6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUERPURSUANT TO RULE 13a-16

OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of March, 2019

Commission File Number 000-23288

SILICOM LTD.

(Translation of Registrant’s name into English)

14 Atir Yeda St., P.O.Box 2164, Kfar-Sava 4464323, Israel

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ☒     Form 40-F ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):___

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):___

On March 19, 2019, the Registrant released its Consolidated Financial Statements and registrant's review of its results of operations and financial condition as of and for the year ended December 31, 2018.

Attached hereto as Exhibit 99.1 are Consolidated Financial Statements as of and for the year ended December 31, 2018 (including the notes thereto).

Attached hereto as Exhibit 99.2 is the registrant’s review of its results of operations and financial condition as of and the year ended December 31, 2018.

Attached hereto as Exhibit 99.3 is Consent of Somekh Chaikin, Independent Registered Public Accounting Firm, a member firm of KPMG International.

This Form 6-K, including all exhibits hereto, is hereby incorporated by reference into all effective registration statements filed by the registrant under the Securities Act of 1933.

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.

	SILICOM LTD. (Registrant)
Date: March 19, 2019	By	/s/ Eran Gilad
	Eran Gilad
	Chief Financial Officer

EX-99.1

Exhibit 99.1

Item 1

Silicom Ltd.

and its Subsidiaries

Consolidated

Financial Statements

As of and for the year ended

December 31, 2018

Silicom Ltd. and its Subsidiaries

Consolidated Financial Statements as of December 31, 2018

Contents

	Page
Report of Independent Registered Public Accounting Firm	F - 3
Consolidated Balance Sheets	F - 5
Consolidated Statements of Operations	F - 7
Consolidated Statements of Changes in Shareholders’ Equity	F - 8
Consolidated Statements of Cash Flows	F - 9
Notes to the Consolidated Financial Statements	F - 10

F - 2

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Silicom Ltd.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Silicom Ltd. and subsidiaries (the Company) as of December 31, 2017 and 2018, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Form 6-K. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

F - 3

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Somekh Chaikin

Certified Public Accountants (Isr.)

Member Firm of KPMG International

We have served as the Company’s auditor since 1997.

Tel Aviv, Israel

March 18, 2019

F - 4

Silicom Ltd. and its Subsidiaries

Consolidated Balance Sheets as of December 31
				2017		2018
	Note			US$ thousands		US$ thousands
Assets
Current assets
Cash and cash equivalents		4			17,021		26,808
Marketable securities		2F, 5			7,752		1,600
Accounts receivable:
Trade, net		2	G		40,742		23,453
Other		6			5,823		9,487
Related parties					625		364
Inventories		7			51,487		42,369
Total current assets					123,450		104,081
Marketable securities		2F, 5			5,945		45,612
Assets held for employees' severance benefits		10			1,591		1,517
Deferred tax assets		15	G		899		894
Property, plant and equipment ("PPE"), net		8			4,121		3,670
Intangible assets, net		9			1,047		966
Goodwill					25,561		25,561
Total assets					162,614		182,301

Avi Eizenman	Shaike Orbach	Eran Gilad
Chairman of the Board of Directors	Chief Executive Officer	Chief Financial Officer

Kfar-Saba, Israel

March 18, 2019

The accompanying notes are an integral part of these consolidated financial statements.

F - 5

Silicom Ltd. and its Subsidiaries

Consolidated Balance Sheets as of December 31 (Continued)
			2017			2018
	Note		US$ thousands			US$ thousands
Liabilities and shareholders' equity
Current liabilities
Trade accounts payable				12,619			15,389
Other accounts payable and accrued expenses				6,420			6,133
Related parties				10			18
Total current liabilities				19,049			21,540
Long-term liabilities
Liability for employees' severance benefits		10		2,765			2,612
Total liabilities				21,814			24,152
Commitments and contingencies		11
Shareholders' equity		12
Ordinary shares, ILS 0.01 par value; 10,000,000 shares
authorized; 7,564,502 and 7,574,176 issued as at
December 31, 2017 and 2018, respectively;
7,549,531 and 7,559,205 outstanding as at
December 31, 2017 and 2018, respectively				22			22
Additional paid-in capital				51,909			54,621
Treasury shares (at cost) - 14,971 ordinary shares as at
December 31, 2017 and 2018				(38	)		(38	)
Retained earnings				88,907			103,544
Total shareholders' equity				140,800			158,149
Total liabilities and shareholders’ equity				162,614			182,301

The accompanying notes are an integral part of these consolidated financial statements.

F - 6

Silicom Ltd. and its Subsidiaries

Consolidated Statements of Operations for the Year Ended December 31
				2016			2017			2018
				US$ thousands
	Note			Except for share and per share data
Sales*		2M, 13			100,347			125,690			133,753
Cost of sales					61,796			79,762			91,697
Gross profit					38,551			45,928			42,056
Operating expenses
Research and development**					12,663			13,915			14,820
Sales and marketing					6,423			6,722			6,642
General and administrative					3,969			4,507			3,943
Contingent consideration benefit		3			(334	)		(4,642	)		-
Total operating expenses					22,721			20,502			25,405
Operating income					15,830			25,426			16,651
Financial income, net		14			35			156			923
Income before income taxes					15,865			25,582			17,574
Income taxes		15			2,728			3,868			2,937
Net income					13,137			21,714			14,637
Income per share:
Basic income per ordinary share (US$)		2	S		1.789			2.912			1.938
Diluted income per ordinary share (US$)					1.767			2.856			1.912
Weighted average number of ordinary
shares used to compute basic income
per share (in thousands)					7,344			7,456			7,552
Weighted average number of ordinary
shares used to compute diluted income
per share (in thousands)					7,435			7,602			7,657

* Including sales to related parties in the amount of US$ 762 thousand, US$ 1,275 thousand and US$ 1,063 thousand in 2016, 2017 and 2018, respectively.

** Including services from related parties in the amount of US$ 351 thousand, US$ 170 thousand and US$ 311 thousand in 2016, 2017 and 2018, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

F - 7

Silicom Ltd. and its Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity
	Ordinary shares				Additional paid-in capital		Treasury shares			Retained earnings			Total shareholders’ equity
	Number of shares(1)		US$ thousands
Balance at
January 1, 2016		7,284,344		21		44,101		(38	)		68,750			112,834
Exercise of options and RSUs(2)		97,269		1		951		-			-			952
Share-based compensation		-		-		1,781		-			-			1,781
Dividend (US $1.00  per share)		-		-		-		-			(7,312	)		(7,312	)
Net income		-		-		-		-			13,137			13,137
Balance at
December 31, 2016		7,381,613		22		46,833		(38	)		74,575			121,392
Exercise of options and RSUs(2)		167,918		*-		2,651		-			-			2,651
Share-based compensation		-		-		2,425		-			-			2,425
Dividend (US $1.00  per share)		-		-		-		-			(7,382	)		(7,382	)
Net income		-		-		-		-			21,714			21,714
Balance at
December 31, 2017		7,549,531		22		51,909		(38	)		88,907			140,800
Exercise of options and RSUs(2)		9,674		*-		288		-			-			288
Share-based compensation		-		-		2,424		-			-			2,424
Net income		-		-		-		-			14,637			14,637
Balance at
December 31, 2018		7,559,205		22		54,621		(38	)		103,544			158,149

(1)	Net of 14,971 shares held by Silicom Inc.
(2)	Restricted share units (hereinafter - "RSUs")
*	Less than 1 thousand.

The accompanying notes are an integral part of these consolidated financial statements.

F - 8

Silicom Ltd. and its Subsidiaries

Consolidated Statements of Cash Flows for the Year Ended December 31
	2016			2017			2018
	US$ thousands
Cash flows from operating activities
Net income		13,137			21,714			14,637
Adjustments required to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization		3,856			3,799			3,293
Write-down of obsolete inventory		3,170			2,918			6,211
Discount on marketable securities, net		358			217			32
Share-based compensation expense		1,550			2,425			2,424
Deferred taxes, net		(260	)		453			5
Changes in assets and liabilities:
Accounts receivable - trade		(4,007	)		(13,237	)		16,985
Accounts receivable - other		(1,832	)		(2,475	)		(3,384	)
Accounts receivable - related parties		56			(208	)		261
Change in liability for employees' severance benefits, net		126			171			(79	)
Inventories		(21,426	)		(10,287	)		2,540
Trade accounts payable		1,809			1,698			3,059
Other accounts payable and accrued expenses		1,098			(1,144	)		(314	)
Contingent consideration benefit		(334	)		(4,642	)		-
Accounts payable - related parties		(8	)		6			8
Net cash provided by (used in) operating activities		(2,707	)		1,408			45,678
Cash flows from investing activities
Purchase of property, plant and equipment		(1,441	)		(1,690	)		(1,345	)
Investment in intangible assets		-			(11	)		(1,022	)
Proceeds from maturity of marketable securities		8,575			16,175			7,750
Purchases of marketable securities		-			(5,961	)		(41,670	)
Net cash provided by (used in) investing activities		7,134			8,513			(36,287	)
Cash flows from financing activities
Exercise of options		952			2,651			288
Dividend		(7,312	)		(7,382	)		-
Payment made in connection with contingent consideration		(4,463	)		-			-
Net cash provided by (used in) financing activities		(10,823	)		(4,731	)		288
Effect of exchange rate changes on cash balances held		135			(86	)		108
Increase (decrease) in cash and cash equivalents		(6,261	)		5,104			9,787
Cash and cash equivalents at beginning of year		18,178			11,917			17,021
Cash and cash equivalents at end of year		11,917			17,021			26,808
Supplementary cash flow information
A. Non-cash transactions:
Investments in PPE and intangible assets		39			119			146
B. Cash paid during the year for:
Income taxes		4,648			4,584			3,260

The accompanying notes are an integral part of these consolidated financial statements

F - 9

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 1 - General

Silicom Ltd. is an Israeli corporation engaged in designing, manufacturing, marketing and supporting high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices.

The Company's shares have been traded in the United States on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") since February 1994. Since January 2, 2014 the Company's shares have been traded on the NASDAQ Global Select Market (prior thereto they were traded on the NASDAQ Global Market).  The Company's shares were traded in Israel on the Tel Aviv Stock Exchange ("TASE") from December 2005 through January 26, 2016, after which, on January 28, 2016, the Company delisted from trading on the TASE.

In these financial statements the terms "Company" or "Silicom" refer to Silicom Ltd. and its wholly owned subsidiaries, Silicom Connectivity Solutions, Inc. (hereinafter - "Silicom Inc.") and Silicom Denmark A/S (Fiberblaze A/S) (hereinafter – "Silicom Denmark"), whereas the term "subsidiaries" refers to Silicom Inc. and Silicom Denmark.

Note 2 - Summary of Significant Accounting Policies

The significant accounting policies, which are applied consistently throughout the periods presented, are as follows:

A. Financial statements in US dollars

Substantially all sales of the Company are made outside of Israel (see Note 13Aregarding geographical distribution), in US dollars ("dollars"). Most purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the functional currency of the Company is the dollar.

Transactions and monetary balances in other currencies are translated into the functional currency using the current exchange rate.

All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in earnings when they arise.

F - 10

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of significant Accounting Policies (cont’d)

B. Basis of presentation

The accompanying consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

C. Estimates and assumptions

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include income taxes, inventories, marketable securities, goodwill, intangible assets and share-based compensation.

D. Business combinations

The Company accounts for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.

E. Cash and cash equivalents

The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.

F. Marketable securities

The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts.

Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method.

F - 11

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of significant Accounting Policies (cont’d)

 F.             Marketable securities (cont’d)

Such amortization and accretion are included in the "Financial income, net" line item in the consolidated statements of operations.

When other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.

A decline in the market value of HTM security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. To determine whether an impairment is other than temporary, the Company considers all available information relevant to the collectibility of the security, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash flows expected to be collected. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.

If the Company intends to sell the security or it is more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.

G. Trade accounts receivable, net

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns.

As of December 31, 2017 and 2018, the provision for doubtful accounts receivable amounted to US$ 20 thousand.

H. Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the "weighted average-cost" method.

The Company writes down obsolete or slow moving inventory to its net realizable value.

F - 12

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of significant Accounting Policies (cont’d)

I. Assets held for employees’ severance benefits

Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets are recorded at their current cash redemption value.

J. Property, plant and equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line basis over the estimated useful life of the assets at the following annual rates:

	%
Machinery and equipment	15 - 33
Office furniture and equipment	6 - 33
Leasehold improvements	*

*Over the shorter term of the lease or the life of the asset

K. Goodwill and other intangible assets

Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

The Company operates in one operating segment and this segment comprises one reporting unit.

Goodwill is reviewed for impairment at least annually in accordance with ASC 350, Testing Goodwill for Impairment. ASC 350 provides an entity the option to perform a qualitative assessment to determine whether it is more likely than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more likely than-not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.

F - 13

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of significant Accounting Policies (cont’d)

 K.             Goodwill and other intangible assets (cont’d)

If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed. During the year ended December 31, 2018, no impairments were found and therefore no impairment losses were recorded.

Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives of 3 years. The acquired customer relationships and current technology are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in amortization of such intangible assets in the straight-line method.

 L. Impairment of Long-Lived Assets

In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall long-lived assets, such as property, plant, equipment and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or an asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.

F - 14

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of significant Accounting Policies (cont’d)

M.   Revenue recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, a new accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of the promised goods at an amount that reflects the consideration that is expected to be received in exchange for those goods. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. The Company adopted ASC 606 at the beginning of the first quarter of fiscal 2018, and implemented new accounting policies and internal controls necessary to support the requirements of ASC 606. The adoption of ASC 606 did not have any impact on the Company's revenue recognition.

The Company recognizes revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer.  The Company accounts for a contract with customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company identifies separated contractual performance obligations and evaluates each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time.  All of the Company's performance obligations for the reported periods were satisfied at a point in time.

Revenue is allocated among performance obligations in a manner that reflects the consideration that the Company expects to be entitled to for the promised goods based on standalone selling prices (SSP). SSP are estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of the product when the Company sell the goods separately in similar circumstances and to similar customers.

Until January 1, 2018, revenues from sales of products were recognized upon delivery provided that the collection of the resulting receivable was reasonably assured, there was persuasive evidence of an arrangement, no significant obligations remained and the price was fixed or determinable.

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated statements of operations.

F - 15

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of significant Accounting Policies (cont’d)

N. Research and development costs

Capitalization of software development costs related to programmable components incorporated into the Company's products, are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. The company has determined that technological feasibility for its software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. The Company started to capitalize internal software development costs during 2018. The Company did not capitalize any internal software development costs for the year ended December 31, 2017 and 2016, because the cost incurred and the time between technological feasibility and product release was insignificant. Other costs incurred in the research and development of the Company’s products are expensed as incurred.

O. Allowance for product warranty

The Company grants service warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience. Accordingly, these financial statements do not include an accrual for warranty obligations.

P. Treasury shares

Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.

Q. Income taxes

Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are presented as non-current assets and liabilities and measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

R. Share-based compensation

The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:

When portions of an award vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the requisite service period for each separately vesting portion of the award.

F - 16

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of significant Accounting Policies (cont’d)

S. Basic and diluted earnings per share

Basic income per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding. Diluted income per ordinary share calculation is similar to basic income per ordinary share except that the weighted average of common shares outstanding is increased to include outstanding potential common shares during the period if dilutive. Potential common shares arise from stock options and RSUs, and the dilutive effect is reflected by the application of the treasury stock method.

The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.

	Year ended December 31
	2016		2017		2018
Net income attributable to ordinary shares
(US$ thousands)		13,137		21,714		14,637
Weighted average number of ordinary shares outstanding
used in basic income per ordinary share calculation		7,343,696		7,455,528		7,552,094
Add assumed exercise of outstanding dilutive potential
ordinary shares		91,485		146,443		105,236
Weighted average number of ordinary shares outstanding
used in diluted income per ordinary share calculation		7,435,181		7,601,971		7,657,330
Basic income per ordinary shares (US$)		1.789		2.912		1.938
Diluted income per ordinary shares (US$)		1.767		2.856		1.912
The weighted average number of shares related  to options
and RSUs excluded from the diluted earnings per share
calculation because of anti-dilutive effect		9,633		-		171,086

F - 17

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies (cont’d)

T. Comprehensive Income

For the years ended December 31, 2016, 2017 and 2018, comprehensive income equals net income.

U. Fair Value Measurements

The Company's financial instruments consist mainly of cash and cash equivalents, marketable securities, trade and other receivables and trade accounts payable. The carrying amounts of these financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these investments. The fair value of marketable securities is presented in Note 5 to these consolidated financial statements. Assets held for severance benefits are recorded at their current cash redemption value.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

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Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies (cont’d)

 V.        Concentrations of risks

(1)           Credit risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial institutions. Marketable securities consist of held to maturity marketable securities issued by highly rated corporations. As of December 31, 2017 and 2018, the ratings of the securities in the Company's portfolio was at least A and A- respectively. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations). The Company closely monitors extensions of credit and has never experienced significant credit losses. See note 13.

 (2)           Significant customers

The Company's top three customers accounted for approximately 36% of its revenues in 2018. The Company expects that a small number of customers will continue to account for a significant portion of its revenues for the foreseeable future. See note 13.

W.          Liabilities for loss contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

X. Recent Accounting Pronouncements

(1) In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize most of their leases on balance sheet as a right-of-use asset and a lease liability. This ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2018. The Company will adopt ASU 2016-02 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of its first quarter of 2019. The Company evaluated the impact of adopting ASU 2016-02, based on the lease portfolio as of December 31, 2018, and anticipates recording lease assets of approximately $3.4 million and lease liabilities of approximately $3.3 million on its consolidated balance sheets, with no material impact to its consolidated statements of operations.

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Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies (cont’d)

 X.           Recent Accounting Pronouncements (cont’d)

(2) In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. The impact of adopting the new standard on the net income is not expected to be material.

(3) In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill in Step 2 of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excess of a reporting unit’s carrying amount over its fair value as determined in Step 1 of the testing. ASU 2017-04 is effective for interim and annual testing dates after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated balance sheets, results of operations, cash flows or presentation thereof.

(4) In July 2018, the FASB issued ASU 2018-09, which clarifies and corrects unintended application of guidance, and makes improvements to several Codification Topics. The changes are part of an ongoing FASB project to make non-substantive technical corrections, clarifications, and improvements that are not expected to have a significant effect on accounting practice or create a significant administrative cost to most entities. Most of the amendments are effective immediately.

Some of the amendments are effective for annual and interim periods in fiscal years beginning after December 15, 2018.

The Company does not expect the adoption of ASU 2018-09 to have a material impact on its consolidated balance sheets, results of operations, cash flows or presentation thereof.

F - 20

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 3 – Acquisitions

A. ADI Engineering, Inc.

On October 28, 2015 (hereinafter – "closing date") the Company acquired certain assets from ADI Engineering, Inc. (hereinafter – "ADI"), a privately-held, US-based provider of custom embedded communications and networking products, for an aggregate purchase price of US$ 10,000 thousand in cash and estimated contingent consideration of US$ 7,802 thousand in cash and in options to ordinary shares, payable in three yearly payments, after the closing, subject to the attainment of certain performance milestones until December 31, 2017. The fair value measurement of the contingent consideration was classified at level 2 and level 3 of the fair value hierarchy (see Note 2U). Of the total purchase price of US$ 17,802 thousand, US$ 222 thousand was attributed to tangible assets, US$ 4,261 thousand was attributed to intangible assets and US$ 13,319 thousand was attributed to goodwill. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. The recognized goodwill is deductible for income tax purposes for 10 years.

In connection with the contingent consideration, during 2016 the Company paid ADI an amount of US$ 3,000 thousand. Any amount not paid was charged to the statement of operations as an income.

B. Silicom Denmark

On December 10, 2014 (hereinafter – "closing date"), the Company completed the acquisition of all of the outstanding shares and voting interests of Silicom Denmark, a provider of high performance application acceleration solutions, for an aggregate purchase price of US$ 10,161 thousand in cash and estimated contingent consideration of US$ 4,683 thousand in cash and in options to ordinary shares, subject to the attainment of certain performance milestones until August 31, 2015. The fair value measurement of the contingent consideration was classified at level 3 of the fair value hierarchy (see Note 2U). Of the total estimated purchase price of US$ 14,844 thousand, US$ 2,022 thousand was attributed to tangible assets, US$ 1,996 thousand was attributed to intangible assets, US$ 12,242 thousand was attributed to goodwill and US$ 1,416 was attributed to liabilities assumed. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. None of the recognized goodwill is expected to be deductible for income tax purposes.

In connection with the contingent consideration, during 2016 the Company paid to the Silicom Denmark sellers an amount of US$ 1,463 thousand, of which 90% was paid in cash and 10% in options to ordinary shares of the Company.

In relation to this acquisition, on April 18, 2016, the Company granted, in the aggregate, 22,795 optionsto the Silicom Denmark sellers and to the Silicom Denmark employees (see Note 12I). Any amount not paid was charged to the statement of operations as an income.

F - 21

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 4 - Cash and Cash Equivalents

	December 31
	2017		2018
	US$ thousands
Cash		12,834		16,147
Cash equivalents *		4,187		10,661
		17,021		26,808

 

*                Comprised mainly of deposits in banks as at December 31, 2017 and 2018 carrying a weighted average interest rate of 0.07% and 2.79%, respectively.

F - 22

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 5 - Marketable Securities

The Company's investment in marketable securities as of December 31, 2017 and 2018 are classified as ''held-to-maturity'' and consist of the following:

			Gross		Gross
			unrealized		unrealized
	Amortized		holding		holding			Aggregate
	cost basis**		gains		(losses)			fair value*
	US$ thousands
At December 31, 2018
Held to maturity:
Corporate debt securities and government debt securities
Current		1,610		-		(22	)		1,588
Non-Current		46,052		-		(778	)		45,274
		47,662		-		(800	)		46,862
At December 31, 2017
Held to maturity:
Corporate debt securities
Current		7,798		-		(49	)		7,749
Non-Current		5,976		-		(95	)		5,881
		13,774		-		(144	)		13,630

*	Fair value is being determined using quoted market prices in active markets (Level 2).
**	Including accrued interest in the amount of US$ 77 thousand and US$ 450 thousand as of December 31, 2017 and 2018 respectively. The accrued interest is presented as part of other account receivable on the balance sheet.

Activity in marketable securities in 2018	US$ thousands
Balance at January 1, 2018		13,774
Purchases of marketable securities		41,670
Discount on marketable securities, net		(32	)
Proceeds from maturity of marketable securities		(7,750	)
Balance at December 31, 2018		47,662

F - 23

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 5 - Marketable Securities (Cont’d)

The following table summarizes the gross unrealized losses on investment securities for which other-than-temporary impairments have not been recognized and the fair value of those securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2018:

	Less than 12 months					12 months or more					Total
Held to maturity:	Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value
Corporate debt securities  and government debt  securities		(679	)		41,024		(121	)		5,838		(800	)		46,862

The unrealized losses on the investments were caused by changes in interest rate. The Company has the ability and intent to hold these investments until maturity and it is more likely than not that the Company will not be required to sell any of the securities before recovery; therefore these investments are not considered other than temporarily impaired.

Note 6 - Other Receivables

	December 31
	2017		2018
	US$ thousands
Advances to suppliers		555		5,260
Government authorities		4,475		2,916
Prepaid expense		531		884
Other receivables		262		427
		5,823		9,487

Note 7 - Inventories

	December 31
	2017		2018
	US$ thousands
Raw materials and components		24,407		19,088
Products in process		15,079		10,883
Finished products		12,001		12,398
		51,487		42,369

F - 24

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 8 - Property, Plant and Equipment, Net

	December 31
	2017			2018
	US$ thousands
Machinery and equipment		10,531			12,150
Office furniture and equipment		665			725
Leasehold improvements		2,309			2,375
Property, plant and equipment		13,505			15,250
Accumulated depreciation		(9,384	)		(11,580	)
Property, Plant and equipment, net		4,121			3,670
Depreciation expense for the years ended December 31, 2016, 2017 and 2018 were US$ 1,616 thousand, US$ 1,911 thousand and US$ 2,190 thousand, respectively.

F - 25

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 9 - Intangible Assets

Intangible assets

Net intangible assets as of December 31, 2018 are as follows:

			December 31
			2017		2018
	Useful life		US$ thousands
Original cost:
Current technology		3		3,844		3,832
Customer relationships		3		1,937		1,937
Capitalization of software development costs		3		-		928
Licenses		3		-		106
				5,781		6,803
Accumulated amortization:
Current technology				3,181		3,832
Customer relationships				1,553		1,937
Capitalization of software development costs				-		37
Licenses				-		31
				4,734		5,837
Intangible assets, Net:
Current technology				663		-
Customer relationships				384		-
Capitalization of software development costs				-		891
Licenses				-		75
				1,047		966

Amortization expense for the years ended December 31, 2016, 2017 and 2018 were US$ 2,240 thousand, US$ 1,888 thousand and US$ 1,103 thousand, respectively.

F - 26

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 10 - Assets Held and Liability for Employees' Severance Benefits

A. Under Israeli law and labor agreements, Silicom is required to make severance payments to retired or dismissed employees and to employees leaving employment in certain other circumstances.

In respect of the liability to the employees, individual insurance policies are purchased and deposits are made with recognized severance pay funds.

The liability for severance pay is calculated on the basis of the latest salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited including accumulated income thereon as well as by the unfunded provision.

B. According to Section 14 to the Severance Pay Law ("Section 14") the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the company pursuant to such Section 14. Commencing July 1, 2008, the Company has entered into agreements with a majority of its employees in order to implement Section 14. Therefore, as of that date, the payment of monthly deposits by the Company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to those employees that have entered into such agreements and therefore the Company incurs no additional liability since that date with respect to such employees. Amounts accumulated in the pension funds or insurance policies pursuant to Section 14 are not supervised or administrated by the Company and therefore neither such amounts nor the corresponding accrual are reflected in the balance sheet.

C. Consequently, the assets held for employees' severance benefits reported on the balance sheet, in respect of deposits for those employees who have signed agreements pursuant to Section 14, represent the redemption value of deposits made through June 30, 2008. The liability for employee severance benefits, with respect to those employees, represents the liability of the Company for employees' severance benefits as of June 30, 2008.

As a result of the implementation of Section 14, as described above, the liability with respect to those employees is calculated on the basis of number of years of employment as of June 30, 2008, multiplied by the latest salary paid. The liability is covered by the amounts deposited, including accumulated income thereon, as well as by the unfunded provision. Such liability will be removed, either upon termination of employment or retirement.

D. Expenses recorded with respect to employees' severance payments for the years ended December 31, 2016, 2017 and 2018 were US$ 761 thousand, US$ 830 thousand and US$ 605 thousand, respectively.

F - 27

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 11 - Commitments and Contingencies

Lease commitments

The premises and facilities occupied by the Company are leased under various operating lease agreements. Furthermore, the Company has entered into several operating lease agreements for motor vehicles in Israel.

The agreements related to leases in Israel are in Israeli Shekel ("ILS") or in ILS, linked to the Israeli Consumer Price Index or to the US Dollars. The agreements related to leases in the USA are in US Dollars and the agreements related to leases in Denmark are in Danish Krone ("DKK").

The minimum future rental payments under the above leases at exchange rates in effect on December 31, 2018, are as follows:

Year ended December 31	US$ thousands
2019		1,394
2020		643
2021 and on		1,818

Of the amounts above, US$ 50 thousand in 2019, relate to related parties.

Rental expenses under the lease agreements for the years ended December 31, 2016, 2017 and 2018 were US$ 1,563 thousand, US$ 1,760 thousand and US$ 1,812 thousand, respectively.

F - 28

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity

Share based compensation

A. On October 21, 2013 the Board resolved to adopt the Global Share Incentive Plan (2013) (the "2013 Plan") and to reserve up to 500,000 ordinary shares for issuance under the 2013 Plan to employees, directors, officers and consultants of the Company or of any subsidiary or affiliate of the Company. In January 2018, our Board approved the increase of the number of ordinary shares reserved for issuance under the 2013 Plan by 600,000 additional ordinary shares. Grants under the 2013 Plan, whether as options, restricted stock units, restricted stock or other equity based awards, including their terms, are subject to the Board of Directors' approval. Grants to directors and certain other officers are generally subject to the approvals of the Compensation Committee as well as Board of Directors, and grants to directors or a CEO (and under certain circumstances certain other officers) will also have to be approved by the Shareholders.

B. Options or RSUs granted to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards of options, or the ordinary shares issued upon their exercise, must be deposited with a trustee for at least two years following the date of grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares.

Capital gains on awards granted under the plans are subjected to tax of 25% to be paid by the employee, and the Company is not entitled to a tax deduction.

Gains which are not capital gains on awards under the plans are subjected to regular tax rates on individuals, and the Company is entitled to a tax deduction for such gains.

F - 29

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

 Share based compensation (cont'd)

C. During 2014 and 2015, the Company granted 74,000 and 8,000 RSUs respectively to certain of its directors, employees and consultants under the 2013 Plan. In relation to those grants:

1. The vesting period of the RSUs ranges between 2 to 3 years from the date of grant.

2. The fair value of RSUs is estimated based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.

3. The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:

	2014	2015
Expected dividend yield	2.06%	3.22%
Termination rate	4.35%	0%

F - 30

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

Share based compensation (cont'd)

D. On July 28, 2015, the Company granted, in the aggregate, 89,907 options to certain of its directors and employees under the 2013 Plan.  In relation to this grant:

1. The exercise price for the options (per ordinary share) was US$ 26.91 and the Option expiration date was the earlier to occur of: (a) July 28, 2023; and (b) the closing price of the shares falling below US$ 13.46 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.

2. The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.08%
Expected dividend yield	2.09%
Average expected volatility (b)	53.01%
Termination rate	9%
Suboptimal factor (c)	3.4

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

F - 31

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

Share based compensation (cont'd)

E.      On June 8, 2016, the Company granted, in the aggregate, 93,660 optionsto certain of its directors and employees under the 2013 Plan. In relation to this grant:

1. The exercise price for the options (per ordinary share) was US$ 28.38 and the Option expiration date was the earlier to occur of: (a) June 8, 2024; and (b) the closing price of the shares falling below US$ 14.19 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.

2. The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	1.58%
Expected dividend yield	2.42%
Average expected volatility  (b)	47.90%
Termination rate	9%
Suboptimal factor(c)	3.32

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

F - 32

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

Share based compensation (cont'd)

F. On January 30, 2017, the Company granted, in the aggregate, 119,925 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:

1. The exercise price for the options (per ordinary share) was US$ 39.62 and the Option expiration date was the earlier to occur of: (a) January 30, 2025; and (b) the closing price of the shares falling below US$ 19.81 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.

2. The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.35%
Expected dividend yield	2.42%
Average expected volatility  (b)	43.71%
Termination rate	9%
Suboptimal factor (c)	3.28

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

F - 33

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

 Share based compensation (cont'd)

G. On January 30, 2017, the Company granted, in the aggregate, 78,000 RSUs to certain of its directors and employees under the 2013 Plan. In relation to those grants:

1. 50% of the RSUs vest on the second anniversary of the date of the grant and the additional 50% of the RSUs vest on the third anniversary of the date of the grant.

2. The fair value of RSUs is estimated based on the market value of the Company's stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.

3. The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:

Expected dividend yield	2.68%
Termination rate	1.74%

F - 34

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

Share based compensation (cont'd)

H. On April 30, 2018, the Company granted, in the aggregate, 137,010 optionsto certain of its directors and employees under the 2013 Plan. In relation to this grant:

1. The exercise price for the options (per ordinary share) was US$ 36.11 and the Option expiration date was the earlier to occur of: (a) April 30, 2026; and (b) the closing price of the shares falling below US$ 18.06 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.

2. The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.92%
Expected dividend yield	0.0 %
Average expected volatility  (b)	45.13%
Termination rate	9%
Suboptimal factor (c)	3.2

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

F - 35

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

Share based compensation (cont'd)

I. The following table summarizes information regarding stock options as at December 31, 2018:

	Options outstanding				Options exercisable
			Weighted average				Weighted average
			remaining				remaining
Exercise price	Number		contractual life		Number		contractual life
US$	of options		(in years)		of options		(in years)
15.28		6,575		1.7		6,575		1.7
26.91		20,415		4.6		20,415		4.6
33.27		19,706		7.3		19,706		7.3
28.38		77,616		5.4		77,616		5.4
39.62		109,840		6.1		-		-
36.11		131,343		7.3		-		-
		365,495				124,312

The aggregate intrinsic value of options outstanding as of December 31, 2017 and 2018 is US$ 9,175 thousand and US$ 835 thousand, respectively.

The aggregate intrinsic value of options exercisable as of December 31, 2017 and 2018 is US$ 1,759 thousand and US$ 835 thousand, respectively.

The total intrinsic value of options exercised during the year ended December 31, 2017 and 2018, is US$ 4,194 thousand and US$ 67 thousand, respectively.

The intrinsic value of the options at the date of grant is zero.

F - 36

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

Share based compensation (cont'd) 

J.          The stock option activity under the abovementioned plans is as follows: 

				Weighted		average
	Number			average		grant date
	of options			exercise price		fair value
				US$		US$
Balance at January 1, 2016		214,701
Granted*		116,455			29.34		10.96
Exercised		(62,269	)		15.28		6.54
Forfeited		(2,882	)		29.71		11.79
Balance at December 31, 2016		266,005
Granted		119,925			39.62		11.89
Exercised		(124,918	)		21.46		8.46
Forfeited		(11,101	)		33.18		10.87
Balance at December 31, 2017		249,911
Granted		137,010			36.11		14.71
Exercised		(9,674	)		28.02		9.94
Forfeited		(11,752	)		36.73		13.05
Balance at December 31, 2018		365,495
Exercisable at December 31, 2018		124,312

* In 2016 the Company granted in the aggregate, 116,455 options. Regarding the grant of 93,660 options, see Note 12E. Regarding the grant of 22,795 options, see Note 3B.

F - 37

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

Share based compensation (cont'd)
K.	The Restricted Share Units activity under the abovementioned plans is as follows:

				Weighted
	Number of			average
	Restricted			grant date
	Share Units			fair value
				US$
Balance at January 1, 2016		78,000
Vested		(35,000	)		46.54
Balance at December 31, 2016		43,000
Granted		78,000			34.90
Vested		(43,000	)		42.52
Balance at December 31, 2017 and  December 31, 2018		78,000

The aggregate intrinsic value of RSUs outstanding as of December 31, 2017 and December 31, 2018 is US$ 5,469 thousand and US$ 2,725 thousand, respectively.

F - 38

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 12 - Shareholders' Equity (cont'd)

Share based compensation (cont'd)
L.	During 2016, 2017 and 2018, the Company recorded share-based compensation expenses. The following summarizes the allocation of the stock-based compensation expenses:

	Year ended December 31
	2016		2017		2018
	US$ thousands		US$ thousands		US$ thousands
Cost of sales		180		320		372
Research and development costs		504		832		953
Selling and marketing expenses		366		537		569
General and administrative expenses		500		736		530
		1,550		2,425		2,424

As of December 31, 2018, there were US$ 1,668 thousand of unrecognized compensation costs related to outstanding stock options and RSUs to be recognized over a weighted average period of 1.19 years.

F - 39

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 13 - Geographic areas and major customers

 

A.        Information on sales by geographic distribution:

The Company has one operating segment.

  

Sales are attributed to geographic distribution based on the location of the customer.

	Year ended December 31
	2016		2017		2018
	US$ thousands
North America		65,590		100,434		108,024
Europe		24,208		20,156		21,038
Asia-Pacific		10,549		5,100		4,691
		100,347		125,690		133,753

    B.         Sales to single customers exceeding 10% of sales (US$ thousands):

	Year ended December 31
	2016		2017		2018
	US$ thousands
Customer "A"		17,366		16,915		18,855
Customer "B"		*		*		14,506
Customer "C"		*		*		14,220
Customer "D"		*		25,888		*
Customer "E"		11,628		*		*

 *          Less than 10% of sales.

F - 40

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 13 - Geographic areas and major customers (cont'd)

C.        Major Customers - as percentage of net Accounts Receivable balance:

  

Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance as of December 31, 2017 and 2018, consist of the following customers:

	Year ended December 31
	2017			2018
	Percentage
Customer 1		15	%		22	%
Customer 2		*			18	%
Customer 3		*			10	%
Customer 4		30	%		*
Customer 5		22	%		*

        *            Less than 10% of Trade accounts receivable, net.

D.        Information on Long lived assets - Property, Plant and Equipment by geographic areas: 

  

The following table presents the locations of the Company’s long lived assets - Property, Plant and Equipment as of December 31, 2017 and 2018:

	Year ended December 31
	2017		2018
	US$ thousands
North America		20		46
Europe		225		235
Israel		3,876		3,389
		4,121		3,670

F - 41

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 14 - Financial Income (Expenses), Net

	Year ended December 31
	2016			2017			2018
	US$ thousands
Interest income		751			527			840
Discount on marketable securities, net		(358	)		(217	)		(32	)
Exchange rate differences, net		(236	)		(45	)		208
Bank charges		(122	)		(109	)		(93	)
		35			156			923

F - 42

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 15 - Taxes on Income

A. Measurement of results for tax purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986

As a "foreign invested company" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's taxable income or loss is calculated in US Dollars.

B. Corporate tax rate in Israel

Taxable income of Israeli companies was subject to tax at the rate of 25% as from 2016 and thereafter.

