Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) June 30, 2020 December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 251,325 $ 178,690
Short-term marketable securities 194,556 232,398
Accounts receivable, net 12,872 24,274
Inventories 103,963 90,380
Prepaid expenses and other current assets 14,512 15,597
Total current assets 577,228 541,339
PROPERTY AND EQUIPMENT, net 138,572 116,619
INTANGIBLE ASSETS, net 14,658 16,865
GOODWILL 91,849 91,849
DEFERRED TAX ASSETS 1,514 2,836
OTHER ASSETS 29,956 34,388
Total assets $ 853,777 $ 803,896
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 42,871 $ 27,433
Accrued payroll and related expenses 14,365 13,408
Taxes payable 363 584
Other accrued liabilities 7,156 9,051
Total current liabilities 64,755 50,476
LONG-TERM INCOME TAXES PAYABLE 15,329 14,617
DEFERRED TAX LIABILITIES 121 164
OTHER LIABILITIES 14,100 14,093
Total liabilities 94,305 79,350
COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 13)
STOCKHOLDERS’ EQUITY:
Common stock 28 28
Additional paid-in capital 168,470 152,117
Accumulated other comprehensive loss ( 1,720 ) ( 3,130 )
Retained earnings 592,694 575,531
Total stockholders’ equity 759,472 724,546
Total liabilities and stockholders’ equity $ 853,777 $ 803,896
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share amounts) 2020 2019 2020 2019
NET REVENUES $ 106,832 $ 102,865 $ 216,496 $ 192,053
COST OF REVENUES 53,296 51,293 106,480 95,007
GROSS PROFIT 53,536 51,572 110,016 97,046
OPERATING EXPENSES:
Research and development 19,770 19,269 38,922 37,215
Sales and marketing 13,037 13,209 26,510 26,226
General and administrative 7,804 9,334 16,565 17,724
Total operating expenses 40,611 41,812 81,997 81,165
INCOME FROM OPERATIONS 12,925 9,760 28,019 15,881
OTHER INCOME 1,480 1,310 3,257 2,462
INCOME BEFORE INCOME TAXES 14,405 11,070 31,276 18,343
PROVISION FOR INCOME TAXES 1,213 225 2,198 265
NET INCOME $ 13,192 $ 10,845 $ 29,078 $ 18,078
EARNINGS PER SHARE:
Basic $ 0.44 $ 0.37 $ 0.98 $ 0.62
Diluted $ 0.44 $ 0.37 $ 0.96 $ 0.61
SHARES USED IN PER SHARE CALCULATION:
Basic 29,856 29,297 29,729 29,125
Diluted 30,312 29,702 30,232 29,597
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. The Earnings Per Share and Shares Used in Per Share Calculation information presented above does not reflect the effect of the August 2020 stock split. Refer to Note 9, Earnings Per Share , in this Form 10-Q for details.
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POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2020 2019 2020 2019
NET INCOME $ 13,192 $ 10,845 $ 29,078 $ 18,078
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of $ 0 tax in each of the three and six months ended June 30, 2020 and 2019
( 30 ) ( 250 ) ( 313 ) ( 272 )
Unrealized gain on marketable securities, net of $ 0 tax in each of the three and six months ended June 30, 2020 and 2019
2,566 257 1,614 591
Amortization of defined benefit pension items, net of tax of $ 24 and $ 55 in the three and six months ended June 30, 2020, respectively, and $ 5 and $ 9 in the three and six months ended June 30, 2019, respectively
58 18 109 34
Total other comprehensive income 2,594 25 1,410 353
TOTAL COMPREHENSIVE INCOME $ 15,786 $ 10,870 $ 30,488 $ 18,431
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2020 2019 2020 2019
Common stock
Beginning balance $ 28 $ 28 $ 28 $ 28
Common stock issued under employee stock plans — — — —
Repurchase of common stock — — — —
Ending balance 28 28 28 28
Additional paid-in capital
Beginning balance 162,343 127,769 152,117 126,164
Common stock issued under employee stock plans 769 1,178 6,298 5,678
Repurchase of common stock ( 623 ) — ( 2,636 ) ( 7,302 )
Stock-based compensation 5,981 5,496 12,691 9,903
Ending balance 168,470 134,443 168,470 134,443
Accumulated other comprehensive loss
Beginning balance ( 4,314 ) ( 1,361 ) ( 3,130 ) ( 1,689 )
Other comprehensive income 2,594 25 1,410 353
Ending balance ( 1,720 ) ( 1,336 ) ( 1,720 ) ( 1,336 )
Retained earnings
Beginning balance 585,773 404,865 575,531 402,569
Net income 13,192 10,845 29,078 18,078
Payment of dividends to stockholders ( 6,271 ) ( 4,980 ) ( 11,915 ) ( 9,917 )
Ending balance 592,694 410,730 592,694 410,730
Total stockholders’ equity $ 759,472 $ 543,865 $ 759,472 $ 543,865
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
(In thousands) 2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,078 $ 18,078
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 11,069 9,431
