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Item 1. Financial Statements

2020-10-29 compared with 2020-07-30 · 134 added, 142 removed, 430 unchanged (39% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands) June 30, 2020 December 31, 2019

(In thousands) September 30, 2020 December 31, 2019

CURRENT ASSETS:

33 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands, except per share amounts) 2020 2019 2020 2019

19 unchanged sentences

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.

The Earnings Per Share and Shares Used in Per Share Calculation information presented above reflects the effect of the August 2020 stock split.

Refer to Note 9, Earnings Per Share , in this Form 10-Q for details.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2020 2019 2020 2019

1 unchanged sentence

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

Foreign currency translation adjustments, net of $ 0 tax in each of the three and nine months ended September 30, 2020 and 2019

( 51 ) 27 ( 364 ) ( 245 )

Unrealized gain on marketable securities, net of $ 0 tax in each of the three and six months ended June 30, 2020 and 2019

Unrealized gain (loss) on marketable securities, net of $ 0 tax in each of the three and nine months ended September 30, 2020 and 2019

( 633 ) 208 981 799

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

Total other comprehensive income 2,594 25 1,410 353

Amortization of defined benefit pension items, net of tax of $ 37 and $ 92 in the three and nine months ended September 30, 2020, respectively, and $ 5 and $ 15 in the three and nine months ended September 30, 2019, respectively

Total other comprehensive income (loss) ( 635 ) 252 775 605

TOTAL COMPREHENSIVE INCOME $ 14,185 $ 17,351 $ 44,673 $ 35,782

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2020 2019 2020 2019

11 unchanged sentences

Beginning balance ( 1,720 ) ( 1,336 ) ( 3,130 ) ( 1,689 )

Other comprehensive income 2,594 25 1,410 353

Other comprehensive income (loss) ( 635 ) 252 775 605

Ending balance ( 2,355 ) ( 1,084 ) ( 2,355 ) ( 1,084 )

8 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Nine Months Ended

September 30,

(In thousands) 2020 2019

8 unchanged sentences

Deferred income taxes 100 1,278

Increase (decrease) in accounts receivable allowance for credit losses ( 154 ) 57

Increase in accounts receivable allowance for credit losses, net 155 57

Change in operating assets and liabilities:

11 unchanged sentences

Proceeds from sales and maturities of marketable securities 86,995 66,184

Net cash provided by (used in) investing activities 17,844 ( 43,601 )

Net cash used in investing activities ( 14,478 ) ( 83,780 )

CASH FLOWS FROM FINANCING ACTIVITIES:

19 unchanged sentences

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.

The condensed consolidated financial statements should be read in conjunction with the Company’s 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.

The share and per share information for all periods presented in this Form 10-Q has been adjusted for the effect of the August 2020 stock split.

Refer to Note 8, Stockholders’ Equity , in this Form 10-Q for details.

SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:

2 unchanged sentences

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 June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 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.

4 unchanged sentences

Accounts Receivable

(In thousands) June 30,

(In thousands) September 30,

2020 December 31,

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Allowance for Credit Losses

Three Months Ended Six Months Ended

(In thousands) June 30,

2020 June 30,

Three Months Ended Nine Months Ended

(In thousands) September 30,

2020 September 30,

Beginning balance $ ( 609 ) $ ( 763 )

3 unchanged sentences

Ending balance $ ( 918 ) $ ( 918 )

(In thousands) June 30,

(In thousands) September 30,

2020 December 31,

4 unchanged sentences

Prepaid Expenses and Other Current Assets

(In thousands) June 30,

(In thousands) September 30,

2020 December 31,

7 unchanged sentences

Intangible Assets

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

(In thousands) Gross Accumulated Amortization Net Gross Accumulated Amortization Net

6 unchanged sentences

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:

The estimated future amortization expense related to finite-lived intangible assets at September 30, 2020, is as follows:

Fiscal Year Estimated

(In thousands)

2020 (remaining six months) $ 2,152

2020 (remaining three months) $ 1,076

Thereafter 1,884

1 unchanged sentence

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss for three and six months ended June 30, 2020 and 2019, were as follows:

Changes in accumulated other comprehensive loss for three and nine months ended September 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,

September 30, September 30, September 30, September 30,

(In thousands) 2020 2019 2020 2019 2020 2019 2020 2019

5 unchanged sentences

_______________

(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.

(1) This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the three months ended September 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,

Nine Months Ended Nine Months Ended Nine Months Ended Nine Months Ended

September 30, September 30, September 30, September 30,

(In thousands) 2020 2019 2020 2019 2020 2019 2020 2019

5 unchanged sentences

_______________

(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.

