POWER INTEGRATIONS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) September 30, 2020 December 31, 2019 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 232,014 $ 178,690 Short-term marketable securities 211,926 232,398 Accounts receivable, net 29,447 24,274 Inventories 104,805 90,380 Prepaid expenses and other current assets 14,755 15,597 Total current assets 592,947 541,339 PROPERTY AND EQUIPMENT, net 147,719 116,619 INTANGIBLE ASSETS, net 13,582 16,865 GOODWILL 91,849 91,849 DEFERRED TAX ASSETS 2,660 2,836 OTHER ASSETS 27,311 34,388 Total assets $ 876,068 $ 803,896 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 43,623 $ 27,433 Accrued payroll and related expenses 12,892 13,408 Taxes payable 379 584 Other accrued liabilities 9,357 9,051 Total current liabilities 66,251 50,476 LONG-TERM INCOME TAXES PAYABLE 15,497 14,617 DEFERRED TAX LIABILITIES 87 164 OTHER LIABILITIES 14,436 14,093 Total liabilities 96,271 79,350 COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 13) STOCKHOLDERS’ EQUITY: Common stock 28 28 Additional paid-in capital 181,192 152,117 Accumulated other comprehensive loss ( 2,355 ) ( 3,130 ) Retained earnings 600,932 575,531 Total stockholders’ equity 779,797 724,546 Total liabilities and stockholders’ equity $ 876,068 $ 803,896 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share amounts) 2020 2019 2020 2019 NET REVENUES $ 121,129 $ 114,159 $ 337,625 $ 306,212 COST OF REVENUES 61,560 56,028 168,040 151,035 GROSS PROFIT 59,569 58,131 169,585 155,177 OPERATING EXPENSES: Research and development 20,868 17,957 59,790 55,172 Sales and marketing 13,658 13,452 40,168 39,678 General and administrative 10,302 9,224 26,867 26,948 Total operating expenses 44,828 40,633 126,825 121,798 INCOME FROM OPERATIONS 14,741 17,498 42,760 33,379 OTHER INCOME 877 1,078 4,134 3,540 INCOME BEFORE INCOME TAXES 15,618 18,576 46,894 36,919 PROVISION FOR INCOME TAXES 798 1,477 2,996 1,742 NET INCOME $ 14,820 $ 17,099 $ 43,898 $ 35,177 EARNINGS PER SHARE: Basic $ 0.25 $ 0.29 $ 0.74 $ 0.60 Diluted $ 0.24 $ 0.29 $ 0.72 $ 0.59 SHARES USED IN PER SHARE CALCULATION: Basic 59,823 58,770 59,582 58,426 Diluted 60,852 59,732 60,668 59,418 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 reflects the effect of the August 2020 stock split. Refer to Note 9, Earnings Per Share , in this Form 10-Q for details. 5 Table of Contents POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2020 2019 2020 2019 NET INCOME $ 14,820 $ 17,099 $ 43,898 $ 35,177 Other comprehensive income (loss), net of tax: 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 (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 $ 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 49 17 158 51 Total other comprehensive income (loss) ( 635 ) 252 775 605 TOTAL COMPREHENSIVE INCOME $ 14,185 $ 17,351 $ 44,673 $ 35,782 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Three Months Ended Nine Months Ended September 30, September 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 168,470 134,443 152,117 126,164 Common stock issued under employee stock plans 3,364 4,005 9,662 9,683 Repurchase of common stock — — ( 2,636 ) ( 7,302 ) Stock-based compensation 9,358 5,106 22,049 15,009 Ending balance 181,192 143,554 181,192 143,554 Accumulated other comprehensive loss Beginning balance ( 1,720 ) ( 1,336 ) ( 3,130 ) ( 1,689 ) Other comprehensive income (loss) ( 635 ) 252 775 605 Ending balance ( 2,355 ) ( 1,084 ) ( 2,355 ) ( 1,084 ) Retained earnings Beginning balance 592,694 410,730 575,531 402,569 Net income 14,820 17,099 43,898 35,177 Payment of dividends to stockholders ( 6,582 ) ( 4,999 ) ( 18,497 ) ( 14,916 ) Ending balance 600,932 422,830 600,932 422,830 Total stockholders’ equity $ 779,797 $ 565,328 $ 779,797 $ 565,328 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, (In thousands) 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 43,898 $ 35,177 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 17,071 14,262 Amortization of intangibles 3,283 3,840 Loss on disposal of property and equipment 311 214 Stock-based compensation expense 22,049 15,009 Amortization of premium (accretion of discount) on marketable securities 525 ( 296 ) Deferred income taxes 100 1,278 Increase in accounts receivable allowance for credit losses, net 155 57 Change in operating assets and liabilities: Accounts receivable ( 5,328 ) ( 14,804 ) Inventories ( 14,425 ) ( 7,853 ) Prepaid expenses and other assets 6,133 ( 3,034 ) Accounts payable 6,365 ( 2,636 ) Taxes payable and accrued liabilities ( 864 ) 1,126 Net cash provided by operating activities 79,273 42,340 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 35,738 ) ( 14,325 ) Proceeds from sale of property and equipment 331 — Acquisition of technology licenses — ( 351 ) Purchases of marketable securities ( 66,066 ) ( 135,288 ) Proceeds from sales and maturities of marketable securities 86,995 66,184 Net cash used in investing activities ( 14,478 ) ( 83,780 ) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock under employee stock plans 9,662 9,683 Repurchase of common stock ( 2,636 ) ( 7,302 ) Payments of dividends to stockholders ( 18,497 ) ( 14,916 ) Net cash used in financing activities ( 11,471 ) ( 12,535 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 53,324 ( 53,975 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 178,690 134,137 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 232,014 $ 80,162 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Unpaid property and equipment $ 14,180 $ 2,868 Unpaid technology licenses $ — $ 675 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid (received) for income taxes, net $ ( 1,927 ) $ 1,083 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Table of Contents 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 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. 