Amortization of intangibles 2,207 2,483
Loss on disposal of property and equipment 292 152
Stock-based compensation expense 12,691 9,903
Amortization of premium (accretion of discount) on marketable securities 321 ( 230 )
Deferred income taxes 1,279 1,659
Increase (decrease) in accounts receivable allowance for credit losses ( 154 ) 57
Change in operating assets and liabilities:
Accounts receivable 11,556 ( 14,453 )
Inventories ( 13,583 ) ( 8,340 )
Prepaid expenses and other assets 4,092 ( 3,614 )
Accounts payable 5,861 4,153
Taxes payable and accrued liabilities ( 1,665 ) 1,217
Net cash provided by operating activities 63,044 20,496
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ( 21,622 ) ( 8,348 )
Proceeds from sale of property and equipment 331 —
Acquisition of technology licenses — ( 251 )
Purchases of marketable securities ( 19,827 ) ( 54,424 )
Proceeds from sales and maturities of marketable securities 58,962 19,422
Net cash provided by (used in) investing activities 17,844 ( 43,601 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock plans 6,298 5,678
Repurchase of common stock ( 2,636 ) ( 7,302 )
Payments of dividends to stockholders ( 11,915 ) ( 9,917 )
Net cash used in financing activities ( 8,253 ) ( 11,541 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 72,635 ( 34,646 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 178,690 134,137
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 251,325 $ 99,491
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unpaid property and equipment $ 13,932 $ 2,098
Unpaid technology licenses $ — $ 100
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) for income taxes, net $ ( 2,155 ) $ 890
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of Power Integrations, Inc., a Delaware corporation (the “Company”), and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
While the financial information furnished is unaudited, the condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and the financial condition of the Company at the date of the interim balance sheet in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in conjunction with the Power Integrations, Inc. consolidated financial statements and the notes thereto for the year ended December 31, 2019, included in its Form 10-K filed on February 7, 2020, with the Securities and Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:
Significant Accounting Policies and Estimates
No material changes have been made to the Company’s significant accounting policies disclosed in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements , in its Annual Report on Form 10-K, filed on February 7, 2020, for the year ended December 31, 2019.
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which modifies the measurement of expected credit losses on certain financial instruments. In addition, for available-for-sale debt securities, the standard eliminates the concept of other-than-temporary impairment and requires the recognition of an allowance for credit losses rather than reductions in the amortized cost of the securities. The Company adopted the new standard in the first quarter of 2020, effective January 1, 2020, using the modified-retrospective approach. For available-for-sale debt securities, the Company has made a policy election to present separately accrued interest receivable within prepaid expenses and other current assets on the condensed consolidated balance sheet. Upon adoption, there was no impact on the Company’s condensed consolidated financial statements.
3. COMPONENTS OF THE COMPANY’S CONDENSED CONSOLIDATED BALANCE SHEETS:
Accounts Receivable
(In thousands) June 30,
2020 December 31,
2019
Accounts receivable trade $ 53,118 $ 61,036
Allowance for ship and debit ( 37,143 ) ( 33,475 )
Allowance for stock rotation and rebate ( 2,494 ) ( 2,524 )
Allowance for credit losses ( 609 ) ( 763 )
Total $ 12,872 $ 24,274
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POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company maintains an allowance for estimated credit losses resulting from the inability of customers to make required payments. This allowance is established using estimates formulated by the Company’s management based upon factors such as the composition of the accounts receivable aging, historical losses, changes in payments patterns, customer creditworthiness, and current economic trends. Receivables determined to be uncollectible are written off and deducted from the allowance.