Furthermore, In December 2016, the regular tax rate in Israel was reduced to 23% in two steps. The first step was to a rate of 24% as from 2017 and the second step was to a rate of 23% as from 2018 and thereafter.

C. Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law")

1.     On December 29, 2010 the Knesset approved the Economic Policy Law for 2011-2012, which includes an amendment to the Law for the Encouragement of Capital Investments – 1959 (hereinafter – "the Amendment to the Law"). The Amendment to the Law is effective from January 1, 2011 and its provisions will apply to preferred income derived or accrued in 2011 and thereafter by a Preferred Company, per the definition of these terms in the Amendment to the Law.

Companies can choose to not be included in the scope of the Amendment to the Law and to stay in the scope of the law before its amendment until the end of the benefits period.

Under the Amendment to the Law, which the Company started applying in 2014, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all preferred income of such company. Under the law, when the election is made, the uniform tax rate (for 2014 and on) will be 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The profits of these Preferred Companies will be freely distributable as dividends, subject to a withholding tax of 20% (or a lower rate under an applicable tax treaty).

In December 2016, under the Amendment to the Law, the uniform tax rate in areas in Israel designated as Development Zone A was reduced to 7.5% as from 2017 and thereafter. The company has two facilities in Israel of which one of them is located in Development Zone A.

F - 43

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 15 - Taxes on Income (cont’d)

C. Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law") (cont'd)

1.         (cont'd)

            Should the Company derive income from sources other than the Preferred company, such income will be taxable at the regular corporate tax rates for the applicable year.

             2.       In the event of distribution by the Company of dividends out of its retained earnings that were generated prior to 2014 tax year and were tax exempt under the "Approved Enterprise" or "Benefited Enterprise" status, the Company would be subjected to a maximum of 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the shareholders.

Out of the Company’s retained earnings as of December 31, 2017 and 2018, approximately US$ 50,356 thousand and US$ 46,581 thousand respectively are tax-exempt, under the previous "Approved Enterprise" and "Benefited Enterprise" status. If such tax-exempt income is distributed as a dividend (including a liquidation dividend), it would be taxed at the reduced corporate tax rate applicable to such profits (up to 25%) and an income tax liability of up to approximately US$ 12,589 thousand and US$ 11,645 thousand would be incurred as of December 31, 2017 and 2018, respectively. The Company anticipates that any future dividends distributed pursuant to its dividend policy, will be distributed from income sources which will not impose additional tax liabilities on the Company. The Company intends to reinvest the amount of its tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s "Approved Enterprise" or "Benefited Enterprise". If the Company was to declare a dividend from its tax-exempt income, an income tax expense would be recognized in the period a dividend is declared.

F - 44

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 15 - Taxes on Income (cont’d)

D.            Taxation of the subsidiaries

1. The subsidiary Silicom Inc. files tax returns to US federal tax authorities and to state tax authorities in the states of New Jersey, California, Virginia, New York, New Mexico, Tennessee and Texas.

On December 22, 2017, the Tax Cuts and Jobs Acts was enacted into law. The new legislation impacted the company by reduction of the Federal corporate income tax rate to 21% effective January 1, 2018.

2. The subsidiary Silicom Denmark is taxed according to the tax laws in Denmark.

3. The Company has not provided for Israeli income and foreign withholding taxes on US$ 6,701 thousand of its non-Israeli subsidiaries' undistributed earnings as of December 31, 2018. The earnings could become subject to tax if earnings are remitted or deemed remitted as dividends or upon sale of a subsidiary.

The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The unrecognized deferred tax liability associated with these temporary differences was approximately US$ 838 thousand at December 31, 2018. 

4. As of December 31, 2018, the net operating loss carry-forwards of the Companys’ subsidiaries for tax purposes amounted to approximately US$ 900 thousand. These losses are available to offset any future taxable income.

E.             Tax assessments

1. For the Israeli jurisdiction the Company has final tax assessments for all years up to and including the tax year ended December 31, 2013.

2. For the US Federal jurisdiction, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2014. For the New Jersey and California state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2013. For the Virginia state jurisdiction, Silicom Inc. has open tax assessments for the years 2015 through 2018.  For the Tennessee state jurisdiction, Silicom Inc. has open tax assessments for the years 2016 through 2018.  For the New Mexico and New York state jurisdictions, Silicom Inc. has open tax assessments for the years 2017 and 2018. For the Texas state jurisdiction, Silicom Inc. has open tax assessments for the year 2018.

3. For the Danish jurisdiction, Silicom Denmark has final tax assessments for all years up to and including the tax year ended August 31, 2014.

F - 45

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 15 - Taxes on Income (cont'd)

F. Income before income taxes and income taxes expense (benefit) included in the consolidated statements of operations

	Year ended December 31
	2016			2017			2018
	US$ thousands
Income before income taxes:
Israel		15,541			23,226			14,703
Foreign jurisdiction		324			2,356			2,871
		15,865			25,582			17,574
Current taxes:
Israel		2,242			2,379			2,400
Foreign jurisdiction		720			1,095			831
		2,962			3,474			3,231
Current tax (benefits) expenses relating
to prior years:
Israel		26			12			(73	)
Foreign jurisdiction		-			(71	)		(226	)
		26			(59	)		(299	)
Deferred taxes:
Israel		10			549			(106	)
Foreign jurisdiction		(270	)		(96	)		111
		(260	)		453			5
Income tax expense		2,728			3,868			2,937

F - 46

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 15 - Taxes on Income (cont’d)

G.          Deferred tax assets and liabilities

The tax effects of significant items comprising the Company’s deferred tax assets and liabilities are as follows:

	December 31			December 31
	2017			2018
	US$ thousands			US$ thousands
Deferred tax assets:
Accrued employee benefits		282			281
Research and development costs		846			842
Tax loss carryforwards		111			169
PPE		15			48
Share based compensation		213			348
Intangible assets		110			202
Other		2			23
Total gross deferred tax assets		1,579			1,913
Deferred tax liabilities:
Intangible assets		-			(212	)
Goodwill		(680	)		(807	)
Total gross deferred tax liabilities		(680	)		(1,019	)
Net deferred tax assets		899			894
In Israel		788			894
Foreign jurisdictions		111			-
Net deferred tax assets		899			894
Non-current deferred tax assets		899			894

F - 47

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 15 - Taxes on Income (cont’d)

 

H.            Reconciliation of the statutory tax expense to actual tax expense

	Year ended December 31
	2016			2017			2018
	US$ thousands
Income before income taxes		15,865			25,582			17,574
Statutory tax rate in Israel		25.0	%		24.0	%		23.0	%
		3,966			6,140			4,042
Increase (decrease) in taxes resulting from:
Non-deductible operating expenses, net		228			364			295
Non-taxable income		(84	)		(1,114	)		-
Prior years adjustments		26			(59	)		(299	)
Tax effect due to
"Preferred Enterprise" status*		(1,924	)		(2,361	)		(1,398	)
Taxes related to foreign jurisdictions		324			632			176
Changes in tax rate		94			162			-
Other		98			104			121
Income tax expense		2,728			3,868			2,937

*             The effect of the benefit resulting from the "Preferred Enterprise" status on net earnings per ordinary share is as follows:

	Year ended December 31
	2016		2017		2018
Basic		0.26		0.32		0.19
Diluted		0.26		0.31		0.18

F - 48

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 15 - Taxes on Income (cont’d)

I.             Accounting for uncertainty in income taxes

The accounting literature clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.

During 2016, 2017 and 2018 the Company and its subsidiaries did not have any significant unrecognized tax benefits and thus, no related interest and penalties were accrued.

In addition, the Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.

F - 49

Silicom Ltd. and its Subsidiaries

Notes to the Consolidated Financial Statements

Note 16 - Subsequent Events

(1) In January 2019, the Company’s compensation committee and board of directors, respectively, have approved the grant of a total of 141,928 options under the Global Share Incentive Plan (2013), of which options granted to directors and office holders are subject to the approval of the Annual General Meeting, which is currently scheduled to convene no later than June 2019, as prescribed under the Israeli Companies Law, 1999 and the Company's Amended and Restated Articles of Association.

F - 50

Item 2

Management's Annual Report on Internal Control over Financial Reporting

Disclosure Controls and Procedures. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a15(f) and 15d15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Report of Management on Internal Control over Financial Reporting. Our management has assessed our internal control over financial reporting as of December 31, 2018, the end of our fiscal year. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control — Integrated Framework (2013)".

Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2018 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

Attestation Report of the Registered Public Accounting Firm. Our independent registered public accounting firm, Somekh Chaikin, a member firm of KPMG International, has audited the consolidated financial statements included in this report on Form 6-K, and as part of its audit, has issued its audit report on the effectiveness of our internal control over financial reporting as of December 31, 2018.  The attestation report of our independent registered public accounting firm on management's assessment of the Company's internal control over financial reporting is included on pages F-3 and F-4 of this report on Form 6-K, and is included herein by reference.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitation, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Changes in Internal Control over Financial Reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

	Date: March 18, 2019
Signature: /S/ Shaike Orbach		Signature: /S/ Eran Gilad
Shaike Orbach, Chief Executive Officer		Eran Gilad, Chief Financial Officer

EX-99.2

Exhibit 99.2

A.          Operating Results

You should read the following management’s discussion and analysis of our financial condition and operating results in conjunction with the consolidated financial statements and the related notes thereto included in this annual report. The following table sets forth, for the periods indicated, the relationship (in percentages) of items from our Consolidated Statement of Operations Data to our total sales:

Year Ended December 31,
	2016			2017			2018
Sales		100	%		100	%		100	%
Cost of sales		61.6			63.5			68.6
Gross profit		38.4			36.5			31.4
Research and development expenses		12.6			11.1			11.1
Sales and marketing expenses		6.4			5.3			5.0
General and administrative expenses		3.9			3.6			2.9
Contingent consideration expense (benefit)		(0.3	)		(3.7	)		-
Operating Income		15.8			20.2			12.4
Financial income, net		-			0.2			0.7
Income before income taxes		15.8			20.4			13.1
Income tax expenses		2.7			3.1			2.2
Net Income		13.1			17.3			10.9

Sales in 2018 increased moderately by 6.4% to $133,753 thousand compared to $125,690 thousand in 2017. Our modest growth in sales was mainly attributed to the following: On the positive side, this growth was mainly driven by our continued benefit from our success in expanding our customer base and product offering, especially in our CPE/EDGE product lines, supporting important market trends like NFV, SD-WAN and Cyber security. However, on the negative side, we lost our largest-ever Cloud related Design Win in March 2018. All of the above, lead to our modest growth in 2018.

Sales in 2017 increased by 25.3% to $125,690 thousand compared to $100,347 thousand in 2016. The increase in sales was mainly attributed to our success in our target markets, especially those driven by Cloud Computing. This achievement was part of our continued success in expanding our customer base and product offering supporting important market trends like Cloud Computing, Cyber security, SDN, NFV, Virtualization and SD-WAN.

Gross profit in 2018 was $42,056 thousand compared to $45,928 thousand in 2017. Gross profit as a percentage of sales in 2018 was 31.4%, compared to 36.5% in 2017. The lower gross profit percentage in 2018 compared to 2017 was attributed to: (i) a $3.2 million write-off related to the loss of our largest-ever Cloud related Design Win, which we announced on March 13, 2018, (ii) changes to the mix of products that we sold in 2018, on which our gross profit is largely dependent, which was influenced by our strategic decision to take advantage of increased revenue potential and opportunities, and (iii) write-downs of inventory made with respect to any slow moving or obsolete inventory we can no longer use (not including the above mentioned write-off); the inventory write-downs as a percentage of sales in 2018 increased to 2.9%, compared to 2.3% in 2017.

Gross profit in 2017 was $45,928 thousand compared to $38,551 thousand in 2016. Gross profit as a percentage of sales in 2017 was 36.5%, compared to 38.4% in 2016. Our gross profit is largely dependent on the mix of products we sell during a specific year. The lower gross profit percentage in 2017 compared to 2016 was primarily a result of changes to the mix of products we sold in 2017, which was influenced by our strategic decision to take advantage of increased revenue potential and opportunities, especially in the Cloud related business. Gross profit was also affected by, among other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory we can no longer use. The inventory write-downs as a percentage of sales in 2017 decreased to 2.3%, compared to 3.2% in 2016.

Research and development expenses in 2018 increased by 6.5% to $14,820 thousand compared to $13,915 thousand in 2017. This increase was mainly attributed to the increase in the number of our research and development employees, to an increase in the use of consultants and subcontracted work, as well as to an increase in other related research and development expenses required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately $2,308 thousand to such increase, as well as to an increase in the share-based compensation which amounted to approximately $953 thousand in 2018, compared to $832 thousand in 2017, all of which were offset by capitalization of internal software development costs in the amount of $928 thousand, as well as a decrease in amortization of acquired intangible assets, which amounted to approximately $655 thousand in 2018, compared to $1,251  thousand in 2017.

Research and development expenses in 2017 increased by 9.9% to $13,915 thousand compared to $12,663 thousand in 2016. This increase was mainly attributed to the increase in the number of our research and development employees required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately $827 thousand to such increase, combined with a weakening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone) which contributed approximately $498 thousand to the increase, offset by a slight decrease in amortization of acquired intangible assets which amounted to approximately $1,251 thousand in 2017, compared to $1,324 thousand in 2016.

Sales and marketing expenses in 2018 decreased by 1.2% to $6,642 thousand compared to $6,722 thousand in 2017. This decrease was mainly attributed to a decrease in amortization of acquired intangible assets which amounted to approximately $384 thousand in 2018, compared to $637 thousand in 2017, offset by our continued investment in the promotion of our networking and data infrastructure solutions to our target markets including those driven by trends like Cloud Computing, Cyber security, SDN, NFV, Virtualization, SD-WAN and other trends, by, among others, our continued effort to expand exposure of our product offering and expanding our customer base, which contributed approximately $173 thousand.

Sales and marketing expenses in 2017 increased by 4.7% to $6,722 thousand compared to $6,423 thousand in 2016. This increase was mainly attributed to our continued investment in the promotion of our networking and data infrastructure solutions to our target markets including those driven by trends like Cloud Computing, Cyber security, SDN, NFV, Virtualization, SD-WAN and other trends, by, among others, our continued effort to expand exposure of our product offering and expanding our customer base, which contributed approximately $164 thousand to such increase, combined with a weakening of the US Dollar against the New Israeli Shekel (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels) which contributed approximately $144 thousand to the increase, offset by a slight decrease in amortization of acquired intangible assets which amounted to approximately $637 thousand in 2017, compared to $646 thousand in 2016.

General and administrative expenses in 2018 decreased by 12.5% to $3,943 thousand compared to $4,507 thousand in 2017. This decrease was mainly attributed to a decrease in payroll related expenses attributed to general and administrative activity which amounted approximately $359 thousand, as well as to a decrease in the share-based compensation, which amounted to approximately $530 thousand in 2018, compared to $735 thousand in 2017.

In 2018 we had a contingent consideration expense in the amount of $0 thousand compared to a contingent consideration benefit in the amount of $4,642 thousand in 2017. For additional information see Note 3 to our financial statements included elsewhere in this annual report.

General and administrative expenses in 2017 increased by 13.6% to $4,507 thousand compared to $3,969 thousand in 2016. This increase was mainly attributed to the growth in our activity, which contributed approximately $340 thousand to such increase, combined with a weakening of the US Dollar against the New Israeli Shekel (since a significant portion of our general and administrative expenses are incurred in New Israeli Shekels) which contributed approximately $198 thousand to the increase.

In 2017 we had a contingent consideration benefit in the amount of $4,642 thousand compared to a contingent consideration benefit in the amount of $334 thousand in 2016. For additional information see Note 3 to our financial statements included elsewhere in this annual report.

Financial income, net in 2018 increased by 491.7% to $923 thousand compared to $156 thousand in 2017. The increase resulted from the net effect of the following factors: (i) an increase in income from investment in marketable securities, attributed to increase in the funds available for investment, which amounted to $808 thousand in 2018 compared to $310 thousand in 2017, (ii) a decrease in bank fees, which contributed approximately $16 thousand to the increase, and (iii) a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone, which created a net financial income in US Dollars from exchange rate differences (a portion of our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Krone) of $208 thousand in 2018 compared to a net financial expenses in the amount of $45 thousand in 2017.

Financial income, net in 2017 increased by 345.7% to $156 thousand compared to $35 thousand in 2016. The increase resulted from the net effect of the following factors: (i) a decrease in income from investment in marketable securities, attributed to lower funds available for investment, which amounted to $310 thousand in 2017 compared to $393 thousand in 2016, (ii) a decrease in bank fees, which contributed approximately $13 thousand to the increase, and (iii) to a lower offsetting effect of the weakening of the US Dollar against the New Israeli Shekel and the Danish Krone, which created a net financial expense in US Dollars from exchange rate differences (a portion of our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Krone) of $45 thousand in 2017 compared to $236 thousand in 2016.

In 2018 we recorded current income tax expenses of $3,231 thousand and deferred income tax expenses of $5 thousand compared to current income tax expenses of $3,474 thousand and deferred income tax expenses of $453 thousand in 2017. The minor decrease in our current income tax expenses was mainly attributed to a decrease in the corporate income tax rate in the US Federal jurisdiction. The decrease in the deferred income tax expenses was mainly attributed to deferred income tax expenses in relation to acquired goodwill, which amounted to $127 thousand in 2018 compared to $465 thousand in 2017,  combined with an increase in deferred income tax benefit relating to share-based compensation provided by us to our employees and directors, which amounted to $135 thousand in 2018 compared to deferred income tax expenses which amounted to $33 thousand in 2017. In addition, in 2018 we recorded an income tax benefit relating to prior years in the amount of $299 thousand, compared to an income tax benefit relating to prior years in the amount of $59 thousand in 2017.

In 2017 we recorded current income tax expenses of $3,474 thousand and deferred income tax expense of $453 thousand compared to current income tax expenses of $2,962 thousand and deferred income tax benefit of $260 thousand in 2016. The increase in our current income tax expenses was mainly attributed to the increase in our activity and the resulting taxable income. The increase in the deferred income tax expenses was mainly attributed to an increase in deferred income tax expenses in relation to acquired goodwill, which amounted to $465 thousand in 2017 compared to $154 thousand in 2016, as well as to an increase in deferred income tax expenses in relation to R&D expenses, which amounted to $103 thousand in 2017 compared to deferred income tax benefit of $209 thousand in 2016. In addition, in 2017 we recorded an income tax benefit relating to prior years in the amount of $59 thousand, compared to an income tax expense relating to prior years in the amount of $26 thousand in 2016.

In 2018 we recorded net income of $14,637 thousand compared to net income of $21,714 thousand in 2017, a decrease of 32.6%. The decrease was mainly attributed to the following factors: (i) the decrease in contingent consideration benefit which amounted to $0 thousand in 2018, compared to a contingent consideration benefit of $4,642 thousand in 2017, and (ii) to our lower gross profit in 2018 compared to 2017, as mentioned above.

