See accompanying notes to unaudited condensed consolidated financial statements.

2. REVENUE RECOGNITION

Revenue from Product Sales

The following table presents the Company’s revenue disaggregated by end market (in thousands, except for percentages):

	Three Months Ended June 30,										Six Months Ended June 30,
	2018		% of Revenue			2017 (1)		% of Revenue			2018		% of Revenue			2017 (1)		% of Revenue
Consumer	$	47,809		34.2	%	$	43,917		39.1	%	$	94,953		35.3	%	$	79,528		37.4	%
Computing and storage		36,957		26.4			24,466		21.8			67,927		25.3			45,083		21.2
Automotive		20,340		14.6			12,854		11.5			38,072		14.2			25,185		11.9
Industrial		19,121		13.7			15,034		13.4			36,676		13.6			30,388		14.3
Communications		15,534		11.1			15,927		14.2			31,283		11.6			32,376		15.2
Total	$	139,761		100.0	%	$	112,198		100.0	%	$	268,911		100.0	%	$	212,560		100.0	%

_____________

(1)	2017 amounts have not been adjusted under the modified retrospective method.

The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits, as well as dies in wafer form. The Company also generates royalty revenue from licensing arrangements and revenue from wafer testing services performed for third parties, which have not been significant in all periods presented.

The Company sells its products primarily through third-party distributors, value-added resellers, original equipment manufacturers, original design manufacturers and electronic manufacturing service providers. For the three months ended June 30, 2018 and 2017, approximately 86% and 88%, respectively, of the Company’s sales were made through distribution arrangements. For the six months ended June 30, 2018 and 2017, approximately 87% and 88%, respectively, of the Company’s sales were made through distribution arrangements. These distribution arrangements contain enforceable rights and obligations specific to those distributors and not the end customers. Purchase orders, which are governed by sales agreements or the Company's standard terms of sale, state the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers purchase orders 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.

Under Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company excludes taxes assessed by government authorities, such as sales taxes, from revenue.

Table of Contents

2.Product sales consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue from distributors and direct end customers when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. In accordance with 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 held at customers’ designated locations because the Company retains ownership and the customers do not have an unconditional obligation to pay. The Company recognizes revenue when the customers pull the products from the locations or after a 60-day period lapses, at which time control transfers to the customers and the Company invoices them for payment.

Variable Consideration

The Company records variable consideration as a reduction to revenue in the same period the revenue is recognized. Three U.S.-based distributors have price adjustment rights when they sell the Company’s products to their end customers 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 been sold to the end customers at the lower price, the Company issues the distributors credit memos for the price adjustments. The Company estimates the price adjustments based on analyses of 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 the Company’s total sales to distributors, do not have price adjustment rights.

In addition, certain distributors have limited stock rotation rights that permit the return of a small percentage of the previous six months’ purchases. The Company estimates the stock rotation returns based on analyses of historical returns, and the current level of inventory in the distribution channel. The Company recognizes an asset for product returns which represents the right to recover products from the customers related to stock rotations, with a corresponding reduction to cost of goods sold.

Contract Balances

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of June 30, 2018 and December 31, 2017, accounts receivable totaled $53.5 million and $38.0 million, respectively. To manage credit risk, management performs ongoing credit evaluations of its customers’ financial condition. The Company did not recognize any impairment losses related to its receivables in any of the periods presented.

For certain customers located in Asia, the Company requires cash payments two weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of June 30, 2018 and December 31, 2017, customer prepayments totaled $3.2 million and $4.7 million, respectively. The decrease in the customer prepayment balance for the six months ended June 30, 2018 resulted from a decrease in unfulfilled customer orders for which the Company has received payments. For the six months ended June 30, 2018, the Company recognized $4.7 million of revenue that was included in the customer prepayment balance as of December 31, 2017.

Contract Costs

The Company pays sales commissions based on the achievement of pre-determined product sales targets. As the Company recognizes product sales at a point in time, sales commissions are expensed as incurred.

Warranty

The Company generally provides one to two-year warranties against defects in materials and workmanship and will either repair the products, provide replacements at no charge to customers or issue a refund. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations. Warranty reserve requirements are based on a specific assessment of the products sold with warranties when a customer asserts a claim for warranty or a product defect.

Practical Expedients

The Company’s standard payment terms generally require customers to pay 30 to 60 days after the Company satisfies the performance obligations. For those customers who are required to pay in advance, the Company satisfies the performance obligations typically within one quarter. The Company has elected not to determine whether contacts with customers contain significant financing components.

Table of Contents

As of June 30, 2018, the Company’s unsatisfied performance obligations primarily included products held in consignment arrangements and customer purchase orders for products that the Company has not yet shipped. Because the Company expects to fulfill these performance obligations within one year, the Company has elected not to disclose the amount of these remaining performance obligations or the timing of recognition.

Changes to Financial Statement Line Items

The following tables compare the impact on the financial statement line items between the application of Topic 606 and Topic 605 as of June 30, 2018 and for the three and six months ended June 30, 2018. The significant changes between the two standards are primarily attributable to the following:

●

Under Topic 606, the Company recognizes revenue for three U.S.-based distributors upon shipment of the products to them, net of an estimated amount for price adjustments. Under Topic 605, the Company would have deferred the recognition of revenue and related costs for these U.S. distributors until the Company received notification from the distributors that the products had been sold to the end customers and the amount of price adjustments was fixed and finalized.

●

Under Topic 606, the Company records assets for product returns within other current assets, which primarily represent the carrying value of inventory it expects to recover from customers related to stock rotation returns. Under Topic 605, such amounts would have been netted against the stock rotation reserve within current accrued liabilities.

●

Under Topic 606, the Company recorded a cumulative effect of initially applying the standard to retained earnings. Under Topic 605, the Company would not have recorded this adjustment.

Condensed Consolidated Balance Sheet (in thousands):

	June 30, 2018
	Topic 606
Line Item	(As Reported)		Topic 605		Difference
Assets:
Accounts receivable	$	53,460	$	55,016	$	(1,556	)
Inventories	$	128,909	$	128,938	$	(29	)
Other current assets	$	13,974	$	12,927	$	1,047
Deferred tax assets, net	$	15,791	$	15,892	$	(101	)
Total assets	$	719,952	$	720,591	$	(639	)
Liabilities and Stockholders' Equity:
Accrued liabilities	$	33,033	$	34,178	$	(1,145	)
Retained earnings	$	162,859	$	162,353	$	506
Total liabilities and stockholders' equity	$	719,952	$	720,591	$	(639	)

Condensed Consolidated Statement of Operations (in thousands, except per-share amounts):

	Three Months Ended June 30, 2018							Six Months Ended June 30, 2018
	Topic 606							Topic 606
Line Item	(As Reported)		Topic 605		Difference			(As Reported)		Topic 605		Difference
Revenue	$	139,761	$	139,758	$	3		$	268,911	$	268,717	$	194
Cost of revenue	$	62,197	$	62,234	$	(37	)	$	119,852	$	119,818	$	34
Gross profit	$	77,564	$	77,524	$	40		$	149,059	$	148,899	$	160
Income from operations	$	24,882	$	24,842	$	40		$	46,918	$	46,758	$	160
Income before income taxes	$	27,114	$	27,074	$	40		$	49,591	$	49,431	$	160
Income tax provision	$	2,908	$	2,900	$	8		$	3,529	$	3,496	$	33
Net income	$	24,206	$	24,174	$	32		$	46,062	$	45,935	$	127
Net income per share - diluted	$	0.55	$	0.54	$	0.01		$	1.04	$	1.04	$	-

Table of Contents

Condensed Consolidated Statement of Comprehensive Income (in thousands):

	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
	Topic 606						Topic 606
Line Item	(As Reported)		Topic 605		Difference		(As Reported)		Topic 605		Difference
Net income	$	24,206	$	24,174	$	32	$	46,062	$	45,935	$	127
Comprehensive income	$	17,459	$	17,427	$	32	$	42,544	$	42,417	$	127

Condensed Consolidated Statement of Cash Flows (in thousands):

	Six Months Ended June 30, 2018
	Topic 606
Line Item	(As Reported)			Topic 605			Difference
Cash flows from operating activities:
Net income	$	46,062		$	45,935		$	127
Changes in operating assets and liabilities:
Accounts receivable	$	(16,325	)	$	(16,980	)	$	655
Inventories	$	(29,602	)	$	(29,631	)	$	29
Other assets	$	(983	)	$	(27	)	$	(956	)
Accrued liabilities	$	539		$	428		$	111
Income tax liabilities	$	1,546		$	1,512		$	34

3. STOCK-BASED COMPENSATION

2014 Equity Incentive Plan (the “~~2014~~“2014 Plan”)

The Board of Directors adopted the 2014 Plan in April 2013, and the stockholders approved it in June 2013. In October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The 2014 Plan, 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 ~~September~~June 30, ~~2017, 3.2~~2018, 2.7 million shares remained available for future issuance under the 2014 Plan.

Stock-Based Compensation Expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Cost of revenue	$	453	$	403	$	1,264	$	1,217	$	480	$	452	$	913	$	810
Research and development		3,838		3,986		11,297		11,001		4,194		3,961		8,188		7,459
Selling, general and administrative		9,678		9,127		28,198		22,023		11,218		10,714		21,820		18,520
Total	$	13,969	$	13,516	$	40,759	$	34,241
Total stock-based compensation expense									$	15,892	$	15,127	$	30,921	$	26,789
Tax benefit related to stock-based compensation									$	829	$	-	$	1,959	$	-

Table of Contents

~~In the first quarter of 2016, the Company’s then Chief Financial Officer retired. As the service or performance conditions for her outstanding~~Restricted Stock Units

The Company’s restricted stock units (“RSUs”) had not been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested RSUs and this credit was reflected in selling, general and administrative expenses for the nine months ended September 30, 2016.

