Monolithic Power Systems Annual Report 2019

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One) ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 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) 5808 Lake Washington Blvd. NE, 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 class Trading Symbol Name of each exchange on which registeredCommon Stock, par value $0.001 per share MPWR The NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 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 1934 during thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days. 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 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the ExchangeAct. 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 new or revisedfinancial 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 the common stock onthe Nasdaq Global Select Market on June 28, 2019, was $4.3 billion.* There were 44,602,000 shares of the registrant’s common stock issued and outstanding as of February 19, 2020. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the registrant’s 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Reporton Form 10-K where indicated. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year endedDecember 31, 2019. *Excludes 11,709,000 shares of the registrant’s common stock held by executive officers, directors and stockholders whose ownership exceeds 5% (“affiliates”) of thecommon stock outstanding at June 28, 2019. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct orindirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with theregistrant. 2Table of Contents MONOLITHIC POWER SYSTEMS, INC.TABLE OF CONTENTS Page PART I Item 1.Business5 Information about Executive Officers9Item 1A.Risk Factors9Item 1B.Unresolved Staff Comments26Item 2.Properties27Item 3.Legal Proceedings27Item 4.Mine Safety Disclosures27 PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities28Item 6.Selected Financial Data29Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations30Item 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 Disclosure78Item 9A.Controls and Procedures78Item 9B.Other Information78 PART III Item 10.Directors, Executive Officers and Corporate Governance79Item 11.Executive Compensation79Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters79Item 13.Certain Relationships and Related Transactions, and Director Independence79Item 14.Principal Accounting Fees and Services79 PART IV Item 15.Exhibits, Financial Statement Schedules80Item 16.Form 10-K Summary82 Signatures83 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, and Section 21E ofthe Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of1995. 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 categories and families, •our belief that we may incur significant legal expenses that vary with the level of activity in each of our current or future legal proceedings, •the effect that liquidity of our investments has on our capital resources, •the continuing application of our products in the 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 2020 and beyond, •the factors that we believe will impact our business, operations and financial condition, as well as 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 such acquisitions, •the impact of the U.S. Tax Cuts and Jobs Act enacted in December 2017 (the “2017 Tax Act”) and other tax laws on our income tax provision, financial positionand cash flows, •our plan to repatriate cash from our subsidiary in Bermuda, •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 to the future identifyforward-looking statements. All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans or objectives aboutour business and our industry. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events or results coulddiffer materially and adversely from those expressed in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materiallyinclude those set forth throughout this Annual Report on Form 10-K and, in particular, in the section entitled “Item 1A. Risk Factors.” Except as required by law, wedisclaim any duty to, and undertake no obligation to, update any forward-looking statements, whether as a result of new information relating to existing conditions,future events or otherwise or to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances afterthe date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of thedate of this Annual Report on Form 10-K. Readers should carefully review future reports and documents that we file from time to time with the Securities and ExchangeCommission (“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 herein are referencesto 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 innovative proprietary process technologies. Thesecombined strengths enable MPS to deliver highly integrated monolithic products that offer energy efficient, cost-effective, easy-to-use solutions for systems foundin computing and storage, automotive, industrial, communications and consumer applications. MPS’s mission 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. We have over 2,000 employees worldwide, with locations in Asia (primarily in China, India, Japan,Korea, Singapore and Taiwan), Europe (primarily in France, Germany, Spain, Switzerland and the United Kingdom), and the United States. Industry Overview Semiconductors comprise the basic building blocks of electronic systems and equipment. Within the semiconductor industry, components can be classified either asdiscrete devices, such as individual transistors or integrated circuits (“ICs”), in which a number of transistors and other elements are combined to form a morecomplicated electronic circuit. ICs can be further divided into three primary categories: digital, analog, and mixed-signal. Digital ICs, such as memory devices andmicroprocessors, can store or perform arithmetic functions on data that is represented by a series of ones and zeroes. Analog ICs, in contrast, handle real world signalssuch as temperature, pressure, light, sound, or speed. In addition, analog ICs also perform power management functions, such as regulating or converting voltages, forelectronic devices. Mixed-signal ICs combine digital and analog functions onto a single chip and play an important role in bridging real world to digital systems. Analog and Mixed-Signal Markets. We focus on the market for high performance analog and mixed-signal ICs. High performance products generally are differentiatedby functionality and performance factors, which include integration of higher levels of functionality onto a single chip, greater precision, higher speed and lower heatand noise. There are several key factors that distinguish the analog and mixed-signal IC markets from digital IC markets. These factors include longer product lifecycles, numerous market segments, technology that is difficult to replicate, relative complexity of design and process technology, importance of experienced designengineers, lower capital requirements and diversity of end markets. We have targeted product and market areas that we believe have the ability to offer above-averagegrowth over the long term compared to the semiconductor industry as a whole. End Markets and Applications We design and develop our products for the computing and storage, automotive, industrial, communications and consumer markets, with the computing and storagemarket representing the largest portion of our revenue in 2019. The following table is a summary of the various end market applications for our products, and thosemarkets’ contribution as a percentage of our total revenue: Percentage of Total Revenue End MarketsApplications 2019 2018 2017 Computing and storageStorage, computers and notebooks, printers, servers andworkstations 30.1% 27.3% 21.4%AutomotiveInfotainment, safety and connectivity applications 14.4% 13.8% 11.4%IndustrialPower sources, security, point-of-sale systems, smart meters andother industrial equipment 15.8% 15.2% 13.4%CommunicationsNetworking and telecommunication infrastructure, routers andmodems, wireless access points and voice over IP 13.5% 12.1% 13.5%ConsumerSet-top boxes, monitors, gaming, lighting, chargers, homeappliances, cellular handsets, digital video players, GPS,televisions, stereos and cameras 26.2% 31.6% 40.3% 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 design process, andare applicable across a wide range of analog applications within the computing and storage, automotive, industrial, communications and consumer markets. Our productfamilies are differentiated with respect to their high degree of integration and strong levels of accuracy and efficiency, making them cost-effective relative to manycompeting solutions. Our key product families include the following: Direct Current (“DC”) to DC Products. DC to DC ICs are used to convert and control voltages within a broad range of electronic systems, such as portable electronicdevices, wireless LAN access points, computers, and monitors, automobiles and medical equipment. We believe that our DC to DC products are differentiated in themarket, particularly with respect to their high degree of integration, high voltage operation, high load current, high switching speed and small footprint. These featuresare important to our customers as they result in fewer components, a smaller form factor, more accurate regulation of voltages, and, ultimately, lower system cost andincreased reliability through the elimination of many discrete components and power devices. The DC to DC product family accounted for 94%, 92% and 92% of ourtotal revenue in 2019, 2018 and 2017, respectively. Lighting Control Products. Lighting control ICs are used in backlighting and general illumination products. Lighting control ICs for backlighting are used in systemsthat provide the light source for LCD panels typically found in notebook computers, monitors, car navigation systems and televisions. Backlighting solutions aretypically either white light emitting diode lighting sources or cold cathode fluorescent lamps. The Lighting Control product family accounted for 6%, 8% and 8% of ourtotal revenue in 2019, 2018 and 2017, 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 toachieve revenue growth will depend in part upon our ability to enter new market segments, gain market share, grow in regions outside of China, Taiwan and other Asianmarkets, expand our customer base and continue to secure manufacturing capacity. Customers, Sales and Marketing We sell our products through third-party distributors, value-added resellers and directly to original equipment manufacturers (“OEMs”), original designmanufacturers (“ODMs”), and electronic manufacturing service (“EMS”) providers. Our third-party distributors are subject to distribution agreements with us, whichallow the distributors to sell our products to end customers and other resellers, including OEMs, ODMs or EMS providers. Our value-added resellers may secondsource our products and provide other services to customers. ODMs typically design and manufacture electronic products on behalf of OEMs, and EMS providerstypically provide manufacturing services for OEMs and other electronic product suppliers. Sales to our largest distributor accounted for 23% of our total revenue in 2019, 22% in 2018, and 17% in 2017. In addition, one other distributor accounted for 10% of ourtotal revenue in 2018 and one other distributor accounted for 10% of our total revenue in 2017. No other distributors or end customers accounted for more than 10% ofour full-year, 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 best efforts to promoteand develop a market for our products. These agreements provide that payment for purchases from us will generally occur within 30 to 60 days from the date ofinvoice. 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 throughout 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 a staff ofapplications 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, becausea majority of our revenue is attributable to sales to customers in Asia, changes in the relative value of the dollar may create pricing pressures for our products. For theyears ended December 31, 2019, 2018 and 2017, our revenue from sales to customers in Asia was 89%, 88% and 89%, respectively. Our sales are made primarily pursuant to standard individual purchase orders. Our backlog consists of orders that we have received from customers which have not yetshipped. Because orders in backlog are subject to cancellation or postponement, and backlog at any particular date is not necessarily representative of actual sales forany succeeding period, we believe that our backlog is not necessarily a reliable indicator of future revenue. 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 future customer orders.This subjects us to certain risks, most notably the possibility that sales will not meet our forecast, which could lead to inventories in excess of demand. If excessinventory exists, it may be necessary for us to sell it at a substantial discount, take a significant write-down or dispose of it altogether, all of which would negativelyaffect our profit margins. In addition, in response to market conditions, we may slow the rate of manufacturing our products, which could result in insufficient inventorylevels if we underestimate the demand for our products. We operate in the cyclical semiconductor industry where there is seasonal demand for certain of our products. While we are not immune from current and futureindustry downturns, we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term. Research and Development We have assembled a qualified team of engineers primarily in China, Spain, Taiwan 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 across our productsand markets. These include the development of high efficiency power devices, the design of precision analog circuits, expertise in mixed-signal integration and thedevelopment of proprietary semiconductor process technologies. Our research and development efforts are generally targeted at three areas: systems architecture, circuit design and implementation, and process technology. In the areaof systems architecture, we are exploring new ways of solving our customers’ system design challenges and are investing in the development of systems expertise innew markets and applications that align well with our core capabilities. In the area of circuit design and implementation, our initiatives include expanding our portfolio ofproducts and adding new features to our products. In the area of process technology, we are investing research and development resources to provide leading-edgeanalog 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 process technologies.Our future success and competitive position depend in part upon our ability to obtain and maintain protection of our proprietary technologies. In general, we have elected to pursue patent protection for aspects of our circuit and device designs that we believe are patentable and to protect our manufacturingprocess technologies by maintaining those process technologies as trade secrets. As of December 31, 2019, we had 1,162 patents/applications issued or pending, ofwhich 419 patents have been issued in the United States. Our issued patents are scheduled to expire at various times through December 2039. Our patents are material toour business, but we do not rely on any one particular patent for our success. We also rely on a combination of nondisclosure agreements and other contractualprovisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our technology, know-how and processes. We also seek to register certain ofour trademarks as we deem appropriate. We have not registered any of our copyrights and do not believe registration of copyrights is material to our business. Despiteprecautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future technology or products or to obtain and useinformation 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 patentapplications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged,invalidated or circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect ourproducts and intellectual 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 infringementis an ongoing risk, in part because other companies in our industry could have patent rights that may not be identifiable when we initiate development efforts. Litigationmay be necessary to enforce our intellectual property rights, and we may have to defend ourselves against infringement claims. Any such litigation could be very costlyand may divert our management resources. Further, we have agreed to indemnify certain of our customers and suppliers in some circumstances against liability frominfringement by our products. In the event any third party were to make an infringement claim against us or our customers, we could be enjoined from selling selectedproducts, could be required to indemnify our customers or suppliers, or could pay royalties or other damages to third parties. If any of our products are found to infringeand we are unable to obtain necessary licenses or other rights on acceptable terms, we would either have to change our product so that it does not infringe or stopmaking 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 our engineering anddesign resources on our strengths and to reduce our fixed costs and capital expenditures. In contrast to many fabless semiconductor companies, which utilize standardprocess technologies and design rules established by their foundry partners, we have developed our own proprietary process technologies and collaborate with ourfoundry partners to install our technologies on their equipment in their facilities for use on our behalf. This close collaboration and control over the manufacturingprocess has historically resulted in favorable yields and product performance for our ICs. We currently contract with six suppliers to manufacture our wafers in foundries located in China and Korea. Once our silicon wafers have been produced, they areshipped to our facility in Chengdu, China for wafer sort, which is a testing process performed to identify non-functioning dies. Our semiconductor products are thenassembled and packaged by independent subcontractors in China and Malaysia. The assembled ICs are then sent either for final testing at our Chengdu facility, or toother 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, which enables us to benefit from shorter manufacturing cycle times and lower labor andoverhead costs. We have expanded our product testing capabilities in this facility and are able to take advantage of the rich pool of local engineering talent to expandour 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 design of our analogand mixed-signal ICs, our engineers generally have more years of experience and greater circuit design aptitude than the more prevalent digital circuit design engineerdoes. Analog engineers with advanced skills are limited in number and difficult to replace. The loss of the services of key officers, managers, engineers and othertechnical personnel would materially harm our business. Our future success will depend, in part, on our ability to attract, train, retain, and motivate highly qualifiedtechnical and managerial personnel. We may not be successful in attracting and retaining such personnel. Our employees are not represented by a collective bargainingorganization, and we have never experienced a work stoppage or strike. Our management considers employee relations to be good. As of December 31, 2019, weemployed 2,002 employees primarily located in Asia, Europe and the United States, compared with 1,737 employees as of December 31, 2018. Competition The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue. Our ability to compete effectively and toexpand our business will depend on our ability to continue to recruit both applications engineering and design engineering personnel, our ability to introduce newproducts, and our ability to maintain the rate at which we introduce these new products. Our industry is characterized by decreasing average selling prices over the lifeof a product. We compete with domestic and international semiconductor companies, many of which have substantially greater financial and other resources with whichto pursue engineering, manufacturing, marketing, and distribution of their products and, in some cases, have a broader number of product offerings that may enablethem to more effectively market and sell to customers. We are in direct and active competition, with respect to one or more of our product lines, with at least tenmanufacturers of such products, of varying size and financial strength. We consider our primary competitors to include Analog Devices, Infineon Technologies, MaximIntegrated Products, NXP Semiconductors, ON Semiconductor, 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 we are competitivein the markets in which we sell, particularly because our ICs typically are smaller in size, are highly integrated, possess higher levels of power managementfunctionalities and achieve high performance specifications at lower price points than most of our competition. However, there is no assurance that our products willcontinue to compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by existingcompetitors or new companies entering this market. In addition, there has recently been a high level of consolidation in the semiconductor industry. If these or futureacquisitions are successful, competition may intensify and our competitors may have additional 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 reports that are filed or furnished pursuantto Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge. They may be obtained from our website atwww.monolithicpower.com under “Investor Relations” as soon as reasonably practicable after we electronically file such documents with, or furnish them to, the SEC orat 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 Information About Executive Officers Information regarding our executive officers as of February 28, 2020 is as follows: Name Age PositionMichael Hsing 60 President, Chief Executive Officer and DirectorBernie Blegen 62 Vice President and Chief Financial OfficerDeming Xiao 57 President of Asia OperationsMaurice Sciammas 60 Senior Vice President of Worldwide Sales and MarketingSaria Tseng 49 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 foundingMPS, Mr. Hsing was a Senior Silicon Technology Developer at several analog IC companies, where he developed and patented key technologies, which set newstandards in the power electronics industry. Mr. Hsing is an inventor on numerous patents related to the process development of bipolar mixed-signal semiconductormanufacturing. 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 August2011 to June 2016, Mr. Blegen served as our Corporate Controller. Prior to joining MPS, Mr. Blegen held a number of executive finance and accounting positions for otherpublicly traded technology companies, including Xilinx, Inc. and Credence Systems. Mr. Blegen holds a B.A. from the University of California, Santa Barbara. Deming Xiao has served as our President of Asia Operations since January 2008. Since joining us in May 2001, Mr. Xiao has held several executive positions, includingFoundry Manager and Senior Vice President of Operations. Before joining MPS, from June 2000 to May 2001, Mr. Xiao was Engineering Account Manager at CharteredSemiconductor Manufacturing, Inc. Prior to that, Mr. Xiao spent six years as the Manager of Process Integration Engineering at Fairchild Imaging Sensors. Mr. Xiaoholds a B.S. in Semiconductor Physics from Sichuan University, Chengdu, China and an M.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 and served as VicePresident of Products and Vice President of Sales (excluding greater China) until he was appointed to his current position. Before joining MPS, he was Director of ICProducts at Supertex from 1990 to 1999. He has also held positions at Micrel, Inc. He holds a B.S.E.E. degree from San Jose State University. Saria Tseng has served as our Vice President, General Counsel and Corporate Secretary since 2004 and additionally as our Vice President, Strategic CorporateDevelopment since 2009. Ms. Tseng joined the Company from MaXXan Systems, Inc., where she was Vice President and General Counsel from 2001 to 2004. Previously,Ms. Tseng was an attorney at Gray Cary Ware & Freidenrich, LLP and Jones, Day, Reavis & Pogue. Ms. Tseng is a member of the state bar in both California and NewYork and is a member of the bar association of the Republic of China (Taiwan). Ms. Tseng currently serves on the Board of Directors of Super Micro Computer, Inc., aglobal leader in high performance server technology. Ms. Tseng holds Masters of Law degrees from the University of California at Berkeley and the Chinese CultureUniversity 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 other information in thisAnnual Report on Form 10-K and other filings with the SEC in evaluating our business. If any of the following risks actually occur, our business, financial condition,operating results, and growth prospects would likely be materially and adversely affected. In such an event, the trading price of our common stock could decline, andyou 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 futureperformance, and investors should not use historical trends to anticipate results or trends in future periods. These risks involve forward-looking statements and ouractual results may differ substantially from those discussed in these forward-looking statements. 9Table of Contents The future trading price of our common stock could be subject to wide fluctuations in response to a variety of factors. The future trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, many of which arebeyond our control, including: •actual or anticipated results of operations and financial performance; •general economic, industry and market conditions worldwide; •our ability to outperform the market and outperform at a level that meets or exceeds our investors’ expectations; •whether our guidance meets the expectations of our investors; •the 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; • epidemics and illnesses, such as the COVID-19 outbreak first identified in China in December 2019; •trading activity in our common stock, including short positions; •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; •changes in corporate tax laws; •government policies and regulations on international trade policies and restrictions, including tariffs on imports of foreign goods; •export controls, trade and economic sanctions and regulations, and other regulatory or contractual limitations on our ability to sell or develop our products in certainforeign markets, particularly in China; •our ability to obtain governmental licenses and approvals for international trading activities or technology transfers, including export licenses; 10Table of Contents •our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfully securemanufacturing capacity; •our ability to increase our gross margins; •our ability to accurately forecast future demand for our products; •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; •cyber attacks or other system security, data protection and privacy breaches; •our ability to pay quarterly cash dividends to stockholders; and •changes in the estimation of the future size and growth rate of our markets. In addition, the stock market often experiences substantial volatility that may be unrelated to the operating performance of particular companies. These broad marketfluctuations may adversely affect the trading price of our common stock. We expect our operating results to fluctuate from quarter to quarter and year over year, which may make it difficult to predict our future performance and could causeour stock price to decline and be volatile. Our revenue, expenses, and results of operations are difficult to predict, have varied significantly in the past and will continue to fluctuate significantly in the future dueto 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; •adverse changes in laws and government regulations, such as tariffs on imports of foreign goods, export regulations and export classifications, including in foreigncountries where we have offices or operations; •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; 11Table of Contents •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; •our ability to accurately assess the impact of market conditions on the demand for our products; •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 new tax laws on our income tax provision and cash flows; •the impact of tariffs on imports of foreign goods; •the impact of cyber attacks or other system security, data protection and privacy breaches on our business operations; and •stock-based compensation charges primarily resulting from performance and market-based equity awards granted to our employees. Due to the factors noted above and other risks described in this section, many of which are beyond our control, you should not rely on quarter-to-quarter or year-over-year comparisons to predict our future financial performance. Unfavorable changes in any of the above factors may seriously harm our business, financial condition andresults 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 liquidity and creditavailability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. Economicuncertainty affects businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The tightening ofcredit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing andfuture orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaultsand inventory challenges. Volatility in the credit markets could severely diminish liquidity and capital availability. Demand for our products is a function of the health of the economies in the United States, Europe, China and the rest of Asia. We cannot predict the timing, strength orduration of any economic disruption or subsequent economic recovery worldwide, in our industry, or in the different markets that we serve. We also may not accuratelyassess the impact of changing market and economic conditions on our business and operations. These and other economic factors have had, and may in the futurehave, a material adverse effect on demand for our products 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 be materially andadversely affected by significant political, social and economic developments in China. A slowdown in economic growth in China could adversely impact our customers,prospective customers, suppliers, distributors and partners in China, which could have a material adverse effect on our results of the operations and financial condition.There is no guarantee that economic downturns, whether actual or perceived, any further decrease in economic growth rates or an otherwise uncertain economicoutlook in China will not occur or persist in the future, that they will not be protracted, or that governments will respond adequately to control and reverse suchconditions, any of which could materially and adversely affect our business, financial condition and results of operations. 