Power Integrations
2014 Annual Report
Dear Fellow Stockholders,
With just slight increases in revenues and GAAP earnings per share (and a slight decrease in non-GAAP earnings per share)
our 2014 financial performance clearly did not live up to our expectations. However, our long-term growth strategy remains
intact, while important trends continue to move the power-conversion market in the direction of innovation, integration and
energy efficiency – the hallmarks of our business. We remain as optimistic as ever about the future of our business, and in
this letter I’ll outline a few of the reasons why we expect to resume our growth trajectory in 2015.
First, we are embarking on an exciting new product cycle led by the revolutionary new InnoSwitchTM family. Introduced
formally in November, InnoSwitch ICs are the first power-supply chips to straddle the safety-isolation barrier of the power
supply, enabling us to integrate circuitry on both the high- and low-voltage sides of the circuit board. This results in smaller,
simpler, more energy-efficient designs for our customers; for us it means capturing a greater proportion of the dollar value of
the power supply and, we expect, commanding a greater share of the AC-DC power supply market.
InnoSwitch products feature prominently in a second part of our story for 2015 – an expected turnaround in the
communications end market, which accounted for nearly 20 percent of our sales in 2014. While sales into the consumer,
industrial and computer markets grew last year, communications revenues declined by nearly 15 percent. This was due in
part to soft demand from our two largest end customers, but also reflected increased commoditization in mobile-phone
chargers, which make up a substantial portion of our communications revenues.
In 2015, rapid charging presents an opportunity for differentiation that hasn’t existed in the charger market in recent years.
Mobile-device OEMs are incorporating larger batteries in their phones in order to support larger screens and other power-
hungry features. Unfortunately for users, the low-power chargers that accompany these phones have largely failed to keep
pace, resulting in extended charge times and, effectively, increased downtime. In order to combat this trend, OEMs are
beginning to specify “rapid” chargers, which can deliver two or even three times as much power to the phone as a traditional
charger.
The increased power requirements of rapid charging create technical hurdles for designers in terms of size, complexity,
efficiency and cost, in turn creating a need for innovative, highly integrated products like ours. Rapid charging is an ideal
application for InnoSwitch devices, and we are now in high-volume production for rapid-charge designs at several top-tier
mobile-phone OEMs, including the world’s largest and fastest-growing smartphone vendors.
A third key driver for 2015 will be energy efficiency, which remains a secular trend across all of the major markets we
address, from electronics and appliances to lighting and industrial. While not a new trend, energy efficiency takes on added
importance in the electronics market with the pending onset of DoE-6, the next iteration of the U.S. Department of Energy’s
mandatory efficiency standards for external power supplies. Set to take effect in 2016, DoE-6 calls for increased active-
mode efficiency and a substantial reduction in no-load consumption for external chargers and adapters.
DoE-6 may be the most impactful update to power supply efficiency standards in the U.S. since the original California
Energy Commission standards took effect in 2007. We are already seeing strong redesign activity with InnoSwitch and with
our newly announced LinkSwitch™-4 products, both of which comfortably meet the new standards. While the full impact of
the standards won’t be felt until next year, we anticipate uplift in sales over the course of 2015 as compliant designs start
going into production.
While DoE-6 applies to external power supplies, energy efficiency continues to be an important factor for embedded power
supplies as well. In the consumer market, our dollar content is expanding thanks to the increasing use of electronic features
in white goods and countertop appliances. The additional features add to the challenge of meeting standby efficiency
requirements such as the European EcoDesign Directive, which in turn increases our content even further. With appliances
continuing to become smarter and more connected, we expect this trend to continue for years to come.
In the industrial market we see energy efficiency as a long-term driver across the full range of power levels. On the lower
end of the scale we enable clean technologies like LED lighting and smart utility meters, while our high-power IGBT drivers
are critical components in renewable energy systems, the transmission of high-voltage DC on the power grid, and the
efficient consumption of energy in heavy industry and transportation. Our high-power offerings for the industrial market are
set to expand significantly in the year ahead as we begin to roll out products combining technologies from CT-Concept,
which we acquired in 2012, with internally developed technologies such as those featured in InnoSwitch ICs. Whereas today
we offer IGBT-driver products for applications higher than 30 kilowatts, these new products will enable us to address lower-
power IGBT-driver applications, adding roughly $500 million to our served addressable market (SAM) and taking our total
SAM to more than $3 billion.
Energy efficiency also played a key role in our acquisition of Cambridge Semiconductor, or CamSemi, which closed in early
January. This transaction, our first since the purchase of CT-Concept, is consistent with our history of highly selective M&A
in our core competency of high-voltage power conversion. CamSemi brings a talented team of engineers with deep expertise
in AC-DC power supplies, and we plan to operate their UK headquarters as an R&D center focused on accelerating our
product development efforts. The acquisition also broadens our technology and product portfolio for low-power
applications, especially for high-efficiency chargers and adapters designed to meet tight requirements like the DoE-6
standards.
In summary, while disappointed with our 2014 performance, we look forward to renewed growth in 2015. The technology
behind the InnoSwitch family is among the most significant breakthroughs in the history of the power supply industry, and
arrives at an opportune moment with the convergence of rapid charging and new energy-efficiency standards. With energy-
efficiency providing a broad-based tailwind, we think the pieces are in place to drive growth across all four of our end-
market categories, and we expect momentum to build through the year as these drivers take shape.
Lastly, if you haven’t visited our website in recent months, the cover of this annual report may be your first look at our new
brand identity. Over the past five years we have broadened our focus from low-power AC-DC power supplies to a wider set
of high-voltage power conversion applications, ranging from milliwatts to megawatts of output, and spanning the clean-
power ecosystem from the generation and transmission of energy to the efficient consumption of power in everything from
electronics to lighting to heavy industry. This broader mission is reflected in our updated branding, which features a new
logo emblematic of our unparalleled expertise in power conversion, as well as a new website at a new address:
www.power.com. The new site shines a brighter light on the breadth of our product offerings and technical know-how, while
the change of address signals our ambitious long-term goals in the world of power electronics. We’re excited about this
important symbolic step for our company, and I hope you like the new look.
As always, I thank you for your continued support and I look forward to reporting on our progress in the year ahead.
Sincerely,
Balu Balakrishnan
President and Chief Executive Officer
March 2015
The statements in this Annual Report relating to future events or results are forward-looking statements that involve many risks and
uncertainties. In some cases, forward-looking statements are indicated by the use of words such as “would,” “could,” “will,” “may,”
“expect,” “believe,” “look forward,” “anticipate,” “if,” “future,” “intend,” “plan,” “estimate,” “potential,” “seek,” “scheduled,”
“continue” and similar words and phrases, including the negatives of these terms, or other variations of these terms. Our actual results
could differ materially from those contained in these forward-looking statements due to a number of factors, including changes in global
macroeconomic conditions; potential changes and shifts in customer demand away from end products that utilize our products; the
effects of competition; the outcome and cost of patent litigation; unforeseen costs and expenses; unfavorable fluctuations in component
costs resulting from changes in commodity prices and/or the exchange rate between the U.S. dollar and the Japanese yen; and the
challenges inherent in integrating and forecasting the performance of acquired businesses. In addition, new product introductions and
design wins are subject to the risks and uncertainties that typically accompany development and delivery of complex technologies to the
marketplace, including product development delays and defects and market acceptance of the new products. These and other risk factors
that may cause actual results to differ are discussed in Part I, Item 1A — “Risk Factors” included in the Form 10-K which is part of this
Annual Report. Also, this letter references non-GAAP financial information that excludes stock-based compensation expenses, certain
acquisition-related expenses and other items. The company believes that these non-GAAP measures offer an important analytical tool to
help investors understand the company's core operating results and trends, and to facilitate comparability with the company's historical
results and with the operating results of other companies that provide similar non-GAAP measures. These non-GAAP measures have
certain limitations as analytical tools and are not meant to be considered in isolation or as a substitute for GAAP financial information.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________
FORM 10-K
__________________________________
(Mark One)
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2014
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period
from to
Commission File Number 0-23441
__________________________________
POWER INTEGRATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
Incorporation or organization)
5245 Hellyer Avenue, San Jose, California
(Address of principal executive offices)
94-3065014
(I.R.S. Employer
Identification No.)
95138-1002
(Zip code)
(408) 414-9200
(Registrant's telephone number, including area code)
__________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.001 Par Value
Name of Each Exchange on Which Registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
_________________________________
YES
YES
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES
NO
The aggregate market value of registrant's voting and non-voting common stock held by non-affiliates of registrant on
June 30, 2014, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $1.6
billion, based upon the closing sale price of the common stock as reported on The NASDAQ Global Select Market. Shares of
common stock held by each officer, director and holder of 10% or more of the outstanding common stock have been excluded
in that such persons may be deemed to be affiliates. This determination of affiliate status is not a conclusive determination for
other purposes.
Outstanding shares of registrant's common stock, $0.001 par value, as of January 30, 2015: 29,331,133.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from
the Registrant's definitive proxy statement relating to the 2015 annual meeting of stockholders, which definitive proxy
statement will be filed with the Securities and Exchange Commission within 120 days after the fiscal year to which this Report
relates.
POWER INTEGRATIONS, INC.
TABLE OF CONTENTS
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
PART I.
BUSINESS .........................................................................................................................................
RISK FACTORS ................................................................................................................................
UNRESOLVED STAFF COMMENTS .............................................................................................
PROPERTIES.....................................................................................................................................
LEGAL PROCEEDINGS ..................................................................................................................
MINE SAFETY DISCLOSURES......................................................................................................
PART II.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES............................................
SELECTED FINANCIAL DATA ......................................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ...........................................................................................................
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .....................................................
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................................................................................
CONTROLS AND PROCEDURES ..................................................................................................
OTHER INFORMATION ..................................................................................................................
PART III.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ...........................
EXECUTIVE COMPENSATION......................................................................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ...............................................................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE..............................................................................................................................
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES .....................................................................
PART IV.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES ..................................................................
SIGNATURES . ...........................................................................................................................................................
Page
4
13
20
20
21
21
22
25
27
39
40
40
40
43
44
44
44
45
45
46
88
(cid:19)
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including information incorporated by reference herein, includes a
number of forward-looking statements that involve many risks and uncertainties. In some cases, forward-
looking statements are indicated by the use of words such as “would”, “could”, “will”, “may”, “expect”,
“believe”, “anticipate”, “if”, “future”, “intend”, “plan”, “estimate”, “potential”, “seek” or “continue” and similar
words and phrases, including the negatives of these terms, or other variations of these terms. These statements
reflect our current views with respect to future events and our potential financial performance and are subject to
risks and uncertainties that could cause our actual results and financial position to differ materially and
adversely from what is projected or implied in any forward-looking statements included in this Form 10-K.
These factors include, but are not limited to: we do not have long-term contracts with any of our customers and
if they fail to place, or if they cancel or reschedule orders for our products, our operating results and our
business may suffer; intense competition in the high-voltage power supply industry may lead to a decrease in
our average selling price and reduced sales volume of our products; if demand for our products declines in our
major end markets, our net revenues will decrease; we depend on third-party suppliers to provide us with wafers
for our products and if they fail to provide us sufficient quantities of wafers, our business may suffer; if we are
unable to adequately protect or enforce our intellectual property rights, we could lose market share, incur costly
litigation expenses, suffer incremental price erosion or lose valuable assets, any of which could harm our
operations and negatively impact our profitability; fluctuations in exchange rates, particularly the exchange rate
between the U.S. dollar and the Japanese yen, Swiss franc and Euro, may impact our gross margin or net
income; audits of our tax returns and potential future changes in tax laws may increase the amount of taxes we
are required to pay; we are engaged in intellectual property litigation, and if the outcome is unfavorable to us, it
could result in significant losses and the right to use some of our technologies; and the other risks factors
described in Item 1A of Part I -- “Risk Factors” of this Form 10-K. We make these forward looking statements
based upon information available on the date of this Form 10-K, and we have no obligation (and expressly
disclaim any obligation) to update or alter any forward-looking statements, whether as a result of new
information or otherwise. In evaluating these statements, you should specifically consider the risks described
under Item 1A of Part I -- “Risk Factors,” Item 7 of Part II -“Management's Discussion and Analysis of
Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K.
(cid:20)
PART I.
Item 1. Business.
Overview
We design, develop and market analog and mixed-signal integrated circuits (ICs) and other electronic
components and circuitry used in high-voltage power conversion. Our products are used in power converters
that convert electricity from a high-voltage source (i.e., 48 volts or higher) to the type of power required for a
specified downstream use. In most cases, this conversion entails, among other functions, converting
alternating current (AC) to direct current (DC) or vice versa, reducing or increasing the voltage, and regulating
the output voltage and/or current according to the customer's specifications.
A large percentage of our products are ICs used in AC-DC power supplies, which convert high-
voltage AC from a wall outlet to the low-voltage DC required by most electronic devices. Power supplies
incorporating our products are used with all manner of electronic products including mobile phones,
computers, entertainment and networking equipment, appliances, utility meters, industrial controls and LED
lights. Our highly integrated IC products incorporate high-voltage transistors (MOSFETs) and low-voltage
control circuitry on either a monolithic die or in a hybrid configuration (i.e., separate MOSFETs and
controllers side-by-side in a single package). We believe our patented TOPSwitch ICs, introduced in 1994,
were the first highly integrated ICs to achieve widespread acceptance in the power-supply market. We have
since introduced additional product families to broaden our addressable market and increase the functionality
of our products; we currently offer IC products that can be used in power supplies with output wattages up to
approximately 500 watts.
Since our May 2012 acquisition of CT-Concept Technologie AG (Concept), we also offer IGBT
drivers - circuit boards containing multiple ICs, electrical isolation components and other circuitry - used to
operate arrays of high-voltage, high-power transistors known as IGBT modules. These driver/module
combinations are used for power conversion in high-power applications (i.e., power levels ranging from tens
of kilowatts up to one gigawatt) such as industrial motors, solar- and wind-power systems, electric vehicles
and high-voltage DC transmission systems.
Our products bring a number of important benefits to the power-conversion market compared with less
advanced alternatives, including reduced component count and design complexity, smaller size, higher
reliability and reduced time-to-market. Our products also improve the energy efficiency of power converters,
helping our customers meet the increasingly stringent efficiency standards that have been adopted around the
world for many electronic products, and improving the efficacy of renewable-energy systems, electric vehicles
and other high-power applications.
Industry Background
Virtually every electronic device that plugs into a wall socket requires a power supply to convert the
high-voltage alternating current provided by electric utilities into the low-voltage direct current required by
most electronic devices. A power supply may be located inside a device, such as consumer appliances or
desktop computer, or it may be outside the device as in the case of a mobile-phone charger or an adapter for a
cordless phone.
Until approximately 1970, AC-DC power supplies were generally in the form of line-frequency, or
linear, transformers. These devices, consisting primarily of copper wire wound around an iron core, tend to be
bulky and heavy, and typically waste a substantial amount of electricity. In the 1970s, the invention of high-
voltage discrete semiconductors enabled the development of a new generation of power supplies known as
switched-mode power supplies, or switchers. These switchers generally came to be a cost-effective alternative
to linear transformers in applications requiring more than about three watts of power; in recent years the use of
linear transformers has declined even further as a result of energy-efficiency standards and higher raw-material
prices.
(cid:21)
Switchers are generally smaller, lighter-weight and more energy-efficient than linear transformers.
However, switchers designed with discrete components are highly complex, containing numerous components
and requiring a high level of analog design expertise. Further, the complexity and high component count of
discrete switchers make them relatively costly, difficult to manufacture and prone to failures. Also, some
discrete switchers lack inherent safety and energy-efficiency features; adding these features may further
increase the component count, cost and complexity of the power supply.
In high-power systems such as industrial motor drives, electric locomotives and renewable-energy
systems, power conversion is typically performed using arrays of high-power silicon transistors known as IGBT
modules; these modules are operated by electronic circuitry known as IGBT drivers, whose function is to ensure
accurate, safe and reliable operation of the IGBT modules. Much like discrete power supplies, discrete IGBT
drivers tend to be highly complex, requiring a large number of components and a great deal of design expertise.
Our Highly Integrated Approach
In 1994 we introduced TOPSwitch, the industry's first cost-effective high-voltage IC for switched-
mode AC-DC power supplies; we have since introduced a range of other product families such as TinySwitch,
LinkSwitch and Hiper, which have expanded the range of power-supply applications we can address. In May
2012 we acquired Concept, further expanding our addressable market to include IGBT drivers.
Our ICs and IGBT drivers drastically reduce the complexity and component count of power
converters compared to typical discrete designs by integrating many of the functions otherwise performed by
numerous discrete electronic components, and by eliminating (or reducing the size and cost of) additional
components through innovative system design. As a result, our products enable power converters to have
superior features and functionality at a total cost equal to or lower than that of many competing alternatives.
Our products offer the following key benefits:
• Fewer Components, Reduced Size and Higher Reliability
Our highly integrated ICs and IGBT drivers enable designs with up to 70% fewer components than
comparable discrete designs. This reduction in component count enhances reliability and efficiency, reduces
size, accelerates time-to-market and results in lower manufacturing costs for our customers. Power supplies
that incorporate our ICs are also lighter and more portable than comparable power supplies built with copper-
and-iron linear transformers, which are still used in some low-power applications.
• Reduced Time-to-Market, Enhanced Manufacturability
Because our products eliminate much of the complexity associated with the design of power
converters, designs can typically be completed in much less time, resulting in more efficient use of our
customers' design resources and shorter time-to-market for new designs. The lower component count and
reduced complexity enabled by our products also makes designs more suitable for high-volume
manufacturing. We also provide extensive hands-on design support as well as online design tools, such as our
PI Expert design software, that further reduce time-to-market and product development risks.
• Energy Efficiency
Our patented EcoSmart technology, introduced in 1998, improves the energy efficiency of electronic
devices during normal operation as well as standby and "no-load" conditions. This technology enables
manufacturers to cost-effectively meet the growing demand for energy-efficient products, and to comply with
increasingly stringent energy-efficiency requirements. Our Concept IGBT drivers also enable very high
efficiency in high-power systems; in many such systems, such as renewable-energy installations, even small
efficiency gains can dramatically shorten the payback period over which the cost of a system is recovered
through energy savings.
(cid:22)
• Wide Power Range and Scalability
Products in our current IC families can address AC-DC power supplies with output power up to
approximately 500 watts as well as some high-voltage DC-DC applications; our Concept IGBT drivers are used
in applications with power levels as high as one gigawatt. Within each of our product families, the designer can
scale up or down in power to address a wide range of designs with minimal design effort.
Energy Efficiency
Power supplies often draw significantly more electricity than the amount needed by the devices they
power. As a result, billions of dollars' worth of electricity is wasted each year, and millions of tons of
greenhouse gases are unnecessarily produced by power plants. Energy waste occurs during the normal
operation of a device and in standby mode, when the device is plugged in but idle. For example, computers
and printers waste energy while in “sleep” mode. TVs that are turned off by remote control consume energy
while awaiting a remote-control signal to turn them back on. A mobile-phone charger left plugged into a wall
outlet continues to draw electricity even when not connected to the phone (a condition known as “no-load”).
Many common household appliances, such as microwave ovens, dishwashers and washing machines, also
consume power when not in use. One study has estimated that standby power alone amounts to as much as
10% of residential energy consumption in developed countries.
Lighting is another major source of energy waste. Less than 5% of the energy consumed by traditional
incandescent light bulbs is converted to light, while the remainder is wasted as heat. The Alliance to Save
Energy has estimated that a conversion to efficient lighting technologies such as compact fluorescent bulbs and
light-emitting diodes, or LEDs, could save as much as $18 billion worth of electricity and 158 million tons of
carbon dioxide emissions per year in the U.S. alone.
In response to concerns about the environmental impact of carbon emissions, policymakers are taking
action to promote energy efficiency. For example, the ENERGY STAR® program and the European Union
Code of Conduct encourage manufacturers of electronic devices to comply with voluntary energy-efficiency
specifications. In 2007 the California Energy Commission, or CEC, implemented mandatory efficiency
standards for external power supplies. The CEC standards were implemented nationwide in the U.S. in July
2008 as a result of the Energy Independence and Security Act of 2007, or EISA; these federal standards are
scheduled to tighten in 2016. Similar standards for external power supplies took effect in the European Union in
2010 as part of the EU's EcoDesign Directive for Energy-Related Products.
In 2009 the CEC announced mandatory efficiency standards for televisions, which took effect in 2011,
and in January 2012 the CEC announced mandatory efficiency standards for battery-charging systems, which
took effect in 2013.
In 2010, the EU EcoDesign Directive implemented standards limiting standby power consumption on a
wide range of electronic products; the limit was reduced by 50 percent beginning in 2013, with many products
now limited to 500 milliwatts of standby usage. The EISA law also required substantial improvements in the
efficiency of lighting technologies beginning in 2012; effective in 2014, traditional 100-, 75-, 60- and 40-watt
bulbs may no longer be manufactured or sold in the U.S. Plans to eliminate conventional incandescent bulbs
have also been announced or enacted in other geographies such as Canada, Australia and Europe.
We believe we offer products that enable manufacturers to meet or exceed these regulations, and all
other such regulations of which we are aware. Our EcoSmart technology, introduced in 1998, dramatically
reduces waste in both operating and standby modes; we estimate that this technology has saved billions of
dollars' worth of standby power worldwide since 1998. In 2010 we introduced our CapZero and SenZero IC
families, which eliminate additional sources of standby waste in some power supplies; we have also introduced
a range of product families designed specifically for LED-lighting applications.
(cid:23)
Products
Below is a brief description of our products:
• AC-DC power conversion products
TOPSwitch, our first commercially successful product family, was introduced in 1994. Since that time
we have introduced a wide range of products (such as our TinySwitch, LinkSwitch, Hiper and InnoSwitch
families) to increase the level of integration, improve upon the functionality of the original TOPSwitch and
broaden the range of power levels we can address. In January 2015 we further expanded our product portfolio
with the acquisition of Cambridge Semiconductor Ltd., a producer of controller ICs for low-power AC-DC
applications. Since 2010 we have also introduced products designed specifically for LED-lighting applications,
including our LYTSwitch family.
In 2010 we introduced our CapZero and SenZero families, which reduce standby-power consumption
in certain applications by eliminating waste caused by so-called bleed resistors and sense resistors. Also, by
virtue of our 2010 acquisition of Qspeed Semiconductor, we offer a range of high-performance, high-voltage
diodes known as Qspeed diodes. Qspeed diodes utilize a proprietary silicon technology to provide a unique
combination of high efficiency and low noise, as well as high-frequency operation, which reduces the cost and
size of magnetic components in a power supply.
This portfolio of power-conversion products generally addresses power supplies ranging from less than
one watt of output up to approximately 500 watts of output, a market we refer to as the “low-power” market.
This market consists of an extremely broad range of applications including mobile-device chargers, consumer
appliances, utility meters, LCD monitors, main and standby power supplies for desktop computers and TVs,
LED lamps, and numerous other consumer and industrial applications.
•
IGBT drivers
As a result of our May 2012 acquisition of Concept, we offer a range of IGBT-driver products sold
primarily under the SCALE and SCALE-2 product-family names. These products are fully assembled circuit
boards incorporating multiple ICs, electrical isolation components and other circuitry. We offer both ready to
operate “plug-and-play” drivers designed specifically for use with particular IGBT modules, as well as “driver
cores,” which provide more basic driver functionality that customers can customize to their own specifications
after purchase. In addition, we offer custom made drivers based on our Scale technology.
• High-voltage DC-DC products
The DPA-Switch family of products, introduced in June 2002, was the first monolithic high-voltage
DC-DC power conversion IC designed specifically for use in distributed power architectures. Applications
include power-over-Ethernet powered devices such as voice-over-IP phones and security cameras, as well as
network hubs, line cards, servers, digital PBX phones, DC-DC converter modules and industrial controls.
Other Product Information
TOPSwitch, TinySwitch, LinkSwitch, DPA-Switch, EcoSmart, Hiper, Qspeed, InnoSwitch, Scale-I,
Scale-II, Scale-III, Peakswitch, Capzero, Chiphy, CONCEPT, Concept A Power Integrations Company and PI
Expert are trademarks of Power Integrations, Inc.
End Markets and Applications
Our net revenues consist primarily of sales of the products described above. When evaluating our net
revenues, we categorize our sales into the following four major end-market groupings: communications,
computer, consumer, and industrial electronics.
(cid:24)
The table below provides the approximate mix of our net sales by end market:
End Market
Communications.................................................................
Computer............................................................................
Consumer ...........................................................................
Industrial electronics ..........................................................
Year Ended December 31,
2013
2014
2012
18%
10%
37%
35%
21%
10%
35%
34%
24%
12%
36%
28%
Our products are used in a vast range of power-conversion applications in the above-listed end-
market categories. The following chart lists the most prominent applications for our products in each category.
Market Category
Primary Applications
Communications.................................. Mobile phones, routers, cordless phones, broadband modems, voice-
Computer .............................................
over-IP phones, other network and telecom gear
Desktop PCs, LCD monitors, servers, LCD projectors, adapters for
notebook computers
Consumer............................................. Major and small appliances, air conditioners, TV set-top boxes, digital
Industrial electronics ...........................
Sales, Distribution and Marketing
cameras, TVs, video-game consoles
LED lighting, industrial controls, utility meters, motor controls,
uninterruptible power supplies, tools, industrial motor drives,
renewable energy systems, electric locomotives, high-voltage DC
transmission systems
We sell our products to original equipment manufacturers, or OEMs, and merchant power supply
manufacturers through our direct sales staff and a worldwide network of independent sales representatives and
distributors. We have sales offices in the United States, Switzerland, United Kingdom, Germany, Italy, India,
China, Japan, Korea, the Philippines, Singapore and Taiwan. Direct sales to OEMs and merchant power
supply manufacturers represented approximately 25%, 25% and 26% of our net product revenues for 2014,
2013 and 2012, respectively, while sales to and through distributors accounted for approximately 75%, 75%
and 74% for 2014, 2013 and 2012, respectively. Most of our distributors are entitled to return privileges based
on sales revenue and are protected from price reductions affecting their inventories. Our distributors are not
subject to minimum purchase requirements, and sales representatives and distributors can discontinue
marketing our products at any time.
Our top ten customers, including distributors that resell to OEMs and merchant power supply
manufacturers, accounted for 59%, 59% and 64% of our net revenues for 2014, 2013 and 2012, respectively.
The following distributors accounted for 10% or more of total net revenues in 2014, 2013 and 2012:
Year Ended December 31,
Customer
Avnet.................................................................................
ATM Electronic Corporation............................................
2014
19%
*
2013
19%
*
2012
20%
12%
___________________________
* Total customer revenue was less than 10% of net revenues
No other customers accounted for more than 10% of net revenues in these periods.
In 2014, 2013 and 2012 sales to customers in the United States accounted for approximately 5% of
our net revenues in each of the respective years, and sales to customers outside of the United States accounted
(cid:25)
for approximately 95% of our net revenues in the same periods. See Note 6, “Significant Customers and
International Sales,” in our Notes to Consolidated Financial Statements regarding sales to customers located
in foreign countries. See our consolidated financial statements regarding total revenues and profit for the last
three fiscal years.
We are subject to risks stemming from the fact that most of our manufacturing and most of our
customers are located in foreign jurisdictions. Risks related to our foreign operations are set forth in Item 1A
of this Annual Report on Form 10-K, and include: potential weaker intellectual property rights under foreign
laws, the burden of complying with foreign laws and foreign-currency exchange risk. See, in particular, the
risk factor “Our international sales activities account for a substantial portion of our net revenues, which
subjects us to substantial risks” in Item 1A of this Form 10-K.
Backlog
Our sales are primarily made pursuant to standard purchase orders. The quantity of products purchased
by our customers as well as shipment schedules are subject to revisions that reflect changes in both the
customers' requirements and in manufacturing availability. Historically, our business has been characterized by
short-lead-time orders and quick delivery schedules; for this reason, and because orders in backlog are subject
to cancellation or postponement, backlog is not necessarily a reliable indicator of future revenues. Furthermore,
except in the case of our IGBT-driver products, we do not recognize revenue on distribution sales until our
distributors report that they have sold our products to their customers. As a result, our revenues in a given
period can differ significantly from the value of the products we ship in the same period. We believe this further
reduces the reliability of order backlog as an indicator of future revenues.
Research and Development
Our research and development efforts are focused on improving our technologies, introducing new
products to expand our addressable markets, reducing the costs of existing products, and improving the cost-
effectiveness and functionality of our customers' power converters. We have assembled teams of highly skilled
engineers to meet our research and development goals. These engineers have expertise in high-voltage device
structure and process technology, analog IC design, system architecture and packaging.
In 2014, 2013 and 2012, we incurred costs of $55.0 million, $51.7 million and $45.7 million,
respectively, for research and development. R&D expenses increased in 2014 compared to 2013, driven
primarily by increased payroll and related expenses as a result of increased headcount, due mainly to the
expansion of our product-development efforts. Research and development expenses increased in 2013
compared to the prior year due primarily to the May 2012 acquisition of Concept, which affected our results
for the full year in 2013 but was only included in our results for eight months of 2012. (See Note 11,
Acquisitions, in our Notes to Consolidated Financial Statements, for details).
Intellectual Property and Other Proprietary Rights
We use a combination of patents, trademarks, copyrights, trade secrets and confidentiality procedures
to protect our intellectual-property rights. As of December 31, 2014, we held 724 U.S. patents and had
received foreign patent protection on these patents resulting in 434 foreign patents. The U.S. patents have
expiration dates ranging from 2016 to 2033. We also hold trademarks in the U.S. and various other
geographies including Taiwan, Korea, Hong Kong, China, Europe and Japan.
We regard as proprietary some equipment, processes, information and knowledge that we have
developed and used in the design and manufacture of our products. Our trade secrets include a high-volume
production process that produces our patented high-voltage ICs. We attempt to protect our trade secrets and
other proprietary-information through non-disclosure agreements, proprietary information agreements with
employees and consultants, and other security measures.
(cid:26)
Long-lived Assets
Our long-lived assets consist of property and equipment and intangible assets. Our intangible assets
consist of developed and in-process technology, licenses, patents, customer relationships, trade name, domain
name and goodwill. Our long-lived assets, including property and equipment and intangible assets, are located
in the United States and in foreign countries; U.S. long-lived assets represented 40% in 2014, 2013 and 2012.
Long-lived assets held outside of the United States represented 60% in 2014, 2013 and 2012. In 2014, 2013
and 2012 the majority of our long-lived assets were located in foreign countries, primarily Switzerland, which
held approximately 31%, 33% and 33%, respectively, of our long-lived assets. See Note 2, Summary of
Significant Accounting Policies, in our notes to consolidated financial statements regarding total property and
equipment located in foreign countries.
Manufacturing
We contract with four foundries for the manufacture of the vast majority of our silicon wafers: (1)
ROHM Lapis Semiconductor Co., Ltd., or Lapis, (formerly OKI Electric Industry), (2) Seiko Epson
Corporation, or Epson, (3) X-FAB Semiconductor Foundries AG, or X-FAB, and (4) Renesas Electronics
Corporation (RSMC), or Renesas (through its subsidiary Renesas Electronics America, Inc.). These
contractors manufacture wafers using our proprietary high-voltage process technologies at fabrication facilities
located in Japan, Germany and the United States. For a small number of our products, we also buy wafers
manufactured in Singapore by Global Foundries using a standard, non-proprietary process to implement some
integrated control circuits for use in combination with our proprietary high-voltage MOSFETs.