~~RSUs~~

~~The~~ ~~Company’s RSUs~~ include time-based RSUs, RSUs with only performance conditions (“PSUs”), RSUs with both market and performance conditions (“MPSUs”), and RSUs with only market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals. A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

Time-Based RSUs

Weighted-Average Grant Date Fair
Value Per
Share

PSUs and MPSUs

Weighted-Average Grant Date Fair
Value Per
Share

MSUs

Weighted-Average Grant Date Fair
Value Per
Share

Total

Weighted-Average Grant Date Fair Value Per Share

Outstanding at January 1, 2017
366 $ 51.35 2,284 $ 43.24 1,620 $ 23.57 4,270 $ 36.47
Granted
75 $ 92.53 645 (1) $ 61.08 - $ - 720 $ 64.35
Released
(148 ) $ 47.93 (520 ) $ 42.34 - $ - (668 ) $ 43.57
Forfeited
(14 ) $ 62.01 (5 ) $ 49.82 - $ - (19 ) $ 58.43
Outstanding at September 30, 2017
279 $ 63.68 2,404 $ 48.20 1,620 $ 23.57 4,303 $ 39.93

	Time-Based RSUs			Weighted- Average Grant Date Fair Value Per Share		PSUs and MPSUs			Weighted- Average Grant Date Fair Value Per Share		MSUs		Weighted- Average Grant Date Fair Value Per Share		Total			Weighted- Average Grant Date Fair Value Per Share
Outstanding at January 1, 2018		258		$	66.30		2,266		$	48.59		1,620	$	23.57		4,144		$	39.91
Granted		84		$	113.36		626	(1)	$	81.93		-	$	-		710		$	85.66
Vested		(92	)	$	58.40		(557	)	$	40.38		-	$	-		(649	)	$	42.94
Forfeited		(9	)	$	77.47		(5	)	$	60.20		-	$	-		(14	)	$	71.41
Outstanding at June 30, 2018		241		$	85.38		2,330		$	59.49		1,620	$	23.57		4,191		$	47.09

(1)	Amount re~~flects~~reflects the number of PSUs and MPSUs that may ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions.

The intrinsic value related to vested RSUs ~~released~~ was ~~$12.5~~$15.6 million and ~~$10.6~~$11.4 million for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The intrinsic value related to vested RSUs ~~released~~ was ~~$61.3~~$65.2 million and ~~$53.2~~$48.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. As of ~~September~~June 30, ~~2017,~~2018, the total intrinsic value of all outstanding RSUs was ~~$422.1~~$515.2 million, based on the closing stock price of ~~$106.55.~~$133.67. As of ~~September~~June 30, ~~2017,~~2018, unamortized compensation expense related to all outstanding RSUs was ~~approximately $89.6~~$105.4 million with a weighted-average remaining recognition period of approximately three years.

Cash proceeds from vested PSUs with a purchase price feature totaled $8.7 million for the six months ended June 30, 2018. There were no proceeds for the six months ended June 30, 2017.

Time-Based RSUs:

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, the Compensation Committee of the Board of Directors (the "Compensation Committee") granted ~~75,000~~84,000 RSUs with time-based vesting conditions to ~~non-executive~~ employees and non-employee directors. The RSUs ~~generally~~ vest over four years for employees and one year for directors, subject to continued service with the Company.

~~Table of Contents~~

~~2017~~2018 PSUs:

In February ~~2017,~~2018, the ~~Board of Directors~~Compensation Committee granted ~~200,000~~188,000 PSUs to the executive officers, which represent a target number of shares to be awarded based on the Company’s average two-year ~~(2017~~(2018 and ~~2018)~~2019) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“~~2017~~2018 Executive PSUs”). The maximum number of shares that an executive officer can earn is 300% of the target number of the ~~2017~~2018 Executive PSUs. 50% of the ~~2017~~2018 Executive PSUs will vest in the first quarter of ~~2019~~2020 if the pre-determined performance goals are met during the performance period and approved by the ~~Board of Directors.~~Compensation Committee. The remaining ~~2017~~2018 Executive PSUs will vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the ~~2017~~2018 Executive PSUs is ~~approximately $36.3~~$46.1 million.

In February ~~2017,~~2018, the ~~Board of Directors~~Compensation Committee granted ~~48,000~~44,000 PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s ~~2018~~2019 revenue goals for certain regions or product line divisions, or based on the Company’s average two-year ~~(2017~~(2018 and ~~2018)~~2019) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“~~2017~~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 ~~2017~~2018 Non-Executive PSUs, depending on the job classification of the employee. 50% of the ~~2017~~2018 Non-Executive PSUs will vest in the first quarter of ~~2019~~2020 if the pre-determined performance goals are met during the performance period and approved by the ~~Board of Directors.~~Compensation Committee. The remaining ~~2017~~2018 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the ~~2017~~2018 Non-Executive PSUs, excluding cancelled shares, is ~~approximately $7.1~~$8.8 million.

The ~~2017~~2018 Executive PSUs and the ~~2017~~2018 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 that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the ~~2017~~2018 Executive PSUs and the ~~2017~~2018 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of ~~$89.37,~~$110.00, expected term of 2.6 years, expected volatility of ~~28.6%~~27.5% and risk-free interest rate of ~~1.3%~~2.3%.

Table of Contents

2015 MPSUs:

On December 31, 2015, the ~~Board of Directors~~Compensation Committee granted ~~127,000~~86,000 MPSUs to the executive officers and 41,000 MPSUs to certain ~~key~~non-executive employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2015 MPSUs. The 2015 MPSUs consist of four separate tranches with various performance periods ending on December 31, 2019. The first tranche contains market conditions only, which require the achievement of five stock price targets ranging from $71.36 to $95.57 with a performance period from January 1, 2016 to December 31, 2019. As of September 30, 2017, all five price targets for the first tranche have been ~~achieved.~~achieved and approved by the Compensation Committee.

The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of five stock price targets measured against a base price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading days immediately before the start of the ~~measurement~~performance period for that tranche, or (2) the closing stock price immediately before the start of the ~~measurement~~performance period for that tranche. The stock price targets for the second tranche range from $89.56 to $106.81 with a performance period from January 1, 2017 to December 31, 2019. As of ~~September 30,~~December 31, 2017, ~~four~~all five price targets for the second tranche have been ~~achieved.~~achieved and approved by the Compensation Committee. The stock price targets for the third tranche ~~will be determined on December 31, 2017~~range from $120.80 to $135.48 with a performance period from January 1, 2018 to December 31, 2019. As of June 30, 2018, one stock price target for the third tranche has been achieved and approved by the Compensation Committee. The stock price targets for the fourth tranche will be determined on December 31, 2018 with a performance period from January 1, 2019 to December 31, 2019.

In addition, each of the second, third and fourth tranches requires the achievement of one of following six operating metrics:

Successful implementation of full digital solutions ~~vs. current analog topology~~ for certain power products.

Successful implementation, and adoption by a key customer, of an integrated, software-based ~~field-oriented-control~~field-oriented control with sensors to motor drivers.

Successful implementation of certain advanced power analog processes.

Successful design wins and achievement of a specific level of revenue with a global networking customer.

Achievement of a specific level of revenue with a global electronics manufacturer.

Achievement of a specific level of market share with certain core power products.

As of ~~September~~June 30, ~~2017,~~2018, none of the operating metrics have been achieved.

~~Table of Contents~~

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

The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of $61.35, expected volatility of 33.2%, risk-free interest rate of 1.3%, and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. ~~In March 2016, the Company cancelled 13,000 2015 MPSUs as a result of the departure of its then Chief Financial Officer.~~ Assuming the achievement of all of the required market and performance goals, the total stock-based compensation cost for the 2015 MPSUs, excluding cancelled shares, is ~~approximately~~ $24.6 million ~~to be recognized as follows: $8.3~~($8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for the third tranche, and $6.6 million for the fourth ~~tranche.~~tranche).

For the first tranche, stock-based compensation expense is being recognized over the requisite service period. For the second, third and fourth tranches, stock-based compensation expense for each tranche is recognized depending upon the number of the operating metrics management deems probable of being achieved during the performance periods in each reporting period. As of ~~September~~June 30, ~~2017,~~2018, based on management’s quarterly assessment, three of the six operating metrics were considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense is being recognized for the second, third and fourth tranches over the requisite service period.

~~Stock Options~~

~~No options were granted for the three and nine months ended September 30, 2017 and 2016.~~ No options were exercised for the three months ended September 30, 2017. Total intrinsic value of options exercised was $0.7 million for the three months ended September 30, 2016. Total intrinsic value of options exercised was $0.6 million and $3.2 million for the nine months ended September 30, 2017 and 2016, respectively. Cash proceeds from the exercise of stock options were $0.1 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was no unamortized compensation expense and outstanding options were not material.

Employee Stock Purchase Plan (“ESPP”)

~~For~~No shares were issued under the ESPP for the three months ended ~~September~~ June 30, ~~2017~~2018 and ~~2016,~~2017. For the six months ended June 30, 2018 and 2017, 18,000 and ~~24,000 shares, respectively, were issued under the ESPP. For the nine months ended September 30, 2017 and 2016, 40,000 and 53,000~~22,000 shares, respectively, were issued under the ESPP. As of ~~September~~June 30, ~~2017,~~2018, 4.6 million shares were available for future issuance.

Table of Contents

The intrinsic value of the shares issued was $0.5 million ~~and $0.6 million for the three months ended September 30, 2017 and 2016, respectively. The intrinsic value of the shares issued was $1.0 million~~ for both the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017. As of ~~September~~June 30, ~~2017,~~2018, the unamortized expense was ~~$0.3~~$0.1 million, which will be recognized through the ~~first~~third quarter of 2018. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017
Expected term (years)		0.5			0.5			0.5			0.5			0.5			0.5
Expected volatility		23.5	%		27.5	%		23.5	%		28.6	%		28.2	%		23.4	%
Risk-free interest rate		1.2	%		0.5	%		0.9	%		0.4	%		1.8	%		0.7	%
Dividend yield		0.8	%		1.1	%		0.9	%		1.2	%		1.0	%		0.9	%

Cash proceeds from the shares issued under the ESPP were ~~$2.7~~$1.6 million and ~~$2.5~~$1.4 million for the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, ~~and 2016,~~ respectively.

Under Topic 606, “assets for product returns” primarily represent the carrying value of inventory the Company expects to recover from customers related to stock rotation returns. Prior to the adoption of Topic 606, such amounts were netted against the stock rotation reserve within current accrued liabilities.

