 million, and the deferred costs were $0.2 million and $0.3 million, respectively. On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Theprimary effects of the new standard for us related to the timing of revenue recognition with the three U.S.-based distributors with price adjustmentrights. See “Recent Accounting Pronouncements Not Yet Adopted as of December 31, 2017” in Note 1 to our consolidated financial statements for furtherdiscussion. 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 net realizablevalue. We write down inventory for obsolescence or lack of demand, based on assumptions about future demand and market conditions. If actual marketconditions are less favorable than those projected by management, additional inventory write-downs may be required. Conversely, if market conditionsare more favorable, inventory may be sold that was previously reserved. Valuation of Goodwill and Acquisition-Related Intangible Assets We evaluate intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that an impairment may exist. Weperform an annual impairment assessment for goodwill in the fourth quarter, or more frequently if indicators of potential impairment exist. Impairment ofintangible assets is recognized based on the difference between the fair value of the assets and their carrying value. Impairment for goodwill occurs if thefair 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 ofthe reporting unit’s goodwill and the carrying value of the goodwill. The assumptions and estimates used to determine the fair value of goodwill andintangible 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 intangibleassets. 31Table of Contents 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 taxjurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities for our estimate of future tax effects attributable to temporarydifferences and carryforwards. We record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based onavailable 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 inthe application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty orfinality or uncertainty to an anticipated outcome, changes in accounting or tax laws in the U.S. or foreign jurisdictions where we operate, or changes inother facts or circumstances. In addition, we recognize liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on ourtax 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 taxliability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financialstatements in the period such determination is made. We have calculated our uncertain tax positions which were attributable to certain estimates andjudgments primarily related to transfer pricing, cost sharing and our international tax structure exposure. On December 22, 2017, the tax legislation commonly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted, which significantlychanged U.S. corporate income tax law. The 2017 Tax Act made the following material changes: (1) reduction of the corporate income tax rate effectiveJanuary 1, 2018; (2) replacement of the worldwide tax system with a territorial tax regime, with a one-time mandatory tax on previously deferred foreignearnings; (3) amendment on the deductibility of executive performance-based compensation, and (4) creation of new taxes on certain foreign-sourcedearnings. As of December 31, 2017 and 2016, we had a valuation allowance of $12.6 million and $27.4 million, respectively, attributable to management’sdetermination that it is more likely than not that the deferred tax assets will not be realized. In the fourth quarter of 2017, management assessed therealizability of the deferred tax assets and concluded that a full valuation allowance would no longer be needed on the federal deferred tax assets, dueprincipally to the enactment of the 2017 Tax Act. As a result, we released $21.6 million of valuation allowance which was recorded as a benefit in theincome tax provision. In the event we determine that it is more likely than not that we would be able to realize other deferred tax assets in the future inexcess of our net recorded amount, an adjustment to the valuation allowance for the deferred tax asset would increase income in the period suchdetermination was made. Likewise, should it be determined that additional amounts of the net deferred tax asset will not be realized in the future, anadjustment to increase the deferred tax asset valuation allowance will be charged to income in the period such determination is made. Income tax effects resulting from changes in tax laws are accounted for in the period in which the law is enacted. As of December 31, 2017, we have notcompleted our accounting for the tax effects of the 2017 Tax Act, including the calculation of the deemed repatriation transition tax and theremeasurement of the deferred taxes. As permitted by Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the Securities and Exchange Commissionon December 22, 2017, we recorded provisional amounts based on reasonable estimates for the year ended December 31, 2017. These provisionalamounts are subject to revisions, possibly materially, as we perform further analysis of the 2017 Tax Act, collect and prepare necessary financial data,continue to assess our tax positions, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”),Financial Accounting Standards Board (“FASB”), and other standard-setting and regulatory bodies. Any subsequent adjustment to these amounts will berecorded to the income tax provision in the period when the analysis is complete. We expect to complete the analysis within the one-year measurementperiod ending December 21, 2018, pursuant to SAB 118. Contingencies We are a party to actions and proceedings in the ordinary course of business, including potential litigation regarding our shareholders and our intellectualproperty, challenges to the enforceability or validity of our intellectual property, claims that our products infringe on the intellectual property rights ofothers, and employment matters. The pending proceedings involve complex questions of fact and law and will require the expenditure of significantfunds and the diversion of other resources to prosecute and defend. In addition, from time to time, we become aware that we are subject to othercontingent liabilities. When this occurs, we will evaluate the appropriate accounting for the potential contingent liabilities to determine whether acontingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal andexternal legal counsel and technical experts. Based on the facts and circumstances in each matter, we use our judgment to determine whether it isprobable 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, werecord a contingent loss. In determining the amount of a contingent loss, we take into account advice received from experts for each specific matterregarding the status of legal proceedings, settlement negotiations, prior case history and other factors. Should the judgments and estimates made bymanagement need to be adjusted as additional information becomes available, we may need to record additional contingent losses that could materiallyand adversely impact our results of operations. Alternatively, if the judgments and estimates made by management are adjusted, for example, if aparticular contingent loss does not occur, the contingent loss recorded would be reversed which could result in a favorable impact on our results ofoperations. 32Table of Contents 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. Thefair value of restricted stock units (“RSUs”) with service conditions or performance conditions is based on the grant date share price. The fair value ofRSUs with only market conditions, as well as RSUs containing both market and performance conditions, is estimated using a Monte Carlo simulationmodel. The fair value of stock options, shares issued under the employee stock purchase plan and RSUs with a purchase price feature is estimated usingthe Black-Scholes model. Compensation expense related to awards with service conditions is recorded on a straight-line basis over the requisite service period. Compensationexpense related to awards subject to market 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 onlyperformance conditions, as well as awards containing both market and performance conditions, we recognize compensation expense when it becomesprobable that the performance criteria will be achieved. Management performs the probability assessment on a quarterly basis by reviewing externalfactors, such as macroeconomic conditions and the analog industry forecasts, and internal factors, such as our business and operational objectives andrevenue forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for in the period of change byrecording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. If the projected achievement wasrevised upward or if the actual results were higher than the projected achievement, additional compensation expense would be recorded for the awardsdue to the cumulative catch-up adjustment, which would have an adverse impact on our results of operations. Conversely, if the projected achievementwas revised downward or if the actual results were lower than the projected achievement, previously accrued compensation expense would be reversed forthe awards, which would have a favorable impact on our results of operations. As a result, our stock-based compensation expense is subject to volatilityand may fluctuate significantly each quarter due to changes in our probability assessment or actual results being different from projections made bymanagement. Recent Accounting Pronouncements Refer to Note 1 to our consolidated financial statements regarding recently adopted accounting pronouncements and recent accounting pronouncementsnot yet adopted as of December 31, 2017. Results of Operations The following table summarizes our results of operations: Year Ended December 31, 2017 2016 2015 (in thousands, except percentages) Revenue $470,929 100.0% $388,665 100.0% $333,067 100.0%Cost of revenue 212,646 45.2 177,792 45.7 152,898 45.9 Gross profit 258,283 54.8 210,873 54.3 180,169 54.1 Operating expenses: Research and development 82,359 17.5 73,643 18.9 65,787 19.8 Selling, general and administrative 97,257 20.7 83,012 21.4 72,312 21.7 Litigation expense (benefit), net 1,243 0.2 (229) - 1,000 0.3 Total operating expenses 180,859 38.4 156,426 40.3 139,099 41.8 Income from operations 77,424 16.4 54,447 14.0 41,070 12.3 Interest and other income, net 5,520 1.2 2,817 0.7 1,421 0.5 Income before income taxes 82,944 17.6 57,264 14.7 42,491 12.8 Income tax provision 17,741 3.8 4,544 1.1 7,319 2.2 Net income $65,203 13.8% $52,720 13.6% $35,172 10.6% 33Table of Contents Revenue The following table summarizes our revenue by end market, based on management’s assessment of available end market data: Year Ended December 31, Change End Market 2017 % ofRevenue 2016 % ofRevenue 2015 % ofRevenue From2016 to2017 From2015 to2016 (in thousands, except percentages) Consumer $189,757 40.3% $153,732 39.5% $145,090 43.6% 23.4% 6.0%Computing and storage 100,782 21.4 80,562 20.7 56,568 17.0 25.1% 42.4%Industrial 62,896 13.4 55,685 14.4 45,933 13.8 12.9% 21.2%Automotive 53,888 11.4 33,954 8.7 20,410 6.1 58.7% 66.4%Communications 63,606 13.5 64,732 16.7 65,066 19.5 (1.7)% (0.5)%Total $470,929 100.0% $388,665 100.0% $333,067 100.0% 21.2% 16.7% Revenue for the year ended December 31, 2017 was $470.9 million, an increase of $82.2 million, or 21.2%, from $388.7 million for the year endedDecember 31, 2016. This increase was driven by higher sales in all of our end markets except for communications. Overall unit shipments increased by9% due to higher market demand with current customers and design wins with new customers, and average sales prices increased by 12%. Revenue from the consumer market for the year ended December 31, 2017 increased $36.0 million, or 23.4%, from the same period in 2016. This increasewas primarily driven by higher demand in gaming and home appliance products. Revenue from the computing and storage market increased $20.2million, or 25.1%, from the same period in 2016. This increase was primarily driven by strength in the solid-state drive storage, cloud computing andhigh-performance notebook markets. Revenue from the industrial market increased $7.2 million, or 12.9%, from the same period in 2016. This increasewas primarily driven by higher sales in power source products. Revenue from the automotive market increased $19.9 million, or 58.7%, from the sameperiod in 2016. This increase was primarily driven by higher sales of products for infotainment, safety and connectivity applications. Revenue from thecommunications market decreased $1.1 million, or 1.7%, from the same period in 2016. This decrease was primarily driven by lower demand in wirelessapplications. 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 endedDecember 31, 2015. This increase was driven by higher sales in all of our end markets except for communications. Overall unit shipments increased by19% due to higher market demand with current customers and design wins with new customers, which was partially offset by a 2% decrease in averagesales prices. Revenue from the consumer market for the year ended December 31, 2016 increased $8.6 million, or 6.0%, from the same period in 2015. This increasewas primarily driven by higher demand in battery management systems, home appliances and other high value consumer products. Revenue from thecomputing and storage market increased $24.0 million, or 42.4%, from the same period in 2015. This increase was primarily driven by strength in thecloud computing, high-performance notebook and solid-state drive storage markets. Revenue from the industrial market increased $9.8 million, or 21.2%,from the same period in 2015. This increase was primarily driven by higher sales in security, smart meter and power source products. Revenue from theautomotive market increased $13.5 million, or 66.4%, from the same period in 2015. This increase was primarily driven by higher sales of products forinfotainment, safety and connectivity applications. Revenue from the communications market was essentially flat compared to the same period in 2015. 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 otheroverhead costs, and stock-based compensation expenses. In addition, cost of revenue includes amortization for acquisition-related intangible assets. Year Ended December 31, Change 2017 2016 2015 From 2016 to2017 From 2015 to2016 (in thousands, except percentages) Cost of revenue $212,646 $177,792 152,898 19.6% 16.3%As a percentage of revenue 45.2% 45.7% 45.9% Gross profit $258,283 $210,873 180,169 22.5% 17.0%Gross margin 54.8% 54.3% 54.1% Cost of revenue was $212.6 million, or 45.2% of revenue, for the year ended December 31, 2017, and $177.8 million, or 45.7% of revenue, for the yearended December 31, 2016. The $34.8 million increase in cost of revenue was primarily due to a 9% increase in overall unit shipments, coupled with a13% increase in the average direct cost of units shipped. The increase in cost of revenue was also driven by a $3.5 million increase in inventory write-downs and warranty expenses. 34Table of Contents Gross margin was 54.8% for the year ended December 31, 2017, compared with 54.3% for the year ended December 31, 2016. The increase in grossmargin was primarily due to lower labor and manufacturing overhead costs as a percentage of revenue, partially offset by higher inventory write-downs. 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 yearended December 31, 2015. The $24.9 million increase in cost of revenue was primarily due to a 19% increase in overall unit shipments, which waspartially offset by a 2% decrease in the average direct cost of units shipped. The increase in cost of revenue was also driven by a $1.0 million increase inwarranty 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 grossmargin was primarily due to lower labor and manufacturing overhead costs as a percentage of revenue, partially offset by the impact of certainmanufacturing cost variances. Research and Development Research and development (“R&D”) expenses primarily consist of salary and benefit expenses, bonuses, stock-based compensation and deferredcompensation expenses for design and product engineers, expenses related to new product development and supplies, and facility costs. Year Ended December 31, Change 2017 2016 2015 From 2016 to2017 From 2015 to2016 (in thousands, except percentages) R&D expenses $82,359 $73,643 $65,787 11.8% 11.9%As a percentage of revenue 17.5% 18.9% 19.8% R&D expenses were $82.4 million, or 17.5% of revenue, for the year ended December 31, 2017, and $73.6 million, or 18.9% of revenue, for the yearended December 31, 2016. The $8.8 million increase in R&D expenses was primarily due to an increase of $3.8 million in compensation expenses, whichinclude salary, benefits and bonuses, an increase of $1.9 million in laboratory supplies, an increase of $1.6 million in new product development expenses,an increase of $0.8 million in stock-based compensation expenses mainly associated with the performance-based equity awards, and an increase of $0.7million in expenses related to changes in the value of the deferred compensation plan liabilities. Our R&D headcount was 629 employees as of December31, 2017, compared with 578 employees as of December 31, 2016. 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 yearended 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 compensationexpenses mainly associated with the performance and market-based equity awards, an increase of $2.2 million in cash compensation expenses, whichinclude salary, benefits and bonuses, an increase of $1.6 million in new product development expenses, and an increase of $0.5 million in expensesrelated to changes in the value of the deferred compensation plan liabilities. Our R&D headcount was 578 employees as of December 31, 2016, comparedwith 506 employees as of December 31, 2015. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses primarily include salary and benefit expenses, bonuses, stock-based compensation and deferredcompensation expenses for sales, marketing and administrative personnel, sales commissions, travel expenses, facilities costs, and professional servicefees. Year Ended December 31, Change 2017 2016 2015 From 2016 to2017 From 2015 to2016 (in thousands, except percentages) SG&A expenses $97,257 $83,012 $72,312 17.2% 14.8%As a percentage of revenue 20.7% 21.4% 21.7% 35Table of Contents SG&A expenses were $97.3 million, or 20.7% of revenue, for the year ended December 31, 2017, and $83.0 million, or 21.4% of revenue, for the yearended December 31, 2016. The $14.3 million increase in SG&A expenses was primarily due to an increase of $3.9 million in stock-based compensationexpenses mainly associated with the performance-based equity awards, an increase of $3.7 million in compensation expenses, which include salary,benefits and bonuses, an increase of $1.3 million in depreciation expense, an increase of $1.0 million in expenses related to changes in the value of thedeferred compensation plan liabilities, and an increase of $0.4 million in commission expenses due to higher revenue. In addition, contributing to theincrease in SG&A expenses in 2017 was a stock-based compensation credit of $2.9 million which reduced SG&A expenses in 2016 due to the retirementof our then Chief Financial Officer. As the service or performance conditions for her outstanding restricted stock units had not been satisfied at the time ofher departure, we reversed previously accrued stock-based compensation expenses of $2.9 million associated with the unvested restricted stock units andthe credit was reflected in SG&A expenses for year ended December 31, 2016. Our SG&A headcount was 389 employees as of December 31, 2017,compared with 355 employees as of December 31, 2016. 