In 2017 we recorded net income of $21,714 thousand compared to net income of $13,137 thousand in 2016, an increase of 65.3%. The increase was mainly attributed to the following factors: (i) an increase in our activity, and (ii) the increase in contingent consideration benefit we recorded in 2017, which amounted to $4,642 thousand, compared to a contingent consideration benefit of $334 thousand in 2016.

Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets

Since the majority of our revenues are denominated and paid in U.S. Dollars, we believe that inflation in Israel and in Denmarkand fluctuations in the U.S. dollar exchange rates do not have any material effect on our revenue. Inflation in Israel or Denmark and the Israeli and Danish currency as well as U.S. dollar exchange rate fluctuations, may however, have an effect on our expenses and, as a result, on our net income/loss. The cost of our Israeli and Danish operations, as expressed in U.S. Dollars, is influenced by the extent to which any change in the rates of inflation in Israel or Denmark are not offset (or are offset on a lagging basis) by a change in valuation of the NIS or DKK in relation to the U.S. dollar.

We do not presently engage in any hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake such transactions, if management determines that it is necessary to offset such risks.

B.        Liquidity and Capital Resources

As of December 31, 2018, we had working capital of $82,541 thousand and our current ratio (current assets to current liabilities) was 4.83. Cash and cash equivalents as of December 31, 2018 increased by $9,787 thousand to $26,808 thousand, compared to $17,021 thousand as of December 31, 2017. Short-term marketable securities decreased by $6,152 thousand to $1,600 thousand, compared to $7,752 thousand as of December 31, 2017, and long-term marketable securities increased by $39,667 thousand to $45,612 thousand, compared to $5,945 thousand as of December 31, 2017. The net increase of $43,302 thousand in these three balance sheet items in 2018 was mainly due to positive cash provided by operating activities in the amount of $45,678 thousand and to consideration received in connection with exercise of options to purchase our ordinary shares in the amount of approximately $288 thousand, offset by the following factors: (i) property, plant and equipment expenditures which amounted to $1,345 thousand, and (ii) investment in intangible assets which amounted to $1,022 thousand .

Trade receivables (including trade receivable from related parties) decreased to $23,817 thousand as of December 31, 2018, compared to $41,367 thousand as of December 31, 2017. This decrease was largely affected by a decrease in the average payment terms of our customers. Other receivables increased to $9,487 thousand as of December 31, 2018, compared to $5,823 thousand as of December 31, 2017. This increase was mainly attributed to the increase of our activity.

Trade payables (including trade payables to related parties) increased to $15,407 thousand as of December 31, 2018, compared to $12,629 thousand as of December 31, 2017. This increase was mainly attributed to the increase of our activity. Other payables and accrued liabilities decreased to $6,133 thousand as of December 31, 2018, compared to $6,420 thousand as of December 31, 2017.

Inventories decreased to $42,369 thousand as of December 31, 2018, compared to $51,487 thousand as of December 31, 2017. The decrease was attributed, mainly, to the loss of our largest-ever Cloud related Design Win.

Cash provided by operating activities in 2018 amounted to $45,678 thousand compared to cash provided by operating activities in the amount of $1,408 thousand in 2017. The cash provided by operating activities in 2018 was primarily the result of significant changes in our accounts receivable and inventory, in 2018.

Capital expenditures on property and equipment for year ended December 31, 2018 were $1,740 thousand, compared to $2,118 thousand as of December 31, 2017. This decrease was mainly attributed to a decrease in investment in equipment used for our production and research and development, as a result of the loss of our largest-ever Cloud related Design Win.

We have cash and cash equivalents that we believe are sufficient for our present requirements. Furthermore, our cash resources are sufficient to fund our operating needs for at least the next twelve months.

EX-99.3

Exhibit 99.3

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Silicom Ltd.:

We consent to the incorporation by reference in registration statement No. 333-149144, No. 333-185230 and No. 333-193034 on Form S-8 and registration statement No. 333-217103 on Form  F-3 of Silicom Ltd. of our report dated March 18, 2019, with respect to the consolidated balance sheets of Silicom Ltd. and its subsidiaries as of December 31, 2017 and 2018, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the “consolidated financial statements”), and the effectiveness of internal control over financial reporting as of December 31, 2018, which report appears in Form 6-K of Silicom Ltd. dated March 18, 2019.

/s/ Somekh Chaikin

Certified Public Accountants (Israel)

A member firm of KPMG International

Tel Aviv, Israel

March 18, 2019

XML

Document And Entity Information	12 Months Ended
	Dec. 31, 2018
Document And Entity Information [Abstract]
Entity Registrant Name	SILICOM LTD.
Entity Central Index Key	0000916793
Document Type	6-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2018
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2018
Current Fiscal Year End Date	--12-31

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Current assets
Cash and cash equivalents	$ 26,808	$ 17,021
Marketable securities	1,600	7,752
Accounts receivable:
Trade, net	23,453	40,742
Other	9,487	5,823
Related parties	364	625
Inventories	42,369	51,487
Total current assets	104,081	123,450
Marketable securities	45,612	5,945
Assets held for employees' severance benefits	1,517	1,591
Deferred tax assets	894	899
Property, plant and equipment ("PPE"), net	3,670	4,121
Intangible assets, net	966	1,047
Goodwill	25,561	25,561
Total assets	182,301	162,614
Current liabilities
Trade accounts payable	15,389	12,619
Other accounts payable and accrued expenses	6,133	6,420
Related parties	18	10
Total current liabilities	21,540	19,049
Long-term liabilities
Liability for employees' severance benefits	2,612	2,765
Total liabilities	24,152	21,814
Commitments and contingencies
Shareholders' equity
Ordinary shares, ILS 0.01 par value; 10,000,000 shares authorized; 7,564,502 and 7,574,176 issued as at December 31, 2017 and 2018, respectively; 7,549,531 and 7,559,205 outstanding as at December 31, 2017 and 2018, respectively	22	22
Additional paid-in capital	54,621	51,909
Treasury shares (at cost) - 14,971 ordinary shares as at December 31, 2017 and 2018	(38)	(38)
Retained earnings	103,544	88,907
Total shareholders' equity	158,149	140,800
Total liabilities and shareholders' equity	$ 182,301	$ 162,614

XML

Consolidated Balance Sheets (Parenthetical) - ₪ / shares	Dec. 31, 2018	Dec. 31, 2017
Statement of Financial Position [Abstract]
Ordinary shares, par value	₪ 0.01	₪ 0.01
Ordinary shares, authorized	10,000,000	10,000,000
Ordinary shares, issued	7,574,176	7,564,502
Ordinary shares, outstanding	7,559,205	7,549,531
Ordinary shares, treasury shares	14,971	14,971

XML

Consolidated Statements of Operations - USD ($) $ in Thousands		12 Months Ended
		Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Income Statement [Abstract]
Sales	[1]	$ 133,753	$ 125,690	$ 100,347
Cost of sales		91,697	79,762	61,796
Gross profit		42,056	45,928	38,551
Operating expenses
Research and development	[2]	14,820	13,915	12,663
Sales and marketing		6,642	6,722	6,423
General and administrative		3,943	4,507	3,969
Contingent consideration benefit			(4,642)	(334)
Total operating expenses		25,405	20,502	22,721
Operating income		16,651	25,426	15,830
Financial income, net		923	156	35
Income before income taxes		17,574	25,582	15,865
Income taxes		2,937	3,868	2,728
Net income		$ 14,637	$ 21,714	$ 13,137
Income per share:
Basic income per ordinary share (US$)		$ 1.938	$ 2.912	$ 1.789
Diluted income per ordinary share (US$)		$ 1.912	$ 2.856	$ 1.767
Weighted average number of ordinary shares used to compute basic income per share (in thousands)		7,552,094	7,455,528	7,343,696
Weighted average number of ordinary shares used to compute diluted income per share (in thousands)		7,657,330	7,601,971	7,435,181

[1] Including sales to related parties in the amount of US$ 762 thousand, US$ 1,275 thousand and US$ 1,063 thousand in 2016, 2017 and 2018, respectively.

[2] Including services from related parties in the amount of US$ 351 thousand, US$ 170 thousand and US$ 311 thousand in 2016, 2017 and 2018, respectively.

XML

Consolidated Statements of Operations (Parenthetical) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Income Statement [Abstract]
Sales to related parties	$ 1,063	$ 1,275	$ 762
Services from related parties	$ 311	$ 170	$ 351

XML

Consolidated Statements of Changes In Shareholders' Equity - USD ($) $ in Thousands		Ordinary shares [Member]		Additional paid-in capital [Member]	Treasury shares [Member]	Retained earnings [Member]	Total
Balance at Dec. 31, 2015		$ 21		$ 44,101	$ (38)	$ 68,750	$ 112,834
Balance, shares at Dec. 31, 2015	[1]	7,284,344
Exercise of options and RSUs	[2]	$ 1		951			952
Exercise of options and RSUs, shares	[1],[2]	97,269
Share-based compensation				1,781			1,781
Dividend						(7,312)	(7,312)
Net income						13,137	13,137
Balance at Dec. 31, 2016		$ 22		46,833	(38)	74,575	121,392
Balance, shares at Dec. 31, 2016	[1]	7,381,613
Exercise of options and RSUs	[2]		[3]	2,651			2,651
Exercise of options and RSUs, shares	[1],[2]	167,918
Share-based compensation				2,425			2,425
Dividend						(7,382)	(7,382)
Net income						21,714	21,714
Balance at Dec. 31, 2017		$ 22		51,909	(38)	88,907	140,800
Balance, shares at Dec. 31, 2017	[1]	7,549,531
Exercise of options and RSUs	[2]		[3]	288			288
Exercise of options and RSUs, shares	[1],[2]	9,674
Share-based compensation				2,424			2,424
Net income						14,637	14,637
Balance at Dec. 31, 2018		$ 22		$ 54,621	$ (38)	$ 103,544	$ 158,149
Balance, shares at Dec. 31, 2018	[1]	7,559,205

[1] Net of 14,971 shares held by Silicom Inc.

[2] Restricted share units (hereinafter - "RSUs")

[3] Less than 1 thousand.

XML

Consolidated Statements of Changes In Shareholders' Equity (Parenthetical) - $ / shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Consolidated Statements Of Changes In Shareholders' Equity [Abstract]
Dividend per share		$ 1.00	$ 1.00
Shares held by Silicom, Inc.	14,971	14,971	14,971

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Cash flows from operating activities
Net income	$ 14,637	$ 21,714	$ 13,137
Adjustments required to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	3,293	3,799	3,856
Write-down of obsolete inventory	6,211	2,918	3,170
Discount on marketable securities, net	32	217	358
Share-based compensation expense	2,424	2,425	1,550
Deferred taxes, net	5	453	(260)
Changes in assets and liabilities:
Accounts receivable - trade	16,985	(13,237)	(4,007)
Accounts receivable - other	(3,384)	(2,475)	(1,832)
Accounts receivable - related parties	261	(208)	56
Change in liability for employees' severance benefits, net	(79)	171	126
Inventories	2,540	(10,287)	(21,426)
Trade accounts payable	3,059	1,698	1,809
Other accounts payable and accrued expenses	(314)	(1,144)	1,098
Contingent consideration benefit		(4,642)	(334)
Accounts payable - related parties	8	6	(8)
Net cash provided by (used in) operating activities	45,678	1,408	(2,707)
Cash flows from investing activities
Purchase of property, plant and equipment	(1,345)	(1,690)	(1,441)
Investment in intangible assets	(1,022)	(11)
Proceeds from maturity of marketable securities	7,750	16,175	8,575
Purchases of marketable securities	(41,670)	(5,961)
Net cash provided by (used in) investing activities	(36,287)	8,513	7,134
Cash flows from financing activities
Exercise of options	288	2,651	952
Dividend		(7,382)	(7,312)
Payment made in connection with contingent consideration			(4,463)
Net cash provided by (used in) financing activities	288	(4,731)	(10,823)
Effect of exchange rate changes on cash balances held	108	(86)	135
Increase (decrease) in cash and cash equivalents	9,787	5,104	(6,261)
Cash and cash equivalents at beginning of year	17,021	11,917	18,178
Cash and cash equivalents at end of year	26,808	17,021	11,917
Supplementary cash flow information Non-cash transactions:
Investments in PPE and intangible assets	146	119	39
Supplementary cash flow information Cash paid during the year for:
Income taxes	$ 3,260	$ 4,584	$ 4,648

XML

General

12 Months Ended

Dec. 31, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

General

Note 1 - General

Silicom Ltd. is an Israeli corporation engaged in designing, manufacturing, marketing and supporting high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices.

The Company's shares have been traded in the United States on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") since February 1994. Since January 2, 2014 the Company's shares have been traded on the NASDAQ Global Select Market (prior thereto they were traded on the NASDAQ Global Market).  The Company's shares were traded in Israel on the Tel Aviv Stock Exchange ("TASE") from December 2005 through January 26, 2016, after which, on January 28, 2016, the Company delisted from trading on the TASE.

In these financial statements the terms "Company" or "Silicom" refer to Silicom Ltd. and its wholly owned subsidiaries, Silicom Connectivity Solutions, Inc. (hereinafter - "Silicom Inc.") and Silicom Denmark A/S (Fiberblaze A/S) (hereinafter – "Silicom Denmark"), whereas the term "subsidiaries" refers to Silicom Inc. and Silicom Denmark.

XML

Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2018

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 2 - Summary of Significant Accounting Policies

The significant accounting policies, which are applied consistently throughout the periods presented, are as follows:

A. Financial statements in US dollars

Substantially all sales of the Company are made outside of Israel (see Note 13Aregarding geographical distribution), in US dollars ("dollars"). Most purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the functional currency of the Company is the dollar.

Transactions and monetary balances in other currencies are translated into the functional currency using the current exchange rate.

All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in earnings when they arise.

B. Basis of presentation

The accompanying consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

C. Estimates and assumptions

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include income taxes, inventories, marketable securities, goodwill, intangible assets and share-based compensation.

D. Business combinations

The Company accounts for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.

E. Cash and cash equivalents

The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.

F. Marketable securities

The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts.

Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method.

Such amortization and accretion are included in the "Financial income, net" line item in the consolidated statements of operations.

When other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.

A decline in the market value of HTM security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. To determine whether an impairment is other than temporary, the Company considers all available information relevant to the collectibility of the security, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash flows expected to be collected. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.

If the Company intends to sell the security or it is more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.

G. Trade accounts receivable, net

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns.

As of December 31, 2017 and 2018, the provision for doubtful accounts receivable amounted to US$ 20 thousand.

H. Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the "weighted average-cost" method.

The Company writes down obsolete or slow moving inventory to its net realizable value.

I. Assets held for employees’ severance benefits

Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets are recorded at their current cash redemption value.

J. Property, plant and equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line basis over the estimated useful life of the assets at the following annual rates:

	%
Machinery and equipment	15 - 33
Office furniture and equipment	6 - 33
Leasehold improvements	*

*Over the shorter term of the lease or the life of the asset

K. Goodwill and other intangible assets

Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

The Company operates in one operating segment and this segment comprises one reporting unit.

Goodwill is reviewed for impairment at least annually in accordance with ASC 350, Testing Goodwill for Impairment. ASC 350 provides an entity the option to perform a qualitative assessment to determine whether it is more likely than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more likely than-not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.

If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed. During the year ended December 31, 2018, no impairments were found and therefore no impairment losses were recorded.

Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives of 3 years. The acquired customer relationships and current technology are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in amortization of such intangible assets in the straight-line method.

L. Impairment of Long-Lived Assets

In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall long-lived assets, such as property, plant, equipment and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or an asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.

M.   Revenue recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, a new accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of the promised goods at an amount that reflects the consideration that is expected to be received in exchange for those goods. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. The Company adopted ASC 606 at the beginning of the first quarter of fiscal 2018, and implemented new accounting policies and internal controls necessary to support the requirements of ASC 606. The adoption of ASC 606 did not have any impact on the Company's revenue recognition.

The Company recognizes revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer.  The Company accounts for a contract with customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company identifies separated contractual performance obligations and evaluates each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time.  All of the Company's performance obligations for the reported periods were satisfied at a point in time.

Revenue is allocated among performance obligations in a manner that reflects the consideration that the Company expects to be entitled to for the promised goods based on standalone selling prices (SSP). SSP are estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of the product when the Company sell the goods separately in similar circumstances and to similar customers.

Until January 1, 2018, revenues from sales of products were recognized upon delivery provided that the collection of the resulting receivable was reasonably assured, there was persuasive evidence of an arrangement, no significant obligations remained and the price was fixed or determinable.

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated statements of operations.

N. Research and development costs

Capitalization of software development costs related to programmable components incorporated into the Company's products, are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. The company has determined that technological feasibility for its software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. The Company started to capitalize internal software development costs during 2018. The Company did not capitalize any internal software development costs for the year ended December 31, 2017 and 2016, because the cost incurred and the time between technological feasibility and product release was insignificant. Other costs incurred in the research and development of the Company’s products are expensed as incurred.

O. Allowance for product warranty

The Company grants service warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience. Accordingly, these financial statements do not include an accrual for warranty obligations.

P. Treasury shares

Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.

Q. Income taxes

Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are presented as non-current assets and liabilities and measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

R. Share-based compensation

The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:

When portions of an award vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the requisite service period for each separately vesting portion of the award.

S. Basic and diluted earnings per share

Basic income per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding. Diluted income per ordinary share calculation is similar to basic income per ordinary share except that the weighted average of common shares outstanding is increased to include outstanding potential common shares during the period if dilutive. Potential common shares arise from stock options and RSUs, and the dilutive effect is reflected by the application of the treasury stock method.

The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.

	Year ended December 31
	2016		2017		2018
Net income attributable to ordinary shares
(US$ thousands)		13,137		21,714		14,637
Weighted average number of ordinary shares outstanding
used in basic income per ordinary share calculation		7,343,696		7,455,528		7,552,094
Add assumed exercise of outstanding dilutive potential
ordinary shares		91,485		146,443		105,236
Weighted average number of ordinary shares outstanding
used in diluted income per ordinary share calculation		7,435,181		7,601,971		7,657,330
Basic income per ordinary shares (US$)		1.789		2.912		1.938
Diluted income per ordinary shares (US$)		1.767		2.856		1.912
The weighted average number of shares related  to options
and RSUs excluded from the diluted earnings per share
calculation because of anti-dilutive effect		9,633		-		171,086

T. Comprehensive Income

For the years ended December 31, 2016, 2017 and 2018, comprehensive income equals net income.