Our IC products are assembled and packaged by independent subcontractors in China, Malaysia,
Thailand and the Philippines. Our ICs are tested predominantly at the facilities of our packaging subcontractors
in Asia and, to a small extent, at our headquarters facility in San Jose, California. Our IGBT-driver boards are
assembled by an independent subcontractor in Sri Lanka and tested at our facility in Switzerland.
Our fabless manufacturing model enables us to focus on our engineering and design strengths,
minimize capital expenditures and still have access to high-volume manufacturing capacity. We utilize both
proprietary and standard IC packages for assembly. Some of the materials used in our packages and aspects of
assembly are specific to our products. We require our assembly manufacturers to use high-voltage molding
compounds which are more difficult to process than industry standard molding compounds. We work closely
with our contractors on a continuous basis to maintain and improve our manufacturing processes.
Our proprietary high-voltage processes do not require leading-edge geometries for them to be cost-
effective, and can therefore use our foundries' older, low-cost facilities for wafer manufacturing. However,
because of our highly sensitive high-voltage process, we must interact closely with our foundries to achieve
satisfactory yields. Our wafer supply agreements with Lapis, Epson, X-FAB and Renesas expire in April 2018,
December 2020, December 2020 and December 2014, respectively. (The contract with Renesas is currently
being renegotiated and is expected to be finalized in the first quarter of 2015; until that time we are operating
under the terms of the expired contract.) Under the terms of the Lapis agreement, Lapis has agreed to reserve a
specified amount of production capacity and to sell wafers to us at fixed prices, which are subject to periodic
review jointly by Lapis and us. In addition, Lapis requires us to supply them with a rolling six-month forecast
on a monthly basis. Our agreement with Lapis provides for the purchase of wafers in U.S. dollars, with mutual
sharing of the impact of the fluctuations in the exchange rate between the Japanese yen and the U.S. dollar.
Under the terms of the Epson agreement, Epson has agreed to reserve a specified amount of production
capacity and to sell wafers to us at fixed prices, which are subject to periodic review jointly by Epson and us.
The agreement with Epson also requires us to supply rolling six-month forecasts on a monthly basis, to
provide for the purchase of wafers in U.S. dollars and to share the impact of the exchange rate fluctuation
between the Japanese yen and the U.S. dollar. Under the terms of the Renesas agreement and X-FAB
agreement, both foundries have agreed to reserve a specified amount of production capacity and to sell wafers
to us at fixed prices, which are subject to periodic review jointly by each of these foundries and us. The
agreements with Renesas and X-FAB also require us to supply them with rolling six-month forecasts on a
monthly basis. Our purchases of wafers from Renesas and X-FAB are denominated in U.S. dollars.
(cid:18)(cid:17)
Although some aspects of our relationships with Lapis, Epson, X-FAB and Renesas are contractual,
some important aspects of these relationships are not written in binding contracts and depend on the suppliers'
continued cooperation. We cannot assure that we will continue to work successfully with Lapis, Epson, X-
FAB or Renesas in the future, that they will continue to provide us with sufficient capacity at their foundries to
meet our needs, or that any of them will not seek an early termination of their wafer supply agreement with us.
Our operating results could suffer in the event of a supply disruption with Lapis, Epson, X-FAB or Renesas if
we were unable to quickly qualify alternative manufacturing sources for existing or new products or if these
sources were unable to produce wafers with acceptable manufacturing yields.
We typically receive shipments from our foundries approximately four to six weeks after placing
orders, and lead times for new products can be substantially longer. To provide sufficient time for assembly,
testing and finishing, we typically need to receive wafers four weeks before the desired ship date to our
customers. As a result of these factors and the fact that customers' orders can be placed with little advance
notice, we have only a limited ability to react to fluctuations in demand for our products. We try to carry a
substantial amount of wafer and finished goods inventory to help offset these risks and to better serve our
markets and meet customer demand.
Competition
Competing alternatives to our high-voltage ICs for the power-supply market include monolithic and
hybrid ICs from companies such as Fairchild Semiconductor, STMicroelectronics, Infineon, ON Semiconductor
and Sanken Electric Company, as well as PWM-controller chips paired with discrete high-voltage bipolar
transistors and MOSFETs, which are produced by a large number of vendors, including those listed above as
well as such companies as NXP Semiconductors, Diodes Inc., On-Bright Electronics and Dialog
Semiconductor. Self-oscillating switchers, built with discrete components supplied by numerous vendors, are
also commonly used. For some applications, line-frequency transformers are also a competing alternative to
designs utilizing our products. Our IGBT-driver products compete with alternatives from such companies as
Avago, Infineon and Semikron, as well as driver circuits made up of discrete devices.
Generally, our products enable customers to design power converters with total bill-of-materials
(BOM) costs similar to those of competing alternatives. As a result, the value of our products is influenced by
the prices of discrete components, which fluctuate in relation to market demand, raw-material prices and other
factors, but have generally decreased over time.
While we vary the pricing of our ICs in response to fluctuations in prices of alternative solutions, we
also compete based on a variety of other factors. Most importantly, the highly integrated nature of our products
enables designs that utilize fewer total components than comparable discrete designs or designs using other
integrated or hybrid products. This enables power converters to be designed more quickly and manufactured
more efficiently and reliably than competing designs. We also compete on the basis of product functionality
such as safety features and energy-efficiency features and on the basis of the technical support we provide to
our customers. This support includes hands-on design assistance as well as a range of design tools and
documentation such as software and reference designs. We also believe that our record of product quality and
history of delivering products to our customers on a timely basis serve as additional competitive advantages.
Warranty
We generally warrant that our products will substantially conform to the published specifications for
12 months from the date of shipment. Under the terms of our purchase orders, our liability is limited generally
to either a credit equal to the purchase price or replacement of the defective part.
Employees
As of December 31, 2014, we employed 590 full-time personnel, consisting of 95 in manufacturing,
189 in research and development, 252 in sales, marketing and applications support, and 54 in finance and
administration.
(cid:18)(cid:18)
Investor Information
We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing this material
electronically or otherwise furnishing it to the SEC. Investors may obtain free electronic copies or request
paper copies of these reports via the “for investors” section of our website, http://investors.power.com. Our
website address is provided solely for informational purposes. We do not intend, by this reference, that our
website should be deemed to be part of this Annual Report. The reports filed with the SEC are also available at
www.sec.gov.
Our corporate governance guidelines, the charters of our board committees, and our code of business
conduct and ethics, including ethics provisions that apply to our principal executive officer, principal financial
officer, controller and senior financial officers, are also available via the investor website listed above. These
items are also available in print to any stockholder who requests them by calling (408) 414-9200.
Power Integrations, Inc. was incorporated in California on March 25, 1988, and reincorporated in
Delaware in December 1997.
Executive Officers of the Registrant
As of January 30, 2015, our executive officers, who are appointed by and serve at the discretion of
the board of directors, were as follows:
Name
Balu Balakrishnan
Wolfgang Ademmer
Douglas Bailey
Radu Barsan
David "Mike" Matthews
Sandeep Nayyar
Ben Sutherland
John Tomlin
Clifford Walker
Position With Power Integrations
President, Chief Executive Officer and Director.............................................
Vice President, High-Power Products .............................................................
Vice President, Marketing ...............................................................................
Vice President, Technology.............................................................................
Vice President, Product Development.............................................................
Vice President, Finance and Chief Financial Officer......................................
Vice President, Worldwide Sales.....................................................................
Vice President, Operations ..............................................................................
Vice President, Corporate Development .........................................................
Age
60
47
48
62
50
55
43
67
63
Balu Balakrishnan has served as president and chief executive officer and as a director of Power
Integrations since January 2002. He served as president and chief operating officer from April 2001 to
January 2002. From January 2000 to April 2001, he was vice president of engineering and strategic
marketing. From September 1997 to January 2000, he was vice president of engineering and new business
development. From September 1994 to September 1997, Mr. Balakrishnan served as vice president of
engineering and marketing. Prior to joining Power Integrations in 1989, Mr. Balakrishnan was employed by
National Semiconductor Corporation.
Wolfgang Ademmer serves as vice president of high-power products. Mr. Ademmer joined Power
Integrations in 2012 in connection with our acquisition of Concept. Mr. Ademmer served as president and
CEO of Concept since 2009, where he was responsible for overseeing the operations of Concept. Prior to
joining Concept, he was with Infineon Technologies AG in Germany, leading that company’s appliance and
hybrid-vehicle business segment. He began his career in the power-electronics industry in 1993 at Eupec
Gmbh, where he held a succession of roles, including vice president of sales and marketing, until the merger
of Eupec and Infineon in 2005.
Douglas Bailey has served as our vice president of marketing since November 2004. From March
2001 to April 2004, he served as vice president of marketing at ChipX, a structured ASIC company. His earlier
(cid:18)(cid:19)
experience includes serving as business management and marketing consultant for Sapiential Prime, Inc.,
director of sales and business unit manager for 8x8, Inc., and serving in application engineering management
for IIT, Inc. and design engineering roles with LSI Logic, Inmos, Ltd. and Marconi.
Radu Barsan has served as our vice president of technology since January 2013, leading our foundry
engineering, technology development and quality organizations. Prior to joining Power Integrations, Mr.
Barsan served as chairman and CEO at Redfern Integrated Optics, Inc., a supplier of single frequency narrow
linewidth lasers, modules, and subsystems, from 2001 to 2013, where he was responsible for overseeing the
operations of Redfern Integrated Optics. Previously, he served in a succession of engineering-management and
technology-development roles at Phaethon Communications, Inc., a photonics technology company, Cirrus
Logic, Inc., a high-precision analog and digital signal processing company, Advanced Micro Devices, a
semiconductor design company, Cypress Semiconductor, Inc., a semiconductor company and Microelectronica
a distributor of electronic components. Mr. Barsan has more than 30 years of commercial experience in
semiconductor and optical components development, engineering and operations.
Mike Matthews has served as our vice president of product development since August 2012. Mr.
Matthews joined Power Integrations in 1992, managing our European application-engineering group and then
our European sales organization as managing director of Power Integrations (Europe). He has led our product-
definition team since 2000, serving as director of strategic marketing prior to assuming his current role. Prior
to joining Power Integrations, Mr. Matthews worked at several electric motor-drive companies and then at
Siliconix, a semiconductor company, as a motor-control applications specialist.
Sandeep Nayyar has served as our vice president and chief financial officer since June 2010.
Previously Mr. Nayyar served as vice president of finance at Applied Biosystems, Inc., a developer and
manufacturer of life-sciences products, from 2002 to 2009. Mr. Nayyar was a member of the executive
team with world-wide responsibilities for finance. From 1990 to 2001, Mr. Nayyar served in a
succession of financial roles including vice president of finance at Quantum Corporation, a computer
storage company. Mr. Nayyar also worked for five years in the public-accounting field at Ernst &
Young LLP. Mr. Nayyar is a Certified Public Accountant, Chartered Accountant and has a Bachelor of
Commerce from the University of Delhi, India.
Ben Sutherland has served as our vice president, worldwide sales since July 2011. Mr.
Sutherland joined our company in May 2000 as a member of our sales organization in Europe. From
May 2000 to July 2011, Mr. Sutherland served in various sales positions responsible primarily for our
international sales, and more recently for domestic sales. From 1997 to 2000, Mr. Sutherland served in
various product marketing and sales roles at Vishay Intertechnology, Inc., a manufacturer and supplier of
discrete semiconductors and passive electronic components.
John Tomlin has served as our vice president, operations since October 2001. From 1981 to 2001,
Mr. Tomlin served in a variety of senior management positions in operations, service, logistics and marketing,
most recently as vice president of worldwide operations at Quantum Corporation, a computer storage
company. In addition, Mr. Tomlin held positions in operations and supply chain management at Intel, a
semiconductor chip manufacturer, and Diablo Systems, a disc drive and daisy wheel printer company.
Clifford Walker has served as our vice president, corporate development since June 1995. From
September 1994 to June 1995, Mr. Walker served as vice president of Reach Software Corporation, a software
company. From December 1993 to September 1994, Mr. Walker served as president of Morgan Walker
International, a consulting company.
Item 1A. Risk Factors.
In addition to the other information in this report, the following factors should be considered carefully
in evaluating our business before purchasing shares of our stock.
Our quarterly operating results are volatile and difficult to predict. If we fail to meet the expectations
of public market analysts or investors, the market price of our common stock may decrease significantly. Our
(cid:18)(cid:20)
net revenues and operating results have varied significantly in the past, are difficult to forecast, are subject to
numerous factors both within and outside of our control, and may fluctuate significantly in the future. As a
result, our quarterly operating results could fall below the expectations of public market analysts or investors. If
that occurs, the price of our stock may decline.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Some of the factors that could affect our operating results include the following:
the demand for our products declining in the major end markets we serve, which may occur due to
competitive factors, supply-chain fluctuations or changes in macroeconomic conditions;
our products are sold through distributors, which limits our direct interaction with our end customers,
which reduces our ability to forecast sales and increases the complexity of our business;
competitive pressures on selling prices;
the inability to adequately protect or enforce our intellectual property rights;
expenses we are required to incur (or choose to incur) in connection with our intellectual property
litigations;
reliance on international sales activities for a substantial portion of our net revenues;
fluctuations in exchange rates, particularly the exchange rate between the U.S. dollar and the Japanese
yen, the Euro and the Swiss franc;
the volume and timing of delivery of orders placed by us with our wafer foundries and assembly
subcontractors, and their ability to procure materials;
our ability to develop and bring to market new products and technologies on a timely basis;
earthquakes, terrorists acts or other disasters;
continued impact of changes in securities laws and regulations, including potential risks resulting from
our evaluation of internal controls under the Sarbanes-Oxley Act of 2002;
the lengthy timing of our sales cycle;
undetected defects and failures in meeting the exact specifications required by our products;
the ability of our products to penetrate additional markets;
the volume and timing of orders received from customers;
audits by the Internal Revenue Service, and potential future changes in tax laws may increase the
amount of taxes we are required to pay;
our ability to attract and retain qualified personnel;
risks associated with acquisitions and strategic investments;
our ability to successfully integrate, or realize the expected benefits from, our acquisitions;
changes in environmental laws and regulations, including with respect to energy consumption and
climate change; and
interruptions in our information technology systems.
(cid:18)(cid:21)
If demand for our products declines in our major end markets, our net revenues will decrease. A
limited number of applications of our products, such as cellphone chargers, LED lights, desktop PCs and home
appliances make up a significant percentage of our net revenues. We expect that a significant level of our net
revenues and operating results will continue to be dependent upon these applications in the near term. The
demand for these products has been highly cyclical and has been impacted by economic downturns in the past.
Any economic slowdown in the end markets that we serve could cause a slowdown in demand for our ICs.
When our customers are not successful in maintaining high levels of demand for their products, their demand
for our ICs decreases, which adversely affects our operating results. Any significant downturn in demand in
these markets would cause our net revenues to decline and could cause the price of our stock to fall.
Our products are sold through distributors, which limits our direct interaction with our end customers,
therefore reducing our ability to forecast sales and increasing the complexity of our business. Sales to
distributors accounted for 75% of net revenues in both the years ended December 31, 2014, and December 31,
2013. Selling through distributors reduces our ability to forecast sales and increases the complexity of our
business, requiring us to:
•
•
•
manage a more complex supply chain;
monitor the level of inventory of our products at each distributor and
monitor the financial condition and credit-worthiness of our distributors, many of which are located
outside of the United States and not publicly traded.
Since we have limited ability to forecast inventory levels at our end customers, it is possible that there
may be significant build-up of inventories in the distributor channel, with the OEM or the OEM’s contract
manufacturer. Such a buildup could result in a slowdown in orders, requests for returns from customers, or
requests to move out planned shipments. This could adversely impact our revenues and profits. Any failure to
manage these complexities could disrupt or reduce sales of our products and unfavorably impact our financial
results.
Intense competition in the high-voltage power supply industry may lead to a decrease in our average
selling price and reduced sales volume of our products. The high-voltage power supply industry is intensely
competitive and characterized by significant price sensitivity. Our products face competition from alternative
technologies, such as linear transformers, discrete switcher power supplies, and other integrated and hybrid
solutions. If the price of competing solutions decreases significantly, the cost effectiveness of our products will
be adversely affected. If power requirements for applications in which our products are currently utilized go
outside the cost-effective range of our products, some of these alternative technologies can be used more cost
effectively. In addition, as our patents expire, our competitors could legally begin using the technology covered
by the expired patents in their products, potentially increasing the performance of their products and/or
decreasing the cost of their products, which may enable our competitors to compete more effectively. Our
current patents may or may not inhibit our competitors from getting any benefit from an expired patent. Our
U.S. patents have expiration dates ranging from 2016 to 2033. We cannot assure that our products will continue
to compete favorably or that we will be successful in the face of increasing competition from new products and
enhancements introduced by existing competitors or new companies entering this market. We believe our failure
to compete successfully in the high-voltage power supply business, including our ability to introduce new
products with higher average selling prices, would materially harm our operating results.
If we are unable to adequately protect or enforce our intellectual property rights, we could lose market
share, incur costly litigation expenses, suffer incremental price erosion or lose valuable assets, any of which
could harm our operations and negatively impact our profitability. Our success depends upon our ability to
continue our technological innovation and protect our intellectual property, including patents, trade secrets,
copyrights and know-how. We are currently engaged in litigation to enforce our intellectual property rights, and
associated expenses have been, and are expected to remain, material and have adversely affected our operating
results. We cannot assure that the steps we have taken to protect our intellectual property will be adequate to
prevent misappropriation, or that others will not develop competitive technologies or products. From time to
time, we have received, and we may receive in the future, communications alleging possible infringement of
patents or other intellectual property rights of others. Costly litigation may be necessary to enforce our
(cid:18)(cid:22)
intellectual property rights or to defend us against claimed infringement. The failure to obtain necessary licenses
and other rights, and/or litigation arising out of infringement claims could cause us to lose market share and
harm our business.
As our patents expire, we will lose intellectual property protection previously afforded by those
patents. Additionally, the laws of some foreign countries in which our technology is or may in the future be
licensed may not protect our intellectual property rights to the same extent as the laws of the United States, thus
limiting the protections applicable to our technology.
If we do not prevail in our litigation, we will have expended significant financial resources, potentially
without any benefit, and may also suffer the loss of rights to use some technologies. We are currently involved
in a number of patent litigation matters and the outcome of the litigation is uncertain. See Note 10, Legal
Proceedings and Contingencies, in our Notes to Consolidated Financial Statements. For example, in one of our
patent suits the infringing company has been found to infringe four of our patents. Despite the favorable court
finding, the infringing party filed an appeal to the damages awarded. In another matter, we are being sued in an
ongoing case for patent infringement. Should we ultimately be determined to be infringing another party's
patents, or if an injunction is issued against us while litigation is pending on those claims, such result could
have an adverse impact on our ability to sell products found to be infringing, either directly or indirectly. In the
event of an adverse outcome, we may be required to pay substantial damages, stop our manufacture, use, sale,
or importation of infringing products, or obtain licenses to the intellectual property we are found to have
infringed. We have also incurred, and expect to continue to incur, significant legal costs in conducting these
lawsuits, including the appeal of the case we won, and our involvement in this litigation and any future
intellectual property litigation could adversely affect sales and divert the efforts and attention of our technical
and management personnel, whether or not such litigation is resolved in our favor. Thus, even if we are
successful in these lawsuits, the benefits of this success may fail to outweigh the significant legal costs we will
have incurred.
Our international sales activities account for a substantial portion of our net revenues, which subjects
us to substantial risks. Sales to customers outside of the United States of America account for, and have
accounted for a large portion of our net revenues, including approximately 95% of our net revenues for both the
years ended December 31, 2014, and December 31, 2013. If our international sales declined and we were
unable to increase domestic sales, our revenues would decline and our operating results would be harmed.
International sales involve a number of risks to us, including:
•
•
•
•
•
•
potential insolvency of international distributors and representatives;
reduced protection for intellectual property rights in some countries;
the impact of recessionary environments in economies outside the United States;
tariffs and other trade barriers and restrictions;
the burdens of complying with a variety of foreign and applicable U.S. Federal and state laws; and
foreign-currency exchange risk.
Our failure to adequately address these risks could reduce our international sales and materially and
adversely affect our operating results. Furthermore, because substantially all of our foreign sales are
denominated in U.S. dollars, increases in the value of the dollar cause the price of our products in foreign
markets to rise, making our products more expensive relative to competing products priced in local currencies.
Fluctuations in exchange rates, particularly the exchange rate between the U.S. dollar and the
Japanese yen, Swiss franc and euro, may impact our gross margin and net income. Our exchange rate risk
related to the Japanese yen includes two of our major suppliers, Epson and Lapis, with which we have wafer
supply agreements based in U.S. dollars; however, these agreements also allow for mutual sharing of the impact
of the exchange rate fluctuation between Japanese yen and the U.S. dollar. Each year, our management and
(cid:18)(cid:23)
these suppliers review and negotiate 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 Power
Integrations and each of these suppliers. We completed the acquisition of Concept (located in Biel, Switzerland)
in the second quarter of 2012. We maintain cash denominated in Swiss francs and euros to fund the operations
of our Swiss subsidiary. The functional currency of our Swiss subsidiary is the U.S. dollar; gains and losses
arising from the re-measurement of non-functional currency balances are recorded in other income in our
consolidated statements of income, and material unfavorable exchange-rate fluctuations with the Swiss franc
could negatively impact our net income.
We depend on third-party suppliers to provide us with wafers for our products and if they fail to
provide us sufficient quantities of wafers, our business may suffer. We have supply arrangements for the
production of wafers with Lapis, Renesas, X-FAB and Epson. Our contracts with these suppliers expire on
varying dates, with the earliest having expired as of December 2014, which was Renesas (the contract with
Renesas is currently being renegotiated and is expected to be finalized in the first quarter of 2015, until that time
we are operating under the terms of the expired contract). Although some aspects of our relationships with
Lapis, Renesas, X-FAB and Epson are contractual, many important aspects of these relationships depend on
their continued cooperation. We cannot assure that we will continue to work successfully with Lapis, Renesas,
X-FAB and Epson in the future, and that the wafer foundries' capacity will meet our needs. Additionally, one or
more of these wafer foundries could seek an early termination of our wafer supply agreements. Any serious
disruption in the supply of wafers from Lapis, Renesas, X-FAB or Epson could harm our business. We estimate
that it would take 12 to 24 months from the time we identified an alternate manufacturing source to produce
wafers with acceptable manufacturing yields in sufficient quantities to meet our needs.
Although we provide our foundries with rolling forecasts of our production requirements, their ability
to provide wafers to us is ultimately limited by the available capacity of the wafer foundry. Any reduction in
wafer foundry capacity available to us could require us to pay amounts in excess of contracted or anticipated
amounts for wafer deliveries or require us to make other concessions to meet our customers' requirements, or
may limit our ability to meet demand for our products. Further, to the extent demand for our products exceeds
wafer foundry capacity, this could inhibit us from expanding our business and harm relationships with our
customers. Any of these concessions or limitations could harm our business.
If our third-party suppliers and independent subcontractors do not produce our wafers and assemble
our finished products at acceptable yields, our net revenues may decline. We depend on independent foundries
to produce wafers, and independent subcontractors to assemble and test finished products, at acceptable yields
and to deliver them to us in a timely manner. The failure of the foundries to supply us wafers at acceptable
yields could prevent us from selling our products to our customers and would likely cause a decline in our net
revenues and gross margin. In addition, our IC assembly process requires our manufacturers to use a high-
voltage molding compound that has been available from only a few suppliers. These compounds and their
specified processing conditions require a more exacting level of process control than normally required for
standard IC packages. Unavailability of assembly materials or problems with the assembly process can
materially and adversely affect yields, timely delivery and cost to manufacture. We may not be able to maintain
acceptable yields in the future.
In addition, if prices for commodities used in our products increase significantly, raw material costs
would increase for our suppliers which could result in an increase in the prices our suppliers charge us. To the
extent we are not able to pass these costs on to our customers; this would have an adverse effect on our gross
margins.
If our efforts to enhance existing products and introduce new products are not successful, we may not
be able to generate demand for our products. Our success depends in significant part upon our ability to
develop new ICs for high-voltage power conversion for existing and new markets, to introduce these products
in a timely manner and to have these products selected for design into products of leading manufacturers. New
product introduction schedules are subject to the risks and uncertainties that typically accompany development
and delivery of complex technologies to the market place, including product development delays and defects. If
we fail to develop and sell new products in a timely manner then our net revenues could decline.
(cid:18)(cid:24)
In addition, we cannot be sure that we will be able to adjust to changing market demands as quickly
and cost-effectively as necessary to compete successfully. Furthermore, we cannot assure that we will be able to
introduce new products in a timely and cost-effective manner or in sufficient quantities to meet customer
demand or that these products will achieve market acceptance. Our failure, or our customers' failure, to develop
and introduce new products successfully and in a timely manner would harm our business. In addition,
customers may defer or return orders for existing products in response to the introduction of new products.
When a potential liability exists we will maintain reserves for customer returns, however we cannot assure that
these reserves will be adequate.
In the event of an earthquake, terrorist act or other disaster, our operations may be interrupted and
our business would be harmed. Our principal executive offices and operating facilities are situated near San
Francisco, California, and most of our major suppliers, which are wafer foundries and assembly houses, are
located in areas that have been subject to severe earthquakes, such as Japan. Many of our suppliers are also
susceptible to other disasters such as tropical storms, typhoons or tsunamis. In the event of a disaster, such as
the earthquake and tsunami in Japan, we or one or more of our major suppliers may be temporarily unable to
continue operations and may suffer significant property damage. Any interruption in our ability or that of our
major suppliers to continue operations could delay the development and shipment of our products and have a
substantial negative impact on our financial results.
Securities laws and regulations, including potential risk resulting from our evaluation of internal
controls under the Sarbanes-Oxley Act of 2002, will continue to impact our results. Complying with the
requirements of the Sarbanes-Oxley Act of 2002 and NASDAQ's conditions for continued listing have imposed
significant legal and financial compliance costs, and are expected to continue to impose significant costs and
management burden on us. These rules and regulations also may make it more expensive for us to obtain
director and officer liability insurance, and we may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for
us to attract and retain qualified executive officers and members of our board of directors, particularly qualified
members to serve on our audit committee. Further, the rules and regulations under the Dodd-Frank Wall Street
Reform and Consumer Protection Act, which became effective in 2011, may impose significant costs and
management burden on us.
Additionally, because these laws, regulations and standards promulgated by the Sarbanes-Oxley Act
and the Dodd-Frank Act are expected to be subject to varying interpretations, their application in practice may
evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty
regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and
governance practices.
Because the sales cycle for our products can be lengthy, we may incur substantial expenses before we
generate significant revenues, if any. Our products are generally incorporated into a customer's products at the
design stage. However, customer decisions to use our products, commonly referred to as design wins, can often
require us to expend significant research and development and sales and marketing resources without any
assurance of success. These significant research and development and sales and marketing resources often
precede volume sales, if any, by a year or more. The value of any design win will largely depend upon the
commercial success of the customer's product. We cannot assure that we will continue to achieve design wins or
that any design win will result in future revenues. If a customer decides at the design stage not to incorporate
our products into its product, we may not have another opportunity for a design win with respect to that product
for many months or years.
Our products must meet exacting specifications, and undetected defects and failures may occur which
may cause customers to return or stop buying our products. Our customers generally establish demanding
specifications for quality, performance and reliability, and our products must meet these specifications. ICs as
complex as those we sell often encounter development delays and may contain undetected defects or failures
when first introduced or after commencement of commercial shipments. We have from time to time in the past
experienced product quality, performance or reliability problems. If defects and failures occur in our products,
we could experience lost revenue, increased costs, including warranty expense and costs associated with
(cid:18)(cid:25)
customer support and customer expenses, delays in or cancellations or rescheduling of orders or shipments and
product returns or discounts, any of which would harm our operating results.
If our products do not penetrate additional markets, our business will not grow as we expect. We
believe that our future success depends in part upon our ability to penetrate additional markets for our products.
We cannot assure that we will be able to overcome the marketing or technological challenges necessary to
penetrate additional markets. To the extent that a competitor penetrates additional markets before we do, or
takes market share from us in our existing markets, our net revenues and financial condition could be materially
adversely affected.
We do not have long-term contracts with any of our customers and if they fail to place, or if they cancel
or reschedule orders for our products, our operating results and our business may suffer. Our business is
characterized by short-term customer orders and shipment schedules, and the ordering patterns of some of our
large customers have been unpredictable in the past and will likely remain unpredictable in the future. Not only
does the volume of units ordered by particular customers vary substantially from period to period, but also
purchase orders received from particular customers often vary substantially from early oral estimates provided
by those customers for planning purposes. In addition, customer orders can be canceled or rescheduled without
significant penalty to the customer. In the past, we have experienced customer cancellations of substantial
orders for reasons beyond our control, and significant cancellations could occur again at any time. Also, a
relatively small number of distributors, OEMs and merchant power supply manufacturers account for a
significant portion of our revenues. Specifically, our top ten customers, including distributors, accounted for
59% of our net revenues in both the years ended December 31, 2014, and December 31, 2013. However, a
significant portion of these revenues are attributable to sales of our products through distributors of electronic
components. These distributors sell our products to a broad, diverse range of end users, including OEMs and
merchant power supply manufacturers, which mitigates the risk of customer concentration to a large degree.
Audits of our tax returns and potential future changes in tax laws may increase the amount of taxes we
are required to pay. Our operations are subject to income and transaction taxes in the United States and in
multiple foreign jurisdictions and to review or audit by the IRS and state, local and foreign tax authorities. In
addition, the United States, countries in Asia and other countries where we do business have been considering
changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax
laws applicable to multinational companies. These potential changes could adversely affect our effective tax
rates or result in other costs to us.
We must attract and retain qualified personnel to be successful and competition for qualified personnel
is intense in our market. Our success depends to a significant extent upon the continued service of our executive
officers and other key management and technical personnel, and on our ability to continue to attract, retain and
motivate qualified personnel, such as experienced analog design engineers and systems applications engineers.
The competition for these employees is intense, particularly in Silicon Valley. The loss of the services of one or
more of our engineers, executive officers or other key personnel could harm our business. In addition, if one or
more of these individuals leaves our employ, and we are unable to quickly and efficiently replace those
individuals with qualified personnel who can smoothly transition into their new roles, our business may suffer.
We do not have long-term employment contracts with, and we do not have in place key person life insurance
policies on, any of our employees.
We are exposed to risks associated with acquisitions and strategic investments. We have made, and in
the future intend to make, acquisitions of, and investments in, companies, technologies or products in existing,
related or new markets such as Concept. Acquisitions involve numerous risks, including but not limited to:
•
•
inability to realize anticipated benefits, which may occur due to any of the reasons described below, or
for other unanticipated reasons;
the risk of litigation or disputes with customers, suppliers, partners or stockholders of an acquisition
target arising from a proposed or completed transaction;
(cid:18)(cid:26)
•
•
impairment of acquired intangible assets and goodwill as a result of changing business conditions,
technological advancements or worse-than-expected performance, which would adversely affect our
financial results; and
unknown, underestimated and/or undisclosed commitments, liabilities or issues not discovered in our
due diligence of such transactions.
We also in the future may have strategic relationships with other companies, which may decline in
value and/or not meet desired objectives. The success of these strategic relationships depends on various factors
over which we may have limited or no control and requires ongoing and effective cooperation with strategic
partners. Moreover, these relationships are often illiquid, such that it may be difficult or impossible for us to
monetize such relationships.
Our inability to successfully integrate, or realize the expected benefits from, our acquisitions could
adversely affect our results. We have made, and in the future intend to make, acquisitions of other businesses,
such as Cambridge Semiconductor Limited and Concept, and with these acquisitions there is a risk that
integration difficulties may cause us not to realize expected benefits. The success of the acquisitions could
depend, in part, on our ability to realize the anticipated benefits and cost savings (if any) from combining the
businesses of the acquired companies and our business, which may take longer to realize than expected.
Changes in environmental laws and regulations may increase our costs related to obsolete products in
our existing inventory. Changing environmental regulations and the timetable to implement them continue to
impact our customers' demand for our products. As a result there could be an increase in our inventory
obsolescence costs for products manufactured prior to our customers' adoption of new regulations. Currently we
have limited visibility into our customers' strategies to implement these changing environmental regulations into
their business. The inability to accurately determine our customers' strategies could increase our inventory costs
related to obsolescence.
Interruptions in our information technology systems could adversely affect our business. We rely on
the efficient and uninterrupted operation of complex information technology systems and networks to operate
our business. Any significant system or network disruption, including but not limited to new system
implementations, computer viruses, security breaches, or energy blackouts could have a material adverse impact
on our operations, sales and operating results. We have implemented measures to manage our risks related to
such disruptions, but such disruptions could still occur and negatively impact our operations and financial
results. In addition, we may incur additional costs to remedy any damages caused by these disruptions or
security breaches.
Uncertainties arising out of economic consequences of current and potential military actions or
terrorist activities and associated political instability could adversely affect our business. Like other U.S.
companies, our business and operating results are subject to uncertainties arising out of economic consequences
of current and potential military actions or terrorist activities and associated political instability, and the impact
of heightened security concerns on domestic and international travel and commerce. These uncertainties could
also lead to delays or cancellations of customer orders, a general decrease in corporate spending or our inability
to effectively market and sell our products. Any of these results could substantially harm our business and
results of operations, causing a decrease in our revenues.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We own our principal executive, administrative, manufacturing and technical offices which are located
in San Jose, California. We also own a research and development facility in New Jersey, which was purchased
in 2010 in connection with our acquisition of an early-stage research and development company, and a test
facility in Biel, Switzerland which was acquired in connection with our acquisition of Concept. We lease
(cid:19)(cid:17)
administrative office space in Singapore and Switzerland, a research and development facility in Canada and a
design center in Germany, in addition to sales offices in various countries around the world to accommodate our
sales force. We believe that our current facilities are sufficient for our company; however, if headcount
increases above capacity we may need to lease additional space.
Item 3. Legal Proceedings.
Information with respect to this item may be found in Note 10, Legal Proceedings and Contingencies,
in our Notes to Consolidated Financial Statements included later in this Annual Report on Form 10-K, which
information is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
(cid:19)(cid:18)
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock trades on the NASDAQ Global Select Market under the symbol “POWI”. The
following table shows the high and low closing sales prices per share of our common stock as reported on the
NASDAQ Global Select Market for the periods indicated during which our common stock traded on the
NASDAQ Global Select Market.
Year Ended December 31, 2014
Fourth quarter.................................................................... $
Third quarter ..................................................................... $
Second quarter................................................................... $
First quarter ....................................................................... $
Price Range
High
Low
54.96 $
60.25 $
66.60 $
67.16 $
42.78
51.69
47.23
54.94
Year Ended December 31, 2013
Fourth quarter.................................................................... $
Third quarter ..................................................................... $
Second quarter................................................................... $
First quarter ....................................................................... $
High
Low
57.28 $
56.45 $
45.18 $
44.65 $
51.40
41.16
38.28
34.07
As of January 30, 2015, there were approximately 39 stockholders of record. Because brokers and
other institutions hold many of our shares on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders.
In October 2013, our board of directors declared four quarterly cash dividends in the amount of $0.10 per
share to be paid to stockholders of record at the end of each quarter in 2014; payouts of approximately $3.0 million
each occurred on March 31, 2014, and June 30, 2014. In April 2014, our board of directors increased the dividend
payments for the third and fourth quarters of 2014 to $0.12 per share; these quarterly payouts of approximately
$3.6 million and $3.5 million were made on September 30, 2014, and December 31, 2014. In 2013 we paid quarterly
dividends of $0.08 per share, which resulted in cash payouts of approximately $2.3 million to $2.4 million per
quarter. In January 2015, our board of directors extended the $0.12 quarterly dividend through each quarter in
2015. The declaration of any future cash dividend is at the discretion of the board of directors and will depend on
our financial condition, results of operations, capital requirements, business conditions and other factors, as well
as a determination that cash dividends are in the best interest of our stockholders.
(cid:19)(cid:19)
ISSUER PURCHASES OF EQUITY SECURITIES
In October 2012, our board of directors authorized the use of $50.0 million for the repurchase of our
common stock, subject to pre-defined price/volume guidelines. In 2012, we purchased approximately 0.7
million shares for $20.5 million under this stock repurchase program. No shares were purchased in the twelve
months ended December 31, 2013, due to the stock price levels exceeding the pre-defined price guidelines
mentioned above. In 2014 our board of directors authorized the use of an additional $75.0 million for this
purpose. In the twelve months ended December 31, 2014, we purchased 1.6 million shares for $80.8 million. As
of December 31, 2014, we had $23.7 million available for future stock repurchases. Authorization of future
repurchase programs is at the discretion of the board of directors and will depend on our financial condition,
results of operations, capital requirements, business conditions as well as other factors.
Period
October 1, 2014 to October 31, 2014.............
November 1, 2014 to November 30, 2014.....
December 1, 2014 to December 31, 2014......
Total ...............................................................
Total
Number of
Shares
Purchased
564,602
153,831
9,983
728,416
Average
Price Paid
Per Share
$
$
$
48.09
51.04
49.81
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Approximate Dollar
Value of Shares that
May Yet be
Repurchased Under
the Plans or
Programs (in
millions)
$
$
$
564,602
153,831
9,983
728,416
32.1
24.3
23.7
(cid:19)(cid:20)
Performance Graph(1)
The following graph shows the cumulative total stockholder return of an investment of $100 in cash on
December 31, 2009 through December 31, 2014, for (a) our common stock, (b) The NASDAQ Composite
Index and (c) The NASDAQ Electronic Components Index. Pursuant to applicable SEC rules, all values
assume reinvestment of the full amount of all dividends. The stockholder return shown on the graph below is
not necessarily indicative of future performance, and we do not make or endorse any predictions as to future
stockholder returns.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Power Integrations, Inc., the NASDAQ Composite Index,
and the NASDAQ Electronic Components Index
$250
$200
$150
$100
$50
$0
12/09
12/10
12/11
12/12
12/13
12/14
Power Integrations, Inc.
NASDAQ Composite
NASDAQ Electronic Components
*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31, 2014.
g
y
,
Power Integrations, Inc.
NASDAQ Composite
NASDAQ Electronic Components
______________________________
12/09
100.00
100.00
100.00
12/10
111.10
118
116
12/11
92
12/12
94
118.70
139.00
105
104
12/13
12/14
157
197
144
147
224
191
(1) This Section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be
incorporated by reference in any filing of Power Integrations under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any
general incorporation language in any such filing.
(cid:19)(cid:21)
Item 6. Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with ''Management's
Discussion and Analysis of Financial Condition and Results of Operations'' and the consolidated financial
statements and the notes thereto included elsewhere in this Form 10-K to fully understand factors that may
affect the comparability of the information presented below. We derived the selected consolidated balance
sheet data as of December 31, 2014 and 2013, and the consolidated statements of income (loss) data for the
years ended December 31, 2014, 2013 and 2012, from our audited consolidated financial statements, and
accompanying notes, in this Annual Report on Form 10-K. In the year ended December 31, 2012, we incurred
charges related to our investment in SemiSouth Laboratories (see Note 12, Transactions With Third Party, in
our notes to consolidated financial statements), and from our settlement with the IRS related to the
examination of our tax returns for the years 2003 through 2006 (refer to Note 8, Provision for Income Taxes, in
our notes to consolidated financial statements). The consolidated statements of income (loss) data for each of
the years ended December 31, 2011 and 2010, and the consolidated balance sheet data as of December 31,
2012, 2011 and 2010, are derived from our audited consolidated financial statements which are not included in
this report. Our historical results are not necessarily indicative of results for any future period.
(cid:19)(cid:22)
40,295
32,624
24,508
—
97,427
43,219
1,876
—
1,876
35,886
31,167
25,562
—
92,615
59,926
1,879
—
1,879
Our selected financial data is presented below (in thousands, except per share data).
Year Ended December 31,
2014
2013
2012
2011
2010
Consolidated Statements of Income (Loss):
Net revenues .................................................................... $ 348,797
159,227
Cost of revenues ..............................................................
Gross profit ......................................................................
189,570
Operating expenses:
$ 347,089
163,853
183,236
$ 305,370
154,868
150,502
$ 298,739
158,093
140,646
$ 299,803
147,262
152,541
Research and development ......................................
Sales and marketing.................................................
General and administrative ......................................
Charge related to SemiSouth ...................................
Total operating expenses..................................
Income from operations...................................................
Other income (expense):
54,981
47,796
30,997
—
133,774
55,796
51,654
45,466
32,050
—
129,170
54,066
45,709
37,998
30,243
25,200
139,150
11,352
Other income, net.....................................................
Charge related to SemiSouth ...................................
Total other income (expense)..........................
Income (loss) before provision for (benefit from)
56,814
income taxes ....................................................................
(2,730)
Provision for (benefit from) income taxes.......................
Net income (loss)............................................................. $ 59,544
Earnings (loss) per share:
1,018
—
1,018
Basic ....................................................................... $
Diluted .................................................................... $
1.99
1.93
Shares used in per share calculation:
Basic .......................................................................
Diluted ....................................................................
Dividend per share........................................................... $
29,976
30,829
0.44
1,361
—
1,361
1,611
(33,745)
(32,134)
55,427
(1,839)
$ 57,266
(20,782)
13,622
$ (34,404)
45,095
10,804
$ 34,291
61,805
12,341
$ 49,464
$
$
$
1.95
1.88
29,421
30,420
0.32
$
$
$
(1.20)
(1.20)
28,636
28,636
0.20
$
$
$
1.20
1.14
28,609
29,964
0.20
$
$
$
1.78
1.67
27,837
29,556
0.20
2014
Year Ended December 31,
2012
2013
2011
2010
Consolidated Balance Sheet Data:
Cash and cash equivalents ............................................... $ 60,708
Short-term marketable securities .....................................
114,575
Cash, cash equivalents and short-term marketable
securities .......................................................................... $ 175,283
Working capital................................................................ $ 210,752
Total assets....................................................................... $ 493,663
Long-term liabilities ........................................................ $
7,827
Stockholders' equity......................................................... $ 430,676
$ 92,928
109,179
$ 63,394
31,766
$ 139,836
40,899
$ 155,667
27,355
$ 202,107
$ 227,004
$ 501,421
$ 14,317
$ 436,686
$ 95,160
$ 124,297
$ 399,130
$ 17,514
$ 341,049
$ 180,735
$ 216,079
$ 432,919
$ 34,368
$ 364,529
$ 183,022
$ 210,664
$ 433,070
$ 29,580
$ 352,644
(cid:19)(cid:23)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of our operations should
be read in conjunction with the consolidated financial statements and the notes to those statements included
elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those contained in these
forward-looking statements due to a number of factors, including those discussed in Part I, Item 1A “Risk
Factors” and elsewhere in this report.
Business Overview
We design, develop and market analog and mixed-signal integrated circuits (ICs) and other electronic
components and circuitry used in high-voltage power conversion. Our products are used in power converters
that convert electricity from a high-voltage source (typically 48 volts or higher) to the type of power required
for a specified downstream use. In most cases, this conversion entails, among other functions, converting
alternating current (AC) to direct current (DC) or vice versa, reducing or increasing the voltage, and regulating
the output voltage and/or current according to the customer's specifications.
A large percentage of our products are ICs used in AC-DC power supplies, which convert the high-
voltage AC from a wall outlet to the low-voltage DC required by most electronic devices. Power supplies
incorporating our products are used with all manner of electronic products including mobile phones,
computers, entertainment and networking equipment, appliances, electronic utility meters, industrial controls
and LED lights.
Since our May 2012 acquisition of CT-Concept Technologie AG (Concept), we also offer IGBT
drivers - circuit boards containing multiple ICs, electrical isolation components and other circuitry - used to
operate arrays of high-voltage, high-power transistors known as IGBT modules. These driver/module
combinations are used for power conversion in high-power applications (i.e., power levels ranging from tens
of kilowatts up to one gigawatt) such as industrial motors, solar- and wind-power systems, electric vehicles
and high-voltage DC transmission systems.
Our net revenues were $348.8 million, $347.1 million and $305.4 million in 2014, 2013 and 2012,
respectively. In 2014 revenue increased by $1.7 million, due primarily to growth in three of our primary end-
market categories (consumer, industrial and computer), driven by higher unit sales for a range of applications
including consumer appliances, industrial motor drives and desktop computers. The increase was partially
offset by lower sales into the communications end market due primarily to lower unit sales for residential-
networking applications and cellphone chargers. The increase in revenues from 2012 to 2013 was due in part
to the inclusion of the former Concept business for the full year (compared to only eight months in 2012), and
also reflected higher unit sales into the industrial, consumer and computing end markets, particularly for
applications such as consumer appliances, industrial controls, LED lighting, industrial motor drives,
renewable-energy systems and desktop PCs.
Our top ten customers, including distributors that resell to OEMs and merchant power supply
manufacturers, accounted for 59%, 59% and 64% of our net revenues for 2014, 2013 and 2012, respectively.
Our top two customers, both distributors of our products, collectively accounted for approximately 28% of our
net revenues for 2014, 28% for 2013 and 32% in 2012. In 2014, 2013 and 2012, international sales made up
95% of net revenues.
Because our industry is intensely price-sensitive, our gross margin (gross profit divided by net
revenues) is subject to change based on the relative pricing of solutions that compete with ours. Variations in
product mix, end-market mix and customer mix can also cause our gross margin to fluctuate. Also, because we
purchase a large percentage of our silicon wafers from foundries located in Japan, our gross margin is
influenced by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. All else being
equal, a 10% change in the value of the U.S. dollar compared to the Japanese yen would eventually result in a
(cid:19)(cid:24)
corresponding change in our gross margin of approximately 0.8% to 1.0%; this sensitivity may increase or
decrease depending on the percentage of our wafer supply that we purchase from Japanese suppliers. Also,
although our wafer fabrication and assembly operations are outsourced, as are most of our test operations, a
portion of our production costs are fixed in nature. As a result, our unit costs and gross profit margin are
impacted by the volume of units we produce.
Our gross profit, defined as net revenues less cost of revenues, was $189.6 million, or 54% of net
revenues, in 2014, compared to $183.2 million, or 53% of net revenues in 2013, and $150.5 million, or 49% of
net revenues, in 2012. The increase in 2014 was due primarily to: a favorable end-market mix, with a greater
percentage of revenue coming from higher-margin end markets; a decline in the value of the Japanese yen
versus the U.S. dollar, which decreased the cost of silicon wafers purchased from our Japanese wafer-
fabrication foundries; and unit cost benefits resulting from higher production volumes. The increase in gross
margin from 2012 to 2013 was due primarily to lower manufacturing costs stemming from a combination of
internal cost-reduction initiatives, unit-cost benefits from higher production volumes, the decline in the value of
the Japanese yen versus the U.S. dollar and a more favorable end-market mix.
Total operating expenses in 2014, 2013 and 2012 were $133.8 million, $129.2 million and $139.2
million, respectively. Operating expenses increased in 2014 compared to the prior year as a result of higher
research and development expenses, including increased headcount as well as greater engineering-materials
and equipment-depreciation expenses, all in support of our product-development efforts. Sales and marketing
expenses also increased, due primarily to the expansion of our sales and application-support staffs, which
resulted in higher salary and related expenses. Operating expenses decreased in 2013 from 2012 because in
2012 we recognized impairment charges associated with our investment in SemiSouth Laboratories, including
the write-off of $10.0 million for a prepaid royalty and $15.2 million related to a payment under a loan
guarantee for SemiSouth. (Refer to Note 12, Transactions With Third Party, in our Notes to Consolidated
Financial Statements, for details on the impairment). The decrease in 2013 was partially offset by higher salary
and intangible asset amortization expenses associated with the former Concept business, reflecting its
inclusion for the full year of 2013 compared to only eight months in 2012. (Refer to Note 11, Acquisitions, in
our Notes to Consolidated Financial Statements, for details).
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America, or U.S. GAAP, requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, we evaluate our estimates, including those listed below. We
base our estimates on historical facts and various other assumptions that we believe to be reasonable at the time
the estimates are made. Actual results could differ from those estimates.
Our critical accounting policies are as follows:
•
•
•
•
•
•
revenue recognition;
stock-based compensation;
estimating write-downs for excess and obsolete inventory;
income taxes;
business combinations; and
goodwill and intangible assets.
Our critical accounting policies are important to the portrayal of our financial condition and results of
operations, and require us to make judgments and estimates about matters that are inherently uncertain. A brief
description of these critical accounting policies is set forth below. For more information regarding our
accounting policies, see Note 2, Summary of Significant Accounting Policies, in our Notes to Consolidated
Financial Statements.
(cid:19)(cid:25)
Revenue recognition
Product revenues consist of sales to original equipment manufacturers, or OEMs, merchant power
supply manufacturers and distributors. Approximately 75% of our net product sales were made to distributors in
2014. We apply the provisions of Accounting Standard Codification (“ASC”) 605-10 (“ASC 605-10”) and all
related appropriate guidance. Revenue is recognized when all of the following criteria have been met:
(1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the price is fixed or
determinable, and (4) collectability is reasonably assured. Customer purchase orders are generally used to
determine the existence of an arrangement. Delivery is considered to have occurred when title and risk of loss
have transferred to our customer. We evaluate whether the price is fixed or determinable based on the payment
terms associated with the transaction and whether the sales price is subject to refund or adjustment. With respect
to collectability, we perform credit checks for new customers and perform ongoing evaluations of our existing
customers' financial condition and require letters of credit whenever deemed necessary.
Sales to international OEMs and merchant power supply manufacturers for shipments from our facility
outside of the United States are pursuant to EX Works, or EXW, shipping terms, meaning that title to the
product transfers to the customer upon shipment from our foreign warehouse. Sales to international OEM
customers and merchant power supply manufacturers that are shipped from our facility in California are
pursuant to Delivered at Frontier, or DAF, shipping terms. As such, title to the product passes to the customer
when the shipment reaches the destination country and revenue is recognized upon the arrival of the product in
that country. Shipments to OEMs and merchant power supply manufacturers in the Americas are pursuant to
Free on Board, or FOB, point of origin shipping terms meaning that title is passed to the customer upon
shipment. Revenue is recognized upon title transfer for sales to OEMs and merchant power supply
manufacturers, assuming all other criteria for revenue recognition are met.
Sales to most distributors are made under terms allowing certain price adjustments and rights of return
on our products held by the distributors. As a result of these rights, we defer the recognition of revenue and the
costs of revenues derived from sales to these distributors until our distributors report that they have sold our
products to their customers. Our recognition of such distributor sell-through is based on point of sales reports
received from the distributor, at which time the price is no longer subject to adjustment and is fixed, and the
products are no longer subject to return to us except pursuant to warranty terms. The gross profit that is deferred
upon shipment to the distributor is reflected as “deferred income on sales to distributors” in the accompanying
consolidated balance sheets. The total deferred revenue as of December 31, 2014 and 2013, was approximately
$25.0 million and $25.5 million, respectively. The total deferred cost as of December 31, 2014 and 2013, was
approximately $9.8 million and $9.8 million, respectively.
Frequently, distributors need to sell at a price lower than the standard distribution price in order to win
business. At the time the distributor invoices its customer or soon thereafter, the distributor submits a “ship and
debit” price adjustment claim to us to adjust the distributor's cost from the standard price to the pre-approved
lower price. After we verify that the claim was pre-approved, a credit memo is issued to the distributor for the
ship and debit claim. We maintain a reserve for these unprocessed claims and for estimated future ship and debit
price adjustments. The reserves appear as a reduction to accounts receivable and deferred income on sales to
distributors in our accompanying consolidated balance sheets. To the extent future ship and debit claims
significantly exceed amounts estimated, there could be a material impact on the deferred revenue and deferred
margin ultimately recognized. To evaluate the adequacy of our reserves, we analyze historical ship and debit
payments and levels of inventory in the distributor channels.
Sales to certain of our distributors are made under terms that do not include rights of return or price
concessions after the product is shipped to the distributor. Accordingly, product revenue is recognized upon
shipment and title transfer assuming all other revenue recognition criteria are met.
Stock-based compensation
We apply the provisions of ASC 718-10, Share-Based Payment. Under the provisions of ASC 718-10,
we recognize the fair value of stock-based compensation in our financial statements over the requisite service
period of the individual grants, which generally equals a four-year vesting period. We use estimates of volatility,
(cid:19)(cid:26)
expected term, risk-free interest rate, dividend yield and forfeitures in determining the fair value of these awards
and the amount of compensation expense to recognize. Changes in the estimated forfeiture rate could result in
changes to our current compensation charges for historical grants.
Estimating write-downs for excess and obsolete inventory
When evaluating the adequacy of our valuation adjustments for excess and obsolete inventory, we
identify excess and obsolete products and also analyze historical usage, forecasted production based on demand
forecasts, current economic trends and historical write-offs. This write-down is reflected as a reduction to
inventory in the consolidated balance sheets and an increase in cost of revenues. If actual market conditions are
less favorable than our assumptions, we may be required to take additional write-downs, which could adversely
impact our cost of revenues and operating results.
Income taxes
Income tax expense is an estimate of current income taxes payable or refundable in the current fiscal
year based on reported income before income taxes. Deferred income taxes reflect the effect of temporary
differences and carry-forwards that are recognized for financial reporting and income tax purposes.
We account for income taxes under the provisions of ASC 740. Under the provisions of ASC 740,
deferred tax assets and liabilities are recognized based on the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are
expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. We recognize valuation allowances to reduce any deferred tax assets to the amount that we
estimate will more likely than not be realized based on available evidence and management’s judgment. We
limit the deferred tax assets recognized related to some of our officers’ compensation to amounts that we
estimate will be deductible in future periods based upon Internal Revenue Code Section 162(m). In the event
that we determine, based on available evidence and management judgment, that all or part of the net deferred
tax assets will not be realized in the future, we would record a valuation allowance in the period the
determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating
the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner
inconsistent with our expectations could have a material impact on our results of operations and financial
position.
As of December 31, 2014, we continue to maintain a valuation allowance on our California deferred
tax assets as we believe that it is not more likely than not that the deferred tax assets will be fully realized. We
also maintain a valuation allowance with respect to some of our deferred tax assets relating primarily to tax
credits in Canada and the state of New Jersey as well as Federal capital loss carryforwards.
On May 20, 2014, we signed an agreement to settle all positions and close out the examination of our
income tax returns for the years 2007 through 2009. As a result, we adjusted our tax balances based on the facts,
circumstances, and information available at the reporting date. The resolution of the audit resulted in a federal
tax benefit to us of $2.8 million; we also recorded a state tax benefit of $0.5 million. The agreement with IRS
also allowed us to repatriate up to $5.0 million from our foreign subsidiary without incurring additional U.S.
income taxes.
We engage in qualifying activities for R&D credit purposes. The Tax Increase Prevention Act of 2014
was signed into law on December 19, 2014, to extend the federal research and development credit for 2014.
Business combinations
The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities
assumed based upon their estimated fair values at the date of acquisition. To the extent the purchase price
exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such
excess is allocated to goodwill. We determine the estimated fair values after review and consideration of
relevant information, including discounted cash flows, quoted market prices and estimates made by
(cid:20)(cid:17)
management. We adjust the preliminary purchase price allocation, as necessary, during the measurement period
of up to one year after the acquisition closing date as we obtain more information as to facts and circumstances
existing at the acquisition date impacting asset valuations and liabilities assumed. Acquisition-related costs are
recognized separately from the acquisition and are expensed as incurred.
Goodwill and intangible assets
In accordance with ASC 350-10, Goodwill and Other Intangible Assets, we evaluate goodwill for
impairment on an annual basis, or as other indicators of impairment emerge. The provisions of ASC 350-10
require that we perform a two-step impairment test. In the first step, we compare the implied fair value of our
single reporting unit to its carrying value, including goodwill. If the fair value of our reporting unit exceeds the
carrying amount no impairment adjustment is required. If the carrying amount of our reporting unit exceeds the
fair value, step two will be completed to measure the amount of goodwill impairment loss, if any exists. If the
carrying value of our single reporting unit's goodwill exceeds its implied fair value, then we record an
impairment loss equal to the difference, but not in excess of the carrying amount of the goodwill. Under the
amendments of ASC 350-10, ASU No. 2011-08, Testing Goodwill for Impairment, beginning in the first quarter
of 2012 we have the option to first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less
than its carrying amount. If, we elect this option and after assessing the totality of events or circumstances, we
determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount,
then performing the two-step impairment test is unnecessary. We have not elected this option to date. We
evaluated goodwill for impairment in the fourth quarters of 2014 and 2013, and concluded that no impairment
existed as of December 31, 2014, and December 31, 2013.
ASC 350-10 also requires that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives, and reviewed for impairment in accordance with ASC 360-10, Accounting for
the Impairment or Disposal of Long-Lived Assets. We review long-lived assets, such as acquired intangibles and
property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by a
comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize
an impairment charge by the amount by which the carrying amount of the asset exceeds the fair value of the
asset.
(cid:20)(cid:18)
Results of Operations
The following table sets forth some operating data in dollars, as a percentage of total net revenues
and the increase (decrease) over prior periods for the periods indicated (dollar amounts in thousands).
Year Ended December 31,
Amount
2014
2013
2012
Total net revenues............................. $348,797 $347,089 $305,370
154,868
Cost of revenues ...............................
Gross profit .......................................
150,502
Operating expenses:
163,853
183,236
159,227
189,570
Increase
(Decrease)
2014
vs.
2013
2013 vs.
2012
$ 1,708 $ 41,719
8,985
32,734
(4,626)
6,334
Research and development .......
Sales and marketing..................
General and administrative.......
54,981
47,796
30,997
51,654
45,466
32,050
45,709
37,998
30,243
3,327
2,330
(1,053)
5,945
7,468
1,807
Charge related to SemiSouth ....
Total operating expenses ..
Income from operations....................
—
133,774
55,796
— 25,200
139,150
11,352
129,170
54,066
— (25,200)
(9,980)
42,714
4,604
1,730
Other income (expense)
Charge related to SemiSouth ....
Other income, net .....................
—
1,018
— (33,745)
1,611
1,361
— 33,745
(250)
(343)
Total other income
(expense)...........................
1,018
1,361
(32,134)
(343)
33,495
Income (loss) before provision for
(benefit from) income tax .................
Provision for (benefit from) income
taxes ..................................................
Net income (loss).............................. $ 59,544 $ 57,266 $ (34,404) $ 2,278 $ 91,670
(20,782)
(1,839)
(2,730)
56,814
76,209
13,622
55,427
1,387
(891)
(15,461)
Percent of Net Revenues
2012
2013
2014
100.0% 100.0% 100.0 %
47.2
45.7
52.8
54.3
50.7
49.3
15.8
13.7
8.9
—
38.4
16.0
—
0.3
0.3
14.9
13.1
9.2
—
37.2
15.6
15.0
12.4
9.9
8.3
45.6
3.7
— (11.1)
0.6
0.4
0.4
(10.5)
16.3
16.0
(6.8)
(0.8)
(0.5)
4.5
17.1% 16.5% (11.3)%
Comparison of Years Ended December 31, 2014, 2013 and 2012
Net revenues. Net revenues consist of revenues from product sales, which are calculated net of
returns and allowances. In 2014 revenue increased by $1.7 million, due primarily to growth in three of our
primary end-market categories (consumer, industrial and computer), driven by higher unit sales for a range of
applications including consumer appliances, industrial motor drives and desktop computers. The increase was
partially offset by lower sales into the communications end market due primarily to lower unit sales for
residential-networking applications and cellphone chargers.
The increase in revenues from 2012 to 2013 was due in part to the inclusion of the former Concept
business for the full year (compared to only eight months in 2012), and also reflected higher unit sales into the
industrial, consumer and computing end markets, particularly for such applications such as consumer
appliances, industrial controls, LED lighting, industrial motor drives, renewable-energy systems and desktop
PCs.
Our net revenue mix by the end markets served in 2014, 2013 and 2012 were as follows:
End Market
Communications ..............................................................
Computer..........................................................................
Consumer .........................................................................
Industrial electronics........................................................
(cid:20)(cid:19)
Year Ended December 31,
2013
2012
2014
18%
10%
37%
35%
21%
10%
35%
34%
24%
12%
36%
28%
Sales to customers outside of the United States were $332.8 million in 2014, compared to $328.5
million in 2013 and $289.5 million in 2012, representing approximately 95% of net revenues in each of 2014,
2013 and 2012. Although power supplies using our products are designed and distributed worldwide, most of
these power supplies are manufactured by our customers in Asia. As a result, sales to this region accounted for
approximately 80% of our net revenues in 2014, 81% in 2013 and 82% in 2012. We expect international sales
to continue to account for a large portion of our net revenues.
Distributors accounted for 75% of our net product sales for the years ended December 31, 2014 and
2013, and 74% of our net product sales for the year ended December 31, 2012, with direct sales to OEMs and
power supply manufacturers accounting for the remainder in each of the corresponding years. In 2014 and
2013, one distributor, Avnet, accounted for more than 10% of revenues. In 2012, two distributors, Avnet and
ATM Electronic Corporation, each accounted for more than 10% of revenues. The table below includes net
revenues from each of these customers for the three years ended December 31, 2014.
Customer
Avnet................................................................................
ATM Electronic Corporation...........................................
Year Ended December 31,
2013
2012
2014
19%
*
19%
*
20%
12%
________________________
* Total customer revenue was less than 10% of net revenues
No other customers accounted for 10% or more of net revenues during these years.
Gross profit. Gross profit is net revenues less cost of revenues. Our cost of revenues consists
primarily of the purchase of wafers from our contracted foundries, the assembly, packaging and testing of our
products by sub-contractors, product testing performed in our own facility, overhead associated with the
management of our supply chain and the amortization of acquired intangible assets. Gross margin is gross
profit divided by net revenues. The table below compares gross profit and gross margin for the years ended
December 31, 2014, 2013 and 2012 (dollars in millions):
Net revenues..................................................................... $
Gross profit ...................................................................... $
Gross margin....................................................................