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 yearended 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 compensationexpenses mainly associated with the performance and market-based equity awards, an increase of $2.9 million in cash compensation expenses, whichinclude salary, benefits and bonuses, an increase of $2.1 million in commission expenses due to higher revenue, and an increase of $0.8 million inexpenses related to changes in the value of the deferred compensation plan liabilities. In addition, contributing to the increase in SG&A expenses in 2016was a credit of $2.5 million related to the release of a contingent consideration liability which reduced SG&A expenses in 2015 (see below). Theseincreases were partially offset by the stock-based compensation credit of $2.9 million recorded in 2016 due to the retirement of our then Chief FinancialOfficer. Our SG&A headcount was 355 employees as of December 31, 2016, compared with 306 employees as of December 31, 2015. Our acquisition of Sensima Technology SA (“Sensima”) in July 2014 included a contingent consideration arrangement which required us to pay up to anadditional $8.9 million to former Sensima shareholders if Sensima achieved a new product introduction as well as certain product revenue and directmargin targets in 2016. The fair value of the contingent consideration at the acquisition date was $2.5 million, which was estimated based on aprobability-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 inoperating expense in the Consolidated Statements of Operations. As part of the quarterly assessment in the fourth quarter of 2015, management reviewedthe sales forecast for the products and determined that the projected product revenue in 2016 would likely not meet the minimum target required to earnthe 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. The Company released the liability of $2.5million and recorded the credit in SG&A expenses for the year ended December 31, 2015. Litigation Expense (Benefit), Net Litigation expense was $1.2 million for the year ended December 31, 2017, compared with a litigation benefit, net, of $0.2 million for the year endedDecember 31, 2016. The increase in litigation expense was primarily due to an ongoing litigation. In addition, we recognized $0.7 million of benefit inconnection with two litigation settlements for the year ended December 31, 2016. 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 endedDecember 31, 2015. The net litigation benefit in 2016 was attributable to the recognition of $0.7 million of benefit in connection with two litigationsettlements, partially offset by $0.5 million of litigation expenses. Interest and Other Income, Net Interest and other income, net, was $5.5 million for the year ended December 31, 2017, compared with $2.8 million for the year ended December 31,2016. The increase was primarily due to an increase of $2.9 million in interest income as a result of higher investment balances and higher yields, and anincrease of $1.3 million in income related to changes in the value of the deferred compensation plan investments, partially offset by an increase of $1.0million in amortization of premium on available-for-sale investments and an increase of $0.6 million in foreign currency exchange loss. 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 deferred compensation planinvestments and an increase of $0.9 million in interest income as a result of higher yields and higher investment balances, partially offset by an increaseof $0.6 million in amortization of premium on available-for-sale investments and a decrease of $0.5 million in foreign currency exchange gains. Income Tax Provision The income tax provision for the year ended December 31, 2017 was $17.7 million, or 21.4% of pre-tax income. The effective tax rate differed from thefederal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates, and because of thestock-based compensation deductions. In addition, the effective tax rate was impacted by the effects of the 2017 Tax Act and the release of the U.S.valuation allowance as discussed in details below. 36Table of Contents 2017 U.S. Tax Reform: Under Accounting Standards Codification (“ASC”) 740, Income Taxes, the effects of a new legislation are recognized upon enactment. Accordingly, wewere required to recognize the tax effects of the 2017 Tax Act beginning in the fourth quarter of 2017. On December 22, 2017, the Securities and Exchange Commission issued SAB 118, which addresses the application of ASC 740 in situations when aregistrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income taxeffects of the 2017 Tax Act. In accordance with SAB 118, for matters that have not been completed, we would recognize provisional amounts to theextent that they are reasonably estimable. If a reasonable estimate cannot be determined, we would not be required to report provisional amounts andwould continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act. As of December 31, 2017, we have not completed our accounting for the tax effects of the 2017 Tax Act and recorded certain provisional amounts, asdiscussed below, based on reasonable estimates for the year ended December 31, 2017. The provisional amounts are subject to revisions, possiblymaterially, as we perform further analysis of the 2017 Tax Act, collect and prepare necessary financial data, continue to assess our tax positions, andinterpret any additional guidance issued by the U.S. Treasury Department, IRS, FASB, and other standard-setting and regulatory bodies. Any subsequentadjustment to these amounts will be recorded to the income tax provision in the period when the analysis is complete. We expect to complete the analysiswithin the one-year measurement period ending December 21, 2018, pursuant to SAB 118. Corporate Tax Rate and Remeasurement of Deferred Taxes The 2017 Tax Act reduces the corporate tax rate from 35% to 21%, effective January 1, 2018. Because ASC 740 requires the effect of a change in tax lawsto be recognized as of the date of enactment, we remeasured our deferred tax balance as of December 22, 2017 and recorded a provisional amount of $9.8million to the income tax provision as a result of the remeasurement for the year ended December 31, 2017. Deemed Repatriation Transition Tax The 2017 Tax Act mandates a one-time deemed repatriation transition tax of post-1986 undistributed foreign earnings and profits (“E&P”) on which U.S.income taxes were previously deferred. The rate applied varies depending on whether the E&P is held in liquid or non-liquid assets. A proportionaldeduction on the deemed repatriation results in a transition tax of 15.5% for cash and liquid assets and 8% for non-liquid assets. The transition tax isassessed regardless of whether we repatriate the earnings. The transition tax is determined on the greater of E&P as of two measurement dates (November2, 2017 or December 31, 2017). The amount of cash and liquid assets is determined based on the greater of the amounts calculated using two alternativemeasurement periods. For the year ended December 31, 2017, we recorded a provisional amount of $41.9 million related to the transition tax expense. After the utilization ofR&D tax credits of $18.0 million, the transition tax payable is $23.9 million. As permitted by the 2017 Tax Act, we have elected to pay the transition taxin installments over eight years. As a result, $1.9 million was recorded in current accrued liabilities and $22.0 million was recorded in long-term incometax liabilities as of December 31, 2017. Undistributed Earnings of Subsidiaries We previously considered the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes.Prior to the transition tax, we had an excess of the amount for financial reporting over the tax basis in our foreign subsidiaries including undistributedforeign earnings of $390.2 million. While the transition tax resulted in the reduction of the excess of the amount for financial reporting over the tax basisin our foreign subsidiaries and subjected a provisional amount of $119.7 million of undistributed foreign earnings to tax, an actual repatriation fromour non-U.S. subsidiaries could be subject to additional foreign withholding taxes and U.S. state taxes. We have analyzed our global working capital and cash requirements, and have determined that we plan to repatriate cash from our Bermuda subsidiary onan ongoing basis to fund our future U.S. based expenditures and dividends. For the other foreign subsidiaries, we expect to indefinitely reinvestundistributed earnings to fund foreign operations and their research and development. For those undistributed foreign earnings from which we were notable to make a reasonable estimate of the tax effects of such repatriation, we have not recorded any deferred taxes or accrued for any withholding taxes orstate taxes as of December 31, 2017. We will record the tax effects of any change in our prior assertion with respect to those undistributed foreign earningsin the period that we are first able to make a reasonable estimate, no later than the end of the measurement period under SAB 118. Global Intangible Low-Taxed Income The 2017 Tax Act subjects a U.S. parent shareholder to taxation of its global intangible low-taxed income (“GILTI”), effective January 1, 2018. TheGILTI inclusions will impact companies that have foreign earnings generated without a large aggregate foreign fixed asset base and whose earnings arebeing taxed at a low tax rate. GILTI is calculated based on foreign income in excess of a deemed return on tangible assets of foreign corporations. Theincome inclusion under GILTI is eligible for a deduction that is intended to lower the effective tax rate to 10.5% for taxable years 2018 to 2025, and riseto 13.125% for taxable years after 2025. The enactment of the GILTI tax will result in additional Subpart F income recognition for us in 2018 andonwards. 37Table of Contents Executive Compensation Deductions The 2017 Tax Act retains the $1 million limitation on deductible compensation to covered employees, which include the Chief Executive Officer andfour other highest paid officers, under IRC Section 162(m). However, it eliminates the exception for performance-based cash or stock compensation andexpands the definition of covered employees to include the Chief Financial Officer. Accordingly, beginning January 1, 2018, the deductiblecompensation to covered employees will generally be subject to the $1 million limitation. Release of Valuation Allowance: Management periodically evaluates the realizability of our deferred tax assets based on all available evidence. The realizability of our deferred tax assetsis dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. We maintained a full valuation allowance on our U.S. deferred tax assets as of the third quarter of 2017. In the fourth quarter of 2017, we assessed therealizability of the deferred tax assets and concluded that it was more likely than not that our federal deferred tax assets would be realizable, dueprincipally to the enactment of the 2017 Tax Act. In accordance with ASC 740, management considered all available evidence, both positive andnegative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax asset was needed. Our conclusion wasprimarily driven by the following positive evidence: ●We forecast taxable income in the U.S. in future periods. The enactment of GILTI will result in additional Subpart F income each year. ●Executive performance-based equity awards are now subject to the Section 162(m) deduction limitation. ●We have a history of utilizing all federal tax attributes before expiration. As a result, we released $21.6 million of valuation allowance on federal deferred tax assets, which was recorded as a benefit in the income tax provision inthe fourth quarter of 2017. We continue to maintain a full valuation allowance on the deferred tax assets in California, primarily due to a lowapportionment factor and the amount of R&D tax credits generated is greater than the amount utilized. 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 thefederal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates. In addition, theeffective tax rate was impacted by changes in valuation allowance and the stock-based compensation deductions. 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 $2.7million 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 thischarge, the effective tax rate differed from the federal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda andChina 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 wasimpacted by changes in valuation allowance. Liquidity and Capital Resources December 31, 2017 2016 (in thousands, except percentages) Cash and cash equivalents $82,759 $112,703 Short-term investments 216,331 155,521 Total cash, cash equivalents and short-term investments $299,090 $268,224 Percentage of total assets 45.8% 52.5% Total current assets $449,170 $382,984 Total current liabilities (65,917) (52,921)Working capital $383,253 $330,063 38Table of Contents As of December 31, 2017, we had cash and cash equivalents of $82.8 million and short-term investments of $216.3 million, compared with cash and cashequivalents of $112.7 million and short-term investments of $155.5 million as of December 31, 2016. As of December 31, 2017, $66.4 million of cash andcash equivalents and $113.1 million of short-term investments were held by our international subsidiaries. After the enactment of the 2017 Tax Act, wecurrently plan to repatriate cash from our Bermuda subsidiary on an ongoing basis to fund our future expenditures in the U.S. and continue to indefinitelyreinvest our earnings from other foreign subsidiaries. See the "Income Tax Provision" section for further discussion. The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories and othercurrent assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of December 31, 2017, we hadworking capital of $383.3 million, compared with working capital of $330.1 million as of December 31, 2016. The $53.2 million increase in workingcapital was due to a $66.2 million increase in current assets, partially offset by a $13.0 million increase in current liabilities. The increase in current assetswas primarily due to an increase in short-term investments, accounts receivable, inventories and prepaid expenses, partially offset by a decrease in cashand cash equivalents. The increase in current liabilities was primarily due to an increase in accounts payable, accrued compensation and related benefitsand other accrued liabilities. Summary of Cash Flows The following table summarizes our cash flow activities: Year Ended December 31, 2017 2016 2015 (in thousands) Net cash provided by operating activities $133,821 $107,786 $69,736 Net cash used in investing activities (134,060) (55,726) (57,197)Net cash used in financing activities (31,325) (28,127) (46,652)Effect of exchange rate changes on cash and cash equivalents 1,620 (2,090) (1,293)Net increase (decrease) in cash and cash equivalents $(29,944) $21,843 $(35,406) For the year ended December 31, 2017, net cash provided by operating activities was $133.8 million, primarily due to our net income adjusted for certainnon-cash items, including depreciation and amortization, stock-based compensation and deferred taxes, and a net increase of $15.7 million from thechanges in our operating assets and liabilities. The increase in deferred taxes was primarily due to the release of the U.S. valuation allowance, partiallyoffset by the remeasurement of the deferred tax balance as a result of the 2017 Tax Act, in the fourth quarter of 2017. The increase in accounts receivablewas primarily driven by higher sales. The increase in inventories was primarily driven by an increase in strategic wafer and die inventories as well as anincrease in finished goods to meet current demand and future growth. The increase in accounts payable was primarily driven by increased inventory andcapital asset purchases to meet future demand. The increase in accrued liabilities was primarily driven by an increase in employee contributions to thedeferred compensation plan and warranty expenses. The increase in income tax liabilities was primarily driven by the one-time deemed repatriationtransition tax liability recorded in the fourth quarter of 2017. 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 certainnon-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $2.9 million from the changes in ouroperating assets and liabilities. The increase in other assets was primarily due to a prepaid wafer purchase agreement we funded during the year. Theincrease in inventories was primarily driven by increased purchases to meet current demand and future growth. The increase in accrued liabilities wasprimarily 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 certainnon-cash items, including depreciation and amortization, stock-based compensation, a change in fair value of contingent consideration and a netdecrease of $12.6 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily driven by increasedsales. The increase in inventories was primarily driven by increased purchases to meet current demand and future growth. The increase in accruedliabilities was primarily driven by an increase in employee contributions to the deferred compensation plan. For the year ended December 31, 2017, net cash used in investing activities was $134.1 million, primarily due to purchases of property and equipment of$65.8 million, net purchases of short-term investments of $63.0 million, and net contributions to the deferred compensation plan of $5.3 million. For theyear ended December 31, 2016, net cash used in investing activities was $55.7 million, primarily due to purchases of property and equipment of $37.1million, net purchases of investments of $13.6 million, and net contributions to the deferred compensation plan of $5.0 million. For the year endedDecember 31, 2015, net cash used in investing activities was $57.2 million, primarily due to net purchases of investments of $33.5 million, purchases ofproperty and equipment of $16.0 million, and net contributions to the deferred compensation plan of $8.0 million. 39Table of Contents For the year ended December 31, 2017, we funded the purchases of land in Kirkland, Washington, office space in Shanghai and Hangzhou, China, andland and office space in Taipei, Taiwan for $53.8 million. For the year ended December 31, 2016, we funded the purchases of a previously leasedmanufacturing facility in Chengdu, China, office space in Shenzhen, China, and land and office space in Taipei, Taiwan for $17.5 million. For the yearended December 31, 2015, we spent $5.4 million to purchase office space in Shanghai, China. For the year ended December 31, 2017, net cash used in financing activities was $31.3 million, primarily reflecting $33.9 million used to pay dividendsto our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by $2.9 million of cash proceeds from stock optionexercises and issuance of shares through our employee stock purchase plan. For the year ended December 31, 2016, net cash used in financing activitieswas $28.1 million, primarily reflecting $33.1 million used to pay dividends to our stockholders and dividend equivalents to our employees who holdRSUs, partially offset by $3.8 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan. Forthe year ended December 31, 2015, net cash used in financing activities was $46.7 million, primarily reflecting $32.3 million used in repurchases of ourcommon stock pursuant to our stock repurchase program and $30.0 million used to pay dividends to our stockholders and dividend equivalents to ouremployees who hold RSUs, partially offset by $10.0 million of cash proceeds from stock option exercises and issuance of shares through our employeestock 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 ourcommon stock. The program expired on December 31, 2015. In February 2016, our Board of Directors approved a new stock repurchase program thatauthorized us to repurchase up to $50 million in the aggregate of our common stock. The program expired on December 31, 2017. For the years endedDecember 31, 2017 and 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. 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. Inaddition, outstanding RSU awards contain rights to receive dividend equivalents, which entitle employees who hold RSUs to the same dividend valueper share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividendequivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. For theyear ended December 31, 2017, we paid dividends and dividend equivalents totaling $33.9 million. For the year ended December 31, 2016, we paiddividends and dividend equivalents totaling $33.1 million. For the year ended December 31, 2015, we paid dividends and dividend equivalents totaling$30.0 million. In February 2018, our Board of Directors approved an increase in our quarterly cash dividends from $0.20 per share to $0.30 per share, effective for thefirst quarter of 2018. We anticipate that cash used for future dividends and dividend equivalent payments, as well as payments for the one-time deemed repatriation transitiontax, will come from our current domestic cash and cash generated from ongoing U.S. operations. As a result of the 2017 Tax Act, we also plan to repatriatecash from our Bermuda subsidiary on an ongoing basis to fund these and other future expenditures in the U.S. and continue to indefinitely reinvest ourearnings from other foreign subsidiaries. See the "Income Tax Provision" section for further discussion. Although cash requirements will fluctuate based on the timing and extent of many factors such as those discussed above, we believe that cash generatedfrom operations, together with the liquidity provided by existing cash balances and short-term investments, will be sufficient to satisfy our liquidityrequirements for the next 12 months. 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, and may need to raise additional funds by any one or a combination of thefollowing: issuing equity securities, issuing debt or convertible debt securities, incurring indebtedness secured by our assets, or selling certain productlines and/or portions of our business. Accordingly, we cannot ensure that we will continue to pay dividends and dividend equivalents in the future, andthere 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 andcompanies, and we continue to consider potential acquisition candidates. Any such transactions could involve the issuance of a significant number ofnew equity securities, assumptions of debt, and/or payment of cash consideration. We may also be required to raise additional funds to complete any suchacquisitions, through either the issuance of equity and debt securities or incurring indebtedness secured by our assets. If we raise additional funds oracquire businesses or technologies through the issuance of equity securities or convertible debt securities, our existing stockholders may experiencesignificant dilution. 40Table of Contents Contractual Obligations The following table summarizes our contractual obligations at December 31, 2017: Payment Due by Period Total Less Than1 Year 1 - 3 Years 3 - 5 Years More Than5 years (in thousands) Operating leases $2,145 $1,210 $829 $106 $- Outstanding purchase commitments (1) 52,586 49,736 1,000 1,000 850 Transition tax liability (2) 23,934 1,915 3,829 3,829 14,361 Other long-term obligations (3) 31,910 - 6,576 8,749 16,585 Total $110,575 $52,861 $12,234 $13,684 $31,796 ______________ (1)Outstanding purchase commitments primarily consist of wafer and other inventory purchases, assembly services and license arrangements. (2)The transition tax liability represents a one-time, mandatory deemed repatriation tax imposed on previously deferred foreign earnings under the2017 Tax Act. As permitted by the 2017 Tax Act, we elected to pay the tax liability in installment over eight years: 8% in 2018, 8% in 2019, 8%in 2020, 8% in 2021, 8% in 2022, 15% in 2023, 20% in 2024, and 25% in 2025. See the “Income Tax Provision” section for further discussion. (3)Other long-term obligations include long-term liabilities reflected in our Consolidated Balance Sheets, which primarily consist of the deferredcompensation plan liabilities and accrued dividend equivalents. Because of the uncertainty as to the timing of distributions related to a portionof the deferred compensation plan liabilities, we have excluded estimated obligations of $1.1 million from the table above. In addition, becauseof the uncertainty as to the timing of payments related to our liabilities for unrecognized tax benefits, we have excluded estimated obligations of$9.6 million from the table above. Off Balance Sheet Arrangements As of December 31, 2017, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’sRegulation 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 outsideprofessional 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-termmaturities. A 10% decline in interest rates would impact our results of operations by approximately $0.5 million in interest income. We do not use derivative financial instruments in our investment portfolio. Investments in debt securities are classified as available-for-sale. Foravailable-for-sale investments, no gains or losses are recognized in our results of operations due to changes in interest rates unless such securities are soldprior to maturity or are determined to be other-than-temporarily impaired. Available-for-sale investments are reported at fair value with the relatedunrealized gains or losses being included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Long-Term Investments As of December 31, 2017, our holdings in auction-rate securities, which have a fair value of $5.3 million, have failed to reset as a result of current marketconditions. A 10% decline in the fair value could impact our results of operations by approximately $0.5 million if we determined the decline in value tobe other-than-temporary. 41Table of Contents 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 generallyimpacted by foreign currency rate changes. The functional currency of the Company’s offshore operations is generally the local currency, primarilyincluding the Renminbi, the New Taiwan Dollar and the Euro. In addition, we incur foreign currency exchange gains or losses related to certainintercompany transactions between the U.S. and our foreign subsidiaries that are denominated in a currency other than the functional currency. Gains orlosses from the settlement and remeasurement of the balances are reported in interest and other income. Fluctuations in foreign currency exchange rateshave not had a material impact on our results of operations in any of the periods presented. 42Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED FINANCIAL STATEMENTS Contents PageReport of Independent Registered Public Accounting Firm44Consolidated Balance Sheets45Consolidated Statements of Operations46Consolidated Statements of Comprehensive Income47Consolidated Statements of Stockholders’ Equity48Consolidated Statements of Cash Flows49Notes to Consolidated Financial Statements50 43Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors ofMonolithic Power Systems, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Monolithic Power Systems, Inc. and subsidiaries (the "Company") as of December 31,2017 and 2016, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the three yearsin the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financialstatements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generallyaccepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2017, based on 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, 2018, expressed an unqualifiedopinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and thePCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditsalso included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation ofthe financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ DELOITTE & TOUCHE LLP San Jose, California March 1, 2018 We have served as the Company's auditor since 1999. 44Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except par value) December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents $82,759 $112,703 Short-term investments 216,331 155,521 Accounts receivable, net 38,037 34,248 Inventories 99,281 71,469 Other current assets 12,762 9,043 Total current assets 449,170 382,984 Property and equipment, net 144,636 85,171 Long-term investments 5,256 5,354 Goodwill 6,571 6,571 Acquisition-related intangible assets, net 951 3,002 Deferred tax assets, net 15,917 633 Other long-term assets 30,068 27,411 Total assets $652,569 $511,126 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $22,813 $17,427 Accrued compensation and related benefits 15,597 12,578 Accrued liabilities 27,507 22,916 Total current liabilities 65,917 52,921 Income tax liabilities 31,621 3,870 Other long-term liabilities 33,024 23,219 Total liabilities 130,562 80,010 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; sharesissued and outstanding: 41,614 and 40,793 as of December 31, 2017 and December 31, 2016,respectively 376,586 315,969 Retained earnings 143,608 119,362 Accumulated other comprehensive income (loss) 1,813 (4,215)Total stockholders’ equity 522,007 431,116 Total liabilities and stockholders’ equity $652,569 $511,126 See accompanying notes to consolidated financial statements. 45Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Year Ended December 31, 2017 2016 2015 Revenue $470,929 $388,665 $333,067 Cost of revenue 212,646 177,792 152,898 Gross profit 258,283 210,873 180,169 Operating expenses: Research and development 82,359 73,643 65,787 Selling, general and administrative 97,257 83,012 72,312 Litigation expense (benefit), net 1,243 (229) 1,000 Total operating expenses 180,859 156,426 139,099 Income from operations 77,424 54,447 41,070 Interest and other income, net 5,520 2,817 1,421 Income before income taxes 82,944 57,264 42,491 Income tax provision 17,741 4,544 7,319 Net income $65,203 $52,720 $35,172 Net income per share: Basic $1.58 $1.30 $0.89 Diluted $1.50 $1.26 $0.86 Weighted-average shares outstanding: Basic 41,350 40,436 39,470 Diluted 43,578 41,915 40,869 Cash dividends declared per common share $0.80 $0.80 $0.80 See accompanying notes to consolidated financial statements. 46Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Year Ended December 31, 2017 2016 2015 Net income $65,203 $52,720 $35,172 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments, net of $0 tax in 2017, 2016 and 2015 6,369 (5,033) (4,166)Change in unrealized loss on available-for-sale securities, net of $0 tax in 2017,2016 and 2015 (341) (648) (179)Total other comprehensive income (loss), net of tax 6,028 (5,681) (4,345)Comprehensive income $71,231 $47,039 $30,827 See accompanying notes to consolidated financial statements. 47Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands) Accumulated Common Stock and Other Total Additional Paid-in Capital Retained Comprehensive Stockholders’ Shares Amount Earnings Income (Loss) Equity Balance as of January 1, 2015 38,832 $240,500 $100,114 $5,811 $346,425 Net income - - 35,172 - 35,172 Other comprehensive loss - - - (4,345) (4,345)Dividends and dividend equivalents declared - - (33,999) - (33,999)Exercise of stock options 498 7,744 - - 7,744 Release of restricted stock units 948 - - - - Repurchase of common shares (645) (32,286) - - (32,286)Shares issued under the employee stock purchase plan 56 2,227 - - 2,227 Stock-based compensation expense - 41,650 - - 41,650 Tax benefits from equity awards - 5,928 - - 5,928 Balance as of December 31, 2015 39,689 265,763 101,287 1,466 368,516 Net income - - 52,720 - 52,720 Other comprehensive loss - - - (5,681) (5,681)Dividends and dividend equivalents declared - - (34,645) - (34,645)Exercise of stock options 76 1,344 - - 1,344 Release of restricted stock units 975 - - - - Shares issued under the employee stock purchase plan 53 2,463 - - 2,463 Stock-based compensation expense - 44,934 - - 44,934 Tax benefits from equity awards - 1,465 - - 1,465 Balance as of December 31, 2016 40,793 315,969 119,362 (4,215) 431,116 Net income - - 65,203 - 65,203 Other comprehensive income - - - 6,028 6,028 Dividends and dividend equivalents declared - - (35,816) - (35,816)Exercise of stock options 9 150 - - 150 Release of restricted stock units 772 - - - - Shares issued under the employee stock purchase plan 40 2,701 - - 2,701 Stock-based compensation expense - 52,625 - - 52,625 Cumulative-effect adjustment from adoption of ASU No.2016-09 - 5,141 (5,141) - - Balance as of December 31, 2017 41,614 $376,586 $143,608 $1,813 $522,007 See accompanying notes to consolidated financial statements. 48Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2017 2016 2015 Cash flows from operating activities: Net income $65,203 $52,720 $35,172 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangible assets 16,101 14,674 13,783 (Gain) loss on sales or write-off of property and equipment (3) 57 (339)Amortization of premium on available-for-sale investments 1,976 1,019 463 (Gain) loss on deferred compensation plan investments (2,531) (1,257) 133 Change in fair value of contingent consideration - - (2,507)Deferred taxes, net (15,238) (5) 42 Excess tax benefits from equity awards - (1,465) (5,928)Stock-based compensation expense 52,617 44,989 41,563 Changes in operating assets and liabilities: Accounts receivable (3,785) (3,421) (5,201)Inventories (27,795) (8,323) (22,210)Other assets 1,603 (11,021) (390)Accounts payable 3,077 5,483 147 Accrued compensation and related benefits 2,397 3,136 1,068 Accrued liabilities 10,852 8,035 9,942 Income tax liabilities 29,347 3,165 3,998 Net cash provided by operating activities 133,821 107,786 69,736 Cash flows from investing activities: Property and equipment purchases (65,773) (37,112) (16,024)Proceeds from sales of property and equipment 3 - 340 Purchases of short-term investments (140,531) (236,912) (223,018)Proceeds from maturities and sales of short-term investments 77,502 223,344 189,549 Contributions to deferred compensation plan, net (5,261) (5,046) (8,044)Net cash used in investing activities (134,060) (55,726) (57,197)Cash flows from financing activities: Property and equipment purchased on extended payment terms (250) (300) (300)Proceeds from exercise of stock options 150 1,344 7,744 Proceeds from shares issued under the employee stock purchase plan 2,701 2,463 2,227 Repurchase of common shares - - (32,286)Dividends and dividend equivalents paid (33,926) (33,099) (29,965)Excess tax benefits from equity awards - 1,465 5,928 Net cash used in financing activities (31,325) (28,127) (46,652)Effect of change in exchange rates 1,620 (2,090) (1,293)Net increase (decrease) in cash and cash equivalents (29,944) 21,843 (35,406)Cash and cash equivalents, beginning of period 112,703 90,860 126,266 Cash and cash equivalents, end of period $82,759 $112,703 $90,860 Supplemental disclosures for cash flow information: Cash paid for taxes and interest $3,619 $1,234 $3,322 Supplemental disclosures of non-cash investing and financing activities: Liability accrued for property and equipment purchases $3,061 $787 $2,184 Liability accrued for dividends and dividend equivalents $10,686 $10,416 $10,109 See accompanying notes to consolidated financial statements. 49Table of Contents 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, theCompany was reincorporated in the State of Delaware. MPS designs, develops and markets integrated power semiconductor solutions and power deliveryarchitectures. MPS's mission is to provide innovative power solutions in the consumer, computing and storage, industrial, automotive andcommunications markets. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactionshave 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”) requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptionsused in these consolidated financial statements primarily include those related to revenue recognition, inventory valuation, valuation of share-basedawards, valuation of goodwill and acquisition-related intangible assets, contingencies and tax valuation allowances. Actual results could differ fromthose 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-termand long-term investments and accounts receivable. The Company’s cash consists of checking and savings accounts. The Company’s cash equivalentsinclude 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 corporate debt securities and 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 supportaccounts receivable. To manage credit risk, management performs ongoing credit evaluations of its customers’ financial condition. The Companyrequires cash in advance for certain customers in addition to ongoing credit evaluations. The Company did not record any allowance for doubtfulaccounts as of December 31, 2017 and 2016. The Company participates in the dynamic high technology industry and believes that changes in any of the following areas could have a material adverseeffect on its future financial position, results of operations or cash flows: advances and trends in new technologies and industry standards; competitivepressures in the form of new products or price reductions on current products; changes in product mix; changes in the overall demand for products offeredby 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 currencyexchange rates; risk associated with changes in government policies and regulations on trade restrictions and corporate taxes; availability of necessarycomponents or sub-assemblies; availability of foundry capacity; ability to integrate acquired companies; and the Company’s ability to attract and retainemployees 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 andTaiwan, which utilize the Renminbi and the New Taiwan Dollar as their currencies, respectively. Accordingly, assets and liabilities of the foreignsubsidiaries are translated using exchange rates in effect at the end of the period. Revenue and costs are translated using average exchange rates for theperiod. 