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 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. 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) September 30, 2020 December 31, 2019 Accounts receivable trade $ 65,427 $ 61,036 Allowance for ship and debit ( 30,088 ) ( 33,475 ) Allowance for stock rotation and rebate ( 4,974 ) ( 2,524 ) Allowance for credit losses ( 918 ) ( 763 ) Total $ 29,447 $ 24,274 9 Table of Contents 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 Nine Months Ended (In thousands) September 30, 2020 September 30, 2020 Beginning balance $ ( 609 ) $ ( 763 ) Provision for credit loss expense ( 309 ) ( 309 ) Receivables written off — 154 Recoveries collected — — Ending balance $ ( 918 ) $ ( 918 ) Inventories (In thousands) September 30, 2020 December 31, 2019 Raw materials $ 38,977 $ 39,058 Work-in-process 37,682 25,982 Finished goods 28,146 25,340 Total $ 104,805 $ 90,380 Prepaid Expenses and Other Current Assets (In thousands) September 30, 2020 December 31, 2019 Prepaid legal fees $ 589 $ 16 Prepaid income tax 1,440 5,615 Prepaid maintenance agreements 1,729 819 Interest receivable 1,395 1,279 Advance to suppliers 4,297 3,579 Other 5,305 4,289 Total $ 14,755 $ 15,597 Intangible Assets September 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 ( 28,327 ) 9,633 37,960 ( 25,933 ) 12,027 Customer relationships 16,700 ( 15,471 ) 1,229 20,030 ( 18,098 ) 1,932 Technology licenses 1,926 ( 467 ) 1,459 1,926 ( 281 ) 1,645 Total $ 57,847 $ ( 44,265 ) $ 13,582 $ 61,177 $ ( 44,312 ) $ 16,865 10 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The estimated future amortization expense related to finite-lived intangible assets at September 30, 2020, is as follows: Fiscal Year Estimated Amortization (In thousands) 2020 (remaining three months) $ 1,076 2021 3,494 2022 2,415 2023 2,173 2024 1,279 Thereafter 1,884 Total $ 12,321 Accumulated Other Comprehensive Loss 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 September 30, September 30, September 30, September 30, (In thousands) 2020 2019 2020 2019 2020 2019 2020 2019 Beginning balance $ 2,197 $ 325 $ ( 2,375 ) $ ( 678 ) $ ( 1,542 ) $ ( 983 ) $ ( 1,720 ) $ ( 1,336 ) Other comprehensive income (loss) before reclassifications ( 633 ) 208 — — ( 51 ) 27 ( 684 ) 235 Amounts reclassified from accumulated other comprehensive loss — — 49 (1) 17 (1) — — 49 17 Net-current period other comprehensive income (loss) ( 633 ) 208 49 17 ( 51 ) 27 ( 635 ) 252 Ending balance $ 1,564 $ 533 $ ( 2,326 ) $ ( 661 ) $ ( 1,593 ) $ ( 956 ) $ ( 2,355 ) $ ( 1,084 ) _______________ (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 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 Beginning balance $ 583 $ ( 266 ) $ ( 2,484 ) $ ( 712 ) $ ( 1,229 ) $ ( 711 ) $ ( 3,130 ) $ ( 1,689 ) Other comprehensive income (loss) before reclassifications 981 799 — — ( 364 ) ( 245 ) 617 554 Amounts reclassified from accumulated other comprehensive loss — — 158 (1) 51 (1) — — 158 51 Net-current period other comprehensive income (loss) 981 799 158 51 ( 364 ) ( 245 ) 775 605 Ending balance $ 1,564 $ 533 $ ( 2,326 ) $ ( 661 ) $ ( 1,593 ) $ ( 956 ) $ ( 2,355 ) $ ( 1,084 ) _______________ (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. 11 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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 September 30, 2020, and December 31, 2019, was as follows: Fair Value Measurement at September 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 $ 165,675 $ — $ 165,675 Commercial paper 220,038 — 220,038 Money market funds 18,073 18,073 — Total $ 403,786 $ 18,073 $ 385,713 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 nine months ended September 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 September 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 $ 46,251 $ — $ — $ 46,251 Corporate securities 18,119 52 — 18,171 Total 64,370 52 — 64,422 Investments due in 4-12 months: Corporate securities 136,410 1,366 — 137,776 Total 136,410 1,366 — 137,776 Investments due in 12 months or greater: Corporate securities 9,582 146 — 9,728 Total 9,582 146 — 9,728 Total marketable securities $ 210,362 $ 1,564 $ — $ 211,926 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. 