Power Integrations
2017 Annual Report
Dear Fellow Stockholders,
Our 2017 financial results once again featured double-digit revenue growth and strong cash flow, demonstrating the
continued strength of our product portfolio, market positioning and financial model. We are capitalizing on global trends
such as energy efficiency, clean power, faster charging for mobile devices, smart homes and the internet of things (IoT), the
switch to battery power in areas such as tools and transportation, and the mass adoption of convenience and comfort
appliances in developing markets. These trends are creating an ever-greater need for innovative, energy-efficient power-
conversion technology, and we are meeting that need with a strong offering of products currently in the market, as well as a
robust product pipeline that will drive a meaningful expansion of our addressable market over the next couple of years.
Our total revenues grew 11 percent in 2017, led by the industrial and consumer markets, which together accounted for more
than 70 percent of our sales for the year. Industrial revenues grew 20 percent for the year, driven by a broad range of vertical
markets, some of which have only recently emerged and should have many years of growth ahead. For example, we saw
strong growth in the home-and-building automation, or smart-home, category, which includes IoT applications such as smart
lighting control, networked smoke alarms and occupancy sensors, smart plugs and USB wall outlets.
Since many of these devices are permanently connected to the power grid and spend most of their lifetimes in standby mode,
they require exceptionally low standby power consumption. And because they are often located in cramped, difficult-to-
reach locations such as behind the wall or on the ceiling, reliability and compact footprints are also extremely important.
These characteristics make them ideal targets for our products, and we’re now in production with many of the leading OEMs
in these categories. We expect growth in this area to accelerate in the coming years as manufacturers resolve the
interoperability challenges that naturally accompany networked devices, setting the stage for mass adoption.
Another vertical market that has emerged over the past couple of years is chargers for battery-powered devices such as
electric bikes (or e-bikes) and lawn equipment. E-bikes are rapidly replacing gas-powered scooters in markets such as China
and India where pollution is a major issue, and are also gradually being adopted for personal transportation in developed
markets. Meanwhile lawn equipment is converting to lithium-ion batteries in place of gasoline and plug-in AC motors. The
chargers for these devices tend to be on the higher end of the power scale – in some cases over 200 watts – resulting in
dollar content well above the average for our AC-DC business.
Our high-power gate-driver products also contributed significant growth in the industrial category last year, growing more
than 20 percent driven by renewable-energy applications and by the installation of high-voltage DC transmission
infrastructure in China, which has embarked on a multi-year project to install a DC transmission grid capable of transporting
power more efficiently over long distances than traditional AC infrastructure. Unlike AC transmission, which uses magnetic
transformers, DC transmission facilities require highly sophisticated power-conversion electronics including high-voltage
IGBT modules, each paired with a gate driver whose role is to ensure safe, reliable operation. With voltages running as high
as a million volts, and with many millions of utility customers dependent on this infrastructure, reliability and safety are of
the utmost importance in this application. The fact that our SCALE™-2 drivers have been chosen for this application is a
testament to the strength of our gate-driver technology.
In the consumer category, revenues grew in the mid-teens driven by a strong performance in the appliance market, where we
have averaged double-digit growth over the past several years thanks to a confluence of trends. First, we continue to gain
market share thanks to the reliability and efficiency benefits of our products; these characteristics are prized by appliance
manufacturers due to the high cost of repairs for appliances under warranty. Second, the dollar value of the addressable
market for appliances has grown faster than unit volumes as appliances have converted from mechanical to electronic
controls and from AC motors to DC motors. This trend is picking up steam as OEMs incorporate more electronic features in
their products, such as displays, LED lighting and network connectivity. Third, volume growth has accelerated with the
mass adoption of comfort appliances such as air conditioners by the growing middle class in emerging markets. We believe
this trend is still in the early stages, as emerging markets have yet to see broad penetration of many convenience appliances
such as dishwashers and laundry machines.
Revenues from the communications category, which makes up about a quarter of our sales, were essentially flat for the full
year, reflecting a decline in revenues from legacy cellphone-charger designs (i.e., five watts and below) and low-power
adapters for small-scale networking gear such as Wi-Fi routers. Revenues from rapid-charging applications grew
meaningfully, though at a slower pace than prior years reflecting relatively soft demand in the smartphone industry and a
more gradual rate of adoption ahead of the coming rollout of USB PD technology.
Though its implementation has been slowed by delays in finalizing the specifications, USB PD now appears to be on the
cusp of mass adoption. In late 2017 our InnoSwitch™-3 ICs won a 27-watt USB PD tablet charger design for an Asian OEM,
as well as a 27-watt smartphone charger design for another Asian customer. This is the highest-power cellphone design we
have seen to-date, indicating that power levels continue to rise as OEMs specify ever-larger batteries and increasingly view
charging speed as a differentiating feature. This trend is good news for Power Integrations, as higher power not only
increases the available dollar content in a charger, but also creates a greater need for the efficiency and integration for which
our products are known.
Financially, our company has never been stronger. Like many companies, our 2017 earnings under generally accepted
accounting principles (GAAP) were affected by the new federal tax legislation; in the fourth quarter we recorded a charge of
$37.5 million reflecting the “transition tax” on unremitted foreign earnings, as well as changes in the values of deferred tax
assets and liabilities on our balance sheet. (The cash outflow associated with the charge will be approximately $15 million,
to be paid over eight years.) However, we generated $82 million in cash flow from operations in 2017, and ended the year
with a record $283 million in cash and investments on our balance sheet, an increase of about $32 million for the year. That
increase came in spite of higher-than-usual capital expenditures of $32.5 million, reflecting stepped-up investments in
manufacturing capacity and systems as we plan for future growth.
Underscoring our confidence in the future of our business, as well as the strength of our balance sheet and the increased
flexibility offered by the new tax law (which effectively eliminated the distinction between “U.S. cash” and “offshore
cash”), our board of directors has increased our quarterly dividend to 16 cents per share for each of the four quarters of 2018
(up from 14 cents in 2017), and allocated an additional $30 million for share repurchases, on top of the $44 million dollars
that remained on our authorization at year-end.
In summary, we are pleased with our 2017 results, and we believe we are well positioned for continued growth in 2018 and
beyond. The opportunities ahead of us in the power-conversion market are diverse and numerous, driven by big-picture
trends like energy efficiency as well as the development of new vertical markets such as those described above. We have
developed ground-breaking products and technologies over the past several years, such as our revolutionary FluxLink™k
high-speed communication/isolation technology, to capitalize on these opportunities, and we are making substantial
investments in capacity and infrastructure to support the double-digit revenue growth rate that we believe we can average
over the long term. In addition to these internal investments, we also continue to return cash to stockholders both
consistently through our dividend and opportunistically through our repurchase program.
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Thank you for your support of Power Integrations. I look forward to reporting on our continued progress in the year ahead.
Sincerely,
Balu Balakrishnan
President and Chief Executive Officer
April 2018
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,” “outlook,” “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; and 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. 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.
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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, 2017
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, $0.001 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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES
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. YES
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
uu
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.
tt
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act:
n
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
ff
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES
NON
The aggregate market value of registrant’s voting and non-voting common stock held by non-affiliates of registrant on June 30, 2017, the last
business day of the registrant’s most recently completed second fiscal quarter, was approximately $1.8 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 and director 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 February 9, 2018: 29,834,589.
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 2018 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
PART I.
Pageg
ITEM 1.
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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ITEM 1A.
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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ITEM 1B.
UNRESOLVED STAFF COMMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART II.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . . .
19
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . .
31
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . . . . . . . . . . .
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ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
PART III.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. . . . . . . . . . . . .
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EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
76
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART IV.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
ITEM 16.
FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82
2
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes a number of forward-looking statements that involve many risks and
uncertainties. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,”
“believe,” “should,” “anticipate,” “if,” “future,” “intend,” “plan,” “estimate,” “potential,” “target,” “seek” or “continue” and
similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events.
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/or 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: if demand for our products declines in our major end markets, our net revenues will decrease; 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; 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; intense competition may lead to a decrease
in our average selling price and reduced sales volume of our products; if our products do not penetrate additional markets, our
business will not grow as we expect; 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; 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;
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 expressly disclaim any obligation to update
or alter any forward-looking statements, whether as a result of new information or otherwise, except as required by laws. 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.
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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 (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, computing and networking equipment, appliances, electronic
utility meters, power tools, industrial controls, and lighting applications that utilize light-emitting diodes (LEDs), and “smart-aa
home,” or “internet of things” applications such as networked thermostats, power strips and other building-automation and
security devices.
We also offer high-voltage gate drivers - either standalone ICs or circuit boards containing ICs, electrical isolation
components and other circuitry - used to operate high-voltage switches such as insulated-gate bipolar transistors (IGBTs). These
combinations of switches and drivers are used for power conversion in high-power applications (i.e., power levels ranging from
a few 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.
While the size of our addressable market fluctuates with changes in macroeconomic and industry conditions, the
market has generally exhibited a modest growth rate over time as growth in the unit volume of power converters has been offset
to a large degree by reductions in the average selling price of components in this market. Therefore, the growth of our business
depends largely on increasing our penetration of the markets, that we serve and on further expanding our addressable market.
Our growth strategy includes the following elements:
•
•
Increase our penetration of the markets we serve. We currently address AC-DC power-supply applications
with power outputs up to approximately 500 watts, and gate-driver applications of ten kilowatts and higher.
Through our R&D efforts, we seek to introduce more advanced products for this market that offer higher
levels of integration and performance compared to earlier products. We also continue to expand our sales
and application-engineering staff and our network of distributors, as well as our offerings of technical
documentation and design-support tools and services to help customers use our products. These tools and
services include our PI Expert™ design software, which we offer free of charge, and our transformer-
sample service.
Our market-penetration strategy also includes capitalizing on the importance of energy efficiency in the
power conversion market. For example, our EcoSmart™ technology drastically reduces the amount of
energy consumed by electronic products when they are not in use, helping our customers comply with
regulations that seek to curb this so-called “standby” energy consumption. Also, our gate-driver products
are critical components in energy-efficient DC motor drives, high-voltage DC transmission systems,
renewable-energy installations and electric transportation applications.
Increase the size of our addressable market. Prior to 2010 our addressable market consisted of AC-DC
applications with up to about 50 watts of output, a served available market (“SAM”) opportunity of
approximately $1.5 billion. Since that time we have expanded our SAM to approximately $3 billion through
a variety of means. These include the introduction of products that enable us to address higher-power AC-
DC applications (such as our Hiper™ product families, which address applications up to about 500 watts)
and our entry into the gate-driver markets through the acquisition of CT-Concept Technologie AG in 2012.
In 2016 we introduced the SCALE-iDriverTM family of gate-driver ICs, which enables us to address
4
applications between approximately 10 kilowatts and 100 kilowatts, whereas previously our gate-driver
products were primarily for applications above 100 kilowatts.
Also contributing to our SAM expansion has been the emergence of new applications within the power
ranges that our products can address. For example, applications such as LED lighting, “smart” utility meters,
battery-powered lawn equipment and bicycles, and USB power ports (installed alongside traditional AC
wall outlets) can incorporate our products; the increased use of electronic intelligence and controls in
consumer appliances has also enhanced our SAM. Finally, we have enhanced our SAM by increasing the
level of integration of our products, which in turn increases their value. For example, our InnoSwitch™
ICs integrate circuitry from the secondary, or low-voltage, side of AC-DC power supplies, whereas earlier
product families integrated circuitry only on the primary, or high-voltage side.
We intend to continue expanding our SAM in the years ahead through all of the means described above.
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 a consumer appliance or flat-panel TV, or it may be outside the device as in the
case of a mobile-phone charger or an adapter for a cordless phone or cable modem.
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 availability 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 cost-effective alternatives to linear transformers in applications requiring more than a few 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.
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 protection 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 gate drivers (or IGBT drivers), whose function is to ensure accurate, safe and reliable
operation of the IGBT modules. Much like discrete power supplies, discrete gate 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, Hiper and
InnoSwitch which have expanded the range of power-supply applications we can address. In 2012 we expanded our addressable
market to include high-voltage gate drivers.
Our ICs and gate 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 n
competing alternatives. Our products offer the following key benefits:
•
Fewer Components, Reduced Size and Higher Reliability
Our highly integrated ICs and gate 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 linear transformers, which are still used in some low-power applications.
5
•
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 gate 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.
•
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 high-voltage gate drivers are used in applications with power
levels as high as one gigawatt. Within each of our product families, designers 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”);
and many common household appliances, such as microwave ovens, dishwashers and washing machines, also consume power
when not in use. In fact, a 2015 study by the National Resources Defense Council found that devices that are “always-on” but
inactive may be causing as much as $19 billion in annual energy waste in the U.S. alone.
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 LEDs could save as much as $18 billion
worth of electricity and 158 million tons of carbon dioxide emissions per year in the United States 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 (CEC) implemented mandatory efficiency standards for external power supplies. The CEC standards were
implemented nationwide in the United States in July 2008 as a result of the Energy Independence and Security Act of 2007
(EISA); these federal standards were tightened 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 legislation also required substantial improvements in the efficiency of lighting technologies
beginning in 2012; as of 2014, traditional 100-, 75-, 60- and 40-watt bulbs may no longer be manufactured or sold in the United
States. 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
6
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.
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 and Hiper families) to increase the level of integration
and improve upon the functionality of the original TOPSwitch, and to broaden the range of power levels we can address. 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. We also offer a range of high-performance, high-
voltage diodes known as Qspeed diodes.
In 2014 we introduced our InnoSwitch product family, the first-ever power-supply ICs to combine primary, secondary
and feedback circuits into a single package. These ICs employ a proprietary technology known as FluxLink to enable precise
control without the need for optical components, which tend to add cost and diminish the reliability of power supplies.
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.
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.
•
High-voltage gate drivers
We offer a range of high-voltage gate-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 May 2016 we introduced the SCALE-iDriver family of standalone ICs, which enables us to address applications
between approximately 10 kilowatts and 100 kilowatts, whereas previously our sales of high-power products were primarily
for applications above 100 kilowatts.
•
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, SCALE-II,
SCALE-III, SCALE-iDriver, PeakSwitch, CAPZero, SENZero, ChiPhy, FluxLink, CONCEPT 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.
7
The table below provides the approximate mix of our net sales by end market:
End Market
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2016
2015
2017
24%
5%
38%
33%
27%
6%
36%
31%
24%
7%
36%
33%
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 Categoryg y
Communications . . . . . . . . Mobile-phone chargers, routers, cordless phones, broadband modems, voice-over-IP phones,
y pp
Primary Applications
other network and telecom gear
Computer . . . . . . . . . . . . . . Desktop PCs, LCD monitors, servers, LCD projectors, adapters for notebook computers
Consumer . . . . . . . . . . . . . . Major and small appliances, air conditioners, TV set-top boxes, digital cameras, TVs, video-
game consoles
Industrial . . . . . . . . . . . . . . LED lighting, industrial controls, utility meters, motor controls, uninterruptible power supplies,
tools, networked thermostats, power strips and other “smart home” devices, industrial motor
drives, renewable energy systems, electric locomotives, electric buses and other electric vehicles,
high-voltage DC transmission systems
Sales, Distribution and Marketing
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, United Kingdom, Germany, Italy, India, China, Japan, South Korea, the Philippines, Singapore
and Taiwan. Direct sales to OEMs and merchant power supply manufacturers represented approximately 23%, 25% and 24%
of our net product revenues in 2017, 2016 and 2015, while sales to distributors accounted for the remainder in each of the
corresponding years. Most of our distributors are entitled to return privileges based on revenues 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 approximately 54%, 60% and 61% of net revenues in 2017, 2016, and 2015, respectively.
The following customers, both distributors, accounted for 10% or more of total net revenues in 2017, 2016 and 2015:
Customer
Avnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Powertech Distribution Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_______________
* Total customer revenue was less than 10% of net revenues
Year Ended December 31,
2016
2015
2017
16%
*
18%
10%
21%
11%
No other customers accounted for more than 10% of net revenues in these periods.
Sales to customers outside of the United States accounted for approximately 96% of our net revenues in each of 2017,
2016 and 2015, with sales to customers within the United States accounting for the remainder in each of the corresponding
years. See Note 8, “Significant Customers and Geographic Net Revenues,” in our Notes to Consolidated Financial Statements
in this Annual Report on Form 10-K regarding sales to customers located in foreign countries. See our consolidated financial
statements in Item 8 regarding total revenues and profits for the last three fiscal years, and total assets.
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
8
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.
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 and digital IC design,
system architecture and packaging.
In 2017, 2016 and 2015, we incurred costs of $68.5 million, $62.3 million and $57.5 million, respectively, for research
and development (R&D). R&D expenses increased in 2017 compared to 2016 reflecting increased salary and related expense
from the expansion of headcount, and greater equipment and product-development expenses, all in support of our product-
development efforts. R&D expenses increased in 2016 compared to 2015, primarily due to increased stock-based compensation
expense related to performance-based stock awards as a result of our 2016 performance. The expansion of headcount in support
of our product-development efforts also contributed to the increase in 2016.
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. In 2017 we received 55 U.S. and 31 foreign patents. As of December 31, 2017, we held 667 U.S.
patents and 326 foreign patents. The U.S. patents have expiration dates ranging from 2018 to 2037. While our patent portfolio
as a whole is important to the success of our business, we are not materially dependent upon any single patent. 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 used in the
manufacture of our 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.
Long-lived Assets
Our long-lived assets consist of property and equipment as well as intangible assets. Our intangible assets consist of
developed and in-process technology, licenses, patents, customer relationships, trade name, domain name, in-place leases and
goodwill. Approximately 38% of our long-lived assets were located in the United States in 2017 and 40% in each of 2016 and
2015, while the remainder was held outside of the United States in each of the corresponding years. Approximately 19% of
our total long-lived assets were located in Switzerland in 2017, and 18% in each of 2016 and 2015, respectively.