12Table of Contents Recent changes in international trade policy and rising concern of international tariffs, including tariffs applied to goods traded between the United States and China,could materially and adversely affect 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 foreign leadersregarding tariffs against foreign imports of certain materials. More specifically, there have been several rounds of U.S. tariffs on Chinese goods taking effect in 2018 and2019, some of which prompted retaliatory Chinese tariffs on U.S. goods. The institution of trade tariffs both globally and between the U.S. and China specifically carriesthe risk of negatively affecting China’s overall economic condition, which could have a negative impact on us as we have significant operations in China. Furthermore,imposition of tariffs could cause a decrease in the sales of our products to customers located in China or other customers selling to Chinese end users, which woulddirectly impact our business, financial condition and results of operations. We are subject to export restrictions and laws affecting trade and investments that could materially and adversely affect our business and results of operations. As a global company headquartered in the United States, we are subject to U.S. laws and regulations that could limit and restrict the export of some of our products andservices and may restrict our transactions with certain customers, business partners and other persons, including, in certain cases, dealings with or between ouremployees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services andtechnologies, and in other circumstances we may be required to obtain an export license before exporting the controlled item. Compliance with these laws andregulations has not materially limited our operations or our sales, but could materially limit them in the future, which would materially and adversely affect our businessand results of operations. We maintain an export compliance program but there are risks that the compliance controls could be circumvented, exposing us to legalliabilities. We must also comply with export restrictions and laws imposed by other countries affecting trade and investments. Although these restrictions and laws havenot materially restricted our operations in the recent past, there is a significant risk that they could do so in the future, which would materially and adversely affect ourbusiness and results of operations. In addition, U.S. laws and regulations and sanctions, or threat of sanctions, that could limit and restrict the export of some of ourproducts and services to our customers may also encourage our customers to develop their own solutions to replace our products, or seek to obtain a greater supply ofsimilar or substitute products from our competitors that are not subject to these restrictions, which could materially and adversely affect our business, financialcondition and results of operations. Moreover, U.S. government’s actions targeting exports of certain technologies to China are becoming more pervasive. For example, in May 2019, President Trump issuedan executive order that invoked national emergency economic powers to implement a framework to regulate the acquisition or transfer of information communicationstechnology in transactions that imposed undue national security risks. These actions could lead to additional restrictions on the export of products that include orenable certain technologies, including products we provide to China-based customers. The highly cyclical nature of the semiconductor industry, which has produced significant and sometimes prolonged downturns, could materially and adversely affectour financial condition and results of operations. Historically, the semiconductor industry has been highly cyclical and, at various times, has experienced significant downturns and wide fluctuations in supply anddemand. The semiconductor industry is currently experiencing such a downturn. These conditions have caused significant variances in product demand and productioncapacity, as well as rapid erosion of average selling prices. The industry may experience severe or prolonged downturns in the future, which could result in downwardpressure on the price of our products as well as lower demand for our products. Because significant portions of our expenses are fixed in the short term or incurred inadvance of anticipated 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 business, financial condition and results of operations. We may not be profitable on a quarterly or annual basis. Our profitability is dependent on many factors, including: •our sales, which because of our turns business, are difficult to accurately forecast; •the cancellation or rescheduling of our customers’ orders, which may occur without significant penalty to our customers; •changes in general demand for electronic products as a result of worldwide macroeconomic conditions; 13Table of Contents •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 new tax laws and other government regulations, such as tariffs on imports of foreign goods or regulations restricting the export of goods and servicesbetween 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 expenses relating to productsthat will not be introduced and will not generate revenue until later periods, if at all. We may not achieve profitability on a quarterly or annual basis in the future. Unfavorable changes in our operations, including any of the factors noted above, mayhave 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 and factors thatcould cause a decrease in our growth rates compared to past periods, including increased competition, loss of certain of our customers, unfavorable changes in ouroperations, reduced global electronics demand, a deterioration in market conditions, end-customer market downturn, market acceptance and penetration of our currentand future products, and litigation. A material decrease in our growth rates could adversely affect our stock price and 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, which would impact ouroverall 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 failto improve our gross margin in the future, and accordingly develop and introduce sufficiently differentiated products that result in higher gross margins than industryaverages, our business, 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 improve the leverage ofgrowing research and development costs, strengthen or hold their market positions in an evolving industry, or become unable to continue operations unless they findan acquirer or consolidate with another company. In addition, companies that are strategic alliance partners in some areas of our business may acquire or form allianceswith our competitors, thereby reducing their business with us. We believe that semiconductor industry consolidation may result in stronger competitors that are betterable to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on ourbusiness, financial condition and results of operations. 14Table 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 financial condition would bematerially and adversely affected. We believe that the application of our products in the computing and storage, automotive, industrial, communications and consumer markets will continue to accountfor the majority of our revenue. If the demand for our products declines in the major end markets that we serve, our revenue will decrease and our results of operationsand financial condition would be materially and adversely affected. In addition, as technology evolves, the ability to integrate the functionalities of various components,including our discrete semiconductor products, onto a single chip and/or onto other components of systems containing our products increases. Should our customersrequire integrated solutions that we do not offer, demand for our products could decrease, and our business, financial condition and results of operations would bematerially and adversely affected. We may be unsuccessful in developing and selling new products or in penetrating new markets required to maintain or expand our business. Our competitiveness and future success depend on our ability to design, develop, manufacture, assemble, test, market, and support new products and enhancements ona timely and cost-effective basis. A fundamental shift in technologies in any of our product markets could have a material adverse effect on our competitive positionwithin these markets. Our failure to timely develop new technologies or to react quickly to changes in existing technologies could materially delay our development ofnew products, which could result in product obsolescence, decreased revenue, and/or a loss of market share to competitors. As we develop new product lines, we must adapt to market conditions that are unfamiliar to us, such as competitors and distribution channels that are different fromthose we have known in the past. Some of our new product lines require us to re-equip our labs to test parameters we have not tested in the past. If we are unable toadapt rapidly to these new and additional conditions, we may not be able to successfully penetrate new markets. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specificimplementation 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 business, financial condition and results of operations could bematerially and adversely affected. We may face competition from customers developing products internally. Our customers generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop theirown products internally. The future prospects for our products in these markets are dependent in part upon our customers' acceptance of our products as an alternativeto their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-housedevelopment. Customers may in the future continue to use internally developed components. They may also decide to develop or acquire components, technologies orproducts that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire thetechnology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships withthem, our business, financial condition and results of operations could be materially and adversely affected. 15Table 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 to political, cultural,regulatory, economic, foreign exchange, and operational risks. We derive most of our revenue from customers located in Asia through direct sales or indirect sales through distribution arrangements and value-added reselleragreements with parties located in Asia. As a result, we are subject to increased risks due to this geographic concentration of business and operations. For the yearended December 31, 2019, 89% of our revenue was from customers in Asia. There are risks inherent in doing business in Asia, and internationally in general, including: •changes in, or impositions of, legislative or regulatory requirements, including tax laws in the U.S. and in the countries in which we manufacture or sell our products,and government action to restrict our ability to sell to foreign customers where sales of products may require export license; •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; •export controls, trade and economic sanctions and regulations, and other regulatory or contractual limitations on our ability to sell or develop our products in China; •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, such as the COVID-19 outbreak first identified in China in December 2019; •work stoppages and infrastructure problems due to adverse weather conditions or natural disasters; •work stoppages related to employee dissatisfaction; •economic, social and political instability; •longer accounts receivable collection cycles and difficulties in collecting accounts receivables; •enforcing contracts generally; and •less effective protection of intellectual property and contractual arrangements. If we fail to expand our customer base and significantly reduce the geographic concentration of our customers, we will continue to be subject to the foregoing risks,which could materially and adversely affect our business, financial condition and results of operations. We depend on a limited number of customers, including distributors, for a significant percentage of our revenue. Historically, we have generated most of our revenue from a limited number of customers, including distributors. For example, sales to our largest distributor accountedfor 23% of our total revenue for the year ended December 31, 2019. We continue to rely on a limited number of customers for a significant portion of our revenue.Because we rely on a limited number of customers for significant percentages of our revenue, a decrease in demand or significant pricing pressure for our products fromany of our major customers for any reason (including due to competition, market conditions, catastrophic events or otherwise) could have a materially adverse impact onour business, financial condition and results of operations. 16Table of Contents We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act (the “FCPA”). Our failure to complywith these laws could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition and results ofoperations. We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose ofobtaining or keeping business and/or other benefits, along with various other anti-corruption laws. Although we have implemented policies and procedures designed toensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject, there is no assurance that suchpolicies or procedures will work effectively all of the time or protect us against liability under the FCPA or other laws for actions taken by our employees and otherintermediaries with respect to our business or any businesses that we may acquire. We have significant operations in Asia, which place us in frequent contact withpersons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance with the FCPAand other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedialmeasures, which could have a material adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potentialviolations of the FCPA or other anti-corruption laws by the U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financialcondition and results of operations. We receive a significant portion of our revenue from distribution arrangements, value-added resellers and direct customers, and the loss of any one of thesedistributors, value-added resellers or direct customers or failure to collect a receivable from them could adversely affect our financial position and results ofoperations. We market our products through distribution arrangements and value-added resellers and through our direct sales and applications support organization to customersthat include OEMs, ODMs and EMS providers. Receivables from our customers are generally not secured by any type of collateral and are subject to the risk of beinguncollectible. Sales to our largest distributor accounted for 23% of our total revenue for the year ended December 31, 2019. Significant deterioration in the liquidity orfinancial condition of any of our major customers or any group of our customers could have a material adverse impact on the collectability of our accounts receivableand our future operating results. We primarily conduct our sales on a purchase order basis, and we do not have any long-term supply commitments. Moreover, we believe a high percentage of our products are eventually sold to a number of OEMs. Although we communicate with OEMs in an attempt to achieve“design wins,” which are decisions by OEMs and/or ODMs to incorporate our products, we do not have purchase commitments from these end users. Therefore, therecan be no assurance that the OEMs and/or ODMs will continue to incorporate our ICs into their products. OEM technical specifications and requirements can changerapidly, and we may not have products that fit new specifications from an end customer for whom we have had previous design wins. We cannot be certain that we willcontinue to achieve design wins from large OEMs, that our direct customers will continue to be successful in selling to the OEMs, or that the OEMs will be successful inselling 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 OEMcustomers, the cancellation of a significant customer order, or the cancellation or delay of a customer’s or an OEM’s significant program or product could reduce ourrevenue and adversely affect our financial condition and results of operations. Due to the nature of our business as a component supplier, we may have difficulty both in accurately predicting our future revenue and appropriately managing ourexpenses. 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 mayhave difficulty in accurately forecasting our revenue and expenses. Our revenue depends on the timing, size, and speed of commercial introductions of end productsand systems that incorporate our products, all of which are inherently difficult to forecast, as well as the ongoing demand for previously introduced end products andsystems. In addition, demand for our products is influenced by our customers’ ability to manage their inventory. Our sales to distributors are subject to higher volatilitybecause they service demand from multiple levels of the supply chain which, in itself, is inherently difficult to forecast. If our customers, including distributors, do notmanage their inventory correctly or misjudge their customers’ demand, our shipments to and orders from our customers may vary significantly on a quarterly basis,which could reduce our revenue and adversely affect our financial condition and results of operations. Our ability to increase product sales and revenue may be constrained by the manufacturing capacity of our suppliers. Although we provide our suppliers with rolling forecasts of our production requirements, their ability to provide wafers to us is limited by the available capacity,particularly capacity in the geometries we require, at the facilities in which they manufacture wafers for us. As a result, this lack of capacity has at times constrained ourproduct sales and revenue growth. In addition, an increased need for capacity to meet internal demands or demands of other customers could cause our suppliers toreduce capacity available to us. Our suppliers may also require us to pay amounts in excess of contracted or anticipated amounts for wafer deliveries or require us tomake other concessions in order to acquire the wafer supply necessary to meet our customer requirements. If our suppliers extend lead times, limit supplies or the typesof capacity we require, or increase prices due to capacity constraints or other factors, our revenue and gross margin may materially decline. In addition, if we experiencesupply delays or limitations, our customers may reduce their purchase levels with us and/or seek alternative solutions to meet their demand, which could materially andadversely impact our business and results of operations. Delays in increasing third-party manufacturing capacity may also limit our ability to meet customer demand. 17Table 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 capacity constrained andare unable to provide us sufficient wafers at acceptable yields and at anticipated costs, our revenue and gross margin may decline or we may not be able to fulfill ourcustomer 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 notbe 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’ continuedcooperation and our management of the supplier relationships. In addition, the fabrication of ICs is a highly complex and precise process. Problems in the fabricationprocess can cause a substantial percentage of wafers to be rejected or numerous ICs on each wafer to be non-functional. This could potentially reduce yields. Thefailure of our suppliers to supply us wafers at acceptable yields could prevent us from fulfilling our customer orders for our products and would likely cause a decline inour revenue. Further, as is common in the semiconductor industry, our customers may reschedule or cancel orders on relatively short notice. If our customers cancel orders after wesubmit a committed forecast to our suppliers for the corresponding wafers, we may be required to purchase wafers that we may not be able to resell, which wouldadversely affect our financial condition, results of operations and cash flows. We might not be able to deliver our products on a timely basis if our relationships with our assembly and test subcontractors are disrupted or terminated. We do not have direct control over product delivery schedules or product quality because all of our products are assembled by third-party subcontractors and a portionof our testing is currently performed by third-party subcontractors. Also, due to the amount of time typically required to qualify assembly and test subcontractors, wecould experience delays in the shipment of our products if we were forced to find alternate third parties to assemble or test our products. In addition, events such asglobal economic crises may materially impact our assembly suppliers’ ability to operate. Any future product delivery delays or disruptions in our relationships with oursubcontractors could have a material adverse effect on our financial condition, results of operations and cash flows. There may be unanticipated costs associated with adding to or supplementing our third-party suppliers’ manufacturing capacity. We anticipate that future growth of our business will require increased manufacturing capacity on the part of third-party supply foundries, assembly shops, and testingfacilities for our products. In order to facilitate such growth, we may need to enter into strategic transactions, investments and other activities. Such activities aresubject to a number of risks, including: •the costs and expense associated with such activities; •the availability of modern foundries to be developed, acquired, leased or otherwise made available to us or our third-party suppliers; •the ability of foundries and our third-party suppliers to obtain the advanced equipment used in the production of our products; •delays in bringing new foundry operations online to meet increased product demand; and •unforeseen environmental, engineering or manufacturing qualification problems relating to existing or new foundry facilities, including delays in qualification of newfoundries by our customers. These and other risks may affect the ultimate cost and timing of any expansion of our third-party suppliers’ capacity. 18Table 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 excess inventory, whichcould adversely impact our financial position. As a fabless semiconductor company, we purchase our inventory from third-party manufacturers in advance of selling our products. We place orders with ourmanufacturers based on existing and expected orders from our customers for particular products. While most of our contracts with our customers and distributorsinclude lead time requirements and cancellation penalties that are designed to protect us from misalignment between customer orders and inventory levels, we mustnonetheless make some predictions when we place orders with our manufacturers. In the event that our predictions are inaccurate due to unexpected increases in ordersor unavailability of product within the timeframe that is required, we may have insufficient inventory to meet our customer demands. In addition, a perceived negativetrend in market condition could lead us to decrease the manufacturing volume of our products to avoid excess inventory. If we inaccurately assessed the marketconditions for our products, we would have insufficient inventory to meet our customer demands. In the event that we order products that we are unable to sell due to adecrease in orders, unexpected order cancellations, injunctions due to patent litigation, or product returns, we may have excess inventory which, if not sold, may need tobe written down or would result in a decrease in our revenue in future periods as the excess inventory at our distributors is sold. If any of these situations were to arise,it could have a material impact on our business, financial condition and results of operations. 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 and the enactment of other tax laws, we engagethird-party tax advisors to 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 andissues that may arise in the future, we could be subject to errors, which, if material, would result in us having to restate our financial statements. Restatements aregenerally costly and could adversely impact our results of operations, damage our reputation, and/or have a negative impact on the trading price of our common stock. Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results of operations. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher thananticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets, or by changes in tax laws such as the 2017 Tax Act,regulations, accounting principles or interpretations thereof and discrete items such as vesting of restricted stock units (“RSUs”). In addition, we are subject to potentialfuture examinations of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. We assess the likelihood of adverse outcomes resultingfrom these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from any examinations will not havean adverse effect on our financial condition and results of operations. Our international operations subject us to potentially significant tax consequences, which could adversely affect our results of operations.We conduct our international operations through wholly-owned subsidiaries, branches and representative offices and report our taxable income in variousjurisdictions worldwide based upon our business operations in those jurisdictions. Such corporate structures are subject to complex transfer pricing regulationsadministered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expensesattributable to specific jurisdictions. If such a disagreement were to occur, and our positions were not sustained, we could be required to pay additional taxes, interestand penalties, resulting in higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Additionally, our future worldwide tax rate andfinancial position may be affected by changes in the relevant tax laws, interpretation of such tax laws or the influence of certain tax policy efforts of the EuropeanUnion and the Organization for Economic Co-operation and Development ("OECD"). Implementation of an enterprise resource planning (“ERP”) or other information technology systems could result in significant disruptions to our operations. From time to time, we may implement new ERP software solutions or upgrade existing systems. Implementation of these solutions and systems is highly dependent oncoordination of system providers and internal business teams. We may experience difficulties as we transition to these new or upgraded systems and processes,including loss or corruption of financial, business or customer data. In addition, transitioning to these new systems requires significant capital investments andpersonnel resources. Difficulties in implementing new or upgraded information systems or any significant system failures could disrupt our operations, which couldhave a material adverse effect on our capital resources, financial condition or results of operations. 