SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all intercompany transactions and balances.

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition and allowances for receivables and inventories. These estimates are based on historical facts and various other factors, which the Company believes to be reasonable at the time the estimates are made. However, as the effects of future events cannot be determined with precision, actual results could differ significantly from management’s estimates.

Cash and Cash Equivalents

The Company considers cash invested in highly liquid financial instruments with maturities of three months or less at the date of purchase to be cash equivalents.

Marketable Securities

The Company generally holds securities until maturity; however, they may be sold under certain circumstances including, but not limited to, when necessary for the funding of acquisitions and other strategic investments. As a result the Company classifies its investment portfolio as available-for-sale. The Company classifies all investments with a maturity date greater than three months at the date of purchase as short-term marketable securities in its Consolidated Balance Sheet. As of December 31, 2016, and December 31, 2015, the Company’s marketable securities consisted primarily of commercial paper, corporate bonds and other high-quality commercial securities. The weighted average interest rate of investments at December 31, 2016 and December 31, 2015, was approximately 1.23% and 0.84%, respectively.

Amortized cost and estimated fair market value of investments classified as available-for-sale (excluding cash equivalents) at December 31, 2016, were as follows:



	Amortized		Gross Unrealized					Estimated Fair
(in thousands)	Cost		Gains		Losses			Market Value
Investments due in less than 3 months:
Commercial paper	$	36,996	$	—	$	—		$	36,996
Corporate securities	9,342		2		(2		)	9,342
Total	46,338		2		(2		)	46,338
Investments due in 4-12 months:
Commercial paper	19,186		—		—			19,186
Corporate securities	59,714		15		(76		)	59,653
Total	78,900		15		(76		)	78,839
Investments due 12 months or greater:
Corporate securities	63,305		21		(180		)	63,146
Total	63,305		21		(180		)	63,146
Total investment securities	$	188,543	$	38	$	(258	)	$	188,323

Amortized cost and estimated fair market value of investments classified as available-for-sale (excluding cash equivalents) at December 31, 2015, were as follows:



	Amortized		Gross Unrealized					Estimated Fair
(in thousands)	Cost		Gains		Losses			Market Value
Investments due in less than 3 months:
Corporate securities	$	38,586	$	7	$	(10	)	$	38,583
Total	38,586		7		(10		)	38,583
Investments due in 4-12 months:
Corporate securities	33,654		1		(36		)	33,619
Total	33,654		1		(36		)	33,619
Investments due between 12 months or greater:
Corporate securities	11,626		—		(59		)	11,567
Total	11,626		—		(59		)	11,567
Total investment securities	$	83,866	$	8	$	(105	)	$	83,769

As of December 31, 2016, and 2015, there were no individual securities that had been in a continuous loss position for 12 months or longer.

Inventories

Inventories (which consist of costs associated with the purchases of wafers from domestic and offshore foundries and of packaged components from offshore assembly manufacturers, as well as internal labor and overhead associated with the testing of both wafers and packaged components) are stated at the lower of cost (first-in, first-out) or market. Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Inventories consist of the following:



(in thousands)	December 31, 2016		December 31, 2015
Raw materials	$	14,610	$	19,090
Work-in-process	15,194		12,770
Finished goods	22,760		20,074
Total	$	52,564	$	51,934

Additional Components of the Company’s Consolidated Balance Sheet

Accounts receivable:



(in thousands)	December 31, 2016			December 31, 2015
Accounts receivable trade	$	46,849		$	43,622
Accrued ship and debit and rebate claims	(39,363		)	(35,486		)
Allowance for doubtful accounts	(525		)	(318		)
Total	$	6,961		$	7,818

Prepaid expenses and other current assets:



(in thousands)	December 31, 2016		December 31, 2015
Prepaid legal fees	$	212	$	2,023
Advance to suppliers	69		324
Prepaid income tax	2,431		309
Prepaid maintenance agreements	1,399		736
Interest receivable	743		519
Other	3,666		2,879
Total	$	8,520	$	6,790

Property and Equipment

Property and equipment consist of the following:



(in thousands)	December 31, 2016			December 31, 2015
Land	$	20,288		$	20,288
Construction-in-progress	6,880			2,298
Building and improvements	52,156			51,941
Machinery and equipment	132,162			128,342
Computer software and hardware and office furniture and fixtures	45,951			43,383
	257,437			246,252
Accumulated depreciation	(162,141		)	(146,871		)
Total	$	95,296		$	99,381

