REVEN

E RECOGNITION

Revenue from Product Sales

The Company generates revenue primarily from product sales, which include assembled and tested integrated circuits, as well as dies in wafer form. These product sales were

98%,

98%

and

99%

of the Company’s total revenue for the years ended

December 31, 2018,

2017

and

2016,

respectively. The remaining revenue primarily includes royalty revenue from licensing arrangements and revenue from wafer testing services performed for

third

parties, which have

not

been significant in all periods presented. See Note

for the disaggregation of the Company’s revenue by geographic regions and by product families.

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 years ended

December 31, 2018,

2017

and

2016,

87%,

88%

and

88%,

respectively, of the Company’s sales were made through distribution arrangements. These distribution arrangements contain enforceable rights and obligations specific to those distributors and

not

the end customers. Purchase orders, which are generally governed by sales agreements or the Company's standard terms of sale, set the final terms for unit price, quantity, shipping and payment agreed by both parties. The Company considers 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.

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.

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 shipped and delivered to be held at customers’ designated locations because the Company continues to control the products and retain 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, in some cases, after a

-day period from the delivery date has passed, at which time control transfers to the customers and the Company invoices them for payment.

Variable Consideration

The Company accounts for price adjustment and stock rotation rights as variable consideration that reduces the transaction price, and recognizes that reduction in the same period the associated 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 an analysis 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 in accordance with the contract terms. The Company estimates the stock rotation returns based on an analysis 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 revenue.

Contract Balances

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of

December 31, 2018

and

2017,

accounts receivable totaled

$55.2

million and

$38.0

million, respectively. The Company did

not

record any allowance for doubtful accounts as of

December 31, 2018

and

2017.

For certain customers located in Asia, the Company requires cash payments

two

weeks before the products are scheduled to be shipped to the customers. The Company records these payments received in advance of performance as customer prepayments within current accrued liabilities. As of

December 31, 2018

and

2017,

customer prepayments totaled

$2.5

million and

$4.7

million, respectively. The decrease in the customer prepayment balance for the year ended

December 31, 2018

resulted from a decrease in unfulfilled customer orders for which the Company has received payments. For the year ended

December 31, 2018,

the Company recognized

$4.7

million of revenue that was included in the customer prepayment balance as of

December 31, 2017.

Contract 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.

Practical Expedients

The Company’s standard payment terms generally require customers to pay

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.

As of

December 31, 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

December 31, 2018,

and for the year ended

December 31, 2018.

The significant changes between the

two

standards are primarily attributable to the following:

	●	Under Topic 606, the Company recognizes revenue for three U.S.-based distributors upon shipment of the products to them, net of an 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.

Consolidated Balance Sheet (in thousands):

	December 31, 2018
	Topic 606
Line Item	(As Reported)		Topic 605		Change
Assets:
Accounts receivable, net	$	55,214	$	56,502	$	(1,288	)
Inventories	$	136,384	$	136,526	$	(142	)
Other current assets	$	11,931	$	10,329	$	1,602
Total current assets	$	580,810	$	580,638	$	172
Deferred tax assets, net	$	16,830	$	16,931	$	(101	)
Total assets	$	793,432	$	793,361	$	71
Liabilities and Stockholders' Equity:
Accrued liabilities	$	38,962	$	39,103	$	(141	)
Total current liabilities	$	80,439	$	80,580	$	(141	)
Total liabilities	$	153,339	$	153,480	$	(141	)
Retained earnings	$	194,728	$	194,516	$	212
Total stockholders' equity	$	640,093	$	639,881	$	212
Total liabilities and stockholders' equity	$	793,432	$	793,361	$	71

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

	Year Ended December 31, 2018
	Topic 606
Line Item	(As Reported)		Topic 605		Change
Revenue	$	582,382	$	582,601	$	(219	)
Cost of revenue	$	259,714	$	259,722	$	(8	)
Gross profit	$	322,668	$	322,879	$	(211	)
Income from operations	$	113,488	$	113,699	$	(211	)
Income before income taxes	$	118,482	$	118,693	$	(211	)
Income tax provision	$	13,214	$	13,258	$	(44	)
Net income	$	105,268	$	105,435	$	(167	)
Net income per share - basic	$	2.49	$	2.50	$	(0.01	)

Consolidated Statement of Comprehensive Income (in thousands):

	Year Ended December 31, 2018
	Topic 606
Line Item	(As Reported)		Topic 605		Change
Net income	$	105,268	$	105,435	$	(167	)
Comprehensive income	$	97,912	$	98,079	$	(167	)

Consolidated Statement of Cash Flows (in thousands):

	Year Ended December 31, 2018
	Topic 606
Line Item	(As Reported)			Topic 605			Change
Cash flows from operating activities:
Net income	$	105,268		$	105,435		$	(167	)
Changes in operating assets and liabilities:
Accounts receivable	$	(18,079	)	$	(18,465	)	$	386
Inventories	$	(37,060	)	$	(37,202	)	$	142
Other assets	$	(1,075	)	$	435		$	(1,510	)
Accrued liabilities	$	7,092		$	5,899		$	1,193
Income tax liabilities	$	6,923		$	6,967		$	(44	)