Allowance for Credit Losses
Three Months Ended Six Months Ended
(In thousands) June 30,
2020 June 30,
2020
Beginning balance $ ( 609 ) $ ( 763 )
Provision for credit loss expense — —
Receivables written off — 154
Recoveries collected — —
Ending balance $ ( 609 ) $ ( 609 )
Inventories
(In thousands) June 30,
2020 December 31,
2019
Raw materials $ 43,795 $ 39,058
Work-in-process 33,588 25,982
Finished goods 26,580 25,340
Total $ 103,963 $ 90,380
Prepaid Expenses and Other Current Assets
(In thousands) June 30,
2020 December 31,
2019
Prepaid legal fees $ 172 $ 16
Prepaid income tax 3,014 5,615
Prepaid maintenance agreements 2,017 819
Interest receivable 1,065 1,279
Advance to suppliers 3,877 3,579
Other 4,367 4,289
Total $ 14,512 $ 15,597
Intangible Assets
June 30, 2020 December 31, 2019
(In thousands) Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Domain name $ 1,261 $ — $ 1,261 $ 1,261 $ — $ 1,261
Developed technology 37,960 ( 27,529 ) 10,431 37,960 ( 25,933 ) 12,027
Customer relationships 16,700 ( 15,255 ) 1,445 20,030 ( 18,098 ) 1,932
Technology licenses 1,926 ( 405 ) 1,521 1,926 ( 281 ) 1,645
Total $ 57,847 $ ( 43,189 ) $ 14,658 $ 61,177 $ ( 44,312 ) $ 16,865
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POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated future amortization expense related to finite-lived intangible assets at June 30, 2020, is as follows:
Fiscal Year Estimated
Amortization
(In thousands)
2020 (remaining six months) $ 2,152
2021 3,494
2022 2,415
2023 2,173
2024 1,279
Thereafter 1,884
Total $ 13,397
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for three and six months ended June 30, 2020 and 2019, were as follows:
Unrealized Gains and Losses on Marketable Securities Defined Benefit Pension Items Foreign Currency Items Total
Three Months Ended Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
(In thousands) 2020 2019 2020 2019 2020 2019 2020 2019
Beginning balance $ ( 369 ) $ 68 $ ( 2,433 ) $ ( 696 ) $ ( 1,512 ) $ ( 733 ) $ ( 4,314 ) $ ( 1,361 )
Other comprehensive income (loss) before reclassifications 2,566 257 — — ( 30 ) ( 250 ) 2,536 7
Amounts reclassified from accumulated other comprehensive loss — — 58 (1) 18 (1) — — 58 18
Net-current period other comprehensive income (loss) 2,566 257 58 18 ( 30 ) ( 250 ) 2,594 25
Ending balance $ 2,197 $ 325 $ ( 2,375 ) $ ( 678 ) $ ( 1,542 ) $ ( 983 ) $ ( 1,720 ) $ ( 1,336 )
_______________
(1) This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the three months ended June 30, 2020 and 2019.
Unrealized Gains and Losses on Marketable Securities Defined Benefit Pension Items Foreign Currency Items Total
Six Months Ended Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(In thousands) 2020 2019 2020 2019 2020 2019 2020 2019
Beginning balance $ 583 $ ( 266 ) $ ( 2,484 ) $ ( 712 ) $ ( 1,229 ) $ ( 711 ) $ ( 3,130 ) $ ( 1,689 )
Other comprehensive income (loss) before reclassifications 1,614 591 — — ( 313 ) ( 272 ) 1,301 319
Amounts reclassified from accumulated other comprehensive loss — — 109 (1) 34 (1) — — 109 34
Net-current period other comprehensive income (loss) 1,614 591 109 34 ( 313 ) ( 272 ) 1,410 353
Ending balance $ 2,197 $ 325 $ ( 2,375 ) $ ( 678 ) $ ( 1,542 ) $ ( 983 ) $ ( 1,720 ) $ ( 1,336 )
_______________
(1) This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the six months ended June 30, 2020 and 2019.
4. FAIR VALUE MEASUREMENTS:
The FASB established a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices for identical assets in active markets; (Level 2) inputs other than the quoted
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POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company's cash equivalents and short-term marketable securities are classified within Level 1 or Level 2 of the fair-value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
The fair-value hierarchy of the Company's cash equivalents and marketable securities at June 30, 2020, and December 31, 2019, was as follows:
Fair Value Measurement at
June 30, 2020
(In thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2)
Corporate securities $ 191,560 $ — $ 191,560
Commercial paper 203,594 — 203,594
Money market funds 8,594 8,594 —
Total $ 403,748 $ 8,594 $ 395,154
Fair Value Measurement at
December 31, 2019
(In thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2)
Corporate securities $ 232,398 $ — $ 232,398
Commercial paper 146,955 — 146,955
Money market funds 2,983 2,983 —
Total $ 382,336 $ 2,983 $ 379,353
The Company did not transfer any investments between Level 1 and Level 2 of the fair-value hierarchy in the six months ended June 30, 2020, and the twelve months ended December 31, 2019.