Depreciation expense for property and equipment for fiscal years ended December 31, 2016, 2015 and 2014, was approximately $16.8 million, $16.5 million and $15.9 million, respectively, and was determined using the straight-line method over the following useful lives:



Building and improvements	4-40 years
Machinery and equipment	2-8 years
Computer software and hardware and office furniture and fixtures	4-7 years

Total property and equipment (excluding accumulated depreciation) located in the United States at December 31, 2016, 2015 and 2014, was approximately $155.1 million, $150.1 million and $140.0 million, respectively. In each of 2016 and 2015, approximately 12% of total property and equipment (excluding accumulated depreciation) was held in Thailand by one of the Company’s subcontractors. In 2014 approximately 13% of total property and equipment was held in Thailand by one of the Company’s subcontractors.

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive income (loss) for the three years ended December 31, 2016:



(in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items				Foreign Currency Items			Total
Balance at January 1, 2014	$	210		$	(780	)		$	100		$	(470	)
Other comprehensive income (loss) before reclassifications	(127		)	(538		)		(79		)	(744		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			78			⁽¹⁾	—			78
Other comprehensive income loss	(127		)	(460		)		(79		)	(666		)
Balance at December 31, 2014	83			(1,240		)		21			(1,136		)
Other comprehensive income (loss) before reclassifications	(180		)	(469		)		(191		)	(840		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			125			⁽¹⁾	—			125
Other comprehensive loss	(180		)	(344		)		(191		)	(715		)
Balance at December 31, 2015	(97		)	(1,584		)		(170		)	(1,851		)
Other comprehensive income (loss) before reclassifications	(123		)	(505		)		(384		)	(1,012		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			153			⁽¹⁾	—			153
Other comprehensive loss	(123		)	(352		)		(384		)	(859		)
Balance at December 31, 2016	$	(220	)	$	(1,936	)		$	(554	)	$	(2,710	)

_______________

(1) This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the years ended December 31, 2016, 2015 and 2014.

Business Combinations

The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. The Company determines the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. The Company adjusts the preliminary purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances existing at the acquisition date impacting asset valuations and liabilities assumed. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.

Goodwill and Intangible Assets

Goodwill and the Company's domain name are evaluated in accordance with ASC 350-10, Goodwill and Other Intangible Assets, and an impairment analysis is conducted on an annual basis, or sooner if indicators exist for a potential impairment.

In accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Employee Benefits Plan

The Company sponsors a 401(k) tax-deferred savings plan for all employees in the United States who meet certain eligibility requirements. Participants may contribute up to the amount allowable as a deduction for federal income tax purposes. The Company is not required to contribute; however, the Company contributes a certain percentage of employee annual salaries on a discretionary basis, not to exceed an established threshold. In each of 2016, 2015 and 2014, the Company provided for a contribution of approximately $1.1 million.

Retirement Benefit Obligations (Pension)

The Company recognizes the over-funded or under-funded status of a defined benefit pension or post-retirement plan as an asset or liability in the accompanying consolidated balance sheets. Actuarial gains and losses are recorded in accumulated other comprehensive loss, a component of stockholders’ equity, and are amortized as a component of net periodic cost over the remaining estimated service period of participants.

Revenue Recognition

Product revenues consist of sales to original equipment manufacturers (OEMs), merchant power supply manufacturers and distributors. Approximately 75% of the Company’s net product sales were made to distributors in 2016. The Company applies the provisions of ASC 605-10, Revenue Recognition, and all related appropriate guidance. Revenue is recognized when all of the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the price is fixed or determinable, and (4) collectability is reasonably assured. Customer purchase orders are generally used to determine the existence of an arrangement. Delivery is considered to have occurred when title and risk of loss have transferred to the Company’s customer. The Company evaluates whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. With respect to collectability, the Company performs credit checks for new customers and performs ongoing evaluations of its existing customers’ financial condition and requires letters of credit whenever deemed necessary.

Sales to international OEMs and merchant power supply manufacturers for shipments from the Company’s facility outside of the United States are pursuant to “EX Works” (EXW) shipping terms, meaning that title to the product transfers to the customer upon shipment from the Company’s foreign warehouse. Sales to international OEM customers and merchant power supply manufacturers that are shipped from the Company’s facility in California are pursuant to “delivered at frontier” (DAF) shipping terms. As such, title to the product passes to the customer when the shipment reaches the destination country and revenue is recognized upon the arrival of the product in that country. Shipments to OEMs and merchant power supply manufacturers in the Americas are pursuant to “free on board” (FOB) point of origin shipping terms meaning that title is passed to the customer upon shipment. Revenue is recognized upon title transfer for sales to OEMs and merchant power supply manufacturers, assuming all other criteria for revenue recognition are met.