Manufacturing
We contract with three 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. These contractors manufacture wafers using our proprietary high-voltage process
technologies at fabrication facilities located in Japan, Germany and the United States.
Our ICs are assembled, packaged and tested by independent subcontractors in China, Malaysia, Thailand and the
Philippines; a small percentage of our ICs are tested at our headquarters facility in California. Our IGBT-driver boards are
assembled and tested by independent subcontractors in Sri Lanka and Thailand; some of the boards are 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 certain aspects of the assembly process are specific to our products.
We require our assembly manufacturers to use high-voltage molding compounds which are more difficult to process than
9
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, which enables us to use our foundries’
older, lower-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 and X-FAB
expire in April 2028, December 2025 and December 2020, respectively. Under the terms of the Lapis and Epson agreements,
each supplier 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 the supplier and us. In addition, Lapis and Epson require us to supply them with a
rolling six-month forecast on a monthly basis. Our agreements with Lapis and Epson each provide 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 X-FAB agreement, X-FAB 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 X-FAB and us. The agreement with X-
FAB also requires us to supply them with rolling six-month forecasts on a monthly basis. Our purchases of wafers from X-
FAB are denominated in U.S. dollars.
Although some aspects of our relationships with Lapis, Epson and X-FAB 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 or X-FAB 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 one or more of our
foundries 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.
ff
Competition
Competing alternatives to our high-voltage ICs for the power-supply market include monolithic and hybrid ICs from
companies such as ON Semiconductor, STMicroelectronics, Infineon, and Sanken Electric Company, as well as PWM-controller
chips paired with discrete high-voltage bipolar transistors and MOSFETs; such controller chips 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 and conditions of sale, our liability is limited generally to either a credit equal to the
purchase price or replacement of the defective part.
10
Employees
As of December 31, 2017, we employed 646 full-time personnel, consisting of 85 in manufacturing, 229 in research
and development, 276 in sales, marketing and applications support, and 56 in finance and administration.
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,
www.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.govg .
p
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 31, 2018, our executive officers, who are appointed by and serve at the discretion of the board of
directors, were as follows:
Name
Balu Balakrishnan
Douglas Bailey
Radu Barsan
David “Mike” Matthews
Sandeep Nayyar
Ben Sutherland
Raja Petrakian
Clifford Walker
g
Position With Power Integrations
President, Chief Executive Officer and Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ageg
63
51
65
53
58
46
53
66
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.
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 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 overall operations. 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 semiconductor company. Mr. Barsan has more
than 30 years of commercial experience in semiconductor and photonic 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
11
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.
Raja Petrakian has served as vice president of operations since May 2015. From 1995 to 2015, Dr. Petrakian served
in a succession of roles in operations and supply chain management, most recently as senior vice president of worldwide
operations, at Xilinx Inc. where he was responsible for manufacturing, supply chain management (fabrication through delivery),
customer service, supplier relationships, purchasing, import/export compliance, new product introduction operations, and
logistics. Prior to joining Xilinx he was a research staff member at the IBM T.J. Watson Research Center.
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.
r
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 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 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 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;
the volume and timing of delivery of orders placed by us with our wafer foundries and assembly subcontractors, and
their ability to procure materials;
competitive pressures on selling prices;
the ability of our products to penetrate additional markets;
the volume and timing of orders received from customers;
the inability to adequately protect or enforce our intellectual property rights;
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;
expenses we are required to incur (or choose to incur) in connection with our intellectual property litigations;
12
•
•
•
•
•
•
•
•
•
•
•
•
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 our internal controls over financial reporting;
the lengthy timing of our sales cycle;
undetected defects and failures in meeting the exact specifications required by our products;
changes in tax rules and regulations, changes in interpretation of tax rules and regulations, or unfavorable assessments
from tax audits 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;
interruptions in our information technology systems; and
uncertainties arising out of economic consequences of current and potential military actions or terrorist activities and
associated political instability.
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 consumer 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
approximately 77%, 75% and 76% of net revenues in the years ended December 31, 2017, 2016 and 2015, respectively. 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 are 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.
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. Our primary supply arrangements for the production of wafers are with Epson,
Lapis, and X-FAB. Our contracts with these suppliers expire on varying dates, with the earliest to expire in December 2020.
Although some aspects of our relationships with Lapis, 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 Epson,
Lapis and X-FAB 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 Epson, Lapis and X-FAB 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.
13
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.
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, yy
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 2018 to
2037. 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.
tt
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 54% and 60% of our net revenues in each of the years
ended December 31, 2017 and 2016, respectively. 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.
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
14
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 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.
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 96% of our net revenues for each of the years ended December 31, 2017, and 2016. 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 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 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.
tt
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 13, Legal Proceedings and Contingencies, in our Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K. 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.
15
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.
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 over
financial reporting, will continue to impact our results. Complying with the requirements of the federal securities laws 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 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 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.
16
Changes in tax rules and regulations, changes in interpretation of tax rules and regulations, or unfavorable
assessments from tax audits 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 U.S. Internal Revenue
Service (IRS) and state, local and foreign tax authorities. In addition, the United States, countries in Asia and other countries
where we do business have recently enacted or are 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.
Recently enacted U.S. tax legislation will significantly change the taxation of U.S.-based multinational corporations,
by, among other things, reducing the U.S. corporate income tax rate, adopting elements of a territorial tax system, assessing a
one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and the creation of new
taxes on certain foreign-sourced earnings. The legislation is unclear in some respects and will require interpretations and
implementing regulations by the Internal Revenue Service, as well as state tax authorities, and the legislation could be subject
to potential amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the
legislation. A significant portion of our earnings are earned by our subsidiaries outside the U.S. Changes to the taxation of
certain foreign earnings resulting from the newly enacted U.S. tax legislation, along with the state tax impact of these changes
and potential future cash distributions, may have an adverse effect on our effective tax rate. Furthermore, changes to the taxation
of undistributed foreign earnings could change our future intentions regarding reinvestment of such earnings. The foregoing
items could have a material effect on our business, cash flow, results of operations or financial conditions.
a
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.
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;
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 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
17
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 an R&D facility in New Jersey and a test facility in Biel, Switzerland. We lease administrative office
space in Singapore and Switzerland, R&D facilities in Canada, United Kingdom and Malaysia 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 13, 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.
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, 2017
Year Ended
December 31, 2016
High
Low
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $
72.50
75.25
82.20
84.35
$
$
$
$
62.45
62.70
67.10
71.15
$
$
$
$
49.75
54.36
63.03
69.55
$
$
$
$
41.63
45.04
48.91
61.97
As of February 9, 2018, there were approximately 37 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.
Dividends Declared Per Common Share
The following table presents the quarterly dividends declared per share of our common stock for the periods indicated:
Year Ended
December 31,
2017
2016
First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.14
0.14
0.14
0.14
$
$
$
$
0.13
0.13
0.13
0.13
We paid a total of $16.6 million and $15.1 million in cash dividends during 2017 and 2016, respectively.
Issuer Purchases of Equity Securities
Over the years our board of directors has authorized the use of funds to repurchase shares of our common stock,
including $30.0 million in each of July 2015, October 2015 and July 2017, with repurchases to be executed according to pre-
defined price/volume guidelines. In 2015, we purchased 1.3 million shares for approximately $53.7 million. In 2016, we
purchased 146,000 shares for approximately $6.4 million. In 2017, we purchased 129,000 shares for approximately $9.2 million.
As of December 31, 2017, we had $44.4 million available for future stock repurchases, which has no expiration date. In January
2018, our board of directors authorized the use of an additional $30.0 million for the repurchase of our common stock, with
repurchases to be executed according to pre-defined price/volume guidelines. 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
and business conditions as well as other factors.
The following table summarizes repurchases of our common stock during the fourth quarter of fiscal 2017:
Period
October 1, 2017, to October 31, 2017 . . . . . .
November 1, 2017, to November 30, 2017 . .
December 1, 2017, to December 31, 2017 . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Number of
Shares
Purchased
18,719
—
14,518
33,237
Average
Price Paid
Per Share
73.24
$
—
74.58
$
19
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)
18,719
$
— $
$
14,518
33,237
45.5
45.5
44.4
Performance Graph (1)
The following graph shows the cumulative total stockholders return of an investment of $100 in cash on December
31, 2012, through December 31, 2017, in our common stock, the NASDAQ Composite Index and the NASDAQ Electronic
Components Index and assuming that all dividends were reinvested. 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.
Company/Index
Power Integrations, Inc. . . . . . . . . . . . . . .
NASDAQ Composite . . . . . . . . . . . . . . . .
NASDAQ Electronic Components. . . . . .
12/31/12
100.00
100.00
100.00
12/31/13
167.22
141.63
142.79
12/31/14
156.26
162.09
190.07
12/31/15
148.34
173.33
186.91
12/31/16
208.96
187.19
241.21
12/31/17
228.34
242.29
341.27
_______________
(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.
20
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 Annual Report on Form 10-K to fully understand factors that may affect the comparability of the
information presented below.
Consolidated Statement of Income Data
(in thousands, except per share amounts)
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income from operations . . . . . . . . . . . . . . . . . . . .
Provision for (benefit from) income taxes . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017(1)(2)
431,755
57,637
32,690
27,609
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.93
0.90
Shares used in per share calculation:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per share. . . . . . . . . . . . . . . . . . . . . . . . $
29,674
30,545
0.56
Consolidated Balance Sheet Data
(in thousands)
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $
Short-term marketable securities . . . . . . . . . . . . .
2017(1)(2)
93,655
189,236
$
$
$
$
$
$
Year Ended December 31,
2015(1)(3)
344,609
38,906
179
39,152
2016(1)
389,668
48,874
1,054
48,898
$
$
$
$
2014
348,797
55,796
(2,730)
59,544
1.69
1.65
28,925
29,619
0.52
$
$
$
1.35
1.32
29,001
29,696
0.48
$
$
$
1.99
1.93
29,976
30,829
0.44
2016(1)
Year Ended December 31,
2015(1)(3)
90,092
83,769
62,134
188,323
$
$
2014
60,708
114,575
$
$
$
$
$
$
2013
347,089
54,066
(1,839)
57,266
1.95
1.88
29,421
30,420
0.32
2013
92,928
109,179
Cash, cash equivalents and short-term
marketable securities . . . . . . . . . . . . . . . . . . . . .
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . $
_______________
282,891
250,457
173,861
175,283
202,107
313,483
621,074
22,341
547,682
$
274,318
554,410
7,380
503,084
$
203,050
486,707
6,925
442,590
$
210,752
493,663
7,827
430,676
$
227,004
501,421
14,317
436,686
( )(1)
(2)
In 2017 we adopted Accounting Standards Update 2014-09,
Revenue from Contracts with Customers, which amended
In 2017 we adopted A
the accounting standards for revenue recognition. The standards were applied on a retrospective basis to 2015 and
2016 (refer to Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in our Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K for details), but not to 2013 and 2014.
In December 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
In December 2017 the U.S. governme
and Jobs Act (Refer to Note 11, Provision for Income Taxes, in our Notes to Consolidated Financial Statements in
this Annual Report on Form 10-K for details).
(3) In 2015 we acquired Cambridge Semiconductor Limited (CamSemi), a UK company (refer to Note 14, Acquisitions,
in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for details).
21
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. See
“Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Form 10-K. 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, computing and networking equipment, appliances, electronic
utility meters, power tools, industrial controls, and lighting applications that utilize light-emitting diodes (LEDs), and “smart-aa
home,” or “internet of things” applications such as networked thermostats, power strips and other building-automation and
security devices.
We also offer high-voltage gate drivers- either standalone ICs or circuit boards containing ICs, electrical isolation
components and other circuitry- used to operate high-voltage switches such as insulated-gate bipolar transistors (IGBTs). These
combinations of switches and drivers are used for power conversion in high-power applications (i.e., power levels ranging from
a few 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 $431.8 million, $389.7 million and $344.6 million in 2017, 2016 and 2015, respectively. In
2017 revenues increased by $42.1 million due to higher unit sales into the industrial and consumer end-markets, driven by
growth from a broad range of industrial and consumer-appliance applications. In 2016 revenues increased by $45.1 million
due primarily to higher unit sales into the communications end-market, largely as a result of the success of our InnoSwitch
products in mobile-device chargers. In addition, higher unit sales into the consumer market, particularly the consumer-appliance
market, contributed to the increase in 2016. The increases in both 2017 and 2016 were partially offset by lower unit sales into
the computer end-market, reflecting reduced demand for power supplies for desktop computers.
Our top ten customers, including distributors that resell to OEMs and merchant power supply manufacturers, accounted
for approximately 54%, 60% and 61% of net revenues in 2017, 2016 and 2015, respectively. In 2017 our top customer, a
distributor of our products, accounted for approximately 16% of our net revenues. In 2016 and 2015 our top two customers,
also distributors, collectively accounted for approximately 28% and 32% of our net revenues. International sales represented
approximately 96% of net revenues in each of 2017, 2016, and 2015.
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 corresponding change in our gross margin of approximately 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.uu
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 $213.7 million or 49% of net revenues in 2017,
compared to $192.2 million or 49% of net revenues in 2016, and $173.3 million or 50% of net revenues in 2015. Our gross
margin in 2017 was flat compared to 2016 as a favorable change in end-market mix was offset by higher manufacturing costs
stemming from a decline in the value of the U.S. dollar versus the Japanese yen in 2016, which subsequently increased the cost
of silicon wafers purchased from our Japanese wafer-fabrication foundries. The decrease in gross margin in 2016 was due
primarily to a change in end-market mix, with a greater percentage of revenues coming from lower-margin end-markets,
particularly communications.
22
Total operating expenses in 2017, 2016 and 2015 were $156.0 million, $143.3 million and $134.4 million, respectively.
The increase in operating expenses in 2017 was due primarily to higher salary and related expenses due to the expansion of
our workforce, increased legal expenses in connection with our litigation with ON Semiconductor, and increased stock-based
compensation expense. Operating expenses increased in 2016 due primarily to increased stock-based compensation expense
related to annual performance-based awards, and the expansion of headcount in support of our product-development efforts.
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 and Recent Accounting Pronouncements, in our Notes to Consolidated Financial Statements
in this Annual Report on Form 10-K.
Revenue recognition
Product revenues consist of sales to original equipment manufacturers, or OEMs, merchant power supply
manufacturers and distributors. Approximately 77% of our net product sales were made to distributors in 2017. We apply the
provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers, and all related
appropriate guidance. We recognize revenue under the core principle to depict the transfer of control to our customers in an
amount reflecting the consideration we expect to be entitled. In order to achieve that core principle, we apply the following
five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3)
determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize
revenue when a performance obligation is satisfied.
Product revenues consist of sales to original equipment manufacturers, or OEMs, merchant power supply
manufacturers and distributors. We consider customer purchase orders, which in some cases are governed by master sales
agreements, to be the contracts with a customer. In situations where sales are to a distributor, we have concluded that our
contracts are with the distributor as we hold contracts bearing enforceable rights and obligations with only the distributor. As
part of our consideration of the contract, we evaluate certain factors including the customer’s ability to pay (or credit risk). For
each contract, we consider the promise to transfer products, each of which is distinct, to be the identified performance obligations.
In determining the transaction price we evaluate whether the price is subject to refund or adjustment to determine the net
consideration to which we expect to be entitled. As our standard payment terms are less than one year, we elected the practical
expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. We allocate the
transaction price to each distinct product based on their relative standalone selling price. We consider the product price as
specified on the purchase order the standalone selling price as it is an observable input which depicts the price as if sold to a
similar customer in similar circumstances. We recognize revenue when control of the product is transferred to the customer
(i.e., when our performance obligation is satisfied), which typically occurs at shipment. Further, in determining whether control
has transferred, we consider if there is a present right to payment and legal title, along with risks and rewards of ownership
having transferred to the customer.
Frequently, we receive orders for products to be delivered over multiple dates that may extend across several reporting
periods. We invoice for each delivery upon shipment and recognize revenue for each distinct product delivered, assuming
23
transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption provided by
ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not disclosed. We have also
elected the practical expedient under ASC 340-40-25-4 to expense commissions when incurred as the amortization period of
the commission asset we would have otherwise recognized is less than one year.
Sales to international customers that are shipped from our facility outside of the United States are pursuant to EX
Works, or EXW, shipping terms, meaning that control of the product transfers to the customer upon shipment from our foreign
warehouse. Sales to international customers that we ship from our facility in California are pursuant to Delivered at Frontier,
or DAF, shipping terms. As such, control of the product passes to the customer when the shipment reaches the destination
country and we recognize revenue upon the arrival of the product in that country. Shipments to customers in the Americas are
pursuant to Free on Board, or FOB, point of origin shipping terms meaning that we pass control to the customer upon shipment.
Sales to most distributors are made under terms allowing certain price adjustments and limited rights of return (known
as “stock rotation”) of our products held in their inventory or upon sale to their end customers. We recognize revenue from
sales to distributors upon the transfer of control to the distributor. 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, we issue a credit memo to the distributor for the
ship and debit claim. In determining the transaction price, we consider ship and debit price adjustments to be variable
consideration. Such price adjustments are estimated using the expected value method based on an analysis of actual ship and
debit claims, at the distributor and product level, over a period of time considered adequate to account for current pricing and
business trends. Historically, actual price adjustments for ship and debit claims relative to those estimated and included when
determining the transaction price have not materially differed. To the extent future ship and debit claims significantly exceed
amounts estimated, there could be a material impact on our revenues and results of operations. Stock rotation rights grant the
distributor the ability to return certain specified amounts of inventory. Stock rotation adjustments are an additional form of
variable consideration and are also estimated using the expected value method based on historical return rates. Historically,
these distributor stock rotation adjustments have not been material.
tt
Sales to certain distributors are made under terms that do not include rights of return or price concessions after the
product is shipped to the distributor. Accordingly, upon application of steps one through five above, product revenue is recognized
upon shipment and transfer of control.
