POWER INTEGRATIONS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) ​ March 31, 2022 ​ December 31, 2021 ASSETS ​ ​ ​ ​ ​ ​ CURRENT ASSETS: ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 170,624 ​ $ 158,117 Short-term marketable securities ​ 273,419 ​ 372,235 Accounts receivable, net ​ 30,658 ​ 41,393 Inventories ​ 103,115 ​ 99,266 Prepaid expenses and other current assets ​ 14,685 ​ 15,804 Total current assets ​ 592,501 ​ 686,815 PROPERTY AND EQUIPMENT, net ​ 180,073 ​ 179,824 INTANGIBLE ASSETS, net ​ 8,288 ​ 9,012 GOODWILL ​ 91,849 ​ 91,849 DEFERRED TAX ASSETS ​ 17,371 ​ 16,433 OTHER ASSETS ​ 29,113 ​ 30,554 Total assets ​ $ 919,195 ​ $ 1,014,487 LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ ​ ​ CURRENT LIABILITIES: ​ ​ ​ ​ Accounts payable ​ $ 36,175 ​ $ 43,721 Accrued payroll and related expenses ​ 13,459 ​ 15,492 Taxes payable ​ 5,601 ​ 1,210 Other accrued liabilities ​ 13,999 ​ 11,898 Total current liabilities ​ 69,234 ​ 72,321 LONG-TERM INCOME TAXES PAYABLE ​ 15,384 ​ 15,280 OTHER LIABILITIES ​ 14,004 ​ 14,854 Total liabilities ​ 98,622 ​ 102,455 COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 13) ​ ​ STOCKHOLDERS’ EQUITY: ​ ​ Common stock ​ 26 ​ 28 Additional paid-in capital ​ 39,684 ​ 162,301 Accumulated other comprehensive loss ​ ( 8,169 ) ​ ( 3,737 ) Retained earnings ​ 789,032 ​ 753,440 Total stockholders’ equity ​ 820,573 ​ 912,032 Total liabilities and stockholders’ equity ​ $ 919,195 ​ $ 1,014,487 ​ 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 ​ March 31, (In thousands, except per share amounts) ​ 2022 2021 NET REVENUES ​ $ 182,149 ​ $ 173,737 COST OF REVENUES ​ 81,474 ​ 89,326 GROSS PROFIT ​ 100,675 ​ 84,411 ​ ​ ​ ​ ​ ​ ​ OPERATING EXPENSES: ​ ​ Research and development ​ 23,678 ​ 20,027 Sales and marketing ​ 16,336 ​ 14,123 General and administrative ​ 9,614 ​ 10,075 Total operating expenses ​ 49,628 ​ 44,225 INCOME FROM OPERATIONS ​ 51,047 ​ 40,186 OTHER INCOME ​ 554 ​ 597 INCOME BEFORE INCOME TAXES ​ 51,601 ​ 40,783 PROVISION FOR INCOME TAXES ​ 5,353 ​ 985 NET INCOME ​ $ 46,248 ​ $ 39,798 ​ ​ ​ ​ ​ ​ ​ EARNINGS PER SHARE: ​ ​ Basic ​ $ 0.78 ​ $ 0.66 Diluted ​ $ 0.77 ​ $ 0.65 ​ ​ ​ ​ ​ ​ ​ SHARES USED IN PER SHARE CALCULATION: ​ ​ Basic ​ 59,238 ​ ​ 60,184 Diluted ​ 60,107 ​ ​ 61,451 ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 5 Table of Contents POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, (In thousands) 2022 2021 Net income ​ $ 46,248 ​ $ 39,798 Other comprehensive income (loss), net of tax: ​ ​ Foreign currency translation adjustments, net of $ 0 tax in each of the three months ended March 31, 2022 and 2021 ​ ​ ( 269 ) ​ ​ ( 18 ) Unrealized loss on marketable securities, net of $ 0 tax in each of the three months ended March 31, 2022 and 2021 ​ ​ ( 4,181 ) ​ ​ ( 580 ) Amortization of defined benefit pension items, net of tax of $ 3 and $ 135 in the three months ended March 31, 2022 and 2021, respectively ​ ​ 18 ​ ​ ( 75 ) Total other comprehensive loss ​ ( 4,432 ) ​ ( 673 ) TOTAL COMPREHENSIVE INCOME ​ $ 41,816 ​ $ 39,125 ​ 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 ​ ​ March 31, (In thousands) 2022 2021 Common stock ​ ​ ​ ​ ​ Beginning balance $ 28 ​ $ 28 Common stock issued under employee stock plans ​ — ​ 1 Repurchase of common stock ​ ( 2 ) ​ — Ending balance ​ 26 ​ 29 ​ ​ ​ ​ ​ Additional paid-in capital ​ ​ ​ ​ Beginning balance ​ 162,301 ​ 190,920 Common stock issued under employee stock plans ​ 3,057 ​ 3,651 Repurchase of common stock ​ ( 134,687 ) ​ — Stock-based compensation ​ 9,013 ​ 8,480 Ending balance ​ 39,684 ​ 203,051 ​ ​ ​ ​ ​ Accumulated other comprehensive loss ​ ​ ​ ​ Beginning balance ​ ( 3,737 ) ​ ( 2,163 ) Other comprehensive loss ​ ( 4,432 ) ​ ( 673 ) Ending balance ​ ( 8,169 ) ​ ( 2,836 ) ​ ​ ​ ​ ​ Retained earnings ​ ​ ​ ​ Beginning balance ​ 753,440 ​ 621,626 Net income ​ 46,248 ​ 39,798 Payment of dividends to stockholders ​ ​ ( 10,656 ) ​ ​ ( 7,845 ) Ending balance ​ ​ 789,032 ​ ​ 653,579 ​ ​ ​ ​ ​ ​ ​ Total stockholders’ equity $ 820,573 ​ $ 853,823 ​ ​ 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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, (In thousands) 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: ​ ​ Net income ​ $ 46,248 ​ $ 39,798 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ Depreciation ​ 8,408 ​ 7,453 Amortization of intangibles ​ 724 ​ 1,032 Loss on disposal of property and equipment ​ 75 ​ 17 Stock-based compensation expense ​ 9,013 ​ 8,480 Amortization of premium on marketable securities ​ 937 ​ 176 Deferred income taxes ​ ( 936 ) ​ 1,445 Increase (decrease) in accounts receivable allowance for credit losses ​ 75 ​ ( 2 ) Change in operating assets and liabilities: ​ ​ ​ Accounts receivable ​ 10,660 ​ ( 6,345 ) Inventories ​ ( 3,849 ) ​ 12,369 Prepaid expenses and other assets ​ 1,552 ​ ( 3,253 ) Accounts payable ​ ( 1,709 ) ​ 3,281 Taxes payable and accrued liabilities ​ 3,399 ​ ( 6,329 ) Net cash provided by operating activities ​ 74,597 ​ 58,122 ​ ​ ​ ​ ​ ​ ​ CASH FLOWS FROM INVESTING ACTIVITIES: ​ ​ ​ ​ Purchases of property and equipment ​ ( 14,700 ) ​ ( 11,051 ) Proceeds from sale of property and equipment ​ ​ 1,202 ​ ​ 25 Purchases of marketable securities ​ ( 15,121 ) ​ ( 21,971 ) Proceeds from sales and maturities of marketable securities ​ 108,817 ​ 63,466 Net cash provided by investing activities ​ 80,198 ​ 30,469 ​ ​ ​ ​ ​ ​ ​ CASH FLOWS FROM FINANCING ACTIVITIES: ​ ​ ​ ​ Issuance of common stock under employee stock plans ​ 3,057 ​ 3,652 Repurchase of common stock ​ ( 134,689 ) ​ — Payments of dividends to stockholders ​ ( 10,656 ) ​ ( 7,845 ) Net cash used in financing activities ​ ( 142,288 ) ​ ( 4,193 ) ​ ​ ​ ​ ​ ​ ​ NET INCREASE IN CASH AND CASH EQUIVALENTS ​ 12,507 ​ 84,398 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ​ 158,117 ​ 258,874 CASH AND CASH EQUIVALENTS AT END OF PERIOD ​ $ 170,624 ​ $ 343,272 ​ ​ ​ ​ ​ ​ ​ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: ​ ​ ​ Unpaid property and equipment ​ $ 5,042 ​ $ 6,116 ​ ​ ​ ​ ​ ​ ​ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: ​ ​ ​ ​ Cash paid for income taxes, net ​ $ 1,163 ​ $ 1,512 ​ ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 8 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, 2021, included in its Form 10-K filed on February 7, 2022, with the Securities and Exchange Commission. 2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS: Significant Accounting Policies and Estimates No material changes have been made to the Company’s significant accounting policies disclosed in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements , in its Annual Report on Form 10-K, filed on February 7, 2022, for the year ended December 31, 2021. 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. 3. COMPONENTS OF THE COMPANY’S CONDENSED CONSOLIDATED BALANCE SHEETS: Accounts Receivable ​ ​ ​ ​ ​ ​ ​ ​ March 31, December 31, (In thousands) ​ 2022 ​ 2021 Accounts receivable trade ​ $ 82,463 ​ $ 87,503 Allowance for ship and debit ​ ( 47,690 ) ​ ( 41,599 ) Allowance for stock rotation and rebate ​ ( 3,595 ) ​ ( 4,066 ) Allowance for credit losses ​ ​ ( 520 ) ​ ​ ( 445 ) Total ​ $ 30,658 ​ $ 41,393 ​ ​ 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 payment patterns, customer creditworthiness and current economic trends. Receivables determined to be uncollectible are written off and deducted from the allowance. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, (In thousands) ​ 2022 2021 Beginning balance ​ $ ( 445 ) ​ $ ( 427 ) Provision for credit loss expense ​ ( 400 ) ​ ( 217 ) Receivables written off ​ — ​ — Recoveries collected ​ 325 ​ 219 Ending balance ​ $ ( 520 ) ​ $ ( 425 ) ​ 9 ​ Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ Inventories ​ ​ ​ ​ ​ ​ ​ ​ March 31, December 31, (In thousands) ​ 2022 ​ 2021 Raw materials ​ $ 27,527 ​ $ 24,131 Work-in-process ​ 28,001 ​ 31,788 Finished goods ​ 47,587 ​ 43,347 Total ​ $ 103,115 ​ $ 99,266 ​ Intangible Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2022 ​ December 31, 2021 ​ ​ ​ Accumulated ​ ​ ​ ​ Accumulated ​ ​ (In thousands) ​ Gross ​ Amortization ​ Net ​ Gross ​ Amortization ​ Net Domain name ​ $ 1,261 ​ $ — ​ $ 1,261 ​ $ 1,261 ​ $ — ​ $ 1,261 Developed technology ​ 37,960 ​ ( 32,085 ) ​ 5,875 ​ 37,960 ​ ( 31,603 ) ​ 6,357 Customer relationships ​ 16,700 ​ ( 16,639 ) ​ 61 ​ 16,700 ​ ( 16,458 ) ​ 242 Technology licenses ​ 1,926 ​ ( 835 ) ​ 1,091 ​ 1,926 ​ ( 774 ) ​ 1,152 Total intangible assets ​ $ 57,847 ​ $ ( 49,559 ) ​ $ 8,288 ​ $ 57,847 ​ $ ( 48,835 ) ​ $ 9,012 ​ ​ The estimated future amortization expense related to finite-lived intangible assets at March 31, 2022, is as follows: ​ ​ ​ ​ ​ Estimated ​ ​ Amortization Fiscal Year ​ (In thousands) 2022 (remaining nine months) ​ $ 1,691 2023 ​ 2,173 2024 ​ 1,279 2025 ​ 832 2026 ​ 687 Thereafter ​ 365 Total ​ $ 7,027 ​ Accumulated Other Comprehensive Loss Changes in accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized Gains ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ and Losses on ​ Defined Benefit ​ Foreign Currency ​ ​ ​ ​ Marketable Securities ​ Pension Items ​ Items ​ Total ​ Three Months Ended ​ Three Months Ended ​ Three Months Ended ​ Three Months Ended ​ March 31, ​ March 31, ​ March 31, ​ March 31, (In thousands) 2022 2021 2022 2021 2022 2021 2022 2021 Beginning balance $ ( 1,165 ) ​ $ 890 ​ $ ( 674 ) ​ $ ( 1,641 ) ​ $ ( 1,898 ) ​ $ ( 1,412 ) ​ $ ( 3,737 ) ​ $ ( 2,163 ) Other comprehensive income (loss) before reclassifications ( 4,181 ) ​ ( 580 ) ​ — ​ — ​ ( 269 ) ​ ( 18 ) ​ ( 4,450 ) ​ ( 598 ) Amounts reclassified from accumulated other comprehensive loss — ​ — ​ 18 (1) ( 75 ) (1) — ​ — ​ 18 ​ ( 75 ) Net-current period other comprehensive income (loss) ( 4,181 ) ​ ( 580 ) ​ 18 ​ ( 75 ) ​ ( 269 ) ​ ( 18 ) ​ ( 4,432 ) ​ ( 673 ) Ending balance $ ( 5,346 ) ​ $ 310 ​ $ ( 656 ) ​ $ ( 1,716 ) ​ $ ( 2,167 ) ​ $ ( 1,430 ) ​ $ ( 8,169 ) ​ $ ( 2,836 ) ​ (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, 2022 and 2021. 10 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 March 31, 2022, and December 31, 2021, was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurement at ​ ​ March 31, 2022 ​ ​ ​ Quoted Prices in ​ ​ ​ ​ ​ ​ ​ Active Markets for ​ Significant Other ​ ​ ​ ​ ​ Identical Assets ​ Observable Inputs (In thousands) ​ Total Fair Value ​ (Level 1) ​ (Level 2) Commercial paper ​ $ 85,233 ​ $ — ​ $ 85,233 Corporate securities ​ ​ 267,899 ​ ​ — ​ ​ 267,899 Money market funds ​ 22,658 ​ 22,658 ​ — Total ​ $ 375,790 ​ $ 22,658 ​ $ 353,132 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurement at ​ ​ December 31, 2021 ​ ​ ​ Quoted Prices in ​ ​ ​ ​ ​ ​ ​ Active Markets for ​ Significant Other ​ ​ ​ ​ ​ Identical Assets ​ Observable Inputs (In thousands) ​ Total Fair Value ​ (Level 1) ​ (Level 2) Commercial paper ​ $ 172,237 ​ $ — ​ $ 172,237 Corporate securities ​ ​ 282,540 ​ ​ — ​ ​ 282,540 Money market funds ​ 29,793 ​ 29,793 ​ — Total ​ $ 484,570 ​ $ 29,793 ​ $ 454,777 ​ 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, 2022, and the twelve months ended December 31, 2021. 11 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ 5. MARKETABLE SECURITIES: Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at March 31, 2022, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized ​ Gross Unrealized ​ Estimated Fair (In thousands) Cost Gains Losses Market Value Investments due in 3 months or less: ​ ​ ​ ​ Commercial paper ​ $ 5,996 ​ $ — ​ $ — ​ $ 5,996 Corporate securities ​ ​ 1,953 ​ ​ — ​ ​ ( 1 ) ​ ​ 1,952 Total ​ 7,949 ​ — ​ ( 1 ) ​ 7,948 Investments due in 4-12 months: ​ ​ ​ ​ Corporate securities ​ 45,329 ​ — ​ ( 484 ) ​ 44,845 Total ​ 45,329 ​ — ​ ( 484 ) ​ 44,845 Investments due in 12 months or greater: ​ ​ ​ ​ Corporate securities ​ 225,487 ​ — ​ ( 4,861 ) ​ 220,626 Total ​ ​ 225,487 ​ — ​ ​ ( 4,861 ) ​ 220,626 Total marketable securities ​ $ 278,765 ​ $ — ​ $ ( 5,346 ) ​ $ 273,419 ​ Accrued interest receivable was $ 1.5 million at March 31, 2022 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, 2021, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized ​ Gross Unrealized ​ Estimated Fair (In thousands) Cost Gains Losses Market Value Investments due in 3 months or less: ​ ​ ​ ​ Commercial paper ​ $ 89,965 ​ $ — ​ $ — ​ $ 89,965 Corporate securities ​ ​ 7,285 ​ ​ — ​ ​ ( 3 ) ​ ​ 7,282 Total ​ 97,250 ​ — ​ ( 3 ) ​ 97,247 Investments due in 4-12 months: ​ ​ ​ ​ Corporate securities ​ 25,054 ​ — ​ ( 42 ) ​ 25,012 Total ​ 25,054 ​ — ​ ( 42 ) ​ 25,012 Investments due in 12 months or greater: ​ ​ ​ ​ Corporate securities ​ ​ 251,096 ​ 21 ​ ( 1,141 ) ​ 249,976 Total ​ 251,096 ​ 21 ​ ( 1,141 ) ​ 249,976 Total marketable securities ​ $ 373,400 ​ $ 21 ​ $ ( 1,186 ) ​ $ 372,235 ​ Accrued interest receivable was $ 1.5 million at December 31, 2021 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet. 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 March 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less Than 12 Months ​ 12 Months or Longer ​ Total ​ Estimated Gross Estimated Gross Estimated Gross ​ ​ Fair Market ​ Unrealized ​ Fair Market ​ Unrealized ​ Fair Market ​ Unrealized (In thousands) ​ Value ​ Losses ​ Value ​ Losses ​ Value ​ Losses Corporate securities ​ $ 266,473 ​ $ ( 5,346 ) ​ $ — ​ $ — ​ $ 266,473 ​ $ ( 5,346 ) Total marketable securities ​ $ 266,473 ​ $ ( 5,346 ) ​ $ — ​ $ — ​ $ 266,473 ​ $ ( 5,346 ) ​ In the three months ended March 31, 2022 and 2021, no unrealized losses on marketable securities were recognized in income. The Company does not intend to sell and it is unlikely that it will be required to sell the securities prior to their anticipated recovery. The issuers are high quality (investment grade) and the decline in fair value is largely due to changes 12 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ in interest rates. Additionally, the issuers continue to make timely interest payments on the marketable securities with the fair value expected to recover as they reach maturity. 6. STOCK-BASED COMPENSATION: The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three months ended March 31, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, (In thousands) 2022 2021 Cost of revenues ​ $ 320 ​ $ 631 Research and development ​ 3,055 ​ 2,391 Sales and marketing ​ 1,948 ​ 1,614 General and administrative ​ 3,690 ​ 3,844 Total stock-based compensation expense ​ $ 9,013 ​ $ 8,480 ​ ​ Stock-based compensation expense in the three months ended March 31, 2022, was approximately $ 9.0 million, comprising approximately $ 5.6 million related to restricted stock unit (RSU) awards, $ 3.0 million related to performance-based (PSU) awards and long-term performance-based (PRSU) awards and $ 0.4 million related to the Company’s employee stock purchase plan. Stock-based compensation expense in the three months ended March 31, 2021, was approximately $ 8.5 million, comprising approximately $ 5.3 million related to RSUs, $ 2.7 million related to PSUs and PRSUs and $ 0.5 million related to the Company’s employee stock purchase plan. Stock Options A summary of stock options outstanding as of March 31, 2022, and activity during the three months ended, is presented below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ ​ Weighted- ​ Average ​ ​ ​ ​ ​ ​ ​ Average ​ Remaining ​ Aggregate ​ ​ Shares ​ Exercise ​ Contractual Term ​ Intrinsic Value ​ (In thousands) Price (In years) (In thousands) Outstanding at January 1, 2022 12 ​ $ 21.44 ​ ​ ​ Granted — ​ ​ — ​ Exercised ( 12 ) ​ $ 21.44 ​ Forfeited or expired — ​ ​ — ​ Outstanding at March 31, 2022 — ​ $ — — ​ $ — Vested and exercisable at March 31, 2022 — ​ ​ ​ — ​ $ — ​ 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 expected 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. 13 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ In February 2022, it was determined that approximately 104,000 shares subject to the PSUs granted in 2021 vested in aggregate; the shares were released to the Company’s employees and executives in the first quarter of 2022. A summary of PSUs outstanding as of March 31, 2022, and activity during the three months ended, is presented below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ ​ Weighted- ​ Average ​ ​ ​ ​ ​ ​ ​ Average ​ Remaining ​ Aggregate ​ ​ Shares ​ Grant Date Fair ​ Contractual Term ​ Intrinsic Value ​ (In thousands) Value Per Share (In years) (In thousands) Outstanding at January 1, 2022 104 ​ $ 84.47 ​ ​ ​ Granted 117 ​ $ 79.84 ​ ​ Vested ( 104 ) ​ $ 84.47 ​ Forfeited — ​ ​ — ​ Outstanding at March 31, 2022 117 ​ $ 79.84 0.75 ​ $ 10,819 Outstanding and expected to vest at March 31, 2022 117 ​ ​ ​ 0.75 ​ $ 10,819 ​ 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 2020, 2021 and 2022 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 February 2022 it was determined that approximately 135,000 shares subject to the PRSUs granted in 2019 vested in aggregate; the shares were released to the Company’s executives in the first quarter of 2022. A summary of PRSUs outstanding as of March 31, 2022, and activity during the three months ended, is presented below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average ​ Aggregate ​ ​ ​ ​ Weighted-Average ​ Remaining ​ Intrinsic ​ ​ Shares ​ Grant Date Fair ​ Contractual Term ​ Value ​ (In thousands) Value Per Share (In years) (In thousands) Outstanding at January 1, 2022 383 ​ $ 53.14 ​ ​ ​ Granted 110 ​ $ 78.96 ​ Vested ( 135 ) ​ $ 34.09 ​ Forfeited — ​ ​ — ​ Outstanding at March 31, 2022 358 ​ $ 68.18 1.65 ​ $ 33,214 Outstanding and expected to vest at March 31, 2022 332 ​ ​ ​ 1.56 ​ $ 30,771 ​ 14 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ RSU Awards A summary of RSUs outstanding as of March 31, 2022, and activity during the three months ended, is presented below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average ​ Aggregate ​ ​ ​ ​ Weighted-Average ​ Remaining ​ Intrinsic ​ ​ Shares ​ Grant Date Fair ​ Contractual Term ​ Value ​ (In thousands) Value Per Share (In years) (In thousands) Outstanding at January 1, 2022 1,144 ​ $ 46.81 ​ ​ ​ Granted 257 ​ $ 77.73 ​ Vested ( 158 ) ​ $ 42.27 ​ Forfeited ( 9 ) ​ $ 52.58 ​ Outstanding at March 31, 2022 1,234 ​ $ 53.78 1.78 ​ $ 114,351 Outstanding and expected to vest at March 31, 2022 1,157 ​ ​ ​ 1.36 ​ $ 107,194 ​ ​ ​ ​ 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 77 % and 79 % of net revenues for the three months ended March 31, 2022 and 2021, respectively. 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 $ 135.7 million and $ 134.2 million in the three months ended March 31, 2022, and 2021, respectively. Direct sales to OEMs and power-supply manufacturers accounted for the remainder. The following customers represented 10% or more of the Company’s net revenues for the respective periods: ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, Customer ​ 2022 ​ 2021 Avnet 31 % ​ 31 % Honestar Technologies Co., Ltd. ​ 16 % ​ 18 % ​ 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 March 31, 2022, and December 31, 2021, 87 % and 86 %, respectively, of accounts receivable were concentrated with the Company’s top ten customers. The following customers represented 10% or more of accounts receivable: ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, Customer 2022 ​ 2021 Avnet ​ 46 % ​ 45 % Powertech Distribution Ltd. 10 % ​ * * Total customer accounts receivable was less than 10% of accounts receivable. No other customers accounted for 10% or more of the Company’s accounts receivable in the periods presented. 15 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ 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 months ended March 31, 2022 and 2021, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, (In thousands) 2022 2021 United States of America ​ $ 6,906 ​ $ 4,100 Hong Kong/China ​ 105,240 ​ 118,730 Taiwan ​ 5,257 ​ 6,442 Korea ​ 18,664 ​ 12,489 Western Europe (excluding Germany) ​ 8,245 ​ 7,130 Japan ​ 8,049 ​ 4,647 Germany ​ 11,484 ​ 7,006 Other ​ 18,304 ​ 13,193 Total net revenues ​ $ 182,149 ​ $ 173,737 ​ ​ ​ ​ 8. STOCKHOLDERS’ EQUITY: Common Stock Shares Outstanding ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, (In thousands) 2022 2021 Beginning balance ​ ​ 59,913 ​ ​ 59,910 Common stock issued under employee stock plans ​ 449 ​ 453 Repurchased ​ ( 1,584 ) ​ — Ending balance ​ ​ 58,778 ​ ​ 60,363 ​ Common Stock Repurchases As of December 31, 2021, the Company had $ 67.3 million remaining under its stock-repurchase program. In January and February 2022, the Company’s board of directors authorized the use of an additional $ 100 million and $ 50 million, respectively, for the repurchase of the Company’s common stock, with repurchases to be executed according to pre-defined price/volume guidelines. In the three months ended March 31, 2022 the Company purchased 1,584,340 shares for $ 134.7 million, leaving $ 82.7 million remaining on the repurchase authorization as of March 31, 2022. The program has no expiration date. In April 2022, the Company’s board of directors authorized the use of an additional $ 75 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. Cash Dividends In January 2021, the Company’s board of directors declared four cash dividends of $ 0.13 per share to be paid to stockholders of record at the end of each quarter in 2021. In October 2021, the Company’s board of directors raised the quarterly cash dividend with the declaration of five cash dividends of $ 0.15 per share (in lieu of the $ 0.13 per share announced in January 2021) to be paid to stockholders of record at the end of the fourth quarter in 2021 and at the end of each quarter in 2022 . In January 2022, the Company’s board of directors raised the quarterly cash dividend by an additional $ 0.03 per share with the declaration of four cash dividends of $ 0.18 per share (in lieu of the $ 0.15 per share announced in October 2021) to be paid to stockholders of record at the end of each quarter in 2022. 16 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ For the three months ended March 31, 2022 and 2021, cash dividends declared and paid were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, (In thousands, except per share amounts) 2022 2021 Dividends declared and paid ​ $ 10,656 ​ $ 7,845 Dividends declared per common share ​ $ 0.18 ​ $ 0.13 ​ ​ ​ 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. A summary of the earnings per share calculation is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, (In thousands, except per share amounts) 2022 2021 Basic earnings per share: ​ ​ Net income ​ $ 46,248 ​ $ 39,798 Weighted-average common shares ​ 59,238 ​ 60,184 Basic earnings per share ​ $ 0.78 ​ $ 0.66 Diluted earnings per share: (1) ​ ​ Net income ​ $ 46,248 ​ $ 39,798 Weighted-average common shares ​ 59,238 ​ 60,184 Effect of dilutive awards: ​ ​ Employee stock plans ​ 869 ​ 1,267 Diluted weighted-average common shares ​ 60,107 ​ 61,451 Diluted earnings per share ​ $ 0.77 ​ $ 0.65 ​ (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 2022 and 2021 calculations as the shares were not contingently issuable as of the end of the reporting periods. In the three months ended March 31, 2022 and 2021, no stock awards were determined to be anti-dilutive and therefore excluded from the computation of diluted earnings per share. ​ 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 months ended March 31, 2022 and 2021, were 10.4 % and 2.4 %, respectively. In the three months ended March 31, 2022 and 2021, 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 and federal research tax credits. 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 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 17 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ 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 March 31, 2022, the Company maintained a valuation allowance on its California deferred tax assets, New Jersey deferred tax assets, and capital losses for federal purposes, and a valuation allowance with respect to its deferred tax assets relating to tax credits in Canada. Determining the consolidated provision for income-tax expense, income-tax liabilities and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods. ​ 11. COMMITMENTS: Supplier Agreements Under the terms of the Company’s wafer-supply agreements with Seiko Epson Corporation ("Epson"), and ROHM Lapis Semiconductor Co., Ltd. ("Lapis") the wafers purchased from these suppliers are priced in U.S. dollars, with mutual sharing of the impact of fluctuations in the exchange rate between the Japanese yen and the U.S. dollar on future purchases. Each year, the Company’s management and these two suppliers review and negotiate future pricing; the negotiated pricing is denominated in U.S. dollars but is subject to contractual exchange rate provisions. The fluctuation in the exchange rate is shared equally between the Company and each of these suppliers on future purchases. ​ 12. LEGAL PROCEEDINGS AND CONTINGENCIES: From time to time in the ordinary course of business, the Company becomes involved in lawsuits, or customers and distributors may make claims against the Company. In accordance with ASC 450-10, Contingencies , the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. On April 1, 2016, Opticurrent, LLC filed a complaint against the Company in the United States District Court for the Eastern District of Texas 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. The Company challenged those findings in post-trial proceedings, and the Court granted one of the Company’s post-trial motions, reducing the damages award to $ 1.2 million. The 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. In the meanwhile, the District Court issued an order staying execution on the original judgment pending the Company’s appeal, and the Federal Circuit rejected Opticurrent’s challenge to the order staying execution pending appeal. On February 23, 2022, a split panel at the Federal Circuit issued a ruling denying the Company’s appeal challenging the judgment. The Company has until July 25, 2022 to appeal that decision. 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, and the parties and the Court are working on a schedule for expert discovery, dispositive 18 Table of Contents POWER INTEGRATIONS, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) ​ motions, and 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 May 10, 2021, Opticurrent, LLC filed another follow-on lawsuit in the United States District Court for the Eastern District of Texas accusing one of the Company’s customers of infringement based on the use of the Company’s products and seeking damages for the alleged infringement of the same claim of the same patent asserted in the parties’ prior litigation, as described above. The case is at the claim construction stage, but the Company believes it has strong defenses, independent of the issue on appeal in the parties’ first case, and intends to vigorously defend against Opticurrent’s claims against the Company’s technology, 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 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, and the parties thereafter agreed to dismiss the Company’s separate lawsuit against CogniPower. 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. Moreover, given the United States Patent and Trademark Office’s institution of inter partes review proceedings against every independent claim CogniPower asserted in the litigation, the parties have agreed to stay the associated District Court litigation pending resolution of the IPRs. 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 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 March 31, 2022. 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. ​ 19 Table of Contents ​