5. MARKETABLE SECURITIES:
Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at June 30, 2020, were as follows:
Amortized Cost Gross Unrealized Estimated Fair Market Value
(In thousands) Gains Losses
Investments due in 3 months or less:
Commercial paper $ 2,996 $ — $ — $ 2,996
Corporate securities 25,030 77 — 25,107
Total 28,026 77 — 28,103
Investments due in 4-12 months:
Corporate securities 133,251 1,597 — 134,848
Total 133,251 1,597 — 134,848
Investments due in 12 months or greater:
Corporate securities 31,082 523 — 31,605
Total 31,082 523 — 31,605
Total marketable securities $ 192,359 $ 2,197 $ — $ 194,556
Accrued interest receivable was $ 1.1 million at June 30, 2020 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.
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POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at December 31, 2019, were as follows:
Amortized Cost Gross Unrealized Estimated Fair Market Value
(In thousands) Gains Losses
Investments due in 3 months or less:
Corporate securities $ 15,934 $ 18 $ — $ 15,952
Total 15,934 18 — 15,952
Investments due in 4-12 months:
Corporate securities 71,223 269 — 71,492
Total 71,223 269 — 71,492
Investments due in 12 months or greater:
Corporate securities 144,658 302 ( 6 ) 144,954
Total 144,658 302 ( 6 ) 144,954
Total marketable securities $ 231,815 $ 589 $ ( 6 ) $ 232,398
Accrued interest receivable was $ 1.3 million at December 31, 2019 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.
As of June 30, 2020 the Company had no marketable securities classified as available-for-sale (excluding cash equivalents) in a continuous unrealized loss position for which an allowance for credit losses was not recorded. The following table summarizes marketable securities classified as available-for-sale (excluding cash equivalents) in a continuous unrealized loss position for which an allowance for credit losses was not recorded at December 31, 2019:
Less Than 12 Months 12 Months or Longer Total
(In thousands) Estimated Fair Market Value Gross Unrealized Losses Estimated Fair Market Value Gross Unrealized Losses Estimated Fair Market Value Gross Unrealized Losses
December 31, 2019
Corporate securities $ 13,069 $ ( 6 ) $ — $ — $ 13,069 $ ( 6 )
Total marketable securities $ 13,069 $ ( 6 ) $ — $ — $ 13,069 $ ( 6 )
In the three and six months ended June 30, 2020 , no unrealized losses on marketable securities were recognized in income.
6. STOCK-BASED COMPENSATION:
The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three and six months ended June 30, 2020, and June 30, 2019:
Three Months Ended Six Months Ended
(In thousands) June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
Cost of revenues $ 252 $ 273 $ 648 $ 544
Research and development 2,351 2,144 4,460 3,776
Sales and marketing 1,258 1,141 2,650 2,202
General and administrative 2,120 1,938 4,933 3,381
Total stock-based compensation expense $ 5,981 $ 5,496 $ 12,691 $ 9,903
Stock-based compensation expense in the three months ended June 30, 2020, was approximately $ 6.0 million, comprising approximately $ 4.5 million related to restricted stock unit (RSU) awards, $ 1.1 million related to performance-based (PSU) awards and long-term performance-based (PRSU) awards and $ 0.4 million related to the Company’s employee stock purchase plan. Stock-based compensation expense in the six months ended June 30, 2020, was approximately $ 12.7 million, comprising approximately $ 9.5 million related to RSUs, $ 2.4 million related to PSUs and PRSUs and $ 0.8 million related to the Company’s employee stock purchase plan.
Stock-based compensation expense in the three months ended June 30, 2019, was approximately $ 5.5 million, comprising approximately $ 4.2 million related to RSUs, $ 0.9 million related to PSUs and PRSUs and $ 0.4 million related to the
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POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company’s employee stock purchase plan. In the six months ended June 30, 2019, stock-based compensation expense was approximately $ 9.9 million, comprising approximately $ 8.8 million related to RSUs, $ 0.3 million related to PSUs and PRSUs and $ 0.8 million related to the Company’s employee stock purchase plan.
Stock Options
A summary of stock options outstanding as of June 30, 2020, and activity during the six months then ended, is presented below:
Shares
(In thousands) Weighted-
Average
Exercise
Price Weighted-Average
Remaining
Contractual
Term
(In years) Aggregate
Intrinsic Value
(In thousands)
Outstanding at January 1, 2020 167 $ 38.88
Granted — —
Exercised ( 90 ) $ 37.22
Forfeited or expired — —
Outstanding at June 30, 2020 77 $ 40.81 1.51 $ 5,973
Vested and exercisable at June 30, 2020 77 1.51 $ 5,973
PSU Awards
Under the performance-based awards program, the Company grants awards in the performance year in an amount equal to twice the target number of shares to be issued if the maximum performance metrics are met. The number of shares that are released at the end of the performance year can range from zero to 200 % of the target number depending on the Company’s performance. The performance metrics of this program are annual targets consisting of a combination of net revenue, non-GAAP operating income and strategic goals.
As the net revenue, non-GAAP operating income and strategic goals are considered performance conditions, expense associated with these awards, net of estimated forfeitures, is recognized over the service period based on an assessment of the achievement of the performance targets. The fair value of these PSUs is determined using the fair value of the Company’s common stock on the date of the grant, reduced by the discounted present value of dividends expected to be declared before the awards vest. If the performance conditions are not achieved, no compensation cost is recognized and any previously recognized compensation is reversed.
In January 2020, it was determined that approximately 61,000 shares subject to the PSUs granted in 2019 vested in aggregate; the shares were released to the Company’s employees and executives in the first quarter of 2020.
A summary of PSUs outstanding as of June 30, 2020, and activity during the six months then ended, is presented below:
Shares
(In thousands) Weighted- Average Grant Date Fair Value Per Share Weighted-Average Remaining Contractual Term
(In years) Aggregate Intrinsic Value
(In thousands)
Outstanding at January 1, 2020 61 $ 70.11
Granted 73 $ 92.12
Vested ( 61 ) $ 70.11
Forfeited — —
Outstanding at June 30, 2020 73 $ 92.12 0.50 $ 8,652
Outstanding and expected to vest at June 30, 2020 50 0.50 $ 5,961
PRSU Awards
The Company's PRSU program provides for the issuance of PRSUs which will vest based on the Company's performance measured against the PRSU program's established performance targets. PRSUs are granted in an amount equal to twice the target number of shares to be issued if the maximum performance metrics are met. The actual number of shares the recipient receives is determined at the end of a three-year performance period based on results achieved versus the Company's performance goals, and may range from zero to 200 % of the target number. The performance goals for PRSUs granted in fiscal 2018, 2019 and 2020 were based on the Company’s annual revenue growth over the respective three-year performance period.
Expense associated with these awards, net of estimated forfeitures, is recorded throughout the year based on an
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POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assessment of the expected achievement of the performance targets. If the performance conditions are not achieved, no compensation cost is recognized and any previously recognized compensation is reversed.
In January 2020 it was determined that no shares subject to the PRSUs granted in 2017 vested in aggregate; thus no shares were released to the Company’s executives in the first quarter of 2020.
A summary of PRSUs outstanding as of June 30, 2020, and activity during the six months then ended, is presented below:
Shares
(In thousands) Weighted- Average Grant Date Fair Value Per Share Weighted-Average Remaining Contractual Term
(In years) Aggregate Intrinsic Value
(In thousands)
Outstanding at January 1, 2020 144 $ 64.05
Granted 73 $ 98.75
Vested — —
Forfeited — —
Outstanding at June 30, 2020 217 $ 75.70 1.50 $ 25,540
Outstanding and expected to vest at June 30, 2020 100 2.23 $ 11,808
RSU Awards
A summary of RSUs outstanding as of June 30, 2020, and activity during the six months then ended, is presented below:
Shares
(In thousands) Weighted- Average Grant Date Fair Value Per Share Weighted-Average Remaining Contractual Term
(In years) Aggregate Intrinsic Value
(In thousands)
Outstanding at January 1, 2020 860 $ 62.66
Granted 191 $ 85.96
Vested ( 288 ) $ 60.09
Forfeited ( 11 ) $ 66.16
Outstanding at June 30, 2020 752 $ 69.51 1.89 $ 88,770
Outstanding and expected to vest at June 30, 2020 690 1.82 $ 81,463
7. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC NET REVENUES:
Segment Reporting
The Company is organized and operates as one reportable segment, the design, development, manufacture and marketing of integrated circuits and related components for use primarily in the high-voltage power-conversion market. The Company’s chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.