348.8
189.6
54.3%
$
$
347.1
183.2
52.8%
$
$
305.4
150.5
49.3%
Year Ended December 31,
2013
2012
2014
The increase in gross margin from 2013 to 2014 was due primarily to: a favorable end-market mix,
with a greater percentage of revenue coming from higher-margin end markets; a continued decline in the value
of the Japanese yen versus the U.S. dollar, which decreased the cost of silicon wafers purchased from our
Japanese wafer-fabrication foundries; and unit cost benefits from higher production volumes. The increase in
gross margin from 2012 to 2013 was due primarily to lower manufacturing costs stemming from a
combination of internal cost-reduction initiatives, unit-cost benefits from higher production volumes, the
decline in the value of the Japanese yen versus the U.S. dollar and a more favorable end-market mix.
Research and development expenses. Research and development, or R&D, expenses consist
primarily of employee-related expenses including stock-based compensation and expensed material and
facility costs associated with the development of new processes and new products. We also record R&D
expenses for prototype wafers related to new products until the products are released to production. The table
below compares R&D expenses for the years ended December 31, 2014, 2013 and 2012 (dollars in millions):
Net revenues..................................................................... $
R&D expenses ................................................................. $
R&D expenses as a % of net revenues.............................
$
$
348.8
55.0
15.8%
$
$
347.1
51.7
14.9%
305.4
45.7
15.0%
Year Ended December 31,
2014
2013
2012
(cid:20)(cid:20)
R&D expenses increased in 2014 compared to 2013, driven primarily by increased payroll and related
expenses as a result of increased headcount, due mainly to the expansion of our product-development efforts.
We also increased outside-service expenses related to product design and development. The R&D increase was
partially offset by lower stock-based compensation expense, reflecting the fact that our 2014 performance-based
stock awards failed to vest due to our 2014 performance. R&D expenses increased in 2013 compared to 2012,
driven primarily by increased payroll and related expenses as a result of increased headcount, due mainly to our
acquisition of Concept in May 2012. In addition, we expanded our product-development efforts resulting in
increased outside-service expenses related to product design and development.
Sales and marketing expenses. Sales and marketing expenses consist primarily of employee-related
expenses, including stock-based compensation, commissions to sales representatives, amortization of acquired
intangible assets and facilities expenses, including expenses associated with our regional sales and support
offices. The table below compares sales and marketing expenses for the years ended December 31, 2014,
2013 and 2012 (dollars in millions):
Net revenues..................................................................... $
Sales and marketing expenses.......................................... $
Sales and marketing expenses as a % of net revenue ......
$
$
348.8
47.8
13.7%
$
$
347.1
45.5
13.1%
305.4
38.0
12.4%
Year Ended December 31,
2014
2013
2012
Sales and marketing expenses increased in 2014 compared to 2013, due primarily to increased salary
and related expenses reflecting the expansion of our sales and application-support staffs. This increase was
partially offset by lower amortization of acquisition-related intangible assets, as our Concept trade name was
fully amortized in the second quarter of 2014. The increase in sales and marketing expenses in 2013 compared
to 2012 was due primarily to the acquisition of Concept in May of 2012, which in turn resulted in higher payroll
and related expenses including stock-based compensation expense, as well as increased amortization expenses
related to acquired intangible assets. The expansion of our sales force also contributed to the year-over-year
increase, as did higher marketing expenses, which increased due to the development of marketing materials for
the Concept IGBT-driver product line as well as trade-show attendance.
General and administrative expenses. General and administrative, or G&A, expenses consist primarily
of employee-related expenses, including stock-based compensation expenses for administration, finance, human
resources and general management, as well as consulting, professional services, legal and auditing expenses.
The table below compares G&A expenses for the years ended December 31, 2014, 2013 and 2012 (dollars in
millions):
Net revenues..................................................................... $
G&A expenses ................................................................. $
G&A expenses as a % of net revenue..............................
Year Ended December 31,
2014
348.8
31.0
2013
347.1
32.1
$
$
2012
305.4
30.2
$
$
8.9%
9.2%
9.9%
G&A expenses decreased in 2014 compared to 2013 due primarily to lower stock-based compensation
expense, reflecting the fact that our 2014 performance-based stock awards failed to vest due to our 2014
performance. In addition, we incurred lower legal expenses as a result of lower patent fees and general legal
fees, partially offset by increased outside service fees related to our acquisition in January 2015 of Cambridge
Semiconductor Ltd. ("CamSemi"), a UK company (refer to Note 11, Acquisitions, in our Notes to Consolidated
Financial Statements for details). G&A expenses increased in 2013 compared to 2012 due primarily to increased
headcount year-over-year, due primarily to our acquisition of Concept in May of 2012, which resulted in
increased payroll and related expenses, including stock-based compensation expense. The increase was partially
offset by decreased legal expenses related to patent litigation (refer to Note 10, Legal Proceedings and
Contingencies, in our Notes to Consolidated Financial Statements for details), and a decrease in professional-
(cid:20)(cid:21)
service expenses following elevated expenses in 2012 in conjunction with the Concept acquisition and our audit
settlement with the IRS.
Charge Related to SemiSouth. In October 2012, we determined that our assets related to SemiSouth
Laboratories were impaired as of September 30, 2012. As a result we incurred a net charge to operating
expenses of $25.2 million, comprising the write-offs of a prepaid royalty of $10.0 million and $15.2 million
related to a loan guarantee for SemiSouth. Refer to Note 12, Transactions With Third Party, in our Notes to
Consolidated Financial Statements for details on the SemiSouth charge.
Other income/expense, net. Other income (expense), net consists primarily of interest income earned
on cash and cash equivalents, marketable securities and other investments, and the impact of foreign exchange
gains or losses, in addition to an impairment charge related to SemiSouth. The table below compares other
income, net for the years ended December 31, 2014, 2013 and 2012 (dollars in millions):
Net revenues..................................................................... $
Other income (expense) ................................................... $
Other income as a % of net revenue ................................
$
$
348.8
1.0
0.3%
$
$
347.1
1.4
0.4%
Year Ended December 31,
2014
2013
2012
305.4
(32.1)
(10.5)%
Other income/expense decreased in 2014 compared to 2013 due to a 2013 gain realized for the sale of
assets related to SemiSouth, partially offset by increased interest income in 2014. Other income/expense
increased in 2013 compared to 2012, due primarily to a charge of $33.7 million in 2012 related to SemiSouth,
comprising the write-off of $6.7 million of lease receivables, $7.0 million of preferred stock, a promissory note
(net of imputed interest) in the amount of $13.2 million, $6.2 million for a purchase option, and other assets of
$0.6 million. Refer to Note 12, Transactions With Third Party, in our Notes to Consolidated Financial
Statements for details on the SemiSouth impairment. In addition, in 2013 we had the above-mentioned other
income of $0.5 million gain for the sale of assets related to SemiSouth.
Provision for income taxes. Provision for income taxes represents federal, state and foreign taxes. The
table below compares the provision for income taxes for the years ended December 31, 2014, 2013 and 2012
(dollars in millions):
Year Ended December 31,
2014
2013
2012
Income (loss) before provision for (benefit from)
income taxes..................................................................... $
Provision for (benefit from) income taxes ....................... $
Effective tax rate ..............................................................
$
$
56.8
(2.7)
(4.8)%
$
$
55.4
(1.8)
(3.3)%
(20.8)
13.6
(65.5)%
In 2014, our effective tax rate was impacted by an agreement reached with the Internal Revenue
Service to conclude the examination of our income tax returns for the years 2007 through 2009. The resolution
of the audit resulted in a federal tax benefit to us of $2.8 million; we also recorded a state tax benefit of $0.5
million. The one-time benefit included the reversal of $4.1 million of related unrecognized tax benefits that
had been recorded as non-current liabilities in our consolidated balance sheets. Our effective tax rate for the
year ended December 31, 2013, was favorably impacted by the geographic distribution of our world-wide
earnings and earnings in lower-tax jurisdictions. Additionally, the rate was favorably impacted by federal
research tax credits for 2014, 2013 and 2012.
The effective tax rate for the year ended December 31, 2012, was unfavorably impacted as a result of
our audit agreement with the IRS, in connection with the IRS examination of our income tax returns for the
years ended 2003 through 2006. The settlement included federal and state taxes plus interest charges totaling
approximately $44.8 million, partially offset by the reversal of related unrecognized tax benefits of $29.1
million, for a net charge of $18.1 million. During the third quarter of 2012, we recorded an impairment charge
and write-of
f of certain assets related to SemiSouth of approximately
$58.9 million on which we recognized
(cid:20)(cid:22)
an $8.0 million tax benefit. The write-off resulted in a net loss for the year. For further income tax information
refer to Note 8, Provision for Income Taxes, in our Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
We had approximately $175.3 million in cash, cash equivalents and short-term marketable securities
at December 31, 2014, compared to $202.1 million at December 31, 2013, and $95.2 million at December 31,
2012. As of December 31, 2014, 2013 and 2012, we had working capital, defined as current assets less current
liabilities, of approximately $210.8 million, $227.0 million and $124.3 million, respectively.
In March 2012, we loaned $18.0 million to SemiSouth in exchange for a promissory note. In October
2012, we determined that the loan to SemiSouth was other-than-temporarily impaired as of September 30, 2012;
the loan was written off, resulting in a charge in our consolidated statements of income (loss) for the year ended
December 31, 2012, under the caption “other income (expense), charge related to SemiSouth” (see Note 12,
Transactions With Third Party, in our Notes to Consolidated Financial Statements for further details on the
SemiSouth loan).
On July 5, 2012, we entered into a Credit Agreement (the "Credit Agreement") with two banks. The
Credit Agreement provides us with a $100.0 million revolving line of credit to use for general corporate
purposes with a $20.0 million sub-limit for the issuance of standby and trade letters of credit. The Credit
Agreement was amended on April 1, 2014, to extend the Credit Agreement termination date from July 5, 2015,
to April 1, 2017, with all other terms of the Credit Agreement remaining the same. Our ability to borrow under
the revolving line of credit is conditioned upon our compliance with specified covenants, primarily a minimum
cash requirement and a debt-to-earnings ratio, with which we are currently in compliance. The Credit
Agreement terminates on April 1, 2017, and all advances under the revolving line of credit will become due on
such date, or earlier in the event of a default. As of December 31, 2014, we had no amounts outstanding under
our agreement.
Our operating activities generated cash of $85.6 million, $98.7 million, and $51.8 million in the years
ended December 31, 2014, 2013 and 2012, respectively. In each of these years, cash was primarily generated
from operating activities in the ordinary course of business.
Cash provided by operating activities totaled $85.6 million in the year ended December 31, 2014. Our
net income was $59.5 million, which included non-cash depreciation, amortization and stock-based
compensation expenses of $15.9 million, $6.1 million and $14.3 million, respectively. Sources of cash also
included: (1) an $8.2 million decrease in prepaid expenses and other assets as a result of lower payments related
to legal and R&D services, in addition to tax refunds received during the year; (2) a $2.1 million decrease in
accounts receivable as a result of lower sales in the fourth quarter of 2014 compared to 2013 and improved
collections; and (3) a $2.3 million increase in accounts payable due to the timing of payments. These sources of
cash were partially offset by a $21.7 million increase in our inventories as a result of lower-than expected sales,
and by a $3.2 million decrease in taxes payable.
Cash provided by operating activities totaled $98.7 million in the year ended December 31, 2013. Our
net income was $57.3 million, which included non-cash depreciation, amortization and stock-based
compensation expenses of $16.1 million, $7.4 million and $16.5 million, respectively. Sources of cash also
included a $4.2 million increase in deferred income on sales to distributors, resulting from increased shipments
to distributors in the fourth quarter of 2013 compared to the same period of 2012. These sources of cash were
partially offset by a $4.9 million increase in accounts receivable resulting primarily from revenue growth in the
fourth quarter of 2013 compared to the same period in 2012.
Cash provided by operating activities totaled $51.8 million in the year ended December 31, 2012. In
2012, our net loss was $34.4 million, which included non-cash depreciation, amortization and stock-based
compensation expenses of $15.3 million, $5.2 million and $14.2 million, respectively. In addition we incurred a
$58.9 million impairment charge related to our SemiSouth related assets (refer to Note 12, Transactions With
Third Party, in our Notes to Consolidated Financial Statements, for details on our SemiSouth impairment and
charges). Additional sources of cash included (1) a $18.0 million decline in inventory due to reduced wafer
(cid:20)(cid:23)
purchases in 2012, and increased sales at the end of 2012 compared to 2011, and (2) a $5.3 million decrease in
accounts receivable primarily due to the timing of ship-and-debit credit processing. These additional sources of
cash and non-cash items were partially offset by (1) a $26.0 million decrease in taxes payable and other accrued
liabilities primarily in connection with our IRS agreement (refer to Note 8, Provision for Income Taxes, in our
Notes to Consolidated Financial Statements for details on our agreement) and (2) a $11.0 million increase in
prepaid expenses and other assets primarily related to prepaid taxes (in connection with the tax benefit related to
the SemiSouth impairment and the above-mentioned tax agreement).
Our investing activities in the year ended December 31, 2014, resulted in a net $38.1 million use of
cash, consisting primarily of: (1) $7.2 million, net, for purchases of marketable securities; (2) $23.1 million for
purchases of property and equipment, primarily machinery and equipment for production and research and
development; (3) $1.3 million for the purchase of power.com, our new domain name; and (4) a $6.6 million
cash payment to CamSemi under a loan agreement (refer to Note 11, Acquisitions, in our Notes to Consolidated
Financial Statements, for further details).
Our investing activities in the year ended December 31, 2013, resulted in a net $90.7 million use of
cash, consisting primarily of $78.1 million, net, for purchases of marketable securities and $14.0 million for
purchases of property and equipment. Our investment in property and equipment included purchases of
manufacturing and research and development equipment, as well as an enterprise resource planning, or ERP,
software upgrade and building improvements to our San Jose, California facility.
Our investing activities in the year ended December 31, 2012, resulted in a $124.7 million net use of
cash, consisting of: (1) $115.7 million related to the acquisition of Concept; (2) $18.0 million for a loan to
SemiSouth (refer to Note 12, Transactions With Third Party, in our Notes to Consolidated Financial Statements,
for further details); (3) $15.2 million related to a payment under a loan guarantee for SemiSouth, refer to Note
12, Transactions With Third Party, in our Notes to Consolidated Financial Statements, for further details; and
(4) $16.4 million for purchases of property and equipment, primarily building improvements in connection with
our research and development facility in New Jersey and manufacturing equipment and software to support our
growth. These uses of cash were partially offset by $40.5 million of proceeds from maturities of marketable
securities.
Our financing activities in the year ended December 31, 2014, resulted in a net use of $79.6 million,
consisting primarily of $80.8 million for the repurchase of our common stock, and $13.2 million for the
payment of dividends to stockholders. The use of cash was partially offset by proceeds of $13.9 million from
issuance of common stock, including the exercise of employee stock options and the issuance of shares through
our employee stock purchase plan.
Our financing activities in the year ended December 31, 2013, resulted in net proceeds of $21.5
million, consisting primarily of $30.2 million from the issuance of common stock, including the exercise of
employee stock options and the issuance of shares through our employee stock purchase plan, partially offset by
$9.4 million for the payment of dividends to stockholders. Our financing activities in the year ended December
31, 2012, resulted in a net $3.6 million use of cash, consisting of $20.5 million used for the repurchase of our
common stock and $5.8 million for the payment of dividends to stockholders, partially offset by proceeds of
$22.0 million from the issuance of common stock, including the exercise of employee stock options and the
issuance of shares through our employee stock purchase plan.
In October 2013, our board of directors declared four quarterly cash dividends in the amount of $0.10
per share to be paid to stockholders of record at the end of each quarter in 2014. Dividend payouts totaling
approximately $3.0 million each were paid on March 31, 2014, and June 30, 2014. In April 2014, our board of
directors increased the quarterly dividends for the third and fourth quarters of 2014 to $0.12 per share. Dividend
payouts totaling approximately $3.6 million and $3.5 million were paid on September 30, 2014, and December
31, 2014, respectively. In January 2015, our board of directors extended the $0.12 quarterly dividend through
each quarter in 2015.
In January 2013, our board of directors declared four quarterly cash dividends in the amount of $0.08
per share paid to stockholders of record at the end of each quarter in 2013. Payouts of approximately $2.3
(cid:20)(cid:24)
million each were paid on March 29, 2013, and June 28, 2013, and approximately $2.4 million was paid on
September 30, 2013, and December 31, 2013, respectively. In January 2012, our board of directors declared
four quarterly cash dividends in the amount of $0.05 per share to be paid to stockholders of record at the end of
each quarter in 2012. The quarterly dividend payments were each in the aggregate amount of approximately
$1.4 million to stockholders of record. The declaration of any future cash dividend 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, as well as a determination that cash dividends are in the
best interest of the Company's stockholders.
In October 2012, our board of directors authorized the use of $50.0 million for the repurchase of our
common stock, with repurchases to be executed according to certain pre-defined price/volume guidelines set by
the board of directors. In 2012, we purchased 0.7 million shares for approximately $20.5 million under this
stock repurchase program. No shares were purchased during the twelve months ended December 31, 2013, due
to the then current stock price levels which exceeded the pre-defined price guidelines mentioned above. In 2014
the our board of directors authorized the use of an additional $75.0 million for this purpose. In the twelve
months ended December 31, 2014, we purchased 1.6 million shares for $80.8 million. As of December 31,
2014, we had $23.7 million available for future stock repurchases. Authorization of future stock repurchase
programs is at the discretion of the board of directors and will depend on our financial condition, results of
operations, capital requirements, business conditions as well as other factors.
As of December 31, 2014, we had a contractual obligation related to income tax, consisting primarily
of unrecognized tax benefits of approximately $11.2 million. The tax obligation was classified as long-term
income taxes payable and a portion is recorded in deferred tax assets in our consolidated balance sheet.
In connection with our IRS settlements in 2014 and in 2012, we were entitled to repatriate $106.9
million from our foreign subsidiary without incurring additional U.S. income tax (See Note 8, Provision for
Income Taxes, in our Notes to Condensed Consolidated Financial Statements).
Our cash, cash equivalents and investment balances may change in future periods due to changes in
our planned cash outlays, including changes in incremental costs such as direct and integration costs related to
future acquisitions. We expect continued sales growth in our foreign business and plan to use the earnings
generated by our foreign subsidiaries to continue to fund both the working capital and growth needs of our
foreign entities, along with providing funding for any future foreign acquisitions. We do not provide for U.S.
taxes on our undistributed earnings of foreign subsidiaries that we intend to invest indefinitely outside the U.S.,
unless such taxes are otherwise required under U.S. tax law. Beginning in 2013, we determined that a portion of
our foreign subsidiaries current and future earnings may be remitted prospectively to the U.S. for domestic cash
flow purposes and, accordingly, provided for the related U.S. taxes in our consolidated financial statements.
Currently the majority of our cash and marketable securities are held in the U.S. If we change our intent to
invest our undistributed earnings outside the U.S. indefinitely or if a greater amount of undistributed earnings
are needed for U.S. operations than previously anticipated and for which U.S. taxes have not been recorded, we
would be required to accrue or pay U.S. taxes (subject to an adjustment for foreign tax credits, where
applicable) and withholding taxes payable to various foreign countries on some or all of these undistributed
earnings. As of December 31, 2014, we had undistributed earnings of foreign subsidiaries that are indefinitely
invested outside of the U.S. of approximately $144.0 million.
If our operating results deteriorate in future periods, either as a result of a decrease in customer
demand, or severe pricing pressures from our customers or our competitors, or for other reasons, our ability to
generate positive cash flow from operations may be jeopardized. In that case, we may be forced to use our
cash, cash equivalents and short-term investments, use our current financing or seek additional financing from
third parties to fund our operations. We believe that cash generated from operations, together with existing
sources of liquidity, will satisfy our projected working capital and other cash requirements for at least the next
12 months.
(cid:20)(cid:25)
Off-Balance Sheet Arrangements
As of December 31, 2014 and 2013, we did not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which are typically established for the purpose of facilitating off-
balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations
As of December 31, 2014, we had the following contractual obligations and commitments required
by SEC regulations to be disclosed in this table, consisting solely of non-cancelable operating lease
agreements (in thousands):
Payments Due by Period
1 - 3
Years
Less
than 1
4 - 5
Years
Over 5
Years
Total
Operating lease obligations ............. $
4,832
$
1,485
$
1,969
$
1,378
$
—
In addition to our contractual obligations noted above we have a contractual obligation related to
income tax as of December 31, 2014, which primarily comprises unrecognized tax benefits of approximately
$11.2 million, and was classified as long-term income taxes payable and a portion is recorded in deferred tax
assets in our consolidated balance sheet.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our
investment portfolio. We consider cash invested in highly liquid financial instruments with a remaining
maturity of three months or less at the date of purchase to be cash equivalents. Investments in highly liquid
financial instruments with maturities greater than three months are classified as short-term investments. We
generally hold securities until maturity; however, they may be sold under certain circumstances, including, but
not limited to, when necessary for the funding of acquisitions and other strategic investments. As a result of
this policy, we classify our investment portfolio as available-for-sale. We invest in high-credit quality issuers
and, by policy, limit the amount of credit exposure to any one issuer. As stated in our policy, we seek to ensure
the safety and preservation of our invested principal funds by limiting default risk, market risk and
reinvestment risk. We mitigate default risk by investing in safe and high-credit quality securities and by
constantly positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any
investment issuer, guarantor or depository. The portfolio includes only marketable securities with active
secondary or resale markets to facilitate portfolio liquidity. At December 31, 2014 and 2013, we held
primarily cash equivalents and short-term investments with fixed interest rates. We do not hold any
instruments for trading purposes.
Our investment securities are subject to market interest rate risk and will vary in value as market
interest rates fluctuate. To minimize market risk, we invest in high-credit quality issuers and, by policy, limit
the amount of credit exposure to any one issuer, and therefore if market interest rates were to increase or
decrease by 10% from interest rates as of December 31, 2014, or December 31, 2013, the increase or decrease
in the fair market value of our portfolio on these dates would not have been material. We monitor our
investments for impairment on a periodic basis. Refer to Note 2, Summary of Significant Accounting Policies,
for a tabular presentation of our available-for-sale investments and the expected maturity dates.
Foreign Currency Exchange Risk. As of December 31, 2014, our primary transactional currency was
the U.S. dollar; in addition, we hold cash in Swiss francs and euro as a result of our acquisition of Concept in
2012. Cash balances held in foreign countries are subject to local banking laws and may bear higher or lower
risk than cash deposited in the United States.
(cid:20)(cid:26)
The following represents the potential impact on our pretax income from a change in the value of the
U.S. dollar compared to the Swiss franc and euro as of December 31, 2014. This sensitivity analysis applies a
change in the U.S. dollar value of 5% and 10%.
December 31, 2014
10%
5%
Swiss franc and euro foreign exchange impact (in thousands of USD) .................. $
124
$
248
The foreign exchange rate fluctuation between the U.S. dollar versus the Swiss franc and euro is
recorded in other income in our consolidated statements of income (loss).
We have sales offices in various other foreign countries in which our expenses are denominated in the
local currency, primary Asia and Western Europe. From time to time we may enter into foreign currency
hedging contracts to hedge certain foreign currency transactions. As of December 31, 2014, and
December 31, 2013, we did not have an open foreign currency hedge program utilizing foreign currency
forward exchange contracts.
With two of our major suppliers, Seiko Epson Corporation, or Epson, and ROHM Lapis
Semiconductor Co., Ltd., or Lapis, we have wafer supply agreements based in U.S. dollars; however, our
agreements with Epson and Lapis also allow for mutual sharing of the impact of the exchange rate fluctuation
between Japanese yen and the U.S. dollar. Each year, our management and these suppliers review and negotiate
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 us and each of these suppliers.
Nevertheless, as a result of our above-mentioned supplier agreements, our gross margin is influenced
by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. All else being equal, a 10%
change in the value of the U.S. dollar compared to the Japanese yen would result in a corresponding change in
our gross margin of approximately 0.8% to 1.0%; this sensitivity may increase or decrease depending on the
percentage of our wafer supply that we purchase from some of our Japanese suppliers and could subject our
gross profit and operating results to the potential for material fluctuations.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are set forth in the pages indicated in Item 15(a), and
the supplementary data required by this item is included in Note 15, Selected Quarterly Information, in our
notes to consolidated financial statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15
(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Disclosure controls and
procedures are controls and other procedures designed to provide reasonable assurance that information
required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K,
is recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures
designed to provide reasonable assurance that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely
decisions regarding required disclosure. Our disclosure controls and procedures include components of our
internal control over financial reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of our financial reporting and the preparation of financial statements in
(cid:21)(cid:17)
accordance with generally accepted accounting principles in the U.S. To the extent that components of our
internal control over financial reporting are included within our disclosure controls and procedures, they are
included in the scope of our periodic controls evaluation. Based on our management's evaluation (with the
participation of our principal executive officer and principal financial officer), our principal executive officer
and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this
report.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles and that receipts and
expenditures are being made only in accordance with authorizations of our management and
directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial
reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
Management conducted an assessment of Power Integrations' internal control over financial reporting
as of December 31, 2014, based on the framework established by the Committee of Sponsoring Organization
(COSO) of the Treadway Commission in Internal Control - Integrated Framework issued in 2013. Based on
this assessment, management concluded that, as of December 31, 2014, our internal control over financial
reporting was effective.
The effectiveness of Power Integrations' internal control over financial reporting as of December 31,
2014, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated
in their report which appears below.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the fourth quarter of
2014, which were identified in connection with management's evaluation required by paragraph (d) of Rules
13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
(cid:21)(cid:18)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Power Integrations, Inc.
San Jose, California
We have audited the internal control over financial reporting of Power Integrations, Inc. and
subsidiaries (the "Company") as of December 31, 2014, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision
of, the company's principal executive and principal financial officers, or persons performing similar functions,
and effected by the company's Board of Directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility
of collusion or improper management override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and consolidated financial statement schedule as of
and for the year ended December 31, 2014 of the Company and our report dated February 10, 2015 expressed
an unqualified opinion on those consolidated financial statements and consolidated financial statement
schedule.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 10, 2015
(cid:21)(cid:19)
Item 9B. Other Information.
None
(cid:21)(cid:20)
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The names of our executive officers and their ages, titles and biographies as of the date hereof are
incorporated by reference from Part I, Item 1, above.
The following information is included in our Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed within 120 days after our fiscal year end of December 31, 2014, or the Proxy Statement,
and is incorporated herein by reference:
•
•
•
•
•
Information regarding our directors and any persons nominated to become a director, as well
as with respect to some other required board matters, is set forth under Proposal 1 entitled
“Election of Directors.”
Information regarding our audit committee and our designated “audit committee financial
expert” is set forth under the captions “Information Regarding the Board and its
Committees” and “Audit Committee” under Proposal 1 entitled “Election of Directors.”
Information on our code of business conduct and ethics for directors, officers and employees
is set forth under the caption “Code of Business Conduct and Ethics” under Proposal 1
entitled “Election of Directors.”
Information regarding Section 16(a) beneficial ownership reporting compliance is set forth
under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Information regarding procedures by which stockholders may recommend nominees to our
board of directors is set forth under the caption “Nominating and Governance Committee”
under Proposal 1 entitled “Election of Directors.”
Item 11. Executive Compensation.
Information regarding compensation of our named executive officers is set forth under the caption
"Compensation of Executive Officers" in the Proxy Statement, which information is incorporated herein by
reference.
Information regarding compensation of our directors is set forth under the caption "Compensation of
Directors" in the Proxy Statement, which information is incorporated herein by reference.
Information relating to compensation policies and practices as they relate to risk management is set forth
under the caption “Compensation Policies and Practices as They Relate to Risk Management” under Proposal 1
entitled “Election of Directors” in the Proxy Statement, which information is incorporated herein by reference.
Information regarding compensation committee interlocks is set forth under the caption "Compensation
Committee Interlocks and Insider Participation" in the Proxy Statement, which information is incorporated herein
by reference.
The Compensation Committee Report is set forth under the caption "Compensation Committee
Report" in the Proxy Statement, which report is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Information regarding security ownership of certain beneficial owners, directors and executive
officers is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement, which information is incorporated herein by reference.
(cid:21)(cid:21)
Information regarding our equity compensation plans, including both stockholder approved plans and
non-stockholder approved plans, is set forth under the caption “Equity Compensation Plan Information" in the
Proxy Statement, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions is set forth under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which information is incorporated
herein by reference.
Information regarding director independence is set forth under the caption “Proposal 1 - Election of
Directors” in the Proxy Statement, which information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information regarding principal auditor fees and services is set forth under "Principal Accountant Fees
and Services" in the Proposal entitled “Ratification of Selection of Independent Registered Public Accounting
Firm” in the Proxy Statement, which information is incorporated herein by reference.
(cid:21)(cid:22)
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Form:
1. Financial Statements
Report of Independent Registered Public Accounting Firm ............................................
Consolidated Balance Sheets ...........................................................................................
Consolidated Statements of Income (Loss) .....................................................................
Consolidated Statements of Comprehensive Income (Loss) ...........................................
Consolidated Statements of Stockholders' Equity ...........................................................
Consolidated Statements of Cash Flows..........................................................................
Notes to Consolidated Financial Statements....................................................................
Page
47
48
49
50
51
52
54
2. Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or the required information
is shown in the consolidated financial statements or notes thereto.
3. Exhibits
See Index to Exhibits at the end of this Report, which is incorporated herein by reference.
The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report.
(cid:21)(cid:23)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Power Integrations, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of Power Integrations, Inc. and
subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of
income (loss), comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2014. Our audits also included the consolidated financial statement schedule
listed in the Index at Item 15 (a) 2. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated
financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of Power Integrations, Inc. and subsidiaries at December 31, 2014 and 2013, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2014, in
conformity with accounting principles generally accepted in the United States of America. Also, in our opinion,
such consolidated financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company's internal control over financial reporting as of December 31, 2014, based
on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated February 10, 2015, expressed an
unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 10, 2015
(cid:21)(cid:24)
POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................................................... $
Short-term marketable securities .............................................................................
Accounts receivable, net of allowances of $191 and $120 in 2014 and 2013,
respectively (Note 2)................................................................................................
Inventories................................................................................................................
Deferred tax assets ...................................................................................................
Prepaid expenses and other current assets ...............................................................
Total current assets ...........................................................................................
PROPERTY AND EQUIPMENT, net............................................................................
INTANGIBLE ASSETS, net...........................................................................................
GOODWILL ...................................................................................................................
DEFERRED TAX ASSETS (NOTE 8)...........................................................................
OTHER ASSETS ............................................................................................................
Total assets........................................................................................................ $
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................................................................... $
Accrued payroll and related expenses......................................................................
Taxes payable...........................................................................................................
Deferred tax liabilities..............................................................................................
Deferred income on sales to distributors .................................................................
Other accrued liabilities ...........................................................................................
Total current liabilities......................................................................................
LONG-TERM INCOME TAXES PAYABLE (NOTE 8)...............................................
DEFERRED TAX LIABILITIES ...................................................................................
OTHER LIABILITIES ...................................................................................................
Total liabilities ..................................................................................................
