Monolithic Power Systems Annual Report 2018

Plain-text annual report

Table of Contents UNITED 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, 2018 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) 4040 Lake Washington Blvd. NE, Suite 201, Kirkland, Washington 98033(Address of principal executive offices)(Zip code) (425) 296-9956(Registrant’s telephone number, including area code) 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. 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 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 Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ☒ No ☐ 1Table of Contents Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, andwill not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or anemerging 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 with any newor 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 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 of thecommon stock on the Nasdaq Global Select Market on June 29, 2018, was $4.5 billion.* There were 42,916,000 shares of the registrant’s common stock issued and outstanding as of February 20, 2019. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the registrant’s 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of thisForm 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, 2018. *Excludes 8,813,000 million shares of the registrant’s common stock held by executive officers, directors and stockholders whose ownership exceeds5% (“affiliates”) of the common stock outstanding at June 30, 2018. Exclusion of such shares should not be construed to indicate that any suchperson possesses 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. 2Table of Contents MONOLITHIC POWER SYSTEMS, INC.TABLE OF CONTENTS Page PART I Item 1.Business5 Executive Officers of the Registrant9Item 1A.Risk Factors9Item 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 Data28Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations29Item 7A.Quantitative and Qualitative Disclosures About Market Risk39Item 8.Financial Statements and Supplementary Data41Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure76Item 9A.Controls and Procedures76Item 9B.Other Information78 PART III Item 10.Directors, Executive Officers and Corporate Governance78Item 11.Executive Compensation78Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters78Item 13.Certain Relationships and Related Transactions, and Director Independence78Item 14.Principal Accounting Fees and Services78 PART IV Item 15.Exhibits, Financial Statement Schedules79 Signatures81 3Table 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 others, statements concerning: •the above-average industry growth of product and market areas that we have targeted, •our plan to increase our revenue through the introduction of new products within our existing product families as well as in new product categoriesand 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 computing and storage, automotive, industrial, communications and consumer markets, •estimates of our future liquidity requirements, •the cyclical nature of the semiconductor industry, •protection of our proprietary technology, •business outlook for 2019 and beyond, •the factors that we believe will impact our ability to achieve revenue growth, •the percentage of our total revenue from various end markets, •our ability to identify, acquire and integrate the companies, businesses and products that we acquire and achieve the anticipated benefits from suchacquisitions, •the impact of the U.S. Tax Cuts and Jobs Act enacted in December 2017 (the "2017 Tax Act") on our income tax provision and cash flows, •our plan to repatriate cash from our international subsidiaries, •our intention and ability to pay future cash dividends and dividend equivalents, 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(“SEC”), such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. 4Table of Contents 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. PART I ITEM 1. BUSINESS General Monolithic Power Systems (“MPS”) is a leading semiconductor company that designs, develops and markets high-performance power solutions.Incorporated in 1997, MPS’s core strengths include deep system-level and applications knowledge, strong analog design expertise and innovativeproprietary process technologies. These combined strengths enable MPS to deliver highly integrated monolithic products that offer energy efficient, cost-effective, easy-to-use solutions for systems found in computing and storage, automotive, industrial, communications and consumer applications. MPS'smission is to reduce total energy consumption in its customers' systems with green, practical and compact solutions. Our principal executive office is located in Kirkland, Washington and we have over 1,700 employees worldwide, with locations in Asia (primarily inChina, India, Japan, Korea, Singapore and Taiwan), Europe (primarily in France, Germany, Spain, Switzerland and the United Kingdom), and the UnitedStates. 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 computing and storage, automotive, industrial, communications and consumer markets, with the consumer marketrepresenting the largest portion of our revenue. The following is a 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 Revenue End Markets Applications 2018 2017 2016 ● Computing and storage●Storage networks, computers and notebooks, printers,servers and workstations. 27.3% 21.4% 20.7%● Automotive●Infotainment, safety and connectivity applications 13.8% 11.4% 8.7%● Industrial●Power sources, security, point-of-sale systems, smartmeters and other industrial equipment. 15.2% 13.4% 14.4%● Communications●Networking and telecommunication infrastructure,routers and modems, wireless access points and voiceover IP. 12.1% 13.5% 16.7%● Consumer●Set-top boxes, monitors, gaming, lighting, chargers,home appliances, cellular handsets, digital videoplayers, GPS, televisions, stereos and cameras. 31.6% 40.3% 39.5% 5Table 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 computing and storage, automotive, industrial, communications andconsumer markets. Our product families are differentiated with respect to their high degree of integration and strong levels of accuracy and efficiency,making them cost-effective relative to many competing solutions. Our key product families include the following: Direct Current (DC) to DC Products. DC to DC ICs are used to convert and control voltages within a broad range of electronic systems, such as 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%, 92% and 90% of our total revenue in 2018, 2017 and 2016, 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. The Lighting control productfamily accounted for 8%, 8% and 10% of our total revenue in 2018, 2017 and 2016, 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 withus which allow the distributor to sell our products to end customers and other resellers. Distributors sell our products to end customers which includeOEMs, ODMs or EMS providers. Our value-added resellers may second source our products and provide other services to customers. ODMs typicallydesign and manufacture electronic products on behalf of OEMs, and EMS providers typically provide manufacturing services for OEMs and otherelectronic product suppliers. Sales to our largest distributor accounted for 22% of our total revenue in 2018, 17% in 2017, and 22% in 2016. In addition, one other distributoraccounted for 10% of our total revenue in 2018 and one other distributor accounted for 10% of our total revenue in 2017. No other distributors or endcustomers accounted for more than 10% of our total revenue in any of the periods presented. Current distribution agreements with several of our major distributors provide that each distributor has the non-exclusive right to sell and use its bestefforts to promote and develop a market for our products. These agreements provide that payment for purchases from us will generally occur within 30 to60 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 maintain astaff of applications engineers who work directly with our customers’ engineers in the development of their systems’ electronics containing our products. Because our sales are primarily billed and payable in United States dollars, our sales are generally not subject to fluctuating currency exchange rates.However, because a majority of our revenue is attributable to 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, 2018, 2017 and 2016, our revenue from sales to customers in Asia was 88%, 89% 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. 6Table 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 China, Spain and the United States with core competencies in analog and mixed-signal design.Through our research and development efforts, we have developed a collection of intellectual property and know-how that we are able to leverage acrossour products and markets. These include the development of high efficiency power devices, the design of precision analog circuits, expertise in mixed-signal integration and the development of proprietary semiconductor process technologies. Our research and development efforts are generally targeted at three areas: systems architecture, circuit design and implementation, and 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. 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, 2018, we had 1,133patents/applications issued or pending, of which 402 patents have been issued in the United States. Our issued patents are scheduled to expire at varioustimes through December 2038. 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. 7Table 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. Our semiconductorproducts are then assembled and packaged by independent subcontractors in China and Malaysia. The assembled ICs are then sent either for final testingat our Chengdu facility, or to other turnkey providers who perform final testing based on our standards prior to shipping to our customers. We have a 60,000 square-foot manufacturing facility located in Chengdu, China. The facility has been fully operational since 2006 and we havebenefitted from shorter manufacturing cycle times and lower labor and overhead costs. We have expanded our product testing capabilities in this facilityand are able to take advantage of the rich pool of local engineering talent to expand our manufacturing support and engineering operations. 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, 2018, we employed 1,737 employees primarily located in Asia, Europe and theUnited States, compared with 1,534 employees as of December 31, 2017. 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 ten manufacturers of such products, of varying size and financial strength. Weconsider our primary competitors to include Analog Devices, Infineon Technologies, Maxim Integrated Products, NXP Semiconductors, ONSemiconductor, Power Integrations, Renesas Electronics, 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. Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those filed or furnished pursuant toSections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge. They may be obtained from our website atwww.monolithicpower.com under “Investor Relations” as soon as reasonably practicable after we electronically file such material with, or furnish it to, theSEC, 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. 8Table of Contents Executive Officers of the Registrant Information regarding our executive officers as of March 1, 2019 is as follows: Name Age PositionMichael Hsing 59 President, Chief Executive Officer and DirectorBernie Blegen 61 Vice President and Chief Financial OfficerDeming Xiao 56 President of Asia OperationsMaurice Sciammas 59 Senior Vice President of Worldwide Sales and MarketingSaria Tseng 48 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 Vice President and General Counsel from2001 to 2004. Previously, Ms. Tseng was an attorney at Gray Cary Ware & Freidenrich, LLP and Jones, Day, Reavis & Pogue. Ms. Tseng is a member ofthe state bar in both California and New York and is a member of the bar association of the Republic of China (Taiwan). Ms. Tseng currently serves on theBoard of Directors of Super Micro Computer, Inc., a global leader in high performance server technology. Ms. Tseng holds Masters of Law degrees fromthe University of California at Berkeley and the Chinese Culture University in Taipei. 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: •actual or anticipated results of operations and financial performance; 9Table of Contents •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 breath 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 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 corporate taxes, including the impact of the 2017 Tax Act; •government policies and regulations on international trade policies and restrictions, including tariffs on imports of foreign goods; •our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfullysecure manufacturing capacity; •our ability to increase our gross margins; •market reactions to guidance from other semiconductor companies or third-party research groups; •market reactions to merger and acquisition activities in the semiconductor industry, and rumors or expectations of further consolidation in the industry; •investments in sales and marketing resources to enter new markets; •costs of increasing wafer capacity and qualifying additional third-party wafer fabrication facilities; •our ability to pay quarterly cash dividends to stockholders; and, •changes in the estimation of the future size and growth rate of our markets. 10Table of Contents 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 litigation targets; •continued dependence on turns business (orders received and shipped within the same fiscal quarter); •continued dependence on the Asian markets for our customer base; •increases in assembly costs due to commodity price increases, such as the price of gold; •the timing of new product introductions by us and our competitors; •changes in our revenue mix between OEMs, ODMs, distributors and value-added resellers; •changes in product mix, product returns, and actual and potential product liability; •the acceptance of our new products in the marketplace; •our ability to develop new process technologies and achieve volume production; •our ability to meet customer product demand in a timely manner; •the scheduling, rescheduling, or cancellation of orders by our customers; •the cyclical nature of demand for our customers’ products; •fluctuations in our estimate for stock rotation reserves; •our ability to manage our inventory levels, including the levels of inventory held by our distributors; •product obsolescence; •seasonality and variability in the computing and storage, automotive, industrial, communications and consumer 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; 11Table of Contents •the impact of tariffs on imports of foreign goods; 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 particular changing economic conditions in China. 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 could resultin product delays, increased accounts receivable defaults and inventory challenges. Volatility in the credit markets could severely diminish liquidity andcapital availability. Demand for our products is a function of the health of the economies in the United States, Europe, China and the rest of Asia. We cannot predict thetiming, strength or duration of any economic disruption or subsequent economic recovery worldwide, in the United States, in our industry, or in thedifferent markets that we serve. These and other economic factors have had, and may in the future have, a material adverse effect on demand for ourproducts and on our financial condition and operating results. In particular, since we have significant operations in China, our business development plans, results of operations and financial condition may bematerially adversely affected by significant political, social and economic developments in China. A slowdown in economic growth in China couldadversely impact our customers, prospective customers, suppliers, distributors and partners in China, which could have a material adverse effect on ourresults of the operations and financial condition. There is no guarantee that economic downturns, whether actual or perceived, any further decrease ineconomic growth rates or an otherwise uncertain economic outlook in China will not occur or persist in the future, that they will not be protracted or thatgovernments will respond adequately to control and reverse such conditions, any of which could materially and adversely affect our business, financialcondition and results of operations. 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. Any significant or prolonged downturnscould have a material adverse effect on our operating results, financial condition and cash flows. Rising concern of international tariffs, including tariffs applied to goods traded between the United States and China, could materially and adverselyaffect our business and results of operations. Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreignleaders regarding tariffs against foreign imports of certain materials. More specifically, there have been three rounds of U.S. tariffs on Chinese goodstaking effect in July, August and September 2018 (some of which prompted retaliatory Chinese tariffs on U.S. goods). The institution of trade tariffs bothglobally and between the U.S. and China specifically carries the risk of negatively affecting China’s overall economic condition, which could have anegative impact on us as we have significant operations in China. Furthermore, imposition of tariffs could cause a decrease in the sales of our products tocustomers located in China or other customers selling to Chinese end users, which would directly impact our business 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; 12Table of Contents •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. computing and storage, automotive, industrial, communications and consumer); •our competition, which could adversely impact our selling prices and our potential sales; •our manufacturing costs, including our ability to negotiate with our vendors and our ability to efficiently run our test facility in China; •manufacturing capacity constraints; •level of activity in our legal proceedings, which could result in significant legal expenses; •the impact of the 2017 Tax Act on our income tax provision and cash flows; •the impact of tariffs on imports between the U.S. and China; •stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees; and, •our operating expenses, including general and administrative expenses, selling and marketing expenses, and research and development expensesrelating 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, a deterioration in market conditions, end-customer market downturn, marketacceptance and penetration of our current and future products and litigation. A material decrease in our growth rates could adversely affect our stock priceand results of operations. 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. 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. 13Table 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 computing and storage, automotive, industrial, communications and consumer 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 components ofsystems 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 if weare otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations could be materiallyand adversely affected. 