We generally provide an assurance warrant that our products will substantially conform to the published specifications
for twelve months from the date of shipment. Our 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. As such, we do not record a specific warranty
reserve or consider activities related to such warranty, if any, to be a separate performance obligation.
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, 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.
For awards with performance conditions, we recognize compensation expense when it becomes probable that the
performance target will be achieved. A probability assessment is performed on a quarterly basis and requires significant
assumptions and estimates made by management related to the projected achievement of the performance targets, which consist
of non-GAAP operating earnings, strategic goals and/or net revenues. Changes in the probability assessment of achieving the
performance targets are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new
estimate had been applied since the service inception date. If the actual performance targets achieved differ significantly from
those projected by management, additional compensation expense may be recorded for the performance-based awards due to
the cumulative catch-up adjustment, which could have an adverse impact on our results of operations.
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
24
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, Income Taxes. 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, 2017, 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.
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 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. Under the amendments of Accounting Standards Update (ASU)
2017-04, Intangibles - Goodwill and Other (Topic 350), we compare the fair value of our single reporting unit to the carrying
amount, including goodwill. If the fair value of our single reporting unit exceeds the carrying amount no impairment adjustment
is required. If the carrying amount of our reporting unit exceeds the fair value, then we record an impairment loss equal to the
difference, but not in excess of the carrying amount of the goodwill. Under ASC 350-10, 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 comparing the fair value of a reporting unit to its carrying amount is unnecessary. We have not elected
this option to date. We evaluated goodwill for impairment in the fourth quarters of 2017 and 2016, and concluded that no
impairment existed as of December 31, 2017, and December 31, 2016.
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
25
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.
Results of Operations
The following table sets forth statement of income data as a percentage of net revenues for the periods indicated:
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparison of Years Ended December 31, 2017, 2016 and 2015
2017
2016
2015
100.0%
50.5
49.5
15.9
11.9
8.4
36.2
13.3
0.6
13.9
7.5
6.4%
100.0%
50.7
49.3
16.0
12.3
8.5
36.8
12.5
0.3
12.8
0.3
12.5%
100.0%
49.7
50.3
16.7
13.6
8.7
39.0
11.3
0.1
11.4
0.1
11.3%
Net revenues. Net revenues consist of revenues from product sales, which are calculated net of returns and allowances.
In 2017 revenues increased by $42.1 million due to higher unit sales into the industrial and consumer end-markets, driven by
growth from a broad range of industrial and consumer-appliance applications. These increases were partially offset by lower
unit sales into the computer end-market, reflecting reduced demand for power supplies for desktop computers. In 2016 revenues
increased by $45.1 million due primarily to higher unit sales into the communications end-market, largely as a result of the
success of our InnoSwitch products in mobile-device chargers as well as the consumer market, particularly the consumer-
appliance market. These increases were partially offset by lower unit sales into the computer end-market, reflecting reduced
demand for power supplies for desktop computers.
Our approximate net revenue mix by end-markets served in 2017, 2016 and 2015 is as follows:
End Market
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
24%
5%
38%
33%
27%
6%
36%
31%
24%
7%
36%
33%
Sales to customers outside of the United States were $415.1 million in 2017, compared to $374.7 million in 2016
and $329.9 million in 2015, representing approximately 96% of net revenues in each of 2017, 2016 and 2015. 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 79%, 81% and 80% of our net revenues in 2017,
2016 and 2015, respectively. We expect international sales to continue to account for a large portion of our net revenues for
the foreseeable future.
Sales to distributors accounted for 77%, 75% and 76% of our net revenues in 2017, 2016 and 2015, respectively,
with direct sales to OEMs and merchant power supply manufacturers accounting for the remainder in each of the corresponding
years. In 2017 one distributor accounted for more than 10% of revenues. In 2016 and 2015, two distributors each accounted
for more than 10% of revenues.
26
The following customers each accounted for 10% or more of net revenues during these years:
Customer
Avnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Powertech Distribution Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
16%
*
18%
10%
21%
11%
_______________
* 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 following table compares gross profit and gross
margin for the years ended December 31, 2017, 2016 and 2015:
(dollars in millions)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . $
Gross margin . . . . . . . . . . . . . . . . . . . . . .
2017
Change
2016
Change
2015
213.7
49.5%
11.2% $
192.2
49.3%
10.9% $
173.3
50.3%
Our gross margin was essentially flat in 2017 compared to 2016 as a favorable change in end-market mix was largely
offset by higher costs stemming from a decline in the value of the U.S. dollar versus the Japanese yen in 2016, which subsequently
increased the cost of silicon wafers purchased from our Japanese foundries. The decrease in gross margin in 2016 was due
primarily to a change in end-market mix, with a greater percentage of revenue coming from lower-margin end-markets,
particularly the communications market.
Research and development expenses. Research and development (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 following table compares R&D expenses for the years ended December 31, 2017,
2016 and 2015:
(dollars in millions)
R&D expenses . . . . . . . . . . . . . . . . . . . . . . $
Percentage of net revenues . . . . . . . . . . .
2017
Change
2016
Change
2015
68.5
15.9%
9.9% $
62.3
16.0%
8.3% $
57.5
16.7%
R&D expenses increased in 2017 compared to 2016, reflecting increased salary and related expenses from the
expansion of headcount, and greater equipment and product-development expenses, all in support of our product-development
efforts. R&D expenses increased in 2016 as compared to 2015 primarily due to increased stock-based compensation expense
related to performance-based stock awards as a result of our 2016 performance. The expansion of headcount in support of our
product-development efforts also contributed to the 2016 increase.
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 following table compares
sales and marketing expenses for the years ended December 31, 2017, 2016 and 2015:
(dollars in millions)
Sales and marketing expenses . . . . . . . . . . $
Percentage of net revenues . . . . . . . . . . .
2017
Change
2016
Change
2015
51.4
11.9%
7.1% $
48.0
12.3%
2.6% $
46.8
13.6%
Sales and marketing expenses increased in 2017 compared to 2016 primarily due primarily to the expansion of our
sales force, resulting in higher salary and related expenses. Sales and marketing expenses increased in 2016 compared to 2015
primarily due to increased stock-based compensation expense related to performance-based stock awards as a result of our
2016 performance. Higher bonus and sales commissions also contributed to the 2016 increase.
General and administrative expenses. General and administrative (G&A) expenses consist primarily of employee-
related expenses, including stock-based compensation expenses for administration, finance, human resources and general
27
management, as well as consulting, professional services, legal and auditing expenses. The table below compares G&A expenses
for the years ended December 31, 2017, 2016 and 2015:
(dollars in millions)
G&A expenses . . . . . . . . . . . . . . . . . . . . . . $
Percentage of net revenues . . . . . . . . . . .
2017
36.1
8.4%
Change
9.4%
$
2016
Change
2015
33.0
8.5%
10.0% $
30.0
8.7%
G&A expenses increased in each of 2017 and 2016 due primarily to increased expenses related to our litigation with
ON Semiconductor, as well as increased stock-based compensation expense.
Other income. Other income 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. The following table compares other income
for the years ended December 31, 2017, 2016 and 2015:
(dollars in millions)
Other income . . . . . . . . . . . . . . . . . . . . . . . $
Percentage of net revenues . . . . . . . . . . .
2017
Change
2016
Change
2015
2.7
0.6%
146.9% $
1.1
0.3%
153.6% $
0.4
0.1%
Other income increased in 2017 due primarily to an increase in interest income reflecting an increase in our cash and
investment balances along with higher yields earned on those balances. Other income increased in 2016 compared to 2015 due
primarily to the unfavorable impact in 2015 of foreign currency movements relative to the U.S. dollar and the related loss
recognized from the re-measurement of monetary foreign currency assets and liabilities of our Swiss subsidiary.
Provision for income taxes. Provision for income taxes represents federal, state and foreign taxes. The following table
compares the provision for income taxes for the years ended December 31, 2017, 2016 and 2015:
(dollars in millions)
Provision for income taxes. . . . . . . . . . . . . $
Percentage of net revenues . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . .
2017
32.7
7.5%
54.2%
Change
3,001.5% $
2016
Change
2015
488.8% $
1.1
0.3%
2.1%
0.2
0.1%
0.5%
Our effective tax rate is impacted by the geographic distribution of our world-wide earnings in lower tax jurisdictions
and the federal R&D tax credit. In 2017 our effective tax rate was impacted by a $37.5 million charge resulting from the
enactment of the U.S. Tax Cuts and Jobs Act (Tax Act). For additional details on the impact of the Tax Act, refer to Note 11,
Provision for Income Taxes, in our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Additionally, in 2017 our rate was favorably impacted by the recognition of excess tax benefits related to share-based payments
of approximately $2.1 million. Effective January 1, 2017, we adopted Accounting Standards Update 2016-09 (ASU 2016-09),
Compensation - Stock Compensation, under which all excess tax benefits and tax deficiencies are recognized prospectively as
income tax expense or benefit in the income statement. For additional details on our adoption of ASU 2016-09, refer to Note
2, Significant Accounting Policies and Recent Accounting Pronouncements, in our Notes to Consolidated Financial Statements
included in this Annual Report on Form 10-K.
Liquidity and Capital Resources
We had approximately $282.9 million in cash, cash equivalents and short-term marketable securities at December 31,
2017 compared to $250.5 million at December 31, 2016, and $173.9 million at December 31, 2015. As of December 31, 2017,
2016 and 2015, we had working capital, defined as current assets less current liabilities, of approximately $313.5 million,
$274.3 million and $203.1 million, respectively.
On July 27, 2016, we entered into a credit agreement with a bank (the "Credit Agreement") that provides us with a
$75.0 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. Our ability to borrow under the revolving line of credit is conditioned upon our compliance
with specified covenants, including reporting and financial covenants, primarily a minimum liquidity measure and a debt to
earnings ratio, with which we are currently in compliance. The Credit Agreement terminates on July 26, 2019; 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, 2017
and 2016, we had no amounts outstanding under our agreement.
28
Our operating activities generated cash of $82.0 million, $97.9 million, and $92.2 million in the years ended December
31, 2017, 2016 and 2015, respectively. In each of these years, cash was primarily generated from operating activities in the
ordinary course of business.
In 2017, our net income was $27.6 million, which included stock-based compensation expenses, non-cash depreciation
and amortization of $24.7 million, $18.4 million and $6.1 million, respectively. Sources of cash also included a $20.0 million
increase in taxes payable and accrued liabilities driven by the long-term portion of the taxes payable related to the transitional
impact of the U.S. Tax Act and a $0.4 million increase in accounts payable due to the timing of payments. These sources of
cash were partially offset by a $17.6 million increase in prepaid expenses and other assets, primarily driven by advances to
suppliers and prepaid legal expenses, a $10.5 million increase in accounts receivable due to the timing of collections along
with increased shipments and a $4.5 million increase in inventories to support increased demand.
In 2016, our net income was $48.9 million, which included stock-based compensation expenses, non-cash depreciation
and amortization of $20.9 million, $16.8 million, and $6.7 million, respectively. Sources of cash included a $7.7 million increase
in accounts payable due to timing of payments. These sources of cash were partially offset by a $2.5 million increase in prepaid
expenses and other assets due to an increase in prepaid income taxes, and a $1.1 million decrease in taxes payable and accrued
liabilities.
In 2015, our net income was $39.2 million, which included non-cash depreciation, stock-based compensation expenses
and amortization of $16.5 million, $14.8 million and $7.0 million, respectively. Sources of cash also included a $13.5 million
decrease in inventory due to reduction efforts, a $4.1 million decrease in accounts receivable due to the timing of collections,
and a $3.3 million decrease in prepaid expenses and other assets due to income tax refunds received during the period. These
sources of cash were partially offset by a $5.5 million increase in deferred taxes, and a $2.0 million decrease in accounts payable
due to the timing of payments.
Our investing activities in the year ended December 31, 2017, resulted in a $34.7 million net use of cash, consisting
primarily of $32.5 million for purchases of property and equipment, primarily machinery and equipment for use in the
manufacture of our products, and $2.2 million from the purchase of marketable securities, net of maturities.
Our investing activities in the year ended December 31, 2016, resulted in a net $117.4 million use of cash, consisting
primarily of $105.2 million from the purchase of marketable securities, net of maturities, and $12.2 million for purchases of
property and equipment, primarily machinery and equipment for use in the manufacture of our products.
Our investing activities in the year ended December 31, 2015, resulted in a net $7.7 million use of cash, consisting
primarily of $15.5 million in net cash paid for the acquisition of CamSemi, $11.4 million for purchases of property and equipment,
primarily machinery and equipment for use in the manufacture of our products, and $10.4 million net cash paid for a building
purchase (refer to Note 14, Acquisitions, in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-
K, for details). These uses of cash were partially offset by $29.6 million of proceeds from the sale and maturity of marketable
securities, net of purchases.
Our financing activities in the year ended December 31, 2017, resulted in a net use of $15.8 million of cash. Financing
activities consisted primarily of $16.6 million for the payment of dividends to stockholders and $9.2 million for the repurchase
of our common stock, partially offset by proceeds of $10.0 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.
Our financing activities in the year ended December 31, 2016, resulted in a net use of $8.4 million of cash. Financing
activities consisted primarily of $6.4 million for the repurchase of our common stock and $15.1 million for the payment of
dividends to stockholders, partially offset by proceeds of $13.1 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.
Our financing activities in the year ended December 31, 2015, resulted in a net use of $55.1 million of cash. Financing
activities consisted primarily of $53.7 million for the repurchase of our common stock and $13.9 million for the payment of
dividends to stockholders, partially offset by proceeds of $12.6 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 January 2015, our board of directors continued the $0.12 per share quarterly dividend through each quarter in
2015. In January 2016, our board of directors declared four quarterly cash dividends in the amount of $0.13 per share to be
paid to stockholders of record at the end of each quarter in 2016. In January 2017, our board of directors declared four quarterly
cash dividends in the amount of $0.14 per share to be paid to stockholders of record at the end of each quarter in 2017.
In January 2018, our board of directors declared four quarterly cash dividends in the amount of $0.16 per share to
be paid to stockholders of record at the end of each quarter in 2018. The declaration of any future cash dividend is at the
29
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.
Over the years our board of directors has authorized the use of funds to repurchase shares of our common stock,
including $60.0 million authorized in 2015, and $30.0 million authorized in 2017, with repurchases to be executed according
to pre-defined price/volume guidelines. In 2015, we purchased 1.3 million shares for approximately $53.7 million. In 2016,
we purchased 146,000 shares for approximately $6.4 million. In 2017, we purchased 129,000 shares for approximately $9.2
million. As of December 31, 2017, $44.4 million was available for future stock repurchases, which has no expiration date. In
January 2018, our board of directors authorized the use of an additional $30.0 million for the repurchase of our common stock,
with repurchases to be executed according to pre-defined price/volume guidelines. 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 and business conditions as well as other factors.
As of December 31, 2017, we had a contractual obligation related to income tax, consisting primarily of unrecognized
tax benefits of approximately $16.7 million. The tax obligation was classified as long-term income taxes payable or recorded
as contra deferred tax assets in our consolidated balance sheet.
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. The recent Tax Act signed into law on December 22, 2017 subjects U.S. companies to a one-time transition tax
on total post-1986 earnings and profits of their foreign subsidiaries and generally allows companies to repatriate accumulated
foreign earnings without incurring additional U.S. federal taxes beginning after December 31, 2017. Accordingly, as of
December 31, 2017, our worldwide cash and marketable securities are available to fund capital allocation needs, including
capital and internal investments, acquisitions, stock repurchases and/or dividends without incurring additional U.S. federal
income taxes.
If our operating results deteriorate in future periods, either as a result of a decrease in customer demand or 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.
Off-Balance Sheet Arrangements
As of December 31, 2017 and 2016, 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, 2017, we had the following contractual obligations and commitments, consisting solely of non-
cancelable operating lease agreements:
Payments Due by Period
(in thousands)
Operating lease obligations . . . . . . . . . . . . $
Total
Less than 1
Year
4,312
$
1,875
1 - 3 Years
1,756
$
4 - 5 Years
434
$
Over 5
Years
$
247
In addition to our contractual obligations noted above we have a contractual obligation related to income tax as of
December 31, 2017, which primarily comprises unrecognized tax benefits of approximately $16.7 million, and was classified
as contra deferred tax assets or long-term income taxes payable in our consolidated balance sheet. As of December 31, 2017
we also had approximately $15.4 million classified as long-term income taxes payable related to the estimated one-time
transition tax from the enactment of the Tax Act which will be payable in eight annual installments.
30
Recently Issued Accounting Pronouncements
For recently issued accounting announcements, see “Recently Issued Accounting Pronouncements” in Note 2,
Significant Accounting Policies and Recent Accounting Pronouncements, in our Notes to Consolidated Financial Statements
included in this Annual Report on Form 10-K.
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 aa
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 uu
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, 2017 and
2016, 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, 2017,
or December 31, 2016, 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 5, Marketable Securities, in our Notes
to Consolidated Financial Statements in this Annual Report on Form 10-K, for a tabular presentation of our available-for-sale
investments and the expected maturity dates.
Foreign Currency Exchange Risk. As of December 31, 2017, our primary transactional currency was the U.S. dollar;
in addition, we hold cash in Swiss francs and euros to fund the operation of our Swiss subsidiary. 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. 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, 2017. This sensitivity analysis applies a change in the U.S. dollar value of 5% and
10%.