COMMITMENTS AND CONTINGENCIES (Notes 8, 9 and 10)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value
Authorized - 140,000,000 shares
December 31,
2014
December 31,
2013
60,708
114,575
$
10,186
64,025
39
16,379
265,912
95,823
35,524
80,599
11,562
4,243
493,663
$
21,980
$
9,071
2,963
2,193
15,223
3,730
55,160
743
4,272
2,812
62,987
92,928
109,179
12,389
42,235
2,059
18,632
277,422
90,141
40,334
80,599
9,449
3,476
501,421
20,772
8,900
2,266
943
15,727
1,810
50,418
6,885
5,273
2,159
64,735
Outstanding - 29,208,468 and 30,021,943 shares in 2014 and 2013,
respectively .......................................................................................................
Additional paid-in capital ........................................................................................
Accumulated other comprehensive loss...................................................................
Retained earnings.....................................................................................................
Total stockholders’ equity.................................................................................
Total liabilities and stockholders’ equity.......................................................... $
29
171,938
(1,136)
259,845
430,676
493,663
$
30
223,660
(470)
213,466
436,686
501,421
The accompanying notes are an integral part of these consolidated financial statements.
(cid:21)(cid:25)
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share amounts)
Year Ended December 31,
NET REVENUES ............................................................................................................... $ 348,797
COST OF REVENUES.......................................................................................................
159,227
GROSS PROFIT .................................................................................................................
189,570
2014
2013
$ 347,089
2012
$ 305,370
163,853
183,236
154,868
150,502
OPERATING EXPENSES:
Research and development ..........................................................................................
Sales and marketing .....................................................................................................
General and administrative ..........................................................................................
Charge related to SemiSouth (Note 12) .......................................................................
Total operating expenses.......................................................................................
INCOME FROM OPERATIONS.......................................................................................
54,981
47,796
30,997
—
133,774
55,796
51,654
45,466
32,050
—
129,170
54,066
45,709
37,998
30,243
25,200
139,150
11,352
OTHER INCOME (EXPENSE):
Interest income.............................................................................................................
Interest expense............................................................................................................
Charge related to SemiSouth (Note 12) .......................................................................
Other, net......................................................................................................................
Total other income (expense)................................................................................
INCOME (LOSS) BEFORE INCOME TAXES.................................................................
PROVISION FOR (BENEFIT FROM) INCOME TAXES................................................
NET INCOME (LOSS)....................................................................................................... $
1,203
—
—
(185)
1,018
736
(23)
—
648
1,361
56,814
(2,730)
59,544
55,427
(1,839)
$ 57,266
1,747
(2)
(33,745)
(134)
(32,134)
(20,782)
13,622
$ (34,404)
EARNINGS (LOSS) PER SHARE:
Basic............................................................................................................................. $
Diluted.......................................................................................................................... $
1.99
1.93
$
$
1.95
1.88
$
$
(1.20)
(1.20)
SHARES USED IN PER SHARE CALCULATION:
Basic.............................................................................................................................
Diluted..........................................................................................................................
29,976
30,829
29,421
30,420
28,636
28,636
The accompanying notes are an integral part of these consolidated financial statements.
(cid:21)(cid:26)
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income (loss) ........................................................................................... $
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in 2014, 2013
and 2012..................................................................................................
Unrealized gain (loss) on marketable securities, net of $0 tax in 2014,
2013 and 2012.........................................................................................
Unrealized actuarial loss on pension benefits, net of tax of $128, $61
and $155 in 2014, 2013 and 2012, respectively (Note 13).....................
Total other comprehensive loss..........................................................
Total comprehensive income (loss) ............................................................... $
Year Ended December 31,
2014
2013
59,544
$
57,266
$
2012
(34,404)
(79)
(127)
(29)
72
79
138
(460)
(666)
58,878
$
(220)
(177)
57,089
$
(560)
(343)
(34,747)
The accompanying notes are an integral part of these consolidated financial statements.
(cid:22)(cid:17)
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
BALANCE AT JANUARY 1, 2012.......................................
28,065 $
28 $
158,646 $
50 $
205,805 $
364,529
Common Stock
Additional
Paid-In
Accumulated
Other
Comprehensive
Retained
Total
Stockholders'
Shares
Amount
Capital
Income (Loss)
Earnings
Equity
Issuance of common stock under employee stock option
and stock award plans.............................................................
Repurchase of common stock.................................................
Issuance of common stock under employee stock purchase
plan .........................................................................................
Income tax benefits from employee stock plans ....................
Stock-based compensation expense related to employee
stock options and awards........................................................
Stock-based compensation expense related to employee
stock purchases.......................................................................
Payment of dividends to stockholders....................................
Unrealized actuarial loss on pension benefits (Note 13) ........
Unrealized gain on marketable securities...............................
Foreign currency translation adjustment ................................
Net loss ...................................................................................
1,022
(676)
125
—
—
—
—
—
—
—
—
BALANCE AT DECEMBER 31, 2012..................................
28,536
Issuance of common stock under employee stock option
and stock award plans.............................................................
Repurchase of common stock.................................................
Issuance of common stock under employee stock purchase
plan .........................................................................................
Income tax benefits from employee stock plans ....................
Stock-based compensation expense related to employee
stock options and awards........................................................
Stock-based compensation expense related to employee
stock purchases.......................................................................
Payment of dividends to stockholders....................................
Unrealized actuarial loss on pension benefits (Note 13) ........
Unrealized gain on marketable securities...............................
Foreign currency translation adjustment ................................
Net income .............................................................................
1,358
—
128
—
—
—
—
—
—
—
—
BALANCE AT DECEMBER 31, 2013..................................
30,022
Issuance of common stock under employee stock option
and stock award plans.............................................................
Repurchase of common stock.................................................
697
(1,603)
Issuance of common stock under employee stock purchase
plan .........................................................................................
Income tax benefits from employee stock plans ....................
Stock-based compensation expense related to employee
stock options and awards........................................................
Stock-based compensation expense related to employee
stock purchases.......................................................................
Payment of dividends to stockholders....................................
Unrealized actuarial loss on pension benefits (Note 13) ........
Unrealized loss on marketable securities ...............................
Foreign currency translation adjustment ................................
Net income .............................................................................
92
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28
2
—
—
—
—
—
—
—
—
—
—
30
—
(1)
—
—
—
—
—
—
—
—
—
18,200
(20,467)
3,752
1,303
13,092
1,142
—
—
—
—
—
175,668
26,267
—
3,971
1,284
15,275
1,195
—
—
—
—
—
223,660
9,571
(80,760)
4,284
815
12,983
1,385
—
—
—
—
—
—
—
—
—
—
—
—
(560)
138
79
—
(293)
—
—
—
—
—
—
—
(220)
72
(29)
—
(470)
—
—
—
—
—
—
—
(460)
(127)
(79)
—
—
—
—
—
—
—
(5,755)
—
—
—
(34,404)
165,646
—
—
—
—
—
—
(9,446)
—
—
—
57,266
213,466
—
—
—
—
—
—
(13,165)
—
—
—
59,544
BALANCE AT DECEMBER 31, 2014..................................
29,208 $
29 $
171,938 $
(1,136) $
259,845 $
The accompanying notes are an integral part of these consolidated financial statements.
(cid:22)(cid:18)
18,200
(20,467)
3,752
1,303
13,092
1,142
(5,755)
(560)
138
79
(34,404)
341,049
26,269
—
3,971
1,284
15,275
1,195
(9,446)
(220)
72
(29)
57,266
436,686
9,571
(80,761)
4,284
815
12,983
1,385
(13,165)
(460)
(127)
(79)
59,544
430,676
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................................................................. $
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation...............................................................................................................
Amortization of intangibles .......................................................................................
Charge related to SemiSouth (Note 12) .....................................................................
Loss (gain) on disposal of property and equipment...................................................
Gain on sale of asset held for sale..............................................................................
Stock-based compensation expense...........................................................................
Amortization of premium on marketable securities...................................................
Non-cash interest income from SemiSouth note .......................................................
Deferred income taxes ...............................................................................................
Increase (reduction) in accounts receivable allowances ............................................
Excess tax benefit from employee stock plans ..........................................................
Tax benefit associated with employee stock plans ....................................................
Change in operating assets and liabilities:
Accounts receivable............................................................................................
Inventories ..........................................................................................................
Prepaid expenses and other assets ......................................................................
Accounts payable................................................................................................
Taxes payable and accrued liabilities .................................................................
Deferred income on sales to distributors ............................................................
Net cash provided by operating activities .................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................................................................
Proceeds from sale of property and equipment..........................................................
Proceeds from sale of assets held for sale..................................................................
Other assets ................................................................................................................
Acquisition (Note 11).................................................................................................
Payment of guarantee of SemiSouth debt (Note 12) .................................................
Increase in financing lease receivables ......................................................................
Collections of financing lease receivables and other receivables..............................
Loans to third parties (Notes 11 and 12)....................................................................
Purchases of marketable securities ............................................................................
Proceeds from sales and maturities of marketable securities.....................................
Net cash used in investing activities .........................................................
Year Ended
December 31,
2014
2013
2012
59,544
$
57,266
$ (34,404)
15,884
6,072
—
250
—
14,282
1,694
—
157
70
(437)
815
2,133
(21,703)
8,211
2,337
(3,242)
(505)
85,562
(23,071)
—
—
(1,261)
—
—
—
—
(6,600)
(45,269)
38,052
(38,149)
16,088
7,404
—
(131)
(497)
16,485
789
—
(2,781)
(127)
(734)
1,284
(4,936)
2,375
(1,523)
2,467
1,065
4,177
98,671
15,256
5,164
58,945
(1)
—
14,224
850
(1,445)
2,017
(24)
(704)
1,303
5,313
18,026
(11,008)
2,071
(26,029)
2,276
51,830
(13,960)
36
959
(16,358)
2
—
—
—
— (115,720)
(15,200)
—
(420)
—
527
(18,000)
—
433
40,463
(124,706)
—
(109,482)
31,350
(90,664)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock plans
...........................................
13,855
30,239
21,952
(cid:22)(cid:19)
Repurchase of common stock ....................................................................................
Payments of dividends to stockholders......................................................................
Excess tax benefit from employee stock plans ..........................................................
Net cash (used in) provided by financing activities ..................................
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Year Ended
December 31,
2013
—
(9,446)
734
21,527
2012
(20,467)
(5,755)
704
(3,566)
29,534
63,394
(76,442)
139,836
2014
(80,760)
(13,165)
437
(79,633)
(32,220)
92,928
60,708
$
92,928
$
63,394
Unpaid property and equipment................................................................................. $
Fair value of SemiSouth purchase option (Note 12).................................................. $
1,733
$
2,862
$
— $
— $
1,008
6,216
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refund) for income taxes, net of refunds (Note 8) ................................... $
(3,121) $
(4,137) $
46,689
The accompanying notes are an integral part of these consolidated financial statements.
(cid:22)(cid:20)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
Power Integrations, Inc. ("Power Integrations" or the “Company”), incorporated in California on
March 25, 1988 and reincorporated in Delaware in December 1997, designs, develops, manufactures and
markets analog and mixed-signal integrated circuits (ICs) and other electronic components and circuitry used
in high-voltage power conversion. The Company's products are used in power converters that convert
electricity from a high-voltage source (i.e., 48 volts or higher) to the type of power required for a specified
downstream use. A large percentage of the Company's products are ICs used in AC-DC power supplies in a
wide variety of end products, primarily in the consumer, communications, computer and industrial markets.
The Company acquired CT-Concept Technologie AG (“Concept”) in May 2012, and since then offers IGBT
drivers used to operate arrays of high-voltage, high-power transistors known as IGBT modules, which are used
for power conversion in high-power applications such as industrial motors, solar- and wind-power systems,
electric vehicles and high-voltage DC transmission systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries after elimination of all intercompany transactions and balances.
Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing
basis, the Company evaluates its estimates, including those related to revenue recognition and allowances for
receivables and inventories. These estimates are based on historical facts and various other factors, which the
Company believes to be reasonable at the time the estimates are made. However, as the effects of future events
cannot be determined with precision, actual results could differ significantly from management's estimates.
Cash and Cash Equivalents
The Company considers cash invested in highly liquid financial instruments with maturities of three
months or less at the date of purchase to be cash equivalents.
Marketable Securities
The Company generally holds securities until maturity; however, they may be sold under certain
circumstances including, but not limited to, when necessary for the funding of acquisitions and other strategic
investments. As a result the Company classifies its investment portfolio as available-for-sale. The Company
classifies all investments with an original maturity date greater than three months as short-term marketable
securities in its Consolidated Balance Sheet. As of December 31, 2014, and December 31, 2013, the Company's
marketable securities consisted primarily of corporate bonds and other high-quality commercial securities. The
weighted average interest rate of investments at December 31, 2014 and 2013, was approximately 0.76% and
0.74%, respectively.
(cid:22)(cid:21)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortized cost and estimated fair market value of investments classified as available-for-sale at
December 31, 2014, were as follows (in thousands):
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated Fair
Market Value
Investments due in 4-12 months:
Corporate securities.................................................... $ 30,233
30,233
Total...........................................................................
Investments due between 12 months and 5-years:
84,259
Corporate securities....................................................
Total...........................................................................
84,259
Total investment securities ............................................ $ 114,492
$
$
36 $
36
92
92
128 $
— $
—
30,269
30,269
(45)
(45)
(45) $
84,306
84,306
114,575
Amortized cost and estimated fair market value of investments classified as available-for-sale at
December 31, 2013, were as follows (in thousands):
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated Fair
Market Value
Investments due in less than 3 months:
Commercial paper ...................................................... $
Total............................................................................
Investments due in 4-12 months:
Corporate securities....................................................
Total............................................................................
Investments due between 12 months and 5-years:
102,963
Corporate securities....................................................
Total............................................................................
102,963
Total investment securities ............................................ $ 112,068
6,007
6,007
3,098
3,098
$
$
1 $
1
— $
—
—
—
3,099
3,099
6,040
6,040
(26)
(26)
(26) $
103,139
103,139
112,278
33
33
202
202
236 $
As of December 31, 2014, and 2013, there were no individual securities that had been in a continuous
loss position for 12 months or longer.
Inventories
Inventories (which consist of costs associated with the purchases of wafers from domestic and offshore
foundries and of packaged components from offshore assembly manufacturers, as well as internal labor and
overhead associated with the testing of both wafers and packaged components) are stated at the lower of cost
(first-in, first-out) or market. Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable values. Inventories consist of the following (in thousands):
Raw materials................................................................................................. $
Work-in-process.............................................................................................
Finished goods ...............................................................................................
Total ............................................................................................................... $
21,127
14,643
28,255
64,025
$
$
8,221
13,216
20,798
42,235
December 31,
2014
December 31,
2013
(cid:22)(cid:22)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additional Components of the Company's Consolidated Balance Sheet
Accounts Receivable (in thousands):
Accounts receivable trade .............................................................................. $
Accrued ship and debit and rebate claims......................................................
Allowance for doubtful accounts ...................................................................
Total................................................................................................. $
38,344
(27,967)
(191)
10,186
$
$
42,410
(29,901)
(120)
12,389
December 31,
2014
December 31,
2013
Prepaid Expenses and Other Current Assets (in thousands):
December 31,
2014
December 31,
2013
Prepaid legal fees ........................................................................................... $
Loan to Cambridge Semiconductor (Note 11)...............................................
Advance to suppliers......................................................................................
Prepaid income tax.........................................................................................
Prepaid maintenance agreements...................................................................
Interest receivable ..........................................................................................
Other ..............................................................................................................
1,506
$
6,600
800
3,208
1,023
664
2,578
Total................................................................................................. $
16,379
$
6,267
—
757
7,521
947
519
2,621
18,632
Property and Equipment
Property and equipment consist of the following (in thousands):
Land ................................................................................................................. $
Construction-in-progress..................................................................................
Building and improvements.............................................................................
Machinery and equipment................................................................................
Computer software and hardware and office furniture and fixtures ................
Accumulated depreciation ...............................................................................
Total ..................................................................................................... $
December 31,
2014
December 31,
2013
16,754
8,068
44,794
124,138
37,867
231,621
(135,798)
95,823
$
$
16,754
8,003
43,641
111,314
34,327
214,039
(123,898)
90,141
Depreciation expense for property and equipment for fiscal years ended December 31, 2014, 2013
and 2012, was approximately $15.9 million, $16.1 million and $15.3 million, respectively, and was determined
using the straight-line method over the following useful lives:
Building and improvements....................................................................................................
Machinery and equipment ......................................................................................................
Computer software and hardware and office furniture and fixtures.......................................
4-40 years
2-8 years
4-5 years
Total property and equipment located in the United States at December 31, 2014, 2013 and 2012, was
approximately $140 million, $134 million and $126 million, respectively. In 2014 13% of total property and
(cid:22)(cid:23)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
equipment was held in Thailand by one of the Company's sub-contractors. In 2013 and 2012, no more than
10% of total property and equipment was held in any foreign country.
Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss) for three years ended December 31, 2014
(in thousands):
Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
Defined
Benefit
Pension
Items
Foreign
Currency
Items
Total
— $
—
$
50
$
50
138
—
138
138
72
—
72
210
(560)
—
(560)
(560)
(277)
57 (1)
(220)
(780)
(127)
(538)
—
78 (1)
(127)
83
(460)
$ (1,240)
$
79
—
79
129
(29)
—
(29)
100
(79)
—
(79)
21
(343)
—
(343)
(293)
(234)
57
(177)
(470)
(744)
78
(666)
$ (1,136)
Balance at January 1, 2012 ......................................... $
Other comprehensive income (loss) before
reclassifications...........................................................
Amounts reclassified from accumulated other
comprehensive income (loss) .....................................
Other comprehensive income (loss) ...........................
Balance at December 31, 2012 ...................................
Other comprehensive income (loss) before
reclassifications...........................................................
Amounts reclassified from accumulated other
comprehensive income (loss) .....................................
Other comprehensive income (loss) ...........................
Balance at December 31, 2013 ...................................
Other comprehensive income (loss) before
reclassifications...........................................................
Amounts reclassified from accumulated other
comprehensive income (loss) .....................................
Other comprehensive income (loss) ...........................
Balance at December 31, 2014 ................................... $
____________________________
(1) This component of accumulated other comprehensive income is included in the computation of net periodic
pension cost for the years ended December 31, 2014 and December 31, 2013.
Business Combinations
The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities
assumed based upon their estimated fair values at the date of acquisition. To the extent the purchase price
exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such
excess is allocated to goodwill. The Company determines the estimated fair values after review and
consideration of relevant information, including discounted cash flows, quoted market prices and estimates
made by management. The Company adjusts the preliminary purchase price allocation, as necessary, during the
measurement period of up to one year after the acquisition closing date as it obtains more information as to facts
and circumstances existing at the acquisition date impacting asset valuations and liabilities assumed.
Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.
Goodwill and Intangible Assets
Goodwill and the Company's domain name are evaluated in accordance with Accounting Standards
Codification, or ASC, 350-10, Goodwill and Other Intangible Assets, and an impairment analysis is conducted
on an annual basis, or sooner if indicators exist for a potential impairment.
(cid:22)(cid:24)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets,
long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Employee Benefits Plan
The Company sponsors a 401(k) tax-deferred savings plan for all employees in the United States who
meet certain eligibility requirements. Participants may contribute up to the amount allowable as a deduction for
federal income tax purposes. The Company is not required to contribute; however, from time-to-time the
Company will contribute a certain percentage of employee annual salaries on a discretionary basis, not to
exceed an established threshold. In 2014 and 2013 the Company provided for a contribution of approximately
$1.1 million and $1.1 million, respectively. No employee 401(k) contribution was provided for in 2012.
Retirement Benefit Obligations (Pension)
The Company recognizes the overfunded or underfunded status of a defined benefit pension or
postretirement plan as an asset or liability in the accompanying consolidated balance sheets. Actuarial gains and
losses are recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity,
and are amortized as a component of net periodic cost over the remaining estimated service period of
participants.
Revenue Recognition
Product revenues consist of sales to original equipment manufacturers (“OEMs”), merchant power
supply manufacturers and distributors. Approximately 75% of the Company's net product sales were made to
distributors in 2014. The Company applies the provisions of Accounting Standard Codification (“ASC”) 605-10
(“ASC 605-10”) and all related appropriate guidance. Revenue is recognized when all of the following criteria
have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the price is fixed
or determinable, and (4) collectability is reasonably assured. Customer purchase orders are generally used to
determine the existence of an arrangement. Delivery is considered to have occurred when title and risk of loss
have transferred to the Company's customer. The Company evaluates whether the price is fixed or determinable
based on the payment terms associated with the transaction and whether the sales price is subject to refund or
adjustment. With respect to collectability, the Company performs credit checks for new customers and performs
ongoing evaluations of its existing customers' financial condition and requires letters of credit whenever deemed
necessary.
Sales to international OEMs and merchant power supply manufacturers for shipments from the
Company's facility outside of the United States are pursuant to “EX Works” ("EXW") shipping terms, meaning
that title to the product transfers to the customer upon shipment from the Company's foreign warehouse. Sales
to international OEM customers and merchant power supply manufacturers that are shipped from the
Company's facility in California are pursuant to “delivered at frontier” (“DAF”) shipping terms. As such, title to
the product passes to the customer when the shipment reaches the destination country and revenue is recognized
upon the arrival of the product in that country. Shipments to OEMs and merchant power supply manufacturers
in the Americas are pursuant to “free on board” (“FOB”) point of origin shipping terms meaning that title is
passed to the customer upon shipment. Revenue is recognized upon title transfer for sales to OEMs and
merchant power supply manufacturers, assuming all other criteria for revenue recognition are met.
Sales to most of the Company's distributors are made under terms allowing certain price adjustments
and rights of return on the Company's products held by its distributors. As a result of these rights, the Company
defers the recognition of revenue and the costs of revenues derived from these sales until the Company's
(cid:22)(cid:25)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
distributors report that they have sold the Company's products to their customers. The Company's recognition of
such distributor revenue is based on point of sale reports received from the distributors, at which time the price
is no longer subject to adjustment and is fixed, and the products are no longer subject to return to the Company
except pursuant to warranty terms. The gross profit that is deferred as a result of this policy is reflected as
“deferred income on sales to distributors” in the accompanying consolidated balance sheets. The total deferred
revenue as of December 31, 2014, and December 31, 2013, was approximately $25.0 million and $25.5 million,
respectively. The total deferred cost as of December 31, 2014, and December 31, 2013, was approximately $9.8
million and $9.8 million, respectively.
Frequently, distributors need to sell at a price lower than the standard distribution price in order to
win business. At or soon after the distributor invoices its customer, the distributor submits a “ship and debit”
price adjustment claim to the Company to adjust the distributor's cost from the standard price to the pre-
approved lower price. After verification by the Company, a credit memo is issued to the distributor for the ship
and debit claim. The Company maintains a reserve for unprocessed claims and future ship and debit price
adjustments. The reserves appear as a reduction to accounts receivable and deferred income on sales to
distributors in the Company's accompanying consolidated balance sheets. To the extent future ship and debit
claims significantly exceed amounts estimated, there could be a material impact on the deferred revenue and
deferred margin ultimately recognized. To evaluate the adequacy of its reserves, the Company analyzes
historical ship and debit payments and levels of inventory in the distributor channels.
Sales to certain distributors of the Company are made under terms that do not include rights of return
or price concessions after the product is shipped to the distributor. Accordingly, product revenue is recognized
upon shipment and title transfer assuming all other revenue recognition criteria are met.
Foreign Currency Risk and Foreign Currency Translation
As of December 31, 2014, the Company's primary transactional currency was in U.S. dollars; in
addition, the Company holds cash in Swiss francs and Euros as a result of its acquisition of Concept. The
Company completed the acquisition of Concept, which is located in Biel, Switzerland, in the second quarter of
2012. Included in the assets acquired was cash denominated in Swiss francs and Euros, which will be used to
fund operations of the Company's Swiss subsidiary. The functional currency of the Company's Swiss subsidiary
is the U.S. dollar.
Gains and losses arising from the remeasurement of non-functional currency balances are recorded in
''other income (expense)'' in the accompanying consolidated statements of income (loss). For the years ended
December 31, 2014, 2013 and 2012 the Company realized foreign exchange transaction gains (losses) of $0.1
million, $(0.1) million and $(0.6) million, respectively.
The functional currencies of the Company's other subsidiaries are the local currencies. Accordingly, all
assets and liabilities are translated into U.S. dollars at the current exchange rates as of the applicable balance
sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period.
Cumulative gains and losses from the translation of the foreign subsidiaries' financial statements have been
included in stockholders' equity.
Warranty
The Company generally warrants that its products will substantially conform to the published
specifications for 12 months from the date of shipment. The Company's liability is limited to either a credit
equal to the purchase price or replacement of the defective part. Returns under warranty have historically
been immaterial, and as a result, the Company does not record a specific warranty reserve.
Advertising
Advertising costs are expensed as incurred. Advertising costs amounted to $1.5 million, $1.4 million,
and $1.1 million, in 2014, 2013 and 2012
, respectively
.
(cid:22)(cid:26)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Income tax expense is an estimate of current income taxes payable or refundable in the current fiscal
year based on reported income before income taxes. Deferred income taxes reflect the effect of temporary
differences and carry-forwards that are recognized for financial reporting and income tax purposes.
The Company accounts for income taxes under the provisions of ASC 740. Under the provisions of
ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates
that are expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The Company recognizes valuation allowances to reduce any deferred tax assets to the
amount that it estimates will more likely than not be realized based on available evidence and management's
judgment. The Company limits the deferred tax assets recognized related to certain officers' compensation to
amounts that it estimates will be deductible in future periods based upon Internal Revenue Code Section 162
(m). In the event that the Company determines, based on available evidence and management judgment, that all
or part of the net deferred tax assets will not be realized in the future, it would record a valuation allowance in
the period the determination is made. In addition, the calculation of tax liabilities involves significant judgment
in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these
uncertainties in a manner inconsistent with the Company's expectations could have a material impact on the
Company's results of operations and financial position.
The Company engages in qualifying activities for R&D credit purposes. The Tax Increase Prevention
Act of 2014 was signed into law on December 19, 2014, to extend the federal research and development credit
for 2014.
During 2014, the Company settled with the IRS and closed out the examination of its income tax
returns for the years 2007 through 2009. The resolution of the audit resulted in a federal tax benefit to the
Company of $2.8 million; the Company also recorded a state tax benefit of approximately $0.5 million. The
agreement with IRS also allowed the Company to repatriate $5.0 million from its foreign subsidiary without
incurring additional U.S. income taxes.
Common Stock Repurchases and Common Stock Dividend
In October 2012, the Company's board of directors authorized the use of $50.0 million for the
repurchase of its common stock, with repurchases to be executed according to certain pre-defined price/volume
guidelines set by the board of directors. As of December 31, 2012, the Company purchased 0.7 million shares
for approximately $20.5 million. No shares were purchased during the twelve months ended December 31,
2013, as the stock price levels exceeded the pre-defined price guidelines mentioned above. In 2014 the
Company's board of directors authorized the use of an additional $75.0 million for this purpose. In the twelve
months ended December 31, 2014, the Company purchased 1.6 million shares for $80.8 million. As of
December 31, 2014, the Company had $23.7 million available for future stock repurchases. Authorization of
future stock 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 as well as other factors.
In January 2012, the Company's board of directors declared four quarterly cash dividends in the
amount of $0.05 per share to be paid to stockholders of record at the end of each quarter in 2012. The quarterly
dividend payments were each in the aggregate amount of approximately $1.4 million to stockholders of record.
In January 2013, the Company's board of directors declared four quarterly cash dividends in the amount of
$0.08 per share paid to stockholders of record at the end of each quarter in 2013. Payouts of approximately $2.3
(cid:23)(cid:17)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million each were paid on March 29, 2013, and June 28, 2013, and approximately $2.4 million was paid on
September 30, 2013, and December 31, 2013, respectively.
In October 2013, the Company's board of directors declared four quarterly cash dividends in the
amount of $0.10 per share to be paid to stockholders of record at the end of each quarter in 2014. Dividend
payouts totaling approximately $3.0 million each were paid on March 31, 2014, and June 30, 2014. In April
2014, the Company's board of directors increased the quarterly dividends for the third and fourth quarters of
2014 to $0.12 per share. Dividend payouts totaling approximately $3.6 million and $3.5 million were paid on
September 30, 2014, and December 31, 2014, respectively.
In January 2015, the Company's board of directors extended the $0.12 quarterly dividend through each
quarter in 2015. The declaration of any future cash dividend 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, as well as a determination that cash dividends are in the best interest of the Company's
stockholders.
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 December 31, 2014. 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.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") amended the existing accounting
standards for revenue recognition, ASU 2014-09, Revenue from Contracts with Customers. The amendments are
based on the principle that revenue should be recognized to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. The Company is required to adopt the amendments in the first quarter of 2017. Early
adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or
retrospectively with the cumulative effect recognized as of the date of initial application. The Company is
currently evaluating the impact of these amendments and the transition alternatives on its consolidated financial
statements.
3. STOCK PLANS AND SHARE BASED COMPENSATION:
Stock Plans
As of December 31, 2014, the Company had two stock-based compensation plans (the “Plans”) which
are described below.
(cid:23)(cid:18)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2007 Equity Incentive Plan
The 2007 Equity Incentive Plan (the "2007 Plan") was adopted by the board of directors on September
10, 2007 and approved by the stockholders on November 7, 2007 as an amendment and restatement of the 1997
Stock Option Plan (the "1997 Plan"). The 2007 Plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards, restricted stock unit awards ("RSUs"), stock appreciation
rights, performance stock unit awards ("PSU") and other stock awards to employees, directors and consultants.
As of December 31, 2014, the maximum remaining number of shares that may be issued under the 2007 Plan
was 6.5 million shares, which includes options issued but not exercised and awards granted but unvested and
shares remaining available for issuance under the 1997 Plan, including shares subject to outstanding options and
stock awards under the 1997 Plan. Pursuant to the 2007 Plan, the exercise price for incentive stock options and
nonstatutory stock options is generally at least 100% of the fair market value of the underlying shares on the
date of grant. Options generally vest over 48 months measured from the date of grant. Options generally expire
no later than ten years after the date of grant, subject to earlier termination upon an optionee's cessation of
employment or service.
Beginning January 27, 2009, grants pursuant to the Directors Equity Compensation Program (which
was adopted by the board of directors on January 27, 2009) to non-employee directors have been made
primarily under the 2007 Plan. The Directors Equity Compensation Program, provides for grants to outside
directors as follows: effective annually, upon the first trading day of July, each outside director would receive a
grant of an equity award with an aggregate value of $100,000. At each outside director's election, such award
would consist entirely of RSUs or entirely of stock options. The quantity of options would be calculated by
dividing $100,000 by the Black-Scholes value on the date of grant. The quantity of RSUs issued would be
calculated by dividing $100,000 by the grant date fair value. Further, on the date of election of a new outside
director, such new director would receive such grant as continuing outside directors receive on the first trading
day of July; provided, however, that such grant is prorated for the portion of the year that such new outside
director will serve until the next first trading day of July. The Directors Equity Compensation Program will
remain in effect at the discretion of the board of directors or the compensation committee.