(1) This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the nine months ended September 30, 2020 and 2019.

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FAIR VALUE MEASUREMENTS:

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(Level 1) observable inputs such as quoted prices for identical assets in active markets;

(Level 2) inputs other than the quoted

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

prices in active markets that are observable either directly or indirectly;

(Level 2) inputs other than the quoted 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.

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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:

The fair-value hierarchy of the Company's cash equivalents and marketable securities at September 30, 2020, and December 31, 2019, was as follows:

Fair Value Measurement at

June 30, 2020

September 30, 2020

(In thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2)

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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.

The Company did not transfer any investments between Level 1 and Level 2 of the fair-value hierarchy in the nine months ended September 30, 2020, and the twelve months ended December 31, 2019.

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 and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at September 30, 2020, were as follows:

Amortized Cost Gross Unrealized Estimated Fair Market Value

11 unchanged sentences

Total marketable securities $ 210,362 $ 1,564 $ — $ 211,926

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.

Accrued interest receivable was $ 1.4 million at September 30, 2020 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.

POWER INTEGRATIONS, INC.

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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.

As of September 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:

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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.

In the three and nine months ended September 30, 2020 , no unrealized losses on marketable securities were recognized in income.

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,

The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three and nine months ended September 30, 2020, and September 30, 2019:

Three Months Ended Nine Months Ended

(In thousands) September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Cost of revenues $ 602 $ 280 $ 1,250 $ 824

3 unchanged sentences

Total stock-based compensation expense $ 9,358 $ 5,106 $ 22,049 $ 15,009

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

Stock-based compensation expense in the three months ended September 30, 2020, was approximately $ 9.4 million, comprising approximately $ 4.7 million related to restricted stock unit (RSU) awards, $ 4.2 million related to performance-based (PSU) awards and long-term performance-based (PRSU) awards and $ 0.5 million related to the Company’s employee stock purchase plan.

Stock-based compensation expense in the nine months ended September 30, 2020, was approximately $ 22.0 million, comprising approximately $ 14.1 million related to RSUs, $ 6.6 million related to PSUs and PRSUs and $ 1.3 million related to the Company’s employee stock purchase plan.

Stock-based compensation expense in the three months ended September 30, 2019, was approximately $ 5.1 million, comprising approximately $ 4.4 million related to RSUs, $ 0.3 million related to PSUs and PRSUs and $ 0.4 million related to the

POWER INTEGRATIONS, INC.

1 unchanged sentence

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.

In the nine months ended September 30, 2019, stock-based compensation expense was approximately $ 15.0 million, comprising approximately $ 13.2 million related to RSUs, $ 0.6 million related to PSUs and PRSUs and $ 1.2 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:

A summary of stock options outstanding as of September 30, 2020, and activity during the nine months then ended, is presented below:

(In thousands) Weighted-

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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

Outstanding at September 30, 2020 137 $ 20.27 1.21 $ 4,795

Vested and exercisable at September 30, 2020 137 1.21 $ 4,795

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.

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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:

A summary of PSUs outstanding as of September 30, 2020, and activity during the nine months then ended, is presented below:

(In thousands) Weighted- Average Grant Date Fair Value Per Share Weighted-Average Remaining Contractual Term

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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

Outstanding at September 30, 2020 149 $ 46.21 0.25 $ 8,235

Outstanding and expected to vest at September 30, 2020 140 0.25 $ 7,733

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.

2 unchanged sentences

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

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

assessment of the expected achievement of the performance targets.

Expense associated with these awards, net of estimated forfeitures, is recorded throughout the year based on an 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.

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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:

A summary of PRSUs outstanding as of September 30, 2020, and activity during the nine months then ended, is presented below:

(In thousands) Weighted- Average Grant Date Fair Value Per Share Weighted-Average Remaining Contractual Term

4 unchanged sentences

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

A summary of RSUs outstanding as of June 30, 2020, and activity during the six months then ended, is presented below:

Outstanding at September 30, 2020 439 $ 38.14 1.25 $ 24,345

Outstanding and expected to vest at September 30, 2020 267 1.82 $ 14,816

A summary of RSUs outstanding as of September 30, 2020, and activity during the nine months then ended, is presented below:

(In thousands) Weighted- Average Grant Date Fair Value Per Share Weighted-Average Remaining Contractual Term

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Forfeited ( 30 ) $ 36.89

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

Outstanding at September 30, 2020 1,530 $ 35.37 1.66 $ 84,733

Outstanding and expected to vest at September 30, 2020 1,418 1.60 $ 78,580

SIGNIFICANT CUSTOMERS AND GEOGRAPHIC NET REVENUES:

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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.