(in thousands of USD)
Swiss franc and euro foreign exchange impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2017
5%
10%
40
$
79
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.
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, 2017, and December 31, 2016, 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 (Epson) and ROHM Lapis Semiconductor Co., Ltd. (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 eventually result in a corresponding change in our gross margin of approximately
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.
31
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Power Integrations, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Power Integrations, Inc. and subsidiaries (the
"Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes
and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in
conformity with the accounting principles generally accepted in the United States of America
ff
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 14, 2018 expressed an unqualified opinion on the Company's internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 14, 2018
We have served as the Company's auditor since 2005.
32
POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)
ASSETS
CURRENT ASSETS:
December 31,
2017
December 31,
2016
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
93,655
$
Short-term marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189,236
Accounts receivable, net of allowance for doubtful accounts of $734 and $525 in
2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTANGIBLE ASSETS, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED TAX ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,798
57,087
7,758
364,534
111,705
25,419
91,849
2,364
25,203
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
621,074
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
33,211
$
Accrued payroll and related expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LONG-TERM INCOME TAXES PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED TAX LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMMITMENTS AND CONTINGENCIES (NOTES 11, 12 and 13)
12,064
1,767
4,009
51,051
18,259
138
3,944
73,392
62,134
188,323
6,528
52,564
8,715
318,264
95,296
31,502
91,849
11,342
6,157
554,410
29,727
10,756
729
2,734
43,946
2,639
820
3,921
51,326
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value
Authorized - 140,000,000 shares
Outstanding - 29,782,455 and 29,249,635 shares in 2017 and 2016, respectively . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
198,384
(2,139)
351,408
547,682
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
621,074
$
28
172,875
(2,710)
332,891
503,084
554,410
The accompanying notes are an integral part of these consolidated financial statements.
33
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
2017
2016
2015
Year Ended December 31,
NET REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
431,755
$
389,668
$
COST OF REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OPERATING EXPENSES:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
218,091
213,664
68,501
51,384
36,142
Total operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
156,027
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . .
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . .
57,637
2,662
60,299
32,690
197,477
192,191
62,310
47,978
33,029
143,317
48,874
1,078
49,952
1,054
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
27,609
$
48,898
$
344,609
171,309
173,300
57,549
46,816
30,029
134,394
38,906
425
39,331
179
39,152
EARNINGS PER SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.93
0.90
$
$
1.69
1.65
$
$
1.35
1.32
SHARES USED IN PER SHARE CALCULATION:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,674
30,545
28,925
29,619
29,001
29,696
The accompanying notes are an integral part of these consolidated financial statements.
34
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended December 31,
2016
2015
2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
27,609
$
48,898
$
39,152
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in 2017,
2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on marketable securities, net of $0 tax in 2017,
2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized actuarial gain (loss) on pension benefits, net of tax of
($194), $98 and $96 in 2017, 2016 and 2015, respectively . . . . . .
Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . .
79
(207)
699
571
(384)
(123)
(352)
(859)
(191)
(180)
(344)
(715)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28,180
$
48,039
$
38,437
The accompanying notes are an integral part of these consolidated financial statements.
35
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Shares Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive Retained
Earnings
Loss
Total
Stockholders’
Equity
29,208 $
29 $
171,938 $
(1,136) $ 259,845 $
430,676
13,966
13,966
—
578
(1,250)
—
—
(1)
(In thousands)
BALANCE AT JANUARY 1, 2015 . . . . . . . . . . . . . . .
Cumulative-effect adjustment from adoption of ASU
2014-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . .
Unrealized loss on marketable securities . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . .
117
—
—
—
—
—
—
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2015. . . . . . . . . . . . .
—
28,653
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . .
Unrealized loss on marketable securities . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . .
615
(146)
128
—
—
—
—
—
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2016. . . . . . . . . . . . .
—
29,250
Cumulative-effect adjustment from adoption of ASU
2016-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense related to
employee stock awards . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense related to
employee stock purchases . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends to stockholders. . . . . . . . . . . . . .
Unrealized actuarial gain on pension benefits. . . . . . . .
Unrealized loss on marketable securities . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . .
—
569
(129)
92
—
—
—
—
—
—
—
8,133
(53,730)
4,447
(189)
13,562
1,205
—
—
—
—
—
145,366
8,479
(6,435)
4,580
19,599
1,286
—
—
—
—
—
172,875
—
5,086
(9,188)
4,934
23,337
1,340
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28
—
—
—
—
—
—
—
—
—
—
28
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(344)
(180)
(191)
—
—
—
—
—
—
(13,916)
—
—
—
—
(1,851)
39,152
299,047
—
—
—
—
—
—
(352)
(123)
(384)
—
—
—
—
—
(15,054)
—
—
—
—
(2,710)
48,898
332,891
—
—
—
—
—
—
—
699
(207)
79
—
—
—
—
—
—
(16,634)
—
—
—
27,609
8,133
(53,731)
4,447
(189)
13,562
1,205
(13,916)
(344)
(180)
(191)
39,152
442,590
8,479
(6,435)
4,580
19,599
1,286
(15,054)
(352)
(123)
(384)
48,898
503,084
5,087
(9,188)
4,934
23,337
1,340
(16,634)
699
(207)
79
27,609
547,682
7,542
7,542
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BALANCE AT DECEMBER 31, 2017. . . . . . . . . . . . .
—
29,782 $
—
29 $
198,384 $
(2,139) $ 351,408 $
The accompanying notes are an integral part of these consolidated financial statements.
36
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2017
2016
2015
27,609
$
48,898
$
39,152
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(32,496)
(12,198)
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premium on marketable securities . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accounts receivable allowances . . . . . . . . . . . . . . . . . . . . . . . . .
Tax shortfall 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . .
Payment for purchase of building (Note 14). . . . . . . . . . . . . . . . . . . . . . . . .
Payment for acquisition, net of cash acquired (Note 14) . . . . . . . . . . . . . . .
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and maturities of marketable securities . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock plans . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of dividends to stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from draw on line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCREASE (DECREASE) 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:
Unpaid property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loan applied to CamSemi purchase price (Note 14) . . . . . . . . . . . . . . . . . . $
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
18,374
6,083
360
24,677
1,100
15,838
209
—
(10,479)
(4,523)
(17,646)
396
20,041
82,039
16,812
6,663
332
20,885
555
(638)
207
—
751
(630)
(2,524)
7,714
(1,124)
97,901
—
—
(151,663)
149,443
(34,716)
10,020
(9,188)
(16,634)
5,000
(5,000)
(15,802)
31,521
62,134
—
—
(188,654)
83,423
(117,429)
13,059
(6,435)
(15,054)
—
—
(27,958)
90,092
93,655
$
62,134
$
4,913
$
— $
1,825
$
— $
16,464
7,039
361
14,767
1,063
(5,508)
127
(189)
4,144
13,500
3,342
(2,000)
(75)
92,187
(11,359)
(10,389)
(15,549)
(29,748)
59,309
(7,736)
12,580
(53,731)
(13,916)
—
—
29,384
60,708
90,092
1,472
6,600
(8,430)
(55,067)
Cash paid (refund) for income taxes, net of refunds (Note 11) . . . . . . . . . . $
(1,571) $
6,613
$
473
The accompanying notes are an integral part of these consolidated financial statements.
37
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 (typically 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, which convert the high-voltage AC from a wall outlet to the low-voltage DC required by most electronic
devices. Power supplies incorporating the Company’s products are used with all manner of electronic products including mobile
phones, computing and networking equipment, appliances, electronic utility meters, power tools, industrial controls, lighting
applications that utilize light-emitting diodes (LEDs), and “smart-home,” or “internet of things” applications such as networked
thermostats, power strips and other building-automation and security devices. The Company also offers high-voltage gate
drivers – either standalone ICs or circuit boards containing ICs, electrical isolation components and other circuitry – used to
operate high-voltage switches such as insulated-gate bipolar transistors (IGBTs). These combinations of switches and drivers
are used for power conversion in high-power applications (i.e., power levels ranging from a few kilowatts up to one gigawatt)
such as industrial motors, solar- and wind-power systems, electric vehicles and high-voltage DC transmission systems.
2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:
Significant Accounting Policies and Estimates
Segment Reporting
The Company is organized and operates as one reportable segment, the design, development, manufacture and
marketing of integrated circuits and related components for use primarily in high-voltage power conversion market. The
Company’s chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a
consolidated basis for purposes of making operating decisions and assessing financial performance.
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. Generally Accepted Accounting Principles (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.
Revenue Recognition
The Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts
with Customers, and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the
transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled.
In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a
customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction
price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
Product revenues consist of sales to original equipment manufacturers, or OEMs, merchant power supply
manufacturers and distributors. The Company considers customer purchase orders, which in some cases are governed by master
sales agreements, to be the contracts with a customer. In situations where sales are to a distributor, the Company has concluded
that its contracts are with the distributor as the Company holds a contract bearing enforceable rights and obligations only with tt
the distributor. As part of its consideration of the contract, the Company evaluates certain factors including the customer’s
ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is
38
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
distinct, to be the identified performance obligations. In determining the transaction price the Company evaluates whether the
price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. As the
Company’s standard payment terms are less than one year, the Company has elected the practical expedient under ASC
606-10-32-18 to not assess whether a contract has a significant financing component. The Company allocates the transaction
price to each distinct product based on their relative standalone selling price. The product price as specified on the purchase
order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer
in similar circumstances. Revenue is recognized when control of the product is transferred to the customer (i.e., when the
Company’s performance obligation is satisfied), which typically occurs at shipment. Further, in determining whether control
has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of
ownership having transferred to the customer.
Frequently, the Company receives orders for products to be delivered over multiple dates that may extend across
several reporting periods. The Company invoices for each delivery upon shipment and recognizes revenues for each distinct
product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional
exemption provided by ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not
disclosed. The Company has also elected the practical expedient under ASC 340-40-25-4 to expense commissions when incurred
as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.
Sales to international customers that are shipped from the Company’s facility outside of the United States are pursuant
to EX Works, or EXW, shipping terms, meaning that control of the product transfers to the customer upon shipment from the
Company’s foreign warehouse. Sales to international customers that are shipped from the Company’s facility in California are
pursuant to Delivered at Frontier, or DAF, shipping terms. As such, control of 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 customers in the Americas are pursuant to Free on Board, or FOB, point of origin shipping terms meaning that control is
passed to the customer upon shipment.
Sales to most distributors are made under terms allowing certain price adjustments and limited rights of return (known
as “stock rotation”) of the Company’s products held in their inventory or upon sale to their end customers. Revenue from sales
to distributors is recognized upon the transfer of control to the distributor. 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 the Company to adjust the distributor’s cost from the standard
price to the pre-approved lower price. After the Company verifies that the claim was pre-approved, a credit memo is issued to
the distributor for the ship and debit claim. In determining the transaction price, the Company considers ship and debit price
adjustments to be variable consideration. Such price adjustments are estimated using the expected value method based on an
analysis of actual ship and debit claims, at the distributor and product level, over a period of time considered adequate to account
for current pricing and business trends. Historically, actual price adjustments for ship and debit claims relative to those estimated
and included when determining the transaction price have not materially differed. Stock rotation rights grant the distributor the
ability to return certain specified amounts of inventory. Stock rotation adjustments are an additional form of variable
consideration and are also estimated using the expected value method based on historical return rates. Historically, distributor
stock rotation adjustments have not been material.
t
Sales to certain distributors are made under terms that do not include rights of return or price concessions after the
product is shipped to the distributor. Accordingly, upon application of steps one through five above, product revenue is recognized
upon shipment and transfer of control.
The Company generally provides an assurance warranty that its products will substantially conform to the published
specifications for twelve 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. As such, the
Company does not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate
performance obligation.
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.
39
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, Income Taxes. 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.
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 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.
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.
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 a maturity date
greater than three months at the date of purchase as short-term marketable securities in its consolidated balance sheet. As of
December 31, 2017, and December 31, 2016, the Company’s marketable securities consisted primarily of commercial paper,
corporate bonds, government securities and/or other high-quality commercial securities.
40
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, the Company contributes a certain percentage of employee annual salaries
on a discretionary basis, not to exceed an established threshold. The Company provided for a contribution of approximately
$1.2 million in 2017 and approximately $1.1 million in each of 2016 and 2015.
Retirement Benefit Obligations (Pension)
The Company recognizes the over-funded or under-funded status of a defined benefit pension or post-retirement plan
as an asset or liability in the accompanying consolidated balance sheets. Actuarial gains and losses are recorded in accumulated
other comprehensive loss, a component of stockholders’ equity, and are amortized as a component of net periodic cost over the
remaining estimated service period of participants.
Foreign Currency Risk and Foreign Currency Translation
As of December 31, 2017, the Company’s primary transactional currency was U.S. dollars; in addition, the Company
holds cash in Swiss francs and euros to fund the operations of the Company’s Swiss subsidiary. The foreign exchange rate
fluctuation between the U.S. dollar versus the Swiss franc and euro is recorded in “other income” in the consolidated statements
of income.
Gains and losses arising from the remeasurement of non-functional currency balances are recorded in ''other income''
in the accompanying consolidated statements of income. For each of the years ended December 31, 2017 and 2016 the Company
realized foreign exchange transaction losses of $0.1 million and $0.5 million in 2015.
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.
aa
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. In each of 2017 and 2016 advertising costs amounted to $1.3 million and
$1.1 million in 2015.
Research and Development
Research and development costs are expensed as incurred.
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
41
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2017. 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.
Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers, amending the existing accounting standards for revenue recognition. The
Company elected to early adopt these standards, effective on January 1, 2017, using the full retrospective method, under which
the amendments were applied to all prior periods presented. Under the new standards the Company recognizes all revenue on
sales to distributors upon shipment and transfer of control (known as “sell-in” revenue recognition), rather than deferring
recognition on sales to certain distributors until the distributors report that they have sold the products to their customers (known
as “sell-through” revenue recognition).
The impact of adoption on the Company’s previously reported consolidated financial statements were as follows:
Consolidated Balance Sheet:
(In thousands)
December 31, 2016
Impact of
Adoption
As Adjusted
As Reported
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,961
$
(433) $
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income on sales to distributors . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,520
12,032
16,207
2,434
195
(690)
(16,207)
300
6,528
8,715
11,342
—
2,734
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
317,912
$
14,979
$
332,891
Year Ended December 31,
Consolidated Statements of Income:
2016
2015
(In thousands, except per share)
As
Reported
Impact of
Adoption
As
Adjusted
As
Reported
Impact of
Adoption
As
Adjusted
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . $
387,393
$
2,275
$
389,668
$
343,989
$
Cost of revenues . . . . . . . . . . . . . . . . . . . . . .
196,232
Provision for income taxes . . . . . . . . . . . . . .
1,032
1,245
22
197,477
1,054
170,602
271
620
707
(92)
$
344,609
171,309
179
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $
47,890
$
1,008
$
48,898
$
39,147
$
5
$
39,152
Earnings per share
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.66
1.62
$
$
0.03
0.03
$
$
1.69
1.65
$
$
1.35
1.32
$
$
— $
— $
1.35
1.32
42
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated Statement of Cash Flows:
(In thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Year Ended December 31,
As
Reported
2016
Impact of
Adoption
As
Adjusted
As
Reported
2015
Impact of
Adoption
As
Adjusted
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $
47,890
$
1,008
$
48,898
$
39,147
$
5
$
39,152
Deferred income taxes . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets. . . . . . . . .
Taxes payable and accrued liabilities . . . . . .
(660)
650
(2,499)
(1,124)
22
101
(25)
—
(638)
751
(2,524)
(1,124)
(5,416)
4,131
3,391
(76)
(92)
13
(49)
1
Deferred income on sales to distributors . . . $
1,106
$
(1,106) $
— $
(122) $
122
$
(5,508)
4,144
3,342
(75)
—
In March 2016, the FASB amended the existing accounting standards for stock-based compensation, ASU
2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU
2016-09). The amendments impact several aspects of accounting for share-based payment transactions, including the income
tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash
flows. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a
retrospective or modified retrospective approach, while others are applied prospectively. The Company adopted the new
standards in the first quarter of 2017, effective on January 1, 2017. Upon adoption, the Company recognized a windfall tax
benefit of $7.5 million, as a cumulative effect adjustment to opening retained earnings, together with a corresponding increase
in deferred tax assets.
f
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). Under the amendments
in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated
to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying
amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company elected to early adopt
the new standards in the fourth quarter of 2017 when the annual goodwill impairment test was performed.
rr
Recently Issued Accounting Pronouncements
In February 2016, the FASB amended the existing accounting standards for leases, ASU 2016-02, Leases. The
amendments require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by
leases of greater than twelve months. The accounting by lessors will remain largely unchanged from that applied under previous
U.S. GAAP. The Company is required to adopt the amendments in the first quarter of fiscal 2019, with early adoption permitted.
The amendments require a modified retrospective transition approach to recognize and measure leases at the beginning of the
earliest period presented. The Company is currently evaluating the impact of these amendments and the transition alternatives
on its consolidated financial statements.