Customer Concentration
The Company's top ten customers accounted for approximately 59 % and 56 % of net revenues for the three and six months ended June 30, 2020, respectively, and approximately 56 % and 54 %, respectively, in the corresponding periods of the previous year. A significant portion of these revenues are attributable to sales of the Company’s products to distributors of electronic components. These distributors sell the Company’s products to a broad, diverse range of end users, including original equipment manufacturers, or OEMs, and merchant power supply manufacturers. Sales to distributors were $ 87.3 million and $ 170.8 million in the three and six months ended June 30, 2020, respectively and $ 74.8 million and $ 144.7 million, respectively, for the corresponding periods of 2019. Direct sales to OEMs and power-supply manufacturers accounted for the remainder.
In each of three and six months ended June 30, 2020, one customer, a distributor of the Company's products, accounted for more than 10 % of the Company’s net revenues.
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POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table discloses the customer’s percentage of revenues for the respective periods:
Three Months Ended Six Months Ended
Customer June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
Avnet 13 % 10 % 12 % 12 %
No other customers accounted for 10 % or more of the Company’s net revenues in the periods presented.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and trade receivables. The Company does not have any off-balance-sheet credit exposure related to its customers. As of June 30, 2020, and December 31, 2019, 65 % and 63 %, respectively, of accounts receivable were concentrated with the Company’s top ten customers.
The following customers represented 10 % or more of accounts receivable:
Customer June 30,
2020 December 31,
2019
Avnet 20 % *
Powertech Distribution Ltd. * 10 %
________________________
*Total customer accounts receivable was less than 10 % of accounts receivable.
No other customers accounted for 10 % or more of the Company’s accounts receivable in the periods presented.
Geographic Net Revenues
The Company markets its products globally through its sales personnel and a worldwide network of independent sales representatives and distributors. Geographic net revenues, based on “bill to” customer locations, for the three and six months ended June 30, 2020, and June 30, 2019, were as follows:
Three Months Ended Six Months Ended
(In thousands) June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
United States of America $ 2,935 $ 2,612 $ 5,648 $ 5,284
Hong Kong/China 65,680 59,355 126,093 106,584
Taiwan 7,199 10,164 13,678 16,836
Korea 7,284 6,902 17,641 15,444
Western Europe (excluding Germany) 7,995 8,625 18,030 19,526
Japan 4,398 2,909 8,303 6,559
Germany 5,847 3,813 11,414 8,740
Other 5,494 8,485 15,689 13,080
Total net revenues $ 106,832 $ 102,865 $ 216,496 $ 192,053
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. STOCKHOLDERS’ EQUITY:
Common Stock Shares Outstanding
Three Months Ended Six Months Ended
(In thousands) June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
Beginning balance 29,691 29,110 29,431 28,889
Common stock issued under employee stock plans 193 220 477 562
Repurchased ( 8 ) — ( 32 ) ( 121 )
Ending balance 29,876 29,330 29,876 29,330
In July 2020, the Company’s board of directors approved a two -for-one stock split in the form of a stock dividend, payable on August 18, 2020 , to stockholders of record as of the close of business on August 14, 2020 . The Company’s stockholders will receive one additional share of common stock for each share of common stock held on August 14, 2020. As the stock split is not effective as of the filing date of this Form 10-Q, the shares outstanding and basic and diluted earnings per share included this Form 10-Q have not been adjusted for the effect of the stock split.
Common Stock Repurchases
As of December 31, 2019, the Company had approximately $ 43.9 million remaining under its stock-repurchase program. In the six months ended June 30, 2020, the Company repurchased approximately 32,000 shares of its common stock for approximately $ 2.6 million. As of June 30, 2020, the Company had approximately $ 41.3 million remaining under its current repurchase program, which has no expiration date. Authorization of future repurchase programs is at the discretion of the board of directors and will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors.
Cash Dividends
In January 2019, the Company’s board of directors declared four quarterly cash dividends of $ 0.17 per share to be paid to stockholders of record at the end of each quarter in 2019. In October 2019, the Company’s board of directors raised the cash dividends per share with the declaration of five cash dividends, consisting of (a) a dividend of $ 0.02 per share to be paid to stockholders of record at the end of the fourth quarter in 2019, which is in addition to the dividend of $0.17 per share to be paid to stockholders of record at the end of the fourth quarter in 2019 previously declared by the board in January 2019, and (b) a dividend of $ 0.19 per share to be paid to stockholders of record at the end of each quarter in 2020.