On July 28, 2009, the 2007 Plan was amended generally to prohibit outstanding options or stock
appreciation rights from being canceled in exchange for cash without stockholder approval.
1997 Employee Stock Purchase Plan
Under the 1997 Employee Stock Purchase Plan (the “Purchase Plan”), eligible employees may apply
accumulated payroll deductions, which may not exceed 15% of an employee's compensation, to the purchase
of shares of the Company's common stock at periodic intervals. The purchase price of stock under the
Purchase Plan is equal to 85% of the lower of (i) the fair market value of the Company's common stock on the
first day of each offering period, or (ii) the fair market value of the Company's common stock on the purchase
date (as defined in the Purchase Plan). Each offering period consists of one purchase period of approximately
six months duration. An aggregate of 3.0 million shares of common stock were reserved for issuance to
employees under the Purchase Plan. As of December 31, 2014, of the shares reserved for issuance, 2.7 million
shares had been purchased and 0.3 million shares were reserved for future issuance under the Purchase Plan.
Stock-Based Compensation
The Company applies the provisions of ASC 718-10. Under the provisions of ASC 718-10, the
Company recognizes the fair value of stock-based compensation in financial statements over the requisite
service period of the individual grants, which generally equals a four-year vesting period. The Company uses
estimates of volatility, expected term, risk-free interest rate, dividend yield and forfeitures in determining the
fair value of these awards and the amount of compensation expense to recognize. The Company uses the
straight-line method to amortize all stock awards granted over the requisite service period of the award.
(cid:23)(cid:19)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Determining Fair Value of Stock Options
The Company uses the Black-Scholes valuation model for valuing stock option grants using the
following assumptions and estimates:
Expected Volatility. The Company calculates expected volatility based on the historical price volatility
of the Company's stock.
Expected Term. The Company utilizes a model which uses historical exercise, cancellation and
outstanding option data to calculate the expected term of stock option grants.
Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes
valuation model on the implied yield available on a U.S. Treasury note with a term approximately equal to the
expected term of the underlying grants.
Dividend Yield. The dividend yield was calculated by dividing the annual dividend by the average
closing price of the Company's common stock on a quarterly basis.
Estimated Forfeitures. The Company uses historical data to estimate pre-vesting forfeitures, and
records share-based compensation expense only for those awards that are expected to vest.
The following table summarizes the stock-based compensation expense recognized in accordance with
ASC 718-10 for the twelve months ended December 31, 2014, 2013 and 2012 (in thousands).
Year Ended December 31,
2013
2012
2014
Cost of revenues ....................................................................... $
Research and development .......................................................
Sales and marketing..................................................................
General and administrative .......................................................
Total stock-based compensation expense................................. $
879
4,784
3,540
5,079
14,282
$
$
1,074
5,746
3,642
6,023
16,485
$
$
1,058
5,503
3,317
4,346
14,224
The following table summarizes total compensation expense related to unvested awards not yet
recognized, net of expected forfeitures, and the weighted average period over which it is expected to be
recognized as of December 31, 2014.
December 31, 2014
Unrecognized
Compensation
Expense for Unvested
Awards
(In thousands)
Options ................................................................................. $
Long-term performance-based awards.................................
Restricted stock units ...........................................................
Purchase plan........................................................................
Total unrecognized compensation expense.......................... $
786
1,255
20,285
144
22,470
Weighted
Average
Remaining
Recognition
Period
(In years)
1.1
2.0
2.3
0.5
Stock compensation expense in the twelve months ended December 31, 2014, was approximately
$14.3 million (comprising approximately $1.2 million related to stock options, $0.5 million related to long-term
performance-based awards, $11.3 million related to restricted stock units and $1.3 million related to the
Company's Purchase Plan).
(cid:23)(cid:20)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock compensation expense in the twelve months ended December 31, 2013, was approximately
$16.5 million (comprising approximately $2.3 million related to stock options, $3.2 million related to
performance-based awards, $9.8 million related to restricted stock units and $1.2 million related to the
Company's Purchase Plan).
Stock compensation expense in the twelve months ended December 31, 2012, was approximately
$14.2 million (comprising approximately $4.0 million related to stock options, $2.1 million related to
performance-based awards, $7.0 million related to restricted stock units and $1.1 million related to the
Company's Purchase Plan).
The fair value of stock options granted is established on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used during the three years ended
December 31, 2014, 2013 and 2012:
2014*
2013*
2012
Risk-free interest rates ..........................................................
Expected volatility rates .......................................................
Expected dividend yield .......................................................
Expected term of stock options (in years) ............................
Weighted-average grant date fair value of options granted..
—%
—%
—%
0.0
$0.00
—%
—%
—%
0.0
$0.00
0.87% - 1.01%
45%
0.51% - 0.57%
6.4
$18.20
________________________
*The Company did not grant stock options in the years ended December 31, 2014 and 2013, and therefore no fair-
value assumptions were reported for those periods.
The fair value of employees’ stock purchase rights under the Purchase Plan was estimated using the
Black-Scholes model with the following weighted-average assumptions used during the three years ended
December 31, 2014, 2013 and 2012:
Risk-free interest rates.............................................
Expected volatility rates ..........................................
Expected dividend yield ..........................................
Expected term of purchase right (years)..................
Weighted-average estimated fair value of purchase
rights ........................................................................
2014
0.05% - 0.07%
30% - 48%
0.66% - 0.85%
0.5
2013
0.08% - 0.11%
33% - 37%
0.62% - 0.80%
0.5
2012
0.09% - 0.14%
34% - 48%
0.54% - 0.57%
0.5
$14.40
$11.01
$9.40
(cid:23)(cid:21)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity under the Plans, excluding performance-based shares and restricted
stock units, as of December 31, 2014, and changes during three years then ended, is presented below:
Outstanding at January 1, 2012..................................
Granted.......................................................................
Exercised....................................................................
Forfeited or expired....................................................
Outstanding at December 31, 2012............................
Granted.......................................................................
Exercised....................................................................
Forfeited or expired....................................................
Outstanding at December 31, 2013............................
Granted.......................................................................
Exercised....................................................................
Forfeited or expired....................................................
Outstanding at December 31, 2014............................
Exercisable at December 31, 2014.............................
Vested and expected to vest at December 31, 2014...
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
24.01
42.66
20.48
21.10
26.00
—
23.72
39.70
27.34
—
27.64
—
27.27
26.69
27.25
3.56
3.42
3.56
$
$
$
32,905
32,366
32,889
2,817
Shares
(in thousands)
$
3,557
$
135
(870) $
(5) $
$
— $
(1,108) $
(18) $
$
— $
(347) $
— $
$
$
$
1,344
1,292
1,343
1,691
The total intrinsic value of options exercised during the twelve months ended December 31, 2014,
2013 and 2012, was $9.9 million, $26.5 million and $14.5 million, respectively.
The following table summarizes the stock options outstanding at December 31, 2014:
Options Outstanding
Options Vested and Exercisable
Number
Outstanding
(in thousands)
124
268
93
243
40
212
150
85
48
81
1,344
Weighted
Average
Remaining
Contractual
Term (in years)
3.08
4.31
2.45
2.62
2.02
1.10
4.85
5.29
6.50
7.20
3.56
Weighted
Average
Exercise
Price
$19.08
$21.14
$23.68
$25.25
$25.73
$26.75
$33.10
$38.06
$39.49
$42.88
$27.27
Number Vested
(in thousands)
124
268
93
243
40
212
140
85
48
39
1,292
Weighted
Average
Exercise
Price
$19.08
$21.14
$23.68
$25.25
$25.73
$26.75
$32.89
$38.06
$39.49
$42.88
$26.69
Exercise
Price
$17.18 - $21.00 ........................
$21.14 - $21.14 ........................
$22.18 - $24.21 ........................
$25.25 - $25.25 ........................
$25.48 - $26.49 ........................
$26.75 - $26.75 ........................
$26.86 - $36.95 ........................
$37.96 - $38.07 ........................
$39.49 - $39.49 ........................
$42.88 - $42.88 ........................
$17.18 - $42.88 .......................
Performance-based Awards
Under the performance-based awards program, the Company grants awards in the first half of the
performance year in an amount equal to twice the target number of shares to be issued if the target 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 targeted number depending on the Company's performance. The performance metrics of this
program are annual targets consisting of net revenue, non-GAAP operating earnings and strategic goals. Each
performance-based award share granted from the 2007 Plan will reduce the number of shares available for
issuance under the 2007 Plan by 2.0 shares.
(cid:23)(cid:22)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the twelve months ended December 31, 2014, the Company issued approximately 83,000
performance-based awards to employees and executives. As the net revenue and non-GAAP operating income
are considered performance conditions, expense associated with these awards, net of estimated forfeitures is
recognized over the service period based on an assessment of the achievement of the performance targets. The
fair value of these performance-based awards 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. The Company's net revenue and non-GAAP operating
income performance targets were not met in 2014, and therefore the 2014 performance-based awards were
canceled, and no related expense was recognized in the twelve months ended December 31, 2014.
A portion of the 2013 performance-based awards issued to employees and executives vested in the first
quarter of 2014. In January 2014, it was determined that approximately 83,000 shares of the approximately
102,000 performance-based awards granted in 2013 vested in aggregate under the revenue, non-GAAP
operating income and strategic goals performance conditions for such awards. Accordingly, 83,000
performance-based awards were released to the Company's employees and executives in the first quarter of
2014.
A summary of performance-based awards outstanding as of December 31, 2014, and activity during
the three years then ended, is presented below:
Outstanding at January 1, 2012 ..........................
Granted ...............................................................
Vested.................................................................
Forfeited or canceled ..........................................
Outstanding at December 31, 2012 ....................
Granted ...............................................................
Vested.................................................................
Change in units due to performance
achievement for PSUs not earned ......................
Forfeited or canceled ..........................................
Outstanding at December 31, 2013 ....................
Granted ...............................................................
Vested.................................................................
Change in units due to performance
achievement for PSUs not earned ......................
Forfeited or canceled ..........................................
Outstanding at December 31, 2014 ....................
Outstanding and expected to vest at December
31, 2014..............................................................
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
Shares
(in thousands)
Weighted-
Average
Grant Date
Fair Value
Per Share
—
37.60
—
—
37.60
38.68
37.60
— $
102
$
— $
— $
$
102
$
102
$
(54)
37.60
41.79
38.48
53.93
38.48
38.48
53.93
—
(48)
(2)
100
83
(83)
$
$
$
$
$
$
(17)
(83)
$
— $
—
0
0
$
$
—
—
The weighted-average grant-date fair value per share of performance-based awards granted in the years
ended December 31, 2014, 2013 and 2012, was approximately $53.93, $38.68 and $37.60, respectively. The
grant date fair value of awards released, which were fully vested, in the years ended December 31, 2014 and
2013, was approximately $3.2 million and $2.0 million, respectively. There were no performance-based awards
released in year ended December 31, 2012.
(cid:23)(cid:23)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-Term Performance-based Units ("PRSUs")
In the first quarter of 2014 the Company began granting long-term performance-based awards. The
Company's PRSU program provides for the issuance of PRSUs which will vest based on Company performance
measured against the 2014 PRSU Plan's established 2016 revenue target. The PRSUs were granted in an amount
equal to twice the target number of shares to be issued if the target performance metric is 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 goal, and may range from zero to 200% of the targeted
number. The performance goal for PRSUs granted in fiscal 2014 was based on the Company's adjusted annual
revenue growth. Each long-term performance-based award granted from the 2007 Plan will reduce the number
of shares available for issuance under the 2007 Plan by 2 shares.
Recipients of a PRSU award generally must remain employed by the Company on a continuous basis
through the end of the applicable three-year performance period in order to receive shares subject to that award.
Expenses associated with these awards, net of estimated forfeitures, are recorded throughout the year depending
on the number of shares expected to vest based on progress toward the performance target. The cost of long-
term performance-based awards is determined using the fair value of the Company's common stock on the grant
date, 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.
A summary of long-term performance-based awards outstanding as of December 31, 2014, and activity
during the year then ended, is presented below:
Shares
(in thousands)
Weighted-
Average
Grant Date
Fair Value
Per Share
—
55.51
—
—
55.51
— $
$
61
— $
— $
$
61
37
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
2.0
2.0
$
$
3,161
1,928
Outstanding at December 31, 2013 ....................
Granted ...............................................................
Vested.................................................................
Forfeited or canceled ..........................................
Outstanding at December 31, 2014 ....................
Outstanding and expected to vest at December
31, 2014..............................................................
Restricted Stock Units ("RSUs")
The Company grants restricted stock units to employees under the 2007 Plan. RSUs granted to
employees typically vest ratably over a four-year period, and are converted into shares of the Company's
common stock upon vesting on a one-for-one basis subject to the employee's continued service to the Company
over that period. The fair value of RSUs 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. Compensation expense is recognized on a straight-line basis over the requisite service period of
each grant adjusted for estimated forfeitures. Each RSU award granted from the 2007 plan will reduce the
number of shares available for issuance under the 2007 Plan by 2 shares.
(cid:23)(cid:24)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of RSUs outstanding as of December 31, 2014, and activity during the three years then
ended, is as follows:
Outstanding at January 1, 2012 ..........................
Granted ...............................................................
Vested.................................................................
Forfeited .............................................................
Outstanding at December 31, 2012 ....................
Granted ...............................................................
Vested.................................................................
Forfeited .............................................................
Outstanding at December 31, 2013 ....................
Granted ...............................................................
Vested.................................................................
Forfeited .............................................................
Outstanding at December 31, 2014 ....................
Outstanding and expected to vest at December
31, 2014..............................................................
Shares
(in thousands)
458
293
(152)
(26)
573
386
(195)
(50)
714
281
(267)
(36)
692
645
$
$
$
$
$
$
$
$
$
$
$
$
$
Weighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
36.08
41.06
36.48
36.92
38.21
39.09
37.92
39.50
38.97
51.12
38.57
42.74
43.86
1.28
1.22
$
$
35,821
33,364
The weighted-average grant-date fair value per share of RSUs awarded in the years ended
December 31, 2014, 2013 and 2012, was approximately $51.12, $39.09 and $41.06, respectively. The grant date
fair value of awards vested in the years ended December 31, 2014, 2013 and 2012, was approximately $10.3
million, $7.4 million and $5.5 million, respectively.
Shares Reserved
As of December 31, 2014, the Company had approximately 3.3 million shares of common stock
reserved for future issuance under stock option and stock purchase plans.
4. FAIR VALUE MEASUREMENTS:
ASC 820-10, Fair Value Measurements, clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability. As a basis for considering such
assumptions, ASC 820-10 establishes 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 and investment instruments 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 type of instrument valued based on quoted
market prices in active markets primarily includes money market securities. This type of instrument is generally
classified within Level 1 of the fair-value hierarchy. The types of instruments valued based on other observable
inputs (Level 2 of the fair-value hierarchy) include investment-grade corporate bonds and government, state,
municipal and provincial obligations. Such types of investments are valued by using a multi-dimensional
(cid:23)(cid:25)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
relational model, the inputs are primarily benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research
publications.
The Company principally holds securities until maturity; however, they may be sold under certain
circumstances, including, but not limited to, the funding of acquisitions and other strategic investments.
Accordingly, the Company classified its investment portfolio as available-for-sale as of December 31, 2014 and
December 31, 2013. The fair value hierarchy of the Company's short-term marketable securities at
December 31, 2014, and December 31, 2013, was as follows (in thousands):
Fair Value Measurement at
December 31, 2014
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
December 31,
2014
3,370
114,575
117,945
$
$
3,370
—
3,370
$
$
—
114,575
114,575
Description
Money market funds.................... $
Corporate securities .....................
Total........................................ $
Fair Value Measurement at
December 31, 2013
Description
Commercial paper ......................... $
Money market funds .....................
Corporate securities.......................
Total.......................................... $
December 31,
2013
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
3,099
17,492
109,179
129,770
$
$
— $
17,492
—
17,492
$
3,099
—
109,179
112,278
The Company did not transfer any investments between level 1 and level 2 of the fair value hierarchy
in the twelve months ended December 31, 2014, and December 31, 2013.
5. GOODWILL AND INTANGIBLE ASSETS:
There were no changes in the carrying amount of goodwill during the twelve months ended
December 31, 2014, and December 31, 2013.
Intangible assets consist primarily of developed technology, acquired licenses, customer relationships,
trade name, domain name, in-process research and development and patent rights, and are reported net of
accumulated amortization. The Company amortizes the cost of all intangible assets over the shorter of the
estimated useful life or the term of the developed technology, acquired licenses, customer relationships, trade
name and patent rights, which range from two to 12 years, with the exception of $4.7 million of in-process
research and development and $1.3 million to acquire an internet domain name. In-process research and
development is assessed for impairment until the development is completed and products are available for sale,
at which time the Company will begin to amortize the in-process research and development. The Company does
not expect the amortization of in-process research and development to begin in 2015. The Company acquired
the rights to the internet domain name www.power.com, which is now the Company's primary domain name; the
cost to acquire the domain name has been recorded as an intangible asset and will not be amortized as it has an
indefinite useful life. Amortization for acquired intangible assets was approximately $6.1 million, $7.4 million
and $5.2 million in the years ended December 31, 2014, 2013 and 2012, respectively.
(cid:23)(cid:26)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company does not believe there is any significant residual value associated with the following
intangible assets:
December 31, 2014
December 31, 2013
Gross
Accumulated
Amortization
1,261
$
— $
Net
Gross
(in thousands)
1,261
$
Accumulated
Amortization
Net
— $
— $
—
4,690
3,000
1,949
26,670
17,610
3,600
58,780
—
(2,625)
(1,949)
(7,828)
(7,254)
(3,600)
$ (23,256) $
4,690
375
—
18,842
10,356
—
35,524
$
4,690
3,000
1,949
26,670
17,610
3,600
57,519
—
(2,325)
(1,949)
(5,247)
(4,664)
(3,000)
$ (17,185) $
4,690
675
—
21,423
12,946
600
40,334
Domain name ......................... $
In-process research and
development...........................
Technology licenses...............
Patent rights ...........................
Developed technology ...........
Customer relationships...........
Trade name.............................
Total intangible assets............ $
The estimated future amortization expense related to definite-lived intangible assets at December 31,
2014, is as follows:
Fiscal Year
2015 ........................................................................................................................................... $
2016 ...........................................................................................................................................
2017 ...........................................................................................................................................
2018 ...........................................................................................................................................
2019 ...........................................................................................................................................
Thereafter ....................................................................................................................................
Total (1) ....................................................................................................................................... $
Estimated
Amortization
(in thousands)
5,009
4,394
3,994
3,746
3,424
9,006
29,573
_______________
(1)
The total above excludes $4.7 million of in-process research and development which will be
amortized upon completion of development over the estimated useful life of the technology.
6. SIGNIFICANT CUSTOMERS AND INTERNATIONAL SALES:
Segment Reporting
The Company is organized and operates as one reportable segment, the design, development,
manufacture and marketing of analog and mixed-signal ICs and other electronic components and circuitry used
in high-voltage power conversion. 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.
Product Sales
Net revenues consist primarily of sales of the Company's high-voltage integrated-circuit products,
IGBT drivers and high-voltage silicon diodes. When evaluating the Company's net revenues, the Company
categorizes its sales into the following four major end markets served; communications, computer, consumer
and industrial electronics.
(cid:24)(cid:17)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below provides the percentage of net sales activity by end markets served on a comparative
basis for all periods:
End Market
Communications.................................................................
Computer............................................................................
Consumer ...........................................................................
Industrial electronics ..........................................................
Customer Concentration
Year Ended December 31,
2013
2014
2012
18%
10%
37%
35%
21%
10%
35%
34%
24%
12%
36%
28%
Ten customers accounted for approximately 59%, 59% and 64% of net revenues for the years ended
December 31, 2014, 2013 and 2012, 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 OEMs and merchant power supply manufacturers.
The following customers each accounted for 10% or more of total net revenues:
Customer
Avnet.................................................................................
ATM Electronic Corporation............................................
___________________________
* Total customer revenue was less than 10% of net revenues
Year Ended December 31,
2014
2013
2012
19%
*
19%
*
20%
12%
Avnet and ATM Electronic Corporation are distributors of the Company's products. No other
customers accounted for 10% or more of the Company's net revenues in those periods.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consisted
principally of cash investments and trade receivables. The Company has cash investment policies that limit
cash investments to low-risk investments. With respect to trade receivables, the Company performs ongoing
evaluations of its customers' financial conditions and requires letters of credit whenever deemed necessary.
Additionally, the Company establishes an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends related to past write-offs and other relevant information.
Account balances are charged off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit
exposure related to its customers. Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash investments and trade receivables. As of December 31, 2014, and
December 31, 2013, 66% and 71%, respectively, of accounts receivable were concentrated with the Company's
top 10 customers.
The following customers each represented 10% or more of accounts receivable:
Customer
Avnet .....................................................................
ATM Electronic Corporation ................................
Burnon International Ltd.......................................
December 31,
2014
December 31,
2013
22%
*
11%
21%
17%
*
___________________________
* Total customer accounts receivable was less than 10%
(cid:24)(cid:18)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Avnet, ATM Electronic Corporation and Burnon International Ltd. are distributors of the Company’s
products. No other customers accounted for 10% or more of the Company’s accounts receivable in these
periods.
International Sales
The Company markets its products globally through its sales personnel and a worldwide network of
independent sales representatives and distributors. As a percentage of total net revenues, international sales,
which consist of sales to distributors and direct customers outside of the United States of America, comprise
the following:
Year Ended December 31,
2014
2013
2012
Hong Kong/China.......................................................
Taiwan.........................................................................
Korea...........................................................................
Western Europe (excluding Germany) .......................
Japan ...........................................................................
Singapore ....................................................................
Germany .....................................................................
Other ...........................................................................
Total foreign revenue...........................................
47%
15%
11%
11%
5%
1%
2%
3%
95%
47%
15%
11%
11%
5%
2%
2%
2%
95%
45%
17%
12%
10%
6%
2%
1%
2%
95%
The remainder of the Company’s sales is to customers within the United States of America.
7. EARNINGS PER SHARE:
Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted-average
shares of common stock outstanding during the period. Diluted earnings (loss) per share are calculated by
dividing net income (loss) 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 and performance based awards, and the assumed issuance of awards under
the stock purchase plan, as computed using the treasury stock method. A summary of the earnings (loss) per
share calculation is as follows (in thousands, except per share amounts):
Year Ended December 31,
2014
2013
2012
Basic earnings (loss) per share:
Net income (loss) ...................................................................... $
Weighted-average common shares............................................
Basic earnings (loss) per share.................................................. $
Diluted earnings (loss) per share (1):
Net income (loss) ...................................................................... $
Weighted-average common shares............................................
Effect of dilutive securities:
Employee stock plans ........................................................
Diluted weighted-average common shares ...............................
Diluted earnings (loss) per share............................................... $
59,544
29,976
1.99
59,544
29,976
853
30,829
1.93
$
$
$
$
57,266
29,421
1.95
$ (34,404)
28,636
(1.20)
$
57,266
29,421
$ (34,404)
28,636
999
30,420
1.88
—
28,636
(1.20)
$
_______________
(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
(cid:24)(cid:19)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
such shares when the necessary conditions have not been met. The Company has excluded all performance-
based awards underlying the 2014 awards in the 2014 calculation as the performance conditions for those
awards were not met as of the end of the period. The Company has included the shares underlying the 2013
and 2012 awards in the respective year calculations, as those shares were contingently issuable upon the
satisfaction of the annual targets consisting of net revenue, non-GAAP operating earnings and achievement of
strategic goals as of the end of the periods.
In the years ended December 31, 2014 and 2013, options to purchase 36,501 shares and 122,263
shares outstanding, respectively, were not included in the computation of diluted earnings per share for the
periods then ended because they were determined to be anti-dilutive. In the year ended December 31, 2012, all
shares attributable to stock-based awards were excluded in the computation of diluted earnings per share, as
the Company was in a net loss position.
8. PROVISION FOR INCOME TAXES:
Income Taxes
The Company accounts for income taxes under the provisions of ASC 740. Under the provisions of
ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates
that are expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled.
U.S. and foreign components of income before income taxes were (in thousands):
Year Ended December 31,
2013
2012
2014
U.S. operations........................................................................... $ (5,064)
Foreign operations .....................................................................
61,878
Total pretax income (loss).......................................................... $ 56,814
$
1,936
53,491
$ 55,427
$ (36,178)
15,396
$ (20,782)
The components of the provision for (benefit from) income taxes are as follows (in thousands):
Year Ended December 31,
2013
2012
2014
Current provision (benefit):
Federal ............................................................................................ $ (1,234) $
State ................................................................................................
Foreign ............................................................................................
(137)
3,094
1,723
(558)
2
3,049
2,493
$
9,813
(2,083)
1,892
9,622
Deferred provision (benefit):
Federal ............................................................................................
State ................................................................................................
Foreign ............................................................................................
(3,633)
—
(699)
(4,332)
Total ................................................................................................ $ (2,730) $ (1,839)
(3,279)
(284)
(890)
(4,453)
2,647
3,109
(1,756)
4,000
$ 13,622
The Company is entitled to a deduction for federal and state tax purposes with respect to employees'
stock option activity. The net reduction in taxes otherwise payable in excess of any amount credited to income
tax expense has been reflected as an adjustment to additional paid-in capital. For 2014, 2013 and 2012, the
(cid:24)(cid:20)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
benefit arising from employee stock option activity that resulted in an adjustment to additional paid in capital
was approximately $0.8 million, $1.3 million and $1.3 million, respectively.
The provision for (benefit from) income taxes differs from the amount, which would result by applying
the applicable federal income-tax rate to income before provision for (benefit from) income taxes, as follows:
Provision computed at Federal statutory rate .....................
State tax provision, net of Federal benefit ..........................
Business tax credits.............................................................
Stock-based compensation..................................................
Foreign income taxed at different rate................................
IRS audit settlement............................................................
Valuation allowance............................................................
Other ...................................................................................
Total....................................................................................
2014
35.0%
—
(5.5)
(2.9)
(28.6)
(5.8)
2.0
1.0
(4.8)%
2013
35.0%
—
(8.1)
(2.8)
(29.5)
—
(0.1)
2.2
(3.3)%
2012
35.0%
8.9
4.9
2.5
25.9
(87.2)
(48.4)
(7.2)
(65.6)%
The Company reached a settlement with the IRS in the quarter ended June 30, 2014, to close out the
examination of its federal income-tax returns for the years 2007 through 2009. As a result, the Company adjusted
its tax balances and the provision for income tax for the year ended December 31, 2014, includes a one-time benefit
of $3.3 million comprising $2.8 million in federal income taxes and interest, and state income taxes of approximately
$0.5 million. The one-time benefit includes the reversal of $4.1 million of related unrecognized tax benefits that
had been recorded as non-current liabilities in the Company's consolidated balance sheets. The Company has now
concluded all U.S. federal income-tax matters for the years through 2009. The Company engages in qualifying
activities for R&D credit purposes. The Tax Increase Prevention Act of 2014 was signed into law on December
19, 2014, to extend the federal research and development credit for 2014. The related tax benefit was taken in the
fourth quarter of 2014.
The effective tax rate for the year ended December 31, 2013, was favorably impacted by the
geographic distribution of the Company's world-wide earnings and earnings in lower-tax jurisdictions.
Additionally, the rate was favorably impacted by federal research tax credits both for 2013 and 2012.
During the third quarter of 2012, the Company recorded an impairment charge and write-off of certain
assets related to SemiSouth of approximately $58.9 million, on which the Company recognized a $8.0 million
tax benefit. The write-off resulted in a net loss for 2012.
During the third quarter of 2012 the Company made a one-time payment of taxes and interest totaling
$42.6 million in connection with settling the U.S. Internal Revenue Service ("IRS") examination of the
Company's income tax returns for the years 2003 through 2006. Related to this, the provision for income tax in
the second quarter of 2012 included a one-time charge of $44.8 million, comprising $35.0 million in federal
income taxes, net interest of $5.7 million, and state income taxes (including interest) of approximately $4.1
million. The impact of the charge was partially offset by the reversal of $26.9 million of related unrecognized
tax benefits that had been recorded as non-current liabilities in the Company's consolidated balance sheet
resulting in a net charge of $18.1 million. Additionally, there was a $2.2 million reduction of the valuation
allowance on the Company's California deferred tax assets.
(cid:24)(cid:21)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the net deferred income tax asset (liabilities) were as follows (in thousands):
Deferred tax assets:
Other reserves and accruals ........................................................................... $
Tax credit carry-forwards...............................................................................
Stock compensation .......................................................................................
Capital losses .................................................................................................
Net operating loss ..........................................................................................
Valuation allowance.......................................................................................
Deferred tax liabilities:
Depreciation...................................................................................................
Acquired intangibles ......................................................................................
Unremitted earnings.......................................................................................
Other ..............................................................................................................
Net deferred tax asset..................................................................................... $
December 31,
2014
2013
3,928
19,602
5,429
11,401
3,680
(25,828)
18,212
(3,320)
(3,502)
(5,182)
(1,072)
(13,076)
5,136
$
6,893
12,453
5,964
10,307
1,014
(19,271)
17,360
(4,226)
(4,303)
(2,432)
(1,107)
(12,068)
5,292
$
In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income. In the event that the Company determines, based on available
evidence and management judgment, that all or part of the net deferred tax assets will not be realized in the
future, the Company would record a valuation allowance in the period the determination is made. In addition,
the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the
application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s
expectations could have a material impact on its results of operations and financial position.
As of December 31, 2014, the Company continues to maintain a valuation allowance primarily as a
result of SemiSouth capital losses for federal purposes, and on its California deferred tax assets as the Company
believes that it is not more likely than not that the deferred tax assets will be fully realized. In addition, the
Company maintains a valuation allowance with respect to certain of its deferred tax assets relating to tax credits
in Canada and the state of New Jersey.
As of December 31, 2014, the Company had federal research and development tax credit carry-
forwards of approximately $10.8 million, which will begin to expire in 2030 if unutilized, California research
and development tax credit carry-forwards of approximately $14.9 million (there is no expiration of research
and development tax credit carry-forwards for the state of California) and California net operating losses of
$31.5 million which will begin to expire in 2032. As of December 31, 2014, the Company had Canadian
scientific research and experimental development tax credit carry-forwards of approximately $2.3 million and
New Jersey research and experimental development tax credit carry-forwards of approximately $0.4 million,
which will start to expire in 2026 and 2027, respectively.
The Company does not provide for U.S. taxes on its undistributed earnings of foreign subsidiaries
that it intends to invest indefinitely outside the U.S., unless such taxes are otherwise required under U.S. tax
law. Beginning in 2013, the Company determined that a portion of its foreign subsidiaries current and future
earnings may be remitted prospectively to the U.S. for domestic cash flow purposes and, accordingly, provided
for the related U.S. taxes in its consolidated financial statements. If the Company changes its intent to invest
its undistributed foreign earnings indefinitely or if a greater amount of undistributed earnings are needed for
U.S. operations than previously anticipated and for which U.S. taxes have not been recorded, the Company
(cid:24)(cid:22)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
would be required to accrue or pay U.S. taxes (subject to an adjustment for foreign tax credits, where
applicable) and withholding taxes payable to various foreign countries on some or all of these undistributed
earnings. As of December 31, 2014, the Company had undistributed earnings of foreign subsidiaries that are
indefinitely invested outside of the U.S. of approximately $144.0 million. It is not practicable to determine the
income tax liability that might be incurred if these earnings were to be distributed.
Unrecognized Tax Benefits
The Company applies the provisions of ASC 740-10, relating to accounting for uncertain income
taxes.
Reconciliation of the Beginning and Ending Amount of Unrecognized Tax Benefits (in thousands):
Unrecognized Tax Benefits Balance at January 1, 2012............................................................. $
Gross Increases for Tax Positions of Current Year......................................................................
Gross Increases for Tax Positions of Prior Years.........................................................................
Settlements ..................................................................................................................................
Lapse of Statute of Limitations ...................................................................................................
Unrecognized Tax Benefits Balance at December 31, 2012 .......................................................
Gross Increases for Tax Positions of Current Year......................................................................
Gross Increase for Tax Positions of Prior Years..........................................................................
Settlements ..................................................................................................................................
Lapse of Statute of Limitations ...................................................................................................
Unrecognized Tax Benefits Balance at December 31, 2013 .......................................................
Gross Increases for Tax Positions of Current Year......................................................................
Gross Increases for Tax Positions of Prior Years.........................................................................
Settlements ..................................................................................................................................
Lapse of Statute of Limitations ...................................................................................................
Unrecognized Tax Benefits Balance at December 31, 2014 ....................................................... $
34,855
1,110
9,344
(34,496)
—
10,813
1,881
—
—
—
12,694
2,117
710
(4,361)
—
11,160
The Company's total unrecognized tax benefits as of December 31, 2014, 2013 and 2012, was $11.2
million, $12.7 million and $10.8 million, respectively. An income-tax benefit of $4.9 million, net of valuation
allowance adjustments, would be recorded if these unrecognized tax benefits are recognized. As of December
31, 2014, the Company is not under any income tax audit. The Company cannot reasonably estimate the
amount of the unrecognized tax benefit that could be adjusted in the next twelve months.
The Company's continuing practice is to recognize interest and/or penalties related to income-tax matters
in income-tax expense. The Company has accrued interest and penalties at December 31, 2014, and December 31,
2013, of $0.1 million and $0.7 million, respectively, which have been recorded in long-term income taxes payable
in the accompanying Consolidated Balance Sheets. Approximately $10,000 of interest, net of the benefit, was
included in the Company's benefit from income taxes for the year-ended December 31, 2014.
In July 2013, the FASB issued a new accounting standard that requires the presentation of certain
unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the Company's condensed
consolidated balance sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward
exists. The Company adopted this new standard on a prospective basis in the first quarter of 2014. The impact of
the adoption was a reduction to long-term deferred tax assets and non-current income tax payable of approximately
$4.3 million.
In the quarter ended June 30, 2012, the Company reached an understanding regarding the terms for
settling with the U.S. Internal Revenue Service ("IRS") and closed out all positions as part of the examination of
the Company's income tax returns for the years 2003 through 2006. On August 2, 2012, the IRS signed a formal
closing agreement with the Company that is consistent with the intentions of the parties pursuant to their earlier
understanding. Further, the agreement confirmed that the royalty arrangement between the Company and its
(cid:24)(cid:23)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
foreign subsidiary concluded on October 31, 2012, resulting in a substantially lower effective tax rate for the
Company in subsequent years.
As of December 31, 2014, the Company has concluded all U.S. federal income tax matters for the
years through 2009, and has finalized Swiss income tax returns for the years through 2012. There is currently no
pending income tax audit.
9. COMMITMENTS:
Facilities
The Company owns its main executive, administrative, manufacturing and technical offices in San
Jose, California. The Company also owns a research and development facility in New Jersey, which was
purchased in 2010 in connection with its acquisition of an early-stage research and development company, and
a test facility in Biel, Switzerland which was acquired in connection with the Company's acquisition of
Concept. The Company leases administrative office space in Singapore and Switzerland, and a research and
development facility in Canada, in addition to sales offices in various countries around the world.
Future minimum lease payments under all non-cancelable operating lease agreements as of
December 31, 2014, are as follows (in thousands):
Fiscal Year
2015 ........................................................................................................ $ 1,485
1,082
2016 ........................................................................................................
887
2017 ........................................................................................................
966
2018 ........................................................................................................
412
2019 ........................................................................................................
Thereafter................................................................................................
—
Total minimum lease payments ..................................................... $ 4,832
Total rent expense amounted to $1.8 million, $1.5 million and $1.4 million in the years ended
December 31, 2014, 2013 and 2012, respectively.
Purchase Obligations
At December 31, 2014, the Company had no non-cancelable purchase obligations that were due
beyond one year.
10. 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, 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 October 20, 2004, the Company filed a complaint against Fairchild Semiconductor International,
Inc. and Fairchild Semiconductor Corporation (referred to collectively as "Fairchild") in the United States
District Court for the District of Delaware. In its complaint, the Company alleged that Fairchild has and is
infringing four of Power Integrations' patents pertaining to PWM integrated circuit devices. Fairchild denied
infringement and asked for a declaration from the court that it does not infringe any Power Integrations patent
and that the patents are invalid. The Court issued a claim construction order on March 31, 2006 which was
favorable to the Company. The Court set a first trial on the issues of infringement, willfulness and damages for
(cid:24)(cid:24)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 2, 2006. At the close of the first trial, on October 10, 2006, the jury returned a verdict in favor of the
Company finding all asserted claims of all four patents-in-suit to be willfully infringed by Fairchild and
awarding $34.0 million in damages. Fairchild raised defenses contending that the asserted patents are invalid or
unenforceable, and the Court held a second trial on these issues beginning on September 17, 2007. On
September 21, 2007, the jury returned a verdict in the Company's favor, affirming the validity of the asserted
claims of all four patents-in-suit. Fairchild submitted further materials on the issue of enforceability along with
various other post-trial motions, and the Company filed post-trial motions seeking a permanent injunction and
increased damages and attorneys' fees, among other things. On September 24, 2008, the Court denied
Fairchild's motion regarding enforceability and ruled that all four patents are enforceable. On December 12,
2008, the Court ruled on the remaining post-trial motions, including granting a permanent injunction, reducing
the damages award to $6.1 million, granting Fairchild a new trial on the issue of willful infringement in view of
an intervening change in the law, and denying the Company's motion for increased damages and attorneys' fees
with leave to renew the motion after the resolution of the issue of willful infringement. On December 22, 2008,
at Fairchild's request, the Court temporarily stayed the permanent injunction for 90 days. On January 12, 2009,
Fairchild filed a notice of appeal challenging the Court's refusal to enter a more permanent stay of the
injunction, and Fairchild filed additional motions requesting that both the Federal Circuit and the District Court
extend the stay of injunction. The District Court temporarily extended the stay pending the Federal Circuit
ruling on Fairchild's pending motion, but the Federal Circuit dismissed Fairchild's appeal and denied its motion
on May 5, 2009, and the District Court issued an order on May 13, 2009 confirming the reinstatement of the
permanent injunction as originally entered in December 2008. On June 22, 2009, the Court held a brief bench
re-trial on the issue of willful infringement. On July 22, 2010, the Court found that Fairchild willfully infringed
all four of the asserted patents, and the Court also invited briefing on enhanced damages and attorneys' fees.
Fairchild also filed a motion requesting that the Court amend its findings regarding willfulness. On January 18,
2011, the Court denied Fairchild's request to amend the findings regarding Fairchild's willful infringement and
doubled the damages award against Fairchild but declined to award attorneys' fees. On February 3, 2011, the
Court entered final judgment in favor of the Company for a total damages award of $12.9 million. Fairchild
filed a notice of appeal challenging the final judgment and a number of the underlying rulings, and the
Company filed a cross-appeal seeking to increase the damages award. The appeal was argued on January 11,
2012, and the Federal Circuit issued a mixed ruling on March 26, 2013, affirming Fairchild's infringement of
certain claims that support the basis for the permanent injunction while reversing, vacating, and remanding the
findings with respect to other claims, including the Company's claim for damages. The Company filed a petition
seeking Supreme Court review of the Federal Circuit’s ruling on damages issues, and the Supreme Court called
for a response from Fairchild but ultimately declined to review the case. On remand, the Company intends to
pursue its claim for financial compensation based on Fairchild's infringement.
On May 9, 2005, the Company filed a Complaint with the U.S. International Trade Commission
(“ITC”) under section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. section 1337 against System
General (“SG”). The Company filed a supplement to the complaint on May 24, 2005. The Company alleged
infringement of its patents pertaining to pulse width modulation (“PWM”) integrated circuit devices produced
by SG, which are used in power conversion applications such as power supplies for computer monitors. The
Commission instituted an investigation on June 8, 2005 in response to the Company's complaint. SG filed a
response to the ITC complaint asserting that the patents-in-suit were invalid and not infringed. The Company
subsequently and voluntarily narrowed the number of patents and claims in suit, which proceeded to a hearing.
The hearing on the investigation was held before the Administrative Law Judge (“ALJ”) from January 18 to
January 24, 2006. Post-hearing briefs were submitted and briefing concluded February 24, 2006. The ALJ's
initial determination was issued on May 15, 2006. The ALJ found all remaining asserted claims valid and
infringed, and recommended the exclusion of the infringing products as well as certain downstream products
that contain the infringing products. After further briefing, on June 30, 2006, the Commission decided not to
review the initial determination on liability, but did invite briefs on remedy, bonding and the public interest. On
August 11, 2006, the Commission issued an order excluding from entry into the United States the infringing SG
PWM chips, and any LCD computer monitors, AC printer adapters and sample/demonstration circuit boards
containing an infringing SG chip. The U.S. Customs Service is authorized to enforce the exclusion order. On
October 11, 2006, the presidential review period expired without any action from the President, and the ITC
exclusion order is now in full effect. SG appealed the ITC decision, and on November 19, 2007, the Federal
Circuit affirmed the ITC's findings in all respects. On October 27, 2008, SG filed a petition to modify the
(cid:24)(cid:25)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
exclusion order in view of a recent Federal Circuit opinion in an unrelated case, and the Company responded to
oppose any modification, but the Commission modified the exclusion order on February 27, 2009.
Nevertheless, the exclusion order still prohibits SG and related entities from importing the infringing SG chips
and any LCD computer monitors, AC printer adapters, and sample/demonstration circuit boards containing an
infringing SG chip.
On May 23, 2008, the Company filed a complaint against Fairchild Semiconductor International, Inc.,
Fairchild Semiconductor Corporation, and Fairchild's wholly owned subsidiary System General Corporation in
the United States District Court for the District of Delaware. In its complaint, the Company alleged that
Fairchild has infringed and is infringing three patents pertaining to power supply controller integrated circuit
devices. Fairchild answered the Company's complaint on November 7, 2008, denying infringement and asking
for a declaration from the Court that it does not infringe any Power Integrations patent and that the patents are
invalid and unenforceable. Fairchild's answer also included counterclaims accusing the Company of infringing
three patents pertaining to primary side power conversion integrated circuit devices. Fairchild had earlier
brought these same claims in a separate suit against the Company, also in Delaware, which Fairchild dismissed
in favor of adding its claims to the Company's already pending suit against Fairchild. The Company has
answered Fairchild's counterclaims, denying infringement and asking for a declaration from the Court that it
does not infringe any Fairchild patent and that the Fairchild patents are invalid. Fairchild also filed a motion to
stay the case, but the Court denied that motion on December 19, 2008. On March 5, 2009, Fairchild filed a
motion for summary judgment to preclude any recovery for post-verdict sales of parts found to infringe in the
parties' other ongoing litigation, described above, and the Company filed its opposition and a cross-motion to
preclude Fairchild from re-litigating the issues of infringement and damages for those same products. On June
26, 2009, the Court held a hearing on the parties' motions, and on July 9, 2009 the Court issued an order
denying the parties' motions but staying proceedings with respect to the products that were found to infringe and
which are subject to the injunction in the other Delaware case between the parties pending the entry of final
judgment in that case; those products are expected to be addressed in the context of the parties’ remand
proceedings following the appeal in their earlier litigation in Delaware, and the remainder of the case is
proceeding. On December 18, 2009, the Court issued an order construing certain terms in the asserted claims of
the Company's and Fairchild's patents in suit. Following the Court's ruling on claim construction, Fairchild
withdrew its claim related to one of its patents and significantly reduced the number of claims asserted for the
remaining two patents. The parties thereafter filed and argued a number of motions for summary judgment, and
the Court denied the majority of the parties' motions but granted the Company's motion to preclude Fairchild
from re-arguing validity positions that were rejected in the prior case between the parties. Because the assigned
Judge retired at the end of July 2010, the case was re-assigned to a different Judge, and the Court vacated the
trial schedule and had the parties provide their input on the appropriate course of action. The Court thereafter
set a trial schedule with the jury trial on infringement and validity to begin in July 2011. On April 18, 2011, the
Court rescheduled the trial to begin in January 2012, and on June 2, 2011, the Court moved the trial date to
April 2012 to permit the parties to address another patent the Company accused Fairchild of infringing.
Following a trial in April 2012, the jury returned a verdict finding that Fairchild infringes two of the Company's
patents, that Fairchild has induced others to infringe the Company's patents, and also upheld the validity of the
infringed patents. Of the two remaining counterclaim patents Fairchild asserted in the case, one was found not
to be infringed, but the jury found the second patent to be infringed by a limited number of the Company's
products, although the jury further found the Company did not induce infringement by any customers, including
customers outside the United States. On March 29, 2013, the District Court denied most of the parties' post-trial
motions on liability but granted the Company's motion for judgment as a matter of law finding that Fairchild
infringed another of the Company's patents. On April 25, 2013, the Court denied both parties' motions regarding
the unenforceability of each other's patents. The Company intends to challenge adverse findings on appeal;
nevertheless, the Company estimates that even if the verdict on Fairchild's patent were ultimately upheld, the
sales potentially impacted would amount to only about 0.3% of the Company's revenues. The Company
requested an injunction preventing further infringement of its own patents by Fairchild, and Fairchild requested
an injunction as well; following a hearing on the issue in June 2014, the Court denied Fairchild's request for an
injunction against the Company and granted the Company's request for an injunction against Fairchild. On
January 13, 2015, the District Court entered final judgment on the liability and validity issues discussed above,
either party may appeal to the Federal Circuit in the coming months. The Company is also seeking financial
(cid:24)(cid:26)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
damages, as well as enhanced damages for willful infringement, issues to be decided in separate proceedings at
a later date.
On June 28, 2004, the Company filed a complaint for patent infringement in the U.S. District Court,
Northern District of California, against SG Corporation, a Taiwanese company, and its U.S. subsidiary. The
Company's complaint alleged that certain integrated circuits produced by SG infringed and continue to infringe
certain of its patents. On June 10, 2005, in response to the initiation of the International Trade Commission
(ITC) investigation discussed above, the District Court stayed all proceedings. Subsequent to the completion of
the ITC proceedings, the District Court temporarily lifted the stay and scheduled a case management
conference. On December 6, 2006, SG filed a notice of appeal of the ITC decision as discussed above. In
response, and by agreement of the parties, the District Court vacated the scheduled case management
conference and renewed the stay of proceedings pending the outcome of the Federal Circuit appeal of the ITC
determination. On November 19, 2007, the Federal Circuit affirmed the ITC's findings in all respects, and SG
did not file a petition for review. The parties subsequently filed a motion to dismiss the District Court case
without prejudice. On November 4, 2009, the Company re-filed its complaint for patent infringement against
SG and its parent corporations, Fairchild Semiconductor International, Inc. and Fairchild Semiconductor
Corporation, to address their continued infringement of patents at issue in the original suit that recently emerged
from SG requested reexamination proceedings before the U.S. Patent and Trademark Office (USPTO). The
Company seeks, among other things, an order enjoining Fairchild and SG from infringing the Company's
patents and an award of damages resulting from the alleged infringement. Fairchild has denied infringement and
asked for a declaration from the Court that it does not infringe any Power Integrations patent, that the patents
are invalid, and that one of the two of the Company's patents now at issue in the case is unenforceable. On May
5, 2010, Fairchild and SG filed an amended answer including counterclaims accusing the Company of
infringing two patents, and since that time Fairchild has withdrawn its claim for infringement of one of the
patents it originally asserted against the Company but added another patent to the case over the Company's
objections; the Company contests these claims vigorously. Both parties filed summary judgment motions and
challenges to each other’s experts’ testimony, and the Court granted the Company’s motion for summary
judgment of non-infringement with respect to one of Fairchild’s two patents. Following a trial on the remaining
claims in February 2014, the jury returned a verdict in the Company’s favor, affirming the validity of the
asserted claims of the Company’s patents-in-suit, finding that Fairchild and SG infringed the Company’s
asserted patents and induced infringement by others, and awarding $105.0 million in damages. Although the
jury awarded damages, at this stage of the proceedings the Company cannot state the amount, if any, it might
ultimately recover from Fairchild, and no benefits have been recorded in the Company’s consolidated financial
statements as a result of the damages verdict. The Jury also rejected Fairchild’s remaining counterclaims for
infringement against the Company. Fairchild challenged these rulings in post-trial motions, but the judge
confirmed the jury’s determinations on infringement and damages, although the Court declined to find
Fairchild’s infringement willful. Fairchild also pressed its unenforceability claim with respect to one of the two
patents it was found to infringe in post-trial briefing, but the Court rejected Fairchild’s unenforceability claim.
Fairchild also requested reconsideration of the damages determinations, and the Court granted a new trial with
respect to damages but none of the other issues addressed in the previous trial; further proceedings with respect
to the damages retrial will take place over the coming months. The Company has filed a motion requesting a
permanent injunction to prevent further infringement by Fairchild; a ruling is expected in the coming months.
In February 2010, Fairchild and System General (“SG”) filed suits for patent infringement against the
Company, Power Integrations Netherlands B.V., and representative offices of Power Integrations Netherlands in
Shanghai and Shenzhen with the Suzhou Intermediate Court in the People's Republic of China. The suits assert
four Chinese patents and seek an injunction and damages of approximately $19.0 million. Power Integrations
Netherlands filed invalidation proceedings for all four asserted SG patents in the People's Republic of China
Patent Reexamination Board (PRB) of the State Intellectual Property Office (SIPO), and all four challenges
were accepted by the PRB, with hearings conducted in September 2010. In early January 2012, the Company
received rulings from the PRB invalidating the majority of the claims Fairchild asserted in litigation, and the
PRB determinations are currently on appeal. The Suzhou Court conducted evidentiary hearings in 2012 and
issued rulings in late December 2012, finding that the Company did not infringe any of the asserted patents.
Fairchild filed appeals challenging the Suzhou Court's non-infringement rulings, and the appeals court in
(cid:25)(cid:17)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Nanjing held further hearings in the infringement proceedings late last year, but Fairchild has since dismissed its
appeals, bringing the infringement proceedings to a close.
On July 11, 2011, the Company filed a complaint in the U.S. District Court, District of Columbia,
against David Kappos in his capacity as Director of the United States Patent and Trademark Office (“PTO”) as
part of the ongoing reexamination proceedings related to one of the patents asserted against Fairchild and SG in
the Delaware litigation described above. The Company filed a motion for summary judgment on a preliminary
jurisdictional issue, and the PTO filed a cross-motion to dismiss on this same issue; briefing on those motions
was completed in October, 2011. On November 18, 2013, the Court granted the PTO’s motion and transferred
the case to the Federal Circuit, where additional briefing has taken place and a hearing is expected to be
scheduled in the coming months.
On May 1, 2012, Fairchild Semiconductor Corporation and Fairchild's wholly-owned subsidiary,
System General Corporation (referred to collectively as “Fairchild”), filed a complaint against the Company in
the United States District Court for the District of Delaware. In its complaint, Fairchild alleges that the
Company has infringed and is infringing four patents pertaining to power conversion integrated circuit devices.
The Company answered Fairchild's complaint, denying infringement and asking for a declaration from the
Court that it does not infringe any Fairchild patent and that the Fairchild patents are invalid, and the Company
also asserted counterclaims against Fairchild for infringement of five of the Company's patents. Fairchild has
withdrawn its claim for infringement of one of the patents it asserted against the Company after the Company's
preliminary challenge; expert discovery is now complete on the remaining patents. Both parties have filed
dispositive motions on a number of issues, and trial is scheduled to begin on May 26, 2015.
On February 5, 2013, Trinity Capital Investment, LLC (“Trinity”) filed suit against the Company in
California Superior Court. The complaint alleged that SemiSouth Laboratories Inc. had entered into a lease
agreement with Trinity, and that the Company guaranteed SemiSouth's obligations under the lease agreement.
The complaint further alleged that SemiSouth defaulted on the lease agreement in October 2012, and therefore
the Company owed Trinity $2.4 million under the lease guaranty. On April 19, 2013, the Company answered the
complaint, denying the allegations therein. On April 18, 2014, Trinity filed a request to dismiss the action
without prejudice.
The Company is unable to predict the outcome of legal proceedings with certainty, and there can be no
assurance that Power Integrations will prevail in the above-mentioned unsettled litigations. These litigations,
whether or not determined in Power Integrations' favor or settled, will be costly and will divert the efforts and
attention of the Company's management and technical personnel from normal business operations, potentially
causing a material adverse effect on the business, financial condition and operating results. Currently, the
Company is not able to estimate a loss or a range of loss for the ongoing litigation disclosed above, however
adverse determinations in litigation could result in monetary losses, the loss of proprietary rights, subject the
Company to significant liabilities, require Power Integrations to seek licenses from third parties or prevent the
Company from licensing the technology, any of which could have a material adverse effect on the Company's
business, financial condition and operating results.
In the quarter ended June 30, 2014, the IRS issued the Company a notice of proposed adjustments to
the Company's taxable income for the years 2007 through 2009. The Company and IRS signed a formal closing
agreement on May 20, 2014, to settle all positions and close out the examination of the Company's income-tax
returns for the years 2007 through 2009. As a result, the Company adjusted its tax balances based on the facts,
circumstances, and information available at the reporting date. The resolution of the 2007-2009 IRS audit
resulted in a federal tax benefit to the Company of $2.8 million. Additionally, the Company recorded a state tax
benefit of $0.5 million. Also, the agreement allowed the Company to repatriate up to $5.0 million from its
foreign subsidiary without incurring additional U.S. income taxes.
(cid:25)(cid:18)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. ACQUISITIONS:
Cambridge Semiconductor Limited
In December 2014, the Company entered into a loan agreement with Cambridge Semiconductor
Limited ("CamSemi"), a UK company, in which $6.6 million was outstanding as of December 31, 2014. The
estimated fair value of the loan, which was a level 3 fair value measurement (see Note 4, Fair Value
Measurements, for details) approximated the carrying value of $6.6 million, as the loan was outstanding for less
than a month and the interest rate approximated a market rate for such a loan. The loan was in anticipation of a
definitive agreement the Company entered into to acquire CamSemi on January 2, 2015, for approximately
$23.0 million, including an estimated working capital adjustment. The Company closed the acquisition on
January 2, 2015. Pursuant to the purchase agreement, the purchase price is subject to a net asset value
adjustment which will be determined within approximately three months after January 2, 2015.
CamSemi was acquired to accelerate the Company's product development efforts for the low-power
market. The acquisition also broadens the Company's technology and product portfolio for low-power applications,
particularly in the mobility and LED lighting markets.
The initial accounting for the acquisition is still ongoing as of the date this Annual Report on Form 10-
K was issued. It is expected that intangible assets and goodwill will be recorded on the consolidated balance
sheets; however, as the initial accounting for the acquisition has not been completed at the time of the issuance
of these consolidated financial statements, further details have not yet been disclosed.
CT-Concept Technologie AG
On May 1, 2012, the Company, through its subsidiaries Power Integrations Netherlands B.V., a Dutch
company, and Power Integrations Limited, a Cayman Islands company, completed the acquisition of CT
Concept Technologie AG ("Concept" or "Concept Group"), a Swiss company, by acquiring all of the
outstanding shares of its Swiss parent companies Concept Beteiligungen AG and CT-Concept Holding AG (the
“Acquisition”), pursuant to the Share Purchase Agreement ("Purchase Agreement").
The acquisition has been accounted for using the acquisition method of accounting in accordance with
ASC 805 - Business Combinations. Goodwill is not expected to be deductible for tax purposes.
The acquisition furthers the Company's strategic aim to offer highly integrated high-voltage power-
conversion products across the widest possible range of power levels and applications. While Power
Integrations has historically focused on power supplies up to 500 watts of output, Concept products address
higher-power applications, such as industrial motors and renewable energy systems. As such, the combination is
complementary to Power Integrations' existing business. Furthermore, Concept also has an expanding
addressable market and a growing, profitable revenue stream that are consistent with Power Integrations'
financial goals/targets.
(cid:25)(cid:19)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the purchase price and estimated fair values of the assets acquired and
the liabilities assumed as of May 1, 2012, the completion of the acquisition of Concept ("Closing Date").
Assets Acquired
Total Amount
(in thousands)
Cash ...................................................................................................... $
Accounts receivable..............................................................................
Inventories ............................................................................................
Prepaid expenses and other current assets ............................................
Property and equipment, net .................................................................
Intangible assets:...................................................................................
Developed technology .....................................................................
Trade name.......................................................................................
Customer relationships.....................................................................
Goodwill ...............................................................................................
Total assets acquired.................................................................
Current liabilities ..................................................................................
Deferred tax liabilities ..........................................................................
Other liabilities .....................................................................................
Total liabilities assumed ...........................................................
Total purchase price ........................................................ $
14,933
3,220
10,631
2,777
2,310
23,750
3,600
16,700
65,813
143,734
4,587
7,860
634
13,081
130,653
Liabilities assumed
The fair value of intangible assets of $44.1 million has been allocated to the following three asset
categories: 1) developed technology, 2) trade name and 3) customer relationships. The first two will be
amortized on a straight line basis over the estimated useful life of the assets. The third intangible asset,
customer relationships, will be amortized on an accelerated basis over the estimated life of the asset. The
following table represents details of the purchased intangible assets as part of the acquisition:
Developed technology ......................................................................................... $
Trade name ..........................................................................................................
Customer relationships ........................................................................................
Total Concept intangibles.................................................................................... $
Fair Value
Amount
(in thousands)
23,750
3,600
16,700
44,050
Estimated
Useful Life
(in years)
4 - 12
2
10
The fair value of the identifiable intangible assets: developed technology, trademark and customer
relationships were determined based on the following approach.
Developed Technology: The value assigned to the acquired developed technology was determined
using the income approach. The royalty savings were estimated by applying an estimated royalty rate to the
projected revenues for Concept for each developed technology. The selected royalty rate for the developed
technology was based on the Company's analysis of comparable technology, royalty rate indications, and
licensing agreements for comparable technologies. The royalty savings were then adjusted for taxes and
discounted to present value. The fair value of developed technology was capitalized as of the acquisition date
and is being amortized using a straight-line method to cost of revenues over the estimated life of 4 - 12 years.
Trade Name: The value assigned to Concept's trade name was determined using the income approach.
The present value of the expected after-tax royalty savings was added to the sum of the expected amortization
tax benefit. The royalty rate was selected based on an analysis of comparable trade name agreements. In
addition, the rate was adjusted based on an analysis of Concept's projected performance and the importance of
the trade name to the industry. The selected royalty rate was then applied to the projected revenues for the trade
(cid:25)(cid:20)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
name. The fair value of the trade name was amortized on a straight-line basis to sales and marketing expenses
over its estimated life of 2 years.
Customer Relationships: An intangible customer relationship asset was recognized to the extent that
the Company was expected to benefit from future revenues reasonably anticipated given the history and
operating practices of Concept. The value assigned to customer relationships was determined using the income
approach. Forecasted cash flows derived from the acquired customer relationships, net of returns on
contributory assets, were discounted to present value. Expectations related to future customer retention were
based on historical data and a long-term forecast that was constructed based on the Company's financial
projections and expectations. The associated income taxes were based on an assumed tax rate of a hypothetical
buyer. The net income was then charged for the required returns of debt-free working capital, net fixed and
other assets, developed technology and trade name to derive the residual cash flows related to the customer
relationships acquired. The residual cash flows were then discounted to present value. The fair value of
customer relationships was capitalized as of the acquisition date and is being amortized on an accelerated basis
to sales and marketing expenses over the estimated life of 10 years.
12. TRANSACTIONS WITH THIRD PARTY:
On October 22, 2010, the Company purchased SemiSouth preferred stock for $7.0 million, which
represented an approximate 16.0% interest in SemiSouth, a privately-held company. The Company accounted
for its investment under the cost method. Also in October 2010, the Company paid $10.0 million as a prepaid
royalty in exchange for the right to use SemiSouth's technology. The Company's 2010 agreement with
SemiSouth provided, among other things, that the Company had the option to acquire SemiSouth in the future
(“Call Option”) and that the Company may be obligated to acquire SemiSouth at a future date if SemiSouth
achieved certain financial performance conditions (“Put Option”). The Call and Put Options were intended to
result in an acquisition price equal to the estimated fair value of SemiSouth at the time of exercise. Pursuant to
an amended agreement entered into in March 2012 in connection with the $18.0 million financing discussed
below, the maximum purchase price under the call and put options would not exceed $80.0 million.
In July 2011, SemiSouth obtained $15.0 million of financing through the sale, and concurrent licensing
back, of its intellectual property ("IP") with a financing company. In connection with this arrangement, the
Company entered into a contingent purchase commitment with the financing company for SemiSouth's IP,
which effectively provided a guarantee of the arrangement to the finance company. The contingent purchase
commitment required the Company to purchase the IP previously owned by SemiSouth from its new owner for
$15.0 million (plus reimbursement of certain expenses) under certain conditions generally relating to
SemiSouth's failure to make certain payments or SemiSouth's insolvency.
In March 2012, the Company loaned SemiSouth $18.0 million, and in exchange the Company was
issued a promissory note with interest of 2.0%. In consideration for the loan the Company obtained the above-
mentioned amendment to its 2010 agreement with SemiSouth which established a maximum purchase price
under the call and put options. The Company used a Black-Scholes option pricing model to determine the fair
value of the Company's purchase option to be approximately $6.2 million and the fair value of the loan to be
$11.8 million The Company accreted the discount on the loan as interest income using the interest method over
the term of the loan.
Based on SemiSouth's deteriorating financial condition at September 30, 2012, as further evidenced by
its closure in the fourth quarter of 2012, the Company determined that its SemiSouth-related assets were
impaired as of September 30, 2012. The Company's third quarter 2012 results included an impairment charge of
$33.7 million, comprising a write-off of $6.7 million of lease receivables, $7.0 million of preferred stock, a
promissory note (net of imputed interest) in the amount of $13.2 million, $6.2 million for the Purchase Option,
and other assets of $0.6 million. The Company has also expensed the prepaid royalty of $10.0 million as it no
longer expected to use SemiSouth's technology and foresaw no alternative use for it.
In addition, the financing company that owned SemiSouth's intellectual property exercised its
contractual rights to put SemiSouth's intellectual property to the Company under the terms of the above-
(cid:25)(cid:21)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
mentioned SemiSouth contingent purchase commitment. Based on SemiSouth's financial situation and its
closure in the fourth quarter of 2012, the Company estimated that this intellectual property had no value.