3. COMPONENTS OF THE COMPANY’S CONSOLIDATED BALANCE SHEETS
Accounts Receivable
(in thousands)
December 31,
2017
December 31,
2016
Accounts receivable trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
58,718
$
Accrued ship and debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for stock rotation and rebate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(39,486)
(1,700)
(734)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,798
$
46,849
(38,075)
(1,721)
(525)
6,528
43
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Inventories
(in thousands)
December 31,
2017
December 31,
2016
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
15,517
$
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,765
24,805
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
57,087
$
14,610
15,194
22,760
52,564
Prepaid Expenses and Other Current Assets
(in thousands)
December 31,
2017
December 31,
2016
Prepaid income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prepaid legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid maintenance agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advance to suppliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
460
213
856
1,211
1,195
3,823
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,758
$
2,431
212
1,399
69
743
3,861
8,715
Property and Equipment
(in thousands)
December 31,
2017
December 31,
2016
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20,288
$
Construction-in-progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software and hardware and office furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . .
15,353
52,655
151,269
50,440
290,005
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(178,300)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
111,705
$
20,288
6,880
52,156
132,162
45,951
257,437
(162,141)
95,296
Depreciation expense for property and equipment for fiscal years ended December 31, 2017, 2016 and 2015, was
approximately $18.4 million, $16.8 million and $16.5 million, respectively, and was determined using the straight-line method
over the following useful lives:
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4-40 years
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software and hardware and office furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2-8 years
4-7 years
Total property and equipment (excluding accumulated depreciation) located in the United States at December 31,
2017, 2016 and 2015, was approximately $159.5 million, $155.1 million and $150.1 million, respectively. In each of 2017,
2016 and 2015, approximately 12% of total property and equipment (excluding accumulated depreciation) was held in Thailand
by one of the Company’s subcontractors. No other country held 10% or more of total property and equipment in the periods
presented.
44
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the three years ended December 31, 2017:
(in thousands)
Unrealized Gains
and Losses on
Available-for-Sale
Securities
Defined
Benefit
Pension
Items
Foreign
Currency
Items
Total
Balance at January 1, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
83
$
(1,240)
$
21
$
(1,136)
Other comprehensive loss before reclassifications . . . . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive loss . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss before reclassifications . . . . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive loss . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income before reclassifications. . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive loss . .
Other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(180)
—
(180)
(97)
(123)
—
(123)
(220)
(207)
—
(207)
(469)
125 (1)
(344)
(1,584)
(505)
153 (1)
(352)
(1,936)
502
197 (1)
699
(191)
—
(191)
(170)
(384)
—
(384)
(554)
79
—
79
(840)
125
(715)
(1,851)
(1,012)
153
(859)
(2,710)
374
197
571
Balance at December 31, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(427) $
(1,237)
$
(475) $
(2,139)
_______________
(1)
This component of accumulated other comprehensive loss is included in the computation of net periodic pension cost
for the years ended December 31, 2017, 2016 and 2015.
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, yy
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 n
to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value.
The Company’s cash equivalents and 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 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 does not hold any instruments that would be classified within Level 3 of the fair-value hierarchy.
45
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value hierarchy of the Company’s cash equivalents and marketable securities at December 31, 2017, and
December 31, 2016, was as follows:
(in thousands)
Total Fair Value
December 31, 2017
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Corporate securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
179,951
$
— $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,122
9,285
195
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
240,553
$
—
—
195
195
$
179,951
51,122
9,285
—
240,358
(in thousands)
Total Fair Value
Fair Value Measurement at
December 31, 2016
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Corporate securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
132,141
$
— $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,031
1,916
—
1,916
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
192,088
$
1,916
$
132,141
58,031
—
190,172
The Company did not transfer any investments between level 1 and level 2 of the fair value hierarchy in the years
ended December 31, 2017, and December 31, 2016.
5. MARKETABLE SECURITIES:
Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding
cash equivalents) at December 31, 2017, were as follows:
(in thousands)
Investments due in 3 months or less:
Amortized
Cost
Gross Unrealized
Estimated Fair
Gains
Losses
Market Value
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . $
38,485
$
— $
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,485
Investments due in 4-12 months:
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . .
Government securities . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments due in 12 months or greater:
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104,440
9,302
113,742
37,436
37,436
—
—
—
—
—
—
(16) $
(16)
(199)
(17)
(216)
(195)
(195)
Total marketable securities . . . . . . . . . . . . . . . . . . . . $
189,663
$
— $
(427) $
38,469
38,469
104,241
9,285
113,526
37,241
37,241
189,236
46
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding
cash equivalents) at December 31, 2016, were as follows:
(in thousands)
Investments due in 3 months or less:
Amortized
Cost
Gross Unrealized
Estimated Fair
Gains
Losses
Market Value
Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . . . $
36,996
$
— $
— $
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments due in 4-12 months:
Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments due in 12 months or greater:
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,342
46,338
19,186
59,714
78,900
63,305
63,305
Total marketable securities . . . . . . . . . . . . . . . . . . . . $
188,543
$
2
2
—
15
15
21
21
38
(2)
(2)
—
(76)
(76)
(180)
(180)
$
(258) $
36,996
9,342
46,338
19,186
59,653
78,839
63,146
63,146
188,323
The weighted average interest rate of investments at December 31, 2017 and December 31, 2016, was approximately
1.57% and 1.23%, respectively. As of December 31, 2017 and 2016, there were no individual securities that had been in a
continuous loss position for 12 months or greater.
6. GOODWILL AND INTANGIBLE ASSETS:
Changes in the carrying amount of goodwill during the years ended December 31, 2017 and 2016, are as follows:
(in thousands)
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Goodwill acquired during the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill acquired during the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Goodwill
91,849
—
91,849
—
91,849
Intangible assets consist primarily of developed technology, acquired licenses, customer relationships, trade name,
domain name, in-process R&D and patent rights, and are reported net of accumulated amortization. In January 2015, the
Company acquired Cambridge Semiconductor Limited (CamSemi), a UK company, resulting in the addition of the following
intangible assets: developed technology of $6.6 million, which is amortized over a period of three - seven years; and customer
relationships of $2.4 million, which is amortized over a period of five years. In August 2015, the Company purchased a building
with existing third-party leases, resulting in the addition of in-place lease intangible assets of $0.7 million which was amortized
over a period of two years.
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, patent rights and in-place leases, which range
from two to twelve years, with the exception of $4.7 million of in-process R&D and $1.3 million paid to acquire an internet
domain name. In-process R&D 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 R&D. The Company does not expect the amortization
of in-process R&D to begin in 2018. 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 of acquired intangible assets was approximately $6.1
million, $6.7 million and $7.0 million in the years ended December 31, 2017, 2016 and 2015, respectively. The Company does
not believe there is any significant residual value associated with the following intangible assets:
47
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands)
December 31, 2017
Gross
Accumulated
Amortization
Net
Gross
December 31, 2016
Accumulated
Amortization
Domain name . . . . . . . . . . . . . . . . . . . . . . . . $
1,261
$
— $
1,261
$
1,261
$
In-process research and development . . . . . .
Developed technology . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . .
Technology licenses . . . . . . . . . . . . . . . . . . .
In-place leases. . . . . . . . . . . . . . . . . . . . . . . .
4,690
33,270
20,030
—
660
—
(19,211)
(14,621)
—
(660)
4,690
14,059
5,409
—
—
4,690
33,270
20,030
3,000
660
— $
—
(15,455)
(12,474)
(3,000)
(480)
Net
1,261
4,690
17,815
7,556
—
180
Total intangible assets . . . . . . . . . . . . . . . . . . $
59,911
$
(34,492) $
25,419
$
62,911
$
(31,409) $
31,502
The estimated future amortization expense related to definite-lived intangible assets at December 31, 2017, is as
follows:
Fiscal Year
Estimated
Amortization
(in thousands)
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,152
4,753
3,528
2,662
1,584
1,789
19,468
_______________
(1)
The total above excludes $4.7 million of in-process R&D which will be amortized upon completion of development
over the estimated useful life of the technology.
7. STOCK PLANS AND SHARE BASED COMPENSATION:
Stock Plans
As of December 31, 2017, the Company had three stock-based compensation plans (the “Plans”) which are described
below.
2007 Equity Incentive Plan
The 2007 Equity Incentive Plan (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 (1997
Plan). The 2007 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards,
restricted stock unit (RSU) awards, stock appreciation rights, performance-based (PSU) awards, long-term performance based
(PRSU) awards and other stock awards to employees, directors and consultants. Pursuant to the 2007 Plan, the exercise price
for incentive stock options and non-statutory 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. The 2007 Plan expired in September 2017 with no further grants to be made under this plan; however previous grants
under this plan shall remain outstanding until they are exercised, vest, forfeited or expire.
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
48
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
2016 Incentive Award Plan
The 2016 Incentive Award Plan (2016 Plan) was adopted by the board of directors on March 17, 2016 and approved
by the stockholders on May 13, 2016. The Plan provides for the grant of RSU awards, PSU awards and PRSU awards. No other
forms of equity-based awards, including stock options and stock appreciation rights, may be granted under the Plan. As of
December 31, 2017, 35,000 awards have been issued and approximately 1.5 million shares of common stock remain available
for future grant under the 2016 Plan. The 2016 Plan also provides for performance-based cash awards that qualify as
“performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code.
1997 Employee Stock Purchase Plan
Under the 1997 Employee Stock Purchase Plan (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 3.5 million shares of common stock were reserved for issuance
to employees under the Purchase Plan. As of December 31, 2017, of the shares reserved for issuance, 3.0 million shares had
been purchased and 0.5 million shares were reserved for future issuance under the Purchase Plan.
Shares Reserved
As of December 31, 2017, the Company had approximately 2.0 million shares of common stock reserved for future
grant under all stock plans.
Stock-Based Compensation
The Company applies the provisions of ASC 718-10, Stock Compensation. Under the provisions of ASC 718-10, the
Company recognizes the fair value of stock-based compensation in its 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.
The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10
for the years ended December 31, 2017, 2016 and 2015:
(in thousands)
2017
2016
2015
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,321
8,496
5,197
9,663
$
1,148
7,309
4,489
7,939
933
5,255
3,644
4,935
Total stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . $
24,677
$
20,885
$
14,767
49
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2017:
Unrecognized Compensation
Expense for Unvested
Awards
(in thousands)
Weighted Average
Remaining Recognition
Period
(in years)
Long-term performance-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unrecognized compensation expense. . . . . . . . . . . . . . . . . . . . . . $
3,519
35,132
128
38,779
1.36
3.73
0.08
Stock-based compensation expense in the year ended December 31, 2017, was approximately $24.7 million
(comprising approximately $8.2 million related to performance-based awards, $15.2 million related to restricted stock units
and $1.3 million related to the Company’s Purchase Plan).
Stock-based compensation expense in the year ended December 31, 2016, was approximately $20.9 million
(comprising approximately $0.2 million related to stock options, $6.4 million related to performance-based awards, $13.0
million related to restricted stock units and $1.3 million related to the Company’s Purchase Plan).
Stock-based compensation expense in the year ended December 31, 2015, was approximately $14.8 million
(comprising approximately $0.7 million related to stock options, $0.3 million related to performance-based awards, $12.7
million related to restricted stock units and $1.2 million related to the Company’s Purchase Plan).
The Company did not grant stock options in the years ended December 31, 2017, 2016 and 2015, and therefore no
fair-value assumptions are reported.
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, 2017, 2016 and 2015:
Risk-free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term of purchase rights (in years). . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average estimated fair value of purchase rights. . . . . . . . . . . . . . .
Year Ended December 31,
2016
0.44%
32%
0.96%
0.50
$12.23
2015
0.13%
29%
1.08%
0.50
$10.18
2017
0.91%
30%
0.80%
0.50
$16.74
50
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock options outstanding as of December 31, 2017, and activity during three years then ended, is
presented below:
(shares and intrinsic value in thousands)
Shares
Outstanding at January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
1,344
$
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
Vested and Exercisable at December 31, 2017 . . . . . . . . . . . . .
—
(311) $
(3) $
1,030
$
—
(333) $
—
697
$
—
(186) $
—
511
511
$
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
27.27
—
26.11
37.97
27.58
—
25.41
—
28.62
—
27.48
—
29.03
2.05
2.05
$
$
22,770
22,770
The total intrinsic value of options exercised during the year ended December 31, 2017, 2016 and 2015, was $8.9
million, $11.5 million and $7.0 million, respectively.
The following table summarizes the stock options outstanding at December 31, 2017:
(shares in thousands)
Range of Exercise Prices
$17.75 - $24.21 . . . . . . . . . . . . . . . . . . .
$31.15 - $42.88 . . . . . . . . . . . . . . . . . . .
PSU Awards
Options Outstanding
Options Exercisable
Options
Outstanding
Weighted Average
Remaining
Contractual Term
(in years)
Weighted
Average
Exercise
Price
Options
Exercisable
Weighted
Average
Exercise
Price
263
248
511
1.26
2.88
2.05
$
$
$
20.96
37.56
29.03
263
248
511
$
$
$
20.96
37.56
29.03
Under the performance-based awards program, the Company grants awards in the performance year in an amount
equal to twice the target number of shares to be issued if the maximum performance metrics are met. The number of shares
that are released at the end of the performance year can range from zero to 200% of the target number depending on the
Company’s performance. The performance metrics of this program are annual targets consisting of a combination of net revenue,
non-GAAP operating earnings and strategic goals.
As the net revenue, non-GAAP operating income and strategic goals are considered performance conditions, expense
associated with these awards, net of estimated forfeitures, is recognized over the service period based on an assessment of the
achievement of the performance targets. The fair value of these PSUs is determined using the fair value of the Company’s
common stock on the date of the grant, reduced by the discounted present value of dividends expected to be declared before
the awards vest. If the performance conditions are not achieved, no compensation cost is recognized and any previously
recognized compensation is reversed.
51
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of PSU awards outstanding as of December 31, 2017, and activity during the three years then ended, is
presented below:
(shares and intrinsic value in thousands)
Shares
Weighted
Average Grant
Date Fair Value
Per Share
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
Outstanding and expected to vest at December 31, 2017 . . . . .
—
89
—
$
(78) $
11
101
$
$
(11) $
(2) $
99
88
$
$
(99) $
(9) $
$
79
79
—
52.36
—
52.35
52.35
46.26
52.35
46.87
46.25
63.99
46.25
63.99
63.99
0
0
$
$
5,819
5,819
The grant date fair value of PSU awards released, which were fully vested, in the years ended December 31, 2017
and 2016 were approximately $4.6 million and $0.6 million, respectively. There were no PSU awards released in the year ended
December 31, 2015 (as the Company did not reach its minimum performance goals established for the 2014 PSUs).
PRSU Awards (Long-term Performance Based)
The Company's PRSU program provides for the issuance of PRSUs which will vest based on the Company's
performance measured against the PRSU Plan's established revenue targets. The PRSUs were granted in an amount equal to
twice the target number of shares to be issued if the maximum performance metrics are met. The actual number of shares the
recipient receives is determined at the end of a three-year performance period based on results achieved versus the Company’s
performance goals, and may range from zero to 200% of the target number. The performance goals for PRSUs granted in fiscal
2017, 2016 and 2015 were based on the Company’s annual revenue growth over the respective three-year performance period.
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 fair value of PRSU 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.
52
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of PRSU awards outstanding as of December 31, 2017, and activity during the three years then ended,
is presented below:
(shares and intrinsic value in thousands)
Shares
Weighted
Average Grant
Date Fair Value
Per Share
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
61
72
—
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4) $
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
129
78
—
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(57) $
Outstanding at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
Outstanding and expected to vest at December 31, 2017 . . . . .
$
$
150
71
—
(37) $
$
184
164
RSU Awards
55.51
52.47
—
57.76
53.75
43.26
—
55.35
47.65
63.00
—
51.59
52.80
1.49
1.28
$
$
13,547
12,072
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.
A summary of RSU awards outstanding as of December 31, 2017, and activity during the three years then ended, is
presented below:
(shares and intrinsic value in thousands)
Shares
Weighted
Average Grant
Date Fair Value
Per Share
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .
Outstanding and expected to vest at December 31, 2017 . . . . .
692
$
319
$
(267) $
(63) $
681
331
$
$
(270) $
(24) $
718
558
$
$
(284) $
(44) $
$
948
860
43.86
49.75
42.49
45.71
46.98
46.70
45.13
47.21
47.54
60.82
46.52
50.89
55.51
1.97
1.80
$
$
69,742
63,289
The grant date fair value of RSUs vested in the years ended December 31, 2017, 2016 and 2015, was approximately
$13.2 million, $12.2 million and $11.3 million, respectively.
53
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC NET REVENUES:
Customer Concentration
The Company's top ten customers accounted for approximately 54%, 60% and 61% in 2017, 2016 and 2015,
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. Sales to distributors in 2017, 2016 and 2015 were $330.9 million, $292.6 million
and $261.4 million, respectively. Direct sales to OEMs and power-supply manufacturers accounted for the remainder.
The following customers, distributors of the Company’s products, each accounted for 10% or more of total net
revenues:
Customer
Avnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Powertech Distribution Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_______________
* Total customer revenue was less than 10% of net revenues.
Year Ended December 31,
2016
2015
2017
16%
*
18%
10%
21%
11%
No other customers accounted for 10% or more of the Company’s net revenues in the periods presented.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consisted principally of
cash investments and trade receivables. The Company does not have any off-balance-sheet credit exposure related to its
customers. As of December 31, 2017 and December 31, 2016, 64% and 70%, respectively, of accounts receivable were
concentrated with the Company’s top ten customers.
The following customer, a distributor of the Company’s products, represented 10% or more of accounts receivable:
Customer
Avnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2017
December 31,
2016
18%
24%
No other customers accounted for 10% or more of the Company’s accounts receivable in the periods presented.