Sales to most of the Company's distributors are made under terms allowing certain price adjustments and rights of return on the Company's products held by its distributors. As a result of these rights, the Company defers the recognition of revenue and the costs of revenues derived from these sales until the Company's distributors report that they have sold the Company's products to their customers. The Company's recognition of such distributor revenue is based on point of sale reports received from the distributors, at which time the price is no longer subject to adjustment and is fixed, and the products are no longer subject to return to the Company except pursuant to warranty terms. The gross profit that is deferred as a result of this policy is reflected as “deferred income on sales to distributors” in the accompanying consolidated balance sheets. The total deferred revenue as of December 31, 2016, and December 31, 2015, was approximately $28.1 million and $25.7 million, respectively. The total deferred cost as of December 31, 2016, and December 31, 2015, was approximately $11.9 million and $10.6 million, respectively.

Frequently, distributors need to sell at a price lower than the standard distribution price in order to win business. At or soon after the distributor invoices its customer, the distributor submits a “ship and debit” price adjustment claim to the Company to adjust the distributor's cost from the standard price to the pre-approved lower price. After verification by the Company, a credit memo is issued to the distributor for the ship and debit claim. The Company maintains a reserve for unprocessed claims and future ship and debit price adjustments. The reserves appear as a reduction to accounts receivable and deferred income on sales to distributors in the Company's accompanying consolidated balance sheets. To the extent future ship and debit claims significantly exceed amounts estimated, there could be a material impact on the deferred revenue and deferred margin ultimately recognized. To evaluate the adequacy of its reserves, the Company analyzes historical ship and debit payments and levels of inventory in the distributor channels.

Sales to certain distributors of the Company are made under terms that do not include rights of return or price concessions after the product is shipped to the distributor. Accordingly, product revenue is recognized upon shipment and title transfer assuming all other revenue recognition criteria are met.

Foreign Currency Risk and Foreign Currency Translation

As of December 31, 2016, the Company’s primary transactional currency was U.S. dollars; in addition, the Company holds cash in Swiss francs and euros to fund the operations of the Company’s Swiss subsidiary. The foreign exchange rate fluctuation between the U.S. dollar versus the Swiss franc and euro is recorded in “other income” in the consolidated statements of income.

Gains and losses arising from the remeasurement of non-functional currency balances are recorded in ''other income'' in the accompanying consolidated statements of income. For the years ended December 31, 2016, 2015 and 2014 the Company realized foreign exchange transaction gains (losses) of $(0.1) million, $(0.5) million and $0.1 million, respectively.

The functional currencies of the Company’s other subsidiaries are the local currencies. Accordingly, all assets and liabilities are translated into U.S. dollars at the current exchange rates as of the applicable balance sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period. Cumulative gains and losses from the translation of the foreign subsidiaries’ financial statements have been included in stockholders’ equity.

Warranty

The Company generally warrants that its products will substantially conform to the published specifications for 12 months from the date of shipment. The Company’s liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial, and as a result, the Company does not record a specific warranty reserve.

Advertising

Advertising costs are expensed as incurred. Advertising costs amounted to $1.3 million, $1.1 million, and $1.5 million, in 2016, 2015 and 2014, respectively.

Research and Development

Research and development costs are expensed as incurred.

Income Taxes

Income tax expense is an estimate of current income taxes payable or refundable in the current fiscal year based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences and carry-forwards that are recognized for financial reporting and income tax purposes.

The Company accounts for income taxes under the provisions of ASC 740, Income Taxes. Under the provisions of ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes valuation allowances to reduce any deferred tax assets to the amount that it estimates will more likely than not be realized based on available evidence and management’s judgment. The Company limits the deferred tax assets recognized related to certain officers’ compensation to amounts that it estimates will be deductible in future periods based upon Internal Revenue Code Section 162(m). In the event that the Company determines, based on available evidence and management judgment, that all or part of the net deferred tax assets will not be realized in the future, it would record a valuation allowance in the period the determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on the Company’s results of operations and financial position.

Common Stock Repurchases and Common Stock Dividend

In 2014 and 2015, the Company’s board of directors authorized the use of $75.0 million and $60.0 million, respectively, for repurchase of the Company’s common stock, with repurchases to be executed according to pre-defined price/volume guidelines. In 2014, the Company purchased 1.6 million shares for approximately $80.8 million. In 2015, the Company purchased 1.3 million shares for approximately $53.7 million. In 2016, the Company purchased 146,000 shares for approximately $6.4 million. As of December 31, 2016, the Company had $23.6 million available for future stock repurchases. Authorization of future stock repurchase programs is at the discretion of the board of directors and will depend on the Company's financial condition, results of operations, capital requirements and business conditions as well as other factors.

The following table presents the quarterly dividends declared on the Company’s common stock for the periods indicated:



	Year Ended December 31,
	2016		2015		2014
First Quarter	$	0.13	$	0.12	$	0.10
Second Quarter	$	0.13	$	0.12	$	0.10
Third Quarter	$	0.13	$	0.12	$	0.12
Fourth Quarter	$	0.13	$	0.12	$	0.12

The Company paid a total of approximately $15.1 million, $13.9 million and $13.2 million in cash dividends during 2016, 2015 and 2014, respectively.

In January 2017, the Company’s board of directors declared a $0.14 quarterly dividend for each quarter in 2017. The declaration of any future cash dividend is at the discretion of the board of directors and will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination that cash dividends are in the best interest of the Company’s stockholders.

Indemnifications

The Company sells products to its distributors under contracts, collectively referred to as Distributor Sales Agreements (DSA). Each DSA contains the relevant terms of the contractual arrangement with the distributor, and generally includes certain provisions for indemnifying the distributor against losses, expenses, and liabilities from damages that may be awarded against the distributor in the event the Company’s products are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party (Customer Indemnification). The DSA generally limits the scope of and remedies for the Customer Indemnification obligations in a variety of industry-standard respects, including, but not limited to, limitations based on time and geography, and a right to replace an infringing product. The Company also, from time to time, has granted a specific indemnification right to individual customers.

The Company believes its internal development processes and other policies and practices limit its exposure related to such indemnifications. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees' development work to the Company. To date, the Company has not had to reimburse any of its distributors or customers for any losses related to these indemnifications and no material claims were outstanding as of December 31, 2016. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnifications.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, amending the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue from the transfer of promised goods or services to customers should be recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective method). The Company is required to adopt the amendments in the first quarter of 2018; early adoption is permitted beginning January 1, 2017. The Company will early adopt the new guidance, effective on January 1, 2017, using the full retrospective method under which it would recast prior reporting periods. Under the new standards the Company will recognize all revenue on sales to distributors upon shipment and transfer of control (known as “sell-in” revenue recognition), rather than deferring recognition until distributors report that they have sold the products to their customers (known as “sell-through” revenue recognition). Currently, a high percentage of the Company’s revenues on sales to distributors are recognized on sell-through. Because this change in methodology will cause a shift in the timing of when revenue is recognized, the Company expects that the quarterly seasonal pattern of its revenues will be affected by the new standards. Based on the Company’s analysis, under the new standards annual net revenues would increase by approximately $2 million and $1 million in 2016 and 2015, respectively.

In July 2015, the FASB amended the existing accounting standards for the measurement of inventory, ASU 2015-11, Inventory. The amendments require inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company is required to adopt the amendments in the first quarter of 2017. The amendments should be applied prospectively with early adoption permitted as of the beginning of an interim or annual reporting period. The Company does not expect that the adoption of these amendments will have a material impact on its consolidated financial statements.

In February 2016, the FASB amended the existing accounting standards for leases, ASU 2016-02, Leases. The amendments require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged from that applied under previous U.S. GAAP. The Company is required to adopt the amendments in the first quarter of fiscal 2019, with early adoption permitted. The amendments require a modified retrospective transition approach to recognize and measure leases at the beginning of the earliest period presented. The Company is currently evaluating the impact of these amendments and the transition alternatives on its consolidated financial statements.

In March 2016, the FASB amended the existing accounting standards for stock-based compensation, ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments impact several aspects of accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is required to adopt the amendments in the first quarter of 2017. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. Upon adoption, the Company expects to recognize a windfall tax benefit of approximately $7 million to $8 million, as a cumulative effect adjustment to opening retained earnings, together with a corresponding increase in deferred tax assets.