12 Table of Contents 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 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: 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 nine months ended September 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 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, 2019 Cost of revenues $ 602 $ 280 $ 1,250 $ 824 Research and development 2,976 1,893 7,436 5,669 Sales and marketing 1,900 1,211 4,550 3,413 General and administrative 3,880 1,722 8,813 5,103 Total stock-based compensation expense $ 9,358 $ 5,106 $ 22,049 $ 15,009 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 13 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 September 30, 2020, and activity during the nine 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 335 $ 19.44 Granted — — Exercised ( 198 ) $ 18.87 Forfeited or expired — — Outstanding at September 30, 2020 137 $ 20.27 1.21 $ 4,795 Vested and exercisable at September 30, 2020 137 1.21 $ 4,795 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 121,000 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 September 30, 2020, and activity during the nine 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 121 $ 35.06 Granted 149 $ 46.25 Vested ( 121 ) $ 35.06 Forfeited — — 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 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. 14 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. 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 September 30, 2020, and activity during the nine 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 287 $ 32.03 Granted 152 $ 49.67 Vested — — Forfeited — — 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 RSU Awards A summary of RSUs outstanding as of September 30, 2020, and activity during the nine 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 1,719 $ 31.33 Granted 430 $ 44.48 Vested ( 589 ) $ 30.16 Forfeited ( 30 ) $ 36.89 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 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 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 $ 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. 15 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 2019 Avnet 18 % 11 % 14 % 11 % Honestar Technologies Co., Ltd. 14 % * * * ________________________ *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. 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 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 September 30, 2020 December 31, 2019 Avnet 29 % * Powertech Distribution Ltd. 10 % 10 % Honestar Technologies Co., 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 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, 2019 United States of America $ 2,380 $ 2,878 $ 8,028 $ 8,162 Hong Kong/China 76,549 64,526 202,642 171,110 Taiwan 4,133 10,410 17,811 27,246 Korea 12,121 7,177 29,762 22,621 Western Europe (excluding Germany) 7,535 9,220 25,565 28,746 Japan 4,303 4,753 12,606 11,312 Germany 5,755 4,921 17,169 13,661 Other 8,353 10,274 24,042 23,354 Total net revenues $ 121,129 $ 114,159 $ 337,625 $ 306,212 16 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. STOCKHOLDERS’ EQUITY: Common Stock Shares Outstanding Three Months Ended Nine Months Ended (In thousands) September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Beginning balance 59,752 58,660 58,862 57,778 Common stock issued under employee stock plans 103 178 1,057 1,302 Repurchased — — ( 64 ) ( 242 ) Ending balance 59,855 58,838 59,855 58,838 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 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 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. Cash Dividends 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 $ 0.01 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 $ 0.11 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, 2019 Dividends declared and paid $ 6,582 $ 4,999 $ 18,497 $ 14,916 Dividends declared per common share $ 0.110 $ 0.085 $ 0.310 $ 0.255 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 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. 17 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) A summary of the earnings per share calculation is 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, 2019 Basic earnings per share: Net income $ 14,820 $ 17,099 $ 43,898 $ 35,177 Weighted-average common shares 59,823 58,770 59,582 58,426 Basic earnings per share $ 0.25 $ 0.29 $ 0.74 $ 0.60 Diluted earnings per share: (1) Net income $ 14,820 $ 17,099 $ 43,898 $ 35,177 Weighted-average common shares 59,823 58,770 59,582 58,426 Effect of dilutive awards: Employee stock plans 1,029 962 1,086 992 Diluted weighted-average common shares 60,852 59,732 60,668 59,418 Diluted earnings per share $ 0.24 $ 0.29 $ 0.72 $ 0.59 _______________ (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 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 share and per share information for all periods presented in this Form 10-Q has been adjusted for the effect of the stock split. 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 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, 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 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. 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 18 Table of Contents 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. 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. 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. 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, 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. 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 19 Table of Contents POWER INTEGRATIONS, INC. 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. 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 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. 20 Table of Contents