Geographic Net Revenues
The Company markets its products globally through its sales personnel and a worldwide network of independent
sales representatives and distributors. Geographic net revenues based on “bill to” customer locations were as follows:
(In thousands)
United States of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Hong Kong/China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Korea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Western Europe (excluding Germany) . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2016
2015
2017
16,647
227,335
50,307
38,012
48,230
20,769
11,558
18,897
431,755
$
$
14,948
198,858
50,324
41,996
41,214
19,767
7,563
14,998
389,668
$
$
14,759
173,202
47,279
34,264
38,028
16,994
7,802
12,281
344,609
54
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. COMMON STOCK REPURCHASES AND CASH DIVIDENDS:
Common Stock Repurchases
Over the years the Company’s board of directors has authorized the use of funds to repurchase shares of the Company’s
common stock, including $60.0 million and $30.0 million in 2015 and 2017, respectively, with repurchases to be executed
according to pre-defined price/volume guidelines. In 2015, the Company purchased 1.3 million shares for approximately $53.7
million. In 2016, the Company purchased 146,000 shares for approximately $6.4 million. In 2017, the Company purchased
129,000 shares for approximately $9.2 million. As of December 31, 2017, the Company had $44.4 million available for future
stock repurchases, which has no expiration date. In January 2018, the Company’s board of directors authorized the use of an
additional $30.0 million for the repurchase of the Company’s common stock, with repurchases to be executed according to pre-
defined price/volume guidelines. Authorization of future 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 and business conditions as
well as other factors.
Common Stock Dividend
The following table presents the quarterly dividends declared per share of the Company’s common stock for the
periods indicated:
Year Ended December 31,
2016
2017
2015
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.14
0.14
0.14
0.14
$
$
$
$
0.13
0.13
0.13
0.13
$
$
$
$
0.12
0.12
0.12
0.12
The Company paid a total of approximately $16.6 million, $15.1 million and $13.9 million in cash dividends during
2017, 2016 and 2015, respectively.
In January 2018, the Company’s board of directors declared a $0.16 per share quarterly dividend for each quarter in
2018. 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.
10. EARNINGS PER SHARE:
Basic earnings per share are calculated by dividing net income by the weighted-average shares of common stock
outstanding during the period. Diluted earnings per share are calculated by dividing net income by the weighted-average shares
of common stock and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares
included in this calculation consist of dilutive shares issuable upon the assumed exercise of outstanding common stock options,
the assumed vesting of outstanding restricted stock units, the assumed issuance of awards under the stock purchase plan and
contingently issuable performance-based awards, as computed using the treasury stock method.
55
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the earnings per share calculation is as follows:
(in thousands, except per share amounts)
Basic earnings per share:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average common shares . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share (1):
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average common shares . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities:
Employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted-average common shares . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
_______________
2017
2016
2015
27,609
29,674
0.93
27,609
29,674
871
30,545
0.90
$
$
$
$
48,898
28,925
1.69
48,898
28,925
694
29,619
1.65
$
$
$
$
39,152
29,001
1.35
39,152
29,001
695
29,696
1.32
(1)
The Company includes the shares underlying performance-based awards in the calculation of diluted earnings per
share if the performance conditions have been satisfied as of the end of the reporting period and excludes such shares
when the necessary conditions have not been met. The Company has included in the 2017, 2016 and 2015 calculations
those shares that were contingently issuable upon the satisfaction of the performance conditions as of the end of the
respective periods.
In the years ended December 31, 2017 and 2016, no outstanding stock awards were determined to be anti-dilutive
and therefore were excluded from the computation of diluted earnings per share. In the years ended December 31, 2015,
approximately 8,000 outstanding stock awards were determined to be anti-dilutive and therefore were excluded from the
computation of diluted earnings per share.
11. PROVISION FOR INCOME TAXES:
U.S. Tax Reform
The Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate
tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that
were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company
has not completed the accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below,ww
the Company has made a reasonable estimate of the effects on existing deferred tax balances and the one-time transition tax.
In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based
on the Company’s existing accounting policies and positions that were in effect immediately prior to enactment.
The SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax
effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act
enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect
the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that
a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable
estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate
to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws
that were in effect immediately before the enactment of the Tax Act.
The items for which the Company was able to determine a reasonable estimate includes a provisional one-time
transition tax of $35.3 million, which was included as a component of the income tax provision for the year-ended December
31, 2017. This one-time transition tax was based on the Company’s total post-1986 earnings and profits (E&P) previously
deferred from U.S. income taxes. The Company has not yet completed the calculation of the total post-1986 E&P for these
56
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified
assets. As of December 31, 2017, the Company has no undistributed foreign earnings that would be subject to the transition
tax; although, this amount may change upon finalization of the total post-1986 foreign E&P balances and the amounts held in
cash or other specified assets.
The Company also re-measured certain deferred tax assets and liabilities based on the rates at which they are expected
to reverse in future periods, which is generally 21%. The Company recorded a provisional amount of $4.9 million related to
the re-measurement of the Company’s deferred tax assets and liabilities. However, the Company is still analyzing certain aspects
of the Tax Act and refining calculations, which could potentially affect the measurement of these balances or potentially give
rise to new deferred tax amounts.
The Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income
are imposed in excess of a deemed return on tangible assets of foreign corporations. Due to the complexity of the GILTI tax
rules; the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. The Company is
allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related
to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s
measurement of deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the
new GILTI tax rules will depend, in part, on analyzing the Company’s global income to determine whether the Company expects
to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the
Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company’s current
structure and estimated future results of global operations but also the Company’s intent and ability to modify the Company’s
structure and/or business. The Company is not yet able to reasonably estimate the effect of this provision of the Tax Act.
Therefore, the Company has not made any adjustments related to potential GILTI tax in the Company’s financial statements
and has not made a policy decision regarding whether to record deferred taxes on GILTI.
Income Taxes
The Company accounts for income taxes under the provisions of ASC 740, Income Taxes. 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)
U.S. operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2016
2017
2015
(6,944) $
67,243
60,299
$
(477) $
50,429
49,952
$
(2,246)
41,577
39,331
57
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the provision for income taxes are as follows:
(in thousands)
Current provision:
Year Ended December 31,
2016
2017
2015
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred provision (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
35,311
4
1,483
36,798
(3,640)
—
(468)
(4,108)
32,690
$
$
— $
—
1,638
1,638
(175)
(27)
(382)
(584)
1,054
$
443
83
5,407
5,933
(1,791)
(57)
(3,906)
(5,754)
179
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 the tax provision due to the adoption of ASU 2019-09, Compensation - Stock Compensation, effective
January 1, 2017. For additional details on the adoption of ASU 2016-09, refer to Note 2, Significant Accounting Policies and
Recent Accounting Pronouncements, in the Company’s Notes to Consolidated Financial Statements. Prior to the adoption of
ASU 2016-09, 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 2015, the deficiency arising from employee stock option activity
that resulted in an adjustment to additional paid in capital was approximately $0.2 million. No adjustment was recorded in
2016.
The provision for income taxes differs from the amount that would result by applying the applicable federal income
tax rate to income before provision for income taxes, as follows:
Year Ended December 31,
2016
2017
2015
Provision computed at Federal statutory rate . . . . . . . . . . . . . . . . . .
Business tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income taxed at different rate . . . . . . . . . . . . . . . . . . . . . . .
U.S. Tax Act - transition tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Tax Act - deferred tax asset and liability adjustment . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0%
(5.7)
(5.0)
(37.3)
54.1
8.1
2.2
2.8
54.2%
35.0%
(6.0)
2.2
(33.1)
—
—
1.8
2.2
2.1%
35.0%
(6.8)
0.8
(33.2)
—
—
2.6
2.1
0.5%
The Company’s effective tax rate is impacted by the geographic distribution of the world-wide earnings in lower tax
jurisdictions and the federal R&D tax credit. Additionally, in 2017 the Company’s effective tax rate is impacted by a $37.5
million charge resulting from the enactment of the Tax Act.
58
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
_______________
2017(1)
2016
$
979
10,442
4,064
163
7,059
—
(18,421)
4,286
(1,965)
—
(95)
(2,060)
2,226
$
1,267
26,895
5,760
10,585
2,671
174
(27,489)
19,863
(2,322)
(7,019)
—
(9,341)
10,522
(1) The reduction of deferred tax assets is primarily due to the utilization of tax attributes for transition tax related to th
(1)
Tax Act as well as the reduction of the U.S. federal corporate tax rate from 35% to 21% beginning in 2018.
e
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, 2017, the Company continues to maintain a valuation allowance primarily as a result of 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, 2017, due to the impact of the Tax Act, the Company expects to utilize all federal research and
development tax credit carry-forwards and all net operating loss carry-forwards; California research and development tax credit
carry-forwards of approximately $21.5 million (there is no expiration of research and development tax credit carry-forwards
for the state of California) and California net operating losses of $46.6 million which will begin to expire in 2032. As of
December 31, 2017, the Company had Canadian scientific research and experimental development tax credit carry-forwards
of approximately $2.4 million and New Jersey research and experimental development tax credit carry-forwards of
approximately $0.8 million, which will start to expire in 2030 and 2026, respectively.
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POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Increase for Tax Positions of Current Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Decrease for Tax Positions of Prior Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized Tax Benefits Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Increase for Tax Positions of Current Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Decrease for Tax Positions of Prior Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized Tax Benefits Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Increase for Tax Positions of Current Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Decrease for Tax Positions of Prior Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized Tax Benefits Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrecognized
Tax Benefits
11,160
3,063
(663)
13,560
1,856
(23)
15,393
1,699
(409)
16,683
The Company's total unrecognized tax benefits as of December 31, 2017, 2016 and 2015, were $16.7 million, $15.4
million and $13.6 million, respectively. An income tax benefit of $10.3 million, net of valuation allowance adjustments, would
be recorded if these unrecognized tax benefits are recognized. 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 had accrued interest and penalties of $0.1 million as of both December 31, 2017, and December 31,
2016, which have been recorded in long-term income taxes payable in the accompanying consolidated balance sheets.
As of December 31, 2017, the Company has concluded all U.S. federal income tax matters for the years through
2012. However, due to tax attributes, the IRS may calculate tax adjustments for subsequent years for positions taken prior to
2012. There is currently no pending income tax audit.
On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of
stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court
in December 2015. In February 2016, the Commissioner appealed the Tax Court decision. At this time, the U.S. Department
of the Treasury has not withdrawn the requirement to include stock-based compensation expense from IRS cost-sharing
regulations. The Company has reviewed this case and its impact and concluded that no adjustment to the consolidated financial
statements is appropriate at this time. The Company will continue to monitor ongoing developments and potential impacts to
the consolidated financial statements.
12. 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 and a test facility in Biel, Switzerland. The
Company leases administrative office space in Singapore and Switzerland, and R&D facilities in Canada and the United
Kingdom, in addition to sales offices in various countries around the world.
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POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments under all non-cancelable operating lease agreements as of December 31, 2017,
are as follows:
Fiscal Year
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(in thousands)
1,875
1,057
699
286
148
247
4,312
Total rent expense amounted to $2.0 million, $1.9 million and $2.0 million in the years ended December 31, 2017,
2016 and 2015, respectively.
Purchase Obligations
At December 31, 2017, the Company had no non-cancelable purchase obligations that were due beyond one year.
13. LEGAL PROCEEDINGS AND CONTINGENCIES:
From time to time in the ordinary course of business, the Company becomes involved in lawsuits, or customers and
distributors may make claims against the Company. In accordance with ASC 450-10, Contingencies, the Company makes a
provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably
estimated.
a
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 pulse width modulation (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 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,aa
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
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POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 District Court reinstated
the prior findings that Fairchild willfully infringed three of the Company’s patents; 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 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 liquid-crystal-
display (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 exclusion order in view of a recent Federal Circuit opinion in an unrelated case, and the Company nn
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 (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 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
62
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JJ
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 challenged adverse findings on appeal; nevertheless, the
Company estimated that even if the verdict on Fairchild’s patent had ultimately been upheld, the sales potentially impacted
would have amounted to less than 0.5% 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, and both parties filed appeals with the Federal Circuit. After briefing was completed, oral argument on
the appeal took place in early July 2016, and on December 12, 2016, the Federal Circuit issued its opinion in the appeal,
overturning the lone infringement verdict against the Company, finding one of the Company’s patents invalid, and overturning
the District Court’s jury instruction on inducement. In view of the Federal Circuit’s rejection of the District Court’s jury
instruction on inducement, the Court also vacated the inducement findings and associated injunction against Fairchild and
remanded the case for a retrial on inducement, but the underlying validity and infringement findings against Fairchild on those
two patents remain intact. On remand, the Company will also be seeking financial damages as well as enhanced damages for
Fairchild’s willful infringement.
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 SG and Fairchild 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, SG and Fairchild 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 SG and Fairchild
infringed the Company’s asserted patents and induced infringement by others, and awarding $105.0 million in damages. The
Jury also rejected Fairchild’s remaining counterclaims for infringement against the Company. Fairchild challenged these rulings
63
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, with the retrial scheduled for December 2015. Thereafter, the parties
completed pretrial proceedings challenging each other’s experts, and the Court granted portions of each party’s motions limiting
the scope of expert testimony for purposes of the damages retrial, but neither party was successful in their efforts to prevent
the other side’s experts from testifying at trial. Following a retrial on the issue of damages in December 2015, the jury returned
a verdict in the Company’s favor, finding that the Company’s patented technology created the basis for customer demand for
the infringing Fairchild products and awarding $139.8 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. Fairchild filed post-
trial motions challenging the verdict, but the Court rejected Fairchild’s motions challenging the damages verdict in August
2016. The Company also filed motions requesting enhanced damages and attorney fees and reinstatement of the willfulness
finding against Fairchild in view of an intervening change of law; on January 13, 2017, the District Court reinstated the finding
that Fairchild’s infringement was willful but declined to enhance damages or award fees. In January 2017, Fairchild filed a
further challenge to the verdict, but the Court rejected Fairchild’s motion and entered a final judgment of $146.5 million after
factoring in pre-judgment interest. Fairchild’s appeal on the merits is under way, with briefing now completed and oral argument
expected in the coming months and a ruling to follow thereafter.
rr
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 asserted four Chinese patents and sought 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. 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 Nanjing held further hearings in the infringement proceedings in late 2014, but Fairchild has since dismissed
its appeals, bringing the infringement proceedings to a close in the first quarter of 2015.
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 took place. Following a
hearing in May 2015, the Federal Circuit ruled in the Company’s favor on August 12, 2015, overturning the PTO’s claim
construction and remanding the case for further proceedings. On remand, the PTO ignored the Federal Circuit’s guidance, so
the Company has filed another appeal to the Federal Circuit; briefing and oral argument on the second appeal are now complete,
with a ruling expected 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 rr
for the District of Delaware. In its complaint, Fairchild alleged 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 withdrew its claim for infringement of one of the patents it asserted against the Company after the Company’s
preliminary challenge. The parties streamlined their contentions in view of the Court’s pretrial rulings, and following a trial in
late May and early June 2015, a jury returned a verdict finding that Fairchild infringed one of the Company’s patents, that
Fairchild has induced and contributed to others’ infringement of the Company’s patent, and that the Company induced
infringement of a Fairchild patent that was previously found infringed in the 2012 trial described above, with a damages award
of $2.4 million in favor of Fairchild. Both parties filed post-trial motions and challenges to various portions of the jury verdicts,
64
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and the Court addressed the first wave of post-trial motions, denying each side’s challenges to the verdict and denying Fairchild’s
request for an injunction. In parallel proceedings, the Federal Circuit overturned the underlying finding of infringement against
the Company on the Fairchild patent-in-suit, and the Company moved to vacate the inducement and damages judgment against
the Company, a motion that Fairchild did not oppose. Further proceedings and an appeal of the outstanding issues are expected
in the coming months.
On October 21, 2015, the Company filed a complaint for patent infringement against Fairchild Semiconductor
Corporation, Fairchild Semiconductor International, Inc., and wholly-owned subsidiary Fairchild (Taiwan) Corporation
(referred to collectively as “Fairchild”) to address Fairchild’s continued infringement of two patents Fairchild was previously
found to infringe in the three District Court cases the Company brought against Fairchild discussed above. In each of the three
prior cases, Fairchild was found to infringe one of the patents at issue in the latest complaint, and Fairchild’s challenges to the
validity of the patents were rejected during the course of the prior lawsuits as well. Fairchild has answered the Company’s
complaint, 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. Fairchild’s answer also included counterclaims accusing the Company of infringing four
patents pertaining to power conversion integrated circuit devices, including one patent the Company was found not to infringe
in prior litigation. 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. On December 15, 2016,
the Court stayed the case pending resolution of the parties’ inter partes review (IPR) and reexamination proceedings regarding
the patents-in-suit.
On March 10, 2016, Silver Star Capital, LLC filed a petition with the U.S. Patent & Trademark Office (PTO) requesting
that the PTO conduct an IPR of the validity of the Company’s U.S. Patent No. 6,212,079 (the ’079 patent), which the Company
has asserted against Fairchild Semiconductor in the California litigation initiated in 2004, as discussed above. The Company’s
’079 patent is also asserted in the Company’s most recent lawsuits against Fairchild filed in October 2015 and against ON
Semiconductor filed in November 2016, also discussed herein. On March 29, 2016, ON Semiconductor Corporation filed
another petition requesting inter partes review of the Company’s ‘079 patent. Since that time, ON Semiconductor filed eleven
more IPR petitions requesting review of various patents that the Company previously asserted against Fairchild as described
above, and another three IPR petitions requesting review of various patents that the Company asserted against ON Semiconductor
as described herein. The PTO denied Silver Star Capital’s IPR petition on the ‘079 patent but instituted IPR proceedings with
respect to ON Semiconductor’s petition directed to the ‘079 patent. On September 22, 2017, the PTO rejected as obvious the
claims of the Company’s ‘079 patent that were asserted in litigation and which form the basis for the $146.5 million judgment
against Fairchild; an appeal to reverse the PTO’s adverse findings is expected in the coming months. The PTO also instituted
IPR proceedings in response to eight of ON Semiconductor’s eleven other petitions challenging patents previously asserted
against Fairchild, denying institution in three cases, and the PTO has rejected a number of claims in the context of these ongoing
proceedings. In one case, the PTO rejected as anticipated the claims of the Company’s U.S. Patent No. 6,538,908 that were
asserted in litigation against Fairchild; an appeal is expected in the coming months, and further proceedings and the PTO’s
initial rulings on other IPRs are expected in the coming months as well. Although the validity of many of the Company’s
challenged patents has previously been confirmed in the Company’s District Court litigation with Fairchild and in many cases
in prior PTO reexamination proceedings as well, and though the Company intends to vigorously defend the validity of its
patents, the outcome of the IPR proceedings is uncertain.