U. Fair Value Measurements

The Company's financial instruments consist mainly of cash and cash equivalents, marketable securities, trade and other receivables and trade accounts payable. The carrying amounts of these financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these investments. The fair value of marketable securities is presented in Note 5 to these consolidated financial statements. Assets held for severance benefits are recorded at their current cash redemption value.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 V.        Concentrations of risks

(1)           Credit risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial institutions. Marketable securities consist of held to maturity marketable securities issued by highly rated corporations. As of December 31, 2017 and 2018, the ratings of the securities in the Company's portfolio was at least A and A- respectively. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations). The Company closely monitors extensions of credit and has never experienced significant credit losses. See note 13.

 (2)           Significant customers

The Company's top three customers accounted for approximately 36% of its revenues in 2018. The Company expects that a small number of customers will continue to account for a significant portion of its revenues for the foreseeable future. See note 13.

W.          Liabilities for loss contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

X. Recent Accounting Pronouncements

(1) In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize most of their leases on balance sheet as a right-of-use asset and a lease liability. This ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2018. The Company will adopt ASU 2016-02 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of its first quarter of 2019. The Company evaluated the impact of adopting ASU 2016-02, based on the lease portfolio as of December 31, 2018, and anticipates recording lease assets of approximately $3.4 million and lease liabilities of approximately $3.3 million on its consolidated balance sheets, with no material impact to its consolidated statements of operations.

(2) In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. The impact of adopting the new standard on the net income is not expected to be material.

(3) In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill in Step 2 of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excess of a reporting unit’s carrying amount over its fair value as determined in Step 1 of the testing. ASU 2017-04 is effective for interim and annual testing dates after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated balance sheets, results of operations, cash flows or presentation thereof.

(4) In July 2018, the FASB issued ASU 2018-09, which clarifies and corrects unintended application of guidance, and makes improvements to several Codification Topics. The changes are part of an ongoing FASB project to make non-substantive technical corrections, clarifications, and improvements that are not expected to have a significant effect on accounting practice or create a significant administrative cost to most entities. Most of the amendments are effective immediately.

Some of the amendments are effective for annual and interim periods in fiscal years beginning after December 15, 2018.

The Company does not expect the adoption of ASU 2018-09 to have a material impact on its consolidated balance sheets, results of operations, cash flows or presentation thereof.

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Acquisitions

12 Months Ended

Dec. 31, 2018

Business Combinations [Abstract]

Acquisitions

Note 3 – Acquisitions

A. ADI Engineering, Inc.

On October 28, 2015 (hereinafter – "closing date") the Company acquired certain assets from ADI Engineering, Inc. (hereinafter – "ADI"), a privately-held, US-based provider of custom embedded communications and networking products, for an aggregate purchase price of US$ 10,000 thousand in cash and estimated contingent consideration of US$ 7,802 thousand in cash and in options to ordinary shares, payable in three yearly payments, after the closing, subject to the attainment of certain performance milestones until December 31, 2017. The fair value measurement of the contingent consideration was classified at level 2 and level 3 of the fair value hierarchy (see Note 2U). Of the total purchase price of US$ 17,802 thousand, US$ 222 thousand was attributed to tangible assets, US$ 4,261 thousand was attributed to intangible assets and US$ 13,319 thousand was attributed to goodwill. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. The recognized goodwill is deductible for income tax purposes for 10 years.

In connection with the contingent consideration, during 2016 the Company paid ADI an amount of US$ 3,000 thousand. Any amount not paid was charged to the statement of operations as an income.

B. Silicom Denmark

On December 10, 2014 (hereinafter – "closing date"), the Company completed the acquisition of all of the outstanding shares and voting interests of Silicom Denmark, a provider of high performance application acceleration solutions, for an aggregate purchase price of US$ 10,161 thousand in cash and estimated contingent consideration of US$ 4,683 thousand in cash and in options to ordinary shares, subject to the attainment of certain performance milestones until August 31, 2015. The fair value measurement of the contingent consideration was classified at level 3 of the fair value hierarchy (see Note 2U). Of the total estimated purchase price of US$ 14,844 thousand, US$ 2,022 thousand was attributed to tangible assets, US$ 1,996 thousand was attributed to intangible assets, US$ 12,242 thousand was attributed to goodwill and US$ 1,416 was attributed to liabilities assumed. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. None of the recognized goodwill is expected to be deductible for income tax purposes.

In connection with the contingent consideration, during 2016 the Company paid to the Silicom Denmark sellers an amount of US$ 1,463 thousand, of which 90% was paid in cash and 10% in options to ordinary shares of the Company.

In relation to this acquisition, on April 18, 2016, the Company granted, in the aggregate, 22,795 optionsto the Silicom Denmark sellers and to the Silicom Denmark employees (see Note 12I). Any amount not paid was charged to the statement of operations as an income.

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Cash and Cash Equivalents

12 Months Ended

Dec. 31, 2018

Cash and Cash Equivalents [Abstract]

Cash and Cash Equivalents

Note 4 - Cash and Cash Equivalents

	December 31
	2017		2018
	US$ thousands
Cash		12,834		16,147
Cash equivalents *		4,187		10,661
		17,021		26,808

 

*                Comprised mainly of deposits in banks as at December 31, 2017 and 2018 carrying a weighted average interest rate of 0.07% and 2.79%, respectively.

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Marketable Securities

12 Months Ended

Dec. 31, 2018

Investments, Debt and Equity Securities [Abstract]

Marketable Securities

Note 5 - Marketable Securities

The Company's investment in marketable securities as of December 31, 2017 and 2018 are classified as ''held-to-maturity'' and consist of the following:

			Gross		Gross
			unrealized		unrealized
	Amortized		holding		holding			Aggregate
	cost basis**		gains		(losses)			fair value*
	US$ thousands
At December 31, 2018
Held to maturity:
Corporate debt securities and government debt securities
Current		1,610		-		(22	)		1,588
Non-Current		46,052		-		(778	)		45,274
		47,662		-		(800	)		46,862
At December 31, 2017
Held to maturity:
Corporate debt securities
Current		7,798		-		(49	)		7,749
Non-Current		5,976		-		(95	)		5,881
		13,774		-		(144	)		13,630

*	Fair value is being determined using quoted market prices in active markets (Level 2).
**	Including accrued interest in the amount of US$ 77 thousand and US$ 450 thousand as of December 31, 2017 and 2018 respectively. The accrued interest is presented as part of other account receivable on the balance sheet.

Activity in marketable securities in 2018	US$ thousands
Balance at January 1, 2018		13,774
Purchases of marketable securities		41,670
Discount on marketable securities, net		(32	)
Proceeds from maturity of marketable securities		(7,750	)
Balance at December 31, 2018		47,662

The following table summarizes the gross unrealized losses on investment securities for which other-than-temporary impairments have not been recognized and the fair value of those securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2018:

	Less than 12 months					12 months or more					Total
Held to maturity:	Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value
Corporate debt securities  and government debt  securities		(679	)		41,024		(121	)		5,838		(800	)		46,862

The unrealized losses on the investments were caused by changes in interest rate. The Company has the ability and intent to hold these investments until maturity and it is more likely than not that the Company will not be required to sell any of the securities before recovery; therefore these investments are not considered other than temporarily impaired.

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Other Receivables

12 Months Ended

Dec. 31, 2018

Receivables [Abstract]

Other Receivables

Note 6 - Other Receivables

	December 31
	2017		2018
	US$ thousands
Advances to suppliers		555		5,260
Government authorities		4,475		2,916
Prepaid expense		531		884
Other receivables		262		427
		5,823		9,487

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Inventories

12 Months Ended

Dec. 31, 2018

Inventory Disclosure [Abstract]

Inventories

Note 7 - Inventories

	December 31
	2017		2018
	US$ thousands
Raw materials and components		24,407		19,088
Products in process		15,079		10,883
Finished products		12,001		12,398
		51,487		42,369

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Property, Plant and Equipment, Net

12 Months Ended

Dec. 31, 2018

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment, Net

Note 8 - Property, Plant and Equipment, Net

	December 31
	2017			2018
	US$ thousands
Machinery and equipment		10,531			12,150
Office furniture and equipment		665			725
Leasehold improvements		2,309			2,375
Property, plant and equipment		13,505			15,250
Accumulated depreciation		(9,384	)		(11,580	)
Property, Plant and equipment, net		4,121			3,670
Depreciation expense for the years ended December 31, 2016, 2017 and 2018 were US$ 1,616 thousand, US$ 1,911 thousand and US$ 2,190 thousand, respectively.

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Intangible Assets

12 Months Ended

Dec. 31, 2018

Intangible Assets, Net (Excluding Goodwill) [Abstract]

Intangible Assets

Note 9 - Intangible Assets

Intangible assets

Net intangible assets as of December 31, 2018 are as follows:

			December 31
			2017		2018
	Useful life		US$ thousands
Original cost:
Current technology		3		3,844		3,832
Customer relationships		3		1,937		1,937
Capitalization of software development costs		3		-		928
Licenses		3		-		106
				5,781		6,803
Accumulated amortization:
Current technology				3,181		3,832
Customer relationships				1,553		1,937
Capitalization of software development costs				-		37
Licenses				-		31
				4,734		5,837
Intangible assets, Net:
Current technology				663		-
Customer relationships				384		-
Capitalization of software development costs				-		891
Licenses				-		75
				1,047		966

Amortization expense for the years ended December 31, 2016, 2017 and 2018 were US$ 2,240 thousand, US$ 1,888 thousand and US$ 1,103 thousand, respectively.

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Assets Held and Liability for Employees' Severance Benefits

12 Months Ended

Dec. 31, 2018

Retirement Benefits [Abstract]

Assets Held and Liability for Employees' Severance Benefits

Note 10 - Assets Held and Liability for Employees' Severance Benefits

A. Under Israeli law and labor agreements, Silicom is required to make severance payments to retired or dismissed employees and to employees leaving employment in certain other circumstances.

In respect of the liability to the employees, individual insurance policies are purchased and deposits are made with recognized severance pay funds.

The liability for severance pay is calculated on the basis of the latest salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited including accumulated income thereon as well as by the unfunded provision.

B. According to Section 14 to the Severance Pay Law ("Section 14") the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the company pursuant to such Section 14. Commencing July 1, 2008, the Company has entered into agreements with a majority of its employees in order to implement Section 14. Therefore, as of that date, the payment of monthly deposits by the Company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to those employees that have entered into such agreements and therefore the Company incurs no additional liability since that date with respect to such employees. Amounts accumulated in the pension funds or insurance policies pursuant to Section 14 are not supervised or administrated by the Company and therefore neither such amounts nor the corresponding accrual are reflected in the balance sheet.

C. Consequently, the assets held for employees' severance benefits reported on the balance sheet, in respect of deposits for those employees who have signed agreements pursuant to Section 14, represent the redemption value of deposits made through June 30, 2008. The liability for employee severance benefits, with respect to those employees, represents the liability of the Company for employees' severance benefits as of June 30, 2008.

As a result of the implementation of Section 14, as described above, the liability with respect to those employees is calculated on the basis of number of years of employment as of June 30, 2008, multiplied by the latest salary paid. The liability is covered by the amounts deposited, including accumulated income thereon, as well as by the unfunded provision. Such liability will be removed, either upon termination of employment or retirement.

D. Expenses recorded with respect to employees' severance payments for the years ended December 31, 2016, 2017 and 2018 were US$ 761 thousand, US$ 830 thousand and US$ 605 thousand, respectively.

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 11 - Commitments and Contingencies

Lease commitments

The premises and facilities occupied by the Company are leased under various operating lease agreements. Furthermore, the Company has entered into several operating lease agreements for motor vehicles in Israel.

The agreements related to leases in Israel are in Israeli Shekel ("ILS") or in ILS, linked to the Israeli Consumer Price Index or to the US Dollars. The agreements related to leases in the USA are in US Dollars and the agreements related to leases in Denmark are in Danish Krone ("DKK").

The minimum future rental payments under the above leases at exchange rates in effect on December 31, 2018, are as follows:

Year ended December 31	US$ thousands
2019		1,394
2020		643
2021 and on		1,818

Of the amounts above, US$ 50 thousand in 2019, relate to related parties.

Rental expenses under the lease agreements for the years ended December 31, 2016, 2017 and 2018 were US$ 1,563 thousand, US$ 1,760 thousand and US$ 1,812 thousand, respectively.

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Shareholders' Equity

12 Months Ended

Dec. 31, 2018

Stockholders' Equity Note [Abstract]

Shareholders' Equity

Note 12 - Shareholders' Equity

Share based compensation

A. On October 21, 2013 the Board resolved to adopt the Global Share Incentive Plan (2013) (the "2013 Plan") and to reserve up to 500,000 ordinary shares for issuance under the 2013 Plan to employees, directors, officers and consultants of the Company or of any subsidiary or affiliate of the Company. In January 2018, our Board approved the increase of the number of ordinary shares reserved for issuance under the 2013 Plan by 600,000 additional ordinary shares. Grants under the 2013 Plan, whether as options, restricted stock units, restricted stock or other equity based awards, including their terms, are subject to the Board of Directors' approval. Grants to directors and certain other officers are generally subject to the approvals of the Compensation Committee as well as Board of Directors, and grants to directors or a CEO (and under certain circumstances certain other officers) will also have to be approved by the Shareholders.

B. Options or RSUs granted to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards of options, or the ordinary shares issued upon their exercise, must be deposited with a trustee for at least two years following the date of grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares.

Capital gains on awards granted under the plans are subjected to tax of 25% to be paid by the employee, and the Company is not entitled to a tax deduction.

Gains which are not capital gains on awards under the plans are subjected to regular tax rates on individuals, and the Company is entitled to a tax deduction for such gains.

C. During 2014 and 2015, the Company granted 74,000 and 8,000 RSUs respectively to certain of its directors, employees and consultants under the 2013 Plan. In relation to those grants:

1. The vesting period of the RSUs ranges between 2 to 3 years from the date of grant.

2. The fair value of RSUs is estimated based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.

3. The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:

	2014	2015
Expected dividend yield	2.06%	3.22%
Termination rate	4.35%	0%

D. On July 28, 2015, the Company granted, in the aggregate, 89,907 options to certain of its directors and employees under the 2013 Plan.  In relation to this grant:

1. The exercise price for the options (per ordinary share) was US$ 26.91 and the Option expiration date was the earlier to occur of: (a) July 28, 2023; and (b) the closing price of the shares falling below US$ 13.46 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.

2. The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.08%
Expected dividend yield	2.09%
Average expected volatility  (b)	53.01%
Termination rate	9%
Suboptimal factor(c)	3.4

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

E.      On June 8, 2016, the Company granted, in the aggregate, 93,660 optionsto certain of its directors and employees under the 2013 Plan. In relation to this grant:

1. The exercise price for the options (per ordinary share) was US$ 28.38 and the Option expiration date was the earlier to occur of: (a) June 8, 2024; and (b) the closing price of the shares falling below US$ 14.19 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.

2. The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	1.58%
Expected dividend yield	2.42%
Average expected volatility  (b)	47.90%
Termination rate	9%
Suboptimal factor(c)	3.32

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

F. On January 30, 2017, the Company granted, in the aggregate, 119,925 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:

1. The exercise price for the options (per ordinary share) was US$ 39.62 and the Option expiration date was the earlier to occur of: (a) January 30, 2025; and (b) the closing price of the shares falling below US$ 19.81 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.

2. The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.35%
Expected dividend yield	2.42%
Average expected volatility  (b)	43.71%
Termination rate	9%
Suboptimal factor (c)	3.28

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

G. On January 30, 2017, the Company granted, in the aggregate, 78,000 RSUs to certain of its directors and employees under the 2013 Plan. In relation to those grants:

1. 50% of the RSUs vest on the second anniversary of the date of the grant and the additional 50% of the RSUs vest on the third anniversary of the date of the grant.

2. The fair value of RSUs is estimated based on the market value of the Company's stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.

3. The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:

Expected dividend yield	2.68%
Termination rate	1.74%

H. On April 30, 2018, the Company granted, in the aggregate, 137,010 optionsto certain of its directors and employees under the 2013 Plan. In relation to this grant:

1. The exercise price for the options (per ordinary share) was US$ 36.11 and the Option expiration date was the earlier to occur of: (a) April 30, 2026; and (b) the closing price of the shares falling below US$ 18.06 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.

2. The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.92%
Expected dividend yield	0.0 %
Average expected volatility  (b)	45.13%
Termination rate	9%
Suboptimal factor (c)	3.2

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

I. The following table summarizes information regarding stock options as at December 31, 2018:

	Options outstanding				Options exercisable
			Weighted average				Weighted average
			remaining				remaining
Exercise price	Number		contractual life		Number		contractual life
US$	of options		(in years)		of options		(in years)
15.28		6,575		1.7		6,575		1.7
26.91		20,415		4.6		20,415		4.6
33.27		19,706		7.3		19,706		7.3
28.38		77,616		5.4		77,616		5.4
39.62		109,840		6.1		-		-
36.11		131,343		7.3		-		-
		365,495				124,312

The aggregate intrinsic value of options outstanding as of December 31, 2017 and 2018 is US$ 9,175 thousand and US$ 835 thousand, respectively.

The aggregate intrinsic value of options exercisable as of December 31, 2017 and 2018 is US$ 1,759 thousand and US$ 835 thousand, respectively.

The total intrinsic value of options exercised during the year ended December 31, 2017 and 2018, is US$ 4,194 thousand and US$ 67 thousand, respectively.

The intrinsic value of the options at the date of grant is zero.

J.          The stock option activity under the abovementioned plans is as follows: 

				Weighted		average
	Number			average		grant date
	of options			exercise price		fair value
				US$		US$
Balance at January 1, 2016		214,701
Granted*		116,455			29.34		10.96
Exercised		(62,269	)		15.28		6.54
Forfeited		(2,882	)		29.71		11.79
Balance at December 31, 2016		266,005
Granted		119,925			39.62		11.89
Exercised		(124,918	)		21.46		8.46
Forfeited		(11,101	)		33.18		10.87
Balance at December 31, 2017		249,911
Granted		137,010			36.11		14.71
Exercised		(9,674	)		28.02		9.94
Forfeited		(11,752	)		36.73		13.05
Balance at December 31, 2018		365,495
Exercisable at December 31, 2018		124,312

* In 2016 the Company granted in the aggregate, 116,455 options. Regarding the grant of 93,660 options, see Note 12E. Regarding the grant of 22,795 options, see Note 3B.

K. The Restricted Share Units activity under the abovementioned plans is as follows:

				Weighted
	Number of			average
	Restricted			grant date
	Share Units			fair value
				US$
Balance at January 1, 2016		78,000
Vested		(35,000	)		46.54
Balance at December 31, 2016		43,000
Granted		78,000			34.90
Vested		(43,000	)		42.52
Balance at December 31, 2017 and  December 31, 2018		78,000

The aggregate intrinsic value of RSUs outstanding as of December 31, 2017 and December 31, 2018 is US$ 5,469 thousand and US$ 2,725 thousand, respectively.