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

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

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

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows:

Restricted cash includes a security deposit that is set aside in a bank account and cannot be withdrawn by the Company under the terms of a lease agreement. The restriction will end and any unused amount will be returned to the Company upon the expiration of the lease.

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

As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, accrued dividends totaled $12.7 million and $8.3 million, ~~and $8.2 million,~~ respectively.

The declaration of any future cash dividends is at the discretion of the Board of Directors and will depend on, among other things, the ~~Company~~’sCompany’s financial condition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, ~~compliance with the terms of future indebtedness and credit facilities~~ and other factors that the Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of the stockholders.

The Company anticipates that ~~the~~ cash used for future ~~dividends~~dividend payments will come from its current domestic cash and cash generated from ongoing U.S. ~~operations. If~~operations, as well as cash ~~held by the Company’s international~~to be repatriated from its Bermuda subsidiary. Earnings from other foreign subsidiaries ~~is needed for the payment of dividends, the Company may~~will continue to be ~~required to accrue and pay U.S. taxes to repatriate the funds under the current tax laws.~~indefinitely reinvested.

Under the ~~Company~~’sCompany’s stock plans, outstanding RSUs contain rights to receive cash dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, accrued dividend equivalents totaled ~~$5.6~~$7.2 million and ~~$4.1~~$5.8 million, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among ~~other things,~~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 consumer, computing and storage, industrial, automotive and communications markets,

estimates of our future liquidity requirements,

the cyclical nature of the semiconductor industry,

protection of our proprietary technology,

business outlook for the remainder of ~~2017~~2018 and beyond,

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

the percentage of our total revenue from various ~~market segments,~~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,~~

our intention and ability to ~~repurchase shares under our stock repurchase program and~~ pay future cash dividends, and

the factors that differentiate us from our competitors.

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

~~The following management~~’s discussion and analysis should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2017 included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year ended December 31, 2016 included in our Annual Report on Form 10-K.

We are a leading semiconductor company that designs, develops and markets high-performance power solutions. Founded in 1997, MPS’s core strengths include deep system-level and applications knowledge, strong analog design expertise and an innovative proprietary process technology. These combined strengths enable MPS to deliver highly integrated monolithic products that offer energy efficient, cost-effective, easy-to-use solutions for systems found in consumer, computing and storage, industrial, ~~applications, telecommunication infrastructures, cloud computing,~~ automotive and ~~consumer~~communications applications. Our mission is to reduce total energy consumption in our customers' systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.

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

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

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

We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where ~~the~~our products ~~we produce~~ are incorporated into end-user products. Our revenue from direct or indirect sales to customers in Asia was 89% ~~and 91%~~ for both the three months ended ~~September~~June 30, 2018 and 2017, and ~~2016,~~88% and 89% ~~and 90%~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the consumer, computing and storage, industrial, automotive and communications markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and ~~successfully~~continue to secure manufacturing capacity.

~~Other than those~~Except for the changes related to revenue recognition discussed ~~in “Recent Accounting Pronouncements”~~ in Note 1 and Note 2 to Condensed Consolidated Financial Statements, there have been no other significant changes in our critical accounting policies and estimates used in the preparation of our financial statements during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

The table below sets forth the data in the Condensed Consolidated ~~Statement~~sStatements of Operations as a percentage of revenue:

The following table summarizes our revenue by end ~~market, based on management’s assessment of available end market data:~~market:

Revenue for the three months ended ~~September~~June 30, ~~2017~~2018 was ~~$128.9~~$139.8 million, an increase of ~~$22.4~~$27.6 million, or ~~21.1%~~24.6%, from ~~$106.5~~$112.2 million for the three months ended ~~September~~June 30, ~~2016.~~2017. This increase was driven by higher sales in all of our end markets except for communications. Overall unit shipments increased by ~~approximately 4%~~12% due to higher market demand, ~~with current customers~~ and ~~design wins with new customers, coupled with a 15% increase in~~ average sales ~~prices.~~ prices increased by 9%.

Revenue from the consumer market for the three months ended ~~September~~June 30, ~~2017~~2018 increased ~~$11.7~~$3.9 million, or ~~26.8%~~8.9%, from the same period in ~~2016.~~2017. This increase was primarily driven by higher demand in ~~gaming~~home appliance and ~~home appliance~~internet-of-things related products. Revenue from the computing and storage market increased ~~$5.6~~$12.5 million, or ~~23.7%~~51.1%, from the same period in ~~2016.~~2017. This increase was primarily driven by strength in the solid-state drive storage, ~~and~~ cloud computing and high-performance notebook markets. Revenue from the automotive market increased $7.5 million, or 58.2%, from the same period in 2017. This increase was primarily driven by higher sales of products for infotainment, safety and connectivity applications. Revenue from the industrial market increased ~~$1.8~~$4.1 million, or ~~12.6%~~27.2%, from the same period in ~~2016.~~2017. This increase was primarily driven by higher sales in power source products. Revenue from the ~~automotive~~communications market ~~increased $4.2~~decreased $0.4 million, or ~~48.8%~~2.5%, from the same period in 2016. This increase was primarily driven by higher sales in products for infotainment, safety and connectivity applications. Revenue from the communications market decreased $0.8 million, or 5.0%, from the same period in 2016.2017. This decrease was primarily driven by lower demand in ~~networking and telecommunication application markets.~~wireless applications.

Revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was ~~$341.5~~$268.9 million, an increase of ~~$56.5~~$56.3 million, or ~~19.8%~~26.5%, from ~~$285.0~~$212.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. This increase was driven by higher sales in all of our end ~~markets.~~markets except for communications. Overall unit shipments increased by 8%15% due to higher market demand, ~~with current customers~~ and ~~design wins with new customers, coupled with an 11% increase in~~ average sales ~~prices.~~ prices increased by 8%.

Revenue from the consumer market for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 increased ~~$19.1~~$15.4 million, or ~~16.5%~~19.4%, from the same period in ~~2016.~~2017. This increase was primarily driven by higher demand in ~~gaming~~home appliance, specialty lighting and ~~home appliance~~internet-of-things related products. Revenue from the computing and storage market increased ~~$16.9~~$22.8 million, or ~~29.6%~~50.7%, from the same period in ~~2016.~~2017. This increase was primarily driven by strength in the solid-state drive storage, cloud computing and high-performance notebook markets. Revenue from the automotive market increased $12.9 million, or 51.2%, from the same period in 2017. This increase was primarily driven by higher sales of products for infotainment, safety and ~~cloud computing markets.~~connectivity applications. Revenue from the industrial market increased ~~$6.2~~$6.3 million, or ~~15.3%~~20.7%, from the same period in ~~2016.~~2017. This increase was primarily driven by higher sales in power source, security and ~~point of sale system~~meter products. Revenue from the ~~automotive~~communications market ~~increased $14.1~~decreased $1.1 million, or ~~59.1%~~3.4%, from the same period in ~~2016.~~2017. This ~~increase~~decrease was primarily driven by ~~higher sales~~lower demand in ~~products for infotainment, safety and connectivity~~wireless applications. ~~Revenue from the communications market was essentially flat compared to the same period in 2016.~~

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

Cost of revenue was ~~$58.1~~$62.2 million, or ~~45.0%~~44.5% of revenue, for the three months ended ~~September~~June 30, ~~2017,~~2018, and ~~$48.5~~$50.8 million, or ~~45.6%~~45.3% of revenue, for the three months ended ~~September~~June 30, ~~2016.~~2017. The ~~$9.6~~$11.4 million increase in cost of revenue was primarily due to a ~~4% increase in overall unit shipments, coupled with an 18% increase in the average direct cost of units shipped.~~

~~Gross margin was 55.0~~% for the three months ended September 30, 2017, compared with 54.4% for the three months ended September 30, 2016. The increase in gross margin was primarily due to lower labor and manufacturing overhead costs as a percentage of revenue, partially offset by increased sales of lower margin products.

~~Cost of revenue was $154.4 million, or 45.2~~% of revenue, for the nine months ended September 30, 2017, and $130.7 million, or 45.8% of revenue, for the nine months ended September 30, 2016. The $23.7 million increase in cost of revenue was primarily due to an 8%12% increase in overall unit shipments, coupled with a ~~12%~~7% increase in the average direct cost of units shipped. The increase in cost of revenue was also driven by ana $3.8 million increase ~~of $1.7 million~~ in inventory ~~write-downs.~~write-downs, partially offset by a $0.8 million decrease in warranty expenses.

Gross margin was ~~54.8%~~55.5% for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2018, compared with ~~54.2%~~54.7% for the ~~nine~~three months ended ~~September~~June 30, ~~2016.~~2017. The increase in gross margin was primarily due to increased sales of higher margin products, lower labor and manufacturing overhead costs, ~~as a percentage of revenue,~~lower warranty expenses, and lower amortization expense due to certain intangible assets being fully amortized, partially offset by higher inventory write-downs as a percentage of revenue.

Cost of revenue was $119.9 million, or 44.6% of revenue, for the six months ended June 30, 2018, and $96.3 million, or 45.3% of revenue, for the six months ended June 30, 2017. The $23.6 million increase in cost of revenue was primarily due to a 15% increase in overall unit shipments, coupled with a 6% increase in the average direct cost of units shipped. The increase in cost of revenue was also driven by a $5.1 million increase in inventory write-downs.

Gross margin was 55.4% for the six months ended June 30, 2018, compared with 54.7% for the six months ended June 30, 2017. The increase in gross margin was primarily due to increased sales of higher margin products, lower labor and manufacturing overhead costs and lower amortization expense due to certain intangible assets being fully amortized, partially offset by higher inventory write-downs as a percentage of revenue.