In April 2020, the Company’s board of directors raised the cash dividends with the declaration of three cash dividends of $ 0.21 per share (in lieu of the $ 0.19 per share previously announced in October 2019) to be paid to stockholders of record at the end of each of the second, third and fourth quarter in 2020. In July 2020, the Company’s board of directors raised the cash dividends further with the declaration of two cash dividends of $ 0.22 per share, equivalent to $ 0.11 on a post-split basis (in lieu of the $0.21 per share announced in April 2020) to be paid to stockholders of record at the end of each of the third and fourth quarter in 2020.
For the three and six months ended June 30, 2020, and 2019, cash dividends declared and paid were as follows:
Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
Dividends declared and paid $ 6,271 $ 4,980 $ 11,915 $ 9,917
Dividends declared per common share $ 0.21 $ 0.17 $ 0.40 $ 0.34
9. EARNINGS PER SHARE:
Basic earnings per share are calculated by dividing net income by the weighted-average shares of common stock outstanding during the period. Diluted earnings per share are calculated by dividing net income by the weighted-average shares of common stock and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares included in this calculation consist of dilutive shares issuable upon the assumed exercise of outstanding common stock options, the
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assumed vesting of outstanding restricted stock units, the assumed issuance of awards under the stock purchase plan and contingently issuable performance-based awards, as computed using the treasury stock method.
A summary of the earnings per share calculation is as follows:
Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
Basic earnings per share:
Net income $ 13,192 $ 10,845 $ 29,078 $ 18,078
Weighted-average common shares 29,856 29,297 29,729 29,125
Basic earnings per share $ 0.44 $ 0.37 $ 0.98 $ 0.62
Diluted earnings per share: (1)
Net income $ 13,192 $ 10,845 $ 29,078 $ 18,078
Weighted-average common shares 29,856 29,297 29,729 29,125
Effect of dilutive awards:
Employee stock plans 456 405 503 472
Diluted weighted-average common shares 30,312 29,702 30,232 29,597
Diluted earnings per share $ 0.44 $ 0.37 $ 0.96 $ 0.61
_______________
(1) The Company includes the shares underlying performance-based awards in the calculation of diluted earnings per share if the performance conditions have been satisfied as of the end of the reporting period and excludes such shares when the necessary conditions have not been met. The Company has excluded the shares underlying the outstanding performance-based awards in the 2020 and 2019 calculations as the shares were not contingently issuable as of the end of the reporting periods.
In the three and six months ended June 30, 2020 and 2019, no outstanding stock awards were determined to be anti-dilutive and therefore excluded from the computation of diluted earnings per share.
In July 2020, the Company’s board of directors approved a two-for-one stock split in the form of a stock dividend to stockholders of record as of the close of business on August 14, 2020. Refer to Note 8, Stockholders’ Equity , for additional information. The following table discloses unaudited pro forma weighted average shares outstanding and earnings per share information, as if the additional shares resulting from the stock split had been outstanding since the beginning of each period presented:
Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
Weighted average shares outstanding
Basic 59,712 58,594 59,458 58,250
Diluted 60,624 59,404 60,464 59,194
Earnings per share:
Basic $ 0.22 $ 0.19 $ 0.49 $ 0.31
Diluted $ 0.22 $ 0.18 $ 0.48 $ 0.31
10. PROVISION FOR INCOME TAXES:
Income-tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries, adjusted for certain discrete items which are fully recognized in the period they occur. Accordingly, the interim effective tax rate may not be reflective of the annual estimated effective tax rate.
The Company's effective tax rates for the three and six months ended June 30, 2020, were 8.4 % and 7.0 %, respectively and 2.0 % and 1.4 %, respectively, for the corresponding periods of 2019. In the three and six months ended June 30, 2020 and 2019, the effective tax rate was lower than the statutory federal income-tax rate of 21 % due to the geographic distribution of the Company’s world-wide earnings in lower-tax jurisdictions, federal research tax credits and the recognition of excess tax benefits related to share-based payments. These benefits were partially offset by foreign income subject to U.S. tax, known as global intangible low-taxed income. The Company’s primary jurisdiction where foreign earnings are derived is the Cayman Islands,
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which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not material. The Company has not been granted any incentivized tax rates and does not operate under any tax holidays in any jurisdiction.
As of June 30, 2020, the Company maintained a valuation allowance on its California deferred tax assets, New Jersey deferred tax assets, and capital losses for federal purposes, and a valuation allowance with respect to its deferred tax assets relating to tax credits in Canada.
Determining the consolidated provision for income-tax expense, income-tax liabilities and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.