19Table of Contents System security risks, data protection or privacy breaches, cyber attacks and systems integration issues could disrupt our internal operations and/or harm ourreputation, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation orotherwise adversely affect our stock price. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietaryinformation, create system disruptions or cause shutdowns. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicioussoftware programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptionsand delays that may impede our sales, manufacturing, distribution, financial reporting or other critical functions. In the ordinary course of business, we store sensitive data on our internal systems, network and servers, such as proprietary business and financial information, andconfidential data pertaining to our customers, suppliers and business partners. The secure maintenance of sensitive information on our networks and the protectionfeatures of our solutions are both critical to our operations and business strategy. We devote significant resources to network security, data encryption, and othersecurity measures to protect our systems and data. However, these security measures cannot provide absolute security. Although we make significant efforts tomaintain the security and integrity of our systems and solutions, any destructive or intrusive breach could compromise our networks, creating system disruptions orslowdowns, 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 occurand we were unable to protect sensitive data, our relationships with our business partners and customers could be materially damaged, our reputation could bematerially harmed, and we could be exposed to a risk of litigation and possible significant liability. Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migrationwork that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and ourremediation efforts may be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders andinterrupt other processes. Delayed sales or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation. Effective May 25, 2018, the European Union (“EU”) implemented the General Data Protection Regulation (“GDPR”), a broad data protection framework that expandsthe scope of current EU data protection law to non-European Union entities that process, or control the processing of, the personal information of EU subjects. TheGDPR allows for the imposition of fines and corrective action on entities that improperly use or disclose the personal information of EU subjects, including through adata security breach. The State of California enacted the California Consumer Privacy Act of 2018 (“CCPA”), effective on January 1, 2020, which contains requirementssimilar to GDPR for the handling of personal information of California residents, commencing on January 1, 2020. Our failure to fully comply with GDPR, CCPA and other laws could lead to significant fines and require onerous corrective action. In addition, data security breachesexperienced by us could result in the loss of trade secrets or other intellectual property, public disclosure of sensitive commercial data, and the exposure of personallyidentifiable information (including sensitive personal information) of our employees, customers, suppliers and others. Unauthorized use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of thesystems of our suppliers or vendors by an unauthorized party, or through employee error, theft or misuse, or otherwise, could harm our business. If any suchunauthorized use or disclosure of, or access to, such personal information was to occur, our operations could be seriously disrupted, and we could be subject todemands, claims and litigation by private parties, and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significantcosts in notifying affected persons and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating to theunauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure of, such informationcould harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business, financial condition and resultsof operations. If we are unsuccessful in legal proceedings brought against us or any of our customers, we could be prevented from selling many of our products or be required to paysubstantial damages. An unfavorable outcome or an additional award of damages, attorneys’ fees or an injunction could cause our revenue to decline significantly andcould severely harm our business and operating results. From time to time we are a party to various legal proceedings. If we are not successful in litigation that could be brought against us or our customers, we could beordered to pay monetary fines and/or damages. If we are found liable for willful patent infringement, damages could be significant. We and/or our customers could alsobe prevented from selling some or all of our products. Moreover, our customers and end users could decide not to use our products, and our products and ourcustomers’ accounts payable to us could be seized. Finally, interim developments in these proceedings could increase the volatility in our stock price as the marketassesses the impact of such developments on the likelihood that we will or will not ultimately prevail in these proceedings. Given our inability to control the timing and nature of significant events in our legal proceedings that either have arisen or may arise, our legal expenses are difficultto forecast and may vary substantially from our publicly disclosed forecasts with respect to any given quarter, which could contribute to increased volatility in ourstock price and financial condition. Historically, we have incurred significant expenses in connection with various legal proceedings that vary with the level of activity in the proceeding. It is difficult for usto forecast our legal expenses for any given quarter, which adversely affects our ability to forecast our expected results of operations in general. We may also be subjectto unanticipated legal proceedings, which would result in us incurring unexpected legal expenses. If we fail to meet the expectations of securities or industry analysts asa 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 infringementis an ongoing risk, in part because other companies in our industry could have patent rights that may not be identifiable when we initiate development efforts. Litigationmay be necessary to enforce our intellectual property rights, and we may have to defend ourselves against additional infringement claims. Such litigation is very costly.In the event any third party makes a new infringement claim against us or our customers, we could incur additional ongoing legal expenses. In addition, in connectionwith these legal proceedings, we may be required to post bonds to defend our intellectual property rights in certain countries for an indefinite period of time, until suchdispute is resolved. If our legal expenses materially increase or exceed anticipated amounts, our capital resources and financial condition could be adversely affected.Further, if we are not successful in any of our intellectual property defenses, our financial condition could be adversely affected and our business could be harmed. Ourmanagement team may also be required to devote a great deal of time and effort to these legal proceedings, which could divert management’s attention from focusing onour operations and adversely affect our business. 20Table 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 maintain protection ofcertain proprietary technologies used in our products. We pursue patents for some of our new products and unique technologies, and we also rely on a combination ofnondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our technology, know-howand processes. Despite the precautions we take, it may be possible for unauthorized third parties to copy aspects of our current or future technologies or products, or toobtain and use information that we regard as proprietary. We intend to continue to protect our proprietary technologies, including through patents. However, there canbe 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 notdevelop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated or circumvented by others. Furthermore, the lawsof the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extentas laws in the United States. Our failure to adequately protect our proprietary technologies could materially harm our business. We face risks in connection with our internal control over financial reporting. Effective internal control over financial reporting is necessary for us to provide reliable and accurate financial reports. If we cannot provide reliable financial reports orprevent fraud or other financial misconduct, our business and operating results could be harmed. Our failure to implement and maintain effective internal control overfinancial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, inturn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our results ofoperations and/or have a negative impact on the trading price of our common stock, and could subject us to stockholder litigation. In addition, we cannot assure youthat we will not in the future identify material weaknesses in our internal control over financial reporting that we have not discovered to date, which may impact thereliability of our financial reporting and financial statements. Our products must meet specifications, and undetected defects and failures may occur, which may cause customers to return or stop buying our products and mayexpose 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 ours often encounterdevelopment delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments, which might require productreplacement or recall. Further, our third-party manufacturing processes or changes thereof, or raw material used in the manufacturing processes may cause our productsto fail. We have from time to time in the past experienced product quality, performance or reliability problems. Our standard warranty period is generally one to two years,which exposes us to significant risks of claims for defects and failures. If defects and failures occur in our products, we could experience lost revenue, increased costs,including warranty expense and costs associated with customer support, cancellations or rescheduling of orders or shipments, and product returns or discounts, any ofwhich would harm our operating results. In addition, product liability claims may be asserted with respect to our technology or products. Although we currently have insurance, there can be no assurance thatwe have obtained a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, or that we will have sufficientresources to satisfy any asserted claims. The price and availability of commodities (e.g., gold, copper and silicon) may adversely impact our ability to deliver our products in a timely and cost-effective manner,and may adversely affect our business and results of operations. Our products incorporate commodities such as gold, copper and silicon. An increase in the price or a decrease in the availability of these commodities and similarcommodities that we use could negatively impact our business and results of operations. 21Table 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 Renminbi rises against theU.S. Dollar, there could be an increase in our manufacturing costs relative to competitors who have manufacturing facilities located in the U.S., which could adverselyaffect our operations. In addition, our sales are primarily denominated in the U.S. Dollar. If the value of the U.S Dollar rises against other currencies, it may adverselyaffect the demand for our products in international markets, which could negatively impact our business and results of operations. We incur foreign currency exchange gains or losses related to the timing of payments for transactions between the U.S. and our foreign subsidiaries, which are reportedin interest and other income in the statements of operations. Fluctuations in the value of the U.S. Dollar relative to the foreign currencies could increase the amount offoreign currency exchange losses we record, which could have an adverse impact on our results of operations. Our business is subject to various governmental laws and regulations, and compliance with these regulations may impact our revenue and cause us to incursignificant expense. If we fail to maintain compliance with applicable regulations or obtain government licenses and approvals for our desired international tradingactivities or technology transfers, we may be forced to recall products and cease their distribution, and we could be subject to civil or criminal penalties. Our business is subject to various significant laws and other legal requirements imposed by the U.S. and other countries we conduct business with, including exportcontrol laws such as the Export Administration Act, the Export Administration Regulations (“EAR”) and other laws, regulations and requirements governinginternational trade and technology transfer. These laws and regulations are complex, change frequently and have generally become more stringent over time. We may berequired to incur significant expense to comply with these regulations or to remedy violations of these regulations. In addition, if our customers fail to comply with theseregulations, we may be required to suspend sales to these customers, which could negatively impact our results of operations. We must conform the manufacture anddistribution of our products to various laws and adapt to regulatory requirements in many countries as these requirements change. If we fail to comply with theserequirements in the manufacture or distribution of our products, we could be required to pay civil penalties, face criminal prosecution and, in some cases, be prohibitedfrom distributing our products commercially until the products are brought into compliance. Environmental laws and regulations could cause a disruption in our business and operations. We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substancesin electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Suchlaws and regulations have been passed in several jurisdictions in which we operate, including various European Union member countries and countries in Asia. Therecan be no assurance that similar laws and regulations will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products,and even the discontinuance of existing and planned future products if the cost were to become prohibitive. We and our manufacturing partners are or will be subject to extensive Chinese government regulation, and the benefit of various incentives from Chinesegovernments that we and our manufacturing partners receive may be reduced or eliminated, which could increase our costs or limit our ability to sell products andconduct 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 broad discretion andauthority to regulate the technology industry in China. Additionally, China’s government has implemented policies from time to time to regulate economic expansion inChina. It exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominatedobligations, 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 Standing Committee of theNational People’s Congress promulgated the Cyber Security Law of the People’s Republic of China (the “Cyber Security Law”), which took effect on June 1, 2017. TheCyber Security Law sets forth various requirements relating to the collection, use, storage, disclosure and security of data, among other things. Various Chineseagencies are expected to issue additional regulations in the future to define these requirements more precisely. These requirements may increase our costs ofcompliance. We cannot assure you that we will be able to comply with all of these regulatory requirements. Any failure to comply with the Cyber Security Law and therelevant regulations and policies could result in further cost and liability to us and could adversely affect our business and results of operations. Additionally, increasedcosts to comply with, and other burdens imposed by, the Cyber Security Law and relevant regulations and policies that are applicable to the businesses of our suppliers,vendors and other service providers, as well as our customers, could adversely affect our business and results of operations. Any additional new regulations or the amendment or modification of previously implemented regulations could require us and our manufacturing partners to change ourbusiness plans, increase our costs, or limit our ability to sell products and conduct activities in China, which could adversely affect our business and operating results. 22Table of Contents The Chinese government and provincial and local governments also have provided, and continue to provide, various incentives to encourage the development of thesemiconductor industry in China. Such incentives include tax rebates, reduced tax rates, favorable lending policies and other measures, some or all of which may beavailable to our manufacturing partners and to us with respect to our facilities in China. Any of these incentives could be reduced or eliminated by governmentalauthorities at any time. Any such reduction or elimination of incentives currently provided to us and our manufacturing partners could adversely affect our businessand operating results. There are inherent risks associated with the operation of our manufacturing and testing facilities in China, which could increase product costs or cause a delay inproduct 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 reasonable cost levels, wemay incur higher costs than our current expense levels, which would affect our gross margins. In addition, if capacity restraints result in significant delays in productshipments, 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 our revenue and grossprofits. Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our gross profits and financial results will suffer if weare unable to offset any reductions in our average selling prices by reducing our costs, developing new or enhanced products on a timely basis with higher sellingprices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own wafer manufacturing or assembly facilities, we may not be ableto reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our profit margins. Because of the lengthy sales cycles for our products and the fixed nature of a significant portion of our expenses, we may incur substantial expenses before we earnassociated revenue and may not ultimately achieve our forecasted sales for our products. The introduction of new products presents significant business challenges because product development plans and expenditures may be made up to two years or morein advance of any sales. It generally takes us up to 12 months or more to design and manufacture a new product prototype. Only after we have a prototype do weintroduce the product to the market and begin selling efforts in an attempt to achieve design wins. This sales process requires us to expend significant sales andmarketing resources without any assurance of success. Volume production of products that use our ICs, if any, may not be achieved for an additional period of time afteran initial sale. Sales cycles for our products are lengthy for a number of reasons, including: •our customers usually complete an in-depth technical evaluation of our products before they place a purchase order; •the commercial adoption of our products by OEMs and ODMs is typically limited during the initial release of their product to evaluate product performance andconsumer 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 are frequently delayed. As a result of our lengthy sales cycles, we may incur substantial expenses before we earn associated revenue because a significant portion of our operating expenses isrelatively fixed and based on expected revenue. The lengthy sales cycles of our products also make forecasting the volume and timing of orders difficult. In addition, thedelays inherent in lengthy sales cycles raise additional risks that customers may cancel or change their orders. Our sales are made by purchase orders. Because industrypractice allows customers to reschedule or cancel orders on relatively short notice, backlog is not always a good indicator of our future sales. If customer cancellationsor product changes occur, we could lose anticipated sales and not have sufficient time to reduce our inventory and operating expenses. 23Table of Contents Our success depends on our investment of significant resources in research and development. We may have to invest more resources in research and developmentthan anticipated, which could increase our operating expenses and negatively impact our operating results. Our success depends on us investing significant amounts of resources into research and development. We expect to have to continue to invest heavily in research anddevelopment in the future in order to continue to innovate and introduce new products in a timely manner and increase our revenue and profitability. If we have toinvest more resources in research and development than we anticipate, we could see an increase in our operating expenses which may negatively impact our operatingresults. Also, if we are unable to properly manage and effectively utilize our research and development resources, we could see material adverse effects on our business,financial condition and operating results. In addition, if new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to investsignificantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantlygreater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. Research anddevelopment expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and theseinvestments may be independent of our level of revenue, which could negatively impact our financial results. In order to remain competitive, we anticipate that we willcontinue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to theincreased complexity and the greater number of products under development. The loss of any of our key personnel or the failure to attract or retain specialized technical and management personnel could affect our operations or impair ourability to grow our business. Our future success depends upon our ability to attract and retain highly qualified technical and managerial personnel. We are particularly dependent on the continuedservices of our key executives, including Michael Hsing, our President and Chief Executive Officer, who founded our company and developed our proprietary processtechnology. In addition, personnel with highly skilled analog and mixed-signal design engineering expertise are scarce and competition for personnel with these skills isintense. There can be no assurance that we will be able to retain existing key employees or that we will be successful in attracting, integrating or retaining other highlyqualified personnel with critical capabilities in the future. If we are unable to retain the services of existing key employees or are unsuccessful in attracting new highlyqualified employees quickly enough to meet the demands of our business, including design cycles, our business could be harmed. Furthermore, if we lose keypersonnel, the search for a qualified replacement and the transition could interrupt our operations as the search could take us longer than expected and divertmanagement resources, and the newly hired employee could take longer than expected to integrate into the team. If we fail to retain key employees in our sales, applications, finance and legal staff or to make continued improvements to our internal systems, particularly in theaccounting and finance area, our business may suffer. If we fail to continue to adequately staff our sales, applications, financial and legal staff, maintain or upgrade our business systems and maintain internal control thatmeet the demands of our business, our ability to operate effectively will suffer. The operation of our business also depends upon our ability to retain these employees,as these employees hold a significant amount of institutional knowledge about us and our products, and, if they were to terminate their employment, our sales andinternal control over financial reporting could be adversely affected. We intend to continue to expand our operations, which may strain our resources and increase our operating expenses. We plan to continue to expand our domestic and foreign operations through internal growth, strategic relationships, and/or acquisitions. We expect that any suchexpansion will strain our systems and operational and financial controls. In addition, we are likely to incur significantly higher operating costs. To manage our growtheffectively, we must continue to improve and expand our systems and controls, as well as hire experienced administrative and financial personnel. If we fail to do so, ourgrowth will be limited. If we fail to effectively manage our planned expansion of operations, our business and operating results may be harmed. We may not realize the anticipated benefits of any company or business that we acquire. In addition, acquisitions could result in diluting the ownership interests ofour stockholders, reduce our cash balances, and cause us to incur debt or to assume contingent liabilities, which could adversely affect our business. We may also bethe target of strategic transactions, which could divert our management’s attention and otherwise disrupt 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 our designcapability or offer other competitive opportunities. As a result of completing acquisitions, we could use a significant portion of our available cash, cash equivalents andshort-term investments, issue equity securities that would dilute current stockholders’ percentage ownership, or incur substantial debt or contingent liabilities. Suchactions could impact our operating results and the price of our common stock. 24Table of Contents In addition, we may be unable to identify or complete prospective acquisitions for various reasons, including competition from other companies in the semiconductorindustry, the valuation expectations of acquisition candidates and applicable antitrust laws or related regulations. If we are unable to identify and complete acquisitions,we may not be able to successfully expand our business and product offerings. We cannot guarantee that any future acquisitions will improve our results of operations or that we will otherwise realize the anticipated benefits of any acquisitions. Inaddition, if we are unsuccessful in integrating any acquired company or business into our operations or if integration is more difficult than anticipated, we mayexperience 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 adverselyaffect our ability to integrate or realize any anticipated benefits from the acquired companies, businesses or assets include those associated with: •unexpected losses of key employees or customers of the acquired companies or businesses; •conforming the acquired company’s standards, processes, procedures and controls with our operations; •coordinating new product and process development; •hiring additional management and other critical personnel; •increasing the scope, geographic diversity and complexity of our operations; •difficulties in consolidating facilities and transferring processes and know-how; •difficulties in the assimilation of acquired operations, technologies or products; •the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or stockholders of acquired companies; •our inability to commercialize acquired technologies; •the risk that the future business potential as projected is not realized and as a result, we may be required to take an impairment charge related to goodwill or acquiredintangibles 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 potential transactions maydiver the attention of management, and cause us to incur various costs and expenses in investigating and evaluating such transactions, whether or not they areconsummated. If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders. We may issue additional shares of common stock in the future in order to raise additional capital to fund our global operations or in connection with an acquisition. Wealso issue RSUs to employees, which convert into shares of common stock upon vesting. Any issuance of our common stock may result in immediate dilution to ourstockholders. In addition, the issuance of a significant amount of our common stock may result in additional regulatory requirements, such as stockholder approval. We compete against many companies with substantially greater financial and other resources, and our market share may be reduced if we are unable to respond toour competitors effectively. The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue. Our ability to compete effectively and toexpand our business will depend on our ability to continue to recruit applications and design talent, our ability to introduce new products, and our ability to maintain therate at which we introduce these new products. We compete with domestic and non-domestic semiconductor companies, many of which have substantially greaterfinancial and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. We are in direct and active competition,with respect to one or more of our product lines, with many manufacturers of such products, of varying size and financial strength. The number of our competitors hasgrown due to the expansion of the market segments in which we participate. 