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

R&D expenses were ~~$21.4~~$23.5 million, or ~~16.6%~~16.8% of revenue, for the three months ended ~~September~~June 30, ~~2017~~2018, and ~~$20.5~~$20.3 million, or ~~19.2%~~18.1% of revenue, for the three months ended ~~September~~June 30, ~~2016.~~2017. The ~~$0.9~~$3.2 million increase in R&D expenses was primarily due to an increase of ~~$0.9~~$1.2 million in compensation expenses, which include salary, benefits and ~~bonuses.~~bonuses, an increase of $0.7 million in new product development expenses, an increase of $0.3 million in laboratory supplies, and an increase of $0.2 million in stock-based compensation expenses mainly associated with the performance-based equity awards. These increases were partially offset by a $0.3 million decrease in depreciation. Our R&D headcount was ~~624~~655 employees as of ~~September~~June 30, ~~2017,~~2018, compared with ~~570~~592 employees as of ~~September~~June 30, ~~2016.~~2017.

R&D ~~expenses~~expenses were ~~$60.6~~$45.1 million, or ~~17.8%~~16.8% of revenue, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018, and ~~$55.7~~$39.2 million, or ~~19.5%~~18.4% of revenue, for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The ~~$4.9~~$5.9 million increase in R&D expenses was primarily due to an increase of ~~$2.1~~$2.7 million in compensation expenses, which include salary, benefits and bonuses, an increase of ~~$1.2 million in laboratory supplies, an increase of $1.1~~$1.4 million in new product development expenses, an increase of $0.9 million in laboratory supplies, and an increase of ~~$0.5~~$0.7 million in stock-based compensation expenses ~~related to changes~~mainly associated with the performance-based equity awards. These increases were partially offset by a $0.7 million decrease in ~~the value of the deferred compensation plan liabilities.~~depreciation.

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

SG&A expenses were ~~$25.3~~$28.6 million, or ~~19.6%~~20.4% of revenue, for the three months ended ~~September~~June 30, ~~2017~~2018, and ~~$22.4~~$25.9 million, or ~~21.0%~~23.1% of revenue, for the three months ended ~~September~~June 30, ~~2016.~~2017. The ~~$2.9~~$2.7 million increase in SG&A expenses was primarily due to an increase of ~~$0.8~~$1.1 million in commission expenses driven by higher revenue, an increase of $0.7 million in compensation expenses, which include salary, benefits and bonuses, and an increase of ~~$0.7 million in commission expenses due to higher revenue, an increase of $0.6~~$0.5 million in stock-based compensation expenses mainly associated with the performance-based equity ~~awards, and an increase of $0.4 million in depreciation expense.~~awards. Our SG&A headcount was ~~378~~403 employees as of ~~September~~June 30, ~~2017,~~2018, compared with ~~350~~369 employees as of ~~September~~June 30, ~~2016.~~ 2017.

SG&A expenses were ~~$73.2~~$55.9 million, or ~~21.4%~~20.8% of revenue, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018, and ~~$61.7~~$48.0 million, or ~~21.6%~~22.6% of revenue, for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The ~~$11.5~~$7.9 million increase in SG&A expenses was primarily due to an increase of $3.3 million in stock-based compensation expenses mainly associated with the performance-based equity awards, an increase of $2.3 million in compensation expenses, which include salary, benefits and bonuses, ~~an increase of $1.3 million in depreciation expense, an increase of $0.6 million in expenses related to changes in the value of the deferred compensation plan liabilities,~~ and an increase of ~~$0.5~~$2.0 million in commission expenses ~~due to~~driven by higher revenue. In addition, contributing to the increase in SG&A expenses for the nine months ended September 30, 2017 was a stock-based compensation credit recorded in the nine months ended September 30, 2016 due to the retirement of our then Chief Financial Officer in the first quarter of 2016. As the service or performance conditions for her outstanding restricted stock units had not been satisfied at the time of her departure, we reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested restricted stock units and recorded the credit in SG&A expenses for the nine months ended September 30, 2016.

Litigation expense was ~~$0.3~~$0.6 million for the three months ended ~~September~~June 30, ~~2017,~~2018, compared with ~~$55,000~~$0.3 million for the three months ended ~~September~~June 30, ~~2016.~~2017. The increase ~~in litigation expense~~ was primarily due to ~~increased litigation activity.~~ongoing litigation.

Litigation expense was ~~$0.9~~$1.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, compared with ~~$92,000~~$0.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. The increase ~~in litigation expense~~ was primarily due to increased litigation activity. In addition, contributing to the increase in litigation expense was $0.2 million in proceeds received in connection with a litigation settlement recorded in the nine months ended September 30, 2016.ongoing litigation.

Interest and other income, net, was ~~$1.3~~$2.2 million for the three months ended ~~September~~June 30, ~~2017,~~2018, compared with ~~$0.8~~$1.2 million for the three months ended ~~September~~June 30, ~~2016.~~2017. The increase was primarily due to an increase of ~~$0.8~~$0.7 million in foreign currency exchange gain and an increase of $0.2 million in interest income ~~partially offset by~~as a result of higher investment balances and yields.

Interest and other income, net, was $2.7 million for the six months ended June 30, 2018, compared with $2.6 million for the six months ended June 30, 2017. The increase was primarily due to an increase of $0.4 million in foreign currency exchange gain, an increase of $0.4 million in interest income as a result of higher investment balances and yields, and a decrease of $0.2 million in amortization of premium on available-for-sale investments, ~~and an increase~~which was partially offset by a decrease of ~~$0.2 million in foreign currency exchange loss.~~

Interest and other income, net, was $3.9 million for the nine months ended September 30, 2017, compared with $1.9 million for the nine months ended September 30, 2016. The increase was primarily due to an increase of $2.3 million in interest income and an increase of $0.8$1.0 million in income related to changes in the value of the deferred compensation plan ~~investments, partially offset by an increase of $0.9 million in amortization of premium on available-for-sale investments and an increase of $0.3 million in foreign currency exchange loss.~~investments.

We have not adjusted our provisional tax estimates related to the 2017 Tax Act that were recorded in the fourth quarter of 2017. These amounts remained as estimates as of June 30, 2018 and, as permitted by Staff Accounting Bulletin No. 118, they will be refined through December 2018 based on our ongoing analysis of data and tax positions along with new guidance from regulators and interpretation of the law.

The income tax provision for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was ~~$1.4~~$2.9 million, or ~~5.8%~~10.7% of pre-tax income, and ~~$3.1~~$3.5 million, or ~~5.5%~~7.1% of pre-tax income, respectively. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates, and because of certain stock-based compensation deductions. In addition, the effective tax rate was impacted by the inclusion of the global intangible low-taxed income ("GILTI") under the 2017 Tax Act.

For the three and six months ended June 30, 2018, our effective tax rate included the estimated impact of $15.5 million and $27.9 million, respectively, related to the GILTI provisions that was included as additional subpart F income, which was accounted for as a period cost. In addition, during the first quarter of 2018, we paid the 2018 installment of $1.9 million related to the deemed repatriation transition tax liability. As of June 30, 2018, $1.9 million of the remaining transition tax liability was recorded in current accrued liabilities and $20.1 million was recorded in long-term income tax liabilities on the Condensed Consolidated Balance Sheet.

The income tax provision for the three and six months ended June 30, 2017 was $1.2 million, or 7.4% of pre-tax income, and $1.7 million, or 5.4% of pre-tax income, respectively. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation.

The income tax provision for the three and nine months ended September 30, 2016 was $1.4 million, or 8.9% of pre-tax income, and $2.7 million, or 6.9% of pre-tax income, respectively. The effective tax rate differed from the federal statutory rate primarily because foreign income generated by our subsidiaries in Bermuda and China was taxed at lower rates. In addition, the effective tax rate was impacted by changes in the valuation allowance primarily related to stock-based compensation.

~~On July 27, 2015, in~~~~Altera Corp. v. Commissioner~~, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued in December 2015, and the IRS appealed the decision in February 2016. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in the cost pool to be shared under a cost-sharing arrangement. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any adjustments as of September 30, 2017. We will continue to monitor developments related to this opinion and the potential impact on our financial statements.

As of ~~September~~June 30, ~~2017,~~2018, we had cash and cash equivalents of ~~$104.4~~$83.1 million and short-term investments of ~~$195.2~~$230.4 million, compared with cash and cash equivalents of ~~$112.7~~$82.8 million and short-term investments of ~~$155.5~~$216.3 million as of December 31, ~~2016.~~2017. As of ~~September~~June 30, ~~2017, $74.8~~2018, $54.9 million of cash and cash equivalents and ~~$98.3~~$125.3 million of short-term investments were held by our international subsidiaries. ~~If these funds are needed for~~As a result of the enactment of the 2017 Tax Act, we currently plan to repatriate cash from our ~~operations~~Bermuda subsidiary to fund our future expenditures in the U.S.~~, we may~~ Earnings from other foreign subsidiaries will continue to be ~~required to accrue and pay U.S. taxes to repatriate these funds under the current tax laws. However, our intent is to~~ indefinitely ~~reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate these funds~~ ~~to fund our U.S. operations.~~reinvested.

The significant components of our working capital are cash and cash equivalents, short-term ~~investments,~~investments, accounts receivable, inventories and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of ~~September~~June 30, ~~2017,~~2018, we had working capital of ~~$397.6~~$434.5 million, compared with working capital of ~~$330.1~~$383.3 million as of December 31, ~~2016.~~2017. The ~~$67.5~~$51.2 million increase in working capital was due to ~~an $80.8~~a $60.6 million increase in current assets, partially offset by a ~~$13.3~~$9.4 million increase in current liabilities. The increase in current assets was primarily due to an increase in short-term investments, accounts receivable ~~inventories~~ and ~~prepaid expenses, partially offset by a decrease in cash and cash equivalents.~~inventories. The increase in current liabilities was primarily due to an increase in accounts payable ~~accrued compensation and related benefits~~ and other accrued liabilities.