L. During 2016, 2017 and 2018, the Company recorded share-based compensation expenses. The following summarizes the allocation of the stock-based compensation expenses:

	Year ended December 31
	2016		2017		2018
	US$ thousands		US$ thousands		US$ thousands
Cost of sales		180		320		372
Research and development costs		504		832		953
Selling and marketing expenses		366		537		569
General and administrative expenses		500		736		530
		1,550		2,425		2,424

As of December 31, 2018, there were US$ 1,668 thousand of unrecognized compensation costs related to outstanding stock options and RSUs to be recognized over a weighted average period of 1.19 years.

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Geographic areas and major customers

12 Months Ended

Dec. 31, 2018

Geographic areas and major customers [Abstract]

Geographic areas and major customers

Note 13 - Geographic areas and major customers

 

A.        Information on sales by geographic distribution:

The Company has one operating segment.

  

Sales are attributed to geographic distribution based on the location of the customer.

	Year ended December 31
	2016		2017		2018
	US$ thousands
North America		65,590		100,434		108,024
Europe		24,208		20,156		21,038
Asia-Pacific		10,549		5,100		4,691
		100,347		125,690		133,753

    B.         Sales to single customers exceeding 10% of sales (US$ thousands):

	Year ended December 31
	2016		2017		2018
	US$ thousands
Customer "A"		17,366		16,915		18,855
Customer "B"		*		*		14,506
Customer "C"		*		*		14,220
Customer "D"		*		25,888		*
Customer "E"		11,628		*		*

 *          Less than 10% of sales.

C.        Major Customers - as percentage of net Accounts Receivable balance:

  

Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance as of December 31, 2017 and 2018, consist of the following customers:

	Year ended December 31
	2017			2018
	Percentage
Customer 1		15	%		22	%
Customer 2		*			18	%
Customer 3		*			10	%
Customer 4		30	%		*
Customer 5		22	%		*

        *            Less than 10% of Trade accounts receivable, net.

D.        Information on Long lived assets - Property, Plant and Equipment by geographic areas: 

  

The following table presents the locations of the Company’s long lived assets - Property, Plant and Equipment as of December 31, 2017 and 2018:

	Year ended December 31
	2017		2018
	US$ thousands
North America		20		46
Europe		225		235
Israel		3,876		3,389
		4,121		3,670

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Financial Income (Expenses), Net

12 Months Ended

Dec. 31, 2018

Other Income and Expenses [Abstract]

Financial Income (Expenses), Net

Note 14 - Financial Income (Expenses), Net

	Year ended December 31
	2016			2017			2018
	US$ thousands
Interest income		751			527			840
Discount on marketable securities, net		(358	)		(217	)		(32	)
Exchange rate differences, net		(236	)		(45	)		208
Bank charges		(122	)		(109	)		(93	)
		35			156			923

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Taxes on Income

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Taxes on Income

Note 15 - Taxes on Income

A. Measurement of results for tax purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986

As a "foreign invested company" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's taxable income or loss is calculated in US Dollars.

B. Corporate tax rate in Israel

Taxable income of Israeli companies was subject to tax at the rate of 25% as from 2016 and thereafter.

Furthermore, In December 2016, the regular tax rate in Israel was reduced to 23% in two steps. The first step was to a rate of 24% as from 2017 and the second step was to a rate of 23% as from 2018 and thereafter.

C. Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law")

1.    On December 29, 2010 the Knesset approved the Economic Policy Law for 2011-2012, which includes an amendment to the Law for the Encouragement of Capital Investments – 1959 (hereinafter – "the Amendment to the Law"). The Amendment to the Law is effective from January 1, 2011 and its provisions will apply to preferred income derived or accrued in 2011 and thereafter by a Preferred Company, per the definition of these terms in the Amendment to the Law.

Companies can choose to not be included in the scope of the Amendment to the Law and to stay in the scope of the law before its amendment until the end of the benefits period.

Under the Amendment to the Law, which the Company started applying in 2014, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all preferred income of such company. Under the law, when the election is made, the uniform tax rate (for 2014 and on) will be 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The profits of these Preferred Companies will be freely distributable as dividends, subject to a withholding tax of 20% (or a lower rate under an applicable tax treaty).

In December 2016, under the Amendment to the Law, the uniform tax rate in areas in Israel designated as Development Zone A was reduced to 7.5% as from 2017 and thereafter. The company has two facilities in Israel of which one of them is located in Development Zone A.

Should the Company derive income from sources other than the Preferred company, such income will be taxable at the regular corporate tax rates for the applicable year.

 2.   In the event of distribution by the Company of dividends out of its retained earnings that were generated prior to 2014 tax year and were tax exempt under the "Approved Enterprise" or "Benefited Enterprise" status, the Company would be subjected to a maximum of 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the shareholders.

Out of the Company’s retained earnings as of December 31, 2017 and 2018, approximately US$ 50,356 thousand and US$ 46,581 thousand respectively are tax-exempt, under the previous "Approved Enterprise" and "Benefited Enterprise" status. If such tax-exempt income is distributed as a dividend (including a liquidation dividend), it would be taxed at the reduced corporate tax rate applicable to such profits (up to 25%) and an income tax liability of up to approximately US$ 12,589 thousand and US$ 11,645 thousand would be incurred as of December 31, 2017 and 2018, respectively. The Company anticipates that any future dividends distributed pursuant to its dividend policy, will be distributed from income sources which will not impose additional tax liabilities on the Company. The Company intends to reinvest the amount of its tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s "Approved Enterprise" or "Benefited Enterprise". If the Company was to declare a dividend from its tax-exempt income, an income tax expense would be recognized in the period a dividend is declared.

D.            Taxation of the subsidiaries

1. The subsidiary Silicom Inc. files tax returns to US federal tax authorities and to state tax authorities in the states of New Jersey, California, Virginia, New York, New Mexico, Tennessee and Texas.

On December 22, 2017, the Tax Cuts and Jobs Acts was enacted into law. The new legislation impacted the company by reduction of the Federal corporate income tax rate to 21% effective January 1, 2018.

2. The subsidiary Silicom Denmark is taxed according to the tax laws in Denmark.

3. The Company has not provided for Israeli income and foreign withholding taxes on US$ 6,701 thousand of its non-Israeli subsidiaries' undistributed earnings as of December 31, 2018. The earnings could become subject to tax if earnings are remitted or deemed remitted as dividends or upon sale of a subsidiary.

The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The unrecognized deferred tax liability associated with these temporary differences was approximately US$ 838 thousand at December 31, 2018. 

4. As of December 31, 2018, the net operating loss carry-forwards of the Companys’ subsidiaries for tax purposes amounted to approximately US$ 900 thousand. These losses are available to offset any future taxable income.

E.             Tax assessments

1. For the Israeli jurisdiction the Company has final tax assessments for all years up to and including the tax year ended December 31, 2013.

2. For the US Federal jurisdiction, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2014. For the New Jersey and California state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2013. For the Virginia state jurisdiction, Silicom Inc. has open tax assessments for the years 2015 through 2018.  For the Tennessee state jurisdiction, Silicom Inc. has open tax assessments for the years 2016 through 2018.  For the New Mexico and New York state jurisdictions, Silicom Inc. has open tax assessments for the years 2017 and 2018. For the Texas state jurisdiction, Silicom Inc. has open tax assessments for the year 2018.

3. For the Danish jurisdiction, Silicom Denmark has final tax assessments for all years up to and including the tax year ended August 31, 2014.

F. Income before income taxes and income taxes expense (benefit) included in the consolidated statements of operations

	Year ended December 31
	2016			2017			2018
	US$ thousands
Income before income taxes:
Israel		15,541			23,226			14,703
Foreign jurisdiction		324			2,356			2,871
		15,865			25,582			17,574
Current taxes:
Israel		2,242			2,379			2,400
Foreign jurisdiction		720			1,095			831
		2,962			3,474			3,231
Current tax (benefits) expenses relating
to prior years:
Israel		26			12			(73	)
Foreign jurisdiction		-			(71	)		(226	)
		26			(59	)		(299	)
Deferred taxes:
Israel		10			549			(106	)
Foreign jurisdiction		(270	)		(96	)		111
		(260	)		453			5
Income tax expense		2,728			3,868			2,937

G.          Deferred tax assets and liabilities

The tax effects of significant items comprising the Company’s deferred tax assets and liabilities are as follows:

	December 31			December 31
	2017			2018
	US$ thousands			US$ thousands
Deferred tax assets:
Accrued employee benefits		282			281
Research and development costs		846			842
Tax loss carryforwards		111			169
PPE		15			48
Share based compensation		213			348
Intangible assets		110			202
Other		2			23
Total gross deferred tax assets		1,579			1,913
Deferred tax liabilities:
Intangible assets		-			(212	)
Goodwill		(680	)		(807	)
Total gross deferred tax liabilities		(680	)		(1,019	)
Net deferred tax assets		899			894
In Israel		788			894
Foreign jurisdictions		111			-
Net deferred tax assets		899			894
Non-current deferred tax assets		899			894

 

H.            Reconciliation of the statutory tax expense to actual tax expense

	Year ended December 31
	2016			2017			2018
	US$ thousands
Income before income taxes		15,865			25,582			17,574
Statutory tax rate in Israel		25.0	%		24.0	%		23.0	%
		3,966			6,140			4,042
Increase (decrease) in taxes resulting from:
Non-deductible operating expenses, net		228			364			295
Non-taxable income		(84	)		(1,114	)		-
Prior years adjustments		26			(59	)		(299	)
Tax effect due to
"Preferred Enterprise" status*		(1,924	)		(2,361	)		(1,398	)
Taxes related to foreign jurisdictions		324			632			176
Changes in tax rate		94			162			-
Other		98			104			121
Income tax expense		2,728			3,868			2,937

*             The effect of the benefit resulting from the "Preferred Enterprise" status on net earnings per ordinary share is as follows:

	Year ended December 31
	2016		2017		2018
Basic		0.26		0.32		0.19
Diluted		0.26		0.31		0.18

I.             Accounting for uncertainty in income taxes

The accounting literature clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.

During 2016, 2017 and 2018 the Company and its subsidiaries did not have any significant unrecognized tax benefits and thus, no related interest and penalties were accrued.

In addition, the Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.

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Subsequent Events

12 Months Ended

Dec. 31, 2018

Subsequent Events [Abstract]

Subsequent Events

Note 16 - Subsequent Events

(1) In January 2019, the Company’s compensation committee and board of directors, respectively, have approved the grant of a total of 141,928 options under the Global Share Incentive Plan (2013), of which options granted to directors and office holders are subject to the approval of the Annual General Meeting, which is currently scheduled to convene no later than June 2019, as prescribed under the Israeli Companies Law, 1999 and the Company's Amended and Restated Articles of Association.

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

Accounting Policies [Abstract]

Financial Statements in US Dollars

A. Financial statements in US dollars

Substantially all sales of the Company are made outside of Israel (see Note 13Aregarding geographical distribution), in US dollars ("dollars"). Most purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the functional currency of the Company is the dollar.

Transactions and monetary balances in other currencies are translated into the functional currency using the current exchange rate.

All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in earnings when they arise.

Basis of Presentation

B. Basis of presentation

The accompanying consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Estimates and Assumptions

C. Estimates and assumptions

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include income taxes, inventories, marketable securities, goodwill, intangible assets and share-based compensation.

Business combinations

D. Business combinations

The Company accounts for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.

Cash and cash equivalents

E. Cash and cash equivalents

The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.

Marketable securities

F. Marketable securities

The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts.

Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method.

Such amortization and accretion are included in the "Financial income, net" line item in the consolidated statements of operations.

When other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.

A decline in the market value of HTM security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. To determine whether an impairment is other than temporary, the Company considers all available information relevant to the collectibility of the security, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash flows expected to be collected. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.

If the Company intends to sell the security or it is more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.

Trade accounts receivable, net

G. Trade accounts receivable, net

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns.

As of December 31, 2017 and 2018, the provision for doubtful accounts receivable amounted to US$ 20 thousand.

Inventories

H. Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the "weighted average-cost" method.

The Company writes down obsolete or slow moving inventory to its net realizable value.

Assets held for employees' severance benefits

I. Assets held for employees’ severance benefits

Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets are recorded at their current cash redemption value.

Property, plant and equipment

J. Property, plant and equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line basis over the estimated useful life of the assets at the following annual rates:

	%
Machinery and equipment	15 - 33
Office furniture and equipment	6 - 33
Leasehold improvements	*

*Over the shorter term of the lease or the life of the asset

Goodwill and other intangible assets

K. Goodwill and other intangible assets

Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

The Company operates in one operating segment and this segment comprises one reporting unit.

Goodwill is reviewed for impairment at least annually in accordance with ASC 350, Testing Goodwill for Impairment. ASC 350 provides an entity the option to perform a qualitative assessment to determine whether it is more likely than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more likely than-not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.

If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed. During the year ended December 31, 2018, no impairments were found and therefore no impairment losses were recorded.

Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives of 3 years. The acquired customer relationships and current technology are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in amortization of such intangible assets in the straight-line method.

Impairment of Long-Lived Assets

L. Impairment of Long-Lived Assets

In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall long-lived assets, such as property, plant, equipment and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or an asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.

Revenue recognition

M.   Revenue recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, a new accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of the promised goods at an amount that reflects the consideration that is expected to be received in exchange for those goods. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. The Company adopted ASC 606 at the beginning of the first quarter of fiscal 2018, and implemented new accounting policies and internal controls necessary to support the requirements of ASC 606. The adoption of ASC 606 did not have any impact on the Company's revenue recognition.

The Company recognizes revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer.  The Company accounts for a contract with customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company identifies separated contractual performance obligations and evaluates each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time.  All of the Company's performance obligations for the reported periods were satisfied at a point in time.

Revenue is allocated among performance obligations in a manner that reflects the consideration that the Company expects to be entitled to for the promised goods based on standalone selling prices (SSP). SSP are estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of the product when the Company sell the goods separately in similar circumstances and to similar customers.

Until January 1, 2018, revenues from sales of products were recognized upon delivery provided that the collection of the resulting receivable was reasonably assured, there was persuasive evidence of an arrangement, no significant obligations remained and the price was fixed or determinable.

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated statements of operations.

Research and development costs

N. Research and development costs

Capitalization of software development costs related to programmable components incorporated into the Company's products, are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. The company has determined that technological feasibility for its software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. The Company started to capitalize internal software development costs during 2018. The Company did not capitalize any internal software development costs for the year ended December 31, 2017 and 2016, because the cost incurred and the time between technological feasibility and product release was insignificant. Other costs incurred in the research and development of the Company’s products are expensed as incurred.

Allowance for product warranty

O. Allowance for product warranty

The Company grants service warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience. Accordingly, these financial statements do not include an accrual for warranty obligations.

Treasury shares

P. Treasury shares

Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.

Income taxes

Q. Income taxes

Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are presented as non-current assets and liabilities and measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Share-based compensation

R. Share-based compensation

The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:

When portions of an award vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the requisite service period for each separately vesting portion of the award.

Basic and diluted earnings per share

S. Basic and diluted earnings per share

Basic income per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding. Diluted income per ordinary share calculation is similar to basic income per ordinary share except that the weighted average of common shares outstanding is increased to include outstanding potential common shares during the period if dilutive. Potential common shares arise from stock options and RSUs, and the dilutive effect is reflected by the application of the treasury stock method.

The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.

	Year ended December 31
	2016		2017		2018
Net income attributable to ordinary shares
(US$ thousands)		13,137		21,714		14,637
Weighted average number of ordinary shares outstanding
used in basic income per ordinary share calculation		7,343,696		7,455,528		7,552,094
Add assumed exercise of outstanding dilutive potential
ordinary shares		91,485		146,443		105,236
Weighted average number of ordinary shares outstanding
used in diluted income per ordinary share calculation		7,435,181		7,601,971		7,657,330
Basic income per ordinary shares (US$)		1.789		2.912		1.938
Diluted income per ordinary shares (US$)		1.767		2.856		1.912
The weighted average number of shares related  to options
and RSUs excluded from the diluted earnings per share
calculation because of anti-dilutive effect		9,633		-		171,086

Comprehensive Income

T. Comprehensive Income

For the years ended December 31, 2016, 2017 and 2018, comprehensive income equals net income.

Fair Value Measurements

U. Fair Value Measurements

The Company's financial instruments consist mainly of cash and cash equivalents, marketable securities, trade and other receivables and trade accounts payable. The carrying amounts of these financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these investments. The fair value of marketable securities is presented in Note 5 to these consolidated financial statements. Assets held for severance benefits are recorded at their current cash redemption value.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

Concentrations of risks

 V.        Concentrations of risks

(1)           Credit risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial institutions. Marketable securities consist of held to maturity marketable securities issued by highly rated corporations. As of December 31, 2017 and 2018, the ratings of the securities in the Company's portfolio was at least A and A- respectively. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations). The Company closely monitors extensions of credit and has never experienced significant credit losses. See note 13.

 (2)           Significant customers

The Company's top three customers accounted for approximately 36% of its revenues in 2018. The Company expects that a small number of customers will continue to account for a significant portion of its revenues for the foreseeable future. See note 13.

Liabilities for loss contingencies

W.          Liabilities for loss contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

Recent Accounting Pronouncements

X. Recent Accounting Pronouncements

(1) In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize most of their leases on balance sheet as a right-of-use asset and a lease liability. This ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2018. The Company will adopt ASU 2016-02 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of its first quarter of 2019. The Company evaluated the impact of adopting ASU 2016-02, based on the lease portfolio as of December 31, 2018, and anticipates recording lease assets of approximately $3.4 million and lease liabilities of approximately $3.3 million on its consolidated balance sheets, with no material impact to its consolidated statements of operations.

(2) In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. The impact of adopting the new standard on the net income is not expected to be material.

(3) In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill in Step 2 of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excess of a reporting unit’s carrying amount over its fair value as determined in Step 1 of the testing. ASU 2017-04 is effective for interim and annual testing dates after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated balance sheets, results of operations, cash flows or presentation thereof.

(4) In July 2018, the FASB issued ASU 2018-09, which clarifies and corrects unintended application of guidance, and makes improvements to several Codification Topics. The changes are part of an ongoing FASB project to make non-substantive technical corrections, clarifications, and improvements that are not expected to have a significant effect on accounting practice or create a significant administrative cost to most entities. Most of the amendments are effective immediately.

Some of the amendments are effective for annual and interim periods in fiscal years beginning after December 15, 2018.

The Company does not expect the adoption of ASU 2018-09 to have a material impact on its consolidated balance sheets, results of operations, cash flows or presentation thereof.

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Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2018

Accounting Policies [Abstract]

Depreciation of Property, Plant and Equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line basis over the estimated useful life of the assets at the following annual rates:

	%
Machinery and equipment	15 - 33
Office furniture and equipment	6 - 33
Leasehold improvements	*

*Over the shorter term of the lease or the life of the asset

Computation of Basic and Diluted Income Per Ordinary Share

The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.

