MONOLITHIC POWER SYSTEMS INC

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires entities to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheets for leases with terms greater than 12 months. In addition, the standard applies to leases embedded in service or other arrangements. The Company adopted the standard on January 1, 2019 using the modified retrospective method and did not restate comparative periods, as permitted by the standard. In addition, the Company elected the transition practical expedients to not reassess whether its outstanding contracts contained or were leases, classification of its existing leases and lease terms.

Upon adoption, the Company recognized ROU assets and lease liabilities of its outstanding operating leases on the Condensed Consolidated Balance Sheets, primarily related to real estate. The adoption did not have a material impact on the Condensed Consolidated Statements of Operations or the Condensed Consolidated Statements of Cash Flows. See Note 6 for further discussion of the impact of the adoption on the Company’s financial statements.

The fair value of the building was determined based on the income approach, which considered the discounted cash flows and direct capitalization analysis, and the sales comparison approach. The fair value of land was determined based on the sales comparison approach. The fair value of the in-place leases was determined primarily based on the analysis of the economic benefits of certain cost savings to acquire new tenants.

The building is depreciated over a useful life of 40 years and the in-place leases are amortized over the average remaining lease terms of 3.5 years. Land is not depreciated.

The Company has operating leases for administrative and sales and marketing offices, manufacturing operations and research and development facilities, employee housing units, and certain equipment. The leases have remaining lease terms from one to four years. Some of the leases include renewal options which can extend the lease term for up to five years or on a month-to-month basis. The Company does not have finance lease arrangements.

As permitted by Topic 842, the Company does not recognize leases with a term of 12 months or less on the Condensed Consolidated Balance Sheets. For all lease arrangements that contain lease and nonlease components, the Company has elected the practical expedient to combine them as single lease components. As of March 31, 2019, operating lease ROU assets totaled $2.8 million and operating lease liabilities totaled $2.2 million. The Company recognizes operating lease costs on a straight-line basis over the lease term.

Because the implicit rate in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the remaining lease payments. 

The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As of March 31, 2019, we had working capital of $482.5 million, compared with working capital of $500.4 million as of December 31, 2018. The $17.9 million decrease in working capital was due to an $11.2 million increase in current liabilities, coupled with a $6.7 million decrease in current assets. The increase in current liabilities was primarily due to an increase in accounts payable and other accrued liabilities. The decrease in current assets was primarily due to a decrease in short-term investments, which was partially offset by an increase in cash and cash equivalents, accounts receivable, inventories and other current assets. As of March 31, 2019, total cash, cash equivalents and short investments decreased $18.3 million compared to the balance as of December 31, 2018, primarily due to the purchase of a building and land in Kirkland, Washington, which was partially offset by additional cash generated from operations.