25Table of Contents We cannot assure you that our products will continue to compete favorably, or that we will be successful in the face of increasing competition from new products andenhancements introduced by existing competitors or new companies entering this market, which would materially and adversely affect our results of operations and ourfinancial condition. If securities or industry analysts downgrade our stock or do not continue to publish research or reports about our business, our stock price and trading volume coulddecline. The trading market for our common stock will depend, in part, on the research and reports that industry or securities analysts publish about us or our business. We donot have any control over these analysts. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of theseanalysts 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 ortrading volume to decline. Short positions in our stock could have a substantial impact on the trading price of our stock. Historically, there have been “short” positions in our common stock. The anticipated downward pressure on our stock price due to actual or anticipated sales of ourstock by some institutions or individuals who engage in short sales of our common stock could cause our stock price to decline. Such stock price decreases couldencourage further short-sales that could place additional downward pressure on our stock price. This could lead to further increases in the existing short position in ourcommon stock and cause volatility in our stock price. The volatility of our stock may cause the value of a stockholder’s investment to decline rapidly. Additionally, if ourstock price declines, it may be more difficult for us to raise capital and may have other adverse effects on our business. There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts. We have a dividend program approved by our Board of Directors, pursuant to which we intend to pay quarterly cash dividends on our common stock. The declarationof 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, capitalrequirements, business conditions, and other factors that our Board of Directors may deem relevant, as well as a determination that cash dividends are in the bestinterests of our stockholders. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all orin any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on the price of our common stock. Our worldwide operations are subject to political, economic and health risks and natural disasters, which could have a material adverse effect on our businessoperations. Our office in California, the production facilities of our third-party wafer suppliers, our IC testing and manufacturing facilities, a portion of our assembly and researchand development activities, and certain other critical business operations are located in or near seismically active regions and are subject to periodic earthquakes. We donot maintain earthquake insurance and could be materially and adversely affected in the event of a major earthquake. Much of our revenue, as well as our manufacturersand assemblers, are concentrated in Asia, particularly in China. Such concentration increases the risk that other natural disasters, labor strikes, terrorism, war, politicalunrest, epidemics, and/or health advisories could disrupt our operations. For example, the COVID-19 outbreak first identified in China in December 2019 has resulted insignificant disruptions in business operations and other economic activities in certain parts of the country. The World Health Organization has declared the growingdisease to be a global health emergency, and the U.S. government has issued travel restrictions to and from China. Any of these events may disrupt our ability to staffour business adequately, could generally disrupt our operations, and specifically, any prolonged health threat from COVID-19 globally could have a material adverseimpact on our business operations and results of operations. In addition, we rely heavily on our internal information and communications systems and on systems or support services from third parties to manage our operationsefficiently and effectively. Any of these are subject to failure due to a natural disaster or other disruptions. System-wide or local failures that affect our informationprocessing could have material adverse effects on our business, financial condition, results of operations and cash flows. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 26Table of Contents ITEM 2. PROPERTIES The following table summarizes our significant properties as of December 31, 2019: Location ApproximateBuildingSquare Footage Primary UseOwned: United States: Kirkland, Washington 98,000 Principal executive office, research and development, sales and marketing Livonia, Michigan 40,000 Sales and marketing, research and developmentSan Jose, California 106,000 Research and development, sales and marketing, administrative International: 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 development Leased: Chengdu, China 89,000 Manufacturing operations, inventory warehouseBarcelona, Spain 12,000 Research and development We also lease other sales and marketing, and research and development offices in Asia, Europe and the United States. We believe that our existing facilities are adequatefor 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 stockholders, challenges to the enforceabilityor validity of our intellectual property, claims that our products infringe on the intellectual property rights of others, and employment matters. These proceedings ofteninvolve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. Wedefend ourselves vigorously against any such claims. As of December 31, 2019, there were no material pending legal proceedings to which we were a party. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 27Table 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 19, 2020, there were 23 registered holders of record of our common stock. A substantially greater number of holders of our common stock are “streetname” 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 approved by our Board of Directors, pursuant to which we intend to pay quarterly cash dividends on our common stock. Basedon our historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividends when and if declared byour Board 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 ofoperations, capital requirements, business conditions and other factors that our Board of Directors may deem relevant, as well as a determination that cash dividends arein 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 Nasdaq Composite Index and thePHLX Semiconductor Sector Index. An investment of $100 is assumed to have been made in our common stock on December 31, 2014 and its performance relative to theperformance of a similar investment in the two indexes is shown through December 31, 2019, 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 by reference in futurefilings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it byreference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934. 28Table 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 Condition and Results ofOperations” and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K to fully understand factors thatmay affect the comparability of the information presented below. We derived the selected consolidated balance sheet data as of December 31, 2019 and 2018, and theconsolidated statement of operations data for the years ended December 31, 2019, 2018 and 2017 from our audited consolidated financial statements and accompanyingnotes included in this Annual Report on Form 10-K. The consolidated balance sheet data as of December 31, 2017, 2016 and 2015, and the consolidated statement ofoperations data for the years ended December 31, 2016 and 2015 are derived from our audited consolidated financial statements which are not included in thisreport. Operating results for any year are not necessarily indicative of results to be expected for any future periods. Consolidated Statement of Operations Data: Year Ended December 31, 2019 2018 2017 2016 2015 (in thousands, except per share amounts) Revenue $627,921 $582,382 $470,929 $388,665 $333,067 Cost of revenue 281,596 259,714 212,646 177,792 152,898 Gross profit 346,325 322,668 258,283 210,873 180,169 Operating expenses: Research and development 107,757 93,455 82,359 73,643 65,787 Selling, general and administrative 133,542 113,803 97,257 83,012 72,312 Litigation expense (benefit), net 2,464 1,922 1,243 (229) 1,000 Total operating expenses 243,763 209,180 180,859 156,426 139,099 Income from operations 102,562 113,488 77,424 54,447 41,070 Interest and other income, net 10,558 4,994 5,520 2,817 1,421 Income before income taxes 113,120 118,482 82,944 57,264 42,491 Income tax expense 4,281 13,214 17,741 4,544 7,319 Net income $108,839 $105,268 $65,203 $52,720 $35,172 Net income per share: Basic $2.52 $2.49 $1.58 $1.30 $0.89 Diluted $2.38 $2.36 $1.50 $1.26 $0.86 Weighted-average shares outstanding: Basic 43,165 42,247 41,350 40,436 39,470 Diluted 45,763 44,602 43,578 41,915 40,869 Cash dividends declared per common share $1.60 $1.20 $0.80 $0.80 $0.80 Consolidated Balance Sheet Data: December 31, 2019 2018 2017 2016 2015 (in thousands) Cash and cash equivalents $172,960 $172,704 $82,759 $112,703 $90,860 Short-term investments $282,437 $204,577 $216,331 $155,521 $144,103 Total assets $956,375 $793,432 $652,569 $511,126 $431,285 Common stock and additional paid-in capital $549,517 $450,908 $376,586 $315,969 $265,763 Total stockholders' equity $773,491 $640,093 $522,007 $431,116 $368,516 Working capital $556,981 $500,371 $383,253 $330,063 $288,645 29Table 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 this Annual Reporton Form 10-K. Overview We are a leading semiconductor company that designs, develops and markets high-performance power solutions. Incorporated in 1997, MPS’s core strengths includedeep system-level and applications knowledge, strong analog design expertise and an innovative proprietary process technology. These combined strengths enableMPS 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. Our mission is to reduce total energy consumption in our customers’ systems with green, practicaland compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy-efficient, moreaccurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce newproducts within our existing product families, as well as in new innovative product categories. We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and future industry downturns,but we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term. We work with third parties to manufacture and assemble our ICs. This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineeringand design resources on our core strengths. Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up.Typical lead times for orders are generally 8 to 16 weeks. These factors, combined with the fact that orders in the semiconductor industry can typically be cancelled orrescheduled 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 incorporated into end-userproducts. Our revenue from direct or indirect sales to customers in Asia was 89%, 88% and 89% for the years ended December 31, 2019, 2018 and 2017, respectively. Wederive a majority of our revenue from the sales of our DC to DC converter products which serve the computing and storage, automotive, industrial, communications andconsumer markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gainmarket share, manage litigation risk, diversify our customer base and continue to secure manufacturing capacity. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared inaccordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make estimates and judgments thataffect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, inventories, income taxes and contingencies. We base our estimates onhistorical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making thejudgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments used in the preparation of ourfinancial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand forour products and economic conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, fromthese estimates. We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financial statements. Revenue Recognition We generate revenue primarily from product sales, which include assembled and tested integrated circuits, as well as dies in wafer form. These product sales were 99%,98% and 98% of our total revenue for the years ended December 31, 2019, 2018 and 2017, respectively. The remaining revenue primarily includes royalty revenue fromlicensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periods presented. 30Table of Contents We recognize revenue from product sales when we satisfy a performance obligation by transferring control of the promised goods or services to our customers, in anamount 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 end customerswhen 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 haslegal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. In accordance with the shipping terms specified in thecontracts, 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’ designated locations becausewe continue to control the products and retain ownership, and the customers do not have an unconditional obligation to pay. We recognize revenue when thecustomers consume the products from the consigned inventory locations or, in some cases, after a 60-day period from the delivery date has passed, at which timecontrol 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 the same periodthe associated revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell our products to their end customers at a price that islower than the distribution price invoiced by us. When we receive claims from the distributors that products have been sold to the end customers at the lower price, weissue the distributors credit memos for the price adjustments. We estimate the price adjustments using the expected value method based on an analysisof historical claims, at both the distributor and product level, as well 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 our total sales to distributors, do not have price adjustment rights. We record a credit against accounts receivable forthe estimated price adjustments, with a corresponding reduction to revenue. Certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases in accordance with the contractterms. We estimate the stock rotation returns using the expected value method based on an analysis of historical returns, and the current level of inventory in thedistribution channel. We record a liability for the stock rotation reserve, with a corresponding reduction to revenue. In addition, we recognize an asset for productreturns which represents the right to recover products from the customers related to stock rotations, with a corresponding reduction to cost of revenue. We pay sales commissions based on the achievement of pre-determined product sales targets. We have elected the practical expedient to expense sales commissions asincurred because the amortization period would have been one year or less. 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 net realizable value. Wewrite down excess and obsolete inventories based on assumptions about future demand and market conditions. If actual demand or market conditions are less favorablethan those projected by management, additional inventory write-downs may be required. Conversely, if actual demand or market conditions are more favorable,inventories may be sold that were previously written down. 31Table of Contents Accounting for Income Taxes We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction.We also recognize federal, state and foreign deferred tax assets or liabilities for our estimate of future tax effects attributable to temporary differences and carryforwards.We record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected tobe realized. Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application ofcomplex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty, finality or uncertainty to an anticipatedoutcome, changes in accounting or tax laws in the U.S. or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognizeliabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on our tax returns if it has less than a 50% likelihood of being sustained. If wedetermine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an incometax benefit or additional income tax expense in our financial statements in the period such determination is made. We have calculated our uncertain tax positions whichwere attributable to certain estimates and judgments. As of December 31, 2019 and 2018, we had a valuation allowance of $15.4 million and $13.0 million, respectively, attributable to management’s determination that it ismore likely than not that certain deferred tax assets will not be fully realized. In the event we determine that it is more likely than not that we would be able to realize thedeferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance for the deferred tax assets would increase income in theperiod such determination 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 stockholders and our intellectual property,challenges to the enforceability or validity of our intellectual property, claims that our products infringe on the intellectual property rights of others, and employmentmatters. The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources toprosecute and defend. In addition, from time to time, we become aware that we are subject to other contingent liabilities. When this occurs, we will evaluate theappropriate accounting for the potential contingent liabilities to determine whether a contingent liability should be recorded. In making this determination, managementmay, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the facts and circumstances in each matter,we use our judgment to determine whether it is probable that a contingent loss has occurred and whether the amount of such loss can be estimated. If we determine aloss is probable and estimable, we record a contingent loss. In determining the amount of a contingent loss, we take into account advice received from experts for eachspecific matter regarding 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 materially and adverselyimpact our results of operations. Alternatively, if the judgments and estimates made by management are adjusted, for example, if a particular contingent loss does notoccur, the contingent loss recorded would be reversed which could result in a favorable impact on our results of operations. 32Table of Contents Stock-Based Compensation We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair value ofRSUs with service conditions or performance conditions is based on the grant date share price. The fair value of shares issued under the employee stock purchase plan(“ESPP”) and RSUs with a purchase price feature is estimated using the Black-Scholes model. The fair value of RSUs with market conditions, as well as RSUs containingboth market and performance conditions, is estimated using a Monte Carlo simulation model. Compensation expense related to awards with service conditions is recorded on a straight-line basis over the requisite service period. Compensation expense related toawards subject to market or performance conditions is recognized over the requisite service period for each separately vesting tranche. For awards with only marketconditions, compensation expense is not reversed if the market conditions are not satisfied. For awards with performance conditions, as well as awards containing bothmarket and performance conditions, we recognize compensation expense when the performance goals are achieved, or when it becomes probable that the performancegoals will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external factors, such as macroeconomic conditions and theanalog industry revenue forecasts, and internal factors, such as our business and operational objectives and revenue forecasts. Changes in the probability assessmentof achievement of the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new estimate had beenapplied since the service inception date. If the projected achievement was revised upward or if the actual results were higher than the projected achievement, additionalcompensation expense would be recorded for the awards due to the cumulative catch-up adjustment, which would have an adverse impact on our results of operations.Conversely, if the projected 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 compensation expense issubject to volatility and may fluctuate significantly each quarter due to changes in our probability assessment of achievement of the performance conditions or actualresults being different from projections made by management. 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 pronouncements not yetadopted as of December 31, 2019. Results of Operations The following table summarizes our results of operations: Year Ended December 31, 2019 2018 2017 (in thousands, except percentages) Revenue $627,921 100.0% $582,382 100.0% $470,929 100.0%Cost of revenue 281,596 44.8 259,714 44.6 212,646 45.2 Gross profit 346,325 55.2 322,668 55.4 258,283 54.8 Operating expenses: Research and development 107,757 17.2 93,455 16.0 82,359 17.5 Selling, general and administrative 133,542 21.3 113,803 19.5 97,257 20.7 Litigation expense 2,464 0.4 1,922 0.4 1,243 0.2 Total operating expenses 243,763 38.9 209,180 35.9 180,859 38.4 Income from operations 102,562 16.3 113,488 19.5 77,424 16.4 Interest and other income, net 10,558 1.7 4,994 0.9 5,520 1.2 Income before income taxes 113,120 18.0 118,482 20.4 82,944 17.6 Income tax expense 4,281 0.7 13,214 2.3 17,741 3.8 Net income $108,839 17.3% $105,268 18.1% $65,203 13.8% 33Table of Contents Revenue The following table summarizes our revenue by end market: Year Ended December 31, Change End Market 2019 % ofRevenue 2018 % ofRevenue 2017 % ofRevenue From 2018to 2019 From 2017to 2018 (in thousands, except percentages) Computing and storage $189,215 30.1% $159,121 27.3% $100,782 21.4% 18.9% 57.9%Automotive 90,303 14.4 80,078 13.8 53,888 11.4 12.8% 48.6%Industrial 99,381 15.8 88,472 15.2 62,896 13.4 12.3% 40.7%Communications 84,794 13.5 70,589 12.1 63,606 13.5 20.1% 11.0%Consumer 164,228 26.2 184,122 31.6 189,757 40.3 (10.8)% (3.0)%Total $627,921 100.0% $582,382 100.0% $470,929 100.0% 7.8% 23.7% Revenue for the year ended December 31, 2019 was $627.9 million, an increase of $45.5 million, or 7.8%, from $582.4 million for the year ended December 31, 2018. Thisincrease was driven by higher sales in all of our end markets except for the consumer market. Overall unit shipments increased by 8% due to higher market demand andaverage sales prices were essentially flat compared to the same period in 2018. For the year ended December 31, 2019, revenue from the communications market increased $14.2 million, or 20.1%, from the same period in 2018. This increase wasprimarily driven by higher demand in infrastructure sales including the 5G network. Revenue from the computing and storage market increased $30.1 million, or 18.9%,from the same period in 2018. This increase was primarily driven by strength in the high-performance notebook and cloud computing markets, which was partially offsetby lower demand in the solid-state drive storage market. Revenue from the automotive market increased $10.2 million, or 12.8%, from the same period in 2018. Thisincrease was primarily driven by higher sales of products for infotainment applications. Revenue from the industrial market increased $10.9 million, or 12.3%, from thesame period in 2018. This increase was primarily driven by higher sales in power source and security products. Revenue from the consumer market decreased $19.9million, or 10.8%, from the same period in 2018. This decrease was primarily due to a decrease in demand for high volume consumer-related products, as well as lowersales from specialty lighting, chargers and gaming products. This decrease was partially offset by higher demand for wearables and home appliance products. 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 ended December 31, 2017. Thisincrease was driven by higher sales in all of our end markets except for the consumer market. Overall unit shipments increased by 19% due to higher market demand andaverage sales prices increased by 4% from the same period in 2017. For the year ended December 31, 2018, revenue from the computing and storage market increased $58.3 million, or 57.9%, from the same period in 2017. This increase wasprimarily driven by strength in the solid-state drive storage, cloud computing and high-performance notebook markets. Revenue from the 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 for infotainment, safety and connectivityapplications. 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 inpower source, security and meter products. Revenue from the communications market increased $7.0 million, or 11.0%, from the same period in 2017. This increase wasprimarily driven by higher demand in networking applications. Revenue from the consumer market decreased $5.6 million, or 3.0%, from the same period in 2017. Thisdecrease was primarily due to softness in demand for high volume consumer-related products, particularly those sold in the greater China region. This decrease waspartially offset by higher demand for products related to home appliance, specialty lighting and internet-of-things applications. Cost of Revenue and Gross Margin Cost of revenue primarily consists of costs incurred to manufacture, assemble and test our products, as well as warranty costs, inventory-related and other overheadcosts, and stock-based compensation expenses. Year Ended December 31, Change 2019 2018 2017 From 2018 to2019 From 2017 to2018 (in thousands, except percentages) Cost of revenue $281,596 $259,714 $212,646 8.4% 22.1%As a percentage of revenue 44.8% 44.6% 45.2% Gross profit $346,325 $322,668 $258,283 7.3% 24.9%Gross margin 55.2% 55.4% 54.8% 34Table of Contents Cost of revenue was $281.6 million, or 44.8% of revenue, for the year ended December 31, 2019, and $259.7 million, or 44.6% of revenue, for the year ended December 31,2018. The $21.9 million increase in cost of revenue was primarily due to an 8% increase in overall unit shipments and a 6% increase in the average direct cost of unitsshipped. The increase in cost of revenue was partially offset by a decrease in inventory write-downs and warranty expenses. Gross margin was 55.2% for the year ended December 31, 2019, compared with 55.4% for the year ended December 31, 2018. The decrease in gross margin was primarilydue to increased sales of lower margin products, which was partially offset by lower inventory write-downs and warranty expenses as a percentage of revenue. 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 year ended December 31,2017. The $47.1 million increase in cost of revenue was primarily due to a 19% increase in overall unit shipments, which was partially offset by a 1% decrease in theaverage direct cost of units shipped. The increase in cost of revenue was also driven by a $10.5 million increase in inventory write-downs, a $2.1 million increase inwarranty expenses, and a $1.7 million increase in manufacturing overhead costs, which was partially offset by a $1.2 million decrease in amortization expense as certainintangible 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 margin was primarilydue to increased sales of higher margin products and lower manufacturing overhead costs as a percentage of revenue, which was partially offset by higher inventorywrite-downs as a percentage of revenue. Research and Development (“R&D”) R&D expenses primarily consist of salary and benefit expenses, bonuses, stock-based compensation and deferred compensation for design and product engineers,expenses related to new product development and supplies, and facility costs. Year Ended December 31, Change 2019 2018 2017 From 2018 to2019 From 2017 to2018 (in thousands, except percentages) R&D expenses $107,757 $93,455 $82,359 15.3% 13.5%As a percentage of revenue 17.2% 16.0% 17.5% R&D expenses were $107.8 million, or 17.2% of revenue, for the year ended December 31, 2019, and $93.5 million, or 16.0% of revenue, for the year ended December 31,2018. The $14.3 million increase in R&D expenses was primarily due to an increase of $4.6 million in compensation expenses, which include salary, benefits and bonuses,an increase of $3.6 million in stock-based compensation expenses, which were mainly associated with performance-based equity awards, an increase of $2.4 million innew product development expenses, and an increase of $1.8 million in expenses related to changes in the value of the deferred compensation plan liabilities. Our R&Dheadcount was 839 employees as of December 31, 2019, compared with 710 employees as of December 31, 2018. 