The Company's top ten customers accounted for approximately 65 % and 56 % of net revenues for the three and nine months ended September 30, 2020, respectively, and approximately 55 % 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.

Sales to distributors were $ 85.3 million and $ 256.1 million in the three and nine months ended September 30, 2020, respectively, and $ 78.0 million and $ 222.7 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.

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,

The following customers represented 10 % or more of the Company’s net revenues for the respective periods:

Three Months Ended Nine Months Ended

Customer September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Avnet 18 % 11 % 14 % 11 %

Honestar Technologies Co., Ltd.

________________________

*Total customer revenue was less than 10 % of net revenues.

No other customers accounted for 10 % or more of the Company’s net revenues in the periods presented.

2 unchanged sentences

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.

As of September 30, 2020, and December 31, 2019, 74 % 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,

Customer September 30,

2020 December 31,

Powertech Distribution Ltd.

Honestar Technologies Co., Ltd.

________________________

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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,

Geographic net revenues, based on “bill to” customer locations, for the three and nine months ended September 30, 2020, and September 30, 2019, were as follows:

Three Months Ended Nine Months Ended

(In thousands) September 30,

2020 September 30,

2019 September 30,

2020 September 30,

United States of America $ 2,380 $ 2,878 $ 8,028 $ 8,162

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Common Stock Shares Outstanding

Three Months Ended Six Months Ended

(In thousands) June 30,

2020 June 30,

2019 June 30,

2020 June 30,

Three Months Ended Nine Months Ended

(In thousands) September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Beginning balance 59,752 58,660 58,862 57,778

3 unchanged sentences

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.

The Company’s stockholders received one additional share of common stock for each share of common stock held on August 14, 2020.

The share and per share information for all periods presented in this Form 10-Q has 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.

In the nine months ended September 30, 2020, the Company repurchased approximately 64,000 shares of its common stock for approximately $ 2.6 million.

As of September 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.

1 unchanged sentence

In January 2019, the Company’s board of directors declared four quarterly cash dividends of $ 0.085 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 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 $ 0.01 per share to be paid to stockholders of record at the end of the fourth quarter in 2019, that was in addition to the dividend of $0.085 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 $ 0.095 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 $ 0.105 per share (in lieu of the $ 0.095 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,

In July 2020, the Company’s board of directors raised the cash dividends further with the declaration of two cash dividends of $ 0.11 per share (in lieu of the $0.105 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 nine months ended September 30, 2020, and 2019, cash dividends declared and paid were as follows:

Three Months Ended Nine Months Ended

(In thousands, except per share amounts) September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Dividends declared and paid $ 6,582 $ 4,999 $ 18,497 $ 14,916

3 unchanged sentences

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

Dilutive common equivalent shares included in this calculation consist of dilutive shares issuable upon the assumed exercise of outstanding common stock options, the 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.

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,

Three Months Ended Nine Months Ended

(In thousands, except per share amounts) September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Basic earnings per share:

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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 the three and nine months ended September 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,

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

The share and per share information for all periods presented in this Form 10-Q has been adjusted for the effect of the stock split.

PROVISION FOR INCOME TAXES:

1 unchanged sentence

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.

The Company's effective tax rates for the three and nine months ended September 30, 2020, were 5.1 % and 6.4 %, respectively and 8.0 % and 4.7 %, respectively, for the corresponding periods of 2019.

In the three and nine months ended September 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,

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

which is a non-taxing jurisdiction.

The Company’s primary jurisdiction where foreign earnings are derived is the Cayman Islands, 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.

As of September 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.

4 unchanged sentences

("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.

dollars, with mutual sharing of the

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

impact of fluctuations in the exchange rate between the Japanese yen and the U.S.

dollar on future purchases.

12 unchanged sentences

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.

Although the Court of Appeals affirmed the original findings and the reduced damages award, the Company believes it has strong defenses, and intends to continue to vigorously defend itself against Opticurrent’s claims, including through a pending motion to set aside the judgment in view of a disclaimer that Opticurrent made during reexamination proceedings, which has been fully briefed and argued, with 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.

3 unchanged sentences

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

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

That motion was granted, so CogniPower’s claims for infringement will go forward separately in their lawsuit against the Company’s customers, but the Company has filed a motion to intervene in that lawsuit and expects a ruling in the coming months.

The Company’s infringement claims against CogniPower likewise will proceed in a separate action.

These cases are in their preliminary stages, 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 the Company will prevail in the above-mentioned unsettled litigations.

These litigations, whether or not determined in the Company’s 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 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 the Company 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.

INDEMNIFICATIONS:

1 unchanged sentence

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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

1 unchanged sentence

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.

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 September 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements