What changed in this filing

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Item 1. Financial Statements

2021-04-29 compared with 2020-10-29 · 173 added, 264 removed, 300 unchanged (59% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(In thousands)

March 31, 2021

December 31, 2020

CURRENT ASSETS:

2 unchanged sentences

Accounts receivable, net

Inventories 104,805 90,380

Prepaid expenses and other current assets

2 unchanged sentences

INTANGIBLE ASSETS, net

GOODWILL 91,849 91,849

DEFERRED TAX ASSETS

OTHER ASSETS 27,311 34,388

Total assets $ 876,068 $ 803,896

LIABILITIES AND STOCKHOLDERS’ EQUITY

6 unchanged sentences

LONG-TERM INCOME TAXES PAYABLE

DEFERRED TAX LIABILITIES 87 164

OTHER LIABILITIES

2 unchanged sentences

STOCKHOLDERS’ EQUITY:

Common stock 28 28

Additional paid-in capital

6 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands, except per share amounts)

NET REVENUES $ 121,129 $ 114,159 $ 337,625 $ 306,212

COST OF REVENUES

GROSS PROFIT 59,569 58,131 169,585 155,177

OPERATING EXPENSES:

4 unchanged sentences

INCOME FROM OPERATIONS

OTHER INCOME 877 1,078 4,134 3,540

INCOME BEFORE INCOME TAXES

PROVISION FOR INCOME TAXES

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.

The Earnings Per Share and Shares Used in Per Share Calculation information presented above reflects the effect of the August 2020 two -for-one 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 Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands)

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

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

Foreign currency translation adjustments, net of $ 0 tax in each of the three months ended March 31, 2021 and 2020

Unrealized loss on marketable securities, net of $ 0 tax in each of the three months ended March 31, 2021 and 2020

Amortization of defined benefit pension items, net of tax of $ 135 and $ 31 in the three months ended March 31, 2021, and 2020, respectively

Total other comprehensive loss

TOTAL COMPREHENSIVE INCOME

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands)

11 unchanged sentences

Beginning balance

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

Other comprehensive loss

Ending balance

1 unchanged sentence

Beginning balance

Net income 14,820 17,099 43,898 35,177

Payment of dividends to stockholders

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

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

1 unchanged sentence

Stock-based compensation expense

Amortization of premium (accretion of discount) on marketable securities 525 ( 296 )

Amortization of premium on marketable securities

Deferred income taxes

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

Decrease in accounts receivable allowance for credit losses

Change in operating assets and liabilities:

Accounts receivable

Inventories ( 14,425 ) ( 7,853 )

Prepaid expenses and other assets

5 unchanged sentences

Proceeds from sale of property and equipment

Acquisition of technology licenses — ( 351 )

Purchases of marketable securities

Proceeds from sales and maturities of marketable securities

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

Net cash provided by (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

3 unchanged sentences

Net cash used in financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 53,324 ( 53,975 )

NET INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

2 unchanged sentences

Unpaid property and equipment

Unpaid technology licenses $ — $ 675

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid (received) for income taxes, net $ ( 1,927 ) $ 1,083

Cash paid for income taxes, net

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

7 unchanged sentences

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, 2020, included in its Form 10-K filed on February 5, 2021, 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.

The share and per share information for all periods presented in this Form 10-Q reflects the effect of the August 2020 two -for-one stock split.

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

Certain prior year amounts have been reclassified for consistency with the current year presentation.

These reclassifications had no effect on the reported results of operations.

SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:

1 unchanged sentence

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 5, 2021, for the year ended December 31, 2020.

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.

Recent Accounting Pronouncements

The Company has considered all recent accounting pronouncements issued, but not yet effective, and does not expect any to have a material effect on the Company’s condensed consolidated financial statements.

COMPONENTS OF THE COMPANY’S CONDENSED CONSOLIDATED BALANCE SHEETS:

Accounts Receivable

(In thousands) September 30,

2020 December 31,

(In thousands)

Accounts receivable trade

2 unchanged sentences

Allowance for credit losses

Total $ 29,447 $ 24,274

POWER INTEGRATIONS, INC.

4 unchanged sentences

Allowance for Credit Losses

Three Months Ended Nine Months Ended

(In thousands) September 30,

2020 September 30,

Three Months Ended

(In thousands)

Beginning balance

3 unchanged sentences

Ending balance

(In thousands) September 30,

2020 December 31,

(In thousands)

Raw materials

1 unchanged sentence

Finished goods

Total $ 104,805 $ 90,380

Prepaid Expenses and Other Current Assets

(In thousands) September 30,

2020 December 31,

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

March 31, 2021

December 31, 2020

(In thousands)

Developed technology

1 unchanged sentence

Technology licenses

Total $ 57,847 $ ( 44,265 ) $ 13,582 $ 61,177 $ ( 44,312 ) $ 16,865

Total intangible assets

The estimated future amortization expense related to finite-lived intangible assets at March 31, 2021, is as follows:

(In thousands)

2021 (remaining nine months)

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

(In thousands)

2020 (remaining three months) $ 1,076

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,

Changes in accumulated other comprehensive loss for three months ended March 31, 2021 and 2020, were as follows:

Unrealized Gains

and Losses on

Defined Benefit

Foreign Currency

Marketable Securities

Pension Items

Three Months Ended

(In thousands)

4 unchanged sentences

Ending balance

_______________

(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)

(1) This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the three months ended March 31, 2021 and 2020.

FAIR VALUE MEASUREMENTS:

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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 September 30, 2020, and December 31, 2019, was as follows:

The fair-value hierarchy of the Company’s cash equivalents and marketable securities at March 31, 2021, and December 31, 2020, 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)

March 31, 2021

Quoted Prices in

Active Markets for

Significant Other

Identical Assets

Observable Inputs

(In thousands)

Total Fair Value

Corporate securities

1 unchanged sentence

Money market funds

Total $ 403,786 $ 18,073 $ 385,713

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurement at

December 31, 2020

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

Quoted Prices in

Active Markets for

Significant Other

Identical Assets

Observable Inputs

(In thousands)

Total Fair Value

Corporate securities

1 unchanged sentence

Money market funds

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.

The Company did not transfer any investments between Level 1 and Level 2 of the fair-value hierarchy in the three months ended March 31, 2021, and the twelve months ended December 31, 2020.

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

Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at March 31, 2021, were as follows:

Gross Unrealized

Estimated Fair

(In thousands)

Investments due in 3 months or less:

1 unchanged sentence

Corporate securities

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:

Commercial paper

Corporate securities

Total 9,582 146 — 9,728

Total marketable securities

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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accrued interest receivable was $ 1.2 million at March 31, 2021 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.

Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at December 31, 2020, were as follows:

Amortized Cost Gross Unrealized Estimated Fair Market Value

(In thousands) Gains Losses

Gross Unrealized

Estimated Fair

(In thousands)

Investments due in 3 months or less:

Commercial paper

Corporate securities

Total 15,934 18 — 15,952

Investments due in 4-12 months:

Corporate securities

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

Accrued interest receivable was $ 0.8 million at December 31, 2020 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.

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,

The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three months ended March 31, 2021, and March 31, 2020:

Three Months Ended

(In thousands)

Cost of revenues

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Total stock-based compensation expense

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.

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-based compensation expense in the three months ended March 31, 2021, was approximately $ 8.5 million, comprising approximately $ 5.3 million related to restricted stock unit (RSU) awards, $ 2.7 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.

In the three months ended March 31, 2020, stock-based compensation expense was approximately $ 6.7 million, comprising approximately $ 5.0 million related to RSUs, $ 1.3 million related to PSUs and PRSUs and $ 0.4 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:

(In thousands) Weighted-

Price Weighted-Average

(In years) Aggregate

A summary of stock options outstanding as of March 31, 2021, and activity during the three months then ended, is presented below:

Intrinsic Value

(In thousands)

Outstanding at January 1, 2021

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

Outstanding at March 31, 2021

Vested and exercisable at March 31, 2021

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 2021.

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

(In years) Aggregate Intrinsic Value

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of PSUs outstanding as of March 31, 2021, and activity during the three months then ended, is presented below:

Grant Date Fair

Contractual Term

Intrinsic Value

(In thousands)

Value Per Share

(In thousands)

Outstanding at January 1, 2021

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

Outstanding at March 31, 2021

Outstanding and expected to vest at March 31, 2021

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.

1 unchanged sentence

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.

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The performance goals for PRSUs granted in fiscal 2019 were based on the Company’s annual revenue growth, while the PRSUs granted in 2020 and 2021 were based on the Company’s compound annual growth rate (“CAGR”) of revenue as measured against the revenue CAGR of the analog semiconductor industry, in each case over the respective three-year performance period.

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:

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

(In years) Aggregate Intrinsic Value

In January 2021 it was determined that approximately 6,000 shares subject to the PRSUs granted in 2018 vested in aggregate;

the shares were released to the Company’s executives in the first quarter of 2021.

A summary of PRSUs outstanding as of March 31, 2021, and activity during the three months then ended, is presented below:

Weighted-Average

Grant Date Fair

Contractual Term

(In thousands)

Value Per Share

(In thousands)

Outstanding at January 1, 2021

Granted 152 $ 49.67

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

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

(In years) Aggregate Intrinsic Value

Outstanding at March 31, 2021

Outstanding and expected to vest at March 31, 2021

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of RSUs outstanding as of March 31, 2021, and activity during the three months then ended, is presented below:

Weighted-Average

Grant Date Fair

Contractual Term

(In thousands)

Value Per Share

(In thousands)

Outstanding at January 1, 2021

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

Outstanding at March 31, 2021

Outstanding and expected to vest at March 31, 2021

SIGNIFICANT CUSTOMERS AND GEOGRAPHIC NET REVENUES:

3 unchanged sentences

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.

The Company’s top ten customers accounted for approximately 79 % of net revenues for the three months ended March 31, 2021, and approximately 55 % in the corresponding period of 2020.

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.

Sales to distributors were $ 134.2 million in the three months ended March 31, 2021, and $ 83.5 million for the corresponding period of 2020.

Direct sales to OEMs and power-supply manufacturers accounted for the remainder.

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,

Avnet 18 % 11 % 14 % 11 %

Three Months Ended

Honestar Technologies Co., Ltd.

________________________

Powertech Distribution Ltd.

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

3 unchanged sentences

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.

As of March 31, 2021, and December 31, 2020, 86 % and 90 %, respectively, of accounts receivable were concentrated with the Company’s top ten customers.

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following customers represented 10% or more of accounts receivable:

Customer September 30,

2020 December 31,

Powertech Distribution Ltd.

Honestar Technologies Co., Ltd.

________________________

* Total customer accounts receivable was less than 10% of accounts receivable.

2 unchanged sentences

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,

Geographic net revenues, based on “bill to” customer locations, for the three months ended March 31, 2021, and March 31, 2020, were as follows:

Three Months Ended

(In thousands)

United States of America

Hong Kong/China

Taiwan 4,133 10,410 17,811 27,246

Korea 12,121 7,177 29,762 22,621

Western Europe (excluding Germany)

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

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,

Three Months Ended

(In thousands)

Beginning balance

Common stock issued under employee stock plans

Repurchased — — ( 64 ) ( 242 )

Ending balance

1 unchanged sentence

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.

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

The Company did not repurchase any common stock during the three months ended March 31, 2021.

As of March 31, 2021, the Company had approximately $ 41.3 million remaining under its current repurchase program, which has no expiration date.

In April 2021, the Company’s board of directors authorized the use of an additional $ 50.0 million for the repurchase of the Company’s common stock, with repurchases to be executed according to pre-defined price/volume guidelines.

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.

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 October 2019, the Company’s board of directors declared four quarterly cash dividends 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,

In January 2021, the Company’s board of directors raised the quarterly cash dividend by an additional $ 0.02 per share with the declaration of four cash dividends of $ 0.13 per share to be paid to stockholders of record at the end of each quarter in 2021.

For the three months ended March 31, 2021, and 2020, cash dividends declared and paid were as follows:

Three Months Ended

(In thousands, except per share amounts)

Dividends declared and paid

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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.

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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,

Three Months Ended

(In thousands, except per share amounts)

Basic earnings per share:

Net income $ 14,820 $ 17,099 $ 43,898 $ 35,177

Weighted-average common shares

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Diluted earnings per share:

Net income $ 14,820 $ 17,099 $ 43,898 $ 35,177

Weighted-average common shares

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Diluted earnings per share

_______________

(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 2021 and 2020 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 the three months ended March 31, 2021 and 2020, no outstanding stock awards were determined to be anti-dilutive and therefore excluded from the computation of diluted earnings per share.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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

PROVISION FOR INCOME TAXES:

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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.

The Company’s effective tax rates for the three months ended March 31, 2021 and 2020, were 2.4 % and 5.8 %, respectively.

In the three months ended March 31, 2021 and 2020, 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.

Additionally, in the three months ended March 31, 2021, the Company’s effective tax rate was favorably impacted by a discrete item associated with the release of an unrecognized tax benefit.

These benefits were partially offset by foreign income subject to U.S.

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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.

As of March 31, 2021, 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.

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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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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.

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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 April 1, 2016, Opticurrent, LLC filed a complaint against the Company in the United States District Court for the Eastern District of Texas alleging that the Company infringed one patent pertaining to transistor switch devices and seeking damages for the alleged infringement.

The Company filed a motion to transfer the case to the Northern District of 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.

Following a trial in February 2019, a jury issued a finding of direct

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

The Court of Appeals affirmed the original findings and the reduced damages award, but the Company believes Opticurrent made key disclaimers during reexamination proceedings after the original trial, giving rise to a motion to set aside the original judgment in view of a disclaimer, an issue that is currently on appeal to the Federal Circuit.

Briefing on the Company’s appeal is expected to take place over the coming months, with oral argument and a ruling thereafter.

The District Court has issued an order staying execution on the original judgment pending the Company’s appeal.

As such, the Company continues to believe it has strong defenses, and intends to continue to vigorously defend itself against Opticurrent’s claims.

On June 19, 2019, Opticurrent, LLC filed a follow-on lawsuit in the United States District Court for the Northern District of California accusing more of the Company’s products of infringement and seeking damages for the alleged infringement of the same claim of the same patent asserted in the parties’ prior litigation, as described above.

Limited discovery has taken place, but proceedings are currently stayed, and no schedule has yet been set for expert discovery, dispositive motions, or trial.

The Company believes it has strong defenses, independent of the issue on appeal in the first case, 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 in the United States District Court for the District of Delaware 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.

That motion was granted, so CogniPower’s claims for infringement initially went forward separately in their lawsuit against the Company’s customers in the District of Delaware, but the Company filed a motion to intervene in that lawsuit and received a ruling allowing the Company to intervene in CogniPower’s customer lawsuit on February 1, 2021.

Fact discovery is now under way, 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.

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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

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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 September 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 March 31, 2021.

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