For the ~~nine months~~six month ended ~~September~~June 30, ~~2017,~~2018, net cash provided by operating activities was ~~$80.4~~$41.7 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of ~~$25.1~~$41.7 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily driven by increased sales and the timing of shipments in the last month of the quarter. The increase in inventories was primarily 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 in accounts payable was primarily driven by increased inventory and capital asset purchases to meet future demand. For the six months ended June 30, 2017, net cash provided by operating activities was $46.8 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $17.3 million from the changes in our operating assets and liabilities. The increase in accounts receivable was primarily driven by higher sales and ~~outstanding balances with certain customers with longer payment terms.~~the timing of shipments. The increase in inventories was primarily driven by an increase in strategic wafer and die bank inventories as well as an increase in finished goods to meet current demand and future growth. The increase in accounts payable was primarily driven by increased inventory and capital asset purchases to meet future demand. The increase in accrued liabilities was primarily driven by an increase in employee contributions to the deferred compensation plan and warranty expenses. For the nine months ended September 30, 2016, net cash provided by operating activities was $76.8 million, primarily due to our net income adjusted for certain non-cash items, including depreciation and amortization and stock-based compensation, and a net decrease of $2.7 million from the changes in our operating assets and liabilities. The increase in other assets was primarily due to a prepaid wafer purchase agreement we funded in the second quarter of 2016. The increase in inventories was primarily due to 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 in accounts payable was primarily driven by increased inventory and capital asset purchases to meet future demand. plan.

For the ~~nine~~six months ended ~~September~~June 30, 2018, net cash used in investing activities was $29.9 million, primarily due to purchases of property and equipment of $13.0 million, net purchases of short-term investments of $15.9 million, and net contributions to the deferred compensation plan of $0.9 million. For the six months ended June 30, 2017, net cash used in investing activities was ~~$67.8~~$73.7 million, primarily due to net purchases of short-term investments of ~~$40.6~~$51.6 million, purchases of property and equipment of ~~$25.1~~$20.5 million, and net contributions to the deferred compensation plan of ~~$2.1~~$1.6 million. For the nine months ended September 30, 2016, net cash used in investing activities was $37.7 million, primarily due to purchases of property and equipment of $29.0 million, net purchases of investments of $6.3 million, and net contributions to the deferred compensation plan of $2.3 million.

~~During the first nine months~~ of 2017, we funded the purchases of land in Kirkland, Washington, and land and office space in Taipei, Taiwan for $13.3 million. During the first nine months of 2016, we funded the purchases of a previously leased manufacturing facility in Chengdu, China, office space in Shenzhen, China, and land and office space in Taipei, Taiwan for $17.5 million.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, net cash used in financing activities was ~~$22.7~~$11.1 million, primarily reflecting ~~$25.3~~$21.5 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by ~~$2.8~~$10.3 million of cash proceeds from ~~stock option exercises~~vesting of RSUs and issuance of shares through our employee stock purchase plan. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, net cash used in financing activities was ~~$20.1~~$15.6 million, primarily reflecting ~~$24.6~~$16.8 million used to pay dividends to our stockholders and dividend equivalents to our employees who hold RSUs, partially offset by ~~$3.7~~$1.5 million of cash proceeds from stock option exercises and issuance of shares through our employee stock purchase plan.

~~We have~~In June 2014, our Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. In addition, outstanding RSU awards contain rights to receive dividend equivalents, which entitle employees who hold RSUs to the same dividend value per share as holders of common stock. The dividend equivalents are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. For the ~~nine~~six months ended ~~September~~June 30, 2018, we paid dividends and dividend equivalents totaling $21.5 million. For the six months ended June 30, 2017, we paid dividends and dividend equivalents totaling ~~$25.3~~$16.8 million. ~~For~~

In February 2018, our Board of Directors approved an increase in our quarterly cash dividends from $0.20 per share to $0.30 per share, effective for the ~~nine months ended September 30, 2016, we paid~~dividends declared in first quarter of 2018.

We anticipate that cash used for future dividends and dividend ~~equivalents totaling $24.6 million.~~equivalent payments, as well as payments for the one-time deemed repatriation transition tax and other expenditures, will come from our current domestic cash and cash generated from ongoing U.S. operations, as well as cash to be repatriated from our Bermuda subsidiary. Earnings from other foreign 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 from operations, together with the liquidity provided by existing cash balances and short-term investments, will be sufficient to satisfy our liquidity requirements for the next 12 months.

We anticipate the cash used for future dividends, dividend equivalents and the stock repurchase program will come from our current domestic cash and cash generated from ongoing U.S. operations. If cash held by our international subsidiaries is needed for these payments, we may be required to accrue and pay U.S. taxes to repatriate these funds under the current tax laws. In the future, in order to strengthen our financial position, respond to changes in our circumstance or unforeseen events or conditions, or fund our growth, we may need to discontinue paying dividends and dividend equivalents, ~~or repurchasing shares,~~ and may need to raise additional funds by any one or a combination of the following: issuing equity securities, issuing debt or convertible debt securities, incurring indebtedness secured by our assets, or selling certain product lines and/or portions of our business. Accordingly, we cannot ensure that we will continue to pay dividends and dividend equivalents ~~or repurchase shares~~ in the future, and there can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.

From time to time, we have engaged in discussions with third parties concerning potential acquisitions of product lines, technologies, businesses and companies, and we continue to consider potential acquisition candidates. Any such transactions could involve the issuance of a significant number of new equity securities, assumptions of debt, and/or payment of cash consideration. We may also be required to raise additional funds to complete any such acquisitions, through either the issuance of equity and debt securities or incurring indebtedness secured by our assets. If we raise additional funds or acquire businesses or technologies through the issuance of equity securities or convertible debt securities, our existing stockholders may experience significant dilution.

In October 2017, we entered into agreements to purchase office space in Shanghai, China and Hangzhou, China for approximately $14.4 million and $16.0 million, respectively. We closed both transactions by early November 2017.

Our outstanding purchase commitments primarily consist of wafer purchases from our foundries, assembly services and license arrangements. As of ~~September~~June 30, ~~2017,~~2018, the outstanding balance under our purchase commitments was ~~$52.8~~$74.9 million, compared with ~~$46.3~~$52.6 million as of December 31, ~~2016.~~2017.

Under the 2017 Tax Act, we have a transition tax liability which represents a one-time, mandatory deemed repatriation tax imposed on previously deferred foreign earnings. As permitted by the 2017 Tax Act, we elected to pay the tax liability in installment over eight years through 2025. During the first quarter of 2018, we paid the 2018 installment of $1.9 million. As of June 30, 2018, the outstanding liability was $22.0 million.

Other long-term obligations include long-term liabilities reflected in our Condensed Consolidated Balance Sheets, which primarily consist of the deferred compensation plan liabilities and accrued dividend ~~equivalents.~~equivalents. As of ~~September~~June 30, ~~2017,~~2018, the outstanding obligations were ~~$28.7~~$34.9 million, compared with ~~$23.2~~$33.0 million as of December 31, ~~2016.~~2017.

Our other contractual obligations have not changed significantly from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

For a discussion of market risks, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, there were no material changes or developments that would materially alter the market risk assessment performed as of December 31, ~~2016.~~2017.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures ~~as defined in~~pursuant to Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~September~~June 30, ~~2017,~~2018, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Effective January 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). We have implemented additional business processes and control activities, primarily related to variable consideration estimates and presentation and disclosure, in order to monitor and maintain appropriate controls over financial reporting. There were no other changes in our internal control over financial reporting that occurred d~~uring~~during the quarter ended ~~September~~June 30, ~~2017~~2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In designing and evaluating the disclosure controls and procedures, ~~management~~management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

We are a party to actions and proceedings in the ordinary course of business, including potential litigation initiated by our shareholders, challenges to the enforceability or validity of our intellectual property, claims that our products infringe on the intellectual property rights of others, and employment matters. These proceedings often involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to prosecute and defend. We defend ourselves vigorously against any such claims.

As of ~~September~~June 30, ~~2017,~~2018, there were no material pending legal proceedings to which we were a party.

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

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

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

our results of operations and financial performance;

general economic, industry and market conditions worldwide;

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

whether our guidance meets the expectations of our investors;

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

developments generally affecting the semiconductor industry;

commencement of or developments relating to our involvement in litigation;

investor perceptions of us and our business strategies;

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

actions by institutional or other large stockholders;

terrorist acts or acts of war;

actual or anticipated fluctuations in our results of operations;

actual or anticipated manufacturing capacity limitations;

developments with respect to intellectual property rights;

introduction of new products by us or our competitors;

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

conditions and trends in technology industries;

our loss of key customers;

changes in market valuation or earnings of our competitors;

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

government debt default;

government policies and regulations on corporate taxes, including the impact of the 2017 Tax Act;

government policies and regulations on international trade policies and restrictions, ~~and corporate taxes;~~including tariffs on imports of foreign goods;

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

our ability to increase our gross margins;

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

~~Table of Contents~~

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

investments in sales and marketing resources to enter new markets;

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

our ability to ~~repurchase shares under our stock repurchase program and~~ pay quarterly cash dividends to stockholders; and,

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

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

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

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

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

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

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

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

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

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

continued dependence on the Asian markets for our customer base;

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

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

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

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

the acceptance of our new products in the marketplace;

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

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

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

the cyclical nature of demand for our ~~customers~~’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;

~~Table of Contents~~

product obsolescence;

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

the availability of adequate manufacturing capacity from our outside suppliers;

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

the potential loss of future business resulting from capacity issues;

changes in manufacturing yields;

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

	•	the impact of the 2017 Tax Act on our income tax provision and cash flows;

the impact of tariffs against foreign imports; and,

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

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

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

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

Table of Contents

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 leaders regarding the possibility of instituting tariffs against foreign imports of certain materials. More specifically, in March, April and July of 2018, the U.S. and China have applied tariffs to certain of each other’s exports. The institution of trade tariffs both globally and between the U.S. and China specifically carries the 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 would directly impact our business and operating results.

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

Our profitability is dependent on many factors, including:

our sales, which because of our turns business, are difficult to accurately forecast;

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

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

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

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

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

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

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

~~Table of Contents~~

manufacturing capacity constraints;

level of activity in our legal proceedings, which could result in significant legal expenses;

the impact of the 2017 Tax Act on our income tax provision and cash flows;

the impact of tariffs on imports between the U.S. and China;

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

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

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

We may not experience growth rates comparable to past years.

In the past, our revenue increased significantly in certain years due to increased sales of certain of our products. We are subject to numerous risks and factors that could cause a decrease in our growth rates compared to past periods, including increased competition, loss of certain of our customers, unfavorable changes in our operations, reduced global electronics demand, end-customer market downturn, market acceptance and penetration of our current and future products and ~~ongoing~~ litigation. A material decrease in our growth rates could adversely affect our stock price and results of operations.