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 ended December 31,2017. The $11.1 million increase in R&D expenses was primarily due to an increase of $6.9 million in compensation expenses, which include 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-basedcompensation expenses mainly associated with performance-based equity awards. These increases were partially offset by an increase of $1.4 million in income relatedto changes in the value of the deferred compensation plan liabilities. Our R&D headcount was 710 employees as of December 31, 2018, compared with 629 employees asof December 31, 2017. 35Table of Contents Selling, General and Administrative (“SG&A”) SG&A expenses primarily include salary and benefit expenses, bonuses, stock-based compensation and deferred compensation for sales, marketing and administrativepersonnel, sales commissions, travel expenses, facilities costs, and professional service fees. Year Ended December 31, Change 2019 2018 2017 From 2018 to2019 From 2017 to2018 (in thousands, except percentages) SG&A expenses $133,542 $113,803 $97,257 17.3% 17.0%As a percentage of revenue 21.3% 19.5% 20.7% SG&A expenses were $133.5 million, or 21.3% of revenue, for the year ended December 31, 2019, and $113.8 million, or 19.5% of revenue, for the year ended December 31,2018. The $19.7 million increase in SG&A expenses was primarily due to an increase of $14.0 million in stock-based compensation expenses, which were mainlyassociated with performance-based equity awards, an increase of $2.8 million in compensation expenses, which include salary, benefits and bonuses, and an increase of$2.7 million in expenses related to changes in the value of the deferred compensation plan liabilities. Our SG&A headcount was 503 employees as of December 31, 2019,compared with 433 employees as of December 31, 2018. 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 year ended 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 compensation expenses mainly associated withperformance-based equity awards, an increase of $5.0 million in compensation expenses, which include salary, benefits and bonuses, and an increase of $4.0 million incommission 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 thedeferred compensation plan liabilities. Our SG&A headcount was 433 employees as of December 31, 2018, compared with 389 employees as of December 31, 2017. Litigation Expense Litigation expense was $2.5 million for the year ended December 31, 2019, compared with $1.9 million for the year ended December 31, 2018. The increase was primarilydue to an ongoing lawsuit in which we are the plaintiff. 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. The increase was primarilydue to an ongoing lawsuit in which we are the plaintiff. Interest and Other Income, Net Interest and other income, net, was $10.6 million for the year ended December 31, 2019, compared with $5.0 million for the year ended December 31, 2018. The increasewas primarily due to an increase of $4.8 million in income related to changes in the value of the deferred compensation plan investments, an increase of $1.0 million ininterest income as a result of higher investment balances and yields, and a decrease of $0.6 million in amortization of premium on available-for-sale securities. Thesefavorable changes were partially offset by an increase of $1.3 million in foreign currency exchange losses. 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 decreasewas 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 partiallyoffset by an increase of $1.5 million in foreign currency exchange gains, an increase of $1.0 million in interest income as a result of higher investment balances andyields, and a decrease of $0.6 million in amortization of premium on available-for-sale securities. Income Tax Provision The income tax expense for the year ended December 31, 2019 was $4.3 million, or 3.8% of pre-tax income. The effective tax rate differed from the federal statutory rateprimarily due to foreign income from our subsidiaries in Bermuda and China being taxed at lower statutory tax rates, the impact of certain tax credits and excess taxbenefits from stock-based compensation. The decrease in the effective tax rate relative to the federal statutory rate was partially offset by the inclusion of the globalintangible low-taxed income (“GILTI”) tax. The income tax expense for the year ended December 31, 2018 was $13.2 million, or 11.2% of pre-tax income. The effective tax rate differed from the federal statutory rateprimarily due to foreign income from our subsidiaries in Bermuda and China being taxed at lower statutory tax rates. The decrease in the effective tax rate relative to thefederal statutory rate was partially offset by the inclusion of the GILTI tax. The income tax expense for the year ended December 31, 2017 was $17.7 million, or 21.4% of pre-tax income. The effective tax rate differed from the federal statutory rateprimarily due to foreign income from our subsidiaries in Bermuda and China being taxed at lower rates and the release of the U.S. valuation allowance. The decrease inthe effective tax rate relative to the federal statutory rate was partially impacted by the effects of the 2017 Tax Act, including the remeasurement of deferred taxes and theone-time deemed repatriation transition tax. 36Table of Contents See Note 12 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. Liquidity and Capital Resources December 31, 2019 2018 (in thousands, except percentages) Cash and cash equivalents $172,960 $172,704 Short-term investments 282,437 204,577 Total cash, cash equivalents and short-term investments $455,397 $377,281 Percentage of total assets 47.6% 47.6% Total current assets $655,206 $580,810 Total current liabilities (98,225) (80,439)Working capital $556,981 $500,371 As of December 31, 2019, we had cash and cash equivalents of $173.0 million and short-term investments of $282.4 million, compared with cash and cash equivalents of$172.7 million and short-term investments of $204.6 million as of December 31, 2018. As of December 31, 2019, $99.5 million of cash and cash equivalents and $186.7million of short-term investments were held by our international subsidiaries. For the year ended December 31, 2019, we repatriated $75 million of cash from our Bermudasubsidiary to the U.S. The proceeds were primarily used to fund real estate purchases and cash dividend payments. We may repatriate additional cash from our Bermudasubsidiary to fund our expenditures in future periods. We anticipate that earnings from other foreign subsidiaries will continue to be indefinitely reinvested. The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories and other current assets,reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of December 31, 2019, we had working capital of$557.0 million, compared with working capital of $500.4 million as of December 31, 2018. The $56.6 million increase in working capital was due to a $74.4 million increase incurrent assets, which was partially offset by a $17.8 million increase in current liabilities. The increase in current assets was primarily due to an increase in short-terminvestments and other current assets, which was partially offset by a decrease in inventories. The increase in current liabilities was primarily due to an increase inaccounts payable, 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, 2019 2018 2017 2019 2018 2017 (in thousands) Net cash provided by operating activities $216,303 $141,451 $133,821 Net cash used in investing activities (167,112) (14,740) (134,060)Net cash used in financing activities (48,050) (34,559) (31,325)Effect of change in exchange rates (883) (2,208) 1,625 Net increase (decrease) in cash, cash equivalents and restricted cash $258 $89,944 $(29,939) For the year ended December 31, 2019, net cash provided by operating activities was $216.3 million, primarily due to our net income adjusted for certain non-cash items,including depreciation and amortization and stock-based compensation, and a net increase of $17.8 million from the changes in our operating assets and liabilities. Theincrease in other assets was primarily due to an increase in prepaid income taxes and an increase in certain tax withholding proceeds receivable related to RSUs thatvested at the end of the year. The increase in other accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensationplan. The decrease in inventories was primarily driven by a decrease in wafer and die purchases. 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 certain non-cash items,including depreciation and amortization and stock-based compensation, and a net decrease of $37.5 million from the changes in our operating assets and liabilities. Theincrease in accounts receivable was primarily driven by increased sales. The increase in inventories was primarily driven by an increase in strategic wafer and dieinventories as well as an increase in finished goods to meet current demand and future growth. The increase in accrued liabilities was primarily driven by an increase inemployee 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 certain non-cash items,including depreciation and amortization, stock-based compensation and deferred taxes, and a net increase of $15.7 million from the changes in our operating assets andliabilities. The increase in deferred taxes was primarily due to the release of the U.S. valuation allowance, partially offset by the remeasurement of the deferred tax balancein the fourth quarter of 2017 as a result of the 2017 Tax Act. The increase in accounts receivable was primarily driven by higher sales. The increase in inventories wasprimarily driven by an increase in strategic wafer and die inventories as well as an increase in finished goods to meet current demand and future growth. The increase inaccounts payable was primarily driven by increased inventory and capital asset purchases to meet future demand. The increase in accrued liabilities was primarily drivenby an increase in employee contributions to the deferred compensation plan and warranty expenses. The increase in income tax liabilities was primarily driven by theone-time deemed repatriation transition tax liability recorded in the fourth quarter of 2017. For the year ended December 31, 2019, net cash used in investing activities was $167.1 million, primarily due to purchases of property and equipment of $95.8 million, netpurchases of short-term investments of $76.8 million and net contributions to the deferred compensation plan of $3.1 million. These cash outflows were partially offsetby proceeds from sales of property and equipment of $9.3 million. For the year ended December 31, 2018, net cash used in investing activities was $14.7 million, primarilydue 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 netsales of investments of $11.9 million. For the year ended December 31, 2017, net cash used in investing activities was $134.1 million, primarily due to purchases ofproperty and equipment of $65.8 million, net purchases of short-term investments of $63.0 million, and net contributions to the deferred compensation plan of $5.3million. For the year ended December 31, 2019, we funded the purchases of properties in Kirkland, Washington and Livonia, Michigan for $57.4 million. We did not purchase anysignificant properties for the year ended December 31, 2018. For the year ended December 31, 2017, we funded the purchases of land in Kirkland, Washington, officespace in Shanghai and Hangzhou, China, and land and office space in Taipei, Taiwan for $53.8 million. For the year ended December 31, 2019, net cash used in financing activities was $48.1 million, primarily reflecting $67.3 million used to pay dividends to our stockholdersand dividend equivalents to our employees who hold RSUs, which was partially offset by $19.9 million of cash proceeds from the vesting of RSUs and the issuance ofshares through our ESPP. For the year ended December 31, 2018, net cash used in financing activities was $34.6 million, primarily reflecting $47.5 million used to paydividends to our stockholders and dividend equivalents to our employees who hold RSUs, which was partially offset by $13.6 million of cash proceeds from the vestingof RSUs and the issuance of shares through our ESPP. 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 cashproceeds from stock option exercises and the issuance of shares through our ESPP. In February 2020, our Board of Directors approved an increase in our quarterly cash dividends from $0.40 per share to $0.50 per share. We anticipate that cash used for future dividends and dividend equivalent payments, as well as payments for the one-time deemed repatriation transition tax and otherexpenditures, will come from our domestic cash, cash generated from ongoing U.S. operations, and cash repatriated from our Bermuda subsidiary. Earnings from otherforeign subsidiaries will continue to be indefinitely reinvested. Although cash requirements will fluctuate based on the timing and extent of many factors such as those discussed above, we believe that cash generated fromoperations, together with the liquidity provided by existing cash balances and short-term investments, will be sufficient to satisfy our liquidity requirements for the next12 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 needto discontinue paying dividends and dividend equivalents, and may need to raise additional funds by any one or a combination of the following: issuing equitysecurities, issuing debt or convertible debt securities, incurring indebtedness secured by our assets, or selling certain product lines and/or portions of our business.Accordingly, we cannot ensure that we will continue to pay dividends and dividend equivalents in the future, and there can be no guarantee that we will be able to raiseadditional funds on terms acceptable to us, or at all. From time to time, we have engaged in discussions with third parties concerning potential acquisitions of product lines, technologies, businesses and companies, andwe continue to consider potential acquisition candidates. Any such transactions could involve the issuance of a significant number of new equity securities,assumptions of debt, and/or payment of cash consideration. We may also be required to raise additional funds to complete any such acquisitions, through either theissuance of equity and debt securities or incurring indebtedness secured by our assets. If we raise additional funds or acquire businesses or technologies through theissuance of equity securities or convertible debt securities, our existing stockholders may experience significant dilution. 38Table of Contents Contractual Obligations The following table summarizes our contractual obligations at December 31, 2019: Payment Due by Period Total Less Than1 Year 1 - 3 Years 3 - 5 Years More Than5 years (in thousands) Operating lease obligations (1) $2,717 $1,571 $1,124 $22 $- Outstanding purchase commitments (2) 90,613 79,937 9,826 300 550 Transition tax liability (3) 20,705 1,972 3,944 8,627 6,162 Other long-term obligations (4) 45,930 - 9,304 11,506 25,120 Total $159,965 $83,480 $24,198 $20,455 $31,832 (1)Operating lease obligations represent the undiscounted remaining lease payments. While we have elected not to record short-term leases with a term of 12 monthsor less at the commencement date on the Consolidated Balance Sheets, the remaining obligations for these leases are included in the table above. (2)Outstanding purchase commitments represent our obligations with our suppliers and other parties that require the future purchases of goods or services, whichprimarily consist of wafer and other inventory purchases, assembly and other manufacturing services, construction or purchases of property and equipment, andlicense arrangements. (3)The transition tax liability represents the one-time, mandatory deemed repatriation tax imposed on previously deferred foreign earnings under the 2017 Tax Act. Aspermitted by the 2017 Tax Act, we have elected to pay the tax liability in installments on an interest-free basis through 2025. (4)Other long-term obligations include long-term liabilities reflected on our Consolidated Balance Sheets, which primarily consist of the deferred compensation planliabilities and accrued dividend equivalents. Because of the uncertainty as to the timing of payments related to our liabilities for unrecognized tax benefits, we haveexcluded estimated obligations of $18.9 million from the table above. Off Balance Sheet Arrangements As of December 31, 2019, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Our cash equivalents and short-term investments are subject to market risk, primarily interest rate and credit risk. Our investments are managed by outside professionalmanagers within investment guidelines set by management and approved by our Board of Directors. Such guidelines include security type, credit quality and maturityand are intended to limit market risk by restricting our investments to high quality debt instruments with relatively short-term maturities. Based on our investmentpositions as of December 31, 2019, a 10% decline in interest rates would impact our results of operations by approximately $0.7 million in interest income. We do not use derivative financial instruments in our investment portfolio. Investments in debt securities are classified as available-for-sale, which are reported at fairvalue with the unrealized gains or losses being included in accumulated other comprehensive income (loss), a component of stockholders’ equity. When the fair value ofan investment is below its amortized cost basis, no realized losses are recognized in our results of operations due to changes in interest rates (i.e., non-credit lossfactors) unless we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities before recovery of the entire amortizedcost basis. 39Table of Contents Long-Term Investments As of December 31, 2019, our holdings in auction-rate securities had a face value of $3.4 million and a fair value of $3.1 million. The decline in the fair value could impactour operating results by $0.2 million if we have the intent to sell the securities, it is more likely than not that we will be required to sell the securities before recovery ofthe entire amortized cost basis, or the decline in value is related to credit loss factors. An additional 10% decline in the fair value could further impact our operatingresults by $0.3 million. To date, we have redeemed $40.0 million, or 92% of the original portfolio in these securities, 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 generally impacted byforeign currency rate changes. The functional currency of the Company’s offshore operations is generally the local currency, primarily including the Renminbi, the NewTaiwan Dollar and the Euro. In addition, we incur foreign currency exchange gains or losses related to certain intercompany transactions between the U.S. and ourforeign subsidiaries that are denominated in a currency other than the functional currency. Gains or losses from the settlement and remeasurement of the balances arereported in interest and other income, net. Fluctuations in foreign currency exchange rates have not had a material impact on our results of operations in any of theperiods presented. 40Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED FINANCIAL STATEMENTS Contents PageReports of Independent Registered Public Accounting Firm (Ernst & Young LLP)42Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP)45Consolidated Balance Sheets46Consolidated Statements of Operations47Consolidated Statements of Comprehensive Income48Consolidated Statements of Stockholders’ Equity49Consolidated Statements of Cash Flows50Notes to Consolidated Financial Statements51 41Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Monolithic Power Systems, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Monolithic Power Systems Inc. (the Company) as of December 31, 2019, the related consolidatedstatements of operations, comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2019, and the related notes (collectivelyreferred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial positionof the Company at December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with U.S. generallyaccepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal controlover financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (2013 framework) and our report dated February 28, 2020 expressed an unqualified opinion thereon. 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 financial statementsbased on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance withthe U.S. federal securities laws and the applicable 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 reasonable assuranceabout whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks ofmaterial misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principlesused and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides areasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to becommunicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especiallychallenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, takenas a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure towhich it relates. 42Table of Contents Inventory Valuation Description of the MatterThe Company’s inventories totaled $127.5 million as of December 31, 2019, representing 13.3% of total assets. As explained in Note 1 to theconsolidated financial statements, the Company values inventories at the lower of standard cost (which approximates actual costdetermined on a first-in first-out basis) and estimated net realizable value in each reporting period. Excess and obsolete inventory is writtendown to its estimated net realizable value if less than cost. Auditing management’s estimates for excess and obsolete inventory involved subjective auditor judgment because management’sassessment of whether a write down is required and the measurement of any excess of cost over net realizable value is judgmental andconsiders a number of qualitative factors that are affected by market and economic conditions outside the Company’s control. In particular,the excess and obsolete inventory calculations are sensitive to significant assumptions, including demand for the Company’s products,which considers adjustments to sales forecasts for specific product considerations, including but not limited to new product launches andexpected industry sales growth. How We Addressed theMatter in Our AuditWe obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company'sexcess and obsolete inventory reserve process. This included controls over management’s assessment of inventory valuation, includingthe determination of forecasted usage of inventories and how factors outside of the Company’s control might affect management’sjudgment related to the valuation of excess and obsolete inventory. Our substantive audit procedures included, among others, evaluating the significant assumptions stated above and testing thecompleteness and accuracy of the underlying data used in management’s excess and obsolete inventory valuation assessment. Weevaluated inventory levels compared to forecasted product demand, historical sales and specific product considerations. We alsoassessed the historical accuracy of management’s estimates and performed sensitivity analyses over the significant assumptions toevaluate the changes in the excess and obsolete inventory estimates that would result from changes in the underlying assumptions. /s/ Ernst & Young LLP We have served as the Company's auditor since 2019. San Jose, California February 28, 2020 43Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Monolithic Power Systems, Inc. Opinion on Internal Control Over Financial Reporting We have audited Monolithic Power Systems Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion,Monolithic Power Systems Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based onthe COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetof the Company as of December 31, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the yearended December 31, 2019, and the related notes and our report dated February 28, 2020 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express anopinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required tobe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission 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 reasonable assuranceabout whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating thedesign and operating 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 reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. /s/ Ernst & Young LLP San Jose, CaliforniaFebruary 28, 2020 44Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Monolithic Power Systems, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Monolithic Power Systems, Inc. and subsidiaries (the “Company”) as of December 31, 2018, therelated consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31,2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for each of the two years in the period ended December31, 2018, in conformity with accounting principles generally accepted in the United States of America. 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 financial statementsbased on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks ofmaterial misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principlesused and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide areasonable basis for our opinion. /s/ Deloitte & Touche LLP San Jose, California March 1, 2019 We began serving as the Company’s auditor in 1999. In 2019 we became the predecessor auditor. 45Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except par value) December 31, 2019 2018 ASSETS Current assets: Cash and cash equivalents $172,960 $172,704 Short-term investments 282,437 204,577 Accounts receivable, net 52,704 55,214 Inventories 127,500 136,384 Other current assets 19,605 11,931 Total current assets 655,206 580,810 Property and equipment, net 228,315 150,001 Long-term investments 3,138 3,241 Goodwill 6,571 6,571 Deferred tax assets, net 17,193 16,830 Other long-term assets 45,952 35,979 Total assets $956,375 $793,432 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $27,271 $22,678 Accrued compensation and related benefits 26,164 18,799 Other accrued liabilities 44,790 38,962 Total current liabilities 98,225 80,439 Income tax liabilities 37,596 34,375 Other long-term liabilities 47,063 38,525 Total liabilities 182,884 153,339 Commitments and contingencies Stockholders’ equity: Common stock and additional paid-in capital: $0.001 par value; shares authorized: 150,000; shares issued andoutstanding: 43,616 and 42,505, respectively 549,517 450,908 Retained earnings 229,450 194,728 Accumulated other comprehensive loss (5,476) (5,543)Total stockholders’ equity 773,491 640,093 Total liabilities and stockholders’ equity $956,375 $793,432 See accompanying notes to consolidated financial statements. 46Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Year Ended December 31, 2019 2018 2017 Revenue $627,921 $582,382 $470,929 Cost of revenue 281,596 259,714 212,646 Gross profit 346,325 322,668 258,283 Operating expenses: Research and development 107,757 93,455 82,359 Selling, general and administrative 133,542 113,803 97,257 Litigation expense 2,464 1,922 1,243 Total operating expenses 243,763 209,180 180,859 Income from operations 102,562 113,488 77,424 Interest and other income, net 10,558 4,994 5,520 Income before income taxes 113,120 118,482 82,944 Income tax expense 4,281 13,214 17,741 Net income $108,839 $105,268 $65,203 Net income per share: Basic $2.52 $2.49 $1.58 Diluted $2.38 $2.36 $1.50 Weighted-average shares outstanding: Basic 43,165 42,247 41,350 Diluted 45,763 44,602 43,578 See accompanying notes to consolidated financial statements. 47Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Year Ended December 31, 2019 2018 2017 Net income $108,839 $105,268 $65,203 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (1,706) (7,082) 6,369 Change in unrealized gain (loss) on available-for-sale securities, net of tax of $(203), $209and $0, respectively 1,773 (274) (341)Other comprehensive income (loss), net of tax 67 (7,356) 6,028 Comprehensive income $108,906 $97,912 $71,231 See accompanying notes to consolidated financial statements. 48Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands, except per share amounts) Accumulated Common Stock and Other Total Additional Paid-in Capital Retained Comprehensive Stockholders’ Shares Amount Earnings Income (Loss) Equity Balance as of January 1, 2017 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 per share) - - (35,816) - (35,816)Common stock issued under the employee equity incentive plan 781 150 - - 150 Common stock 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 per share) - - (54,527) - (54,527)Common stock issued under the employee equity incentive plan 858 10,637 - - 10,637 Common stock 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 Net income - - 108,839 - 108,839 Other comprehensive income - - - 67 67 Dividends and dividend equivalents declared ($1.60 per share) - - (74,117) - (74,117)Common stock issued under the employee equity incentive plan 1,083 16,650 - - 16,650 Common stock issued under the employee stock purchase plan 28 3,277 - - 3,277 Stock-based compensation expense - 78,682 - - 78,682 Balance as of December 31, 2019 43,616 $549,517 $229,450 $(5,476) $773,491 See accompanying notes to consolidated financial statements. 49Table of Contents MONOLITHIC POWER SYSTEMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2019 2018 2017 Cash flows from operating activities: Net income $108,839 $105,268 $65,203 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,867 12,311 16,101 (Gain) loss on disposal and sale of property and equipment, net (259) 22 (3)Amortization of premium on available-for-sale securities 729 1,353 1,976 (Gain) loss on deferred compensation plan investments (3,806) 255 (2,531)Deferred taxes, net (577) (843) (15,238)Stock-based compensation expense 78,699 60,607 52,617 Changes in operating assets and liabilities: Accounts receivable 2,512 (18,079) (3,785)Inventories 8,865 (37,060) (27,795)Other assets (10,204) (1,075) 1,603 Accounts payable 3,048 871 3,077 Accrued compensation and related benefits 7,496 3,806 2,397 Accrued liabilities 7,449 7,092 10,852 Income tax liabilities (1,355) 6,923 29,347 Net cash provided by operating activities 216,303 141,451 133,821 Cash flows from investing activities: Purchases of property and equipment (95,806) (22,526) (65,770)Acquisition of in-place leases (981) - - Purchases of short-term investments (212,562) (99,199) (140,531)Proceeds from maturities and sales of short-term investments 135,801 109,131 77,502 Proceeds from sales of long-term investments 250 2,000 - Proceeds from sales of property and equipment 9,268 - - Contributions to deferred compensation plan, net (3,082) (4,146) (5,261)Net cash used in investing activities (167,112) (14,740) (134,060)Cash flows from financing activities: Property and equipment purchased on extended payment terms (683) (749) (250)Proceeds from common stock issued under the employee equity incentive plan 16,650 10,637 150 Proceeds from common stock issued under the employee stock purchase plan 3,277 3,028 2,701 Dividends and dividend equivalents paid (67,294) (47,475) (33,926)Net cash used in financing activities (48,050) (34,559) (31,325)Effect of change in exchange rates (883) (2,208) 1,625 Net increase (decrease) in cash, cash equivalents and restricted cash 258 89,944 (29,939)Cash, cash equivalents and restricted cash, beginning of period 172,818 82,874 112,813 Cash, cash equivalents and restricted cash, end of period $173,076 $172,818 $82,874 Supplemental disclosures for cash flow information: Cash paid for taxes $10,700 $7,134 $3,619 Non-cash investing and financing activities: Liability accrued for property and equipment purchases $7,803 $1,737 $3,061 Liability accrued for dividends and dividend equivalents $21,955 $16,319 $10,686 See accompanying notes to consolidated financial statements. 50Table of Contents MONOLITHIC POWER SYSTEMS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Monolithic Power Systems, Inc. (the “Company”) was incorporated in the State of California on August 22, 1997. On November 17, 2004, the Company wasreincorporated in the State of Delaware. MPS designs, develops and markets integrated power semiconductor solutions and power delivery architectures. MPS’smission is to 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 transactions have beeneliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financialstatements, and reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions used in these consolidated financialstatements primarily include those related to revenue recognition, inventory valuation, valuation of share-based awards, contingencies and income tax valuationallowances. Actual results could differ from those estimates. Certain Significant Risks and Uncertainties Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term and long-terminvestments and accounts receivable. The Company’s cash consists of checking and savings accounts. The Company’s cash equivalents include short-term, highlyliquid investments purchased with remaining maturities at the date of purchase of three months or less. The Company’s short-term investments may consist of corporatedebt securities, certificates of deposit, commercial paper and government agency bonds and treasuries, and the long-term investments consist of government-backedstudent loan auction-rate securities. The Company generally does not require its customers to provide collateral or other security to support accounts receivable. Tomanage credit risk, management performs ongoing credit evaluations of its customers’ financial condition, monitors payment performance, and, in some cases, requiresstandby letters of credit. The Company also requires payment in advance for certain customers prior to shipments of goods. The Company participates in the dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on itsfuture financial position, results of operations or cash flows: advances and trends in new technologies and industry standards; competitive pressures in the form of newproducts or price reductions on current products; changes in product mix; changes in the overall demand for products offered by the Company; changes in third-partymanufacturers; changes in key suppliers; changes in certain strategic relationships or customer relationships; litigation or claims against the Company based onintellectual property, patent, product, regulatory or other factors; fluctuations in foreign currency exchange rates; risk associated with changes in government policiesand regulations on trade restrictions and corporate taxes; availability of necessary components or sub-assemblies; availability of foundry capacity; ability to integrateacquired companies; and the Company’s ability to attract and retain employees necessary to support its growth. Foreign Currency In general, the functional currency of the Company’s international subsidiaries is the local currency. The primary subsidiaries are located in China, Taiwan and Europe,which utilize the Renminbi, the New Taiwan Dollar and the Euro as their currencies, respectively. Accordingly, assets and liabilities of the foreign subsidiaries aretranslated using exchange rates in effect at the end of the period. Revenue and costs are translated using average exchange rates for the period. The resultingtranslation adjustments are presented as a separate component of accumulated other comprehensive loss in stockholders’ equity on the Consolidated Balance Sheets.In addition, the Company incurs foreign currency exchange gain or loss related to certain intercompany transactions between the U.S. and its foreign subsidiaries thatare denominated in a currency other than the functional currency. In connection with the settlement and remeasurement of the balances, the Company recorded foreigncurrency exchange gain (loss) of $(0.3) million, $1.0 million and $(0.6) million for the years ended December 31, 2019, 2018 and 2017, respectively, which were reported ininterest and other income, net, on the Consolidated Statements of Operations. 51Table of Contents Cash, Cash Equivalents and Investments The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents. The Company mayclassify investments with maturities beyond one year as short-term based on the nature of the investments and their availability for use in current operations. Cash equivalents are stated at cost, which approximates fair market value. The Company’s short-term and long-term debt investments are classified as available-for-salesecurities and are stated at their fair market value, with unrealized gains and losses recorded in accumulated other comprehensive loss. Premiums and discounts on debtinvestments are generally amortized or accreted over the life of the related available-for-sale securities. Interest income is recognized when earned. The cost ofinvestments sold is determined on a specific identification method. The Company’s available-for-sale investments are subject to periodic impairment reviews. When a decline in the fair value of a debt security below its amortized cost isconsidered other-than-temporary, the Company records an impairment charge in interest and other income, net. Fair Value of Financial Instruments Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at themeasurement date. When determining the fair value, the Company considers the principal or most advantageous market in which the Company would transact, as well asassumptions that market participants would use when pricing the assets or liabilities. Fair value is estimated by applying the following hierarchy, which prioritizes theinputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to thefair value measurement: ●Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. ●Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that arenot active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. ●Level 3 - Significant unobservable inputs to the valuation methodology and typically reflect management’s estimates of assumptions that market participantswould use in pricing the asset or liability. 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 realizable value. TheCompany writes down excess and obsolete inventory based on its age and forecasted demand, which includes estimates taking into consideration the Company’soutlook on market and economic conditions, technology changes, new product introductions and changes in strategic direction. Actual demand may differ fromforecasted demand, and such differences may have a material effect on recorded inventory values. When the Company records a write-down on inventory, it establishesa new, lower cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established costbasis. Property and Equipment Property and equipment are stated at cost. Depreciation commences when an asset is placed in service and available for its intended use. Depreciation is computedusing the straight-line method over the estimated useful lives of the assets. Buildings and building improvements have estimated useful lives of 20 to 40 years.Leasehold improvements are amortized over the shorter of the estimated useful lives or the lease period. Production equipment and software have estimated useful livesof three to eight years. Transportation equipment has estimated useful lives of 5 to 20 years. Furniture and fixtures have estimated useful lives of three to five years.Land is not depreciated. 52Table 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 carrying amount of anasset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of theasset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the assetand its fair value based on the present value of estimated future cash flows. The Company did not record material impairments in any of the periods presented. Goodwill Goodwill represents the excess of the fair value of purchase consideration over the fair value of net tangible and identified intangible assets as of the date of acquisition.Goodwill is not amortized. The Company tests goodwill for impairment at least annually in the fourth quarter of the year, or whenever events or changes in circumstances indicate that goodwillmay be impaired. The Company has elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit isless than its carrying amount. If the Company determines that it is more likely than not that its fair value is less than the carrying amount, then a quantitative goodwillimpairment test is performed to measure the impairment loss. 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 the ability to deferthe receipt of compensation in order to accumulate funds for retirement on a tax deferred basis. The Company does not make contributions to the plan or guaranteereturns on the investments. The Company is responsible for the plan’s administrative expenses. Participants’ deferrals and investment gains and losses remain as theCompany’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 are included inoperating expense on the Consolidated Statements of Operations. The Company manages the risk of changes in the fair value of the liabilities by electing to match theliabilities with investments in corporate-owned life insurance policies, mutual funds and money market funds that offset a substantial portion of the exposure. Theinvestments are recorded at the cash surrender value of the corporate-owned life insurance policies, and at the fair value of the mutual funds and money market funds,which are classified as trading securities. Changes in the cash surrender value of the corporate-owned life insurance policies and the fair value of mutual fund andmoney market fund investments are included in interest and other income, net on the Consolidated Statements of Operations. The following table summarizes thedeferred compensation plan balances on the Consolidated Balance Sheets (in thousands): December 31, 2019 2018 Deferred compensation plan asset components: Cash surrender value of corporate-owned life insurance policies $16,883 $13,103 Fair value of mutual funds and money market funds 21,975 18,867 Total $38,858 $31,970 Deferred compensation plan assets reported in: Other long-term assets $38,858 $31,970 Deferred compensation plan liabilities reported in: Accrued compensation and related benefits (short-term) $425 $447 Other long-term liabilities 39,665 32,283 Total $40,090 $32,730 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 to which itexpects to be entitled to in exchange for those goods or services. See Note 2 for further discussion. 53Table of Contents Research and Development Costs incurred in research and development are expensed as incurred. Warranty Reserve The Company generally provides one to two-year warranties against defects in materials and workmanship and will either repair the products, provide replacementsat no charge to customers or issue a refund. As they are considered assurance-type warranties, the Company does not account for them as separate performanceobligations. Warranty reserve requirements are generally based on a specific assessment of the products sold with warranties when a customer asserts a claim forwarranty or a product defect. See Note 13 for the changes in warranty reserves for the periods presented. Leases The Company determines if an arrangement is a lease at inception. Lease terms may include options to extend or terminate the lease when it is reasonably certain that theCompany will exercise that option. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term andoperating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized atthe commencement date based on the present value of remaining lease payments over the lease term. ROU assets also include any initial direct costs incurred andprepaid lease payments, less lease incentives received. Because the implicit rate in each lease is not readily determinable, the Company uses its estimated incrementalborrowing rate to determine the present value of the remaining lease payment. The Company recognizes operating lease costs on a straight-line basis over the leaseterm. The Company does not record short-term leases with a term of 12 months or less at the commencement date on the Consolidated Balance Sheets. For lease arrangementsthat contain lease and non-lease components, the Company accounts for them as single lease components. For lease arrangements where the Company is the lessor, the Company recognizes lease income from operating leases on a straight-line basis over the lease term. Stock-Based Compensation The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fairvalue of RSUs with service conditions or performance conditions is based on the grant date stock price. The fair value of shares issued under the ESPP and RSUs with apurchase price feature is estimated using the Black-Scholes model. The fair value of RSUs with market conditions, as well as RSUs containing both market andperformance conditions, is estimated using a Monte Carlo simulation model. Compensation expense related to awards with service conditions is recorded on a straight-line basis over the requisite service period. Compensation expense related toawards subject to market or performance conditions is recognized over the requisite service period for each separately vesting tranche. For awards with only marketconditions, compensation expense is not reversed if the market conditions are not satisfied. For awards with performance conditions, as well as awards containing bothmarket and performance conditions, the Company recognizes compensation expense when the performance goals are achieved, or when it becomes probable that theperformance goals will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external factors, such as macroeconomicconditions and the analog industry revenue forecasts, and internal factors, such as the Company’s business and operational objectives and revenue forecasts. Changesin the probability assessment of achievement of the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment asif the new estimate had been applied since the service inception date. Any previously recognized compensation expense is reversed if the performance conditions arenot expected to be satisfied as a result of management’s assessment. The Company accounts for forfeitures of equity awards 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 fiscal year by taxjurisdiction. The Company also recognizes federal, state and foreign deferred tax assets or liabilities for its estimate of future tax effects attributable to temporarydifferences and carryforwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on availableevidence and judgment, are not expected to be realized. 54Table of Contents The Company’s calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in theapplication 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 oruncertainty to an anticipated outcome, changes in accounting or tax laws in the U.S. or foreign jurisdictions where the Company operates, or changes in other facts orcircumstances. In addition, the Company recognizes liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on its tax returns if it hasless than a 50% likelihood of being sustained. If the Company determines that payment of these amounts is unnecessary or if the recorded tax liability is less than itscurrent assessment, the Company may be required to recognize an income tax benefit or additional income tax expense in its financial statements in the period suchdetermination is made. The Company has calculated its uncertain tax positions which were attributable to certain estimates and judgments. Litigation and Contingencies The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation regarding its stockholders and its intellectualproperty, challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights of others,and employment matters. The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion ofother resources to prosecute and defend. In addition, from time to time, the Company becomes aware that it is subject to other contingent liabilities. When this occurs,the Company will evaluate the appropriate accounting for the potential contingent liabilities to determine whether a contingent liability should be recorded. In makingthis determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the factsand circumstances in each matter, the Company uses its judgment to determine whether it is probable that a contingent loss has occurred and whether the amount ofsuch loss can be estimated. If the Company determines a loss is probable and estimable, the Company records a contingent loss. In determining the amount of acontingent loss, the Company takes into account advice received from experts for each specific matter regarding the status of legal proceedings, settlementnegotiations, prior case history and other factors. Should the judgments and estimates made by management need to be adjusted as additional information becomesavailable, the Company may need to record additional contingent losses. Alternatively, if the judgments and estimates made by management are adjusted, for example, ifa particular contingent loss does not occur, the contingent loss recorded would be reversed. Litigation expense recorded on the Consolidated Statements of Operations includes primarily patent infringement litigation and other business matters. The Companyrecords litigation costs in the period in which they are incurred. Proceeds resulting from settlement of litigation or favorable judgments are recorded as a reductionagainst litigation expense. Net Income per Share Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income pershare reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into commonshares, and calculated using the treasury stock method. Contingently issuable shares, including equity awards with performance conditions or market conditions, areconsidered outstanding common shares and included in the basic net income per share as of the date that all necessary conditions to earn the awards have beensatisfied. Prior to the end of the contingency period, the number of contingently issuable shares included in the diluted net income per share is based on the number ofshares, if any, that would be issuable under the terms of the arrangement at the end of the reporting period. The Company’s RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and paid to the employees when the underlying RSUs vest.Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill the requisite service requirement and, as a result, the awardsdo 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 comprehensiveloss presented on the Consolidated Balance Sheets primarily consists of unrealized gains or losses related to available-for-sale investments and foreign currencytranslation adjustments. 55Table of Contents Recently Adopted Accounting Pronouncement In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires entities to recognize 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 other arrangements. TheCompany adopted the standard on January 1, 2019 using the modified retrospective transition method and did not restate comparative periods, as permitted by thestandard. In addition, the Company elected the transition practical expedients to not reassess whether its outstanding contracts as of December 31, 2018 contained orwere leases, classification of its existing leases and lease terms. Upon adoption, the Company recognized ROU assets and lease liabilities of its outstanding operating leases on the Consolidated Balance Sheets, primarily related toreal estate. The adoption did not have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. See Note 7 forfurther discussion. Recent Accounting Pronouncements Not Yet Adopted as of December 31, 2019 In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptionsrelated to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities foroutside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard will be effective for annual reportingperiods beginning after December 15, 2020. Early adoption is permitted. The standard will generally be applied prospectively, with certain exceptions. The Company isevaluating the impact of the adoption on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for FairValue Measurement, which changes certain disclosure requirements, including those related to Level 3 fair value measurements. The standard will be effective for annualreporting periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a material impact on its disclosures. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies theaccounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation to measurethe amount of a goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed thecarrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. Thestandard will be applied prospectively, and will be effective for annual reporting periods beginning after December 15, 2019. The Company will continue to perform thequalitative assessment on its goodwill impairment test and does not expect the adoption of this standard to have a material impact. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, whichintroduces a model based on expected losses to estimate credit losses for financial assets held at amortized cost. In addition, for available-for-sale debt securities, thestandard eliminates the concept of other-than-temporary impairment and entities will be required to recognize an allowance for credit losses rather than reductions in theamortized cost of the securities. The standard will be effective for annual reporting periods beginning after December 15, 2019. Entities will apply the standard byrecording a cumulative-effect adjustment to retained earnings. The effect of the standard on the Company’s available-for-sale debt securities will largely depend on thecomposition of the investment portfolio, the financial condition of the issuers, the credit quality and expected collectability of the securities, and economicconditions. The Company does not expect the standard to have a material impact on its consolidated financial statements at the time of adoption. 2. REVENUE RECOGNITION The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 using the modified retrospective transition methodapplied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after January 1, 2018 are presented underTopic 606, while prior-period amounts have not been retrospectively adjusted and were reported in accordance with Topic 605, 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. These product saleswere 99%, 98% and 98% of the Company’s total revenue for the years ended December 31, 2019, 2018 and 2017, respectively. The remaining revenue primarily includesroyalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periodspresented. See Note 16 for the disaggregation of the Company’s revenue by geographic regions and by product families. 56Table of Contents The Company sells its products primarily through third-party distributors, value-added resellers, OEMs, ODMs and EMS providers. For the years ended December 31,2019, 2018 and 2017, 83%, 87% and 88%, respectively, of the Company’s product sales were made through distribution arrangements. These distribution arrangementscontain enforceable rights and obligations specific to those distributors and not the end customers. Purchase orders, which are generally governed by sales agreementsor the Company's standard terms of sale, set the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers purchaseorders to be the contracts with customers. The unit price as stated on the purchase orders is considered the observable, stand-alone selling price for the arrangements. The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amountthat reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company excludes taxes assessed by governmentauthorities, 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 from distributors anddirect end customers when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a presentright 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 accordancewith the shipping terms specified in the contracts, these criteria are generally met when the products are shipped from 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’ designated locations becausethe Company continues to control the products and retain ownership, and the customers do not have an unconditional obligation to pay. The Company recognizesrevenue when the customers consume the products from the consigned inventory locations or, in some cases, after a 60-day period from the delivery date has passed, atwhich 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 that reduction in thesame period the associated revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell the Company’s products to their endcustomers at a price that is lower than the distribution price invoiced by the Company. When the Company receives claims from the distributors that products have beensold to the end customers at the lower price, the Company issues the distributors credit memos for the price adjustments. The Company estimates the price adjustmentsusing the expected value method based on an analysis of historical claims, at both the distributor and product level, as well as an assessment of any known trends ofproduct sales mix. Other U.S. distributors and non-U.S. distributors, which make up the majority of the Company’s total sales to distributors, do not have priceadjustment rights. The Company records a credit against accounts receivable for the estimated price adjustments, with a corresponding reduction to revenue. Certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases in accordance with the contractterms. The Company estimates the stock rotation returns using the expected value method based on an analysis of historical returns, and the current level of inventoryin the distribution channel. The Company records a liability for the stock rotation reserve, with a corresponding reduction to revenue. In addition, the Companyrecognizes an asset for product returns which represents the right to recover products from the customers related to stock rotations, with a corresponding reduction tocost of revenue. Contract Balances The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of December 31, 2019and 2018, accounts receivable totaled $52.7 million and $55.2 million, respectively. The Company did not record any allowance for doubtful accounts as of December 31,2019 and 2018. For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. TheCompany records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of December 31, 2019 and2018, customer prepayments totaled $3.4 million and $2.5 million, respectively. The increase in the customer prepayment balance for the year ended December 31,2019 resulted from an increase in unfulfilled customer orders for which the Company has received payments. For the year ended December 31, 2019, the Companyrecognized $2.5 million of revenue that was included in the customer prepayment balance as of December 31, 2018. Practical Expedients The Company has elected the practical expedient to expense sales commissions as incurred because the amortization period would have been one year or less. 57Table of Contents The Company’s standard payment terms generally require customers to pay 30 to 60 days after the Company satisfies the performance obligations. For those customerswho are required to pay in advance, the Company satisfies the performance obligations generally within two weeks. The Company has elected not to determine whethercontacts with customers contain significant financing components. The Company’s unsatisfied performance obligations primarily include products held in consignment arrangements and customer purchase orders for products that theCompany has not yet shipped. Because the Company expects to fulfill these performance obligations within one year, the Company has elected not to disclose theamount of these remaining performance obligations or the timing of recognition. 