14Table 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, 2018, 88% 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 we manufacture or sellour 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 we have significant operations; •tariffs imposed by China and the United States that may impact our sales; •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 22% of our total revenue for the year ended December 31, 2018. 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. 15Table 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 place 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 EMS providers. Receivables from our customers are generally not secured by any type of collateral and aresubject to the risk of being uncollectible. Sales to our largest distributor accounted for 22% of our total revenue for the year ended December 31,2018. Significant deterioration in the liquidity or financial condition of any of our major customers or any group of our customers could have a materialadverse impact on the collectability of our accounts receivable and our future operating results. We primarily conduct our sales on a purchase order basis,and we do not have any long-term supply commitments. Moreover, we believe a high percentage of our products are eventually sold to a number of OEMs. Although we communicate with OEMs in an attempt 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 have hadprevious design wins. We cannot be certain that we will continue to achieve design wins from large OEMs, that our direct customers will continue to besuccessful in selling to the OEMs, or that the OEMs will be successful in selling products which incorporate our ICs. The loss of any significant customer,any material reduction in orders by any of our significant customers or by their OEM customers, the cancellation of a significant customer order, or thecancellation or delay of a customer’s or an OEM’s significant program or product could reduce our revenue and adversely affect our results of operationsand 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 demand forpreviously introduced end products and systems. In addition, demand for our products is influenced by our customers’ ability to manage their inventory.Our sales to distributors are subject to higher volatility because they service demand from multiple levels of the supply chain which, in itself, is inherentlydifficult to forecast. If our customers, including distributors, do not manage their inventory correctly or misjudge their customers’ demand, our shipmentsto and orders from our customers may vary significantly on a quarterly basis, which could reduce our revenue and adversely affect our results of operationsand financial condition. 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. 16Table 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, assembly shops,and testing facilities for our products. In order to facilitate such growth, we may need to enter into strategic transactions, investments and other activities.Such activities are subject to a number of risks, including: •the costs and expense associated with such activities; •the availability of modern foundries to be developed, acquired, leased or otherwise made available to us or our third-party suppliers; •the ability of foundries and our third-party suppliers to obtain the advanced equipment used in the production of our products; •delays in bringing new foundry operations online to meet increased product demand; and •unforeseen environmental, engineering or manufacturing qualification problems relating to existing or new foundry facilities, including delays inqualification 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. 17Table of Contents 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. The 2017 Tax Act will continue to have significant effects on our income tax expense, which could result in a material adverse impact on our resultsof operations, 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 the corporate tax rate, businessdeductions and international tax provisions. Many of these provisions significantly differ from prior U.S. tax law, resulting in material tax accountingimplications for us. Some of the significant new requirements include, but are not limited to, a one-time mandatory deemed repatriation transition tax onpreviously deferred foreign earnings, a remeasurement of our deferred taxes due to the change in the corporate tax rate, taxation of certain globalintangible low-taxed income under the international tax provisions, and limitations on the deductibility of performance-based compensation for officers.Any increase in our income tax expense as a result of the 2017 Tax Act could have a material negative impact on our results of operations. In addition, thedeemed repatriation transition tax liability, which is payable in installments over eight years, will adversely impact our cash flows and financial conditionin future periods. Any changes to our corporate tax planning and strategies may not result in a favorable impact on our income tax expense in futureperiods. The calculation of the tax impact under the 2017 Tax Act is complex. It requires the collection and analysis of extensive information, the use of estimatesand the exercise of significant judgment in determining our tax provision. As we continue to evaluate our existing processes and controls necessary toaddress the financial reporting effects of the 2017 Tax Act, we also expect further guidance may be forthcoming from the Financial Accounting StandardsBoard (“FASB”) and the SEC, as well as regulations, interpretations and rulings from federal and state tax agencies. If we fail to correctly interpret the taxlaw or implement effective internal controls on gathering, analyzing and reviewing data used in our calculations, our income tax provision could bemisstated, which could have a material adverse impact on our results of operations and financial condition. The complexity of calculating our tax provision may result in errors that could result in restatements of our financial statements. Due to the complexity associated with the calculation of our tax provision, 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, or by changes in taxlaws such as the 2017 Tax Act, regulations, accounting principles or interpretations thereof and discrete items such as vesting of restricted stock units. Inaddition, we are subject to potential future examinations of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. Weassess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be noassurance that the outcomes from any examinations will not have an adverse effect 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 any significant systemfailures could disrupt our operations, which could have a material adverse effect on our capital resources, financial condition or results of operations. 18Table 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, financial reporting or other criticalfunctions. 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 absolute security. Although we make significant efforts to maintain the security and integrity of our systems and solutions, any destructive or intrusive breach couldcompromise our networks, creating system disruptions or slowdowns, and the information stored on our networks could be accessed, publicly disclosed,lost or stolen. If any of these types of security breaches were to occur and we were unable to protect sensitive data, our relationships with our businesspartners and customers could be materially damaged, our reputation could be materially harmed, and we could be exposed to a risk of litigation andpossible significant liability. Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integrationor migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could causebusiness disruptions and our remediation efforts may be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adverselyimpact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions could adversely affect ourfinancial 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. 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 and effort to these legal proceedings, which could divert management’s attention from focusing on our operationsand adversely affect our business. 19Table of Contents 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 92% of the originalportfolio of our auction-rate securities at par and continue to hold $3.6 million in principal amount as of December 31, 2018. The underlying maturity ofthese auction-rate securities is up to 28 years. We have historically recorded temporary and other-than-temporary impairment charges on theseinvestments. The valuation is subject to fluctuations in the future, which will depend on many factors, including the quality of underlying collateral,estimated time for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, amongothers. Should there be further deterioration in the market for auction-rate securities, the value of our portfolio may decline, which may have an adverseimpact on our cash position and our results of operations if management determines the decline in value to be other-than-temporary. 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. 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. 20Table of Contents 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 or obtain government licenses and approvals for ourdesired international trading activities or technology transfers, we may be forced to recall products and cease their distribution, and we could besubject 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 Export Administration Act, the Export Administration Regulations ("EAR") and other laws, regulations andrequirements governing international trade and technology transfer. These laws and regulations are complex, change frequently and have generallybecome more stringent over time. We may be required to incur significant expense to comply with these regulations or to remedy violations of theseregulations. 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 products if the cost wereto 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. 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 of data,among other things. Various Chinese agencies are expected to issue additional regulations in the future to define these requirements more precisely. Theserequirements may increase our costs of compliance. We cannot assure you that we will be able to comply with all of these regulatory requirements. Anyfailure to comply with the Cyber Security Law and the relevant regulations and policies could result in further cost and liability to us and could adverselyaffect our business and results of operations. Additionally, increased costs to comply with, and other burdens imposed by, the Cyber Security Law andrelevant regulations and policies that are applicable to the businesses of our suppliers, vendors and other service providers, as well as our customers, couldadversely affect our business and results of operations. 21Table of Contents 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 us and 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. We face the following risks, among others, with respect to our operations in China: •inability to hire and maintain a qualified workforce; •inability to maintain appropriate and acceptable manufacturing controls; and, •higher than anticipated overhead and other costs of operation. If we are unable to maintain our facilities in China at fully operational status with qualified workers, appropriate manufacturing controls and 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 us toexpend 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; •the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of their product to evaluate productperformance 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. 22Table of Contents 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 are scarceand competition for personnel with these skills is intense. There can be no assurance that we will be able to retain existing key employees or that we willbe successful in attracting, integrating or retaining other highly qualified personnel with critical capabilities in the future. If we are unable to retain theservices of existing key employees or are unsuccessful in attracting new highly qualified employees quickly enough to meet the demands of our business,including design cycles, our business could be harmed. Furthermore, if we lose key personnel, the search for a qualified replacement and the transitioncould interrupt our operations as the search could take us longer than expected and divert management resources, and the newly hired employee couldtake 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. 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. 23Table of Contents 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, or incur substantialdebt or contingent liabilities. Such actions could impact our operating results and the price of our common stock. In addition, we may be unable to identify or complete prospective acquisitions for various reasons, including competition from other companies in 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 difficult thananticipated, we may experience disruptions that could harm our business and result in our failure to realize the anticipated benefits of the acquisitions.Some of the risks that may adversely affect our ability to integrate or realize any anticipated benefits from the acquired companies, businesses or assetsinclude 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 an impairment charge related togoodwill or acquired intangibles that would impact our profitability; •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. 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 to our stockholders. In addition, the issuance of a significant amount of our common stock may result in additionalregulatory requirements, such as stockholder approval. 24Table of Contents 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. 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 financial condition,results of operations, capital requirements, business conditions, and other factors that our Board of Directors may deem relevant, as well as a determinationthat cash dividends are in the best interests of our stockholders. Our dividend payments may change from time to time, and we cannot provide assurancethat we will continue to declare dividends at all or in any particular amounts. A reduction in or elimination of our dividend payments could have anegative effect on the price of our common stock. Major earthquakes or other natural disasters and resulting systems outages may cause us significant losses. Our office in California, the production facilities of our third-party wafer suppliers, our IC testing and manufacturing facilities, a portion of our assemblyand research and development activities, and certain other critical business operations are located in or near seismically active regions and are subject toperiodic earthquakes. We do not maintain earthquake insurance and could be materially and adversely affected in the event of a major earthquake. Muchof our revenue, as well as our manufacturers and assemblers, are concentrated in Asia, particularly in China. Such concentration increases the risk thatother natural disasters, labor strikes, terrorism, war, political unrest, epidemics, and/or health advisories could disrupt our operations. In addition, we relyheavily on our internal information and communications systems and on systems or support services from third parties to manage our operationsefficiently and effectively. Any of these are subject to failure due to a natural disaster or other disruption. System-wide or local failures that affect ourinformation processing could have material adverse effects on our business, financial condition, operating results and cash flows. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 25Table of Contents ITEM 2. PROPERTIES The following table summarizes our primary properties as of December 31, 2018: Location ApproximateBuildingSquare Footage Primary UseOwned: San Jose, California 106,000 Research and development, sales and marketing, administrative Chengdu, China 150,000 Research and development, administrative Chengdu, 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: Kirkland, Washington 9,000 Principal executive office, research and development, sales and marketingChengdu, China 89,000 Manufacturing operations, inventory warehouseBarcelona, Spain 5,000 Research and developmentTolochenaz, Switzerland 5,000 Research and developmentTokyo, Japan 3,000 Sales and marketing We also lease other sales and marketing, and research and development offices in Asia, Europe and the United States. We believe that our existingfacilities 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, 2018, there were no materialpending legal proceedings to which we were a party. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 26Table of Contents PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Common Stock Information Our common stock is traded on the Nasdaq Global Select Market under the symbol “MPWR.” Holders of Common Stock As of February 20, 2019, there were nine registered holders of record of our common stock. A substantially greater number of holders of our common stockare “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions on their behalf. Dividend Policy We currently have a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. Based on our historicalpractice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared by ourBoard of Directors, which are payable to the stockholders in the following month. The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other things, our financial condition,results of operations, capital requirements, business conditions and other factors that our Board of Directors may deem relevant, as well as a determinationthat cash dividends are in the best interests of the stockholders. 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, 2013 and its relative performance is tracked through December 31, 2018, 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. 27Table 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 dataas of December 31, 2018 and 2017, and the consolidated statement of operations data for the years ended December 31, 2018, 2017 and 2016 from ouraudited consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K. The consolidated balance sheet dataas of December 31, 2016, 2015 and 2014, and the consolidated statement of operations data for the years ended December 31, 2015 and 2014 arederived from our audited consolidated financial statements which are not included in this report. Operating results for any year are not necessarilyindicative of results to be expected for any future periods. Consolidated Statement of Operations Data: Year Ended December 31, 2018 2017 2016 2015 2014 (in thousands, except per share amounts) Revenue $582,382 $470,929 $388,665 $333,067 $282,535 Cost of revenue 259,714 212,646 177,792 152,898 129,917 Gross profit 322,668 258,283 210,873 180,169 152,618 Operating expenses: Research and development 93,455 82,359 73,643 65,787 58,590 Selling, general and administrative 113,803 97,257 83,012 72,312 66,755 Litigation expense (benefit), net 1,922 1,243 (229) 1,000 (8,027)Total operating expenses 209,180 180,859 156,426 139,099 117,318 Income from operations 113,488 77,424 54,447 41,070 35,300 Interest and other income, net 4,994 5,520 2,817 1,421 1,092 Income before income taxes 118,482 82,944 57,264 42,491 36,392 Income tax provision 13,214 17,741 4,544 7,319 897 Net income $105,268 $65,203 $52,720 $35,172 $35,495 Net income per share: Basic $2.49 $1.58 $1.30 $0.89 $0.92 Diluted $2.36 $1.50 $1.26 $0.86 $0.89 Weighted-average shares outstanding: Basic 42,247 41,350 40,436 39,470 38,686 Diluted 44,602 43,578 41,915 40,869 39,793 Cash dividends declared per common share $1.20 $0.80 $0.80 $0.80 $0.45 Consolidated Balance Sheet Data: December 31, 2018 2017 2016 2015 2014 (in thousands) Cash and cash equivalents $172,704 $82,759 $112,703 $90,860 $126,266 Short-term investments $204,577 $216,331 $155,521 $144,103 $112,452 Total assets $793,432 $652,569 $511,126 $431,285 $399,366 Common stock and additional paid-in capital $450,908 $376,586 $315,969 $265,763 $240,500 Total stockholders' equity $640,093 $522,007 $431,116 $368,516 $346,425 Working capital $500,371 $383,253 $330,063 $288,645 $271,051 28Table 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. Incorporated in 1997, MPS’s corestrengths include 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 computing and storage, automotive, industrial, communications and consumer 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 ICs. This has enabled us to limit our capital expenditures and fixed costs, while focusing ourengineering and design resources on our core strengths. Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product toramp up. Typical lead time for orders is fewer than 90 days. These factors, combined with the fact that orders in the semiconductor industry can typicallybe 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, 2018, 2017 and 2016, our revenue from sales to customers in Asia was 88%, 89% and 91%,respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the computing and storage, automotive,industrial, communications and consumer 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 We generate revenue primarily from product sales, which include assembled and tested integrated circuits, as well as dies in wafer form. These productsales were 98%, 98% and 99% of our total revenue for the years ended December 31, 2018, 2017 and 2016, respectively. The remaining revenue primarilyincludes royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significantin all periods presented. 29Table of Contents We recognize revenue from product sales when we satisfy a performance obligation by transferring control of the promised goods or services to ourcustomers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Product sales consist of a single performance obligation that we satisfy at a point in time. We recognize product revenue from distributors and direct endcustomers when the following events have occurred: (a) we have transferred physical possession of the products, (b) we have a present right to payment,(c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. In accordance withthe shipping terms specified in the contracts, these criteria are generally met when the products are shipped from our facilities (such as the “Ex Works”shipping term) or delivered to the customers’ locations (such as the “Delivered Duty Paid” shipping term). Under certain consignment agreements, revenue is not recognized when the products are shipped and delivered to be held at customers’ designatedlocations because we continue to control the products and retain ownership, and the customers do not have an unconditional obligation to pay. Werecognize revenue when the customers pull the products from the locations or, in some cases, after a 60-day period from the delivery date has passed, atwhich time control transfers to the customers and we invoice them for payment. We account for price adjustment and stock rotation rights as variable consideration that reduces the transaction price, and recognize that reduction in thesame period the associated revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell our products to their endcustomers at a price that is lower than the distribution price invoiced by us. When we receive claims from the distributors that products have been sold tothe end customers at the lower price, we issue the distributors credit memos for the price adjustments. We estimate the price adjustments based on ananalysis of historical claims, at both the distributor and product level, as well as an assessment of any known trends of product sales mix. OtherU.S. distributors and non-U.S. distributors, which make up the majority of our total sales to distributors, do not have price adjustment rights. In addition, certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases inaccordance with the contract terms. We estimate the stock rotation returns based on an analysis of historical returns, and the current level of inventory inthe distribution channel. We recognize an asset for product returns which represents the right to recover products from the customers related to stockrotations, with a corresponding reduction to cost of revenue. We pay sales commissions based on the achievement of pre-determined product sales targets. As we recognize product sales at a point in time, salescommissions are expensed as incurred. Inventory Valuation We value our inventories at the lower of the standard cost (which approximates actual cost on a first-in, first-out basis) or their current estimated netrealizable value. We write down excess and obsolete inventories based on assumptions about future demand and market conditions. If actual demand ormarket conditions are less favorable than those projected by management, additional inventory write-downs may be required. Conversely, if actualdemand or market conditions are more favorable, inventories may be sold that were 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. 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 in theapplication of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty, finality oruncertainty to an anticipated outcome, changes in accounting or tax laws in the U.S. or foreign jurisdictions where we operate, or changes in other facts orcircumstances. In addition, we recognize liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on our tax returns ifit has less than a 50% likelihood of being sustained. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is lessthan our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements in theperiod such determination is made. We have calculated our uncertain tax positions which were attributable to certain estimates and judgments primarilyrelated to transfer pricing, cost sharing and our international tax structure exposure. 30Table of Contents On December 22, 2017, the 2017 Tax Act was enacted, which significantly changed U.S. corporate income tax law. The 2017 Tax Act made the followingmaterial changes: (1) reduction of the corporate income tax rate effective January 1, 2018; (2) replacement of the worldwide tax system with a territorialtax regime, with a one-time mandatory tax on previously deferred foreign earnings; (3) amendment on the deductibility of executive performance-basedcompensation, and (4) creation of new taxes on certain foreign-sourced earnings. Income tax effects resulting from changes in tax laws are accounted for inthe period in which the law is enacted. As permitted by Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC on December 22, 2017, werecorded provisional amounts based on reasonable estimates for the year ended December 31, 2017, with a one-year measurement period to complete theanalysis. Any subsequent adjustments to these provisional amounts would be recorded to the income tax provision in the period when the analysis wascomplete. In December 2018, we have completed our accounting for the tax effects of the 2017 Tax Act, including the calculation of the deemedrepatriation transition tax. See the “Income Tax Provision” for further discussion. As of December 31, 2018 and 2017, we had a valuation allowance of $13.0 million and $12.6 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 assets would increase income in the period suchdetermination was made. Likewise, should it be determined that additional amounts of the net deferred tax assets will not be realized in the future, anadjustment to increase the deferred tax assets valuation allowance will be charged to income in the period such determination is made. Contingencies We are a party to actions and proceedings in the ordinary course of business, including potential litigation regarding our shareholders and ourintellectual property, challenges to the enforceability or validity of our intellectual property, claims that our products infringe on the intellectualproperty rights of others, and employment matters. The pending proceedings involve complex questions of fact and law and will require the expenditureof significant funds and the diversion of other resources to prosecute and defend. In addition, from time to time, we become aware that we are subject toother contingent 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 internaland external 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. 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 ofshares issued under the employee stock purchase plan and RSUs with a purchase price feature is estimated using the Black-Scholes model. The fair valueof RSUs with market conditions, as well as RSUs containing both market and performance conditions, is estimated using a Monte Carlo simulationmodel. 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 performanceconditions, as well as awards containing both market and performance conditions, we recognize compensation expense when the performance goals areachieved, or when it becomes probable that the performance goals will be achieved. Management performs the probability assessment on a quarterly basisby reviewing external factors, such as macroeconomic conditions and the analog industry revenue forecasts, and internal factors, such as our 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. If theprojected achievement was revised upward or if the actual results were higher than the projected achievement, additional compensation expense would berecorded for the awards due to the cumulative catch-up adjustment, which would have an adverse impact on our results of operations. Conversely, if theprojected achievement was revised downward or if the actual results were lower than the projected achievement, previously accrued compensationexpense would be reversed for the awards, which would have a favorable impact on our results of operations. As a result, our stock-based compensationexpense is subject to volatility and may fluctuate significantly each quarter due to changes in our probability assessment or actual results being differentfrom projections made by management. 31Table of Contents We account for forfeitures of equity awards when they occur. 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, 2018. Results of Operations The following table summarizes our results of operations: Year Ended December 31, 2018 2017 2016 (in thousands, except percentages) Revenue $582,382 100.0% $470,929 100.0% $388,665 100.0%Cost of revenue 259,714 44.6 212,646 45.2 177,792 45.7 Gross profit 322,668 55.4 258,283 54.8 210,873 54.3 Operating expenses: Research and development 93,455 16.0 82,359 17.5 73,643 18.9 Selling, general and administrative 113,803 19.5 97,257 20.7 83,012 21.4 Litigation expense (benefit), net 1,922 0.4 1,243 0.2 (229) - Total operating expenses 209,180 35.9 180,859 38.4 156,426 40.3 Income from operations 113,488 19.5 77,424 16.4 54,447 14.0 Interest and other income, net 4,994 0.9 5,520 1.2 2,817 0.7 Income before income taxes 118,482 20.4 82,944 17.6 57,264 14.7 Income tax provision 13,214 2.3 17,741 3.8 4,544 1.1 Net income $105,268 18.1% $65,203 13.8% $52,720 13.6% Revenue The following table summarizes our revenue by end market: Year Ended December 31, Change End Market 2018 % ofRevenue 2017 % ofRevenue 2016 % ofRevenue From 2017to 2018 From 2016to 2017 (in thousands, except percentages) Computing and storage $159,121 27.3% $100,782 21.4% $80,562 20.7% 57.9% 25.1%Automotive 80,078 13.8 53,888 11.4 33,954 8.7 48.6% 58.7%Industrial 88,472 15.2 62,896 13.4 55,685 14.4 40.7% 12.9%Communications 70,589 12.1 63,606 13.5 64,732 16.7 11.0% (1.7)%Consumer 184,122 31.6 189,757 40.3 153,732 39.5 (3.0)% 23.4%Total $582,382 100.0% $470,929 100.0% $388,665 100.0% 23.7% 21.2% Revenue for the year ended December 31, 2018 was $582.4 million, an increase of $111.5 million, or 23.7%, from $470.9 million for the year endedDecember 31, 2017. This increase was driven by higher sales in all of our end markets except for the consumer market. Overall unit shipments increasedby 19% due to higher market demand, and average sales prices increased by 4% from the same period in 2017. 32Table of Contents Revenue from the computing and storage market for the year ended December 31, 2018 increased $58.3 million, or 57.9%, from the same period in 2017.This increase was primarily driven by strength in the solid-state drive storage, cloud computing and high-performance notebook markets. Revenue fromthe automotive market increased $26.2 million, or 48.6%, from the same period in 2017. This increase was primarily driven by higher sales of products forinfotainment, safety and connectivity applications. Revenue from the industrial market increased $25.6 million, or 40.7%, from the same period in 2017.This increase was primarily driven by higher sales in power source, security and meter products. Revenue from the communications market increased $7.0million, or 11.0%, from the same period in 2017. This increase was primarily driven by higher demand in networking applications. Revenue from theconsumer market decreased $5.6 million, or 3.0%, from the same period in 2017. This decrease was primarily due to softness in demand for high volumeconsumer-related products, particularly those sold in the greater China region. This decrease was partially offset by higher demand for products related tohome appliance, specialty lighting and internet-of-things applications. 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 the communications market. Overall unit shipmentsincreased by 9% due to higher market demand, and average sales prices increased by 12% from the same period in 2016. Revenue from the computing and storage market for the year ended December 31, 2017 increased $20.2 million, or 25.1%, from the same period in2016. This increase was primarily driven by strength in the solid-state drive storage, cloud computing and high-performance notebook markets.Revenue from the automotive market increased $19.9 million, or 58.7%, from the same period in 2016. This increase was primarily driven by highersales of products for infotainment, safety and connectivity applications. Revenue from the industrial market increased $7.2 million, or 12.9%, from thesame period in 2016. This increase was primarily driven by higher sales in power source products. Revenue from the communications market decreased$1.1 million, or 1.7%, from the same period in 2016. This decrease was primarily due to lower demand in wireless applications. Revenue from theconsumer market increased $36.0 million, or 23.4%, from the same period in 2016. This increase was primarily driven by higher demand in gaming andhome appliance products. 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 2018 2017 2016 From 2017 to2018 From 2016 to2017 (in thousands, except percentages) Cost of revenue $259,714 $212,646 $177,792 22.1% 19.6%As a percentage of revenue 44.6% 45.2% 45.7% Gross profit $322,668 $258,283 $210,873 24.9% 22.5%Gross margin 55.4% 54.8% 54.3% Cost of revenue was $259.7 million, or 44.6% of revenue, for the year ended December 31, 2018, and $212.6 million, or 45.2% of revenue, for the yearended December 31, 2017. The $47.1 million increase in cost of revenue was primarily due to a 19% increase in overall unit shipments, which waspartially offset by a 1% decrease in the average direct cost of units shipped. The increase in cost of revenue was also driven by a $10.5 million increase ininventory write-downs, a $2.1 million increase in warranty expenses, and a $1.7 million increase in manufacturing overhead costs, which was partiallyoffset by a $1.2 million decrease in amortization expense as certain intangible assets were fully amortized in 2018. Gross margin was 55.4% for the year ended December 31, 2018, compared with 54.8% for the year ended December 31, 2017. The increase in gross marginwas primarily due to increased sales of higher margin products and lower manufacturing overhead costs as a percentage of revenue, which was partiallyoffset by higher inventory write-downs as a percentage of revenue. 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. 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 manufacturing overhead costs as a percentage of revenue, which was partially offset by higher inventory write-downsas a percentage of revenue. 33Table of Contents Research and Development Research and development (“R&D”) expenses primarily consist of salary and benefit expenses, bonuses, stock-based compensation and deferredcompensation for design and product engineers, expenses related to new product development and supplies, and facility costs. Year Ended December 31, Change 2018 2017 2016 From 2017 to2018 From 2016 to2017 (in thousands, except percentages) R&D expenses $93,455 $82,359 $73,643 13.5% 11.8%As a percentage of revenue 16.0% 17.5% 18.9% R&D expenses were $93.5 million, or 16.0% of revenue, for the year ended December 31, 2018, and $82.4 million, or 17.5% of revenue, for the year endedDecember 31, 2017. The $11.1 million increase in R&D expenses was primarily due to an increase of $6.9 million in compensation expenses, whichinclude salary, benefits and bonuses, an increase of $2.4 million in laboratory supplies, an increase of $1.4 million in new product development expenses,and an increase of $1.2 million in stock-based compensation expenses mainly associated with performance-based equity awards. These increases werepartially offset by an increase of $1.4 million in income related to changes in the value of the deferred compensation plan liabilities. Our R&D headcountwas 710 employees as of December 31, 2018, compared with 629 employees as of December 31, 2017. 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 year endedDecember 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 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. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses primarily include salary and benefit expenses, bonuses, stock-based compensation and deferredcompensation for sales, marketing and administrative personnel, sales commissions, travel expenses, facilities costs, and professional service fees. Year Ended December 31, Change 2018 2017 2016 From 2017 to2018 From 2016 to2017 (in thousands, except percentages) SG&A expenses $113,803 $97,257 $83,012 17.0% 17.2%As a percentage of revenue 19.5% 20.7% 21.4% SG&A expenses were $113.8 million, or 19.5% of revenue, for the year ended December 31, 2018, and $97.3 million, or 20.7% of revenue, for the yearended December 31, 2017. The $16.5 million increase in SG&A expenses was primarily due to an increase of $6.6 million in stock-based compensationexpenses mainly associated with performance-based equity awards, an increase of $5.0 million in compensation expenses, which include salary, benefitsand bonuses, and an increase of $4.0 million in commission expenses driven by higher revenue. These increases were partially offset by an increase of$2.0 million in income related to changes in the value of the deferred compensation plan liabilities. Our SG&A headcount was 433 employees as ofDecember 31, 2018, compared with 389 employees as of December 31, 2017. 