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

~~In June 2014, the Board~~

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

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

Contents

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

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

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

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

~~Table of Contents~~

Industry consolidation may lead to increased competition and may harm our operating results.

In recent years, there has been a trend toward semiconductor industry consolidation. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry, or become unable to continue operations unless they find an acquirer or consolidate with another company. In addition, companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that semiconductor industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.

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

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

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

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

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

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

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

Table of Contents

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

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

product performance;

product availability;

product quality and reliability; and,

effective marketing, sales and service.

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

We may face competition from customers developing products internally.

Our customers generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop their own products internally. The future prospects for our products in these markets are dependent in part upon our customers' acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. Customers may in the future continue to use internally developed components. They also may decide to develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations could be materially and adversely affected.

~~Table of Contents~~

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

We derive most of our revenue from customers located in Asia through direct sales or indirect sales through distribution arrangements and value-added reseller agreements with parties located in Asia. As a result, we are subject to increased risks due to this geographic concentration of business and ~~operations.~~operations. For ~~both~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, 89% and 88% of our revenue, respectively, was from customers in Asia. There are risks inherent in doing business in Asia, and internationally in general, including:

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

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

currency exchange rate fluctuations impacting intra-company transactions;

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

transportation delays;

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

tariffs imposed by China that may impact our sales;

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

international political relationships and threats of war;

terrorism and threats of terrorism;

Table of Contents

epidemics and illnesses;

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

work stoppages related to employee dissatisfaction;

economic, social and political instability;

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

enforcing contracts generally; and,

less effective protection of intellectual property and contractual arrangements.

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

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

Historically, we have generated most of our revenue from a limited number of customers, including distributors. For example, sales to our largest distributor accounted for ~~approximately 17%~~20% of our total re~~venue~~revenue for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. We continue to rely on a limited number of customers for a significant portion of our revenue. Because we rely on a limited number of customers for significant percentages of our revenue, a decrease in demand or significant pricing pressure for our products from any of our major customers for any reason (including due to competition, market conditions, catastrophic events or otherwise) could have a materially adverse impact on our financial conditions and results of operations.

~~Table of Contents~~

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

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

~~Regulations~~ ~~related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.~~

Pursuant to the Dodd-Frank Act, the SEC adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to conduct diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have undertaken the necessary diligence to determine whether such minerals are used in the manufacture of our products. However, the implementation of these new requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, regardless of our findings, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.

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

We market our products through distribution arrangements and value-added resellers and through our direct sales and applications support organization to customers that include OEMs, ODMs and electronic manufacturing service providers (“EMSs”). Receivables from our customers are generally not secured by any type of collateral and are subject to the risk of being uncollectible. Sales to our largest distributor accounted for ~~approximately 17%~~20% of our total re~~venue~~revenue for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. Significant deterioration in the liquidity or financial condition of any of our major customers or any group of our customers could have a material adverse impact on the collectability of our accounts receivable and our future operating results. We primarily conduct our sales on a purchase order basis, and we do not have any long-term supply commitments.

Moreover, we believe a high percentage of our products are eventually sold to a number of OEMs. Although we communicate with OEMs in an attempt to achieve “design wins,” which are decisions by OEMs and/or ODMs to incorporate our products, we do not have purchase commitments from these end users. Therefore, there can be no assurance that the OEMs and/or ODMs will continue to incorporate our ICs into their products. OEM technical specifications and requirements can change rapidly, and we may not have products that fit new specifications from an end-customer for whom we have had previous design wins. We cannot be certain that we will continue to achieve design wins from large OEMs, that our direct customers will continue to be successful in selling to the OEMs, or that the OEMs will be successful in selling products which incorporate our ICs. The loss of any significant customer, any material reduction in orders by any of our significant customers or by their OEM customers, the cancellation of a significant customer order, or the cancellation or delay of a ~~customer~~’scustomer’s or an OEM’s significant program or product could reduce our revenue and adversely affect our results of operations and financial condition.

3537

Table of Contents

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

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

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

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

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

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

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

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

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

We do not have direct control over product delivery schedules or product quality because all of our products are assembled by third-party subcontractors and a portion of our testing is currently performed by third-party subcontractors. Also, due to the amount of time typically required to qualify assembly and test subcontractors, we could experience delays in the shipment of our products if we were forced to find alternate third parties to assemble or test our products. In addition, events such as global economic crises may materially impact our assembly suppliers’ ability to operate. Any future product delivery delays or disruptions in our relationships with our subcontractors could have a material adverse effect on our operating results, financial condition and cash flows.

3638

Table of Contents

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

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

the costs and expense associated with such activities;

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

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

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

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

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

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

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

The 2017 Tax Act is expected to have significant effects on our income tax expense, which could result in a material adverse impact on our results of operations, financial condition and cash flows.

In December 2017, the 2017 Tax Act was enacted and includes a broad range of tax reforms, including changes to corporate tax rates, business deductions and international tax provisions. Many of these provisions significantly differ from prior U.S. tax law, resulting in material tax accounting implications for us. Some of the significant new requirements include, but are not limited to, a one-time mandatory deemed repatriation transition tax on previously deferred foreign earnings, a remeasurement of our deferred taxes due to the change in the corporate tax rate, taxation of certain global intangible low-taxed income under the international tax provisions, and limitations on the deductibility of performance-based compensation for officers. Some of these provisions, such as the deemed repatriation transition tax and remeasurement of deferred tax assets, had immediate accounting implications which resulted in a significant increase in our tax expenses for the year ended December 31, 2017. As we continue to evaluate the potential implications of the 2017 Tax Act on our financial statements, any increase in our income tax expense in future periods could have a material negative impact on our results of operations. In addition, the deemed repatriation transition tax liability, which is payable over eight years, will adversely impact our cash flows and financial condition in future periods. Any changes to our corporate tax planning and strategies as a result of the 2017 Tax Act may not result in a favorable impact on our income tax expense in future periods.

Table of Contents

The calculation of the tax impact and exposures under the 2017 Tax Act is complex. It requires the collection of information not regularly produced by us, the use of estimates and the exercise of significant judgment in determining our tax provision. As regulations and guidance evolve with respect to the 2017 Tax Act, and as we gather more information and perform more analysis, our results may differ from previous estimates and may materially affect our financial position. Furthermore, we will need to evaluate whether changes to our existing processes and controls are necessary to address the financial reporting effects. If we fail to correctly interpret the tax law or implement effective internal controls on gathering, analyzing and reviewing data used in our calculations, our income tax provision could be misstated, which could have a material adverse impact on our results of operations and financial condition.

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

Due to the complexity associated with the calculation of our tax provision, including the effects of the 2017 Tax Act, we engage third-party tax 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 and issues that may arise in the future, we could be subject to errors, which, if material, would result in us having to restate our financial statements. Restatements are generally costly and could adversely impact our results of operations, 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.

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws such as the 2017 Tax Act, regulations, accounting principles or interpretations thereof and discrete items such as future exercises or dispositions of stock options and restricted stock releases. In addition, we are subject to potential future examinations of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. For example, our U.S. federal income tax returns for the years ended December 31, 2005 through December 31, 2007 were examined by the IRS. We reached a resolution onwith the ~~audits~~IRS in April 2015 and recorded a one-time net charge of $2.7 million to our income tax provision in the second quarter of 2015. ~~In addition, the IRS examined our U.S. federal income tax return for the year ended December 31, 2014. No adjustments were made by the IRS upon conclusion of the examination.~~ We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from any examinations will not have an adverse effect on our operating results and financial condition.

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

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

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 on coordination 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 and personnel resources. Difficulties in implementing new or upgraded information systems or significant system failures could disrupt our operations, which could have a material adverse effect on our capital resources, financial condition or results of operations.

~~Table of Contents~~

System security risks, data protection or privacy breaches, cyber attacks and systems integration issues could disrupt our internal operations and/or harm our reputation, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price.

Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, create system disruptions or cause shutdowns. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution or other critical functions.

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

Table of Contents

Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and our remediation efforts may be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.

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

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

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

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

~~Table of Contents~~

Future legal proceedings may divert our financial and management resources.

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

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

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

Table of Contents

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

The market for government-backed student loan auction-rate securities became illiquid in 2008. Since 2008, we have redeemed 87% of the original portfolio of our auction-rate securities at ~~par. It is unclear~~par and continue to hold $5.6 million in principal amount as ~~to when the remaining balance~~ of ~~our auction-rate securities will regain their liquidity.~~June 30, 2018. The underlying maturity of these auction-rate securities is up to 3130 years. We have historically recorded temporary and other-than-temporary impairment charges on these investments. The valuation is subject to fluctuations in the future, which will depend on many factors, including the quality of underlying collateral, estimated time for liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, among others. Should there be further deterioration in the market for auction-rate securities, the value of our portfolio may decline, which may have an adverse impact on our cash position and our earnings. If the accounting rules for these securities change, there may be an adverse impact on our earnings.

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

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

Our products must meet specifications, and undetected defects and failures may occur, which may cause customers to return or stop buying our products and may expose us to product liability risk.

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

~~Table of Contents~~

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

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

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

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

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

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

Table of Contents

Our business is subject to various governmental laws and regulations, and compliance with these regulations may impact our revenue and cause us to incur significant expense. If we fail to maintain compliance with applicable regulations or obtain government licenses and approvals for our desired international trading activities 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 export control laws such as the ~~U.S.~~ Export Administration ~~Regulations.~~Act, the Export Administration Regulations ("EAR") and other laws, regulations and requirements governing international trade and technology transfer. These laws and regulations are complex, change frequently and have generally become more stringent over time. We may be required to incur significant expense to comply with these regulations or to remedy violations of these regulations. In addition, if our customers fail to comply with these regulations, we may be required to suspend sales to these customers, which could negatively impact our results of operations. We must conform the manufacture and distribution of our products to various laws and adapt to regulatory requirements in many countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, we could be required to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products commercially until the products are brought into compliance.

Environmental laws and regulations could cause a disruption in our business and operations.

We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Union member countries and countries in Asia. There can be no assurance that similar laws and regulations will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive.

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

We have manufacturing and testing facilities in China and most of our manufacturing partners are located in China. The Chinese government has broad discretion and authority to regulate the technology industry in China. Additionally, ~~China~~’sChina’s government has implemented policies from time to time to regulate economic expansion in China. It exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

~~Table of Contents~~

~~Additionally, personal~~Personal privacy, cyber security, and data protection are becoming increasingly significant issues in China. To address these issues, the Standing Committee of the National ~~People~~’sPeople’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. The Cyber Security Law sets forth various requirements relating to the collection, use, storage, disclosure and security of data, among other things. Various Chinese agencies are expected to issue additional regulations in the future to define these requirements more precisely. These requirements may increase our costs of compliance. 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 the relevant regulations and policies could result in ~~additional~~further cost and liability to us and could adversely affect our business and results of operations. Additionally, increased costs 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 our business plans, increase our costs, or limit our ability to sell products and conduct activities in China, which could adversely affect our business and operating results.

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

Table of Contents

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

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

inability to hire and maintain a qualified workforce;

inability to maintain appropriate and acceptable manufacturing controls; and,

higher than anticipated overhead and other costs of operation.

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

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

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

~~Table of Contents~~

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

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

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

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

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

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

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

Table 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 development than anticipated, which could increase our operating expenses and negatively impact our operating results.

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

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

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

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

~~Table of Contents~~

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

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

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

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

We may not realize the anticipated benefits of any company or business that we acquire. In addition, acquisitions could result in diluting the ownership interests of our stockholders, reduce our cash balances, and cause us to incur debt or to assume contingent liabilities, which could adversely affect our business. We may also be the 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 design capability or offer other competitive opportunities. As a result of completing acquisitions, we could use a significant portion of our available cash, cash equivalents and short-term investments, issue equity securities that would dilute current ~~stockholders~~’stockholders’ percentage ownership, incur substantial debt or contingent liabilities, or incur impairment charges related to goodwill or other acquisition-related intangibles. Such actions could impact our operating results and the price of our common stock.

Table of Contents

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

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

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

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

coordinating new product and process development;

hiring additional management and other critical personnel;

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

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

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

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

our inability to commercialize acquired technologies;

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

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

~~Table of Contents~~

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

diversion of ~~management~~’smanagement’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 may diver the attention of management, and cause us to incur various costs and expenses in investigating and evaluating such transactions, whether or not they are consummated.

If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders.

We may issue additional shares of common stock in the future in order to raise additional capital to fund our global operations or in connection with an acquisition. We also issue restricted stock units to employees, which convert into shares of common stock upon vesting. Any issuance of our common stock may result in immediate dilution of our stockholders. In addition, the issuance of a significant amount of our common stock may result in additional regulatory requirements, such as stockholder approval.

Table of Contents

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

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

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

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

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

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

In June 2014, the Board of Directors approved a dividend program pursuant to which we intend to pay quarterly cash dividends on our common stock. The declaration of any future cash dividends is at the discretion of our Board of Directors and will depend on, among other things, our financial condition, results of operations, capital requirements, business conditions, statutory requirements of Delaware law, and other factors that our Board of Directors may deem relevant, as well as a determination that cash dividends are in the best interests of our stockholders. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction in or elimination of our dividend payments could have a negative effect on the price of our common stock.

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

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

~~Table of Contents~~

ITEM 6. EXHIBITS

~~Exhibit No.~~

~~31.1~~

~~Description~~

~~Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

~~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 the Sarbanes-Oxley Act of 2002.~~

	32.1*	~~Certification of~~ ~~Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
	~~101.INS~~	~~XBRL Instance~~

~~101.SCH~~

~~XBRL Taxonomy Extension Schema~~

~~101.CAL~~

~~XBRL Taxonomy~~ ~~Extension Calculation~~

~~101.DEF~~

~~XBRL Taxonomy Extension Definition~~

~~101.LAB~~

~~XBRL Taxonomy Extension Labels~~

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation~~

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

~~Table of Contents~~

~~MONOLITHIC POWER SYSTEMS, INC~~

~~SIGNATURES~~

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on~~ ~~its behalf by the undersigned thereunto duly authorized.~~

	~~MONOLITHIC POWER SYSTEMS, INC.~~

~~Dated:~~ ~~November 3, 2017~~	~~/s/ T. Bernie Blegen~~

	T. ~~Bernie Blegen~~
	~~Chief Financial Officer~~
	~~(Duly Authorized Officer and Principal Financial and~~ ~~Accounting Officer)~~

~~Table of Contents~~

~~EXHIBIT INDEX~~

Exhibit No.

31.1

Description

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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 the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation

101.DEF

XBRL Taxonomy Extension Definition

101.LAB

XBRL Taxonomy Extension Labels

101.PRE

XBRL Taxonomy Extension Presentation

* This exhibit shall not be deemed “~~filed”~~“filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

Table of Contents

MONOLITHIC POWER SYSTEMS, INC

47SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MONOLITHIC POWER SYSTEMS, INC.

Dated: August 1, 2018	/s/ T. Bernie Blegen

	T. Bernie Blegen
	Chief Financial Officer
	(Duly Authorized Officer and Principal Financial and Accounting Officer)

TABLE OF CONTENTS		PAGE
PART I. FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	3
	CONDENSED CONSOLIDATED BALANCE SHEETS	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	4
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	~~MANAGEMENT~~’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2123
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	2830
ITEM 4.	CONTROLS AND PROCEDURES	2830
PART II. OTHER INFORMATION		2830
ITEM 1.	LEGAL PROCEEDINGS	2830
ITEM 1A.	RISK FACTORS	2831
ITEM 6.	EXHIBITS	4547

	September 30,		December 31,			June 30,			December 31,
	2017		2016			2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	104,424	$	112,703		$	83,075		$	82,759
Short-term investments		195,174		155,521			230,428			216,331
Accounts receivable, net		50,757		34,248
Accounts receivable							53,460			38,037
Inventories		99,887		71,469			128,909			99,281
Other current assets		13,560		9,043			13,974			12,762
Total current assets		463,802		382,984			509,846			449,170
Property and equipment, net		100,629		85,171			150,658			144,636
Long-term investments		5,368		5,354			5,247			5,256
Goodwill		6,571		6,571			6,571			6,571
Acquisition-related intangible assets, net		1,464		3,002			504			951
Deferred tax assets, net		661		633			15,791			15,917
Other long-term assets		26,518		27,411			31,335			30,068
Total assets	$	605,013	$	511,126		$	719,952		$	652,569

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21,831	$	17,427		$	26,689		$	22,813
Accrued compensation and related benefits		17,458		12,578			15,604			15,597
Accrued liabilities		26,879		22,916			33,033			27,507
Total current liabilities		66,168		52,921			75,326			65,917
Income tax liabilities		4,627		3,870			30,735			31,621
Other long-term liabilities		28,695		23,219			34,871			33,024
Total liabilities		99,490		80,010			140,932			130,562
Commitments and contingencies
Stockholders' equity:
Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 41,508 and 40,793 as of September 30, 2017 and December 31, 2016, respectively		364,726		315,969
Common stock and additional paid-in capital, $0.001 par value; shares authorized: 150,000; shares issued and outstanding: 42,285 and 41,614 as of June 30, 2018 and December 31, 2017, respectively							417,866			376,586
Retained earnings		140,455		119,362			162,859			143,608
Accumulated other comprehensive income (loss)		342		(4,215	)		(1,705	)		1,813
Total stockholders’ equity		505,523		431,116
Total liabilities and stockholders’ equity	$	605,013	$	511,126
Total stockholders’ equity							579,020			522,007
Total liabilities and stockholders’ equity						$	719,952		$	652,569

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Revenue	$	128,939	$	106,456	$	341,499	$	285,047	$	139,761	$	112,198	$	268,911	$	212,560
Cost of revenue		58,083		48,531		154,377		130,686		62,197		50,773		119,852		96,293
Gross profit		70,856		57,925		187,122		154,361		77,564		61,425		149,059		116,267
Operating expenses:
Research and development		21,442		20,472		60,629		55,669		23,481		20,292		45,091		39,186
Selling, general and administrative		25,255		22,397		73,219		61,696		28,561		25,873		55,879		47,965
Litigation expense, net		327		55		903		92
Litigation expense										640		290		1,171		576
Total operating expenses		47,024		42,924		134,751		117,457		52,682		46,455		102,141		87,727
Income from operations		23,832		15,001		52,371		36,904		24,882		14,970		46,918		28,540
Interest and other income, net		1,255		780		3,873		1,920		2,232		1,237		2,673		2,618
Income before income taxes		25,087		15,781		56,244		38,824		27,114		16,207		49,591		31,158
Income tax provision		1,445		1,408		3,112		2,678		2,908		1,193		3,529		1,668
Net income	$	23,642	$	14,373	$	53,132	$	36,146	$	24,206	$	15,014	$	46,062	$	29,490

Net income per share:
Basic	$	0.57	$	0.35	$	1.29	$	0.90	$	0.57	$	0.36	$	1.09	$	0.72
Diluted	$	0.54	$	0.34	$	1.22	$	0.87	$	0.55	$	0.35	$	1.04	$	0.68
Weighted-average shares outstanding:
Basic		41,458		40,590		41,276		40,335		42,237		41,323		42,079		41,185
Diluted		43,486		41,895		43,384		41,752		44,400		43,397		44,341		43,332

Cash dividends declared per common share	$	0.20	$	0.20	$	0.60	$	0.60	$	0.30	$	0.20	$	0.60	$	0.40

	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016			2018			2017		2018			2017
Net income	$	23,642	$	14,373		$	53,132	$	36,146		$	24,206		$	15,014	$	46,062		$	29,490
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of $0 tax in 2017 and 2016		1,500		(52	)		3,992		(1,593	)
Change in unrealized gain (loss) on available-for-sale securities, net of $0 tax in 2017 and 2016		222		(13	)		565		190
Foreign currency translation adjustments, net of $0 tax in 2018 and 2017												(6,862	)		1,186		(2,473	)		2,492
Change in unrealized gain (loss) on available-for-sale securities, net of $0 tax in 2018 and 2017												115			141		(1,045	)		343
Total other comprehensive income (loss), net of tax		1,722		(65	)		4,557		(1,403	)		(6,747	)		1,327		(3,518	)		2,835
Comprehensive income	$	25,364	$	14,308		$	57,689	$	34,743		$	17,459		$	16,341	$	42,544		$	32,325