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 gain or loss related to certain intercompanytransactions between the U.S. and its foreign subsidiaries that are denominated in a currency other than the functional currency. In connection with thesettlement and remeasurement of the balances, the Company recorded foreign currency exchange gain (loss) of $(0.6) million, $0.1 million and $0.6million for the years ended December 31, 2017, 2016 and 2015, respectively, which were reported in interest and other income, net, in the ConsolidatedStatements of Operations. 50Table of Contents 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 thecategorization 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 marketsLevel 2: Inputs other than the quoted prices in active markets that are observable either directly or indirectlyLevel 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 attheir fair market value. Premiums and discounts are amortized or accreted over the life of the related available-for-sale securities. Interest income isrecognized when earned. The Company determines whether an impairment is temporary or other-than temporary. Unrealized gains or losses that are deemed to be temporary arerecorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity in the Consolidated Balance Sheets, and changes inunrealized gains or losses are recorded in the Consolidated Statements of Comprehensive Income. The Company records an impairment charge in interestand other income, net, in the Consolidated Statements of Operations when an available-for-sale investment has experienced a decline in value that isdeemed to be other-than-temporary. Other-than-temporary impairment exists when the Company either has the intent to sell the security, it will morelikely 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, 2017 and 2016, the fair value of the Company’s holdings in auction-rate securities was $5.3 million and $5.4 million, respectively,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 orrestructured, 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) and estimated net realizablevalue. The Company writes down excess and obsolete inventory based on its age and forecasted demand, which includes estimates taking intoconsideration the Company’s outlook on market and economic conditions, technology changes, new product introductions and changes in strategicdirection. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. When theCompany records a write-down on inventory, it establishes a new, lower cost basis for that inventory, and subsequent changes in facts and circumstanceswill 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. Buildingsand building improvements have estimated useful lives of 20 to 40 years. Leasehold improvements are amortized over the shorter of the estimated usefullives or the lease period. Production equipment and software have estimated useful lives of three to seven years. Transportation equipment has estimateduseful lives of 5 to 15 years. Furniture and fixtures have estimated useful lives of three to five years. Land is not depreciated. 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 dateof acquisition. In-process research and development (“IPR&D”) assets represent the fair value of incomplete R&D projects that had not reachedtechnological feasibility as of the date of acquisition. The IPR&D assets are initially capitalized at fair value as intangible assets with indefinite lives andassessed for impairment at each reporting period. When the IPR&D projects are completed, they are reclassified as amortizable intangible assets and areamortized over their estimated useful lives. Alternatively, if the IPR&D projects are abandoned, they are impaired and expensed to research anddevelopment. 51Table of Contents Acquisition-related intangible assets with finite lives consist of know-how and developed technologies. These assets are amortized on a straight-line basisover the estimated useful lives of three to five years and the amortization expense is recorded in cost of revenue in the Consolidated Statements ofOperations. 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 carryingamount of an asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected toresult from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the differencebetween 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 indicatethat 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 fairvalue 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 thecarrying amount, then the two-step goodwill impairment test is performed. The first step compares the fair value of the reporting unit with its carryingamount. If the carrying amount exceeds its fair value, the second step measures the impairment loss by comparing the implied fair value of the goodwillwith 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, and certain prepaid expenses. The Company amortizes the land use rights over 50 years. Deferred Compensation Plan The Company has a non-qualified, unfunded deferred compensation plan, which provides certain key employees, including executive management, withthe ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax deferred basis. The Company does not makecontributions to the plan or guarantee returns on the investments. The Company is responsible for the plan’s administrative expenses. Participants’deferrals and investment gains and losses remain as the Company’s liabilities and the underlying assets are subject to claims of general creditors. The liabilities for compensation deferred under the plan are recorded at fair value in each reporting period. Changes in the fair value of the liabilities areincluded in operating expense in the Consolidated Statements of Operations. The Company manages the risk of changes in the fair value of the liabilitiesby electing to match the liabilities with investments in corporate-owned life insurance policies and mutual funds that offset a substantial portion of theexposure. 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 mutualfund investments are included in interest and other income, net in the Consolidated Statements of Operations. The following table summarizes thedeferred compensation plan balances in the Consolidated Balance Sheets (in thousands): December 31, 2017 2016 Deferred compensation plan asset components: Cash surrender value of corporate-owned life insurance policies $11,455 $8,180 Fair value of mutual funds 16,625 12,108 Total $28,080 $20,288 Deferred compensation plan assets reported in: Other long-term assets $28,080 $20,288 Deferred compensation plan liabilities reported in: Accrued compensation and related benefits (short-term) $356 $479 Other long-term liabilities 28,087 19,836 Total $28,443 $20,315 52Table of Contents 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 providereplacement products at no charge to the customer for defective products. Reserve requirements are recorded in the period of sale and are based on anassessment of the products sold with warranty and historical warranty costs incurred. Historically, the warranty expenses have not been material to theCompany’s consolidated financial statements. Revenue Recognition The Company’s revenue consists primarily of product sales of assembled and tested integrated circuits and dies in wafer form to the consumer, computingand storage, industrial, automotive and communications markets. The remaining revenue has not been significant historically and primarily includesroyalties from licensing arrangements and revenue from wafer testing services for third parties. The Company recognizes revenue based on the following four criteria: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred orservices have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) is basedon management’s judgment regarding the fixed nature of the fees charged for products delivered and the collectability of those fees. The application ofthese criteria has resulted in the Company generally recognizing revenue upon shipment or delivery (when title and risk of loss have transferred tocustomers), including to most of the distributors, original equipment manufacturers and electronic manufacturing service providers. For each of the years ended December 31, 2017, 2016 and 2015, 88% of the Company’s sales, respectively, were made through distribution arrangementswith third parties. The Company generally recognizes revenue upon shipment or delivery of products to the distributors based on the followingconsiderations: (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 are30-45 days for its distributors) or price adjustments to distributors when the Company recognizes revenue upon shipment or delivery. (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 has 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. Certain of the Company’s large distributors have contracts that included limited stock rotation rights that permit the return of a small percentage of theprevious six months’ purchases. The Company maintains a sales reserve for stock rotation rights, which is based on historical experience of actual stockrotation 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 ofDecember 31, 2017 and 2016, the reserve for stock rotation rights was $2.6 million and $1.9 million, respectively. If the Company enters into arrangements with distributors that have price adjustment or other rights that are not fixed or determinable, the Companyrecognizes revenue under such arrangements only after the distributors have sold the products to end customers, at which time the price is no longersubject to adjustment and is fixed. Three of the Company’s U.S.-based distributors have such price adjustment rights and accordingly, the Companydefers revenue recognition on these shipments until the products are sold to the end customers by the distributors. As of December 31, 2017 and 2016, thedeferred revenue balance before the price adjustments from these distributors was $1.9 million and $3.7 million, and the deferred costs were $0.2 millionand $0.3 million, respectively. On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606).The primary effects of the new standard for the Company related to the timing of revenue recognition with the three U.S.-based distributors with priceadjustment rights. See “Recent Accounting Pronouncements Not Yet Adopted as of December 31, 2017” below for further discussion. 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 theaward. The fair value of restricted stock units (“RSUs”) with service conditions or performance conditions is based on the grant date share price. The fairvalue of RSUs with only market conditions, as well as RSUs containing both market and performance conditions, is estimated using a Monte Carlosimulation model. The fair value of stock options, shares issued under the employee stock purchase plan and RSUs with a purchase price feature isestimated using the Black-Scholes model. 53Table of Contents Compensation expense related to awards with service conditions is recorded on a straight-line basis over the requisite service period. Compensationexpense related to awards subject to market 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 onlyperformance conditions, as well as awards containing both market and performance conditions, the Company recognizes compensation expense when itbecomes probable that the performance criteria will be achieved. Management performs the probability assessment on a quarterly basis by reviewingexternal factors, such as macroeconomic conditions and the analog industry forecasts, and internal factors, such as the Company’s business andoperational objectives and revenue forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for inthe period of change by recording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. Anypreviously recognized compensation expense is reversed if the performance conditions are not expected to be satisfied. Prior to January 1, 2017, the Company recognized stock-based compensation expense less an estimate for forfeitures. Upon the adoption of ASU No.2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, on January 1, 2017, theCompany elected to account for forfeitures when they occur. See “Recently Adopted Accounting Pronouncement” below 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 fiscalyear by tax jurisdiction. The Company also recognizes federal, state and foreign deferred tax assets or liabilities for its estimate of future tax effectsattributable to temporary differences and carryforwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount ofany 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 withuncertainties 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 theCompany operates, or changes in other facts or circumstances. In addition, the Company recognizes liabilities for potential U.S. and foreign income taxfor uncertain income tax positions taken on its tax returns if it has less than a 50% likelihood of being sustained. If the Company determines that paymentof these amounts is unnecessary or if the recorded tax liability is less than its current assessment, the Company may be required to recognize an incometax benefit or additional income tax expense in its financial statements in the period such determination is made. The Company has calculated itsuncertain tax positions which were attributable to certain estimates and judgments primarily related to transfer pricing, cost sharing and its internationaltax structure exposure. On December 22, 2017, the tax legislation commonly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted, which significantlychanged U.S. corporate income tax law. The 2017 Tax Act made the following material changes: (1) reduction of the corporate income tax rate effectiveJanuary 1, 2018; (2) replacement of the worldwide tax system with a territorial tax regime, with a one-time mandatory tax on previously deferred foreignearnings; (3) amendment on the deductibility of executive performance-based compensation, and (4) creation of new taxes on certain foreign-sourcedearnings. Income tax effects resulting from changes in tax laws are accounted for by the Company in the period in which the law is enacted. See Note 12 forfurther discussion. 54Table of Contents 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 itsintellectual property, challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on theintellectual property rights of others, and employment matters. The pending proceedings involve complex questions of fact and law and will require theexpenditure of significant funds and the diversion of other resources to prosecute and defend. In addition, from time to time, the Company becomes awarethat it is subject to other contingent liabilities. When this occurs, the Company will evaluate the appropriate accounting for the potential contingentliabilities to determine whether a contingent liability should be recorded. In making this determination, management may, depending on the nature of thematter, consult with internal and external legal counsel and technical experts. Based on the facts and circumstances in each matter, the Company uses itsjudgment to determine whether it is probable that a contingent loss has occurred and whether the amount of such loss can be estimated. If the Companydetermines a loss is probable and estimable, the Company records a contingent loss. In determining the amount of a contingent loss, the Company takesinto account advice received from experts for each specific matter regarding the status of legal proceedings, settlement negotiations, prior case historyand other factors. Should the judgments and estimates made by management need to be adjusted as additional information becomes available, theCompany 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 businessmatters. The Company records litigation costs in the period in which they are incurred. Proceeds resulting from settlement of litigation or favorablejudgments 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. Dilutednet income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised orconverted into common shares, and calculated using the treasury stock method. Contingently issuable shares, including equity awards with performanceconditions or market conditions, are considered outstanding common shares and included in the basic net income per share as of the date that allnecessary conditions to earn the awards have been satisfied. Prior to the end of the contingency period, the number of contingently issuable sharesincluded 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 endof the reporting period. The Company’s outstanding RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and paid to the employeeswhen the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their servicerequirement 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 comprehensiveincome (loss) presented in the Consolidated Balance Sheets primarily consists of unrealized gains or losses related to available-for-sale investments andforeign currency translation adjustments. Recently Adopted Accounting Pronouncement 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 changed 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 ofexcess tax benefits in the statements of cash flows. The Company adopted the standard on January 1, 2017 and the primary impact of the adoption wasas follows: ●The Company elected to account for forfeitures of equity awards when they occur. The change was applied on a modified retrospective basis and theCompany recorded a cumulative-effect adjustment of $5.1 million to retained earnings on January 1, 2017, with a corresponding offset toadditional paid-in capital. ●Excess tax benefits are recognized in the income tax provision in the Consolidated Statements of Operations prospectively, rather than in additionalpaid-in capital in the Consolidated Balance Sheets. The Company applied the modified retrospective method and there was no netimpact on retained earnings on January 1, 2017, as the increase in deferred tax assets related to previously unrecognized excess tax benefits wasfully offset by a valuation allowance. ●The Company is presenting excess tax benefits as an operating activity in the Consolidated Statements of Cash Flows on a prospective basis. 