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 performance-based equity awards, an increase of $3.7 million in compensation expenses, which include salary, benefitsand bonuses, an increase of $1.3 million in depreciation expense, and an increase of $1.0 million in expenses related to changes in the value of thedeferred compensation plan liabilities. In addition, contributing to the increase in SG&A expenses in 2017 was a stock-based compensation credit of $2.9million which reduced SG&A expenses in 2016 due to the retirement of our former Chief Financial Officer. As the service or performance conditions forher outstanding restricted stock units had not been satisfied at the time of her departure, we reversed previously accrued stock-based compensationexpenses of $2.9 million associated with the unvested restricted stock units and the 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. 34Table of Contents Litigation Expense (Benefit), Net Litigation expense was $1.9 million for the year ended December 31, 2018, compared with $1.2 million for the year ended December 31, 2017. Theincrease was primarily due to increased expenses on an ongoing lawsuit in which we are the plaintiff. 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 lawsuit in which we are the plaintiff. In addition, we did notrecognize any litigation benefit for the year ended December 31, 2017, compared with $0.7 million of benefit recognized in connection with twolitigation settlements for the year ended December 31, 2016. Interest and Other Income, Net Interest and other income, net, was $5.0 million for the year ended December 31, 2018, compared with $5.5 million for the year ended December 31, 2017.The decrease was primarily due to an increase of $3.6 million in expenses related to changes in the value of the deferred compensation plan investments.This decrease was partially offset by an increase of $1.5 million in foreign currency exchange gain, an increase of $1.0 million in interest income as aresult of higher investment balances and yields, and a decrease of $0.6 million in amortization of premium on available-for-sale securities. 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, which was partially offset by an increaseof $1.0 million in amortization of premium on available-for-sale investments and an increase of $0.6 million in foreign currency exchange loss. Income Tax Provision The income tax provision for the year ended December 31, 2018 was $13.2 million, or 11.2% 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 the inclusion of the global intangible low-taxed income (“GILTI”) provisions as a result of the 2017 Tax Act. 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. In addition, the effective tax rate was impacted by the effects of the 2017 Tax Act, including the remeasurement of deferredtaxes and the one-time deemed repatriation transition tax, and the release of the U.S. valuation allowance. 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. 2017 Tax Act: Under Accounting Standards Codification (“ASC”) No. 740, Income Taxes, the effects of a new legislation are recognized upon enactment. Accordingly,we were required to recognize the tax effects of the 2017 Tax Act beginning in the fourth quarter of 2017. On December 22, 2017, the SEC issued SAB 118, which addressed the application of ASC No. 740 in situations when a registrant did not have thenecessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act.In accordance with SAB 118, for matters that have not been completed, we would recognize provisional amounts to the extent that they were reasonablyestimable. Any subsequent adjustments to the provisional amounts would be recorded to the income tax provision in the period when the analysis wascomplete. We were permitted to finalize the analysis within a one-year measurement period. As of December 31, 2017, we had not completed the accounting for the tax effects of the 2017 Tax Act and recorded certain provisional amounts based onreasonable estimates. In December 2018, we finalized the analysis of the 2017 Tax Act and recorded certain adjustments to the provisional amounts, asdiscussed further below. 35Table of Contents We expect further guidance may be forthcoming from the FASB and the SEC, as well as regulations, interpretations and rulings from federal and state taxagencies, which could result in additional impact and adjustments to our income tax provisions in future periods. 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 No. 740 requires the effect of a change in taxlaws to 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$9.8 million to the income tax provision as a result of the remeasurement for the year ended December 31, 2017. In December 2018, we finalized theanalysis and did not make any adjustment to the provisional amount recorded 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. For the year ended December 31, 2017, we recorded a provisional amount of $41.9 million related to the transitiontax expense. After the utilization of R&D tax credits of $18.0 million, the provisional transition tax liability was $23.9 million. In December 2018, wefinalized the analysis of the transition tax, and recorded an increase of $1.3 million to the transition tax expense and a net increase of $0.7 million to thetransition tax liability. As permitted by the 2017 Tax Act, we have elected to pay the transition tax liability of $24.6 million in installments on an interest-free basis over eightyears through 2025. For the year ended December 31, 2018, we paid $2.6 million of the transition tax. As of December 31, 2018, $1.3 million of theremaining transition tax was recorded in current accrued liabilities and $20.7 million was recorded in long-term income tax liabilities. 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 $123.2 million of undistributed foreign earnings to tax, an actual repatriation from our non-U.S. subsidiariescould 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. As of December 31, 2018, we recorded deferred taxes liabilities of$1.1 million related to California state taxes, which were netted against deferred tax assets. GILTI The 2017 Tax Act subjects a U.S. parent shareholder to taxation of its GILTI, effective January 1, 2018. The GILTI inclusions impact companies that haveforeign earnings generated without a large aggregate foreign fixed asset base and whose earnings are being taxed at a low tax rate. For the year endedDecember 31, 2018, we included $81.1 million related to the GILTI provisions as additional Subpart F income, which was accounted for as a period cost. Executive Compensation Deduction 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 is generally subject to the $1 million limitation. 36Table of Contents Release of Valuation Allowance: Management periodically evaluates the realizability of our deferred tax assets based on all available evidence. The realizability of our deferred taxassets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize theseassets. 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, weassessed the realizability of the deferred tax assets and concluded that it was more likely than not that our federal deferred tax assets would be realizable,due principally to the enactment of the 2017 Tax Act. In accordance with ASC No. 740, management considered all available evidence, both positiveand negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets was needed. Our conclusion wasprimarily driven by the following positive evidence: ●We forecasted 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 provisionin the 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. Liquidity and Capital Resources December 31, 2018 2017 (in thousands, except percentages) Cash and cash equivalents $172,704 $82,759 Short-term investments 204,577 216,331 Total cash, cash equivalents and short-term investments $377,281 $299,090 Percentage of total assets 47.6% 45.8% Total current assets $580,810 $449,170 Total current liabilities (80,439) (65,917)Working capital $500,371 $383,253 As of December 31, 2018, we had cash and cash equivalents of $172.7 million and short-term investments of $204.6 million, compared with cash andcash equivalents of $82.8 million and short-term investments of $216.3 million as of December 31, 2017. As of December 31, 2018, $143.8 million ofcash and cash equivalents and $101.0 million of short-term investments were held by our international subsidiaries. As a result of the enactment of the2017 Tax Act, we currently plan to repatriate cash from our Bermuda subsidiary to fund our future expenditures in the U.S. Earnings from other foreignsubsidiaries will continue to be indefinitely reinvested. 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, 2018, we hadworking capital of $500.4 million, compared with working capital of $383.3 million as of December 31, 2017. The $117.1 million increase in workingcapital was due to a $131.6 million increase in current assets, which was partially offset by a $14.5 million increase in current liabilities. The increase incurrent assets was primarily due to an increase in cash and cash equivalents, accounts receivable and inventories. The increase in current liabilities wasprimarily due to an increase in accrued compensation and related benefits and other accrued liabilities. Summary of Cash Flows The following table summarizes our cash flow activities: Year Ended December 31, 2018 2017 2016 (in thousands) Net cash provided by operating activities $141,451 $133,821 $107,786 Net cash used in investing activities (14,740) (134,060) (55,726)Net cash used in financing activities (34,559) (31,325) (28,127)Effect of change in exchange rates (2,208) 1,625 (2,093)Net increase (decrease) in cash, cash equivalents and restricted cash $89,944 $(29,939) $21,840 37Table of Contents For the year ended December 31, 2018, net cash provided by operating activities was $141.5 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 $37.5 million from the changes in ouroperating assets and liabilities. The increase in accounts receivable was primarily driven by increased sales. The increase in inventories was primarilydriven by an increase in strategic wafer and die inventories as well as an increase in finished goods to meet current demand and future growth. Theincrease in accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensation plan. 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 in the fourth quarter of 2017 as a result of the 2017 Tax Act. 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, 2018, net cash used in investing activities was $14.7 million, primarily due to purchases of property and equipment of$22.5 million and net contributions to the deferred compensation plan of $4.1 million, which was partially offset by net sales of investments of $11.9million. For the year ended December 31, 2017, net cash used in investing activities was $134.1 million, primarily due to purchases of property andequipment of $65.8 million, net purchases of short-term investments of $63.0 million, and net contributions to the deferred compensation plan of $5.3million. For the year ended December 31, 2016, net cash used in investing activities was $55.7 million, primarily due to purchases of property andequipment of $37.1 million, net purchases of investments of $13.6 million, and net contributions to the deferred compensation plan of $5.0 million. We did not purchase any significant properties for the year ended December 31, 2018. For the year ended December 31, 2017, we funded the purchases ofland in Kirkland, Washington, office space in Shanghai and Hangzhou, China, and land and office space in Taipei, Taiwan for $53.8 million. For the yearended December 31, 2016, we funded the purchases of a previously leased manufacturing facility in Chengdu, China, office space in Shenzhen, China,and land and office space in Taipei, Taiwan for $17.5 million. For the year ended December 31, 2018, net cash used in financing activities was $34.6 million, primarily reflecting $47.5 million used to pay dividends toour stockholders and dividend equivalents to our employees who hold RSUs, which was partially offset by $13.6 million of cash proceeds from vesting ofRSUs and issuance of shares through our employee stock purchase plan. 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 dividends to our stockholders and dividend equivalents to our employees who hold RSUs,which was partially offset by $2.9 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan.For the year ended December 31, 2016, net cash used in financing activities was $28.1 million, primarily reflecting $33.1 million used to pay dividends toour stockholders and dividend equivalents to our employees who hold RSUs, which was partially offset by $3.8 million of cash proceeds from stockoption exercises and issuance of shares through our employee stock purchase plan. We have a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. In addition, outstanding RSU awardscontain rights to receive dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock.The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on theunderlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. For the year ended December 31, 2018,we paid dividends and dividend equivalents totaling $47.5 million. For the year ended December 31, 2017, we paid dividends and dividend equivalentstotaling $33.9 million. For the year ended December 31, 2016, we paid dividends and dividend equivalents totaling $33.1 million. In February 2019, our Board of Directors approved an increase in our quarterly cash dividends from $0.30 per share to $0.40 per share, effective for thedividends declared in the first quarter of 2019. We anticipate that cash used for future dividends and dividend equivalent payments, as well as payments for the one-time deemed repatriation transitiontax and other expenditures, will come from our current domestic cash, cash generated from ongoing U.S. operations, and cash to be repatriated from ourBermuda subsidiary. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested. 38Table of Contents 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. Contractual Obligations The following table summarizes our contractual obligations at December 31, 2018: Payment Due by Period Total Less Than1 Year 1 - 3 Years 3 - 5 Years More Than5 years (in thousands) Operating leases $2,877 $1,511 $1,145 $221 $- Outstanding purchase commitments (1) 61,389 54,874 5,165 650 700 Transition tax liability (2) 22,058 1,353 3,944 5,669 11,092 Other long-term obligations (3) 38,525 - 5,698 7,517 25,310 Total $124,849 $57,738 $15,952 $14,057 $37,102 ______________ (1)Outstanding purchase commitments primarily consist of wafer and other inventory purchases, assembly services and license arrangements. (2)The transition tax liability represents the 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 installments on an interest-free basis through 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 payments related to our liabilities forunrecognized tax benefits, we have excluded estimated obligations of $13.7 million from the table above. In February 2019, we entered into an agreement to purchase an office building and land located in Kirkland, Washington, for $53.0 million in cash. We expect to close the transaction in the first quarter of 2019. Off Balance Sheet Arrangements As of December 31, 2018, 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 short-term 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. Based on our investment positions as of December 31, 2018 and 2017, a 10% decline in interest rates would impact our results of operations byapproximately $0.6 million and $0.5 million in interest income, respectively. 39Table of Contents We do not use derivative financial instruments in our investment portfolio. Investments in debt securities are classified as available-for-sale. No realizedgains or losses are recognized in our results of operations due to changes in interest rates unless such securities are sold prior to maturity or are determinedto be other-than-temporarily impaired. Available-for-sale investments are reported at fair value with the unrealized gains or losses being included inaccumulated other comprehensive income (loss), a component of stockholders’ equity. Long-Term Investments As of December 31, 2018 and 2017, our holdings in auction-rate securities had a face value of $3.6 million and $5.6 million, and a fair value of $3.2million and $5.3 million, respectively. As of December 31, 2018 and 2017, a 10% decline in the fair value could impact our results of operations byapproximately $0.4 million and $0.5 million, respectively, if we determined the decline in value to be other-than-temporary. To date, we have redeemed92% of the original portfolio in these securities, or $39.7 million, at par without any realized losses. 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, net. Fluctuations in foreign currency exchangerates have not had a material impact on our results of operations in any of the periods presented. 40Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED FINANCIAL STATEMENTS Contents PageReport of Independent Registered Public Accounting Firm42Consolidated Balance Sheets43Consolidated Statements of Operations44Consolidated Statements of Comprehensive Income45Consolidated Statements of Stockholders’ Equity46Consolidated Statements of Cash Flows47Notes to Consolidated Financial Statements48 41Table 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 31,2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the three yearsin the period ended December 31, 2018, 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, 2018 and 2017, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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, 2019, 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, 2019 We have served as the Company's auditor since 1999. 42Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except par value) December 31, 2018 2017 ASSETS Current assets: Cash and cash equivalents $172,704 $82,759 Short-term investments 204,577 216,331 Accounts receivable, net 55,214 38,037 Inventories 136,384 99,281 Other current assets 11,931 12,762 Total current assets 580,810 449,170 Property and equipment, net 150,001 144,636 Long-term investments 3,241 5,256 Goodwill 6,571 6,571 Acquisition-related intangible assets, net 111 951 Deferred tax assets, net 16,830 15,917 Other long-term assets 35,868 30,068 Total assets $793,432 $652,569 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $22,678 $22,813 Accrued compensation and related benefits 18,799 15,597 Accrued liabilities 38,962 27,507 Total current liabilities 80,439 65,917 Income tax liabilities 34,375 31,621 Other long-term liabilities 38,525 33,024 Total liabilities 153,339 130,562 Commitments and contingencies (notes 13 and 14) Stockholders' equity: Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; sharesissued and outstanding: 42,505 and 41,614, respectively 450,908 376,586 Retained earnings 194,728 143,608 Accumulated other comprehensive income (loss) (5,543) 1,813 Total stockholders’ equity 640,093 522,007 Total liabilities and stockholders’ equity $793,432 $652,569 See accompanying notes to consolidated financial statements. 43Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Year Ended December 31, 2018 2017 2016 Revenue $582,382 $470,929 $388,665 Cost of revenue 259,714 212,646 177,792 Gross profit 322,668 258,283 210,873 Operating expenses: Research and development 93,455 82,359 73,643 Selling, general and administrative 113,803 97,257 83,012 Litigation expense (benefit), net 1,922 1,243 (229)Total operating expenses 209,180 180,859 156,426 Income from operations 113,488 77,424 54,447 Interest and other income, net 4,994 5,520 2,817 Income before income taxes 118,482 82,944 57,264 Income tax provision 13,214 17,741 4,544 Net income $105,268 $65,203 $52,720 Net income per share: Basic $2.49 $1.58 $1.30 Diluted $2.36 $1.50 $1.26 Weighted-average shares outstanding: Basic 42,247 41,350 40,436 Diluted 44,602 43,578 41,915 See accompanying notes to consolidated financial statements. 44Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Year Ended December 31, 2018 2017 2016 Net income $105,268 $65,203 $52,720 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (7,082) 6,369 (5,033)Change in unrealized loss on available-for-sale securities, net of tax of $209, $0,and $0, respectively (274) (341) (648)Total other comprehensive income (loss), net of tax (7,356) 6,028 (5,681)Comprehensive income $97,912 $71,231 $47,039 See accompanying notes to consolidated financial statements. 45Table 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, 2016 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 ($0.80 pershare) - - (34,645) - (34,645)Exercise of stock options 76 1,344 - - 1,344 Vesting 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 ($0.80 pershare) - - (35,816) - (35,816)Exercise of stock options 9 150 - - 150 Vesting 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 of a change in accounting principles - 5,141 (5,141) - - Balance as of December 31, 2017 41,614 376,586 143,608 1,813 522,007 Net income - - 105,268 - 105,268 Other comprehensive loss - - - (7,356) (7,356)Dividends and dividend equivalents declared ($1.20 pershare) - - (54,527) - (54,527)Exercise of stock options 5 59 - - 59 Vesting of restricted stock units 853 10,578 - - 10,578 Shares issued under the employee stock purchase plan 33 3,028 - - 3,028 Stock-based compensation expense - 60,657 - - 60,657 Cumulative effect of a change in accounting principles - - 379 - 379 Balance as of December 31, 2018 42,505 $450,908 $194,728 $(5,543) $640,093 See accompanying notes to consolidated financial statements. 46Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2018 2017 2016 Cash flows from operating activities: Net income $105,268 $65,203 $52,720 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangible assets 12,311 16,101 14,674 (Gain) loss on sales or write-off of property and equipment 22 (3) 57 Amortization of premium on available-for-sale securities 1,353 1,976 1,019 (Gain) loss on deferred compensation plan investments 255 (2,531) (1,257)Deferred taxes, net (843) (15,238) (5)Excess tax benefits from equity awards - - (1,465)Stock-based compensation expense 60,607 52,617 44,989 Changes in operating assets and liabilities: Accounts receivable (18,079) (3,785) (3,421)Inventories (37,060) (27,795) (8,323)Other assets (1,075) 1,603 (11,021)Accounts payable 871 3,077 5,483 Accrued compensation and related benefits 3,806 2,397 3,136 Accrued liabilities 7,092 10,852 8,035 Income tax liabilities 6,923 29,347 3,165 Net cash provided by operating activities 141,451 133,821 107,786 Cash flows from investing activities: Property and equipment purchases (22,526) (65,770) (37,112)Purchases of short-term investments (99,199) (140,531) (236,912)Proceeds from maturities and sales of short-term investments 109,131 77,502 223,344 Proceeds from sales of long-term investments 2,000 - - Contributions to deferred compensation plan, net (4,146) (5,261) (5,046)Net cash used in investing activities (14,740) (134,060) (55,726)Cash flows from financing activities: Property and equipment purchased on extended payment terms (749) (250) (300)Proceeds from exercise of stock options 59 150 1,344 Proceeds from vesting of restricted stock units 10,578 - - Proceeds from shares issued under the employee stock purchase plan 3,028 2,701 2,463 Dividends and dividend equivalents paid (47,475) (33,926) (33,099)Excess tax benefits from equity awards - - 1,465 Net cash used in financing activities (34,559) (31,325) (28,127)Effect of change in exchange rates (2,208) 1,625 (2,093)Net increase (decrease) in cash, cash equivalents and restricted cash 89,944 (29,939) 21,840 Cash, cash equivalents and restricted cash, beginning of period 82,874 112,813 90,973 Cash, cash equivalents and restricted cash, end of period $172,818 $82,874 $112,813 Supplemental disclosures for cash flow information: Cash paid for taxes and interest $7,134 $3,619 $1,234 Non-cash investing and financing activities: Liability accrued for property and equipment purchases $1,737 $3,061 $787 Liability accrued for dividends and dividend equivalents $16,319 $10,686 $10,416 See accompanying notes to consolidated financial statements. 47Table of Contents MONOLITHIC POWER SYSTEMS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Monolithic Power Systems, Inc. was incorporated in the State of California on August 22, 1997. On November 17, 2004, the Company was reincorporatedin the State of Delaware. MPS designs, develops and markets integrated power semiconductor solutions and power delivery architectures. MPS's mission isto provide innovative power solutions in the computing and storage, automotive, industrial, communications and consumer 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 andliabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Significant estimates andassumptions used in these consolidated financial statements primarily include those related to revenue recognition, inventory valuation, valuation ofshare-based awards, valuation of goodwill and acquisition-related intangible assets, contingencies and tax valuation allowances. Actual results coulddiffer from those estimates. Certain Significant Risks and Uncertainties Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-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, certificates of deposit and government agency bonds and treasuries, and the long-term investmentsconsist of government-backed student loan auction-rate securities. The Company generally does not require its customers to provide collateral or othersecurity to support accounts receivable. To manage credit risk, management performs ongoing credit evaluations of its customers’ financialcondition. The Company requires cash in advance for certain customers in addition to ongoing credit evaluations. See Note 2 for further discussion. 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,Taiwan and Europe, which utilize the Renminbi, the New Taiwan Dollar and the Euro as their currencies, respectively. Accordingly, assets and liabilitiesof the foreign subsidiaries are translated using exchange rates in effect at the end of the period. Revenue and costs are translated using average exchangerates for the period. The resulting translation adjustments are presented as a separate component of accumulated other comprehensive income (loss) instockholders’ equity in the Consolidated Balance Sheets. In addition, the Company incurs foreign currency exchange gain or loss related to certainintercompany transactions between the U.S. and its foreign subsidiaries that are denominated in a currency other than the functional currency. Inconnection with the settlement and remeasurement of the balances, the Company recorded foreign currency exchange gain (loss) of $1.0 million, $(0.6)million and $0.1 million for the years ended December 31, 2018, 2017 and 2016, respectively, which were reported in interest and other income, net, inthe Consolidated Statements of Operations. 48Table 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 generally amortized or accreted over the life of the related available-for-sale securities. Interestincome is recognized when earned. The Company determines whether an impairment is temporary or other-than temporary. Unrealized gains or losses that are deemed to be temporary 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, 2018 and 2017, the fair value of the Company’s holdings in auction-rate securities was $3.2 million and $5.3 million, respectively, allof 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 eight years. Transportation equipment has estimateduseful lives of 5 to 20 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. Goodwill is not amortized. Acquisition-related intangible assets with finite lives consist of know-how and developed technologies. Theseassets are amortized on a straight-line basis over the estimated useful lives of three to five years and the amortization expense is recorded in cost ofrevenue in the Consolidated Statements of Operations. 49Table of Contents 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 expectedto result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the 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 thefair value of the reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that its fair value is less than 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. Deferred Compensation Plan The Company has a non-qualified, unfunded deferred compensation plan, which provides certain key employees, including executive officers, with theability to defer the receipt of compensation in order to accumulate funds for retirement on a tax deferred basis. The Company does not make contributionsto the plan or guarantee returns on the investments. The Company is responsible for the plan’s administrative expenses. Participants’ deferrals andinvestment 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, mutual funds and money market funds that offset asubstantial portion of the exposure. The investments are recorded at the cash surrender value of the corporate-owned life insurance policies, and at the fairvalue of the mutual funds and money market funds, which are classified as trading securities. Changes in the cash surrender value of the corporate-ownedlife insurance policies and the fair value of mutual fund and money market fund investments are included in interest and other income, net in theConsolidated Statements of Operations. The following table summarizes the deferred compensation plan balances in the Consolidated Balance Sheets (inthousands): December 31, 2018 2017 Deferred compensation plan asset components: Cash surrender value of corporate-owned life insurance policies $13,103 $11,455 Fair value of mutual funds and money market funds 18,867 16,625 Total $31,970 $28,080 Deferred compensation plan assets reported in: Other long-term assets $31,970 $28,080 Deferred compensation plan liabilities reported in: Accrued compensation and related benefits (short-term) $447 $356 Other long-term liabilities 32,283 28,087 Total $32,730 $28,443 Revenue Recognition The Company recognizes revenue when it transfers control of promised goods or services to its customers in an amount that reflects the consideration towhich it expects to be entitled to in exchange for those goods or services. See Note 2 for further discussion. Research and Development Costs incurred in research and development are expensed as incurred. 50Table of Contents Warranty Reserve The Company generally provides one to two-year warranties against defects in materials and workmanship and will either repair the products, providereplacements at no charge to customers or issue a refund. As they are considered assurance-type warranties, the Company does not account for them asseparate performance obligations. Warranty reserve requirements are generally based on a specific assessment of the products sold with warranties when acustomer asserts a claim for warranty or a product defect. See Note 13 for the changes in warranty reserves for the periods presented. 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 shares issued under the employee stock purchase plan and RSUs with a purchase price feature is estimated using the Black-Scholes model. Thefair value of RSUs with market conditions, as well as RSUs containing both market and performance conditions, is estimated using a Monte Carlosimulation 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 performanceconditions, as well as awards containing both market and performance conditions, the Company recognizes compensation expense when the performancegoals are achieved, or when it becomes probable that the performance goals will be achieved. Management performs the probability assessment on aquarterly basis by reviewing external factors, such as macroeconomic conditions and the analog industry revenue forecasts, and internal factors, such asthe Company’s business and operational objectives and revenue forecasts. Changes in the probability assessment of achievement of the performanceconditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new estimate had been applied since theservice inception date. Any previously recognized compensation expense is reversed if the performance conditions are not expected to be satisfied as aresult of management’s assessment. Prior to January 1, 2017, the Company recognized stock-based compensation expense less an estimate for forfeitures. Upon the adoption of AccountingStandards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,on January 1, 2017, the Company elected to account for forfeitures when they occur. 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, 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 2017 Tax Act was enacted, which significantly changed U.S. corporate income tax law. The 2017 Tax Act made the followingmaterial changes: (1) reduction of the corporate income tax rate effective January 1, 2018; (2) replacement of the worldwide tax system with a territorialtax regime, with a one-time mandatory tax on previously deferred foreign earnings; (3) amendment on the deductibility of executive performance-basedcompensation, and (4) creation of new taxes on certain foreign-sourced earnings. Income tax effects resulting from changes in tax laws are accounted forby the Company in the period in which the law is enacted. See Note 12 for further discussion. 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 history andother factors. Should the judgments and estimates made by management need to be adjusted as additional information becomes available, the Companymay need to record additional contingent losses. 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. 51Table of Contents Litigation expense (benefit), net recorded in the Consolidated Statements of Operations includes primarily patent infringement litigation and otherbusiness matters. The Company records litigation costs in the period in which they are incurred. Proceeds resulting from settlement of litigation orfavorable judgments are recorded as a reduction against litigation expense. Net Income per Share Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. 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 employees whenthe 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 Pronouncements 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 applied to those contracts whichwere not completed as of December 31, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior-period amounts have not been retrospectively adjusted and continue to be reported in accordance with Topic 605, Revenue Recognition. The Company recorded a net increase to the opening balance of retained earnings of $0.4 million, net of tax, as of January 1, 2018 due to the cumulativeeffect of initially applying Topic 606, primarily related to the change in revenue recognition for three U.S.-based distributors. Sales to these distributorsare transacted under the terms of agreements providing price adjustment rights. Prior to the adoption of Topic 606, revenue and costs related to these saleswere deferred until the Company received notification from the distributors that the products had been sold to the end customers and the amount of priceadjustments was fixed and finalized. Upon adoption of Topic 606, the transaction price takes into consideration the effect of variable consideration suchas price adjustments, which are estimated and recorded at the time the promised goods are transferred to the distributors. Accordingly, effective January 1,2018, the Company recognizes revenue at the time of shipment to these distributors when all revenue recognition criteria have been met, adjusted for anestimate of the price adjustments based on management’s review of historical data and other information available at the time. See Note 2 for furtherdiscussion. 52Table of Contents Other: In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain disclosure requirements,including the presentation of changes in stockholders’ equity and the dividend per share for interim periods, as well as the elimination of certaindisclosures for annual periods. The Company adopted the provisions of the release on November 5, 2018. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which requires entities to show thechanges in the total of cash, cash equivalents and restricted cash in the Consolidated Statements of Cash Flows. The Company adopted the standardon January 1, 2018 and applied the guidance retrospectively to all periods presented. See Note 3 for further discussion. Recent Accounting Pronouncements Not Yet Adopted as of December 31, 2018 Leases: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires entities to recognize right-of-use (“ROU”) assets and leaseliabilities on the balance sheets for leases with terms greater than 12 months. In addition, the standard applies to leases embedded in service or otherarrangements. The Company will adopt the standard on January 1, 2019 using the modified retrospective method and will not restate comparative periods,as permitted by the standard. In addition, the Company will elect the transition practical expedients to not reassess whether its existing contracts containor are leases, classification of its existing leases and lease terms. Upon adoption, the Company will record ROU assets and lease liabilities of approximately $2.0 million to $3.0 million, which represent the present valueof the remaining minimum rental payments for its outstanding leases as of January 1, 2019, primarily related to real estate. The adoption will not have amaterial impact on the Consolidated Statements of Operations, as the Company will continue to recognize lease expenses on a straight-line basis over thelease terms. Other: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the DisclosureRequirements for Fair Value Measurement, which changes certain disclosure requirements, including those related to Level 3 fair value measurements.The standard will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluatingthe impact of the adoption on its disclosures. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the accounting for goodwillimpairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwillimpairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard willbe applied prospectively, and will be effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. TheCompany is evaluating the impact of the adoption on its annual goodwill impairment test. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces a model based on expected lossesto estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, thelosses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for annual reportingperiods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. Entities willapply the standard by recording a cumulative-effect adjustment to retained earnings. The Company is evaluating the impact of the adoption on itsconsolidated financial position, results of operations, cash flows and disclosures. 