On April 1, 2016, Opticurrent, LLC filed a complaint against the Company in the United States District Court for
the Eastern District of Texas. In its complaint, Opticurrent alleges that the Company has infringed and is infringing one patent
pertaining to transistor switch devices. The Company filed a motion to transfer the case to California, which the Court granted,
and the case was assigned to a new judge in San Francisco following the transfer. Further proceedings and summary judgment
briefing are expected over the course of the coming months, with trial scheduled for February 2019. The Company intends to
vigorously defend itself against Opticurrent’s claims.
On August 11, 2016, ON Semiconductor filed a complaint against the Company in the United States District Court
for the District of Arizona. In its complaint, ON Semiconductor alleged that the Company has infringed and is infringing six
patents and requested injunctive relief. The Company filed a motion to transfer the case to the Northern District of California,
which the Court granted, and the case has been consolidated with the Company’s affirmative case against ON Semiconductor
in the Northern District of California, as discussed below. The Company believes it has valid defenses and intends to vigorously
defend itself against ON Semiconductor’s claims.
65
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On November 1, 2016, the Company filed a lawsuit against ON Semiconductor in the United States District Court
for the Northern District of California to address ON Semiconductor’s infringement of six patents. The court denied ON
Semiconductor’s motion requesting that the case be transferred to Arizona and scheduled trial for December of 2019, with
interim deadlines for hearing claim construction and dispositive motions. In consolidating the pleadings from the California
and Arizona cases following the transfer of ON Semiconductor’s case from Arizona, ON Semiconductor asserted two additional
patents, bringing the total number of patents asserted against the Company to eight in this case, and ON Semiconductor’s
amended complaint also seeks a declaration of non-infringement with respect to another of the Company’s patents that was
previously asserted against Fairchild Semiconductor. Further proceedings and discovery will take place over the coming months.
On December 27, 2016, ON Semiconductor filed a complaint against the Company in the United States District Court
for the Eastern District of Texas. In its complaint, ON Semiconductor alleges that the Company has infringed and is infringing
six patents and requests injunctive relief. On March 9, 2017, ON Semiconductor dismissed its Texas complaint and re-filed a
substantially similar complaint in the District of Delaware. After the Company filed a motion to dismiss, ON Semiconductor
filed an amended complaint; the Company has answered ON Semiconductor’s complaint and asserted claims for infringement
of seven of the Company’s patents. Trial has been scheduled for February of 2020, with interim deadlines for discovery and
claim construction, and the Company believes it has valid defenses and intends to vigorously defend itself against ON
Semiconductor’s claims.
In November 2017, ON Semiconductor filed suit against the Company in Taiwan charging the Company with
infringing three Taiwanese patents and seeking an injunction and damages of approximately $1.0 million. No schedule has
been set for the case at this preliminary stage, but the Company believes it has valid defenses and intends to vigorously defend
itself against ON Semiconductor’s claims.
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.
14. ACQUISITIONS:
Cambridge Semiconductor Limited
On January 2, 2015, the Company acquired 100% of the shares outstanding of Cambridge Semiconductor Limited
(CamSemi) for total consideration of approximately $23.3 million, of which $16.7 million was paid in cash and $6.6 million
was applied against an outstanding loan owed to the Company. The acquisition-related costs for the purchase of CamSemi
totaled $1.0 million, with $0.8 million recognized in 2014 and $0.2 million recognized in 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 purchase price allocated to goodwill in the acquisition (as noted in the purchase price
allocation below) is related largely to synergies and economies of scale expected from combining the operations of CamSemi
with those of the Company.
66
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 January 2, 2015, the completion of the acquisition of CamSemi:
(in thousands)
Total Amount
q
Assets Acquired
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets:
Developed technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities Assumed
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,134
1,891
1,409
408
1,093
6,600
2,420
11,250
26,205
1,832
1,090
2,922
23,283
The following table represents details of the purchased intangible assets:
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total acquired CamSemi intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair Value
Amount
(in thousands)
6,600
2,420
9,020
Estimated
Useful Life
(in years)
3 - 7
5
The fair value of the identifiable intangible assets were determined based on the following approach.
Developed Technology. The income approach was used to value the acquired developed technology. Revenue
attributable to the Company’s technology was estimated based on expected evolution of the technology over time. Expenses
were assumed to reflect the costs necessary to support the developed technology. The present value was capitalized as developed
technology as of the acquisition date and is being amortized using a straight-line method to cost of revenues over the estimated
life of 3 - 7 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 historical customer relationships and operating
practices of CamSemi. In order to determine the fair value of the customer relationships, the Company’s analysis assumed that
the Company would immediately benefit from the economics generated by CamSemi’s existing customer relationships. This
amount was reduced by the potential impact given no past customer relationships and the assumption that the Company could
reacquire the customer relationships and ramp up to a similar level of revenue within two years. The fair value of customer
relationships was capitalized as of the acquisition date and is being amortized on a straight line basis to sales and marketing
expenses over the estimated life of 5 years.
Pro forma results of operations for this acquisition have not been presented because it is not material to the Company’s
consolidated financial statements.
67
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Corporate Headquarters Building
In August 2015, the Company purchased a building adjacent to its corporate headquarters in San Jose, California to
support the continued growth of the business. The purchase has been accounted for using the acquisition method of accounting
in accordance with ASC 805, Business Combinations, as the building had existing rental income resulting from in-place lease
agreements with third-party tenants. The aggregate purchase price of $10.4 million, funded with cash on hand, was allocated
as follows: $3.5 million for land, $6.3 million for building and improvements, $0.7 million for in-place leases and $(0.1) million
for liabilities assumed. The building and improvements are being depreciated on a straight-line basis over an estimated useful
life of up to 30 years. Additionally, as a result of the purchase, the Company acquired existing third-party leases that were
valued as in-place lease intangible assets and are being amortized over the weighted average estimated life of two years. The
valuation of the acquired in-place leases were estimated by the Company based on the amount of avoided cash outflows necessary
to originate such leases. Acquisition-related costs in connection with the building purchase were included in other income in
the consolidated statements of income and were not material for the periods presented.
Rental income from third-party leases, and the proportionate share of building expenses for those leases, are included
in other income in the consolidated statements of income from the date of acquisition. These amounts were not material for
the periods presented.
15. RETIREMENT PLANS:
The Company sponsors a defined benefit pension plan (Pension Plan) for its Swiss subsidiary in accordance with the
legal requirements of Switzerland. 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, 2017, 2016 and 2015. At December 31, 2017, the projected benefit obligation was $10.6 million,
the plan assets were $6.8 million and the net pension liability was $3.8 million. As of December 31, 2016, the projected benefit
obligation was $11.8 million, the plan assets were $7.9 million, and the net pension liability was $3.9 million. The Company
has recorded the unfunded amount as a liability in its consolidated balance sheet at December 31, 2017 and 2016, under the
other liabilities caption. The Company expects to make contributions to the Pension Plan of approximately $0.3 million during
2018. The unrealized actuarial loss on pension benefits, net of tax at December 31, 2017, 2016 and 2015 was $1.2 million, $1.9
million and $1.6 million, respectively. These amounts were reflected in Note 3 above under the caption “accumulated other
comprehensive loss.”
In accordance with the Compensation-Retirement Benefits Topic of ASC 715-20, Defined Benefits Plan, the Company
recognizes the over-funded or under-funded status of its defined post-retirement 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.
t
16. BANK LINE OF CREDIT:
On July 27, 2016, the Company entered into a credit agreement with a bank (the "Credit Agreement") that provides
the Company with a $75.0 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 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. The Credit Agreement terminates on July 26, 2019; 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, 2017,
the Company was compliant with all covenants and had no amount outstanding under the Credit Agreement.
68
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. 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, 2017 and 2016.
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. The operating results for any quarter are not necessarily indicative of the
results for any subsequent period or for the entire fiscal year.
tt
Three Months Ended
(unaudited)
(in thousands, except per share data)
2017
2017
2017
2017
2016
2016
2016
2016
Dec. 31,
Sept. 30,
June 30, Mar. 31,
Dec. 31,
Sept. 30,
June 30, Mar. 31,
$ 111,255
Net revenues. . . . . . . . . . . . . . . . . . . . $ 108,249
Gross profit . . . . . . . . . . . . . . . . . . . .
55,713
54,028
Net income (loss)(1) . . . . . . . . . . . . . . $ (16,898) $ 16,506
Earnings (loss) per share
$ 107,563
53,447
$ 13,902
$ 104,688
50,476
$ 14,099
$ 102,436
50,076
$ 14,303
$ 101,625
49,842
$ 12,809
$ 97,571
47,785
$ 11,407
$ 88,036
44,488
$ 10,379
Basic. . . . . . . . . . . . . . . . . . . . . . . $
(0.57) $
Diluted . . . . . . . . . . . . . . . . . . . . . $
(0.57) $
0.55
0.54
$
$
0.47
0.46
$
$
0.48
0.47
$
$
0.49
0.48
$
$
0.44
0.43
$
$
0.40
0.39
$
$
0.36
0.35
Shares used in per share calculation
Basic. . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . .
29,759
29,759
29,759
30,614
29,720
30,454
29,456
30,248
29,196
29,914
28,972
29,625
28,850
29,422
28,679
29,244
_______________
( )(1)
In December 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
In December 2017 the U.S. governme
and Jobs Act (Refer to Note 11, Provision for Income Taxes, in the Notes to Consolidated Financial Statements).
69
Schedule II
Valuation and Qualifying Accounts
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.
The following is a summary of the activity in the allowance for ship and debit credits:
(in thousands)
Allowance for ship and debit credits:
Year ended December 31, 2015 . . . . . . . . . . . . . $
Year ended December 31, 2016 . . . . . . . . . . . . .
Year ended December 31, 2017 . . . . . . . . . . . . . $
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Deductions(1)
Balance at End
of Period
27,425
34,415
38,075
$
$
195,669
262,501
273,492
$
$
(188,679) $
(258,841)
(272,081) $
34,415
38,075
39,486
_______________
(1)
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, Significant Accounting Policies and Recent Accounting
Pronouncements, for the Company’s revenue recognition policy, including the Company’s accounting for ship and
debit claims.
70
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 accordance with generally accepted accounting principles in the U.S. To TT
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, 2017, 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, 2017, our internal control over financial reporting was effective.
The effectiveness of Power Integrations' internal control over financial reporting as of December 31, 2017, 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 2017, 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.
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Power Integrations, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Power Integrations, Inc. and subsidiaries (the
“Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established
in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and
our report dated February 14, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 14, 2018
72
Item 9B. Other Information.
Compensation Matters
On February 13, 2018, the Compensation Committee of the Board of Directors of Power Integrations, Inc. (the
“Company”) took the following compensation actions with respect to the Company’s chief executive officer, chief financial
officer, and other “named executive officers” as defined in Rule 402 of SEC Regulation S-K (collectively, the “Officers”).
2018 Performance-based Incentive Plan
Approved the 2018 Performance-based Incentive Plan (the “2018 PSU Plan”) as follows:
Each officer, as described below, was granted performance stock units, referred to as “PSUs,” which will vest (referred
to as a “payout” below) based on Company performance as against the 2018 PSU Plan’s established net revenue targets, non-
GAAP operating income targets and strategic goals, each as established by the Compensation Committee. The 2018 target net
revenue and non-GAAP operating income levels are intended to have difficulty in attainment levels consistent with the
Company’s 2017 PSU Plan.
The portion of the performance stock units granted under the 2018 PSU Plan that will vest will be calculated
independently for each of its net revenue, non-GAAP operating income and strategic goals components. “Net revenue” is as
set forth in the Company’s annual report for 2018 to be filed with the Securities and Exchange Commission (“SEC”). “Non-
GAAP operating income” means operating income for 2018 determined in accordance with GAAP but excluding the following
items: (i) stock-based compensation expenses recorded under Accounting Standards Codification 718; (ii) amortization of
acquisition-related intangible assets, and the fair-value write-up of acquired inventory; (iii) any other mergers and acquisitions
related expenses; and (iv) any other adjustment made to arrive at the Company’s non-GAAP financial information as presented
in the Company’s SEC filings. Further, in the event of any mergers, acquisitions or divestitures, or any patent or other litigation
settlements or judgments, during the performance period, the net revenue and non-GAAP operating income targets shall be
adjusted based on a revised plan approved by the Board of Directors. The strategic goals component is made up of five different
strategic goals for the Company.
Weighting of the target components is as follows:
Net revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35%
35%
30%
100%
Net Revenue Component of the 2018 PSU Plan:
No payout will be made under the net revenue component of the 2018 PSU Plan if the Company’s 2018 actual net
revenue does not exceed at least the established minimum amount of net revenue as set forth in the 2018 PSU Plan. To the
extent 2018 actual net revenue is above the minimum amount of net revenue, the payout increases linearly from zero at the
minimum amount of net revenue as set forth in the 2018 PSU Plan up to 100% of the net revenue component of the target when
actual net revenue equals target net revenue in the 2018 PSU Plan. If 2018 actual net revenue is above the target amount of net
revenue, then the payout for performance above target increases linearly from the target amount up to a maximum of 200% of
the net revenue component of the target when actual net revenue equals or exceeds the established target to achieve the maximum
amount payout under the net revenue component of the 2018 PSU Plan.
Non-GAAP Operating Income Component of the 2018 PSU Plan:
No payout will be made under the non-GAAP operating income component of the 2018 PSU Plan if the Company’s
2018 actual non-GAAP operating income does not exceed at least the established minimum amount of non-GAAP operating
income as set forth in the 2018 PSU Plan. To the extent 2018 actual non-GAAP operating income is above the minimum amount
of non-GAAP operating income, the payout increases linearly from zero at the minimum amount of non-GAAP operating
income as set forth in the 2018 PSU Plan up to 100% of the non-GAAP operating income component of the target when actual
non-GAAP operating income equals target non-GAAP operating income in the 2018 PSU Plan. If 2018 actual non-GAAP
operating income is above the target amount of non-GAAP operating income, then the payout for performance above target
increases linearly from the target amount up to a maximum of 200% of the non-GAAP operating income component of the
target when actual non-GAAP operating income equals or exceeds the established target to achieve the maximum amount
payout under the non-GAAP operating income component of the 2018 PSU Plan.
73
Strategic Goals Component of the 2018 PSU Plan:
Each of the five goals in the strategic goals component of the 2018 PSU Plan is assigned a percentage, which
percentages range from 2.5% to 20%, and which collectively add up to 30%. If the Company’s 2018 actual achievement of a
goal does not exceed at least the established minimum requirement for a particular goal, then no amount is earned for that goal.
To the extent 2018 actual performance for a goal is better than the established minimum for the goal, then the payout increases
linearly from zero at the minimum amount of performance as set forth in the 2018 PSU Plan up to 100% of the amount for that
goal when actual performance equals target performance for that goal in the 2018 PSU Plan. To the extent 2018 actual
performance for a goal is better than the established target for the goal, then the payout for performance above target increasing
linearly from the target amount actual performance, up to a maximum of 200% for the specific goal when actual performance
equals or exceeds the established target to achieve the maximum payout under the specific goal as set forth in the 2018 PSU
Plan.
2018 Target Performance Stock Units
Approved the 2018 target performance stock units for the Officers as follows:
Executive Officer
Balu Balakrishnan
Sandeep Nayyar
Radu Barsan
Clifford Walker
Raja Petrakian
Title
President and Chief Executive Officer . . . . . . . . . . . . . . . . .
Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President, Technology. . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President, Corporate Development. . . . . . . . . . . . . . . .
Vice President, Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 Target PSUs
10,200
3,100
2,600
2,200
2,200
The actual number of shares subject to the performance stock units is twice the target level shown in the table above
to enable the payout of up to 200% of the target amount if the actual net revenue, non-GAAP operating income and strategic
goals achievement equal or exceed the established levels to achieve the maximum amount of the 2018 PSU Plan.
2018 Restricted Stock Unit Grants
Approved restricted stock unit, referred to as RSU, grants to the following Officers:
Executive Officer
Balu Balakrishnan
Sandeep Nayyar
Radu Barsan
Clifford Walker
Raja Petrakian
Title
President and Chief Executive Officer . . . . . . . . . . . . . . . . .
Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President, Technology. . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President, Corporate Development. . . . . . . . . . . . . . . .
Vice President, Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 RSU Grants
48,000
10,800
9,300
7,500
7,500
The RSU grants will be effective on the grant date. Twenty-five percent (25%) of the RSUs vest on the one year
anniversary of the vesting commencement date (as specified in the Officers’ RSU award agreements), and an additional twenty-
five percent (25%) of the RSUs vest annually over the next three (3) years thereafter, subject to the respective Officer’s
continuous service.