	Year ended December 31
	2016		2017		2018
Net income attributable to ordinary shares
(US$ thousands)		13,137		21,714		14,637
Weighted average number of ordinary shares outstanding
used in basic income per ordinary share calculation		7,343,696		7,455,528		7,552,094
Add assumed exercise of outstanding dilutive potential
ordinary shares		91,485		146,443		105,236
Weighted average number of ordinary shares outstanding
used in diluted income per ordinary share calculation		7,435,181		7,601,971		7,657,330
Basic income per ordinary shares (US$)		1.789		2.912		1.938
Diluted income per ordinary shares (US$)		1.767		2.856		1.912
The weighted average number of shares related  to options
and RSUs excluded from the diluted earnings per share
calculation because of anti-dilutive effect		9,633		-		171,086

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Cash and Cash Equivalents (Tables)

12 Months Ended

Dec. 31, 2018

Cash and Cash Equivalents [Abstract]

Schedule of Cash and Cash Equivalents

	December 31
	2017		2018
	US$ thousands
Cash		12,834		16,147
Cash equivalents *		4,187		10,661
		17,021		26,808

 

*                Comprised mainly of deposits in banks as at December 31, 2017 and 2018 carrying a weighted average interest rate of 0.07% and 2.79%, respectively.

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Marketable Securities (Tables)

12 Months Ended

Dec. 31, 2018

Investments, Debt and Equity Securities [Abstract]

Held-to-Maturity Securities

The Company's investment in marketable securities as of December 31, 2017 and 2018 are classified as ''held-to-maturity'' and consist of the following:

			Gross		Gross
			unrealized		unrealized
	Amortized		holding		holding			Aggregate
	cost basis**		gains		(losses)			fair value*
	US$ thousands
At December 31, 2018
Held to maturity:
Corporate debt securities and government debt securities
Current		1,610		-		(22	)		1,588
Non-Current		46,052		-		(778	)		45,274
		47,662		-		(800	)		46,862
At December 31, 2017
Held to maturity:
Corporate debt securities
Current		7,798		-		(49	)		7,749
Non-Current		5,976		-		(95	)		5,881
		13,774		-		(144	)		13,630

*	Fair value is being determined using quoted market prices in active markets (Level 2).
**	Including accrued interest in the amount of US$ 77 thousand and US$ 450 thousand as of December 31, 2017 and 2018 respectively. The accrued interest is presented as part of other account receivable on the balance sheet.

Schedule of Reconciliation of Marketable Securities

Activity in marketable securities in 2018	US$ thousands
Balance at January 1, 2018		13,774
Purchases of marketable securities		41,670
Discount on marketable securities, net		(32	)
Proceeds from maturity of marketable securities		(7,750	)
Balance at December 31, 2018		47,662

Summary of Investment Securities in an Unrealized Loss Position

The following table summarizes the gross unrealized losses on investment securities for which other-than-temporary impairments have not been recognized and the fair value of those securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2018:

	Less than 12 months					12 months or more					Total
Held to maturity:	Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value
Corporate debt securities  and government debt  securities		(679	)		41,024		(121	)		5,838		(800	)		46,862

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Other Receivables (Tables)

12 Months Ended

Dec. 31, 2018

Receivables [Abstract]

Schedule of Other Receivables

	December 31
	2017		2018
	US$ thousands
Advances to suppliers		555		5,260
Government authorities		4,475		2,916
Prepaid expense		531		884
Other receivables		262		427
		5,823		9,487

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Inventories (Tables)

12 Months Ended

Dec. 31, 2018

Inventory Disclosure [Abstract]

Summary of Inventories

	December 31
	2017		2018
	US$ thousands
Raw materials and components		24,407		19,088
Products in process		15,079		10,883
Finished products		12,001		12,398
		51,487		42,369

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Property, Plant and Equipment, Net (Tables)

12 Months Ended

Dec. 31, 2018

Property, Plant and Equipment [Abstract]

Summary of Property, Plant and Equipment, Net

	December 31
	2017			2018
	US$ thousands
Machinery and equipment		10,531			12,150
Office furniture and equipment		665			725
Leasehold improvements		2,309			2,375
Property, plant and equipment		13,505			15,250
Accumulated depreciation		(9,384	)		(11,580	)
Property, Plant and equipment, net		4,121			3,670

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Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2018

Intangible Assets, Net (Excluding Goodwill) [Abstract]

Schedule of Net Intangible Assets

Net intangible assets as of December 31, 2018 are as follows:

			December 31
			2017		2018
	Useful life		US$ thousands
Original cost:
Current technology		3		3,844		3,832
Customer relationships		3		1,937		1,937
Capitalization of software development costs		3		-		928
Licenses		3		-		106
				5,781		6,803
Accumulated amortization:
Current technology				3,181		3,832
Customer relationships				1,553		1,937
Capitalization of software development costs				-		37
Licenses				-		31
				4,734		5,837
Intangible assets, Net:
Current technology				663		-
Customer relationships				384		-
Capitalization of software development costs				-		891
Licenses				-		75
				1,047		966

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Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies Disclosure [Abstract]

Minimum Future Rental Payments

The minimum future rental payments under the above leases at exchange rates in effect on December 31, 2018, are as follows:

Year ended December 31	US$ thousands
2019		1,394
2020		643
2021 and on		1,818

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Shareholders' Equity (Tables)

12 Months Ended

Dec. 31, 2018

Stockholders' Equity Note [Abstract]

Schedule of assumptions used in estimation of grant date fair value of RSUs

The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:

	2014	2015
Expected dividend yield	2.06%	3.22%
Termination rate	4.35%	0%

Schedule of assumptions used in estimation of grant date fair value of options

The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.08%
Expected dividend yield	2.09%
Average expected volatility (b)	53.01%
Termination rate	9%
Suboptimal factor (c)	3.4

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	1.58%
Expected dividend yield	2.42%
Average expected volatility  (b)	47.90%
Termination rate	9%
Suboptimal factor(c)	3.32

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.35%
Expected dividend yield	2.42%
Average expected volatility  (b)	43.71%
Termination rate	9%
Suboptimal factor (c)	3.28

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:

Expected dividend yield	2.68%
Termination rate	1.74%

The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:

Average Risk-free interest rate (a)	2.92%
Expected dividend yield	0.0 %
Average expected volatility  (b)	45.13%
Termination rate	9%
Suboptimal factor (c)	3.2

(a)	Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
(b)	Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
(c)	Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

Stock Option Summary

The following table summarizes information regarding stock options as at December 31, 2018:

	Options outstanding				Options exercisable
			Weighted average				Weighted average
			remaining				remaining
Exercise price	Number		contractual life		Number		contractual life
US$	of options		(in years)		of options		(in years)
15.28		6,575		1.7		6,575		1.7
26.91		20,415		4.6		20,415		4.6
33.27		19,706		7.3		19,706		7.3
28.38		77,616		5.4		77,616		5.4
39.62		109,840		6.1		-		-
36.11		131,343		7.3		-		-
		365,495				124,312

Stock Option Activity

The stock option activity under the abovementioned plans is as follows: 

				Weighted		average
	Number			average		grant date
	of options			exercise price		fair value
				US$		US$
Balance at January 1, 2016		214,701
Granted*		116,455			29.34		10.96
Exercised		(62,269	)		15.28		6.54
Forfeited		(2,882	)		29.71		11.79
Balance at December 31, 2016		266,005
Granted		119,925			39.62		11.89
Exercised		(124,918	)		21.46		8.46
Forfeited		(11,101	)		33.18		10.87
Balance at December 31, 2017		249,911
Granted		137,010			36.11		14.71
Exercised		(9,674	)		28.02		9.94
Forfeited		(11,752	)		36.73		13.05
Balance at December 31, 2018		365,495
Exercisable at December 31, 2018		124,312

* In 2016 the Company granted in the aggregate, 116,455 options. Regarding the grant of 93,660 options, see Note 12E. Regarding the grant of 22,795 options, see Note 3B.

Schedule of Restricted Share Units activity

The Restricted Share Units activity under the abovementioned plans is as follows:

				Weighted
	Number of			average
	Restricted			grant date
	Share Units			fair value
				US$
Balance at January 1, 2016		78,000
Vested		(35,000	)		46.54
Balance at December 31, 2016		43,000
Granted		78,000			34.90
Vested		(43,000	)		42.52
Balance at December 31, 2017 and  December 31, 2018		78,000

Summary of Allocation of the Stock-Based Compensation Expenses

During 2016, 2017 and 2018, the Company recorded share-based compensation expenses. The following summarizes the allocation of the stock-based compensation expenses:

	Year ended December 31
	2016		2017		2018
	US$ thousands		US$ thousands		US$ thousands
Cost of sales		180		320		372
Research and development costs		504		832		953
Selling and marketing expenses		366		537		569
General and administrative expenses		500		736		530
		1,550		2,425		2,424

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Geographic areas and major customers (Tables)

12 Months Ended

Dec. 31, 2018

Geographic areas and major customers [Abstract]

Sales by Geographic Region

Sales are attributed to geographic distribution based on the location of the customer.

	Year ended December 31
	2016		2017		2018
	US$ thousands
North America		65,590		100,434		108,024
Europe		24,208		20,156		21,038
Asia-Pacific		10,549		5,100		4,691
		100,347		125,690		133,753

Sales to Single Customers Exceeding 10% of Sales

Sales to single customers exceeding 10% of sales (US$ thousands):

	Year ended December 31
	2016		2017		2018
	US$ thousands
Customer "A"		17,366		16,915		18,855
Customer "B"		*		*		14,506
Customer "C"		*		*		14,220
Customer "D"		*		25,888		*
Customer "E"		11,628		*		*

 *          Less than 10% of sales.

Major Customers as Percentage of Net Accounts Receivable Balance

Major Customers - as percentage of net Accounts Receivable balance:

  

Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance as of December 31, 2017 and 2018, consist of the following customers:

	Year ended December 31
	2017			2018
	Percentage
Customer 1		15	%		22	%
Customer 2		*			18	%
Customer 3		*			10	%
Customer 4		30	%		*
Customer 5		22	%		*

        *            Less than 10% of Trade accounts receivable, net.

Schedule of Locations of Company's Long Lived Assets - Property, Plant and Equipment

Information on Long lived assets - Property, Plant and Equipment by geographic areas: 

  

The following table presents the locations of the Company’s long lived assets - Property, Plant and Equipment as of December 31, 2017 and 2018:

	Year ended December 31
	2017		2018
	US$ thousands
North America		20		46
Europe		225		235
Israel		3,876		3,389
		4,121		3,670

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Financial Income (Expenses), Net (Tables)

12 Months Ended

Dec. 31, 2018

Other Income and Expenses [Abstract]

Financial Income (Expenses), Net

	Year ended December 31
	2016			2017			2018
	US$ thousands
Interest income		751			527			840
Discount on marketable securities, net		(358	)		(217	)		(32	)
Exchange rate differences, net		(236	)		(45	)		208
Bank charges		(122	)		(109	)		(93	)
		35			156			923

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Taxes on Income (Tables)

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Income Before Income Taxes and Income Taxes Expense (Benefit) Included in The Consolidated Statements of Operations

Income before income taxes and income taxes expense (benefit) included in the consolidated statements of operations

	Year ended December 31
	2016			2017			2018
	US$ thousands
Income before income taxes:
Israel		15,541			23,226			14,703
Foreign jurisdiction		324			2,356			2,871
		15,865			25,582			17,574
Current taxes:
Israel		2,242			2,379			2,400
Foreign jurisdiction		720			1,095			831
		2,962			3,474			3,231
Current tax (benefits) expenses relating
to prior years:
Israel		26			12			(73	)
Foreign jurisdiction		-			(71	)		(226	)
		26			(59	)		(299	)
Deferred taxes:
Israel		10			549			(106	)
Foreign jurisdiction		(270	)		(96	)		111
		(260	)		453			5
Income tax expense		2,728			3,868			2,937

Deferred Tax Assets and Liabilities

The tax effects of significant items comprising the Company’s deferred tax assets and liabilities are as follows:

	December 31			December 31
	2017			2018
	US$ thousands			US$ thousands
Deferred tax assets:
Accrued employee benefits		282			281
Research and development costs		846			842
Tax loss carryforwards		111			169
PPE		15			48
Share based compensation		213			348
Intangible assets		110			202
Other		2			23
Total gross deferred tax assets		1,579			1,913
Deferred tax liabilities:
Intangible assets		-			(212	)
Goodwill		(680	)		(807	)
Total gross deferred tax liabilities		(680	)		(1,019	)
Net deferred tax assets		899			894
In Israel		788			894
Foreign jurisdictions		111			-
Net deferred tax assets		899			894
Non-current deferred tax assets		899			894

Reconciliation of the Statutory Tax Expense to Actual Tax Expense

Reconciliation of the statutory tax expense to actual tax expense

	Year ended December 31
	2016			2017			2018
	US$ thousands
Income before income taxes		15,865			25,582			17,574
Statutory tax rate in Israel		25.0	%		24.0	%		23.0	%
		3,966			6,140			4,042
Increase (decrease) in taxes resulting from:
Non-deductible operating expenses, net		228			364			295
Non-taxable income		(84	)		(1,114	)		-
Prior years adjustments		26			(59	)		(299	)
Tax effect due to
"Preferred Enterprise" status*		(1,924	)		(2,361	)		(1,398	)
Taxes related to foreign jurisdictions		324			632			176
Changes in tax rate		94			162			-
Other		98			104			121
Income tax expense		2,728			3,868			2,937

*             The effect of the benefit resulting from the "Preferred Enterprise" status on net earnings per ordinary share is as follows:

Schedule of Effect of the Benefit Resulting From the "Preferred Enterprise" Status on Net Earnings Per Ordinary Share

	Year ended December 31
	2016		2017		2018
Basic		0.26		0.32		0.19
Diluted		0.26		0.31		0.18

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Summary of Significant Accounting Policies (Narrative) (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2018 USD ($) item Customers	Dec. 31, 2017 USD ($)
Provision for doubtful accounts	$ 20	$ 20
Number of major customers | Customers	3
Percentage of revenue contributed by major customers	36.00%
Number of operating segments | item	1
Number of reporting units | item	1
Lease assets	$ 3,400
Lease liabilities	$ 3,300
Maximum [Member]
Estimated useful life	3 years

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Summary of Significant Accounting Policies (Depreciation of Property, Plant and Equipment) (Details)	12 Months Ended
	Dec. 31, 2018
Machinery and equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Straight-line depreciation rate	15.00%
Machinery and equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Straight-line depreciation rate	33.00%
Office Furniture and Equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Straight-line depreciation rate	6.00%
Office Furniture and Equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Straight-line depreciation rate	33.00%
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Straight-line depreciation rate		[1]

[1] Over the shorter term of the lease or the life of the asset

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Summary of Significant Accounting Policies (Computation of Basic and Diluted Income Per Ordinary Share) (Details) - USD ($) $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Accounting Policies [Abstract]
Net income attributable to ordinary shares (US$ thousands)	$ 14,637	$ 21,714	$ 13,137
Weighted average number of ordinary shares outstanding used in basic income per ordinary share calculation	7,552,094	7,455,528	7,343,696
Add assumed exercise of outstanding dilutive potential ordinary shares	105,236	146,443	91,485
Weighted average number of ordinary shares outstanding used in diluted income per ordinary share calculation	7,657,330	7,601,971	7,435,181
Basic income per ordinary share (US$)	$ 1.938	$ 2.912	$ 1.789
Diluted income per ordinary share (US$)	$ 1.912	$ 2.856	$ 1.767
The weighted average number of shares related to options and RSUs excluded from the diluted earnings per share calculation because of anti-dilutive effect	171,086		9,633

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Acquisitions (Details) - USD ($) $ in Thousands	Oct. 28, 2015	Dec. 10, 2014	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Business Acquisition [Line Items]
Purchase price allocated to goodwill			$ 25,561	$ 25,561
ADI Engineering, Inc. [Member]
Business Acquisition [Line Items]
Aggregate purchase price in cash	$ 10,000
Contingent consideration	7,802
Total purchase price	17,802
Purchase price allocated to tangible assets	222
Purchase price allocated to intangibles assets	4,261
Purchase price allocated to goodwill	$ 13,319
Total obligation the company paid					$ 3,000
Silicom Denmark [Member]
Business Acquisition [Line Items]
Aggregate purchase price in cash		$ 10,161
Contingent consideration		4,683
Total purchase price		14,844
Purchase price allocated to tangible assets		2,022
Purchase price allocated to intangibles assets		1,996
Purchase price allocated to goodwill		12,242
Purchase price allocated to liabilities assumed		$ 1,416
Total obligation the company paid						$ 1,463
Percentage of contingent consideration paid in cash						90.00%
Percentage of contingent consideration paid in options to ordinary shares						10.00%

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Cash and Cash Equivalents (Details) - USD ($) $ in Thousands		12 Months Ended
		Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Cash and Cash Equivalents [Abstract]
Cash		$ 16,147	$ 12,834
Cash equivalents	[1]	10,661	4,187
Cash and cash equivalents		$ 26,808	$ 17,021	$ 11,917	$ 18,178
Weighted average interest rate of cash on deposit		2.79%	0.07%

[1] Comprised mainly of deposits in banks as at December 31, 2017 and 2018 carrying a weighted average interest rate of 0.07% and 2.79%, respectively.

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Marketable Securities (Held-To-Maturity Securities) (Details) - USD ($) $ in Thousands		Dec. 31, 2018	Dec. 31, 2017
Schedule of Held-to-maturity Securities [Line Items]
Aggregate fair value	[1]	$ 46,862	$ 13,630
Gross unrealized holding gains
Gross unrealized holding (losses)		(800)	(144)
Amortized cost basis	[2]	47,662	13,774
Accrued interest on securities		450	77
Current [Member]
Schedule of Held-to-maturity Securities [Line Items]
Aggregate fair value	[1]	1,588	7,749
Gross unrealized holding gains
Gross unrealized holding (losses)		(22)	(49)
Amortized cost basis	[2]	1,610	7,798
Non Current [Member]
Schedule of Held-to-maturity Securities [Line Items]
Aggregate fair value	[1]	45,274	5,881
Gross unrealized holding gains
Gross unrealized holding (losses)		(778)	(95)
Amortized cost basis	[2]	$ 46,052	$ 5,976

[1] Fair value is being determined using quoted market prices in active markets (Level 2).

[2] Including accrued interest in the amount of US$ 77 thousand and US$ 450 thousand as of December 31, 2017 and 2018 respectively.

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Marketable Securities (Schedule of Reconciliation of Marketable Securities) (Details) - USD ($) $ in Thousands		12 Months Ended
		Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Investments, Debt and Equity Securities [Abstract]
Balance	[1]	$ 13,774
Purchases of marketable securities		41,670	$ 5,961
Discount on marketable securities, net		(32)	(217)	(358)
Proceeds from maturity of marketable securities		(7,750)	(16,175)	$ (8,575)
Balance	[1]	$ 47,662	$ 13,774

[1] Including accrued interest in the amount of US$ 77 thousand and US$ 450 thousand as of December 31, 2017 and 2018 respectively.