55Table of Contents Recent Accounting Pronouncements Not Yet Adopted as of December 31, 2017 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 forentities to use in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue whenit transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange forthose goods or services. The Company adopted the standard on January 1, 2018 using the modified retrospective method and prior-period results will notbe restated. In the first quarter of 2018, the Company will record approximately $0.8 million, before tax, to retained earnings related to the cumulativeeffect of adopting Topic 606, primarily due to the change in revenue recognition for its U.S.-based distributors as discussed below Under Topic 606, the Company’s product sales consist of a single performance obligation that is satisfied at a point in time. The Company recognizesproduct revenue from distributors and other customers when the products are shipped or delivered to the customers (based on the terms of the firmpurchase orders and sales agreements), primarily because (a) the Company has transferred physical possession of the products, (b) the Company has apresent right to payment, (c) the customers have legal title to the products, and (d) the customers bear significant risks and rewards of ownership of theproducts. The primary change for the Company under Topic 606 relates to the timing of revenue recognition with three U.S.-based distributors. Sales to thesedistributors are transacted under the terms of agreements providing price adjustment and other rights. Prior to the adoption of Topic 606, revenue andcosts related to these sales were deferred until the Company received notification from the distributors that products have been sold to the end customersand the amount of price adjustments was fixed and finalized. As of December 31, 2017, the deferred revenue balance before the price adjustments was$1.9 million and the related deferred costs were $0.2 million. Upon adoption of Topic 606, the transaction price takes into consideration the effect ofvariable consideration such as price adjustments, which are estimated and recorded at the time the promised goods are transferred to the customers.Accordingly, effective January 1, 2018, the Company recognizes revenue at the time of shipment or delivery to the distributors, adjusted for an estimateof the price adjustments based on management’s review of historical data and other information available at the time. Revenue from other U.S. and non-U.S. distributors, which make up the majority of the Company’s total sales to distributors, was already recognized at thetime of shipment or delivery to the distributors prior to the adoption of Topic 606 because these arrangements do not contain price adjustment rights.Accordingly, revenue recognition on arrangements with these distributors remains substantially unchanged upon adoption of Topic 606. Other: 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 onthe balance sheets for substantially all leases with a lease term greater than 12 months, including leases currently accounted for as operating leases. Inaddition, the standard applies to leases embedded in service arrangements. The standard requires modified retrospective adoption and will be effective forannual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of the adoption on itsconsolidated 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 FinancialInstruments, which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. Inaddition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in theamortized cost of the securities. The standard will be effective for annual reporting periods beginning after December 15, 2019, with early adoptionpermitted for annual reporting periods beginning after December 15, 2018. Entities will apply the standard by recording a cumulative-effectadjustment 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 GoodwillImpairment, which simplifies the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requiresa hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fairvalue, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if aquantitative impairment test is necessary. The standard will be applied prospectively, and is effective for annual reporting periods beginning afterDecember 15, 2019. Early adoption is permitted. The Company is evaluating the impact of the adoption on its annual goodwill impairment test. 56Table of Contents 2. ACQUISITION On July 22, 2014 (the “Acquisition Date”), the Company acquired 100% of the outstanding capital stock of Sensima Technology SA (“Sensima”) for totalpurchase consideration of $14.2 million, which consisted of a cash payment of $11.7 million and the fair value of contingent consideration of $2.5million. The contingent consideration arrangement required the Company to pay up to an additional $8.9 million to former Sensima shareholders if Sensimaachieved a new product introduction as well as certain product revenue and direct margin targets in 2016. The fair value of the contingent considerationat the Acquisition Date was $2.5 million, which was estimated based on a probability-weighted analysis of possible future revenue outcomes. The fairvalue of the contingent consideration was initially recorded in other long-term liabilities in the Consolidated Balance Sheets and was remeasured at theend of each reporting period, with any changes in fair value recorded in operating expense in the Consolidated Statements of Operations. As part of thequarterly assessment in the fourth quarter of 2015, management reviewed the sales forecast for the products and determined that the projected productrevenue in 2016 would likely not meet the minimum target required to earn the contingent consideration, primarily because the product adoption processby customers would take longer than the Company had originally anticipated. Accordingly, the fair value of the contingent consideration was deemed tobe $0 as of December 31, 2015. The Company released the liability of $2.5 million and recorded the credit in selling, general and administrative expensesfor the year ended December 31, 2015. On December 31, 2016, at the conclusion of the performance period, management affirmed that no contingent consideration was earned as the actualproduct revenue in 2016 did not meet the minimum target. 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): December 31, 2017 2016 Cash, cash equivalents and investments: Cash $75,125 $87,747 Money market funds 7,134 24,956 Corporate debt securities 203,807 109,644 U.S. treasuries and government agency bonds 13,024 45,877 Auction-rate securities backed by student-loan notes 5,256 5,354 Total $304,346 $273,578 December 31, 2017 2016 Reported as: Cash and cash equivalents $82,759 $112,703 Short-term investments 216,331 155,521 Long-term investments 5,256 5,354 Total $304,346 $273,578 The contractual maturities of the Company’s short-term and long-term available-for-sale investments are as follows (in thousands): December 31, 2017 2016 Due in less than 1 year $89,399 $47,568 Due in 1 - 5 years 126,932 107,953 Due in greater than 5 years 5,256 5,354 Total $221,587 $160,875 57Table of Contents The following tables summarize the unrealized gain and loss positions related to the Company’s available-for sale investments (in thousands): December 31, 2017 AmortizedCost UnrealizedGains UnrealizedLosses Total FairValue Fair Value ofInvestments inUnrealizedLoss Position Money market funds $7,134 $- $- $7,134 $- Corporate debt securities 204,789 17 (999) 203,807 197,564 U.S. treasuries and government agency bonds 13,092 - (68) 13,024 13,024 Auction-rate securities backed by student-loan notes 5,570 - (314) 5,256 5,256 Total $230,585 $17 $(1,381) $229,221 $215,844 December 31, 2016 AmortizedCost UnrealizedGains UnrealizedLosses Total FairValue Fair Value ofInvestments inUnrealizedLoss Position Money market funds $24,956 $- $- $24,956 $- Corporate debt securities 110,429 65 (850) 109,644 91,938 U.S. treasuries and government agency bonds 45,899 - (22) 45,877 39,275 Auction-rate securities backed by student-loan notes 5,570 - (216) 5,354 5,354 Total $186,854 $65 $(1,088) $185,831 $136,567 There were no redemptions of auction-rate securities for the years ended December 31, 2017, 2016 and 2015. The underlying maturities of theoutstanding auction-rate securities are up to 30 years. As of December 31, 2017 and 2016, the impairment of $0.3 million and $0.2 million, respectively,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 fairvalue; ●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 additionalcredit loss associated with these securities because the Company expects to recover the entire amortized cost basis; ●The majority of the securities remain AAA, AA+ or Aaa 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, 2017 Total Level 1 Level 2 Level 3 Money market funds $7,134 $7,134 $- $- Corporate debt securities 203,807 - 203,807 - U.S. treasuries and government agency bonds 13,024 - 13,024 - Auction-rate securities backed by student-loan notes 5,256 - - 5,256 Mutual funds under deferred compensation plan 16,625 16,625 - - Total $245,846 $23,759 $216,831 $5,256 Fair Value Measurement at December 31, 2016 Total Level 1 Level 2 Level 3 Money market funds $24,956 $24,956 $- $- Corporate debt securities 109,644 - 109,644 - U.S. treasuries and government agency bonds 45,877 - 45,877 - Auction-rate securities backed by student-loan notes 5,354 - - 5,354 Mutual funds under deferred compensation plan 12,108 12,108 - - Total $197,939 $37,064 $155,521 $5,354 _________________●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 otherthan quoted prices that are observable for the assets. The market inputs used to value these instruments generally consist of market yields, recentlyexecuted transactions, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources may includeindustry standard data providers, security master files from large financial institutions, and other third-party sources used to determine a daily marketvalue.●Level 3—includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair valuemeasurement. 58Table of Contents The Company’s level 3 assets consist of government-backed student loan auction-rate securities, which became illiquid in 2008. The following tableprovides a rollforward of the fair value of the auction-rate securities (in thousands): Balance at January 1, 2016 $5,361 Change in unrealized loss included in other comprehensive loss (7)Balance at December 31, 2016 5,354 Change in unrealized loss included in other comprehensive income (98)Balance at December 31, 2017 $5,256 The Company determined the fair value of the auction-rate securities using a discounted cash flow model with the following assumptions: December 31, 2017 2016 Time-to-liquidity (years) 2-3 2 Discount rate 4.5%-9.6% 4.3%-9.3% 5. BALANCE SHEET COMPONENTS Inventories Inventories consist of the following (in thousands): December 31, 2017 2016 Raw materials $20,573 $14,599 Work in process 40,030 26,048 Finished goods 38,678 30,822 Total $99,281 $71,469 Other Current Assets Other current assets consist of the following (in thousands): December 31, 2017 2016 Prepaid wafer purchase $6,217 $5,000 Other prepaid expense 2,742 2,249 Interest receivable 1,352 966 Value-added tax receivable 1,235 263 Other 1,216 565 Total $12,762 $9,043 59Table of Contents Property and Equipment, Net Property and equipment, net, consist of the following (in thousands): December 31, 2017 2016 Production equipment and software $110,971 $95,565 Buildings and improvements 100,990 48,964 Transportation equipment 11,443 11,291 Land 16,883 8,285 Furniture and fixtures 3,641 3,518 Leasehold improvements 3,321 2,838 Property and equipment, gross 247,249 170,461 Less: accumulated depreciation and amortization (102,613) (85,290)Total $144,636 $85,171 Depreciation and amortization expense was $14.0 million, $12.6 million and $12.0 million for the years ended December 31, 2017, 2016 and 2015,respectively. Other Long-Term Assets Other long-term assets consist of the following (in thousands): December 31, 2017 2016 Deferred compensation plan assets $28,080 $20,288 Prepaid wafer purchase - 5,000 Other prepaid expense 897 1,117 Other 1,091 1,006 Total $30,068 $27,411 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2017 2016 Dividends and dividend equivalents $9,248 $8,946 Customer prepayments 4,742 3,246 Income tax payable 2,861 1,239 Stock rotation reserve 2,647 1,937 Warranty 2,416 1,030 Deferred income 1,845 3,553 Sales rebate 1,036 441 Commissions 938 1,008 Other 1,774 1,516 Total $27,507 $22,916 Other Long-Term Liabilities Other long-term liabilities consist of the following (in thousands): December 31, 2017 2016 Deferred compensation plan liabilities $28,087 $19,836 Dividend equivalents 4,881 3,294 Other 56 89 Total $33,024 $23,219 60Table of Contents 6. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET There have been no changes in the goodwill balance for the years ended December 31, 2017 and 2016. The Company did not identify any goodwillimpairment for the years ended December 31, 2017, 2016 and 2015. Acquisition-related intangible assets consist of the following (in thousands): December 31, 2017 Gross Amount AccumulatedAmortization Net Amount Know-how $1,018 $(704) $314 Developed technologies 6,466 (5,829) 637 Total $7,484 $(6,533) $951 December 31, 2016 Gross Amount AccumulatedAmortization Net Amount Know-how $1,018 $(500) $518 Developed technologies 6,466 (3,982) 2,484 Total $7,484 $(4,482) $3,002 Amortization expense is recorded in cost of revenue in the Consolidated Statements of Operations and totaled $2.1 million, $2.1 million and $1.8 millionfor the years ended December 31, 2017, 2016 and 2015, respectively. The estimated future amortization expense as of December 31, 2017 is as follows (in thousands): 2018 $841 2019 110 Total $951 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 annualincreases 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, 2.4million shares, or a number of shares determined by the Board of Directors. The 2004 Plan expired on November 12, 2014, and equity awards can nolonger 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 Directorsapproved certain amendments to the 2014 Plan. The 2014 Plan, as amended, became effective on November 13, 2014 and provides for the issuance of upto 5.5 million shares. The 2014 Plan will expire on November 13, 2024. As of December 31, 2017, 3.2 million shares remained available for futureissuance under the 2014 Plan. Stock-Based Compensation Expense The Company recognized stock-based compensation expense as follows (in thousands): Year Ended December 31, 2017 2016 2015 Cost of revenue $1,654 $1,575 $1,166 Research and development 14,816 14,041 11,156 Selling, general and administrative 36,147 29,373 29,241 Total stock-based compensation expense $52,617 $44,989 $41,563 Tax benefit related to stock-based compensation $5,054 $- $- 61Table of Contents In the first quarter of 2016, the Company’s then Chief Financial Officer retired. As the service or performance conditions for her outstanding restrictedstock units (“RSUs”) had not been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of$2.9 million associated with the unvested RSUs and this credit was reflected in selling, general and administrative expenses for the year ended December31, 2016. RSUs The Company’s RSUs include time-based RSUs, RSUs with only performance conditions (“PSUs”), RSUs with both market and performance conditions(“MPSUs”), and RSUs with only market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting ofawards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals. A summary of RSUactivity is presented in the table below (in thousands, except per-share amounts): Time-BasedRSUs Weighted-AverageGrantDate FairValue PerShare PSUs andMPSUs Weighted-AverageGrant DateFair ValuePer Share MSUs Weighted-AverageGrantDate FairValue PerShare Total Weighted-AverageGrantDate FairValue PerShare Outstanding at January 1,2015 589 $28.48 1,659 $28.11 1,800 $23.57 4,048 $26.14 Granted 271 $49.82 927 (1) $47.61 - $- 1,198 $48.11 Released (319) $26.56 (629) $23.40 - $- (948) $24.47 Forfeited (42) $35.60 (24) $28.68 - $- (66) $33.06 Outstanding at December 31,2015 499 $40.75 1,933 $38.99 1,800 $23.57 4,232 $32.64 Granted 133 $63.00 1,216 (1) $41.12 - $- 1,349 $43.28 Released (239) $36.43 (736) $29.71 - $- (975) $31.36 Forfeited (27) $45.35 (129) $36.82 (180) $23.57 (336) $30.38 Outstanding at December 31,2016 366 $51.35 2,284 $43.24 1,620 $23.57 4,270 $36.47 Granted 81 $94.25 585 (1) $62.72 - $- 666 $66.56 Released (175) $48.35 (597) $41.94 - $- (772) $43.39 Forfeited (14) $61.80 (6) $49.82 - $- (20) $58.46 Outstanding at December 31,2017 258 $66.30 2,266 $48.59 1,620 $23.57 4,144 $39.91 _________________(1)Amount reflects the number of PSUs and MPSUs that may ultimately be earned based on management’s probability assessment of the achievement ofperformance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions. The intrinsic value related to RSUs released was $74.0 million, $62.9 million and $49.2 million for the years ended December 31, 2017, 2016 and 2015,respectively. As of December 31, 2017, the total intrinsic value of all outstanding RSUs was $430.6 million, based on the closing stock price of $112.36.As of December 31, 2017, unamortized compensation expense related to all outstanding RSUs was $75.9 million with a weighted-average remainingrecognition period of approximately three years. Time-Based RSUs: For the years ended December 31, 2017, 2016 and 2015, the Compensation Committee of the Board of Directors (the "Compensation Committee")granted 81,000, 133,000 and 271,000 RSUs, respectively, with time-based vesting conditions to employees and non-employee directors. The RSUsgenerally vest over three to four years for employees and one year for directors, subject to continued service with the Company. 2017 PSUs: In February 2017, the Compensation Committee granted 200,000 PSUs to the executive officers, which represent a target number of shares to be awardedbased on the Company’s average two-year (2017 and 2018) revenue growth rate compared against the analog industry’s average two-year revenue growthrate as published by the Semiconductor Industry Association (“2017 Executive PSUs”). The maximum number of shares that an executive officer can earnis 300% of the target number of the 2017 Executive PSUs. 50% of the 2017 Executive PSUs will vest in the first quarter of 2019 if the pre-determinedperformance goals are met during the performance period and approved by the Compensation Committee. The remaining 2017 Executive PSUs will vestover the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming theachievement of the highest level of performance goals, the total stock-based compensation cost for the 2017 Executive PSUs is $36.3 million. In February 2017, the Compensation Committee granted 48,000 PSUs to certain non-executive employees, which represent a target number of shares tobe awarded based on the Company’s 2018 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2017and 2018) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor IndustryAssociation (“2017 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the2017 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2017 Non-Executive PSUs will vest in the first quarter of2019 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining 2017Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employmentwith the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2017 Non-Executive PSUs, excluding cancelled shares, is $7.1 million. 62Table of Contents The 2017 Executive PSUs and the 2017 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 pershare 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 fairvalue of the 2017 Executive PSUs and the 2017 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of$89.37, expected term of 2.6 years, expected volatility of 28.6% and risk-free interest rate of 1.3%. 2016 PSUs: In February 2016, the Compensation Committee granted 285,000 PSUs to the executive officers, which represented a target number of shares to beawarded based on the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two-yearrevenue growth rate as published by the Semiconductor Industry Association (“2016 Executive PSUs”). The maximum number of shares that an executiveofficer could earn was 300% of the target number of the 2016 Executive PSUs. 50% of the 2016 Executive PSUs would vest in the first quarter of 2018 ifthe pre-determined performance goals were met during the performance period and approved by the Compensation Committee. The remaining 2016Executive PSUs would vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with theCompany. In July 2016, the Compensation Committee granted 12,000 2016 Executive PSUs to the Company’s new Chief Financial Officer. In February 2018, the Compensation Committee approved the revenue achievement for the 2016 Executive PSUs and a total of 651,000 shares wereearned by the executive officers. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the 2016Executive PSUs, excluding cancelled shares, is $26.1 million. In February 2016, the Compensation Committee granted 64,000 PSUs to certain non-executive employees, which represented a target number of shares tobe awarded based on the Company’s 2017 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2016and 2017) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor IndustryAssociation (“2016 Non-Executive PSUs”). The maximum number of shares that an employee could earn was either 200% or 300% of the target numberof the 2016 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2016 Non-Executive PSUs would vest in the firstquarter of 2018 if the pre-determined performance goals were met during the performance period and approved by the Compensation Committee. Theremaining 2016 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 2018, the Compensation Committee approved the revenue achievement for the 2016 Non-Executive PSUs and a total of 128,000 shares wereearned by the employees. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the 2016 Non-ExecutivePSUs, excluding cancelled shares, is $5.1 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 pershare 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 fairvalue of the 2016 Executive PSUs and the 2016 Non-Executive PSUs granted in February 2016 using the Black-Scholes model with the followingassumptions: 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 ExecutivePSUs 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 PSUs: In February 2015, the Compensation Committee granted 172,000 PSUs to the executive officers, which represented a target number of shares to beawarded based on the Company’s average two-year (2015 and 2016) revenue growth rate compared against the analog industry’s average two-yearrevenue growth rate as published by the Semiconductor Industry Association (“2015 Executive PSUs”). The maximum number of shares that an executiveofficer could earn was 300% of the target number of the 2015 Executive PSUs. In February 2017, the Compensation Committee approved the revenueachievement for the 2015 Executive PSUs and a total of 432,000 shares were earned by the executive officers. 50% of the 2015 Executive PSUs vested inthe first quarter of 2017. The remaining 2015 Executive PSUs vest over the following two years on a quarterly basis. Vesting is subject to the employees’continued employment with the Company. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the2015 Executive PSUs, excluding cancelled shares, is $21.0 million. 63Table of Contents In February 2015, the Compensation Committee granted 58,000 PSUs to certain non-executive employees, which represented a target number of shares tobe awarded based on the Company’s 2016 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2015and 2016) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor IndustryAssociation (“2015 Non-Executive PSUs”). The maximum number of shares that an employee could earn was either 200% or 300% of the target numberof the 2015 Non-Executive PSUs, depending on the job classification of the employee. In February 2017, the Compensation Committee approved therevenue achievement for the 2015 Non-Executive PSUs and a total of 118,000 shares were earned by the non-executive employees. 50% of the 2015 Non-Executive PSUs vested in the first quarter of 2017. The remaining 2015 Non-Executive PSUs vest over the following two years on an annual or quarterlybasis. Vesting is subject to the employees’ continued employment with the Company. Based on the actual achievement of the performance goals, thetotal stock-based compensation cost for the 2015 Non-Executive PSUs, excluding cancelled shares, is $5.7 million. 2015 MPSUs: On December 31, 2015, the Compensation Committee granted 86,000 MPSUs to the executive officers and 41,000 MPSUs to certain non-executiveemployees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (“2015MPSUs”). 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 fourseparate tranches with various performance periods ending on December 31, 2019. The first tranche contains market conditions only, which require theachievement of five stock price targets ranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. As ofSeptember 30, 2017, all five price targets for the first tranche have been achieved and approved by the Compensation Committee. The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of fivestock price targets measured against a base price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading daysimmediately before the start of the performance period for that tranche, or (2) the closing stock price immediately before the start of the performanceperiod for that tranche. The stock price targets for the second tranche range from $89.56 to $106.81 with a performance period from January 1, 2017to December 31, 2019. As of December 31, 2017, all five price targets for the second tranche have been achieved and approved by theCompensation Committee. The stock price targets for the third tranche range from $120.80 to $135.48 with a performance period from January 1,2018 to December 31, 2019. The stock price targets for the fourth tranche will be determined on December 31, 2018 with a performance period fromJanuary 1, 2019 to December 31, 2019. In addition, each of the second, third and fourth tranches requires the achievement of one of following six operating metrics: 1.Successful implementation of full digital solutions for certain power products. 2.Successful implementation, and adoption by a key customer, of an integrated, software-based field-oriented control with sensors to motor drivers. 3.Successful implementation of certain advanced power analog processes. 4.Successful design wins and achievement of a specific level of revenue with a global networking customer. 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. As of December 31, 2017, none of the operating metrics have been achieved. Subject to the employees’ continued employment with the Company, the 2015 MPSUs will fully vest on January 1, 2020 if the pre-determined individualmarket and performance goals in each tranche are met during the performance periods and approved by the Compensation Committee. In addition, the2015 MPSUs contain 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-averageassumptions: 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 thepost-vesting sales restrictions. Assuming the achievement of all of the required market and performance goals, the total stock-based compensation cost forthe 2015 MPSUs, excluding cancelled shares, is $24.6 million ($8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for thethird tranche, and $6.6 million for the fourth tranche). For the first tranche, stock-based compensation expense is being recognized over the requisite service period. 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 ofbeing achieved during the performance periods in each reporting period. As of December 31, 2017, based on management’s quarterly assessment, three ofthe six operating metrics were considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense isbeing recognized for the second, third and fourth tranches over the requisite service period. 64Table of Contents 2014 PSUs: In February 2014, the Compensation Committee granted 252,000 PSUs to the executive officers, which represented a target number of shares to beawarded based on the Company’s average two-year (2014 and 2015) revenue growth rate compared against the analog industry’s average two-yearrevenue growth rate as published by the Semiconductor Industry Association (“2014 Executive PSUs”). The maximum number of shares that an executiveofficer could earn was 300% of the target number of the 2014 Executive PSUs. In February 2016, the Compensation Committee approved the revenueachievement 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 inthe 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. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the2014 Executive PSUs, excluding cancelled shares, is $20.7 million. In April 2014, the Compensation Committee granted 61,000 PSUs to certain non-executive employees, which represented a target number of shares to beawarded based on the Company’s 2015 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2014and 2015) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor IndustryAssociation (“2014 Non-Executive PSUs”). The maximum number of shares that an employee could earn was either 200% or 300% of the target numberof the 2014 Non-Executive PSUs, depending on the job classification of the employee. In February 2016, the Compensation Committee approved therevenue 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 orquarterly basis. Vesting is subject to the employees’ continued employment with the Company. Based on the actual achievement of the performancegoals, the total stock-based compensation cost for the 2014 Non-Executive PSUs, excluding cancelled shares, is $3.7 million. In connection with the acquisition of Sensima in July 2014, the Compensation Committee granted $2.0 million of PSUs (or 47,000 shares) to key Sensimaemployees who became employees of the Company, with the right to earn up to four equal tranches totaling $8.0 million based on the achievement ofcertain cumulative Sensima product revenue targets during the performance period from the acquisition date to July 2019. 50% of the awards subject toeach revenue goal will vest immediately when the revenue goal is met during the performance period and approved by the Compensation Committee.The remaining shares will vest over the following two years. The vesting is subject to the employees’ continued employment with the Company. Theseequity awards are considered arrangements for post-acquisition services and the compensation cost for the four tranches is recognized over the requisiteservice period if it is probable that the performance goals will be met. As of December 31, 2017, stock-based compensation expense of $2.0 million forthe first tranche was being recognized over the requisite service period. Stock-based compensation expense for the other tranches was not beingrecognized as their achievement was deemed not probable as of December 31, 2017. 2013 PSUs: In February 2013, the Compensation Committee granted 220,000 PSUs to the executive officers, which represented a target number of shares to beawarded upon achievement of certain pre-determined revenue targets in 2014 (“2013 Executive PSUs”). The maximum number of shares that anexecutive officer could earn was 300% of the target number of the 2013 Executive PSUs. In February 2015, the Compensation Committee approved therevenue achievement for the 2013 Executive PSUs and a total of 622,000 shares were earned by the executive officers. 50% of the 2013 Executive PSUsvested in the first quarter of 2015 and the remaining shares vested over the following two years on a quarterly basis. Vesting was subject to theemployees’ continued employment with the Company. Based on the actual achievement of the performance goals, the total stock-based compensationcost for the 2013 Executive PSUs, excluding cancelled shares, was $15.0 million. In February 2013, the Compensation Committee granted 91,000 PSUs to certain non-executive employees, which represented a target number of shares tobe 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 Compensation Committee approved the revenueachievement 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 vested over the following two years on an annual or quarterly basis. Vestingwas 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, excluding cancelled shares, was $3.0 million. 65Table of Contents 2013 MSUs: In December 2013, the Compensation Committee granted 276,000 MSUs to the executive officers and 84,000 MSUs to certain non-executive employees,which represented a target number of shares that would be awarded upon achievement of five stock price targets ranging from $40.00 to $56.00 during afive-year performance period from January 1, 2014 to December 31, 2018 (“2013 MSUs”). The maximum number of shares that an employee could earnwas 500% of the target number of the 2013 MSUs. As of December 31, 2015, all five stock price targets have been achieved and approved by theCompensation Committee, and the employees earned a total of 1.8 million shares. The 2013 MSUs will vest quarterly from January 1, 2019 to December31, 2023. Vesting is subject to the employees’ continued employment with the Company. The Company determined the grant date fair value of the 2013 MSUs using a Monte Carlo simulation model with the following assumptions: stock priceof $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, excludingcancelled shares, is $38.2 million. Stock Options No stock options were granted for the years ended December 31, 2017, 2016 and 2015. A summary of stock option activity is presented in the tablebelow: Shares Weighted-AverageExercise Price Weighted-AverageRemainingContractualTerm AggregateIntrinsicValue (in thousands) (in years) (in thousands) Outstanding at January 1, 2015 590 $15.80 1.2 $20,039 Exercised (498) $15.55 Forfeited and expired (2) $6.10 Outstanding at December 31, 2015 90 $17.50 1.3 $4,134 Exercised (76) $17.80 Outstanding at December 31, 2016 14 $15.88 1.0 $921 Exercised (9) $16.79 Outstanding at December 31, 2017 5 $13.89 0.4 $465 Exercisable at December 31, 2017 5 $13.89 0.4 $465 Total intrinsic value of options exercised was $0.7 million, $3.7 million and $18.6 million for the years ended December 31, 2017, 2016 and 2015,respectively. Proceeds from stock option exercises were $0.1 million, $1.3 million and $7.7 million for the years ended December 31, 2017, 2016 and2015, respectively. At December 31, 2017, 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 asix-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 inaccordance with the Internal Revenue Code and applicable Treasury Regulations. The ESPP provides for an annual increase by an amount equal to theleast 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 ofDirectors. As of December 31, 2017, 4.6 million shares were available for future issuance. The ESPP will expire in November 2024. For the years ended December 31, 2017, 2016 and 2015, 40,000, 53,000 and 56,000 shares, respectively, were issued under the ESPP. The intrinsic valueof the shares issued was $1.0 million, $1.0 million and $0.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Theunamortized expense as of December 31, 2017 was $92,000, which will be recognized through the first quarter of 2018. The Black-Scholes model wasused to value the employee stock purchase rights with the following weighted-average assumptions: Year Ended December 31, 2017 2016 2015 Expected term (years) 0.5 0.5 0.5 Expected volatility 23.5% 28.6% 30.3%Risk-free interest rate 0.9% 0.4% 0.2%Dividend yield 0.9% 1.2% 1.4% Cash proceeds from the shares issued under the ESPP were $2.7 million, $2.5 million and $2.2 million for the years ended December 31, 2017, 2016 and2015, respectively. 66Table of Contents 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 $100million in the aggregate of its common stock through June 30, 2015. In April 2015, the Board of Directors approved an extension of the 2013 Programthrough December 31, 2015. The 2013 Program expired on December 31, 2015 with a remaining unused balance of $5.9 million. Shares were retired uponrepurchase 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 the2016 Program through December 31, 2017. The 2016 Program expired on December 31, 2017 with a remaining unused balance of $50 million. For the year ended December 31, 2015, the Company repurchased a total of 0.6 million shares for $32.3 million, at an average price of $50.05 per shareunder the 2013 Program. No shares were repurchased for the years ended December 31, 2017 and 2016. 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 itscommon stock. Based on the Company’s historical practice, stockholders of record as of the last business day of the quarter are entitled to receive thequarterly cash dividends when and if declared by the Board of Directors, which are payable to the stockholders in the following month. The Board ofDirectors declared the following cash dividends (in thousands, except per-share amounts): Year Ended December 31, 2017 2016 2015 Dividend declared per share $0.80 $0.80 $0.80 Total amount $33,145 $32,434 $31,618 As of December 31, 2017 and 2016, accrued dividends totaled $8.3 million and $8.2 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’sfinancial condition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, compliance with the terms offuture indebtedness and credit facilities and other factors that the Board of Directors may deem relevant, as well as a determination that cash dividends arein the best interests of the stockholders. The Company anticipates that cash used for future dividend payments will come from its current domestic cash and cash generated from ongoing U.S.operations. In addition, the Company currently plans to repatriate cash from its Bermuda subsidiary to fund future dividends and continue to indefinitelyreinvest its earnings from other foreign subsidiaries. See Note 12 for further discussion. 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 thesame dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlyingRSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and theawards do not vest. As of December 31, 2017 and 2016, accrued dividend equivalents totaled $5.8 million and $4.1 million, respectively. 67Table of Contents 10. INTEREST AND OTHER INCOME, NET The components of interest and other income, net are as follows (in thousands): Year Ended December 31, 2017 2016 2015 Interest income $5,353 $2,488 $1,608 Amortization of premium on available-for-sale investments (1,976) (1,019) (463)Gain (loss) on deferred compensation plan investments 2,531 1,257 (375)Foreign currency exchange gain (loss) (550) 65 608 Other 162 26 43 Total $5,520 $2,817 $1,421 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, 2017 2016 2015 Numerator: Net income $65,203 $52,720 $35,172 Denominator: Weighted-average outstanding shares used to compute basic net income pershare 41,350 40,436 39,470 Effect of dilutive securities 2,228 1,479 1,399 Weighted-average outstanding shares used to compute diluted net income pershare 43,578 41,915 40,869 Net income per share: Basic $1.58 $1.30 $0.89 Diluted $1.50 $1.26 $0.86 Anti-dilutive common stock equivalents were not material in any of the periods presented. 12. INCOME TAXES The components of income before income taxes are as follows (in thousands): Year Ended December 31, 2017 2016 2015 United States $(19,115) $(14,431) $(247)Foreign 102,059 71,695 42,738 Total income before income taxes $82,944 $57,264 $42,491 The components of the income tax provision are as follows (in thousands): Year Ended December 31, 2017 2016 2015 Current: Federal $31,025 $2,527 $6,042 State 2 - 2 Foreign 1,967 2,013 1,213 Deferred: Federal (15,426) - - Foreign 173 4 62 Total income tax provision $17,741 $4,544 $7,319 68Table of Contents The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows: Year Ended December 31, 2017 2016 2015 U.S. statutory federal tax rate 35.0% 34.0% 34.0%Settlement with tax authorities - - 6.2 Foreign income at lower rates (41.2) (41.1) (43.1)Impact of the 2017 Tax Act: One-time deemed repatriation transition tax 50.5 - - Remeasurement of deferred taxes 11.8 - - Changes in valuation allowance (36.2) 11.0 17.6 Stock-based compensation 2.2 2.2 - Other adjustments (0.7) 1.8 2.5 Effective tax rate 21.4% 7.9% 17.2% The components of net deferred tax assets consist of the following (in thousands): December 31, 2017 2016 Deferred tax assets: R&D tax credits $10,331 $9,817 Stock-based compensation 9,157 7,283 Deferred compensation 5,505 6,752 Depreciation and amortization 191 161 Net operating losses 1,377 - Other expenses not currently deductible 1,924 3,974 Total deferred tax assets 28,485 27,987 Valuation allowance (12,568) (27,354)Net deferred tax assets $15,917 $633 2017 U.S. Tax Reform Under Accounting Standards Codification (“ASC”) 740, Income Taxes, the effects of a new legislation are recognized upon enactment. Accordingly, theCompany was required to recognize the tax effects of the 2017 Tax Act beginning in the fourth quarter of 2017. On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118"), which addresses the applicationof ASC 740 in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete theaccounting for certain income tax effects of the 2017 Tax Act. In accordance with SAB 118, for matters that have not been completed, the Companywould recognize provisional amounts to the extent that they are reasonably estimable. If a reasonable estimate cannot be determined, the Company wouldnot be required to report provisional amounts and would continue to apply ASC 740 based on the provisions of the tax laws that were in effectimmediately before the enactment of the 2017 Tax Act. As of December 31, 2017, the Company has not completed its accounting for the tax effects of the 2017 Tax Act and recorded certain provisionalamounts, as discussed below, based on reasonable estimates for the year ended December 31, 2017. The provisional amounts are subject to revisions,possibly materially, as the Company performs further analysis of the 2017 Tax Act, collects and prepares necessary financial data, continues to assess itstax positions, and interprets any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and otherstandard-setting and regulatory bodies. Any subsequent adjustment to these amounts will be recorded to the income tax provision in the period when theanalysis is complete. The Company expects to complete the analysis within the one-year measurement period ending December 21, 2018, pursuant toSAB 118. Corporate Tax Rate and Remeasurement of Deferred Taxes: The 2017 Tax Act reduces the corporate tax rate from 35% to 21%, effective January 1, 2018. Because ASC 740 requires the effect of a change in tax lawsto be recognized as of the date of enactment, the Company remeasured its deferred tax balance as of December 22, 2017 and recorded a provisionalamount of $9.8 million to the income tax provision as a result of the remeasurement for the year ended December 31, 2017. 69Table of Contents Deemed Repatriation Transition Tax: The 2017 Tax Act mandates a one-time deemed repatriation transition tax of post-1986 undistributed foreign earnings and profits (“E&P”) on which U.S.income taxes were previously deferred. The rate applied varies depending on whether the E&P is held in liquid or non-liquid assets. A proportionaldeduction on the deemed repatriation results in a transition tax of 15.5% for cash and liquid assets and 8% for non-liquid assets. The transition tax isassessed regardless of whether the Company repatriates the earnings. The transition tax is determined on the greater of E&P as of two measurement dates (November 2, 2017 or December 31, 2017). The amount of cash and liquid assets is determined based on the greater of the amounts calculated using twoalternative measurement periods. For the year ended December 31, 2017, the Company recorded a provisional amount of $41.9 million related to the transition tax expense. After theutilization of R&D tax credits of $18.0 million, the transition tax payable is $23.9 million. As permitted by the 2017 Tax Act, the Company has elected topay the transition tax in installments over eight years. As a result, $1.9 million was recorded in current accrued liabilities and $22.0 million was recordedin long-term income tax liabilities as of December 31, 2017. Undistributed Earnings of Subsidiaries: The Company previously considered the earnings in its non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred incometaxes. Prior to the transition tax, the Company had an excess of the amount for financial reporting over the tax basis in its foreign subsidiaries includingundistributed foreign earnings of $390.2 million. While the transition tax resulted in the reduction of the excess of the amount for financial reporting overthe tax basis in its foreign subsidiaries and subjected a provisional amount of $119.7 million of undistributed foreign earnings to tax, an actualrepatriation from its non-U.S. subsidiaries could be subject to additional foreign withholding taxes and U.S. state taxes. The Company has analyzed its global working capital and cash requirements, and has determined that it plans to repatriate cash from its Bermudasubsidiary on an ongoing basis to fund its future U.S. based expenditures and dividends. For the other foreign subsidiaries, the Company expects toindefinitely reinvest undistributed earnings to fund foreign operations and their research and development. For those undistributed foreign earnings fromwhich the Company was not able to make a reasonable estimate of the tax effects of such repatriation, the Company has not recorded any deferred taxes oraccrued for any withholding taxes or state taxes as of December 31, 2017. The Company will record the tax effects of any change in its prior assertionwith respect to those undistributed foreign earnings in the period that it is first able to make a reasonable estimate, no later than the end of themeasurement period under SAB 118. Global Intangible Low-Taxed Income: The 2017 Tax Act subjects a U.S. parent shareholder to taxation of its global intangible low-taxed income (“GILTI”), effective January 1, 2018. TheGILTI inclusions will impact companies that have foreign earnings generated without a large aggregate foreign fixed asset base and whose earnings arebeing taxed at a low tax rate. GILTI is calculated based on foreign income in excess of a deemed return on tangible assets of foreign corporations. Theincome inclusion under GILTI is eligible for a deduction that is intended to lower the effective tax rate to 10.5% for taxable years 2018 to 2025, and riseto 13.125% for taxable years after 2025. The enactment of the GILTI tax will result in additional Subpart F income recognition for the Company in 2018and onwards. Executive Compensation Deductions: The 2017 Tax Act retains the $1 million limitation on deductible compensation to covered employees, which include the Chief Executive Officer andfour other highest paid officers, under IRC Section 162(m). However, it eliminates the exception for performance-based cash or stock compensation andexpands the definition of covered employees to include the Chief Financial Officer. Accordingly, beginning January 1, 2018, the deductiblecompensation to covered employees will generally be subject to the $1 million limitation. Release of Valuation Allowance Management periodically evaluates the realizability of the Company’s deferred tax assets based on all available evidence. The realizability of theCompany’s net deferred tax assets is dependent on its ability to generate sufficient future taxable income during periods prior to the expiration of taxattributes to fully utilize these assets. The Company maintained a full valuation allowance on its U.S. deferred tax assets as of the third quarter of 2017. Inthe fourth quarter of 2017, the Company assessed the realizability of the deferred tax assets and concluded that it was more likely than not that its federaldeferred tax assets would be realizable, due principally to the enactment of the 2017 Tax Act. 70Table of Contents In accordance with ASC 740, management considered all available evidence, both positive and negative, to determine whether, based on the weight ofthat evidence, a valuation allowance for deferred tax asset was needed. The Company’s conclusion was primarily driven by the following positiveevidence: ●The Company forecasts taxable income in the U.S. in future periods. The enactment of GILTI will result in additional Subpart F income eachyear. ●Executive performance-based equity awards are now subject to the Section 162(m) deduction limitation. ●The Company has a history of utilizing all federal tax attributes before expiration. As a result, the Company released $21.6 million of valuation allowance on federal deferred tax assets, which was recorded as a benefit in the income taxprovision in the fourth quarter of 2017. The Company continues to maintain a full valuation allowance on the deferred tax assets in California, primarilydue to a low apportionment factor and the amount of R&D tax credits generated is greater than the amount utilized. Other Income Tax Provision Matters As of December 31, 2017, the Company did not have federal net operating loss carryforwards. As of December 31, 2017, the state net operating losscarryforwards for income tax purposes were $19.7 million, which will expire beginning in 2028. As of December 31, 2017, the Company had R&D tax credit carryforwards of $0.8 million for federal income tax purposes, which will begin to expire in2037, and $21.0 million for state income tax purposes, which can be carried forward indefinitely. Upon adoption of ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting, on January 1, 2017, all excess tax benefits and deficiencies related to equity awards are recognized in the income tax provision in theConsolidated Statements of Operations prospectively, rather than in additional paid-in-capital in the Consolidated Balance Sheets. In addition, thestandard 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 net adjustment to retained earnings as of January 1, 2017, as the deferredtax assets related to the previously unrecognized excess tax benefits were fully offset by a valuation allowance. The Company expects increasedvolatility to the income tax provision in future periods dependent upon, among other variables, the price of its common stock and the timing andvolume 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 besubject to annual limitations. The annual limitations could result in the expiration of the net operating loss and tax credit carryforwards prior toutilization. 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 inan intercompany cost-sharing arrangement. A final decision was issued in December 2015, and the IRS appealed the decision in February 2016. At thistime, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in the cost pool tobe shared under a cost-sharing arrangement. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope ofpotential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, the Company has not recorded any adjustments as of December31, 2017. The Company will continue to monitor developments related to this opinion and the potential impact on its financial statements. At December 31, 2017, the Company had $16.3 million of unrecognized tax benefits, $9.1 million of which would affect its effective tax rate ifrecognized after considering the valuation allowance. At December 31, 2016, the Company had $14.4 million of unrecognized tax benefits, $3.5 millionof which would affect its effective tax rate if recognized after considering the valuation allowance. 71Table of Contents A reconciliation of the gross unrecognized tax benefits is as follows (in thousands): Balance as of January 1, 2015 $16,406 Increase for tax position of current year 1,964 Decrease related to settlement with tax authorities (4,162)Decrease due to lapse of statute of limitation (669)Decrease for tax position of prior year (1,446)Balance as of December 31, 2015 12,093 Increase for tax position of prior year 243 Increase for tax position of current year 2,095 Balance as of December 31, 2016 14,431 Increase for tax position of prior year 169 Increase for tax position of current year 2,360 Decrease due to lapse of statute of limitation (688)Balance as of December 31, 2017 $16,272 The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2017 and 2016,the Company has $0.5 million and $0.3 million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-termincome 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 researchand development tax credit. It is reasonably possible that over the next twelve-month period, the Company may experience increases or decreases in itsunrecognized 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 activitiesthrough 2020 and 2019, respectively. In addition, the Company currently has a tax holiday in Switzerland, which allows for tax-free operations through2018. 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 IRS and other tax authorities. The Company’s U.S. Federal income tax return forthe 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 theCompany and its international subsidiaries on January 1, 2004. In the NOPA, the IRS objected to the Company’s allocation of certain litigation expensesbetween the Company and its international subsidiaries and the amount of "buy-in payments" made by the international subsidiaries to the Company inconnection 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 theNOPA issued in April 2011 but under a different methodology. Under the Revised NOPA, the largest potential federal income tax payment, if the IRSwere 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 May2012. 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 2014and both parties engaged in continuous discussions for a resolution of the matter in the first quarter of 2015. Meanwhile, the Company granted the IRS anextension of the statute of limitations for taxable years 2005 through 2007 to September 30, 2015. The IRS also audited the research and development credits carried forward into year 2005 and the credits generated in the years 2005 through 2007. TheCompany received a NOPA from the IRS in February 2011, proposing to reduce the research and development credits generated in years 2005 through2007 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 theagreement, 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 intellectualproperty rights of the Company to one of its international subsidiaries. This buy-in payment was final and no additional payment would be required withrespect to the intellectual property license for the years under examination or for a previous or subsequent tax year. In addition, the Company made aninterest 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 theCompany as a result of the audits. 72Table of Contents For the second quarter of 2015, the Company's income tax provision included a one-time net charge of $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, $1.6 million was related to taxesand $1.1 million was related to interest. 13. COMMITMENTS AND CONTINGENCIES Lease Obligations As of December 31, 2017, future minimum payments under the non-cancelable operating leases were as follows (in thousands): 2018 $1,210 2019 636 2020 193 2021 55 2022 51 Total $2,145 The Company leases warehouse space, sales and marketing, and research and development offices in China, India, Japan, Korea, the United States andEurope. Certain of the Company’s facility leases provide for periodic rent increases. Rent expense for the years ended December 31, 2017, 2016 and 2015was $1.5 million, $1.7 million and $1.8 million, respectively. Warranty and Indemnification Provisions The changes in warranty reserves are as follows (in thousands): Year Ended December 31, 2017 2016 2015 Balance at beginning of period $1,030 $289 $240 Warranty provision for product sales 1,912 1,102 333 Settlements made (40) (68) (158)Unused warranty provision (486) (293) (126)Balance at end of period $2,416 $1,030 $289 The Company provides indemnification agreements to certain direct or indirect customers. The Company agrees to reimburse these parties for anydamages, costs and expenses incurred by them as a result of legal actions taken against them by third parties for infringing upon their intellectualproperty rights as a result of using the Company’s products and technologies. These indemnification provisions are varied in their scope and are subjectto certain terms, conditions, limitations and exclusions. In addition, the Company has entered into indemnification agreements with its directors andofficers. It is not possible to predict the maximum potential amount of future payments under these agreements due to the limited history of indemnificationclaims and the unique facts and circumstances involved in each particular agreement. There were no indemnification liabilities incurred in any of theperiods presented. However, there can be no assurances that the Company will not incur any financial liabilities in the future as a result of theseobligations. 