							Six Months Ended June 30,
	Nine Months Ended September 30,						2018			2017
	2017			2016
Cash flows from operating activities:
Net income	$	53,132		$	36,146		$	46,062		$	29,490
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangible assets		12,092			10,542			5,830			8,063
Loss on sales or write-off of property and equipment		-			58
Amortization of premium on available-for-sale investments		1,494			619			808			1,005
Gain on deferred compensation plan investments		(1,902	)		(1,097	)		(233	)		(1,266	)
Stock-based compensation expense								30,921			26,789
Deferred taxes, net		-			12			12			-
Excess tax benefits from equity awards		-			(1,078	)
Stock-based compensation expense		40,759			34,241
Changes in operating assets and liabilities:
Accounts receivable		(16,505	)		(2,503	)		(16,325	)		(7,729	)
Inventories		(28,384	)		(7,522	)		(29,602	)		(21,158	)
Other assets		1,696			(10,869	)		(983	)		(1,167	)
Accounts payable		4,999			5,713			3,032			7,755
Accrued compensation and related benefits		4,542			6,549			103			1,733
Accrued liabilities		7,276			4,308			539			3,177
Income tax liabilities		1,249			1,668			1,546			78
Net cash provided by operating activities		80,448			76,787			41,710			46,770
Cash flows from investing activities:
Property and equipment purchases		(25,108	)		(29,036	)		(12,998	)		(20,528	)
Purchases of short-term investments		(102,274	)		(147,055	)		(67,002	)		(93,398	)
Proceeds from maturities and sales of short-term investments		61,678			140,733			51,059			41,809
Contributions to deferred compensation plan, net		(2,124	)		(2,314	)		(911	)		(1,594	)
Net cash used in investing activities		(67,828	)		(37,672	)		(29,852	)		(73,711	)
Cash flows from financing activities:
Property and equipment purchased on extended payment terms		(250	)		(150	)		-			(250	)
Proceeds from exercise of stock options		129			1,191			59			129
Proceeds from vesting of restricted stock units								8,709			-
Proceeds from shares issued under the employee stock purchase plan		2,701			2,463			1,562			1,382
Dividends and dividend equivalents paid		(25,264	)		(24,634	)		(21,467	)		(16,815	)
Excess tax benefits from equity awards		-			1,078
Net cash used in financing activities		(22,684	)		(20,052	)		(11,137	)		(15,554	)
Effect of change in exchange rates		1,785			(444	)		(407	)		909
Net increase (decrease) in cash and cash equivalents		(8,279	)		18,619
Cash and cash equivalents, beginning of period		112,703			90,860
Cash and cash equivalents, end of period	$	104,424		$	109,479
Net increase (decrease) in cash, cash equivalents and restricted cash								314			(41,586	)
Cash, cash equivalents and restricted cash, beginning of period								82,874			112,813
Cash, cash equivalents and restricted cash, end of period							$	83,188		$	71,227

Supplemental disclosures for cash flow information:
Supplemental disclosures:
Cash paid for taxes and interest	$	1,855		$	843		$	3,884		$	1,583
Supplemental disclosures of non-cash investing and financing activities:
Non-cash investing and financing activities:
Liability accrued for property and equipment purchases	$	284		$	197		$	2,939		$	974
Liability accrued for dividends and dividend equivalents	$	10,131		$	9,882		$	14,530		$	9,536

	Time-Based RSUs			Weighted-Average Grant Date Fair Value Per Share		PSUs and MPSUs			Weighted-Average Grant Date Fair Value Per Share		MSUs		Weighted-Average Grant Date Fair Value Per Share		Total			Weighted-Average Grant Date Fair Value Per Share
Outstanding at January 1, 2017		366		$	51.35		2,284		$	43.24		1,620	$	23.57		4,270		$	36.47
Granted		75		$	92.53		645	(1)	$	61.08		-	$	-		720		$	64.35
Released		(148	)	$	47.93		(520	)	$	42.34		-	$	-		(668	)	$	43.57
Forfeited		(14	)	$	62.01		(5	)	$	49.82		-	$	-		(19	)	$	58.43
Outstanding at September 30, 2017		279		$	63.68		2,404		$	48.20		1,620	$	23.57		4,303		$	39.93

	September 30, 2017							June 30, 2018
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Know-how	$	1,018	$	(653	)	$	365	$	1,018	$	(806	)	$	212
Developed technologies		6,466		(5,367	)		1,099		6,466		(6,174	)		292
Total	$	7,484	$	(6,020	)	$	1,464	$	7,484	$	(6,980	)	$	504

	December 31, 2016
	Gross Amount		Accumulated Amortization			Net Amount
Know-how	$	1,018	$	(500	)	$	518
Developed technologies		6,466		(3,982	)		2,484
Total	$	7,484	$	(4,482	)	$	3,002

	December 31, 2017
	Gross Amount		Accumulated Amortization			Net Amount
Know-how	$	1,018	$	(704	)	$	314
Developed technologies		6,466		(5,829	)		637
Total	$	7,484	$	(6,533	)	$	951

	Three Months Ended September 30,						Nine Months Ended September 30,
Customer	2017			2016			2017			2016
Distributor A		17	%		22	%		17	%		22	%
Distributor B		15	%		*			*			*

	Revenue												Accounts Receivable
	Three Months Ended June 30,						Six Months Ended June 30,						June 30,			December 31,
Customer	2018			2017			2018			2017			2018			2017
A (distributor)		20	%		17	%		20	%		17	%		19	%		16	%
B (distributor)		10	%		*			10	%		*			15	%		*
C (value-added reseller)		*			*			*			*			*			15	%

	September 30, 2017
	Amortized Cost		Unrealized Gains		Unrealized Losses			Total Fair Value		Fair Value of Investments in Unrealized Loss Position
Money market funds	$	11,250	$	-	$	-		$	11,250	$	-
Corporate debt securities		180,791		122		(362	)		180,551		122,780
U.S. treasuries and government agency bonds		16,139		-		(16	)		16,123		13,873
Auction-rate securities backed by student-loan notes		5,570		-		(202	)		5,368		5,368
Total	$	213,750	$	122	$	(580	)	$	213,292	$	142,021

	Fair Value Measurement at September 30, 2017								Fair Value Measurement at June 30, 2018
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Money market funds	$	11,250	$	11,250	$	-	$	-	$	16,081	$	16,081	$	-	$	-
Corporate debt securities		180,551		-		180,551		-		207,461		-		207,461		-
U.S. treasuries and government agency bonds		16,123		-		16,123		-		22,967		-		22,967		-
Auction-rate securities backed by student-loan notes		5,368		-		-		5,368		5,247		-		-		5,247
Mutual funds under deferred compensation plan		13,097		13,097		-		-
Mutual funds and money market funds under deferred compensation plan										17,113		17,113		-		-
Total	$	226,389	$	24,347	$	196,674	$	5,368	$	268,869	$	33,194	$	230,428	$	5,247

	Fair Value Measurement at December 31, 2016								Fair Value Measurement at December 31, 2017
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Money market funds	$	24,956	$	24,956	$	-	$	-	$	7,134	$	7,134	$	-	$	-
Corporate debt securities		109,644		-		109,644		-		203,807		-		203,807		-
U.S. treasuries and government agency bonds		45,877		-		45,877		-		13,024		-		13,024		-
Auction-rate securities backed by student-loan notes		5,354		-		-		5,354		5,256		-		-		5,256
Mutual funds under deferred compensation plan		12,108		12,108		-		-
Mutual funds and money market funds under deferred compensation plan										16,625		16,625		-		-
Total	$	197,939	$	37,064	$	155,521	$	5,354	$	245,846	$	23,759	$	216,831	$	5,256

Balance at January 1, 2017	$	5,354
Change in unrealized gain included in other comprehensive income		14
Balance at September 30, 2017	$	5,368

Balance at January 1, 2018	$	5,256
Change in unrealized loss included in other comprehensive income		(9	)
Balance at June 30, 2018	$	5,247

	Unrealized Losses on Available-for- Sale Securities			Foreign Currency Translation Adjustments			Total
Balance as of January 1, 2017	$	(1,023	)	$	(3,192	)	$	(4,215	)
Other comprehensive income before reclassifications		202			1,306			1,508
Amounts reclassified from accumulated other comprehensive loss		-			-			-
Net current period other comprehensive income		202			1,306			1,508
Balance as of March 31, 2017		(821	)		(1,886	)		(2,707	)
Other comprehensive income before reclassifications		144			1,186			1,330
Amounts reclassified from accumulated other comprehensive loss		(3	)		-			(3	)
Net current period other comprehensive income		141			1,186			1,327
Balance as of June 30, 2017		(680	)		(700	)		(1,380	)
Other comprehensive income before reclassifications		217			1,500			1,717
Amounts reclassified from accumulated other comprehensive income		5			-			5
Net current period other comprehensive income		222			1,500			1,722
Balance as of September 30, 2017	$	(458	)	$	800		$	342

	Unrealized Losses on Available-for- Sale Securities			Foreign Currency Translation Adjustments			Total
Balance as of January 1, 2018	$	(1,364	)	$	3,177		$	1,813
Other comprehensive income (loss) before reclassifications		(1,185	)		4,389			3,204
Amounts reclassified from accumulated other comprehensive income		25			-			25
Net current period other comprehensive income (loss)		(1,160	)		4,389			3,229
Balance as of March 31, 2018		(2,524	)		7,566			5,042
Other comprehensive income (loss) before reclassifications		94			(6,862	)		(6,768	)
Amounts reclassified from accumulated other comprehensive income (loss)		21			-			21
Net current period other comprehensive income (loss)		115			(6,862	)		(6,747	)
Balance as of June 30, 2018	$	(2,409	)	$	704		$	(1,705	)

	•	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") on our income tax provision and cash flows,