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Marketable Securities (Summary of Investment Securities in an Unrealized Loss Position) (Details) $ in Thousands	Dec. 31, 2018 USD ($)
Investments, Debt and Equity Securities [Abstract]
Unrealized Losses, Less than 12 months	$ (679)
Unrealized Losses, 12 months or more	(121)
Unrealized Losses, Total	(800)
Fair value, Less than 12 months	41,024
Fair value, 12 months or more	5,838
Fair value, Total	$ 46,862

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Other Receivables (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Receivables [Abstract]
Advances to suppliers	$ 5,260	$ 555
Government authorities	2,916	4,475
Prepaid expense	884	531
Other receivables	427	262
Total other receivables	$ 9,487	$ 5,823

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Inventories (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Inventory Disclosure [Abstract]
Raw materials and components	$ 19,088	$ 24,407
Products in process	10,883	15,079
Finished products	12,398	12,001
Inventories	$ 42,369	$ 51,487

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Property, Plant and Equipment, Net (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Property, Plant and Equipment [Line Items]
Property, plant and equipment	$ 15,250	$ 13,505
Accumulated depreciation	(11,580)	(9,384)
Property, Plant and equipment, net	3,670	4,121
Depreciation	2,190	1,911	$ 1,616
Machinery and equipment [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment	12,150	10,531
Office Furniture and Equipment [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment	725	665
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment	$ 2,375	$ 2,309

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Intangible Assets (Schedule of net intangible assets) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Finite-Lived Intangible Assets [Line Items]
Original cost	$ 6,803	$ 5,781
Accumulated amortization	5,837	4,734
Intangible assets, Net	966	1,047
Amortization expense	1,103	1,888	$ 2,240
Current technology [Member]
Finite-Lived Intangible Assets [Line Items]
Original cost	3,832	3,844
Accumulated amortization	3,832	3,181
Intangible assets, Net		663
Useful life	3 years
Customer relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Original cost	$ 1,937	1,937
Accumulated amortization	1,937	1,553
Intangible assets, Net		384
Useful life	3 years
Capitalization of software development costs [Member]
Finite-Lived Intangible Assets [Line Items]
Original cost	$ 928
Accumulated amortization	37
Intangible assets, Net	891
Licenses [Member]
Finite-Lived Intangible Assets [Line Items]
Original cost	106
Accumulated amortization	31
Intangible assets, Net	$ 75

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Assets Held and Liability for Employees' Severance Benefits (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Retirement Benefits [Abstract]
Severance costs	$ 605	$ 830	$ 761

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Commitments and Contingencies (Narrative) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Commitments and Contingencies Disclosure [Abstract]
Rental expenses under the lease agreements	$ 1,812	$ 1,760	$ 1,563

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Commitments and Contingencies (Minimum Future Rental Payments) (Details) $ in Thousands	Dec. 31, 2018 USD ($)
Operating Leased Assets [Line Items]
2019	$ 1,394
2020	643
2021 and on	1,818
Related Party [Member]
Operating Leased Assets [Line Items]
2019	$ 50

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Shareholders' Equity (Share Option Plan) (Details) - shares	1 Months Ended	12 Months Ended
	Jan. 31, 2018	Dec. 31, 2018	Oct. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Capital gains tax		25.00%
Share Option Plan 2013 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized			500,000
Additional shares authorized	600,000

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Shareholders' Equity (RSUs Granted in 2014, 2015 and 2017) (Narrative) (Details) - Restricted Share Units [Member] - shares	1 Months Ended	12 Months Ended
	Jan. 30, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2015	Dec. 31, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
RSUs grant			78,000	8,000	74,000
Second anniversary [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Percentage of vest RSUs grant	50.00%
Third anniversary [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Percentage of vest RSUs grant	50.00%
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period from date of grant				2 years	2 years
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period from date of grant				3 years	3 years

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Shareholders' Equity (Stock Options Granted in 2015, 2016 and 2017) (Narrative) (Details) - $ / shares		1 Months Ended			12 Months Ended
	Jun. 08, 2016	Apr. 30, 2018	Jan. 30, 2017	Jul. 28, 2015	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	[1]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise price of options					$ 36.11	$ 39.62	$ 29.34
Share Option Plan 2013 [Member] | 39.62 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted		137,010	119,925
Exercise price of options		$ 36.11	$ 39.62
Expiration date		Apr. 30, 2026	Jan. 30, 2025
Closing price to determine expiration date		$ 18.06	$ 19.81
Share Option Plan 2013 [Member] | 28.38 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted	93,660
Exercise price of options	$ 28.38
Expiration date	Jun. 08, 2024
Closing price to determine expiration date	$ 14.19
Share Option Plan 2013 [Member] | $26.91 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted				89,907
Exercise price of options				$ 26.91
Expiration date				Jul. 28, 2023
Closing price to determine expiration date				$ 13.46

[1] In 2016 the Company granted in the aggregate, 116,455 options. Regarding the grant of 93,660 options, see Note 12E. Regarding the grant of 22,795 options, see Note 3B.

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Shareholders' Equity (Fair Value Assumptions) (Details) - item			1 Months Ended				12 Months Ended
		Jun. 08, 2016	Apr. 30, 2018	Jan. 30, 2018	Jan. 30, 2017	Jul. 28, 2015	Dec. 31, 2015	Dec. 31, 2014
$39.62 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Average risk-free interest rate	[1]		2.92%		2.35%
Expected dividend yield			0.00%		2.42%
Average expected volatility	[2]		45.13%		43.71%
Termination rate			9.00%		9.00%
Suboptimal factor	[3]		3.2		3.28
$28.38 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Average risk-free interest rate	[1]	1.58%
Expected dividend yield		2.42%
Average expected volatility	[2]	47.90%
Termination rate		9.00%
Suboptimal factor	[3]	3.32
$26.91 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Average risk-free interest rate	[1]					2.08%
Expected dividend yield						2.09%
Average expected volatility	[2]					53.01%
Termination rate						9.00%
Suboptimal factor	[3]					3.4
Restricted Share Units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected dividend yield				2.68%			3.22%	2.06%
Termination rate				1.74%			0.00%	4.35%

[1] Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.

[2] Expected average volatility represents a weighted average standard deviation rate for the price of the Company's ordinary shares on the NASDAQ National Market.

[3] Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

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Shareholders' Equity (Stock Option Summary) (Details) - $ / shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options outstanding, number of options	365,495	249,911	266,005	214,701
Options exercisable, number of options	124,312
$15.28 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise price US$	$ 15.28
Options outstanding, number of options	6,575
Options outstanding, weighted average remaining contractual life (in years)	1 year 8 months 12 days
Options exercisable, number of options	6,575
Options exercisable, weighted average remaining contractual life (in years)	1 year 8 months 12 days
$26.91 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise price US$	$ 26.91
Options outstanding, number of options	20,415
Options outstanding, weighted average remaining contractual life (in years)	4 years 7 months 6 days
Options exercisable, number of options	20,415
Options exercisable, weighted average remaining contractual life (in years)	4 years 7 months 6 days
33.27 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise price US$	$ 33.27
Options outstanding, number of options	19,706
Options outstanding, weighted average remaining contractual life (in years)	7 years 3 months 19 days
Options exercisable, number of options	19,706
Options exercisable, weighted average remaining contractual life (in years)	7 years 3 months 19 days
28.38 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise price US$	$ 28.38
Options outstanding, number of options	77,616
Options outstanding, weighted average remaining contractual life (in years)	5 years 4 months 24 days
Options exercisable, number of options	77,616
Options exercisable, weighted average remaining contractual life (in years)	5 years 4 months 24 days
39.62 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise price US$	$ 39.62
Options outstanding, number of options	109,840
Options outstanding, weighted average remaining contractual life (in years)	6 years 1 month 6 days
Options exercisable, number of options
36.11 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Exercise price US$	$ 36.11
Options outstanding, number of options	131,343
Options outstanding, weighted average remaining contractual life (in years)	7 years 3 months 19 days
Options exercisable, number of options

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Shareholders' Equity (Intrinsic Value of Stock Options) (Narrative) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Stockholders' Equity Note [Abstract]
Aggregate intrinsic value of options outstanding	$ 835	$ 9,175
Aggregate intrinsic value of options exercisable	835	1,759
Total intrinsic value of options exercised	$ 67	$ 4,194

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Shareholders' Equity (Stock Option Activity) (Details) - $ / shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Stockholders' Equity Note [Abstract]
Options, beginning balance	249,911	266,005	214,701
Options, granted	137,010	119,925	116,455	[1]
Options, exercised	(9,674)	(124,918)	(62,269)
Options, forfeited	(11,752)	(11,101)	(2,882)
Options, ending balance	365,495	249,911	266,005
Options, exercisable	124,312
Weighted average exercise price, granted	$ 36.11	$ 39.62	$ 29.34	[1]
Weighted average exercise price, exercised	28.02	21.46	15.28
Weighted average exercise price, forfeited	36.73	33.18	29.71
Weighted average grant date fair value, granted	14.71	11.89	10.96	[1]
Weighted average grant date fair value, exercised	9.94	8.46	6.54
Weighted average grant date fair value, forfeited	$ 13.05	$ 10.87	$ 11.79

[1] In 2016 the Company granted in the aggregate, 116,455 options. Regarding the grant of 93,660 options, see Note 12E. Regarding the grant of 22,795 options, see Note 3B.

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Shareholders' Equity (Schedule Of Restricted Share Units Activity) (Details) - Restricted Share Units [Member] - $ / shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Number of Restricted Share Units
Restricted Share Units, beginning balance	78,000	43,000	78,000
Restricted Share Units, granted		78,000		8,000	74,000
Restricted Share Units, vested		(43,000)	(35,000)
Restricted Share Units, ending balance	78,000	78,000	43,000	78,000
Weighted average grant date fair value
Weighted average grant date fair value, granted		$ 34.90
Weighted average grant date fair value, vested		$ 42.52	$ 46.54

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Shareholders' Equity (Intrinsic Value of Restricted Share Units) (Narrative) (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Restricted Share Units [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate intrinsic value of RSUs outstanding	$ 2,725	$ 5,469

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Shareholders' Equity (Summary of Allocation of Stock-Based Compensation Expenses) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 2,424	$ 2,425	$ 1,550
Unrecognized compensation costs related to outstanding stock options and RSUs	$ 1,668
Unrecognized compensation costs related to outstanding stock options and RSUs, period for recognition	1 year 2 months 8 days
Cost Of Sales [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 372	320	180
Research And Development Expense [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	953	832	504
Selling And Marketing Expense [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	569	537	366
General And Administrative Expense [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 530	$ 736	$ 500

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Geographic areas and major customers (Sales By Geographic Region) (Details) - USD ($) $ in Thousands		12 Months Ended
		Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Revenues from External Customers and Long-Lived Assets [Line Items]
Sales attributable based on geographic location	[1]	$ 133,753	$ 125,690	$ 100,347
North America [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Sales attributable based on geographic location		108,024	100,434	65,590
Europe [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Sales attributable based on geographic location		21,038	20,156	24,208
Asia Pacific [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Sales attributable based on geographic location		$ 4,691	$ 5,100	$ 10,549

[1] Including sales to related parties in the amount of US$ 762 thousand, US$ 1,275 thousand and US$ 1,063 thousand in 2016, 2017 and 2018, respectively.

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Geographic areas and major customers (Sales to Single Customers Exceeding 10% of Sales) (Details) - USD ($) $ in Thousands		12 Months Ended
		Dec. 31, 2018		Dec. 31, 2017		Dec. 31, 2016
Revenue, Major Customer [Line Items]
Sales	[1]	$ 133,753		$ 125,690		$ 100,347
Customer A [Member]
Revenue, Major Customer [Line Items]
Sales		18,855		16,915		17,366
Customer B [Member]
Revenue, Major Customer [Line Items]
Sales		14,506			[2]		[2]
Customer C [Member]
Revenue, Major Customer [Line Items]
Sales		14,220			[2]		[2]
Customer D [Member]
Revenue, Major Customer [Line Items]
Sales			[2]	25,888			[2]
Customer E [Member]
Revenue, Major Customer [Line Items]
Sales			[2]		[2]	$ 11,628

[1] Including sales to related parties in the amount of US$ 762 thousand, US$ 1,275 thousand and US$ 1,063 thousand in 2016, 2017 and 2018, respectively.

[2] Less than 10% of sales.

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Geographic areas and major customers (Percentage of Net Accounts Receivable Balance) (Details) - Accounts Receivable [Member]	12 Months Ended
	Dec. 31, 2018		Dec. 31, 2017
Customer 1 [Member]
Concentration Risk [Line Items]
Percentage of net accounts receivable	22.00%		15.00%
Customer 2 [Member]
Concentration Risk [Line Items]
Percentage of net accounts receivable	18.00%			[1]
Customer 3 [Member]
Concentration Risk [Line Items]
Percentage of net accounts receivable	10.00%			[1]
Customer 4 [Member]
Concentration Risk [Line Items]
Percentage of net accounts receivable		[1]	30.00%
Customer 5 [Member]
Concentration Risk [Line Items]
Percentage of net accounts receivable		[1]	22.00%

[1] Less than 10% of Trade accounts receivable, net.

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Geographic areas and major customers (Schedule of Locations of Company's Long Lived Assets) (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Revenues from External Customers and Long-Lived Assets [Line Items]
Long lived assets	$ 3,670	$ 4,121
North America [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Long lived assets	46	20
Europe [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Long lived assets	235	225
Israel [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Long lived assets	$ 3,389	$ 3,876

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Financial Income (Expenses), Net (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Other Income and Expenses [Abstract]
Interest income	$ 840	$ 527	$ 751
Discount on marketable securities, net	(32)	(217)	(358)
Exchange rate differences, net	208	(45)	(236)
Bank charges	(93)	(109)	(122)
Financial income, net	$ 923	$ 156	$ 35

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Taxes on Income (Narrative) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Income Tax Disclosure [Line Items]
Tax rate	23.00%	24.00%	25.00%
Federal corporate income tax rate effective January 1, 2018	21.00%
Corporate tax on cash dividends distributed from exempted profits	25.00%
Withholding tax deduction from cash dividends distributed from benefited profits	20.00%
Non-Israeli subsidiaries' undistributed earnings for which Company has not provided for Israeli income and foreign withholding taxes	$ 6,701
Assumed deferred tax liability attributable to taxable temporary differences from non-Israeli subsidiaries'' undistributed earnings	838
Net operating loss carry-forwards	$ 900
Israel Tax Reform [Member]
Income Tax Disclosure [Line Items]
Corporate statutory tax rate on 2018 and thereafter	23.00%
Corporate statutory tax rate on 2017	24.00%
Corporate statutory tax rate on 2016	25.00%
Preferred Enterprise [Member] | Development Area A [Member]
Income Tax Disclosure [Line Items]
Corporate statutory tax rate on 2017 and thereafter	7.50%
Corporate statutory tax rate on 2016	9.00%
Preferred Enterprise [Member] | Rest Of Country [Member]
Income Tax Disclosure [Line Items]
Corporate statutory tax rate on 2016 and thereafter	16.00%
Beneficial Enterprise [Member]
Income Tax Disclosure [Line Items]
Tax exemption	$ 46,581	$ 50,356
Assumed income tax liability	$ 11,645	$ 12,589

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Taxes on Income (Income Before Income Taxes and Income Taxes Expense (Benefit) Included in the Consolidated Statements of Operations) (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Income Tax Disclosure [Abstract]
Income before income taxes, Israel	$ 14,703	$ 23,226	$ 15,541
Income before income taxes, foreign jurisdiction	2,871	2,356	324
Income before income taxes	17,574	25,582	15,865
Current taxes, Israel	2,400	2,379	2,242
Current taxes, foreign jurisdiction	831	1,095	720
Current taxes	3,231	3,474	2,962
Current tax (benefits) expenses relating to prior years, Israel	(73)	12	26
Current tax (benefits) expenses relating to prior years, foreign jurisdiction	(226)	(71)
Current tax (benefits) expenses relating to prior years	(299)	(59)	26
Deferred taxes, Israel	(106)	549	10
Deferred taxes, foreign jurisdiction	111	(96)	(270)
Deferred taxes	5	453	(260)
Income tax expense	$ 2,937	$ 3,868	$ 2,728

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Taxes on Income (Deferred Tax Assets and Liabilities) (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Deferred tax assets:
Accrued employee benefits	$ 281	$ 282
Research and development costs	842	846
Tax loss carryforwards	169	111
PPE	48	15
Share based compensation	348	213
Intangible assets	202	110
Other	23	2
Total gross deferred tax assets	1,913	1,579
Deferred tax liabilities:
Intangible assets	(212)
Goodwill	(807)	(680)
Total gross deferred tax liabilities	(1,019)	(680)
Net deferred tax assets	894	899
In Israel	894	788
Foreign jurisdictions		111
Net deferred tax assets	894	899
Non-current deferred tax assets	$ 894	$ 899

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Taxes on Income (Reconciliation of Statutory Tax Expense To Actual Tax Expense) (Details) - USD ($) $ / shares in Units, $ in Thousands		12 Months Ended
		Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Income before income taxes		$ 17,574	$ 25,582	$ 15,865
Statutory tax rate in Israel		23.00%	24.00%	25.00%
Computed expected tax		$ 4,042	$ 6,140	$ 3,966
Non-deductible operating expenses, net		295	364	228
Non-taxable income			(1,114)	(84)
Prior years adjustments		(299)	(59)	26
Tax effect due to "Preferred Enterprise" status	[1]	(1,398)	(2,361)	(1,924)
Taxes related to foreign jurisdictions		176	632	324
Changes in tax rate			162	94
Other		121	104	98
Income tax expense		$ 2,937	$ 3,868	$ 2,728
Basic		$ 1.938	$ 2.912	$ 1.789
Diluted		1.912	2.856	1.767
Preferred Enterprise - Effect on Net Earnings Per Ordinary Share [Member]
Basic		0.19	0.32	0.26
Diluted		$ 0.18	$ 0.31	$ 0.26

[1] The effect of the benefit resulting from the "Preferred Enterprise" status on net earnings per ordinary share is as follows:

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Subsequent Events (Details) - shares	1 Months Ended	12 Months Ended
	Jan. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	[1]
Subsequent Event [Line Items]
Options granted		137,010	119,925	116,455
Subsequent Event [Member] | Global Share Incentive Plan (2013) [Member]
Subsequent Event [Line Items]
Options granted	141,928

[1] In 2016 the Company granted in the aggregate, 116,455 options. Regarding the grant of 93,660 options, see Note 12E. Regarding the grant of 22,795 options, see Note 3B.