3. CASH, CASH EQUIVALENTS, INVESTMENTS AND RESTRICTED CASH The following is a summary of the Company’s cash, cash equivalents and investments (in thousands): December 31, 2019 2018 Cash, cash equivalents and investments: Cash $144,860 $131,569 Money market funds 28,100 41,135 Corporate debt securities 260,950 170,909 Commercial paper 1,994 - U.S. treasuries and government agency bonds 19,493 32,068 Certificates of deposit - 1,600 Auction-rate securities backed by student-loan notes 3,138 3,241 Total $458,535 $380,522 58Table of Contents December 31, 2019 2018 Reported as: Cash and cash equivalents $172,960 $172,704 Short-term investments 282,437 204,577 Long-term investments 3,138 3,241 Total $458,535 $380,522 The contractual maturities of the Company’s short-term and long-term available-for-sale investments are as follows (in thousands): December 31, 2019 2018 Due in less than 1 year $147,532 $125,845 Due in 1 - 5 years 134,905 78,732 Due in greater than 5 years 3,138 3,241 Total $285,575 $207,818 The following tables summarize the unrealized gain and loss positions related to the Company’s available-for sale investments (in thousands): December 31, 2019 Amortized Cost UnrealizedGains UnrealizedLosses Total Fair Value Fair Value ofInvestments inUnrealized LossPosition Money market funds $28,100 $- $- $28,100 $- Corporate debt securities 260,645 383 (78) 260,950 93,262 Commercial paper 1,994 - - 1,994 - U.S. treasuries and government agency bonds 19,487 7 (1) 19,493 993 Auction-rate securities backed by student-loan notes 3,320 - (182) 3,138 3,138 Total $313,546 $390 $(261) $313,675 $97,393 December 31, 2018 Amortized Cost UnrealizedGains UnrealizedLosses Total Fair Value Fair Value ofInvestments inUnrealized LossPosition 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 As of December 31, 2019 and 2018, unrealized losses that had been in a continuous loss position for 12 months or longer were $0.2 million and $1.6 million, respectively.The Company typically invests in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policygenerally requires securities to be investment grade and limits the amount of credit exposure to any one issuer. When evaluating a debt security for other-than-temporary impairment, management reviewed factors such as the Company’s intent to sell, or whether it will more likely than not be required to sell, the security beforerecovery of its amortized cost basis, the extent to which the fair value of the security is less than its cost, the financial condition of the issuer and the credit quality ofthe investment. As of December 31, 2019 and 2018, the Company did not consider any of its available-for-sale investments to be other-than-temporarily impaired. The Company redeemed $0.3 million and $2.0 million of its auction-rate securities at face value for the years ended December 31, 2019 and 2018, respectively. There wereno sales of auction-rate securities for the year ended December 31, 2017. The underlying maturities of the remaining auction-rate securities are up to 27 years. As ofDecember 31, 2019 and 2018, the impairment of $0.2 million and $0.3 million, respectively, was determined to be temporary because management possessed both theintent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value. In addition, management believed that it wasmore likely than not that the Company would not have to sell these securities before recovery of its amortized cost basis. All scheduled interest payments have beenreceived on time pursuant to the terms and conditions of the securities. To date, the Company has redeemed $40.0 million, or 92% of the original portfolio in theseauction-rate securities, at par without any realized losses. 59Table of Contents Restricted Cash The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the Consolidated Balance Sheets to the amounts reported on theConsolidated Statements of Cash Flows (in thousands): December 31, 2019 2018 Cash and cash equivalents $172,960 $172,704 Restricted cash included in other long-term assets 116 114 Total cash, cash equivalents and restricted cash reported on the Consolidated Statements of Cash Flows $173,076 $172,818 As of December 31, 2019 and 2018, restricted cash included a security deposit that is set aside in a bank account and cannot be withdrawn by the Company under theterms of a lease agreement. The restriction will end upon the expiration of the lease. 4. FAIR VALUE MEASUREMENTS The following table details the fair value measurement of the financial assets (in thousands): December 31, 2019 Total Level 1 Level 2 Level 3 Money market funds $28,100 $28,100 $- $- Corporate debt securities 260,950 - 260,950 - Commercial paper 1,994 - 1,994 - U.S. treasuries and government agency bonds 19,493 - 19,493 - Auction-rate securities backed by student-loan notes 3,138 - - 3,138 Mutual funds and money market funds under deferred compensation plan 21,975 21,975 - - Total $335,650 $50,075 $282,437 $3,138 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 _______________●Level 1—includes instruments with quoted prices in active markets for identical assets.●Level 2—includes instruments for which the valuations are based upon quoted market prices in active markets involving similar assets or inputs other than quotedprices that are observable for the assets. The market inputs used to value these instruments generally consist of market yields, recently executed transactions,broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources may include industry standard data providers,security master files from large financial institutions, and other third-party sources used to determine a daily market value.●Level 3—includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement. The Company’s level 3 assets consist of government-backed student loan auction-rate securities. The following table provides a rollforward of the fair value of theauction-rate securities (in thousands): Balance at January 1, 2018 $5,256 Change in unrealized loss included in other comprehensive income (15)Sale and settlement at par (2,000)Balance at December 31, 2018 3,241 Change in unrealized gain included in other comprehensive income 147 Sale and settlement at par (250)Balance at December 31, 2019 $3,138 60Table 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, 2019 2018 Time-to-liquidity (in years) 2-3 2-3 Discount rate 4.0%-8.3% 4.9%-10.1% The fair value measurement involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similarinstruments. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades ofsimilar illiquid securities and independent pricing services. The valuation of the auction-rate securities is subject to significant management judgment regardingprojected future cash flows, which will depend on many factors, including the quality of the underlying collateral, estimated time to liquidity including potential to becalled or restructured, underlying final maturity, insurance guaranty and market conditions, among others. Changes in any of the unobservable inputs used in the fairvalue measurement of auction-rate securities in isolation would result in a lower or higher fair value measurement. For example, an increase in the time-to-liquidityassumption or estimated discount rate would result in a lower fair value measurement. 5. BALANCE SHEET COMPONENTS Inventories Inventories consist of the following (in thousands): December 31, 2019 2018 Raw materials $22,872 $43,017 Work in process 42,681 38,674 Finished goods 61,947 54,693 Total $127,500 $136,384 Other Current Assets Other current assets consist of the following (in thousands): December 31, 2019 2018 RSU tax withholding proceeds receivable $6,106 $39 Prepaid expense 7,991 3,425 Interest receivable 2,490 1,441 Assets for product returns 1,585 1,602 Prepaid wafer refund receivable - 4,297 Other 1,433 1,127 Total $19,605 $11,931 61Table of Contents Property and Equipment, Net Property and equipment, net, consist of the following (in thousands): December 31, 2019 2018 Production equipment and software $134,420 $120,645 Buildings and improvements 149,443 100,135 Land 35,040 16,724 Transportation equipment 16,510 12,948 Leasehold improvements 7,173 4,755 Furniture and fixtures 4,660 4,341 Property and equipment 347,246 259,548 Less: accumulated depreciation and amortization (118,931) (109,547)Property and equipment, net $228,315 $150,001 Depreciation and amortization expense on property and equipment was $14.5 million, $11.4 million and $14.0 million for the years ended December 31, 2019, 2018 and2017, respectively. Other Long-Term Assets Other long-term assets consist of the following (in thousands): December 31, 2019 2018 Deferred compensation plan assets $38,858 $31,970 Operating lease ROU assets 2,863 - Prepaid expense 2,687 2,713 Other 1,544 1,296 Total $45,952 $35,979 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2019 2018 Dividends and dividend equivalents $21,747 $15,044 Stock rotation and sales returns 5,530 5,363 Customer prepayments 3,412 2,520 Income tax payable 2,435 7,018 Commissions 1,425 1,369 Operating lease liabilities 1,254 - Warranty 1,139 4,564 Other 7,848 3,084 Total $44,790 $38,962 Other Long-Term Liabilities Other long-term liabilities consist of the following (in thousands): December 31, 2019 2018 Deferred compensation plan liabilities $39,665 $32,283 Dividend equivalents 6,265 6,145 Operating lease liabilities 1,103 - Other 30 97 Total $47,063 $38,525 62Table of Contents 6. REAL ESTATE TRANSACTION In March 2019, the Company completed the purchase of an office building and land located in Kirkland, Washington for $52.9 million in cash. The property also had in-place leases for a portion of the building which were assumed by the Company. The Company accounted for the purchase as an asset acquisition and capitalized$0.4 million of transaction costs. The purchase price allocation was as follows (in thousands): Building $30,078 Land 22,254 In-place leases 981 Total $53,313 The fair value of the building was determined based on the income approach, which considered the discounted cash flows and direct capitalization analysis, and thesales comparison approach. The fair value of land was determined based on the sales comparison approach. The fair value of the in-place leases was determinedprimarily based on the analysis of the economic benefits of certain cost savings attributable to the leases. The building is depreciated over a useful life of 40 years and the in-place leases are amortized over the average remaining lease terms of 3.5 years. 7. LEASES Lessee The Company has operating leases primarily for administrative and sales and marketing offices, manufacturing operations and research and development facilities,employee housing units and certain equipment. These leases have remaining lease terms from less than a year to four years. Some of these leases include options torenew the lease term for up to five years or on a month-to-month basis. The Company does not have finance lease arrangements. As of December 31, 2019, operating lease ROU assets totaled $2.9 million and operating lease liabilities totaled $2.4 million. The following tables summarize certaininformation related to the leases (in thousands, except percentages): Year Ended December 31, 2019 Lease costs: Operating lease costs $1,509 Short-term and other lease costs 465 Total lease costs $1,974 Year Ended December 31, 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $1,364 ROU assets obtained in exchange for new operating lease liabilities (1) $3,667 December 31, 2019 Weighted-average remaining lease term (in years) 2.1 Weighted-average discount rate 3.7% (1)The amount includes $2.3 million for operating leases existing on January 1, 2019. 63Table of Contents As of December 31, 2019, the maturities of the lease liabilities were as follows (in thousands): 2020 $1,328 2021 734 2022 390 2023 22 Total remaining lease payments 2,474 Less: imputed interest (117)Total lease liabilities $2,357 Reported as: Current liabilities $1,254 Long-term liabilities $1,103 The Company has elected the transition option under Topic 842 and continued to apply the prior accounting standard for leases, including the disclosure requirements,in the comparative periods. As of December 31, 2018, future minimum rental payments under the non-cancelable operating leases were as follows (in thousands): 2019 $1,511 2020 872 2021 273 2022 195 2023 26 Total $2,877 Rent expense for the years ended December 31, 2018 and 2017 was $1.8 million and $1.5 million, respectively. Lessor The Company owns certain office buildings and leases a portion of these properties to third parties under arrangements that are classified as operating leases. Theseleases have remaining lease terms from one year to five years. Some of these leases include options to renew the lease term for up to five years. For the year ended December 31, 2019, income related to lease payments was $1.8 million. As of December 31, 2019, future income related to lease payments was asfollows (in thousands): 2020 $1,523 2021 1,378 2022 1,138 2023 604 2024 552 Thereafter 45 Total $5,240 8. STOCK-BASED COMPENSATION 2014 Equity Incentive Plan (as amended, the “2014 Plan”) The Board of Directors adopted the 2014 Plan in April 2013, and the stockholders approved it in June 2013. In October 2014, the Board of Directors approved certainamendments to the 2014 Plan. The 2014 Plan, as amended, became effective on November 13, 2014 and provides for the issuance of up to 5.5 million shares.The 2014 Plan will expire on November 13, 2024. As of December 31, 2019, 1.6 million shares remained available for future issuance under the 2014 Plan. 64Table of Contents Stock-Based Compensation Expense The Company recognized stock-based compensation expense as follows (in thousands): Year Ended December 31, 2019 2018 2017 Cost of revenue $2,409 $1,888 $1,654 Research and development 19,584 15,990 14,816 Selling, general and administrative 56,706 42,729 36,147 Total stock-based compensation expense $78,699 $60,607 $52,617 Tax benefit related to stock-based compensation $2,754 $4,383 $5,054 RSUs The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market andperformance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performancegoals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include serviceconditions which require continued employment with the Company. 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 Number ofShares Weighted-AverageGrant DateFair ValuePer Share Number ofShares Weighted-AverageGrant DateFair ValuePer Share Number ofShares Weighted-AverageGrant DateFair ValuePer Share Number ofShares Weighted-AverageGrant DateFair ValuePer Share Outstanding at January 1, 2017 366 $51.35 2,284 $43.24 1,620 $23.57 4,270 $36.47 Granted 81 $94.25 585(1) $62.72 - $- 666 $66.56 Vested (175) $48.35 (597) $41.94 - $- (772) $43.39 Forfeited (14) $61.80 (6) $49.82 - $- (20) $58.46 Outstanding at December 31,2017 258 $66.30 2,266 $48.59 1,620 $23.57 4,144 $39.91 Granted 133 $114.36 630(1) $85.06 600 $68.48 1,363 $80.62 Vested (136) $60.23 (717) $41.08 - $- (853) $44.13 Forfeited (15) $82.20 (5) $63.16 (1) $68.48 (21) $76.92 Outstanding at December 31,2018 240 $95.38 2,174 $61.61 2,219 $35.69 4,633 $50.94 Granted 52 $141.32 512(1) $99.88 - $- 564 $103.68 Vested (103) $81.53 (656) $53.72 (324) $23.57 (1,083) $47.34 Forfeited (9) $117.31 (43) $42.72 (9) $68.48 (61) $57.01 Outstanding at December 31,2019 180 $115.45 1,987 $74.50 1,886 $37.63 4,053 $59.16 (1)Amount reflects the number of awards that may ultimately be earned based on management’s probability assessment of the achievement of performance conditionsat each reporting period. The intrinsic value related to vested RSUs was $138.3 million, $90.0 million and $74.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. As ofDecember 31, 2019, the total intrinsic value of all outstanding RSUs was $679.5 million, based on the closing stock price of $178.02. As of December 31, 2019,unamortized compensation expense related to all outstanding RSUs was $100.1 million with a weighted-average remaining recognition period of approximatelythree years. Cash proceeds from vested PSUs with a purchase price totaled $16.6 million and $10.6 million for the years ended December 31, 2019 and 2018, respectively. Therewere no proceeds for the year ended December 31, 2017. Time-Based RSUs For the years ended December 31, 2019, 2018 and 2017, the Compensation Committee granted 52,000, 133,000, and 81,000 RSUs, respectively, with service conditions tonon-executive employees and non-employee directors. The RSUs generally vest over four years for employees and one year for directors, subject to continuedservice with the Company. PSUs and MPSUs 2019 PSUs: In February 2019, the Compensation Committee granted 151,000 PSUs to the executive officers, which represent a target number of shares to be earned based on theCompany’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 theSemiconductor Industry Association (“2019 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number ofthe 2019 Executive PSUs. 50% of the 2019 Executive PSUs will vest in the first quarter of 2021 if the pre-determined performance goals are met during the performanceperiod. The remaining 2019 Executive PSUs will vest over the following two years on a quarterly basis. Assuming the achievement of the highest level of performancegoals, the total stock-based compensation cost for the 2019 Executive PSUs is $46.6 million. 65Table of Contents The 2019 Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. Shares thatdo not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 2019 Executive PSUs using the Black-Scholesmodel with the following assumptions: stock price of $130.67, expected term of 2.6 years, expected volatility of 29.0% and risk-free interest rate of 2.5%. In October 2018, the Compensation Committee granted 53,000 PSUs to certain non-executive employees, which represent a target number of shares to be earned basedon 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 ratecompared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2019 Non-Executive PSUs”).The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2019 Non-Executive PSUs, depending on the jobclassification of the employee. 50% of the 2019 Non-Executive PSUs will vest in the first quarter of 2021 if the pre-determined performance goals are met during theperformance period. The remaining 2019 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Assuming the achievement of thehighest 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 the shares. Shares thatdo 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 volatility of 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 earned based on theCompany’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 theSemiconductor Industry Association (“2018 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number ofthe 2018 Executive PSUs. 50% of the 2018 Executive PSUs will vest in the first quarter of 2020 if the pre-determined performance goals are met during the performanceperiod. The remaining 2018 Executive PSUs will vest over the following two years on a quarterly basis. Assuming the achievement of the highest level of performancegoals, the total stock-based compensation cost for the 2018 Executive PSUs is $46.1 million. In February 2018, the Compensation Committee granted 44,000 PSUs to certain non-executive employees, which represent a target number of shares to be earned basedon 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 ratecompared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2018 Non-Executive PSUs”).The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2018 Non-Executive PSUs, depending on the jobclassification of the employee. 50% of the 2018 Non-Executive PSUs will vest in the first quarter of 2020 if the pre-determined performance goals are met during theperformance period. The remaining 2018 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Assuming the achievement of thehighest 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 per share uponvesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 2018 ExecutivePSUs and the 2018 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $110.00, expected term of 2.6 years, expectedvolatility 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 would be earned basedon 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 bythe Semiconductor Industry Association (“2017 Executive PSUs”). The maximum number of shares that an executive officer could earn was 300% of the target number ofthe 2017 Executive PSUs. In February 2019, the Compensation Committee approved the revenue achievement for the 2017 Executive PSUs and a total of 521,000 shareswere awarded to the executive officers. 50% of the 2017 Executive PSUs vested in the first quarter of 2019. The remaining 2017 Executive PSUs vest over the followingtwo years on a quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the 2017 Executive PSUsis $31.5 million. 66Table of Contents In February 2017, the Compensation Committee granted 48,000 PSUs to certain non-executive employees, which represented a target number of shares that would beearned 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) revenuegrowth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2017 Non-Executive PSUs”). The maximum number of shares that an employee could earn was either 200% or 300% of the target number of the 2017 Non-Executive PSUs,depending on the job classification of the employee. In February 2019, the Compensation Committee approved the revenue achievement for the 2017 Non-ExecutivePSUs and a total of 101,000 shares were awarded to the employees. 50% of the 2017 Non-Executive PSUs vested in the first quarter of 2019. The remaining 2017 Non-Executive PSUs vest over the following two years on an annual or quarterly basis. Based on the actual achievement of the performance goals, the total stock-basedcompensation 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 $30 per share uponvesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 2017 ExecutivePSUs 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, expectedvolatility of 28.6% and risk-free interest rate of 1.3%. 2015 MPSUs: In December 2015, the Compensation Committee granted 86,000 MPSUs to the executive officers and 41,000 MPSUs to certain non-executive employees, whichrepresented a target number of shares that would be earned upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximumnumber of shares that an employee could earn was 500% of the target number of the 2015 MPSUs. The 2015 MPSUs consisted of four separate tranches with variousperformance periods all ended on December 31, 2019. The first tranche contained market conditions only, which required the achievement of five stock price targetsranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. The second, third and fourth tranches contained both market and performance conditions. The five stock price targets for the second tranche rangedfrom $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 rangedfrom $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 ranged from $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 required the achievement of one of following six operating metrics: 1.Successful implementation of full digital solutions for certain power products. 2.Successful implementation, and adoption by a key customer, of an integrated, software-based field-oriented control with sensors to motor drivers. 3.Successful implementation of certain advanced power analog processes. 4.Successful design wins and achievement of a specific level of revenue with a global networking customer. 5.Achievement of a specific level of revenue with a global electronics manufacturer. 6.Achievement of a specific level of market share with certain core power products. The following table summarizes the achievement of the market and performance conditions: Tranche Market Conditions Performance ConditionsOne All stock price targets were achieved as of September 30, 2017. Not required.Two All stock price targets were achieved as of December 31, 2017. Operating metric #1 was achieved as of December 31, 2018.Three All stock price targets were achieved as of September 30, 2018. Operating metric #2 was achieved as of December 31, 2018.Four All stock price targets were achieved as of March 31, 2019. Operating metric #3 was achieved as of September 30, 2019. A total of 0.6 million shares were awarded to the employees. The 2015 MPSUs will vest on January 1, 2020, with post-vesting sales restrictions on the vested shares forup to an additional two years. 67Table of Contents The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stockprice of $61.35, expected volatility of 33.2%, risk-free interest rate of 1.3%, and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. Based onthe actual achievement of all of the market and performance goals, the total stock-based compensation cost for the 2015 MPSUs, excluding cancelled shares for theterminated employees, is $24.6 million ($8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for the third tranche, and $6.6 million forthe fourth tranche). 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 represented atarget number of shares that would be earned upon achievement of stock price targets (“2018 MSUs”). The maximum number of shares that an employee could earnwas 500% of the target number of the 2018 MSUs if the Company achieved five stock price targets ranging from $140 to $172 during a performance period from October26, 2018 to December 31, 2023. As of December 31, 2019, all stock price targets have been achieved and the employees were awarded a total of 0.6 million shares.The 2018 MSUs will vest on January 1, 2024, with post-vesting sales restrictions on the vested shares for up to an additional two years. The total stock-basedcompensation cost for the 2018 MSUs, excluding cancelled shares for the terminated employees, is $40.4 million. The Company determined the grant date fair value of the 2018 MSUs using a Monte Carlo simulation model with the following assumptions: stock price of $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 sales restrictions. 