Therefore, the Company took a charge of $15.3 million related to this contingent obligation in the third quarter
of 2012, and in the fourth quarter of 2012, the Company settled and paid the commitment for $15.2 million to
the financing company.
13. RETIREMENT PLANS:
In connection with the Company's acquisition of Concept in May 2012, the Company sponsors a
defined benefit pension plan ("Pension Plan") in accordance with the legal requirements of Switzerland (refer to
Note 11, Acquisition, for details on the Concept acquisition). The plan assets, which provide benefits in the
event of an employee's retirement, death or disability, are held in legally autonomous trustee-administered funds
that are subject to Swiss law. Benefits are based on the employee's age, years of service and salary, and the plan
is financed by contributions by both the employee and the Company.
The net periodic benefit cost of the Pension Plan was not material to the Company's financial
statements during the years ended December 31, 2014, 2013 and 2012. At December 31, 2014, the projected
benefit obligation was $8.1 million, the plan assets were $5.8 million and the net pension liability was $2.3
million. As of December 31, 2013, the projected benefit obligation was $7.0 million, the plan assets were $5.1
million, and the net pension liability was $1.9 million. The Company has recorded the unfunded amount as a
liability in its Consolidated Balance Sheet at December 31, 2014 and 2013, under the other liabilities caption.
The Company expects to make contributions to the Pension Plan of approximately $0.4 million during 2015.
The unrealized actuarial loss on pension benefits, net of tax at December 31, 2014, 2013 and 2012 was $1.2
million, $0.8 million and $0.6 million, respectively. This amount was reflected in Note 2 above under the
caption accumulated other comprehensive income.
In accordance with the Compensation-Retirement Benefits Topic of ASC 715-20, the Company
recognizes the over-funded or under-funded status of its defined postretirement plan as an asset or liability in its
statement of financial position. The company measured the plan assets and benefit obligations as of the date of
the fiscal year-end.
14. BANK LINE OF CREDIT:
On July 5, 2012, the Company entered into a Credit Agreement (the "Credit Agreement") with two
banks. The Credit Agreement provides the Company with a $100.0 million revolving line of credit to use for
general corporate purposes with a $20.0 million sublimit for the issuance of standby and trade letters of credit.
The Credit Agreement was amended on April 1, 2014, to extend the Credit Agreement termination date from
July 5, 2015, to April 1, 2017, with all other terms of the Credit Agreement remaining the same. The Company's
ability to borrow under the revolving line of credit is conditioned upon the Company's compliance with
specified covenants, including reporting and financial covenants, primarily a minimum cash requirement and a
debt to earnings ratio, with which the Company is currently in compliance. All advances under the revolving
line of credit will become due on April 1, 2017, or earlier in the event of a default. As of December 31, 2014,
the Company had no amount outstanding under the Credit Agreement.
15. SELECTED QUARTERLY INFORMATION (Unaudited):
The following tables set forth certain data from the Company's consolidated statements of income for
each of the quarters in the years ended December 31, 2014 and 2013.
The unaudited quarterly consolidated financial statements have been prepared on the same basis as
the audited consolidated financial statements contained herein and include all adjustments that the Company
considers necessary for a fair presentation of such information when read in conjunction with the Company's
annual audited consolidated financial statements and notes thereto appearing elsewhere in this report.
(cid:25)(cid:22)
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The operating results for any quarter are not necessarily indicative of the results for any subsequent
period or for the entire fiscal year (in thousands, except per share data).
Three Months Ended
(unaudited)
Dec. 31,
2014
Net revenues ................ $ 86,595
Gross profit.................. $ 45,805
Net income................... $ 14,354
Earnings per share:
Sept. 30,
2014
$ 90,144
$ 49,052
$ 16,111
June 30, Mar. 31, Dec. 31,
2014
$ 83,073
$ 45,977
$ 12,363
2014
$ 88,985
$ 48,736
$ 16,716
2013
$ 90,412
$ 48,391
$ 16,037
Sept. 30,
2013
$ 91,715
$ 48,774
$ 16,654
June 30, Mar. 31,
2013
$ 87,922
$ 46,207
$ 13,672
2013
$ 77,040
$ 39,864
$ 10,903
Basic................... $
Diluted................ $
0.49
0.48
$
$
0.54
0.52
$
$
0.55
0.54
$
$
0.41
0.40
$
$
0.54
0.52
$
$
0.56
0.54
$
$
0.47
0.45
$
$
0.38
0.37
Shares used in per share
calculation:
Basic...................
Diluted................
29,350
30,051
30,013
30,757
30,310
31,110
30,239
31,167
29,974
30,924
29,762
30,652
29,178
30,158
28,754
29,783
(cid:25)(cid:23)
Valuation and Qualifying Accounts
Schedule II
The Company maintains an allowance for doubtful accounts for estimated 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 bad debt, changes in payments patterns, customer creditworthiness, and current economic trends.
The Company maintains an allowance for the distributors' ship and debit credits relating to the sell-through of
the Company's products. This reserve is established using the Company's historical ship and debit amounts
and levels of inventory in the distributor channels.
Following is a summary of the activity in the allowance for doubtful accounts and allowance for ship
and debit credits:
Classification
(in thousands)
Allowances for doubtful accounts:
Year ended December 31, 2012........................ $
Year ended December 31, 2013........................ $
Year ended December 31, 2014........................ $
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions
(1)
Balance at
End of
Period
215
247
120
$
$
$
32
12
135
$
$
$
— $
(139) $
(64) $
247
120
191
Balance at
Beginning
of Period
Classification
(in thousands)
Allowances for ship and debit credits:
Year ended December 31, 2012........................ $ 19,464
Year ended December 31, 2013........................ $ 23,040
Year ended December 31, 2014........................ $ 28,696
Charged to
Costs and
Expenses
Deductions
(2)
Balance at
End of
Period
$ 154,803
$ 172,621
$ 177,260
$ (151,227)
$ (166,965)
$ (178,531)
$ 23,040
$ 28,696
$ 27,425
(1) Deductions relate to amounts written off against the allowances for doubtful accounts.
(2) Deductions relate to ship and debit credits issued which adjust the sell-in price from the standard
distribution price to the pre-approved lower price. Refer to Note 2, Summary of Significant
Accounting Policies, for the Company's revenue recognition policy, including the Company's
accounting for ship and debit claims.
(cid:25)(cid:24)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Dated: February 10, 2015
By:
/s/ SANDEEP NAYYAR
POWER INTEGRATIONS, INC.
Sandeep Nayyar
Chief Financial Officer (Duly Authorized
Officer, Principal Financial Officer and Chief
Accounting Officer)
(cid:25)(cid:25)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Balu Balakrishnan and Sandeep Nayyar his true and lawful attorney-in-fact and agent,
with full power of substitution and, for him and in his name, place and stead, in any and all capacities to sign
any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite
and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Dated: February 10, 2015
By:
/s/ BALU BALAKRISHNAN
Balu Balakrishnan
President, Chief Executive Officer
(Principal Executive Officer)
Dated: February 10, 2015
By:
/s/ SANDEEP NAYYAR
Dated: February 10, 2015
Dated: February 10, 2015
Dated: February 10, 2015
Sandeep Nayyar
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer
By:
/s/ ALAN D. BICKELL
Alan D. Bickell
Director
By:
/s/ NICHOLAS E. BRATHWAITE
Nicholas E. Brathwaite
Director
By:
/s/ E. FLOYD KVAMME
E. Floyd Kvamme
Director and Chairman of the Board
(cid:25)(cid:26)
Dated: February 9, 2015
Dated: February 10, 2015
Dated: February 10, 2015
By:
/s/ STEVEN J. SHARP
Steven J. Sharp
Director
By:
/s/ BALAKRISHNAN S. IYER
Balakrishnan S. Iyer
Director
By:
/s/ WILLIAM GEORGE
William George
Director
(cid:26)(cid:17)
POWER INTEGRATIONS, INC.
INDEX TO EXHIBITS
TO
FORM 10-K ANNUAL REPORT
For the Year Ended
December 31, 2014
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation. (Filed with the SEC as Exhibit 3.1 to our Annual Report on
Form 10-K on February 29, 2012, SEC File No. 000-23441.)
3.2 Amended and Restated Bylaws. (Filed with the SEC as Exhibit 3.1 to our Current Report on
Form 8-K on April 26, 2013, SEC File No. 000-23441.)
4.1 Reference is made to Exhibits 3.1 to 3.2.
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Form of Indemnity Agreement for directors and officers. (Filed with the SEC as Exhibit 10.1 to
our Registration Statement on Form S-1 on September 11, 1997, SEC File No. 000-23441.)*
1997 Stock Option Plan (as amended through January 25, 2005) (Filed with the SEC as Exhibit
10.5 to our Quarterly Report on Form 10-Q on May 6, 2005, SEC File No. 000-23441).*
1997 Outside Directors Stock Option Plan (filed with the SEC as Exhibit 10.3 to our Quarterly
Report on Form 10-Q on August 6, 2009, SEC File No. 000-23441) and forms of agreements
thereunder (filed with the SEC as Exhibit 10.4 to our Registration Statement on Form S-1 on
September 11, 1997, SEC File No. 000-23441).*
1997 Employee Stock Purchase Plan (filed with the SEC as Exhibit 10.5 to our Annual Report on
Form 10-K on March 2, 2009). The forms of agreements thereunder (filed with the SEC as
Exhibit 10.5 to our Registration Statement on Form S-1 on September 11, 1997, SEC File No.
000-23441).*
1998 Nonstatutory Stock Option Plan. (Filed with the SEC as Exhibit 10.4 to our Quarterly
Report on Form 10-Q on August 6, 2009, SEC File No. 000-23441.)*
reserved
Executive Officer Benefits Agreement between us and John Tomlin, dated April 25, 2002. (Filed
with the SEC as Exhibit 10.19 to our Quarterly Report on Form 10-Q on May 10, 2002, SEC File
No. 000-23441.)*
Executive Officer Benefits Agreement between us and Clifford J. Walker, dated April 25, 2002.
(Filed with the SEC as Exhibit 10.20 to our Quarterly Report on Form 10-Q on May 10, 2002,
SEC File No. 000-23441.)*
Technology License Agreement between us and Matsushita Electronics Corporation, dated as of
June 29, 2000. (Filed with the SEC as Exhibit 10.28 to our Quarterly Report on Form 10-Q on
November 14, 2000, SEC File No. 000-23441.)
10.10 Amended and Restated Wafer Supply Agreement between us and OKI Electric Industry Co., Ltd.,
dated as of April 1, 2003. (Filed with the SEC as Exhibit 10.31 to our Quarterly Report on Form
10-Q on August 7, 2003, SEC File No. 000-23441.)†
10.11 Wafer Supply Agreement between us and ZMD Analog Mixed Signal Services GmbH & Co. KG,
dated as of May 23, 2003. (Filed with the SEC as Exhibit 10.32 to our Quarterly Report on Form
10-Q on August 7, 2003, SEC File No. 000-23441.)†
10.12 Amendment Number One to the Amended and Restated Wafer Supply Agreement between us and
OKI Electric Industry Co., Ltd., effective as of August 11, 2004. (Filed with the SEC as Exhibit
10.22 to our Current Report on Form 8-K on April 18, 2006, SEC File No. 000-23441.)†
10.13
2014 Executive Officer Cash Compensation Arrangements and 2014 Bonus Plan (As described in
Item 5.02 of our Current Report on Form 8-K filed with the SEC on January 31, 2014, SEC File
No. 000-23441.)*
(cid:26)(cid:18)
EXHIBIT
NUMBER DESCRIPTION
10.14
Form of Director Option Grant Agreement. (Filed with the SEC as Exhibit 10.9 to our Quarterly
Report on Form 10-Q on May 6, 2009, SEC File No. 000-23441.)*
10.15 Amendment No. 1 to Nonstatutory Stock Option Agreements for Outside Directors, dated
February 20, 2007, between us and Alan Bickell. (Filed with the SEC as Exhibit 10.35 to our
Annual Report on Form 10-K on March 8, 2007, SEC File No. 000-23441.)*
10.16 Amendment No. 1 to Nonstatutory Stock Option Agreements for Outside Directors, dated
February 20, 2007, between us and Nicholas Brathwaite. (Filed with the SEC as Exhibit 10.36 to
our Annual Report on Form 10-K on March 8, 2007, SEC File No. 000-23441.)*
10.17 Amendment Number One to the Wafer Supply Agreement between Power Integrations
International, Ltd. and Seiko Epson Corporation, with an effective date of December 19, 2008.
(Filed with the SEC as Exhibit 10.1 to our Quarterly Report on Form 10-Q on May 6, 2009, SEC
File No. 000-23441.)†
10.18
10.19
2007 Equity Incentive Plan, as amended and restated (Filed with the SEC as Exhibit 10.2 to our
Quarterly Report on Form 10-Q on August 7, 2012, SEC File No. 000-23441.)*
Forms of Option Agreements under the 1997 Stock Option Plan with Executive Officers in
connection with the Chief Executive Officer Benefits Agreement and the Executive Officer
Benefits Agreements. (Filed with the SEC as Exhibit 10.40 to our Annual Report on Form 10-K
on August 8, 2007, SEC File No. 000-23441.)*
10.20
Forms of Option Agreements under the 1997 Stock Option Plan. (Filed with the SEC as Exhibit
10.41 to our Annual Report on Form 10-K on August 8, 2007, SEC File No. 000-23441.)*
10.21
reserved
10.22 Amended and Restated Chief Executive Officer Benefits Agreement, dated as of August 8, 2007,
and entered into August 15, 2007, between Power Integrations, Inc. and Balu Balakrishnan.
(Filed with the SEC as Exhibit 10.3 to our Quarterly Report on Form 10-Q on November 9, 2007,
SEC File No. 000-23441.)*
10.23 Amendment to Executive Officer Benefits Agreement, dated as of August 8, 2007, and entered
into August 15, 2007, between Power Integrations, Inc. and Cliff Walker. (Filed with the SEC as
Exhibit 10.6 to our Quarterly Report on Form 10-Q on November 9, 2007, SEC File No.
000-23441.)*
10.24
Executive Officer Benefits Agreement, dated as of August 8, 2007, and entered into August 15,
2007, between Power Integrations, Inc. and Doug Bailey. (Filed with the SEC as Exhibit 10.8 to
our Quarterly Report on Form 10-Q on November 9, 2007, SEC File No. 000-23441.)*
10.25
reserved
10.26 Amendment Number Two to the Amended and Restated Wafer Supply Agreement between Power
Integrations International, Ltd. and OKI Electric Industry Co., Ltd., effective as of April 1, 2008.
(Filed with the SEC as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on August 8,
2008, SEC File No. 000-23441.)
10.27 Amendment Number Three to the Amended and Restated Wafer Supply Agreement between
Power Integrations International, Ltd. and OKI Electric Industry Co., Ltd., effective as of June 9,
2008. (Filed with the SEC as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on August
8, 2008, SEC File No. 000-23441.)
10.28
10.29
Form of Performance Stock Unit Grant Notice and Performance Stock Unit Agreement. (Filed
with the SEC as Exhibit 10.1 to our Quarterly Report on Form 10-Q on August 6, 2009, SEC File
No. 000-23441.)*
Form of Performance Stock Unit Grant Notice and Performance Stock Unit Agreement (as used
after to January 1, 2013). (Filed with the SEC as Exhibit 10.29 to our Annual Report on Form 10-
K on February 22, 2013, SEC File No. 000-23441.)*
10.30
Forms of Option Agreements under the 2007 Equity Incentive Plan (Filed with the SEC as
Exhibit 99.(d)(4) to our Schedule TO filed on December 3, 2008, SEC File No. 000-23441.)*
(cid:26)(cid:19)
EXHIBIT
NUMBER DESCRIPTION
10.31 Wafer Supply Agreement, between Seiko Epson Corporation and Power Integrations
International, Ltd. effective as of April 1, 2005. (Filed with the SEC as Exhibit 10.1 to our
Quarterly Report on Form 10-Q filed on November 7, 2008, SEC File No. 000-23441.)†
10.32 Amendment Number Four to the Amended and Restated Wafer Supply Agreement between
Power Integrations International, Ltd. and OKI Electric Industry Co., Ltd., dated September 15,
2008. (Filed with the SEC as Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on
November 7, 2008, SEC File No. 000-23441.)†
10.33
Forms of Stock Option Agreements to be used in Director Equity Compensation Program. (Filed
with the SEC as Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on November 7, 2008,
SEC File No. 000-23441.)*
10.34 Amendment to Immediately Exercisable Non-Qualified Stock Option Agreement between Power
Integrations, Inc. and Balu Balakrishnan, dated February 2, 2009 (Filed with the SEC as Exhibit
10.59 to our Annual Report on Form 10-K on March 2, 2009, SEC File No. 000-23441.)*
10.35
Executive officer Benefits agreement, dated as of November 4, 2013, between Power
Integrations, Inc. and Wolfgang Ademmer. (Filed with the SEC as Exhibit 10.35 to our Annual
Report on Form 10-K on February 13, 2014, SEC File No. 000-23441.)*
10.36 Director Equity Compensation Program, as revised in July 2012 and January 2013. (Filed with
the SEC as Exhibit 10.36 to our Annual Report on Form 10-K on February 22, 2013, SEC File
No. 000-23441.)*
10.37 Amendment Number Five to the Amended and Restated Wafer Supply Agreement between
Power Integrations International, Ltd. and OKI Semiconductor Co., Ltd., dated November 14,
2008 (Filed with the SEC as Exhibit 10.61 to our Annual Report on Form 10-K on March 2,
2009, SEC File No. 000-23441.)
10.38 Amendment No. 1 to the Power Integrations, Inc. 1997 Outside Directors Stock Option Plan,
effective as of January 27, 2009 (Filed with the SEC as Exhibit 10.62 to our Annual Report on
Form 10-K on March 2, 2009, SEC File No. 000-23441.)*
10.39
Power Integrations, Inc. Compliance Policy Regarding IRC Section 409A (Filed with the SEC as
Exhibit 10.63 to our Annual Report on Form 10-K on March 2, 2009, SEC File No. 000-23441.)*
10.40 Amendment Number Five to the Amended and Restated Wafer Supply Agreement between
Power Integrations International, Ltd. and XFAB Dresden GmbH & Co. KG, dated December 23,
2009. (Filed with the SEC as Exhibit 10.65 to our Annual Report on Form 10-K on February 26,
2010, SEC File No. 000-23441.) †
10.41 Amendment Number One to the Amended and Restated Wafer Supply Agreement between Power
Integrations International, Ltd. and XFAB Dresden GmbH & Co. KG, effective as of July 20,
2005. (Filed with the SEC as Exhibit 10.66 to our Annual Report on Form 10-K on February 26,
2010, SEC File No. 000-23441.) †
10.42 Amendment No. 2 to Wafer Supply Agreement, between Seiko Epson Corporation and Power
Integrations International, Ltd., entered into on January 5, 2011 (Filed with the SEC as Exhibit
10.47 to our Annual Report on Form 10-K filed on February 25, 2011, SEC File No. 000-23441.)
†
10.43
Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement
(Filed with the SEC as Exhibit 10.1 to our Quarterly Report on Form 10-Q on May 6, 2010, SEC
File No. 000-23441.)*
10.44 Amendment No. 2 to the Power Integrations, Inc. 1997 Outside Directors Stock Option Plan,
effective as of April 12, 2010 (Filed with the SEC as Exhibit 10.2 to our Quarterly Report on
Form 10-Q filed on May 6, 2010, SEC File No. 000-23441.)*
10.45 Offer Letter, dated June 23, 2010, between Power Integrations, Inc. and Sandeep Nayyar (Filed
with the SEC as Exhibit 10.2 to our Quarterly Report on Form 10-Q on August 6, 2010, SEC File
No. 000-23441.).*
(cid:26)(cid:20)
EXHIBIT
NUMBER DESCRIPTION
10.46
10.47
10.48
Executive Officer Benefits Agreement, dated July 22, 2010, between Power Integrations, Inc. and
Sandeep Nayyar (Filed with the SEC as Exhibit 10.3 to our Quarterly Report on Form 10-Q on
August 6, 2010, SEC File No. 000-23441.).*
Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement
for executive officers for use prior to January 2013. (Filed with the SEC as Exhibit 10.6 to our
Quarterly Report on Form 10-Q on August 6, 2010, SEC File No. 000-23441.)*
Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement
for executive officers for use after January 2013. (Filed with the SEC as Exhibit 10.48 to our
Annual Report on Form 10-K on February 22, 2013, SEC File No. 000-23441.)*
10.49 Outside Director Cash Compensation Arrangements (Filed with the SEC as Exhibit 10.3 to our
Quarterly Report on Form 10-Q on November 3, 2010, SEC File No. 000-23441.).*
10.50 Amendment to Executive Officer Benefits Agreement between Power Integrations, Inc. and
Sandeep Nayyar, dated October 29, 2010. (Filed with the SEC as Exhibit 10.57 to our Annual
Report on Form 10-K filed on February 25, 2011, SEC File No. 000-23441.)*
10.51
2013 Executive Compensation Arrangements (Described under Item 5.02 of our Current Report
on Form 8-K, filed with the SEC on January 28, 2013, SEC File No. 000-23441.)*
10.52 Wafer Supply Agreement by and between Power Integrations, Inc. and NEC Electronics America,
Inc., a California corporation (“NEC”), dated August 1, 2008.†
10.53 Amendment Number One to Wafer Supply Agreement by and between the Company and NEC,
effective March 20, 2009. (Filed with the SEC as Exhibit 10.2 to our Quarterly Report on Form
10-Q filed on August 8, 2011, SEC File No. 000-23441.)†
10.54 Amendment to Executive Officer Benefits Agreement, dated as of August 8, 2007, and entered
into August 15, 2007, between Power Integrations, Inc. and John Tomlin. (Filed with the SEC as
Exhibit 10.5 to our Quarterly Report on Form 10-Q on November 9, 2007, SEC File No.
000-23441.)*
10.55 Amendment Number Three to Wafer Supply Agreement, effective as of February 1, 2012, by
Power Integrations International Ltd. and Seiko Epson Corporation. (Filed with the SEC as
Exhibit 10.1 to our Quarterly Report on Form 10-Q on May 8, 2012, SEC File No. 000-23441.) †
10.56 Wafer Supply Agreement, made and entered into as of this 1st day of October, 2010, by and
between Power Integrations International, Ltd., and X-FAB Semiconductor Foundries AG. (Filed
with the SEC as Exhibit 10.2 to our Quarterly Report on Form 10-Q on May 8, 2012, SEC File
No. 000-23441.) †
10.57
reserved
10.58
reserved
10.59
reserved
10.60 Credit Agreement, dated July 5, 2012, by and between Power Integrations, Inc., Union Bank N.A.
and Wells Fargo Bank, National Association. (Filed with the SEC as Exhibit 10.1 to our Quarterly
Report on Form 10-Q on October 31, 2012, SEC File No. 000-23441.)
10.61
10.62
First Amendment to Credit Agreement dated December 17, 2012, between Power Integrations,
Inc., Union Bank, N.A. and Wells Fargo Bank, National Association. (Filed with the SEC as
Exhibit 10.61 to our Annual Report on Form 10-K on February 22, 2013, SEC File No.
000-23441.)
Second Amendment to Credit Agreement, dated April 1, 2014, by and between Power
Integrations, Inc., Union Bank N.A. and Wells Fargo Bank, National Association. (Filed with the
SEC as Exhibit 10.1 to our Quarterly Report on Form 10-Q on May 5, 2014, SEC File No.
000-23441.)
(cid:26)(cid:21)
EXHIBIT
NUMBER DESCRIPTION
10.63
10.64
10.65
10.66
10.67
10.68
10.69
First Amendment to Amended and Restated Chief Executive Officer Benefits Agreement, dated
June 3, 2013, between Power Integrations, Inc. and Balu Balakrishnan. (Filed with the SEC as
Exhibit 10.1 to our Quarterly Report on Form 10-Q on August 1, 2013, SEC File No. 000-23441.)
*
Second Amendment to Executive Officer Benefits Agreement, dated as of May 13, 2013, between
Power Integrations, Inc. and Sandeep Nayyar. (Filed with the SEC as Exhibit 10.2 to our
Quarterly Report on Form 10-Q on August 1, 2013, SEC File No. 000-23441.)*
Executive Officer Benefits Agreement, dated as of April 18, 2013, between Power Integrations,
Inc. and Ben Sutherland. (Filed with the SEC as Exhibit 10.3 to our Quarterly Report on Form
10-Q on August 1, 2013, SEC File No. 000-23441.)*
Second Amendment to Executive Officer Benefits Agreement, dated as of May 30, 2013, between
Power Integrations, Inc. and John Tomlin. (Filed with the SEC as Exhibit 10.4 to our Quarterly
Report on Form 10-Q on August 1, 2013, SEC File No. 000-23441.)*
First Amendment to Executive Officer Benefits Agreement, dated as of May 8, 2013, between
Power Integrations, Inc. and Doug Bailey. (Filed with the SEC as Exhibit 10.5 to our Quarterly
Report on Form 10-Q on August 1, 2013, SEC File No. 000-23441.)*
Second Amendment to Executive Officer Benefits Agreement, dated as of May 6, 2013, between
Power Integrations, Inc. and Cliff Walker. (Filed with the SEC as Exhibit 10.6 to our Quarterly
Report on Form 10-Q on August 1, 2013, SEC File No. 000-23441.)*
Second Amendment to Executive Officer Benefits Agreement, dated as of April 22, 2013,
between Power Integrations, Inc. and Derek Bell. (Filed with the SEC as Exhibit 10.7 to our
Quarterly Report on Form 10-Q on August 1, 2013, SEC File No. 000-23441.)*
10.70 Development Addendum to Wafer Supply Agreement, dated September 22, 2013, between Seiko
Epson Corporation and Power Integrations International Ltd. (Filed with the SEC as Exhibit 10.1
to our Quarterly Report on Form 10-Q on November 1, 2013, SEC File No. 000-23441.)†
10.71
10.72
Executive officer Benefits agreement, dated as of July 26, 2013, between Power Integrations, Inc.
and Radu Barsan. (Filed with the SEC as Exhibit 10.2 to our Quarterly Report on Form 10-Q on
November 1, 2013, SEC File No. 000-23441.)*
Executive officer Benefits agreement, dated as of July 26, 2013, between Power Integrations, Inc.
and Mike Matthews. (Filed with the SEC as Exhibit 10.3 to our Quarterly Report on Form 10-Q
on November 1, 2013, SEC File No. 000-23441.)*
10.73 Amendment Number One to Wafer Supply Agreement, effective as of January 1, 2014, between
Power Integrations International, Ltd., and X-FAB Semiconductor Foundries AG. (Filed with the
SEC as Exhibit 10.2 to our Quarterly Report on Form 10-Q/A on September 19, 2014, SEC File
No. 000-23441.) †
10.74 Amended and Restated Chief Executive Officer Benefits Agreement, dated as of May 1, 2014,
between Power Integrations, Inc. and Balu Balakrishnan. (Filed with the SEC as Exhibit 10.3 to
our Quarterly Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
10.75 Amended and Restated Executive Officer Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and John Tomlin. (Filed with the SEC as Exhibit 10.4 to our Quarterly
Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
10.76 Amended and Restated Executive Officer Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and Cliff Walker. (Filed with the SEC as Exhibit 10.5 to our Quarterly
Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
10.77 Amended and Restated Executive Officer Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and Doug Bailey. (Filed with the SEC as Exhibit 10.6 to our Quarterly
Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
10.78 Amended and Restated Executive Officer Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and Ben Sutherland. (Filed with the SEC as Exhibit 10.7 to our Quarterly
Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
(cid:26)(cid:22)
EXHIBIT
NUMBER DESCRIPTION
10.79 Amended and Restated Executive Officer Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and Sandeep Nayyar. (Filed with the SEC as Exhibit 10.8 to our
Quarterly Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
10.8 Amended and Restated Executive Officer Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and Wolfgang Ademmer. (Filed with the SEC as Exhibit 10.9 to our
Quarterly Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
10.81 Amended and Restated Executive Officer Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and Mike Matthews. (Filed with the SEC as Exhibit 10.10 to our
Quarterly Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
10.82 Amended and Restated Executive Officer Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and Radu Barsan. (Filed with the SEC as Exhibit 10.11 to our Quarterly
Report on Form 10-Q on May 5, 2014, SEC File No. 000-23441.) *
10.83 Compensation arrangement with Balu Balakrishnan (described in Item 5 of Part II of our
Quarterly Report on Form 10-Q filed on May 5, 2014, SEC File No. 000-23441, and incorporated
by reference here).*
10.84
Form of Long Term Performance Stock Unit Notice and Agreement
14.1 Code of Business Conduct and Ethics (Filed with the SEC as the like described exhibit to our
Current Report on Form 8-K on February 4, 2008, SEC File No. 000-23441.)
List of subsidiaries.
21.1
23.1 Consent of Independent Registered Public Accounting Firm.
24.1
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
Power of Attorney (See signature page).
2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
All references in the table above to previously filed documents or descriptions are incorporating those
documents and descriptions by reference thereto.
_____________
†
*
**
This Exhibit has been filed separately with the Commission pursuant to an application for confidential
treatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk.
Indicates a management contract or compensatory plan or arrangement.
The certifications attached as Exhibits 32.1 and 32.2 accompanying this Form 10-K, are not deemed
filed with the SEC, and are not to be incorporated by reference into any filing of Power Integrations,
Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, whether made before or after the date of this Form 10-K, irrespective of any general
incorporation language contained in such filing.
(cid:26)(cid:23)
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
Board of Directors
Corporate Officers
Corporate Information
E. Floyd Kvamme (Chairman)
Partner Emeritus
Kleiner, Perkins, Caufield & Byers
Balu Balakrishnan
President and Chief Executive Officer
Power Integrations, Inc.
Alan D. Bickell
Former Senior Vice President
Hewlett-Packard Co., Retired
Nicholas E. Brathwaite
Partner, Riverwood Capital LLC
William L. George
Former Executive Vice President
ON Semiconductor Corp., Retired
Balakrishnan S. Iyer
Former Senior Vice President and
Chief Financial Officer
Conexant Systems, Inc., Retired
Steven J. Sharp
Former Chairman and CEO
TriQuint Semiconductor, Inc., Retired
Balu Balakrishnan
President and
Chief Executive Officer
Wolfgang Ademmer
Vice President,
High-Power Products
Doug Bailey
Vice President,
Marketing
Radu Barsan
Vice President,
Technology
Mike Matthews
Vice President,
Product Development
Sandeep Nayyar
Vice President, Finance
Chief Financial Officer
Ben Sutherland
Vice President,
Worldwide Sales
John Tomlin
Vice President,
Operations
Clifford J. Walker
Vice President,
Corporate Development
Corporate Counsel
Cooley LLP
Palo Alto, CA
Transfer Agent
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Independent Auditors
Deloitte & Touche LLP
San Jose, CA
Investor Information
For additional information about
Power Integrations,
visit our website at:
www.power.com
write to:
Investor Relations Department
Power Integrations, Inc.
5245 Hellyer Avenue
San Jose, CA 95138
or email:
ir@power.com
Power Integrations, Inc. 5245 Hellyer Avenue, San Jose, CA 95138 www.power.com
©2015 Power Integrations. Power Integrations and the Power Integrations logo are registered trademarks of Power Integrations, Inc. All rights reserved.