2. REVENUE RECOGNITION Revenue from Product Sales The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits, as well as dies in wafer form. Theseproduct sales were 98%, 98% and 99% of the Company’s total revenue for the years ended December 31, 2018, 2017 and 2016, respectively. Theremaining revenue primarily includes royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties,which have not been significant in all periods presented. See Note 17 for the disaggregation of the Company’s revenue by geographic regions and byproduct families. The Company sells its products primarily through third-party distributors, value-added resellers, original equipment manufacturers, original designmanufacturers and electronic manufacturing service providers. For the years ended December 31, 2018, 2017 and 2016, 87%, 88% and 88%, respectively,of the Company’s sales were made through distribution arrangements. These distribution arrangements contain enforceable rights and obligations specificto those distributors and not the end customers. Purchase orders, which are generally governed by sales agreements or the Company's standard terms ofsale, set the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers purchase orders to be the contractswith customers. The unit price as stated on the purchase orders is considered the observable, stand-alone selling price for the arrangements. 53Table of Contents The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, inan amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company excludes taxesassessed by government authorities, such as sales taxes, from revenue. Product sales consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue fromdistributors and direct end customers when the following events have occurred: (a) the Company has transferred physical possession of the products, (b)the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards ofownership of the products. In accordance with the shipping terms specified in the contracts, these criteria are generally met when the products are shippedfrom the Company’s facilities (such as the “Ex Works” shipping term) or delivered to the customers’ locations (such as the “Delivered Duty Paid”shipping term). Under certain consignment agreements, revenue is not recognized when the products are shipped and delivered to be held at customers’ designatedlocations because the Company continues to control the products and retain ownership, and the customers do not have an unconditional obligation topay. The Company recognizes revenue when the customers pull the products from the locations or, in some cases, after a 60-day period from the deliverydate has passed, at which time control transfers to the customers and the Company invoices them for payment. Variable Consideration The Company accounts for price adjustment and stock rotation rights as variable consideration that reduces the transaction price, and recognizes thatreduction in the same period the associated revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell theCompany’s products to their end customers at a price that is lower than the distribution price invoiced by the Company. When the Company receivesclaims from the distributors that products have been sold to the end customers at the lower price, the Company issues the distributors credit memos for theprice adjustments. The Company estimates the price adjustments based on an analysis of historical claims, at both the distributor and product level, aswell as an assessment of any known trends of product sales mix. Other U.S. distributors and non-U.S. distributors, which make up the majority of theCompany’s total sales to distributors, do not have price adjustment rights. In addition, certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases inaccordance with the contract terms. The Company estimates the stock rotation returns based on an analysis of historical returns, and the current level ofinventory in the distribution channel. The Company recognizes an asset for product returns which represents the right to recover products from thecustomers related to stock rotations, with a corresponding reduction to cost of revenue. Contract Balances The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. Asof December 31, 2018 and 2017, accounts receivable totaled $55.2 million and $38.0 million, respectively. The Company did not record any allowancefor doubtful accounts as of December 31, 2018 and 2017. For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers.The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of December 31,2018 and 2017, customer prepayments totaled $2.5 million and $4.7 million, respectively. The decrease in the customer prepayment balance for the yearended December 31, 2018 resulted from a decrease in unfulfilled customer orders for which the Company has received payments. For the yearended December 31, 2018, the Company recognized $4.7 million of revenue that was included in the customer prepayment balance as of December 31,2017. Contract CostsThe Company pays sales commissions based on the achievement of pre-determined product sales targets. As the Company recognizes product sales at apoint in time, sales commissions are expensed as incurred. Practical Expedients The Company’s standard payment terms generally require customers to pay 30 to 60 days after the Company satisfies the performance obligations. Forthose customers who are required to pay in advance, the Company satisfies the performance obligations typically within one quarter. The Company haselected not to determine whether contacts with customers contain significant financing components. 54Table of Contents As of December 31, 2018, the Company’s unsatisfied performance obligations primarily included products held in consignment arrangements andcustomer purchase orders for products that the Company has not yet shipped. Because the Company expects to fulfill these performance obligationswithin one year, the Company has elected not to disclose the amount of these remaining performance obligations or the timing of recognition. Changes to Financial Statement Line Items The following tables compare the impact on the financial statement line items between the application of Topic 606 and Topic 605, as of December 31,2018, and for the year ended December 31, 2018. The significant changes between the two standards are primarily attributable to the following: ●Under Topic 606, the Company recognizes revenue for three U.S.-based distributors upon shipment of the products to them, net of an estimatedamount for price adjustments. Under Topic 605, the Company would have deferred the recognition of revenue and related costs for these U.S.distributors until the Company received notification from the distributors that the products had been sold to the end customers and the amount ofprice adjustments was fixed and finalized. ●Under Topic 606, the Company records assets for product returns within other current assets, which primarily represent the carrying value ofinventory it expects to recover from customers related to stock rotation returns. Under Topic 605, such amounts would have been netted against thestock rotation reserve within current accrued liabilities. ●Under Topic 606, the Company recorded a cumulative effect of initially applying the standard to retained earnings. Under Topic 605, theCompany would not have recorded this adjustment. Consolidated Balance Sheet (in thousands): December 31, 2018 Topic 606 Line Item (As Reported) Topic 605 Change Assets: Accounts receivable, net $55,214 $56,502 $(1,288)Inventories $136,384 $136,526 $(142)Other current assets $11,931 $10,329 $1,602 Total current assets $580,810 $580,638 $172 Deferred tax assets, net $16,830 $16,931 $(101)Total assets $793,432 $793,361 $71 Liabilities and Stockholders' Equity: Accrued liabilities $38,962 $39,103 $(141)Total current liabilities $80,439 $80,580 $(141)Total liabilities $153,339 $153,480 $(141)Retained earnings $194,728 $194,516 $212 Total stockholders' equity $640,093 $639,881 $212 Total liabilities and stockholders' equity $793,432 $793,361 $71 55Table of Contents Consolidated Statement of Operations (in thousands, except per-share amounts): Year Ended December 31, 2018 Topic 606 Line Item (As Reported) Topic 605 Change Revenue $582,382 $582,601 $(219)Cost of revenue $259,714 $259,722 $(8)Gross profit $322,668 $322,879 $(211)Income from operations $113,488 $113,699 $(211)Income before income taxes $118,482 $118,693 $(211)Income tax provision $13,214 $13,258 $(44)Net income $105,268 $105,435 $(167)Net income per share - basic $2.49 $2.50 $(0.01) Consolidated Statement of Comprehensive Income (in thousands): Year Ended December 31, 2018 Topic 606 Line Item (As Reported) Topic 605 Change Net income $105,268 $105,435 $(167)Comprehensive income $97,912 $98,079 $(167) Consolidated Statement of Cash Flows (in thousands): Year Ended December 31, 2018 Topic 606 Line Item (As Reported) Topic 605 Change Cash flows from operating activities: Net income $105,268 $105,435 $(167)Changes in operating assets and liabilities: Accounts receivable $(18,079) $(18,465) $386 Inventories $(37,060) $(37,202) $142 Other assets $(1,075) $435 $(1,510)Accrued liabilities $7,092 $5,899 $1,193 Income tax liabilities $6,923 $6,967 $(44) 3. CASH, CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH The following is a summary of the Company’s cash, cash equivalents and short-term and long-term investments (in thousands): December 31, 2018 2017 Cash, cash equivalents and investments: Cash $131,569 $75,125 Money market funds 41,135 7,134 Corporate debt securities 170,909 203,807 U.S. treasuries and government agency bonds 32,068 13,024 Certificates of deposit 1,600 - Auction-rate securities backed by student-loan notes 3,241 5,256 Total $380,522 $304,346 56Table of Contents December 31, 2018 2017 Reported as: Cash and cash equivalents $172,704 $82,759 Short-term investments 204,577 216,331 Long-term investments 3,241 5,256 Total $380,522 $304,346 The contractual maturities of the Company’s short-term and long-term available-for-sale investments are as follows (in thousands): December 31, 2018 2017 Due in less than 1 year $125,845 $89,399 Due in 1 - 5 years 78,732 126,932 Due in greater than 5 years 3,241 5,256 Total $207,818 $221,587 The following tables summarize the unrealized gain and loss positions related to the Company’s available-for sale investments (in thousands): December 31, 2018 AmortizedCost Unrealized Gains UnrealizedLosses Total FairValue Fair Value ofInvestments inUnrealizedLoss Position Money market funds $41,135 $- $- $41,135 $- Corporate debt securities 172,288 7 (1,386) 170,909 166,204 U.S. treasuries and government agency bonds 32,207 2 (141) 32,068 28,507 Certificates of deposit 1,600 - - 1,600 - Auction-rate securities backed by student-loan notes 3,570 - (329) 3,241 3,241 Total $250,800 $9 $(1,856) $248,953 $197,952 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 The Company sold one auction-rate security of $2.0 million at par for the year ended December 31, 2018. There were no sales of auction-rate securitiesfor the years ended December 31, 2017 and 2016. The underlying maturities of the remaining auction-rate securities are up to 28 years. As of bothDecember 31, 2018 and 2017, the impairment of $0.3 million was determined to be temporary because management possesses both the intent andability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value. In addition, management believes that itis more likely than not that the Company will not have to sell these securities before recovery of its cost basis. To date, the Company has redeemed 92%of the original portfolio in these securities, or $39.7 million, at par without any realized losses. 57Table of Contents Restricted Cash The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets to the amountsreported in the Consolidated Statements of Cash Flows: December 31, 2018 2017 Cash and cash equivalents $172,704 $82,759 Restricted cash included in other long-term assets 114 115 Total cash, cash equivalents and restricted cash reported in the Consolidated Statements ofCash Flows $172,818 $82,874 Restricted cash includes a security deposit that is set aside in a bank account and cannot be withdrawn by the Company under the terms of a leaseagreement. The restriction will end and any unused amount will be returned to the Company upon the expiration of the lease. 4. FAIR VALUE MEASUREMENT The following table details the fair value measurement of the financial assets (in thousands): Fair Value Measurement at December 31, 2018 Total Level 1 Level 2 Level 3 Money market funds $41,135 $41,135 $- $- Corporate debt securities 170,909 - 170,909 - U.S. treasuries and government agency bonds 32,068 - 32,068 - Certificates of deposit 1,600 1,600 Auction-rate securities backed by student-loan notes 3,241 - - 3,241 Mutual funds and money market funds under deferred compensation plan 18,867 18,867 - - Total $267,820 $60,002 $204,577 $3,241 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 and money market funds under deferred compensation plan 16,625 16,625 - - Total $245,846 $23,759 $216,831 $5,256 ●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. The Company’s level 3 assets consist of government-backed student loan auction-rate securities. The following table provides a rollforward of the fairvalue of the auction-rate securities (in thousands): Balance at January 1, 2017 $5,354 Change in unrealized loss included in other comprehensive loss (98)Balance at December 31, 2017 5,256 Sale and settlement at par (2,000)Change in unrealized loss included in other comprehensive loss (15)Balance at December 31, 2018 $3,241 58Table of Contents The Company determined the fair value of the auction-rate securities using a discounted cash flow model with the following assumptions: December 31, 2018 2017 Time-to-liquidity (years) 2-3 2-3 Discount rate 4.9%-10.1% 4.5%-9.6% 5. BALANCE SHEET COMPONENTS Inventories Inventories consist of the following (in thousands): December 31, 2018 2017 Raw materials $43,017 $20,573 Work in process 38,674 40,030 Finished goods 54,693 38,678 Total $136,384 $99,281 Other Current Assets Other current assets consist of the following (in thousands): December 31, 2018 2017 Prepaid wafer purchase (1) $- $6,217 Prepaid wafer refund receivable (1) 4,297 - Other prepaid expense 3,425 2,742 Assets for product returns (2) 1,602 - Interest receivable 1,441 1,352 Value-added tax receivable 423 1,235 Other 743 1,216 Total $11,931 $12,762 (1) In December 2018, a supplier terminated a prepaid wafer purchase agreement with the Company and agreed to refund the Company the remainingwafer purchase prepayment of $4.3 million, which was recorded as a receivable as of December 31, 2018. (2) Under Topic 606, “assets for product returns” primarily represent the carrying value of inventory the Company expects to recover from customersrelated to stock rotation returns. Prior to the adoption of Topic 606, such amounts were netted against the stock rotation reserve within currentaccrued liabilities. Property and Equipment, Net Property and equipment, net, consist of the following (in thousands): December 31, 2018 2017 Production equipment and software $120,645 $110,971 Buildings and improvements 100,135 100,990 Land 16,724 16,883 Transportation equipment 12,948 11,443 Leasehold improvements 4,755 3,321 Furniture and fixtures 4,341 3,641 Property and equipment, gross 259,548 247,249 Less: accumulated depreciation and amortization (109,547) (102,613)Total $150,001 $144,636 59Table of Contents Depreciation and amortization expense was $11.4 million, $14.0 million and $12.6 million for the years ended December 31, 2018, 2017 and 2016,respectively. Other Long-Term Assets Other long-term assets consist of the following (in thousands): December 31, 2018 2017 Deferred compensation plan assets $31,970 $28,080 Prepaid expense 2,713 897 Other 1,185 1,091 Total $35,868 $30,068 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2018 2017 Dividends and dividend equivalents $15,044 $9,248 Income tax payable 7,018 2,861 Stock rotation and sales returns 5,363 2,647 Warranty 4,564 2,416 Customer prepayments 2,520 4,742 Commissions 1,369 938 Sales rebate 236 1,036 Deferred income - 1,845 Other 2,848 1,774 Total $38,962 $27,507 Other Long-Term Liabilities Other long-term liabilities consist of the following (in thousands): December 31, 2018 2017 Deferred compensation plan liabilities $32,283 $28,087 Dividend equivalents 6,145 4,881 Other 97 56 Total $38,525 $33,024 6. GOODWILL AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET There have been no changes in the goodwill balance for the years ended December 31, 2018 and 2017. 60Table of Contents Acquisition-related intangible assets consist of the following (in thousands): December 31, 2018 Gross Amount AccumulatedAmortization Net Amount Know-how $1,018 $(907) $111 Developed technologies 6,466 (6,466) - Total $7,484 $(7,373) $111 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 Amortization expense is recorded in cost of revenue in the Consolidated Statements of Operations and totaled $0.8 million, $2.1 million and $2.1 millionfor the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, the remaining intangible asset balance of $0.1 million will be fully amortized in 2019. 7. STOCK-BASED COMPENSATION 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, 2018, 2.0 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, 2018 2017 2016 Cost of revenue $1,888 $1,654 $1,575 Research and development 15,990 14,816 14,041 Selling, general and administrative 42,729 36,147 29,373 Total stock-based compensation expense $60,607 $52,617 $44,989 Tax benefit related to stock-based compensation $4,383 $5,054 $- In the first quarter of 2016, the Company’s former Chief Financial Officer retired. As the service or performance conditions for her outstanding RSUs hadnot been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of $2.9 million associatedwith the unvested RSUs and this credit was reflected in selling, general and administrative expenses for the year ended December 31, 2016. RSUs The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs withboth market and performance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievementof pre-determined performance goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the“Compensation Committee”). All awards include service conditions which require continued employment with the Company. 