14. LITIGATION The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its shareholders,challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights ofothers, and employment matters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant fundsand the diversion of other resources to prosecute and defend. The Company defends itself vigorously against any such claims. As of December 31, 2017,there were no material pending legal proceedings to which the Company was a party. 73Table of Contents 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. Participantsmay contribute up to the amount allowable as a deduction for federal income tax purposes. The Company is not required to contribute and did notcontribute to the plan for the years ended December 31, 2017, 2016 and 2015. 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 those customers with sales equal to orgreater than 10% of the Company's total revenue or with accounts receivable balances greater than 10% of the Company’s total accounts receivable: Revenue Accounts Receivable Year Ended December 31, December 31, Customer 2017 2016 2015 2017 2016 A (distributor) 17% 22% 24% 16% 19%B (distributor) * * * * 17%C (distributor) 10% * * * * D (value-added reseller) * * * 15% * ________* Represents less than 10%. The Company’s agreements with these third-party distributors and value-added reseller were made in the ordinary course of business and may beterminated with or without cause by these customers with advance notice. Although the Company may experience a short-term disruption in thedistribution of its products and a short-term decline in revenue if its agreement with any of these customers was terminated, the Company believes thatsuch termination would not have a material adverse effect on its financial statements because it would be able to engage alternative distributors, resellersand other distribution channels to deliver its products to end customers within a short period following the termination of the agreement with thecustomer. 17. SEGMENT AND GEOGRAHPIC INFORMATION The Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance analog solutions for theconsumer, computing and storage, industrial, automotive and communications markets. The Company’s chief operating decision maker is its ChiefExecutive Officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financialperformance. The Company derives a majority of its revenue from sales to customers located outside North America, with geographic revenue based onthe customers’ ship-to locations. The following is a summary of revenue by geographic regions (in thousands): Year Ended December 31, Country or Region 2017 2016 2015 China $257,787 $245,169 $213,119 Taiwan 83,357 45,414 41,521 Europe 38,140 27,554 22,603 Korea 34,155 27,710 20,519 Southeast Asia 25,755 19,645 18,592 Japan 20,187 14,318 9,727 United States 11,113 8,567 6,732 Other 435 288 254 Total $470,929 $388,665 $333,067 The following is a summary of revenue by major product families (in thousands): Year Ended December 31, Product Family 2017 2016 2015 DC to DC $431,861 $350,930 $299,726 Lighting Control 39,068 37,735 33,341 Total $470,929 $388,665 $333,067 74Table of Contents The following is a summary of long-lived assets by geographic regions (in thousands): December 31, Country 2017 2016 2015 China $89,472 $45,728 $40,738 United States 65,618 50,242 40,405 Taiwan 17,238 8,919 126 Bermuda 7,522 9,573 11,624 Other 388 571 431 Total $180,238 $115,033 $93,324 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in accumulated other comprehensive income (loss) (in thousands): Unrealized Losseson Available-for-Sale Securities Foreign CurrencyTranslationAdjustments Total Balance as of January 1, 2016 $(375) $1,841 $1,466 Other comprehensive loss before reclassifications (623) (5,033) (5,656)Amounts reclassified from accumulated other comprehensive income (loss) (25) - (25)Net current period other comprehensive loss (648) (5,033) (5,681)Balance as of December 31, 2016 (1,023) (3,192) (4,215)Other comprehensive income (loss) before reclassifications (343) 6,369 6,026 Amounts reclassified from accumulated other comprehensive income (loss) 2 - 2 Net current period other comprehensive income (loss) (341) 6,369 6,028 Balance as of December 31, 2017 $(1,364) $3,177 $1,813 The amounts reclassified from accumulated other comprehensive income (loss) were recorded in interest and other income, net, in the ConsolidatedStatements of Operations. 19. SUBSEQUENT EVENT In February 2018, the Company’s Board of Directors approved an increase in its quarterly cash dividend from $0.20 per share to $0.30 per share, effectivefor the first quarter of 2018. 75Table of Contents 20. QUARTERLY FINANCIAL DATA (UNAUDITED) Three Months Ended December 31,2017 September 30,2017 June 30,2017 March 31,2017 (in thousands, except per share amounts) Revenue $129,430 $128,939 $112,198 $100,362 Cost of revenue 58,269 58,083 50,773 45,520 Gross profit 71,161 70,856 61,425 54,842 Operating expenses: Research and development 21,730 21,442 20,292 18,894 Selling, general and administrative 24,038 25,255 25,873 22,092 Litigation expense, net 340 327 290 286 Total operating expenses 46,108 47,024 46,455 41,272 Income from operations 25,053 23,832 14,970 13,570 Interest and other income, net 1,647 1,255 1,237 1,381 Income before income taxes 26,700 25,087 16,207 14,951 Income tax provision 14,629 1,445 1,193 474 Net income $12,071 $23,642 $15,014 $14,477 Net income per share: Basic $0.29 $0.57 $0.36 $0.35 Diluted $0.27 $0.54 $0.35 $0.33 Weighted-average shares outstanding: Basic 41,574 41,458 41,323 41,047 Diluted 44,610 43,486 43,397 43,268 Cash dividends declared per common share $0.20 $0.20 $0.20 $0.20 Three Months Ended December 31,2016 September 30,2016 June 30,2016 March 31,2016 (in thousands, except per share amounts) Revenue $103,618 $106,456 $94,079 $84,512 Cost of revenue 47,107 48,531 43,153 39,002 Gross profit 56,511 57,925 50,926 45,510 Operating expenses: Research and development 17,974 20,472 17,876 17,321 Selling, general and administrative 21,316 22,397 21,531 17,768 Litigation expense (benefit), net (321) 55 (8) 45 Total operating expenses 38,969 42,924 39,399 35,134 Income from operations 17,542 15,001 11,527 10,376 Interest and other income, net 897 780 597 543 Income before income taxes 18,439 15,781 12,124 10,919 Income tax provision 1,866 1,408 926 344 Net income $16,573 $14,373 $11,198 $10,575 Net income per share: Basic $0.41 $0.35 $0.28 $0.26 Diluted $0.39 $0.34 $0.27 $0.25 Weighted-average shares outstanding: Basic 40,739 40,590 40,387 40,028 Diluted 42,404 41,895 41,716 41,646 Cash dividends declared per common share $0.20 $0.20 $0.20 $0.20 76Table of Contents 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 controlsand 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 thisAnnual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls andprocedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose inreports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and ChiefFinancial 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 anevaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, managementconcluded that our internal control over financial reporting was effective as of December 31, 2017. Management reviewed the results of its assessmentwith our Audit Committee. Our independent registered public accounting firm, Deloitte & Touche LLP, which audited the consolidated financial statements included in this AnnualReport 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, 2017 that have materiallyaffected, 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 welldesigned and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controlsand procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits ofpossible controls and procedures relative to their costs. 77Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors ofMonolithic Power Systems, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Monolithic Power Systems, Inc. and subsidiaries (the “Company”) as of December 31,2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedfinancial statements as of and for the year ended December 31, 2017, of the Company and our report dated March 1, 2018, expressed an unqualifiedopinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on thefinancial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP San Jose, California March 1, 2018 78Table of Contents 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 tocompliance with Section 16(a) of the Securities Exchange Act of 1934 appearing under the captions “Election of Directors” and “Compliance withSection 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2018 Annual Meeting of Stockholders (the “2018Annual Meeting”), which information is incorporated in this Annual Report on Form 10-K by reference. Information regarding executive officers is setforth 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 2018 AnnualMeeting, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS 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 2018 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” inthe Company’s Proxy Statement for the 2018 Annual Meeting, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT 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 2018 AnnualMeeting, and is incorporated herein by reference. 79Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Documents filed as part of this report (1) All financial statements Report of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Comprehensive IncomeConsolidated Statements of Stockholders’ EquityConsolidated Statements of Cash FlowsNotes 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 theschedules, or because the information required is included in the consolidated financial statements or notes thereto. (3) Exhibits ExhibitNumber Description 3.1 (1) Amended and Restated Certificate of Incorporation. 3.2 (2) Amended and Restated Bylaws. 10.1+ (3) Registrant’s 2004 Employee Stock Purchase Plan and form of subscription agreement. 10.2+ (4) Form of Directors’ and Officers’ Indemnification Agreement. 10.3+ (5) Employment Agreement with Michael Hsing, and Amendment thereof. 10.4+ (6) Employment Agreement with Maurice Sciammas, and Amendment thereof. 10.5+ (7) Employment Agreement with Jim Moyer. 10.6+(8) Employment Agreement with Deming Xiao, and Amendment thereof. 10.7+(9) Letter Agreement with Victor Lee. 10.8+(10) Letter Agreement with Karen A. Smith Bogart. 10.9+(11) Letter Agreement with Jeff Zhou. 10.10+(12) Employment Agreement with Meera P. Rao and Saria Tseng and Amendment thereof. 80Table of Contents 10.11+(13) Monolithic Power Systems, Inc. Master Cash Performance Bonus Plan. 10.12+(14) Letter Agreement with Eugen Elmiger. 10.13+(15) Monolithic Power Systems, Inc. 2004 Equity Incentive Plan, as Amended, and Form of Grant Agreement. 10.14+(16) Monolithic Power Systems, Inc. 2014 Equity Incentive Plan, as Amended, and Form of Grant Agreement. 10.15+(17) Employment Agreement with Bernie Blegen. 21.1 Subsidiaries of Monolithic Power Systems, Inc. 23.1 Consent of Independent Registered Public Accounting Firm. 24.1 Power of Attorney (included on Signature page to this Form 10-K). 31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section302 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 906of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation 101.DEF XBRL Taxonomy Extension Definition 101.LAB XBRL Taxonomy Extension Labels 101.PRE XBRL Taxonomy Extension Presentation +Management contract or compensatory plan or arrangement.*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to theliabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the SecuritiesExchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.(1)Incorporated by reference to Exhibit 3.2 of the Registrant’s Registration Statement on Form S-1/A (Registration No. 333-117327), filed withthe Securities and Exchange Commission on November 15, 2004.(2)Incorporated by reference to Exhibit 3.4 of the Registrant’s Registration Statement on Form S-1/A (Registration No. 333-117327), filed withthe Securities and Exchange Commission on November 15, 2004.(3)Incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1 (Registration No. 333-117327), filed with theSecurities and Exchange Commission on July 13, 2004.(4)Incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1/A (Registration No. 333-117327), filed withthe Securities and Exchange Commission on November 15, 2004.(5)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 andExchange 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 theSecurities and Exchange Commission on December 19, 2008.(6)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 andExchange 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 theSecurities and Exchange Commission on December 19, 2008.(7)Incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 (Registration No. 333-117327), filed with theSecurities and Exchange Commission on July 13, 2004.(8)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 andExchange 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 theSecurities and Exchange Commission on December 19, 2008. 81Table of Contents (9)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 andExchange Commission on September 14, 2006.(10)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 andExchange Commission on May 25, 2007.(11)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 andExchange Commission on February 3, 2010.(12)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 andExchange Commission on March 4, 2011.(13)Incorporated by reference to Annexure C of the Registrant’s Proxy Statement on Schedule 14A (File No. 000-51026), filed with the Securitiesand Exchange Commission on April 30, 2013.(14)Incorporated by reference to Exhibit 10.36 of the Registrant’s annual report on Form 10-K (File No), filed with the Securities and ExchangeCommission on March 10, 2014.(15)Incorporated by reference to Exhibit 4.4 of the Registrant’s Registration Statement on Form S-8 (Registration No.), filed with the Securitiesand Exchange Commission on November 3, 2014.(16)Incorporated by reference to Exhibit 4.6 of the Registrant’s Registration Statement on Form S-8 (Registration No.), filed with the Securitiesand Exchange Commission on November 3, 2014.(17) 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 andExchange Commission on July 22, 2016. 82Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. MONOLITHIC POWER SYSTEMS, INC. Date: March 1, 2018By:/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 amendmentsto this report, 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 report has been signed below on March 1, 2018 by the following personson behalf of the registrant and in the capacities indicated: /s/ MICHAEL HSING President, Chief Executive Officer, and Director (Principal Executive Officer)Michael Hsing /s/ T. BERNIE BLEGEN Chief Financial Officer (Principal Financial and Accounting Officer)T. Bernie Blegen /s/ HERBERT CHANG DirectorHerbert Chang /s/ EUGEN ELMIGER DirectorEugen Elmiger /s/ VICTOR K. LEE DirectorVictor K. Lee /s/ JAMES C. MOYER DirectorJames C. Moyer /s/ JEFF ZHOU DirectorJeff Zhou 83Exhibit 21.1 Subsidiaries of Monolithic Power Systems, Inc. MPS International Ltd. (Bermuda) MPS International Ltd. (Shanghai) Chengdu Monolithic Power Systems Co., Ltd. MPS International Korea Co., Ltd. MPS Japan G.K. MPS Japan K.K. MPS Europe Sarl Hangzhou MPS Semiconductor Technology Ltd. MPS International Ltd. (Taiwan) Monolithic Power Systems Pte. Ltd. (Singapore) MPS Germany GmbH MPS Tech Switzerland Sarl EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-199782, 333-198856, 333-187117, 333-180047, 333-172013, 333-164673, 333-157095, 333-149027, 333-120886, 333-132411, and 333-140563 on Form S-8 of our reports dated March 1, 2018 relating to theconsolidated financial statements of Monolithic Power Systems, Inc. and subsidiaries (the “Company”), and the effectiveness of the Company’s internalcontrol over financial reporting appearing in this annual report on Form 10-K of the Company for the year ended December 31, 2017. /s/ DELOITTE & TOUCHE LLP San Jose, CaliforniaMarch 1, 2018  Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TOSECURITIES EXCHANGE ACT RULES 13a-14(a) and 15d-14(a), AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael Hsing, certify that: 1. I have reviewed this Annual Report on Form 10-K of Monolithic Power Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) forthe registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 1, 2018 /s/ Michael Hsing Michael Hsing Chief Executive Officer Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TOSECURITIES EXCHANGE ACT RULES 13a-14(a) and 15d-14(a), AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, T. Bernie Blegen, certify that: 1. I have reviewed this Annual Report on Form 10-K of Monolithic Power Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) forthe registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 1, 2018 /s/ T. Bernie Blegen T. Bernie Blegen Chief Financial Officer Exhibit 32.1 The following certification shall not be deemed “filed” for purposes of section 18 of the Securities Exchange Act of 1934 or otherwise subject to theliabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. CERTIFICATION OF CHIEF EXECUTIVE OFFICER ANDCHIEF FINANCIAL OFFICER PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Monolithic Power Systems, Inc., a Delaware corporation, for the year ended December 31, 2017, asfiled with the Securities and Exchange Commission, each of the undersigned officers of Monolithic Power Systems, Inc. certifies pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the accompanying report on Form 10-K of Monolithic Power Systems, Inc. for the year ended December 31, 2017, as filed with the Securitiesand Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, asamended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of MonolithicPower Systems, Inc. for the periods presented therein. Date: March 1, 2018 /s/ Michael Hsing Michael Hsing Chief Executive Officer Date: March 1, 2018 /s/ T. Bernie Blegen T. Bernie Blegen Chief Financial Officer 

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