2013 MSUs: In December 2013, the Compensation Committee granted 276,000 MSUs to the executive officers and 84,000 MSUs to certain non-executive employees, whichrepresented a target number of shares that would be earned upon achievement of stock price targets (“2013 MSUs”). The maximum number of shares that an employeecould earn was 500% of the target number of the 2013 MSUs if the Company achieved five price targets ranging from $40 to $56 during a performance period fromJanuary 1, 2014 to December 31, 2018. As of December 31, 2015, all stock price targets have been achieved and the employees were awarded a total of 1.8 million shares.The 2013 MSUs vest quarterly from January 1, 2019 to December 31, 2023. The total stock-based compensation cost for the 2013 MSUs, excluding cancelled shares forthe 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: stock price 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 contain any post-vesting sales restrictions. ESPP Under the ESPP, eligible employees may purchase common stock through payroll deductions. Participants may not purchase more than 2,000 shares in a six-monthoffering period, or purchase shares having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period in accordance with theInternal Revenue Code and applicable Treasury Regulations. The ESPP provides for an annual increase by an amount equal to the least of one million shares, 2% of theoutstanding shares of common stock on the first day of the year, or a number of shares as determined by the Board of Directors. As of December 31, 2019, 4.5 millionshares were available for future issuance. The ESPP will expire in November 2024. For the years ended December 31, 2019, 2018 and 2017, 28,000, 33,000 and 40,000 shares, respectively, were issued. The intrinsic value of the shares issued was $0.7million, $1.1 million and $1.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. The unamortized expense was $0.1 million as of December 31,2019, which will be recognized through the first quarter of 2020. The Black-Scholes model was used to value the employee stock purchase rights with the followingweighted-average assumptions: Year Ended December 31, 2019 2018 2017 Expected term (in years) 0.5 0.5 0.5 Expected volatility 37.0% 29.5% 23.5%Risk-free interest rate 2.2% 2.0% 0.9%Dividend yield 1.1% 1.0% 0.9% 68Table of Contents Cash proceeds from the shares issued under the ESPP were $3.3 million, $3.0 million and $2.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. 9. DIVIDENDS AND DIVIDEND EQUIVALENTS Cash Dividend Program The Company has a dividend program approved by the Board of Directors, pursuant to which the Company intends to pay quarterly cash dividends on its commonstock. Based on the Company’s historical practice, stockholders of record as of the last business day of the quarter are entitled to receive the quarterly cash dividendswhen and if declared by the Board of Directors, which are payable to the stockholders in the following month. The Board of Directors declared the following cashdividends (in thousands, except per-share amounts): Year Ended December 31, 2019 2018 2017 Dividend declared per share $1.60 $1.20 $0.80 Total amount $69,196 $50,803 $33,145 As of December 31, 2019 and 2018, accrued dividends totaled $17.4 million and $12.8 million, respectively. The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other things, the Company’s financial condition,results of operations, capital requirements, business conditions, and other factors that the Board of Directors may deem relevant, as well as a determination that cashdividends are in the best interests of the stockholders. The Company anticipates that cash used for future dividend payments will come from its domestic cash, cash generated from ongoing U.S. operations, and cashrepatriated from its Bermuda subsidiary. Earnings from other foreign subsidiaries will continue to be indefinitely reinvested. Cash Dividend Equivalent Rights The Company's RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders ofcommon 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 the requisite service requirement and, as a result, the awards do not vest. As of December 31, 2019 and2018, accrued dividend equivalents totaled $10.6 million and $8.4 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, 2019 2018 2017 Interest income $7,305 $6,321 $5,353 Amortization of premium on available-for-sale securities (729) (1,353) (1,976)Gain (loss) on deferred compensation plan investments 3,806 (1,022) 2,531 Foreign currency exchange gain (loss) (310) 953 (550)Other 486 95 162 Total $10,558 $4,994 $5,520 For the year ended December 31, 2019, “other” includes a $0.7 million gain recognized from the sale of a parcel of land, net of certain capitalized costs and sellingexpenses. 69Table of Contents 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, 2019 2018 2017 Numerator: Net income $108,839 $105,268 $65,203 Denominator: Weighted-average outstanding shares - basic 43,165 42,247 41,350 Effect of dilutive securities 2,598 2,355 2,228 Weighted-average outstanding shares - diluted 45,763 44,602 43,578 Net income per share: Basic $2.52 $2.49 $1.58 Diluted $2.38 $2.36 $1.50 Anti-dilutive common stock equivalents were not material in any of the periods presented. 12. INCOME TAXES The components of income before income taxes are as follows (in thousands): Year Ended December 31, 2019 2018 2017 United States $(4,134) $(13,151) $(19,115)Foreign 117,254 131,633 102,059 Income before income taxes $113,120 $118,482 $82,944 The components of the income tax expense are as follows (in thousands): Year Ended December 31, 2019 2018 2017 Current: Federal $1,682 $11,023 $31,025 State 8 4 2 Foreign 3,105 2,992 1,967 Deferred: Federal (213) (797) (15,426)Foreign (301) (8) 173 Income tax expense $4,281 $13,214 $17,741 70Table of Contents The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows: Year Ended December 31, 2019 2018 2017 U.S. statutory federal tax rate 21.0% 21.0% 35.0%Foreign income at lower rates (20.7) (22.0) (41.2)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”) 11.0 14.4 - Changes in valuation allowance 2.1 - (36.2)Stock-based compensation (1.5) (1.1) 2.2 Tax credits (6.2) (1.9) (2.1)Other adjustments (1.9) 0.2 1.4 Effective tax rate 3.8% 11.2% 21.4% The components of net deferred tax assets consist of the following (in thousands): December 31, 2019 2018 Deferred tax assets: Tax credits $18,080 $11,833 Stock-based compensation 6,237 10,040 Deferred compensation 7,110 6,829 Net operating losses 615 1,133 Other expenses not currently deductible 2,323 1,852 Deferred tax assets, gross 34,365 31,687 Valuation allowance (15,411) (13,041)Deferred tax assets, net of valuation allowance 18,954 18,646 Deferred tax liabilities: Depreciation and amortization (1,259) (711)Undistributed foreign earnings (77) (1,105)Other expenses currently deductible (425) - Deferred tax liabilities (1,761) (1,816)Net deferred tax assets $17,193 $16,830 71Table of Contents Deemed Repatriation Transition Tax: As permitted by the 2017 Tax Act, the Company has elected to pay the one-time, deemed repatriation transition tax liability of $24.6 million in installments on an interest-free basis over eight years through 2025. For the years ended December 31, 2019 and 2018, the Company paid $1.3 million and $2.6 million of the transition tax,respectively. As of December 31, 2019 and 2018, $2.0 million and $1.3 million of the transition tax were recorded in current accrued liabilities, and $18.7 million and $20.7million were recorded in long-term income tax liabilities, respectively. 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 have foreign earningsgenerated without a large aggregate foreign fixed asset base and whose earnings are being taxed at a low tax rate. For the years ended December 31, 2019 and 2018, theCompany included $58.6 million and $81.1 million, respectively, related to the GILTI provisions as additional Subpart F income, which was accounted for as a period cost. Valuation Allowance: The Company periodically evaluates its deferred tax assets, including a determination of whether a valuation allowance is necessary, based upon its ability to utilize theassets using a more likely than not analysis. The realizability of the Company’s net deferred tax assets is dependent on its ability to generate sufficient future taxableincome during periods prior to the expiration of tax attributes to fully utilize these assets. As of December 31, 2019 and 2018, the Company has evaluated and concludedthat no valuation allowance is required, except for a continued full valuation allowance on the deferred tax assets in California. 72Table of Contents Undistributed Earnings of Subsidiaries: The Company has analyzed its global working capital and cash requirements, and has determined that it plans to repatriate cash from its Bermuda subsidiary on anongoing basis to fund its future U.S.-based expenditures and dividends. For the year ended December 31, 2019, the Company repatriated $75 million from its Bermudasubsidiary. As of December 31, 2019, the Company maintained an insignificant deferred tax liability related to California state taxes upon future repatriations. For all other foreign subsidiaries, the Company expects to indefinitely reinvest undistributed earnings to fund their operations and research and development. As ofDecember 31, 2019, the undistributed earnings were approximately $32.9 million. An actual repatriation of the undistributed earnings could be subject to additionalforeign withholding taxes and U.S. state taxes. The Company expects to be able to take a 100% dividend received deduction to offset any U.S. federal income tax liabilityon the undistributed earnings. Determination of the unrecognized state and withholding deferred tax liability is not practicable at this time due to the complexitiesassociated with the hypothetical calculation. Other Income Tax Provision Matters As of December 31, 2019, the Company did not have federal net operating loss carryforwards. As of December 31, 2019, the state net operating loss carryforwards forincome tax purposes were $12.6 million, which will expire beginning in 2028. As of December 31, 2019, the Company had no R&D tax credit carryforwards for federal income tax purposes, and $24.1 million for state income tax purposes, which canbe carried forward indefinitely. In the event of a change in ownership, as defined under federal and state tax laws, the Company's net operating loss and tax credit carryforwards could be subject toannual limitations. The annual limitations could result in the expiration of the net operating loss and tax credit carryforwards prior to utilization. At December 31, 2019, the Company had $25.4 million of unrecognized tax benefits, $17.3 million of which would affect its effective tax rate if recognized after consideringthe valuation allowance. 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. A reconciliation of the gross unrecognized tax benefits is as follows (in thousands): Balance as of January 1, 2017 $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 Increase for tax position of prior year 1,589 Increase for tax position of current year 4,663 Decrease due to settlement with tax authorities (560)Decrease due to lapse of statute of limitation (776)Balance as of December 31, 2019 $25,407 The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2019 and 2018, the Company has$1.6 million and $0.9 million, respectively, of accrued interest related to uncertain tax positions, which were recorded in long-term income tax liabilities in the ConsolidatedBalance Sheets. Uncertain tax positions relate to the allocation of income and deductions among the Company’s global entities and to the determination of the research and developmenttax credit. Various events, some of which cannot be predicted, such as clarification of tax law by administrative or judicial means, may occur and would require theCompany to increase or decrease its reserves and effective income tax rate over the next twelve months. However, it is not possible to determine either the magnitude orthe range of increases or decreases at this time. The Company currently has reduced tax rates in its subsidiaries in Chengdu and Hangzhou, China through 2020 and 2021, respectively, for performing research anddevelopment activities. In July 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner, invalidating the Treasury regulations that require participants in qualifiedintercompany cost-sharing arrangements to share stock-based compensation costs. A final decision was issued by the Tax Court in December 2015, and the IRSappealed the decision in June 2016. In June 2019, the Ninth Circuit Court of Appeals upheld the cost-sharing regulations. In July 2019, Altera filed a petition forrehearing en banc in the Ninth Circuit Court of Appeals. In November 2019, the Ninth Circuit Court of Appeals declined to rehear the case. As of December 31, 2019, ithas not been determined if this ruling will be appealed. Due to the uncertainty surrounding the status of the current regulations, the Company has not recorded anyadjustments as of December 31, 2019. The Company will continue to monitor and evaluate the impact of any new developments on its financial statements. 73Table of Contents Income Tax Examination The Company is subject to examination of its income tax returns by the IRS and other tax authorities. In general, the tax years for 2007 and forward are open forexamination for U.S. federal and state income tax purposes. The Company is currently not under any significant tax examinations in any jurisdictions. 13. COMMITMENTS AND CONTINGENCIES Warranty and Indemnification Provisions The changes in warranty reserves are as follows (in thousands): Year Ended December 31, 2019 2018 2017 Balance at beginning of period $4,564 $2,416 $1,030 Warranty provision for product sales 891 6,586 1,912 Settlements made (2,768) (1,402) (40)Unused warranty provision (1,548) (3,036) (486)Balance at end of period $1,139 $4,564 $2,416 The Company provides indemnification agreements to certain direct or indirect customers. The Company agrees to reimburse these parties for any damages, costs andexpenses incurred by them as a result of legal actions taken against them by third parties for infringing upon their intellectual property rights as a result of using theCompany’s products and technologies. These indemnification provisions are varied in their scope and are subject to certain terms, conditions, limitations andexclusions. In addition, the Company has entered into indemnification agreements with its directors and officers. It is not possible to predict the maximum potential amount of future payments under these agreements due to the limited history of indemnification claims and the uniquefacts and circumstances involved in each particular agreement. There were no indemnification liabilities incurred in any of the periods presented. However, there can beno assurances that the Company will not incur any financial liabilities in the future as a result of these obligations. Purchase Commitments The Company has outstanding purchase commitments with its suppliers and other parties that require the future purchases of goods or services, which primarily consistof wafer and other inventory purchases, assembly and other manufacturing services, construction or purchases of property and equipment, and license arrangements.As of December 31, 2019, the Company’s outstanding purchase obligations totaled approximately $90.6 million. Litigation The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by its stockholders, challenges to theenforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights of others, and employment matters.These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources toprosecute and defend. The Company defends itself vigorously against any such claims. As of December 31, 2019, there were no material pending legal proceedings towhich the Company was a party. 14. 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 may contribute up to theamount allowable as a deduction for federal income tax purposes. The Company is not required to contribute and did not contribute to the plan for the years endedDecember 31, 2019, 2018 and 2017. 74Table of Contents 15. SIGNIFICANT CUSTOMERS The Company sells its products primarily through third-party distributors and value-added resellers, and directly to OEMs, ODMs and EMS providers. The followingtable summarizes those customers with sales equal to 10% or more of the Company's total revenue, or with accounts receivable balances equal to 10% or more of theCompany’s total accounts receivable: Revenue Accounts Receivable Year Ended December 31, December 31, Customer 2019 2018 2017 2019 2018 Company A (distributor) 23% 22% 17% 24% 25%Company B (distributor) * 10% * 11% 16%Company C (distributor) * * 10% * * Company A (value-added reseller) * * * 13% * * Represents less than 10%. The Company’s agreements with these third-party distributors and value-added reseller were made in the ordinary course of business and may be terminated with orwithout cause by these customers with advance notice. Although the Company may experience a short-term disruption in the distribution of its products and a short-term decline in revenue if its agreement with any of these customers was terminated, the Company believes that such termination would not have a material adverseeffect on its financial statements because it would be able to engage alternative distributors, resellers and other distribution channels to deliver its products to endcustomers within a short period following the termination of the agreement with the customer. 16. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one reportable segment that includes the design, development, marketing and sale of high-performance analog solutions for the computingand storage, automotive, industrial, communications and consumer markets. The Company’s chief operating decision maker is its Chief Executive Officer, who reviewsfinancial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company derives a majority ofits revenue from sales to customers located outside North America, with geographic revenue based on the customers’ ship-to locations. The following is a summary of revenue by geographic regions (in thousands): Year Ended December 31, Country or Region 2019 2018 2017 China $382,740 $334,726 $257,787 Taiwan 73,801 75,307 83,357 Europe 49,467 49,484 38,140 Korea 43,900 41,238 34,155 Southeast Asia 32,031 36,495 25,755 Japan 27,812 26,853 20,187 United States 17,836 17,621 11,113 Other 334 658 435 Total $627,921 $582,382 $470,929 The following is a summary of revenue by major product families (in thousands): Year Ended December 31, Product Family 2019 2018 2017 DC to DC $589,651 $537,512 $431,861 Lighting Control 38,270 44,870 39,068 Total $627,921 $582,382 $470,929 75Table of Contents The following is a summary of long-lived assets by geographic regions (in thousands): December 31, Country 2019 2018 2017 China $113,888 $93,096 $89,472 United States 94,671 39,054 37,539 Taiwan 17,652 16,972 17,238 Other 2,104 879 387 Total $228,315 $150,001 $144,636 In 2019, the Company revised this disclosure presentation to exclude certain non-current items primarily related to goodwill and deferred compensation assets inaccordance with ASC 280, Segment Reporting. Prior-year amounts have been corrected. These changes did not impact the Consolidated Balance Sheets. 17. ACCUMULATED OTHER COMPREHENSIVE LOSS The following table summarizes the changes in accumulated other comprehensive loss (in thousands): Unrealized Gains(Losses) onAvailable-for-SaleSecurities Foreign CurrencyTranslationAdjustments Total Balance as of January 1, 2018 $(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)Other comprehensive income (loss) before reclassifications 1,977 (1,706) 271 Amounts reclassified from accumulated other comprehensive loss (1) - (1)Tax effect (203) - (203)Net current period other comprehensive income (loss) 1,773 (1,706) 67 Balance as of December 31, 2019 $135 $(5,611) $(5,476) The amounts reclassified from accumulated other comprehensive income (loss) were recorded in interest and other income, net, in the Consolidated Statements ofOperations. For the year ended December 31, 2019, the Company did not elect to reclassify the income tax effects of the 2017 Tax Act from accumulated othercomprehensive loss to retained earnings as the amounts were not material. 18. SUBSEQUENT EVENT Cash Dividend Increase In February 2020, the Company’s Board of Directors approved an increase in quarterly cash dividends from $0.40 per share to $0.50 per share. 76Table of Contents 19. QUARTERLY FINANCIAL DATA (UNAUDITED) Three Months Ended December 31,2019 September 30,2019 June 30,2019 March 31,2019 (in thousands, except per share amounts) Revenue $166,738 $168,813 $151,007 $141,363 Cost of revenue 74,802 75,655 67,782 63,357 Gross profit 91,936 93,158 83,225 78,006 Operating expenses: Research and development 27,011 27,742 27,545 25,458 Selling, general and administrative 33,240 34,692 35,058 30,553 Litigation expense 991 692 503 278 Total operating expenses 61,242 63,126 63,106 56,289 Income from operations 30,694 30,032 20,119 21,717 Interest and other income, net 2,731 2,257 2,229 3,341 Income before income taxes 33,425 32,289 22,348 25,058 Income tax expense (benefit) 989 2,761 1,655 (1,123)Net income $32,436 $29,528 $20,693 $26,181 Net income per share: Basic $0.75 $0.68 $0.48 $0.61 Diluted $0.70 $0.64 $0.45 $0.58 Weighted-average shares outstanding: Basic 43,496 43,308 43,109 42,749 Diluted 46,503 45,833 45,483 45,232 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 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 expense 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 77Table 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 controls and procedurespursuant to Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures areBased on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures aredesigned at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submitunder the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management conducted an evaluation of theeffectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effectiveas of December 31, 2019. Management reviewed the results of its assessment with our Audit Committee. Our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of our internal control over financial reporting, asstated in the firm’s attestation report, which appears in Part II, Item 8 of this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting Effective January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). We have implemented additional business processes and control activities, primarily relatedto the analysis of lease contracts, recognition of the ROU assets and lease liabilities, and presentation and disclosure, in order to monitor and maintain appropriatecontrols over financial reporting. There were no other changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2019,that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on Effectiveness of Controls and Procedures In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflectthe fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relativeto their costs. ITEM 9B. OTHER INFORMATION None. 78Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Reference is made to the information regarding directors and nominees, code of ethics, corporate governance matters and disclosure relating to compliance with Section16(a) of the Securities Exchange Act of 1934 appearing under the captions “Election of Directors” and “Delinquent Section 16(a) Reports” in the Company’s ProxyStatement for its 2020 Annual Meeting of Stockholders (the “2020 Annual Meeting”), which information is incorporated in this Annual Report on Form 10-K byreference. Information regarding executive officers is set forth under the caption “Information about Executive Officers” in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be set forth under the caption “Executive Officer Compensation” in the Company’s Proxy Statement for the 2020 AnnualMeeting, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item will be set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “EquityCompensation Plan Information” in the Company’s Proxy Statement for the 2020 Annual Meeting, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item will be set forth under the captions “Certain Relationships and Related Transactions” and “Election of Directors” in the Company’sProxy Statement for the 2020 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 2020 Annual Meeting, and isincorporated herein by reference. 79Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) Documents filed as part of this report (1) All financial statements Reports of Independent Registered Public Accounting FirmsConsolidated 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 the schedules, or becausethe 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. 4.1 Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. 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) Monolithic Power Systems, Inc. Master Cash Performance Bonus Plan. 10.10+(12) Letter Agreement with Eugen Elmiger. 10.11+(13) Monolithic Power Systems, Inc. 2004 Equity Incentive Plan, as Amended, and Form of Grant Agreement. 10.12+(14) Monolithic Power Systems, Inc. 2014 Equity Incentive Plan, as Amended, and Form of Grant Agreement. 80Table of Contents 10.13+(15) Employment Agreement with Bernie Blegen. 10.14+ Employment Agreement with Saria Tseng and Amendment thereof. 21.1 Subsidiaries of Monolithic Power Systems, Inc. 23.1 Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP). 23.2 Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP). 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 Section 302 of theSarbanes-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 Section 302 of theSarbanes-Oxley Act of 2002. 32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within theInline XBRL document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) +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 the liabilities of thatSection, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whethermade 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 with the Securitiesand 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 with the Securitiesand 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 with the Securitiesand 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 with the Securitiesand 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 and ExchangeCommission on March 11, 2008 and Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed with the Securities and ExchangeCommission 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 and ExchangeCommission on March 11, 2008 and Exhibit 10.3 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed with the Securities and ExchangeCommission on December 19, 2008.(7)Incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 (Registration No. 333-117327), filed with the Securities andExchange 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 and ExchangeCommission on March 11, 2008 and Exhibit 10.4 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed with the Securities and ExchangeCommission on December 19, 2008. 81Table of Contents (9)Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed with the Securities and ExchangeCommission 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 and ExchangeCommission on February 3, 2010.(11)Incorporated by reference to Annexure C of the Registrant’s Proxy Statement on Schedule 14A (File No. 000-51026), filed with the Securities and ExchangeCommission on April 30, 2013.(12)Incorporated by reference to Exhibit 10.36 of the Registrant’s annual report on Form 10-K (File No. 000-51026), filed with the Securities and ExchangeCommission on March 10, 2014.(13)Incorporated by reference to Exhibit 4.4 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-199782), filed with the Securities andExchange Commission on November 3, 2014.(14)Incorporated by reference to Exhibit 4.6 of the Registrant’s Registration Statement on Form S-8 (Registration No. 333-199782), filed with the Securities andExchange Commission on November 3, 2014.(15)Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No. 000-51026), filed with the Securities and ExchangeCommission on July 22, 2016. ITEM 16. FORM 10-K SUMMARY. None. 82Table 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 its behalf by theundersigned, thereunto duly authorized. MONOLITHIC POWER SYSTEMS, INC. Date: February 28, 2020By:/s/ Michael Hsing Michael Hsing President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael Hsing and T. Bernie Blegen, jointlyand severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same,with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each ofsaid 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 February 28, 2020 by the following persons on behalf of theregistrant and in the capacities indicated: /s/ Michael Hsing President, Chief Executive Officer, and Director (Principal Executive Officer)MICHAEL HSING /s/ T. Bernie Blegen Chief Financial Officer (Principal Financial and Accounting Officer)T. BERNIE BLEGEN /S/ HERBERT CHANG DirectorHERBERT CHANG /S/ EUGEN ELMIGER DirectorEUGEN ELMIGER /S/ VICTOR K. LEE DirectorVICTOR K. LEE /S/ JAMES C. MOYER DirectorJAMES C. MOYER /S/ JEFF ZHOU DirectorJEFF ZHOU 83

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