61Table of Contents A summary of RSU activity is presented in the table below (in thousands, except per-share amounts): Time-Based RSUs PSUs and MPSUs MSUs Total Numberof Shares Weighted-AverageGrantDate FairValue PerShare Numberof Shares Weighted-AverageGrantDate FairValue PerShare Numberof Shares Weighted-AverageGrantDate FairValue PerShare Numberof Shares Weighted-AverageGrantDate FairValue PerShareOutstanding at January 1, 2016 499 $40.75 1,933 $38.99 1,800 $23.57 4,232 $32.64Granted 133 $63.00 1,216 (1) $41.12 - $- 1,349 $43.28Vested (239) $36.43 (736) $29.71 - $- (975) $31.36Forfeited (27) $45.35 (129) $36.82 (180) $23.57 (336) $30.38Outstanding at December 31, 2016 366 $51.35 2,284 $43.24 1,620 $23.57 4,270 $36.47Granted 81 $94.25 585 (1) $62.72 - $- 666 $66.56Vested (175) $48.35 (597) $41.94 - $- (772) $43.39Forfeited (14) $61.80 (6) $49.82 - $- (20) $58.46Outstanding at December 31, 2017 258 $66.30 2,266 $48.59 1,620 $23.57 4,144 $39.91Granted 133 $114.36 630 (1) $85.06 600 $68.48 1,363 $80.62Vested (136) $60.23 (717) $41.08 - $- (853) $44.13Forfeited (15) $82.20 (5) $63.16 (1) $68.48 (21) $76.92Outstanding at December 31, 2018 240 $95.38 2,174 $61.61 2,219 $35.69 4,633 $50.94 (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 vested RSUs was $90.0 million, $74.0 million and $62.9 million for the years ended December 31, 2018, 2017 and 2016,respectively. As of December 31, 2018, the total intrinsic value of all outstanding RSUs was $494.0 million, based on the closing stock price of$116.25. As of December 31, 2018, unamortized compensation expense related to all outstanding RSUs was $124.5 million with a weighted-averageremaining recognition period of approximately 3.5 years. Cash proceeds from vested PSUs with a purchase price totaled $10.6 million for the year ended December 31, 2018. There were no proceeds for the yearsended December 31, 2017 and 2016. Time-Based RSUs For the years ended December 31, 2018, 2017 and 2016, the Compensation Committee granted 133,000, 81,000 and 133,000 RSUs, respectively, withservice conditions to non-executive employees and non-employee directors. The RSUs vest over four years for employees and one year for directors,subject to continued service with the Company. PSUs and MPSUs 2019 PSUs: In October 2018, the Compensation Committee granted 53,000 PSUs to certain non-executive employees, which represent a target number of shares to beearned based on the Company’s 2020 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year(2019 and 2020) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the SemiconductorIndustry Association (“2019 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the targetnumber of the 2019 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2019 Non-Executive PSUs will vest inthe first quarter of 2021 if the pre-determined performance goals are met during the performance period. The remaining 2019 Non-Executive PSUs willvest over the following two years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2019 Non-Executive PSUs is $10.9 million. The 2019 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of theshares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 2019 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $108.43, expected term of 2.9 years, expected volatilityof 28.7% and risk-free interest rate of 2.9%. 2018 PSUs: In February 2018, the Compensation Committee granted 188,000 PSUs to the executive officers, which represent a target number of shares to be earnedbased on the Company’s average two-year (2018 and 2019) revenue growth rate compared against the analog industry’s average two-year revenue growthrate as published by the Semiconductor Industry Association (“2018 Executive PSUs”). The maximum number of shares that an executive officer can earnis 300% of the target number of the 2018 Executive PSUs. 50% of the 2018 Executive PSUs will vest in the first quarter of 2020 if the pre-determinedperformance goals are met during the performance period. The remaining 2018 Executive PSUs will vest over the following two years on a quarterly basis.Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2018 Executive PSUsis $46.1 million. 62Table of Contents In February 2018, the Compensation Committee granted 44,000 PSUs to certain non-executive employees, which represent a target number of shares to beearned based on the Company’s 2019 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year(2018 and 2019) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the SemiconductorIndustry Association (“2018 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the targetnumber of the 2018 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2018 Non-Executive PSUs will vest inthe first quarter of 2020 if the pre-determined performance goals are met during the performance period. The remaining 2018 Non-Executive PSUs willvest over the following two years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2018 Non-Executive PSUs, excluding cancelled shares for the terminated employees, is $8.8 million. The 2018 Executive PSUs and the 2018 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 2018 Executive PSUs and the 2018 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock priceof $110.00, expected term of 2.6 years, expected volatility of 27.5% and risk-free interest rate of 2.3%. 2017 PSUs: In February 2017, the Compensation Committee granted 200,000 PSUs to the executive officers, which represented a target number of shares that wouldbe earned based on the Company’s average two-year (2017 and 2018) revenue growth rate compared against the analog industry’s average two-yearrevenue growth rate as published by the Semiconductor Industry Association (“2017 Executive PSUs”). The maximum number of shares that anexecutive officer could earn was 300% of the target number of the 2017 Executive PSUs. In February 2019, the Compensation Committee approved therevenue achievement for the 2017 Executive PSUs and a total of 521,000 shares were earned by the executive officers. 50% of the 2017 Executive PSUsvested in the first quarter of 2019. The remaining 2017 Executive PSUs vest over the following two years on a quarterly basis. Based on the actualachievement of the performance goals, the total stock-based compensation cost for the 2017 Executive PSUs is $31.5 million. In February 2017, the Compensation Committee granted 48,000 PSUs to certain non-executive employees, which represented a target number of sharesthat would be earned based on the Company’s 2018 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2017 and 2018) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by theSemiconductor Industry Association (“2017 Non-Executive PSUs”). The maximum number of shares that an employee could earn was either 200% or300% of the target number of the 2017 Non-Executive PSUs, depending on the job classification of the employee. In February 2019, the CompensationCommittee approved the revenue achievement for the 2017 Non-Executive PSUs and a total of 101,000 shares were earned by the employees. 50% ofthe 2017 Non-Executive PSUs vested in the first quarter of 2019. The remaining 2017 Non-Executive PSUs vest over the following two years on anannual or quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the 2017 Non-Executive PSUs, excluding cancelled shares for the terminated employees, is $6.1 million. The 2017 Executive PSUs and the 2017 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30per share upon vesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant datefair value 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, and in July 2016, the CompensationCommittee granted 12,000 PSUs to the Company’s new Chief Financial Officer, which represented a target number of shares that would be earned basedon the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two-year revenue growth rateas published by the Semiconductor Industry Association (“2016 Executive PSUs”). The maximum number of shares that an executive officer could earnwas 300% of the target number of the 2016 Executive PSUs. In February 2018, the Compensation Committee approved the revenue achievement for the2016 Executive PSUs and a total of 651,000 shares were earned by the executive officers. 50% of the 2016 Executive PSUs vested in the first quarter of2018. The remaining 2016 Executive PSUs vest over the following two years on a quarterly basis. Based on the actual achievement of the performancegoals, the total stock-based compensation cost for the 2016 Executive PSUs, excluding cancelled shares for the Company’s former Chief FinancialOfficer, 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 sharesthat would be earned based on the Company’s 2017 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by theSemiconductor Industry Association (“2016 Non-Executive PSUs”). The maximum number of shares that an employee could earn was either 200% or300% of the target number of the 2016 Non-Executive PSUs, depending on the job classification of the employee. In February 2018, the CompensationCommittee approved the revenue achievement for the 2016 Non-Executive PSUs and a total of 128,000 shares were earned by the employees. 50% ofthe 2016 Non-Executive PSUs vested in the first quarter of 2018. The remaining 2016 Non-Executive PSUs vest over the following two years on anannual or quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the 2016 Non-Executive PSUs, excluding cancelled shares for the terminated employees, is $5.1 million. 63Table of Contents The 2016 Executive PSUs and the 2016 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $20per share upon vesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant datefair value 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 of29.6% 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 that wouldbe earned 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. Based on the actual achievement ofthe performance goals, the total stock-based compensation cost for the 2015 Executive PSUs, excluding cancelled shares for the Company’s former ChiefFinancial Officer, is $21.0 million. In February 2015, the Compensation Committee granted 58,000 PSUs to certain non-executive employees, which represented a target number of sharesthat would be earned based on the Company’s 2016 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year (2015 and 2016) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by theSemiconductor Industry Association (“2015 Non-Executive PSUs”). The maximum number of shares that an employee could earn waseither 200% or 300% of the target number of the 2015 Non-Executive PSUs, depending on the job classification of the employee. In February 2017, theCompensation Committee approved the revenue achievement for the 2015 Non-Executive PSUs and a total of 118,000 shares were earned bythe employees. 50% of the 2015 Non-Executive PSUs vested in the first quarter of 2017. The remaining 2015 Non-Executive PSUs vest over thefollowing two years on an annual or quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation costfor the 2015 Non-Executive PSUs, excluding cancelled shares for the terminated employees, is $5.7 million. 2015 MPSUs: In December 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 earned upon achievement of both market conditions and performance conditions(“2015 MPSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2015 MPSUs. The 2015 MPSUs consistof four separate tranches with various performance periods all ending on December 31, 2019. The first tranche contains market conditions only, whichrequire the achievement of five stock price targets ranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. The second, third and fourth tranches contain both market and performance conditions. The five stock price targets for the second tranche rangefrom $89.56 to $106.81 with a performance period from January 1, 2017 to December 31, 2019. The five stock price targets for the third tranche rangefrom $120.80 to $135.48 with a performance period from January 1, 2018 to December 31, 2019. The five stock price targets for the fourth tranche rangefrom $126.08 to $136.79 with a performance period from January 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 motordrivers. 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. 64Table of Contents The following table summarize the status of the market and performance conditions: Tranche Market Conditions Performance ConditionsOne All stock price targets have been achieved as of September 30,2017. Not required.Two All stock price targets have been achieved as of December 31, 2017. Operating metric #1 has been achieved as of December 31,2018.Three All stock price targets have been achieved as of September 30,2018. Operating metric #2 has been achieved as of December 31,2018.Four No stock price targets have been achieved as of December 31, 2018. No operating metric has been achieved as of December 31,2018. A total of 394,000 shares have been earned by the employees as of December 31, 2018. The 2015 MPSUs will vest on January 1, 2020, with post-vestingsales restrictions on the vested shares for up to an additional 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 for the terminated employees, is $24.6 million ($8.3 million for the first tranche, $4.5 million forthe second tranche, $5.2 million for the third tranche, and $6.6 million for the fourth tranche). For the first tranche which contains market conditions only, stock-based compensation expense is being recognized over the requisite service period. Forthe second, third and fourth tranches, stock-based compensation expense for each tranche is recognized if an operating metric has been achieved, orif management believes it is probable that an operating metric will be achieved during the performance periods. As of December 31, 2018, two operatingmetrics have been achieved, and based on management’s quarterly assessment, one additional operating metric was considered probable of beingachieved during the performance period. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranchesover the requisite service period. MSUs 2018 MSUs: In October 2018, the Compensation Committee granted 60,000 MSUs to the executive officers and 60,000 MSUs to certain non-executive employees,which represent a target number of shares to be earned upon achievement of stock price targets (“2018 MSUs”). The maximum number of shares that anemployee can earn is 500% of the target number of the 2018 MSUs if the Company achieves five stock price targets ranging from $140 to $172. Theperformance period for the first two stock price targets is from October 26, 2018 to December 31, 2021, and the performance period for the last three pricetargets is from October 26, 2018 to December 31, 2023. As of December 31, 2018, none of the stock price targets has been met. If the stock price targets areachieved during the performance periods, the 2018 MSUs will vest on January 1, 2024, with post-vesting sales restrictions on the vested shares for upto an additional two years. The total stock-based compensation cost for the 2018 MSUs is $41.1 million. The Company determined the grant date fair value of the 2018 MSUs using a Monte Carlo simulation model with the following assumptions: stock priceof $108.43, expected volatility of 31.6%, a risk-free interest rate of 3.0%, and an illiquidity discount of 8.7% to account for the post-vesting salesrestrictions. 2013 MSUs: In December 2013, the Compensation Committee granted 276,000 MSUs to the executive officers and 84,000 MSUs to certain non-executiveemployees, which represented a target number of shares that would be earned upon achievement of stock price targets (“2013 MSUs”). The maximumnumber of shares that an employee could earn was 500% of the target number of the 2013 MSUs if the Company achieved five price targets rangingfrom $40 to $56 during a performance period from January 1, 2014 to December 31, 2018. As of December 31, 2015, all stock price targets have beenmet and the employees earned a total of 1.8 million shares. The 2013 MSUs will vest quarterly from January 1, 2019 to December 31, 2023. The totalstock-based compensation cost for the 2013 MSUs, excluding cancelled shares for the terminated employees, is $38.2 million. The Company determined the grant date fair value of the 2013 MSUs using a Monte Carlo simulation model with the following assumptions: stockprice of $31.73, expected volatility of 38.7% and a risk-free interest rate of 1.6%. There was no illiquidity discount because the awards do not containany post-vesting sales restrictions. 65Table of Contents Stock Options A summary of stock option activity is presented in the table below: Shares Weighted-AverageExercise Price Weighted-AverageRemainingContractualTerm AggregateIntrinsic Value (in thousands) (in years) (in thousands) Outstanding at January 1, 2016 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 Exercised (5) $13.89 Outstanding at December 31, 2018 - $- - $- Total intrinsic value of options exercised was $0.5 million, $0.7 million and $3.7 million for the years ended December 31, 2018, 2017 and 2016,respectively. Cash proceeds from stock option exercises were $0.1 million, $0.1 million and $1.3 million for the years ended December 31, 2018, 2017and 2016, respectively. 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 purchase shares having a value greater than $25,000 in any calendar year as measured at the beginning of the offering periodin accordance 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, 2018, 4.6 million shares were available for future issuance. The ESPP will expire in November 2024. For the years ended December 31, 2018, 2017 and 2016, 33,000, 40,000 and 53,000 shares, respectively, were issued under the ESPP. The intrinsic valueof the shares issued was $1.1 million, $1.0 million and $1.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. Theunamortized expense as of December 31, 2018 was $0.1 million, which will be recognized through the first quarter of 2019. The Black-Scholes model wasused to value the employee stock purchase rights with the following weighted-average assumptions: Year Ended December 31, 2018 2017 2016 Expected term (years) 0.5 0.5 0.5 Expected volatility 29.5% 23.5% 28.6%Risk-free interest rate 2.0% 0.9% 0.4%Dividend yield 1.0% 0.9% 1.2% Cash proceeds from the shares issued under the ESPP were $3.0 million, $2.7 million and $2.5 million for the years ended December 31, 2018, 2017 and2016, respectively. 8. STOCK REPURCHASE PROGRAM In February 2016, the Board of Directors approved a stock repurchase program (the “2016 Program”) that authorized the Company to repurchase up to $50million in the aggregate of its common stock through December 31, 2016. In December 2016, the Board of Directors approved an extension of the 2016Program through December 31, 2017. The 2016 Program expired on December 31, 2017 with a remaining unused balance of $50 million. No shares wererepurchased under the 2016 Program. 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, 2018 2017 2016 Dividend declared per share $1.20 $0.80 $0.80 Total amount $50,803 $33,145 $32,434 66Table of Contents As of December 31, 2018 and 2017, accrued dividends totaled $12.8 million and $8.3 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, and other factors that the Board of Directors may deem relevant, aswell as a determination that cash dividends are in the best interests of the stockholders. The Company anticipates that cash used for future dividend payments will come from its current domestic cash, cash generated from ongoing U.S.operations, and cash to be repatriated from its Bermuda subsidiary. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested.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 tothe same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when theunderlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirementand the awards do not vest. As of December 31, 2018 and 2017, accrued dividend equivalents totaled $8.4 million and $5.8 million, respectively. 10. INTEREST AND OTHER INCOME, NET The components of interest and other income, net are as follows (in thousands): Year Ended December 31, 2018 2017 2016 Interest income $6,321 $5,353 $2,488 Amortization of premium on available-for-sale securities (1,353) (1,976) (1,019)Gain (loss) on deferred compensation plan investments (1,022) 2,531 1,257 Foreign currency exchange gain (loss) 953 (550) 65 Other 95 162 26 Total $4,994 $5,520 $2,817 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, 2018 2017 2016 Numerator: Net income $105,268 $65,203 $52,720 Denominator: Weighted-average outstanding shares used to compute basic net income per share 42,247 41,350 40,436 Effect of dilutive securities 2,355 2,228 1,479 Weighted-average outstanding shares used to compute diluted net income pershare 44,602 43,578 41,915 Net income per share: Basic $2.49 $1.58 $1.30 Diluted $2.36 $1.50 $1.26 Anti-dilutive common stock equivalents were not material in any of the periods presented. 