11. COMMITMENTS:
Supplier Agreements
Under the terms of the Company's wafer-supply agreements with Seiko Epson Corporation ("Epson"), and ROHM Lapis Semiconductor Co., Ltd. ("Lapis") the wafers purchased from these suppliers are priced in U.S. dollars, with mutual sharing of the impact of fluctuations in the exchange rate between the Japanese yen and the U.S. dollar on future purchases. Each year, the Company's management and these two suppliers review and negotiate future pricing; the negotiated pricing is denominated in U.S. dollars but is subject to contractual exchange rate provisions. The fluctuation in the exchange rate is shared equally between the Company and each of these suppliers on future purchases.
12. LEGAL PROCEEDINGS AND CONTINGENCIES:
From time to time in the ordinary course of business, the Company becomes involved in lawsuits, or customers and distributors may make claims against the Company. In accordance with ASC 450-10, Contingencies , the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
On April 1, 2016, Opticurrent, LLC filed a complaint against the Company in the United States District Court for the Eastern District of Texas. In its complaint, Opticurrent alleges that the Company has infringed and is infringing one patent pertaining to transistor switch devices. The Company filed a motion to transfer the case to California, which the Court granted, and the case was assigned to a new judge in San Francisco following the transfer. On December 21, 2018, the Court granted the Company’s challenge to Opticurrent’s damages expert but denied the Company’s motion for summary judgment. Following a trial in February 2019, a jury issued a finding of direct infringement by the Company but found that the Company did not induce infringement, and awarded Opticurrent damages of $ 6.7 million. The Company challenged those findings in post-trial proceedings, and the Court granted one of the Company’s post-trial motions, reducing the damages award to $ 1.2 million. The Company believes it has strong defenses, and intends to vigorously defend itself against Opticurrent’s claims through appeals, which are currently under way, with briefing and oral argument completed, and rulings expected in the coming months.
On June 19, 2019, Opticurrent, LLC filed a follow-on lawsuit accusing more of the Company’s products of infringing the same claim of the same patent asserted in the parties’ prior litigation, as described above. Limited discovery is currently under way, but no schedule has yet been set for expert discovery, dispositive motions, or trial. The Company believes it has strong defenses, and intends to vigorously defend itself against Opticurrent’s claims, with appeals to follow if necessary.
On January 6, 2020, the Company filed a complaint against CogniPower LLC for infringement of two of the Company’s patents and seeking a declaration of non-infringement with respect to patents that CogniPower had charged the Company’s customers with infringing , based on customer use of the Company’s products. In response, CogniPower filed a motion to dismiss the Company’s declaratory judgment claims on the basis that CogniPower had not threatened the Company directly with suit. That motion was granted, therefore CogniPower’s claims for infringement will go forward separately in their lawsuit against the Company’s customers, and the Company’s infringement claims against CogniPower likewise will proceed in a separate action. These cases are in their preliminary stages, and no schedules have been set for the cases at this time, but the Company believes it has strong claims and defenses, and intends to vigorously defend itself against CogniPower’s claims against the Company’s technology, with appeals to follow if necessary.
The Company is unable to predict the outcome of legal proceedings with certainty, and there can be no assurance that Power Integrations will prevail in the above-mentioned unsettled litigations. These litigations, whether or not determined in Power Integrations’ favor or settled, will be costly and will divert the efforts and attention of the Company’s management and technical personnel from normal business operations, potentially causing a material adverse effect on the business, financial
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condition and operating results. Currently, the Company is not able to estimate a loss or a range of loss for the ongoing litigation disclosed above, however adverse determinations in litigation could result in monetary losses, the loss of proprietary rights, subject the Company to significant liabilities, require Power Integrations to seek licenses from third parties or prevent the Company from licensing the technology, any of which could have a material adverse effect on the Company’s business, financial condition and operating results.
13. INDEMNIFICATIONS:
The Company sells products to its distributors under contracts, collectively referred to as Distributor Sales Agreements (“DSA”). Each DSA contains the relevant terms of the contractual arrangement with the distributor, and generally includes certain provisions for indemnifying the distributor against losses, expenses, and liabilities from damages that may be awarded against the distributor in the event the Company's products are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party (“Customer Indemnification”). The DSA generally limits the scope of and remedies for the Customer Indemnification obligations in a variety of industry-standard respects, including, but not limited to, limitations based on time and geography, and a right to replace an infringing product. The Company also, from time to time, has granted a specific indemnification right to individual customers.
The Company believes its internal development processes and other policies and practices limit its exposure related to such indemnifications. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees' development work to the Company. To date, the Company has not had to reimburse any of its distributors or customers for any losses related to these indemnifications and no material claims were outstanding as of June 30, 2020. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnifications.
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