67Table of Contents 12. INCOME TAXES The components of income before income taxes are as follows (in thousands): Year Ended December 31, 2018 2017 2016 United States $(13,151) $(19,115) $(14,431)Foreign 131,633 102,059 71,695 Income before income taxes $118,482 $82,944 $57,264 The components of the income tax provision are as follows (in thousands): Year Ended December 31, 2018 2017 2016 Current: Federal $11,023 $31,025 $2,527 State 4 2 - Foreign 2,992 1,967 2,013 Deferred: Federal (797) (15,426) - Foreign (8) 173 4 Income tax provision $13,214 $17,741 $4,544 The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows: Year Ended December 31, 2018 2017 2016 U.S. statutory federal tax rate 21.0% 35.0% 34.0%Foreign income at lower rates (22.0) (41.2) (41.1)Impact of the 2017 Tax Act: Remeasurement of deferred taxes - 11.8 - One-time deemed repatriation transition tax 0.6 50.5 - Global intangible low-taxed income ("GILTI") 14.4 - - Changes in valuation allowance - (36.2) 11.0 Stock-based compensation (1.1) 2.2 2.2 Other adjustments (1.7) (0.7) 1.8 Effective tax rate 11.2% 21.4% 7.9% 68Table of Contents The components of net deferred tax assets consist of the following (in thousands): December 31, 2018 2017 Deferred tax assets: R&D tax credits $11,833 $10,331 Stock-based compensation 10,040 9,157 Deferred compensation 6,829 5,505 Depreciation and amortization - 191 Net operating losses 1,133 1,377 Other expenses not currently deductible 1,852 1,924 Deferred tax assets, gross 31,687 28,485 Valuation allowance (13,041) (12,568)Deferred tax assets, net of valuation allowance 18,646 15,917 Deferred tax liabilities: Depreciation and amortization (711) - Undistributed foreign earnings (1,105) - Deferred tax liabilities (1,816) - Net deferred tax assets $16,830 $15,917 2017 Tax Act Under ASC No. 740, the effects of a new legislation are recognized upon enactment. Accordingly, the Company was required to recognize the tax effectsof the 2017 Tax Act beginning in the fourth quarter of 2017. On December 22, 2017, the SEC issued SAB 118, which addressed the application of ASC No. 740 in situations when a registrant did not have thenecessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act.In accordance with SAB 118, for matters that have not been completed, the Company would recognize provisional amounts to the extent that they werereasonably estimable. Any subsequent adjustments to the provisional amounts would be recorded to the income tax provision in the period when theanalysis was complete. The Company was permitted to finalize the analysis within a one-year measurement period. As of December 31, 2017, the Company had not completed the accounting for the tax effects of the 2017 Tax Act and recorded certain provisionalamounts based on reasonable estimates. In December 2018, the Company finalized the analysis of the 2017 Tax Act and recorded certain adjustments tothe provisional amounts, as discussed further below. The Company expects further guidance may be forthcoming from the FASB and the SEC, as well as regulations, interpretations and rulings from federaland state tax agencies, which could result in additional impact and adjustments to the Company’s income tax provisions in future periods. 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 No. 740 requires the effect of a change in taxlaws to 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. In December 2018, theCompany finalized the analysis and did not make any adjustment to the provisional amount recorded 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. For the year ended December 31, 2017, the Company recorded a provisional amount of $41.9 million related tothe transition tax expense. After the utilization of R&D tax credits of $18.0 million, the provisional transition tax liability was $23.9 million. InDecember 2018, the Company finalized the analysis of the transition tax, and recorded an increase of $1.3 million to the transition tax expense and anet increase of $0.7 million to the transition tax liability. As permitted by the 2017 Tax Act, the Company has elected to pay the transition tax liability of $24.6 million in installments on an interest-freebasis over eight years through 2025. For the year ended December 31, 2018, the Company paid $2.6 million of the transition tax. As of December 31,2018, $1.3 million of the remaining transition tax was recorded in current accrued liabilities and $20.7 million was recorded in long-term income taxliabilities. 69Table of Contents 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 $123.2 million of undistributed foreign earnings to tax, an actual repatriation 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. As of December 31, 2018, the Companyrecorded deferred taxes liabilities of $1.1 million related to California state taxes, which were netted against deferred tax assets. GILTI: The 2017 Tax Act subjects a U.S. parent shareholder to taxation of its GILTI, effective January 1, 2018. The GILTI inclusions impact companies that haveforeign earnings generated without a large aggregate foreign fixed asset base and whose earnings are being taxed at a low tax rate. For the year endedDecember 31, 2018, the Company included $81.1 million related to the GILTI provisions as additional Subpart F income, which was accounted for as aperiod cost. 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 is generally 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. In accordance with ASC No. 740, management considered all available evidence, both positive and negative, to determine whether, based on the weightof that evidence, a valuation allowance for deferred tax assets was needed. The Company’s conclusion was primarily driven by the following positiveevidence: ●The Company forecasted 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, 2018, the Company did not have federal net operating loss carryforwards. As of December 31, 2018, the state net operating losscarryforwards for income tax purposes were $16.2 million, which will expire beginning in 2027. As of December 31, 2018, the Company had no R&D tax credit carryforwards for federal income tax purposes, and $24.1 million for state income taxpurposes, which can be carried forward indefinitely. 70Table of Contents 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. In July 2018, the U.S. Ninth Circuit Court of Appeals overturned the U.S. Tax Court’s unanimous 2015 decision in Altera v. Commissioner, holding thatthe Internal Revenue Service ("IRS") did not violate the rule-making procedures required by the Administrative Procedures Act. In the case, the taxpayerchallenged IRS regulations that required participants in qualified cost sharing arrangements to share stock based compensation costs. The Tax Court hadinvalidated those regulations, in part because the Treasury Department failed to adequately consider significant taxpayer comments when adopting them.In August 2018, the U.S. Ninth Circuit Court of Appeals withdrew its July 2018 opinion. At this time, the Treasury Department has not withdrawn therequirement from its regulations to include stock-based compensation in the cost pool to be shared under a cost-sharing arrangement. Due to theuncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decisionbeing overturned upon appeal, the Company has not recorded any adjustments as of December 31, 2018. The Company will continue to monitordevelopments related to this case and the potential impact on its financial statements. At December 31, 2018, the Company had $20.5 million of unrecognized tax benefits, $12.8 million of which would affect its effective tax rate ifrecognized after considering the valuation allowance. At December 31, 2017, the Company had $16.3 million of unrecognized tax benefits, $9.1 millionof which would affect its effective tax rate if recognized after considering the valuation allowance. A reconciliation of the gross unrecognized tax benefits is as follows (in thousands): Balance as of January 1, 2016 $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 Increase for tax position of prior year 1,474 Increase for tax position of current year 2,957 Decrease due to lapse of statute of limitation (212)Balance as of December 31, 2018 $20,491 The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2018 and 2017,the Company has $0.9 million and $0.5 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 had a tax holiday in Switzerland, which expired on December 31, 2018 The tax holidayand tax incentives had an insignificant impact on earnings per share for the periods presented. Income Tax Examination 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. 13. COMMITMENTS AND CONTINGENCIES Lease Obligations As of December 31, 2018, future minimum rental payments under the non-cancelable operating leases are as follows (in thousands): 2019 $1,511 2020 872 2021 273 2022 195 2023 26 Total $2,877 71Table of Contents The Company leases manufacturing and inventory warehouse facilities, sales and marketing, and research and development offices in Asia, Europe andthe United States. Certain of the Company’s facility leases provide for periodic rent increases. Rent expense for the years ended December 31, 2018, 2017and 2016 was $1.8 million, $1.5 million and $1.7 million, respectively. Warranty and Indemnification Provisions The changes in warranty reserves are as follows (in thousands): Year Ended December 31, 2018 2017 2016 Balance at beginning of period $2,416 $1,030 $289 Warranty provision for product sales 6,586 1,912 1,102 Settlements made (1,402) (40) (68)Unused warranty provision (3,036) (486) (293)Balance at end of period $4,564 $2,416 $1,030 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 intellectual propertyrights as a result of using the Company’s products and technologies. These indemnification provisions are varied in their scope and are subject to certainterms, conditions, limitations and exclusions. In addition, the Company has entered into indemnification agreements with its directors and officers. It is not possible to predict the maximum potential amount of future payments under these agreements due to the limited history of indemnification claimsand the unique facts and circumstances involved in each particular agreement. There were no indemnification liabilities incurred in any of the periodspresented. However, there can be no assurances that the Company will not incur any financial liabilities in the future as a result of these obligations. 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 31,2018, there were no material pending legal proceedings to which the Company was a party. 15. EMPLOYEE 401(k) PLAN The Company sponsors a 401(k) retirement savings plan for all employees in the U.S. who meet certain eligibility requirements. Participants maycontribute up to the amount allowable as a deduction for federal income tax purposes. The Company is not required to contribute and did not contributeto the plan for the years ended December 31, 2018, 2017 and 2016. 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 2018 2017 2016 2018 2017 A (distributor) 22% 17% 22% 25% 16%B (distributor) 10% * * 16% * C (distributor) * 10% * * * D (value-added reseller) * * * * 15% * Represents less than 10%. 72Table of Contents 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,resellers and other distribution channels to deliver its products to end customers within a short period following the termination of the agreement withthe customer. 17. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance analog solutions forthe consumer, 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 2018 2017 2016 China $334,726 $257,787 $245,169 Taiwan 75,307 83,357 45,414 Europe 49,484 38,140 27,554 Korea 41,238 34,155 27,710 Southeast Asia 36,495 25,755 19,645 Japan 26,853 20,187 14,318 United States 17,621 11,113 8,567 Other 658 435 288 Total $582,382 $470,929 $388,665 The following is a summary of revenue by major product families (in thousands): Year Ended December 31, Product Family 2018 2017 2016 DC to DC $537,512 $431,861 $350,930 Lighting Control 44,870 39,068 37,735 Total $582,382 $470,929 $388,665 The following is a summary of long-lived assets by geographic regions (in thousands): December 31, Country 2018 2017 2016 China $93,096 $89,472 $45,728 United States 71,025 65,618 50,242 Taiwan 16,972 17,238 8,919 Bermuda 6,682 7,522 9,573 Other 878 388 571 Total $188,653 $180,238 $115,033 73Table of Contents 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, 2017 $(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 Other comprehensive loss before reclassifications (549) (7,082) (7,631)Amounts reclassified from accumulated other comprehensive income (loss) 66 - 66 Tax effect 209 - 209 Net current period other comprehensive loss (274) (7,082) (7,356)Balance as of December 31, 2018 $(1,638) $(3,905) $(5,543) The amounts reclassified from accumulated other comprehensive income (loss) were recorded in interest and other income, net, in the ConsolidatedStatements of Operations. 19. SUBSEQUENT EVENTS Cash Dividend Increase In February 2019, the Company’s Board of Directors approved an increase in quarterly cash dividends from $0.30 per share to $0.40 per share, effectivefor the dividends declared in the first quarter of 2019. Real Estate Purchase In February 2019, the Company entered into an agreement to purchase an office building and land located in Kirkland, Washington, for $53.0 million incash. The Company expects to close the transaction in the first quarter of 2019. 20. QUARTERLY FINANCIAL DATA (UNAUDITED) Three Months Ended December 31,2018 September 30,2018 June 30,2018 March 31,2018 (in thousands, except per share amounts) Revenue $153,497 $159,975 $139,761 $129,150 Cost of revenue 68,904 70,957 62,197 57,655 Gross profit 84,593 89,018 77,564 71,495 Operating expenses: Research and development 22,735 25,630 23,481 21,609 Selling, general and administrative 28,372 29,552 28,561 27,318 Litigation expense, net 409 343 640 531 Total operating expenses 51,516 55,525 52,682 49,458 Income from operations 33,077 33,493 24,882 22,037 Interest and other income (expense), net (393) 2,714 2,232 440 Income before income taxes 32,684 36,207 27,114 22,477 Income tax provision 5,046 4,639 2,908 621 Net income $27,638 $31,568 $24,206 $21,856 Net income per share: Basic $0.65 $0.75 $0.57 $0.52 Diluted $0.61 $0.71 $0.55 $0.49 Weighted-average shares outstanding: Basic 42,467 42,362 42,237 41,922 Diluted 45,058 44,669 44,400 44,282 74Table of Contents 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 75Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS 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, 2018, 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’s rulesand forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief FinancialOfficer, 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, management concludedthat our internal control over financial reporting was effective as of December 31, 2018. Management reviewed the results of its assessment with our AuditCommittee. 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 Effective January 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). We haveimplemented additional business processes and control activities, primarily related to variable consideration estimates and presentation and disclosure, inorder to monitor and maintain appropriate controls over financial reporting. There were no other changes in our internal control over financial reportingthat occurred during the quarter ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal controlover 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. 76Table 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 31,2018, 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, 2018, 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, 2018, of the Company and our report dated March 1, 2019, 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, 2019 77Table 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 2019 Annual Meeting of Stockholders (the “2019Annual 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 the caption “Executive Officer Compensation” in the Company’s Proxy Statement for the2019 Annual Meeting, 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 2019 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 2019 Annual Meeting, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item will be set forth under the caption “Audit and Other Fees” in the Company’s Proxy Statement for the 2019 AnnualMeeting, and is incorporated herein by reference. 78Table of Contents PART IV ITEM 15. EXHIBITS, 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 Jeff Zhou. 10.9+(11) Employment Agreements with Meera P. Rao and Saria Tseng and Amendments thereof. 10.10+(12) Monolithic Power Systems, Inc. Master Cash Performance Bonus Plan. 10.11+(13) Letter Agreement with Eugen Elmiger. 10.12+(14) Monolithic Power Systems, Inc. 2004 Equity Incentive Plan, as Amended, and Form of Grant Agreement. 10.13+(15) Monolithic Power Systems, Inc. 2014 Equity Incentive Plan, as Amended, and Form of Grant Agreement. 79Table of Contents 10.14+(16) 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/A (Registration No. 333-117327), filed withthe Securities and Exchange Commission on November 15, 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 withthe Securities 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 withthe Securities 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 withthe Securities 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 withthe Securities and Exchange Commission on December 19, 2008. (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 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed with the Securities andExchange Commission on February 3, 2010.(11)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.(12)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.(13)Incorporated by reference to Exhibit 10.36 of the Registrant’s annual report on Form 10-K (File No. 000-51026), filed with the Securities andExchange Commission on March 10, 2014.(14)Incorporated by reference to Exhibit 4.4 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-199782), filed with theSecurities and Exchange Commission on November 3, 2014.(15)Incorporated by reference to Exhibit 4.6 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-199782), filed with theSecurities and Exchange Commission on November 3, 2014.(16)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. 80Table 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 on itsbehalf by the undersigned, thereunto duly authorized. MONOLITHIC POWER SYSTEMS, INC. Date: March 1, 2019By:/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. BernieBlegen, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to thisreport, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, herebyratifying 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, 2019 by the following persons onbehalf 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 81Exhibit 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 Monolithic Power Spain, S.L. 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, 333-140563, 333-132411, and 333-120886 on Form S-8 of our reports dated March 1, 2019 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, 2018. /s/ DELOITTE & TOUCHE LLP San Jose, CaliforniaMarch 1, 2019 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, 2019 /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, 2019 /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, 2018, 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, 2018, 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, 2019 /s/ Michael Hsing Michael Hsing Chief Executive Officer Date: March 1, 2019 /s/ T. Bernie Blegen T. Bernie Blegen Chief Financial Officer

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