2018 Long-term Performance-based Incentive Plan
Approved the 2018 Long-term Performance-based Incentive Plan (“2018 PRSU Plan”) as follows:
Each officer, as described below, was granted long term performance stock units, referred to as “PRSUs,” which will
vest (referred to as a “payout” below) based on Company performance as against the 2018 PRSU Plan’s established 2020 net
revenue target, as established by the Compensation Committee. The 2020 net revenue target level is intended to have a difficulty
in attainment level consistent with the Company’s 2017 PRSU Plan target net revenue level. The portion of the performance
stock units that will vest will be calculated based on the Company’s 2020 net revenue and awarded in early 2021 upon approval
by the Compensation Committee. “Net revenue” is as set forth in the Company’s annual report for 2020 to be filed with the
SEC. Further, in the event of any mergers, acquisitions or divestitures, or any patent or other litigation settlements or judgments,
during the performance period, the net revenue target shall be adjusted based on a revised plan approved by the Board of
Directors.
74
No payout will be made in early 2021 under the 2018 PRSU Plan if the Company’s 2020 actual net revenue does not
exceed at least the established minimum amount of net revenue as set forth in the 2018 PRSU Plan. To the extent 2020 actual
net revenue is above the minimum amount of net revenue, the payout increases linearly from zero at the minimum amount of
net revenue as set forth in the 2018 PRSU Plan up to 100% of the net revenue component of the target when actual net revenue
equals target net revenue in the 2018 PRSU Plan. If 2020 actual net revenue is above the target amount of net revenue, then
the payout for performance above target increases linearly from the target amount up to a maximum of 200% of the net revenue
component of the target when actual net revenue equals or exceeds the established target to achieve the maximum amount
payout under the 2018 PRSU Plan. Except to the extent provided in the executive officer benefits agreements between the
Company and each Officer, each Officer must be employed through the end of the performance period to receive stock pursuant
to the PRSUs under the 2018 PRSU Plan.
2018 Target PRSUs
Approved the target 2018 PRSUs for the Officers as follows:
Executive Officer
Balu Balakrishnan
Sandeep Nayyar
Radu Barsan
Clifford Walker
Raja Petrakian
Title
President and Chief Executive Officer . . . . . . . . . . . . . . . . .
Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President, Technology. . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President, Corporate Development. . . . . . . . . . . . . . . .
Vice President, Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 Target PRSUs
16,000
3,600
3,100
2,500
2,500
The actual number of shares subject to the PRSUs is twice the target level shown in the table above to enable the
payout of up to 200% of the target amount if actual net revenue equals or exceeds the established level to achieve the maximum
amount of the 2018 PRSU Plan.
2018 Salaries
Approved the 2018 salaries for the Officers, to be effective March 26, 2018, as follows:
Executive Officer
Balu Balakrishnan
Sandeep Nayyar
Radu Barsan
Clifford Walker
Raja Petrakian
Title
President and Chief Executive Officer . . . . . . . . . . . . . . . . .
Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President, Technology. . . . . . . . . . . . . . . . . . . . . . . . . .
Vice President, Corporate Development. . . . . . . . . . . . . . . .
Vice President, Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 Salary
$595,000
$365,000
$340,000
$335,000
$310,000
75
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
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, 2017, or the Proxy Statement, and is incorporated herein by
reference:
•
•
•
•
•
Information regarding our directors and any persons nominated to become a director is set forth under the caption
“Proposal 1 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 Election of Directors” and “Report of the Audit Committee of the Board.”
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 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 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 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.
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 with the caption “Ratification of Selection of Independent Registered Public Accounting Firm” in the Proxy
Statement, which information is incorporated herein by reference.
76
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
1. The financial statements required by Item 15(a) are included in Item 8 of this Annual Report on Form 10-K.
2. The financial statement schedule required by Item 15(a) (Schedule II, Valuation and Qualifying Accounts) is included
in Item 8 of this Annual Report on Form 10-K.
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
(b) Exhibits
Exhibit
Number
Exhibit Description
3.1 Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1 to 3.2
Incorporation by Reference
Form
10-K
File
Number
000-23441
8-K
000-23441
Exhibit/
Appendix
Reference
Filing
Date
Filed
Herewith
3.1
3.1
2/29/2012
4/26/2013
10.1*
Form of Indemnity Agreement for directors and
officers
S-1
333-35421
10.1
9/11/1997
10.2*
Power Integrations, Inc. Compliance Policy Regarding
IRC Section 409A
10-K
000-23441
10.63
3/2/2009
10.3*
1997 Employee Stock Purchase Plan, as amended
DEF14A 000-23441 Appendix B
3/25/2016
10.4*
Forms of agreement under 1997 Employee Stock
Purchase Plan
S-1
333-35421
10.5
9/11/1997
10.5*
1997 Stock Option Plan (as amended through January
25, 2005)
10-Q
000-23441
10.5
5/6/2005
10.6*
Forms of Option Agreements under the 1997 Stock
Option Plan
10-K
000-23441
10.41
8/8/2007
10.7*
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
10.8* Amendment to Immediately Exercisable Non-
Qualified Stock Option Agreement between Power
Integrations, Inc. and Balu Balakrishnan, dated
February 2, 2009
10-K
000-23441
10.40
8/8/2007
10-K
000-23441
10.59
3/2/2009
10.9*
1997 Outside Directors Stock Option Plan
10-Q
000-23441
10.3
8/6/2009
10.10* Amendment No. 1 to the Power Integrations, Inc. 1997
10-K
000-23441
10.62
3/2/2009
Outside Directors Stock Option Plan, effective as of
January 27, 2009
10.11* Amendment No. 2 to the Power Integrations, Inc. 1997
10-Q
000-23441
10.2
5/6/2010
Outside Directors Stock Option Plan, effective as of
April 12, 2010
10.12*
Forms of agreement under 1997 Outside Directors
Stock Option Plan
S-1
333-35421
10.4
9/11/1997
77
Exhibit
Number
Exhibit Description
10.13* Amendment No. 1 to Nonstatutory Stock Option
Agreements for Outside Directors, dated February 20,
2007, between us and Alan Bickell
Incorporation by Reference
File
Number
Exhibit/
Appendix
Reference
Filing
Date
Filed
Herewith
000-23441
10.35
3/8/2007
Form
10-K
10.14* Amendment No. 1 to Nonstatutory Stock Option
10-K
000-23441
10.36
3/8/2007
Agreements for Outside Directors, dated February 20,
2007, between us and Nicholas Brathwaite
10.15*
Form of Director Option Grant Agreement.
10-Q
000-23441
10.9
5/6/2009
10.16* Director Equity Compensation Program, as revised in
10-K
000-23441
10.36
2/22/2013
July 2012 and January 2013
10.17*
Forms of Stock Option Agreements to be used in
Director Equity Compensation Program
10-Q
000-23441
10.5
11/7/2008
10.18* Outside Director Cash Compensation Arrangements
10-Q
000-23441
10.19*
2007 Equity Incentive Plan, as amended and restated
10-Q
000-23441
10.3
10.2
11/3/2010
8/7/2012
10.20*
Forms of Option Agreements under the 2007 Equity
Incentive Plan
Schedule
TO
000-23441
99.(D)(4)
12/3/2008
10.21*
10.22*
Form of Restricted Stock Unit Grant Notice and Form
of Restricted Stock Unit Award Agreement under the
2007 Equity Incentive Plan
Form of Performance Stock Unit Grant Notice and
Performance Stock Unit Agreement (as used after to
January 1, 2013) under the 2007 Equity Incentive Plan
10-Q
000-23441
10.1
5/6/2010
10-K
000-23441
10.29
2/22/2013
10.23*
Form of Long Term Performance Stock Unit Notice
and Agreement under the 2007 Equity Incentive Plan
10-K
000-23441
10.84
2/10/2015
10.24*
Power Integrations, Inc. 2016 Incentive Award Plan
DEF14A 000-23441 Appendix A
3/25/2016
10.25*
Form of restricted Stock Unit Grant Notice and
Agreement under the 2016 Incentive Award Plan
10.26*
Form of Performance Stock Unit Notice and
Agreement under the 2007 Equity Incentive Plan
10-K
000-23441
10.25
2/8/2017
10-K
000-23441
10.26
2/8/2017
10.27*
Form of Long Term Performance Stock Unit Notice
and Agreement under the 2007 Equity Incentive Plan
10-K
000-23441
10.27
2/8/2017
10.28 Technology License Agreement between us and
10-Q
000-23441
10.28
11/14/2000
Matsushita Electronics Corporation, dated as of June
29, 2000
10.29† Wafer Supply Agreement between us and ZMD Analog
10-Q
000-23441
10.32
8/7/2003
Mixed Signal Services GmbH & Co. KG, dated as of
May 23, 2003
10.30† Amended and Restated Wafer Supply Agreement
10-Q
000-23441
10.31
8/7/2003
between us and OKI Electric Industry Co., Ltd., dated
as of April 1, 2003
10.31† Amendment Number One to the Amended and
8-K
000-23441
10.22
4/18/2006
Restated Wafer Supply Agreement between us and
OKI Electric Industry Co., Ltd., effective as of August
11, 2004
10.32 Amendment Number Two to the Amended and
10-Q
000-23441
10.5
8/8/2008
Restated Wafer Supply Agreement between Power
Integrations International, Ltd. and OKI Electric
Industry Co., Ltd., effective as of April 1, 2008
78
Exhibit
Number
Exhibit Description
10.33 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
Incorporation by Reference
File
Number
Exhibit/
Appendix
Reference
Filing
Date
Filed
Herewith
000-23441
10.6
8/8/2008
Form
10-Q
10.34† Amendment Number Four to the Amended and
10-Q
000-23441
10.2
11/7/2008
Restated Wafer Supply Agreement between Power
Integrations International, Ltd. and OKI Electric
Industry Co., Ltd., dated September 15, 2008
10.35† Amendment Number Five to the Amended and
10-K
000-23441
10.61
3/2/2009
Restated Wafer Supply Agreement between Power
Integrations International, Ltd. and OKI
Semiconductor Co., Ltd., effective as of November 14,
2008
10.36† Amendment Number Six to the Amended and Restated
Wafer Supply Agreement between Power Integrations
International, Ltd. and OKI Semiconductor Co., Ltd.,
effective as of November 1, 2015
10-K
000-23441
10.32
2/11/2016
10.37† Amendment Number Seven to the Amended and
10-Q
000-23441
10.1
11/1/2016
Restated Wafer Supply Agreement between Power
Integrations International, Ltd. and OKI
Semiconductor Co., Ltd., effective as of August 8,
2016
10.38† Amendment Number Eight to the Amended and
10-Q
000-23441
10.1
10/26/2017
Restated Wafer Supply Agreement between Power
Integrations International, Ltd. and OKI
Semiconductor Co., Ltd., effective as of July 26, 2017
10.39† Wafer Supply Agreement, between Seiko Epson
10-Q
000-23441
10.1
11/7/2008
Corporation and Power Integrations International, Ltd.
effective as of April 1, 2005
10.40† Amendment Number One to the Wafer Supply
10-Q
000-23441
10.1
5/6/2009
Agreement between Power Integrations International,
Ltd. and Seiko Epson Corporation, with an effective
date of December 19, 2008
10.41† Amendment Number Two to Wafer Supply Agreement,
between Seiko Epson Corporation and Power
Integrations International, Ltd., entered into on January
5, 2011
10-K
000-23441
10.47
2/25/2011
10.42† Amendment Number Three to Wafer Supply
10-Q
000-23441
10.1
5/8/2012
Agreement, effective as of February 1, 2012, by Power
Integrations International Ltd. and Seiko Epson
Corporation
10.43† Development Addendum to Wafer Supply Agreement,
10-Q
000-23441
10.1
11/1/2013
dated September 22, 2013, between Seiko Epson
Corporation and Power Integrations International Ltd
10.44† Amendment Number Four to Wafer Supply
10-K
000-23441
10.38
2/11/2016
Agreement, effective as of April 1, 2015, by Power
Integrations International Ltd. and Seiko Epson
Corporation
10.45† Amendment Number Five to Wafer Supply Agreement,
effective as of November 2, 2015, by Power
Integrations International Ltd. and Seiko Epson
Corporation
10.46† Amendment Number Six to Wafer Supply Agreement,
effective as of December 8, 2015, by Power
Integrations International Ltd. and Seiko Epson
Corporation
79
10-K
000-23441
10.39
2/11/2016
10-K
000-23441
10.40
2/11/2016
Exhibit
Number
Exhibit Description
Incorporation by Reference
Form
File
Number
Exhibit/
Appendix
Reference
Filing
Date
Filed
Herewith
10.47† Amendment Number Seven to Wafer Supply
10-K
000-23441
10.46
2/8/2017
Agreement, effective as of October 3, 2016, by Power
Integrations International Ltd. and Seiko Epson
Corporation
10.48† Amendment Number Eight to Wafer Supply
10-K
000-23441
10.47
2/8/2017
Agreement, effective as of November 8, 2016 by
Power Integrations International Ltd. and Seiko Epson
Corporation
10.49† Amendment Number One to the Amended and
10-K
000-23441
10.66
2/26/2010
Restated Wafer Supply Agreement between Power
Integrations International, Ltd. and XFAB Dresden
GmbH & Co. KG, effective as of July 20, 2005
10.50† Wafer Supply Agreement, made and entered into as of
10-Q
000-23441
10.2
5/8/2012
October 1, 2010, by and between Power Integrations
International, Ltd., and X-FAB Semiconductor
Foundries AG
10.51† Amendment Number One to Wafer Supply Agreement,
effective as of January 1, 2014, between Power
Integrations International, Ltd., and X-FAB
Semiconductor Foundries AG
10.52 Credit Agreement, dated July 27, 2016, by and between
Power Integrations Inc. and Wells Fargo Bank,
National Association
10-Q/A
000-23441
10.2
9/19/2014
10-Q
000-23441
10.1
7/29/2016
10.53
2017 Executive Officer Compensation Arrangements
and 2017 Performance Based Incentive Plan
10-K
000-23441
Item 9B.
2/8/2017
10.54*
2016 Executive Officer Compensation Arrangements
and 2016 Performance Based Incentive Plan
8-K
000-23441
Item 5.02
2/1/2016
10.55*
2015 Executive Officer Cash Compensation
Arrangements and 2015 Bonus Plan
10.56* Offer Letter, dated June 23, 2010, between Power
Integrations, Inc. and Sandeep Nayyar
10.57*
10.58*
Form of Restricted Stock Unit Grant Notice and Form
of Restricted Stock Unit Award Agreement for
executive officers for use prior to January 2013
Form of Restricted Stock Unit Grant Notice and Form
of Restricted Stock Unit Award Agreement for
executive officers for use after January 2013
8-K
000-23441
Item 5.02
2/2/2015
10-Q
000-23441
10.2
8/6/2010
10-Q
000-23441
10.6
8/6/2010
10-K
000-23441
10.48
2/22/2013
10.59* Amended and Restated Chief Executive Officer
10-Q
000-23441
10.3
5/5/2014
Benefits Agreement, dated as of May 1, 2014, between
Power Integrations, Inc. and Balu Balakrishnan
10.60* Amended and Restated Executive Officer Benefits
10-Q
000-23441
10.5
5/5/2014
Agreement, dated as of May 1, 2014, between Power
Integrations, Inc. and Cliff Walker
10.61* Amended and Restated Executive Officer Benefits
10-Q
000-23441
10.6
5/5/2014
Agreement, dated as of May 1, 2014, between Power
Integrations, Inc. and Doug Bailey
10.62* Amended and Restated Executive Officer Benefits
10-Q
000-23441
10.7
5/5/2014
Agreement, dated as of May 1, 2014, between Power
Integrations, Inc. and Ben Sutherland
10.63* Amended and Restated Executive Officer Benefits
10-Q
000-23441
10.8
5/5/2014
Agreement, dated as of May 1, 2014, between Power
Integrations, Inc. and Sandeep Nayyar
80
Exhibit
Number
Exhibit Description
Incorporation by Reference
Form
File
Number
Exhibit/
Appendix
Reference
Filing
Date
Filed
Herewith
10.64* Amended and Restated Executive Officer Benefits
10-Q
000-23441
10.10
5/5/2014
Agreement, dated as of May 1, 2014, between Power
Integrations, Inc. and Mike Matthews
10.65* Amended and Restated Executive Officer Benefits
10-Q
000-23441
10.11
5/5/2014
Agreement, dated as of May 1, 2014, between Power
Integrations, Inc. and Radu Barsan
10.66*
Executive Officer Benefits Agreement, dates as of
April 23, 2015, between Power Integrations, Inc. and
Raja Petrakian
10-Q
000-23441
10.1
7/31/2015
10.67* May 2017 RSU grants to named executive officers
10-Q
000-23441
Item 5
of Part II
5/5/2017
14.1 Code of Business Conduct and Ethics
8-K
000-23441
14.1
2/4/2008
21.1 List of subsidiaries
23.1 Consent of Independent Registered Public Accounting
Firm
24.1
Power of Attorney (See signature page)
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 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
X
X
X
X
X
X
X
X
X
X
X
X
X
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.
Item 16. Form 10-K Summary
Not provided.
81
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 14, 2018
By:
/s/ SANDEEP NAYYAR
POWER INTEGRATIONS, INC.
Sandeep Nayyar
Chief Financial Officer (Duly Authorized Officer,
Principal Financial Officer and Chief Accounting
Officer)
82
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 or her true and lawful attorney-in-fact and agent, with full power of
substitution and, for him or her and in his or her 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 or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent,
or his or her 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 14, 2018
Dated:
February 14, 2018
Dated:
February 14, 2018
Dated:
February 14, 2018
Dated:
February 14, 2018
Dated:
February 14, 2018
Dated:
February 14, 2018
Dated:
February 14, 2018
Dated:
February 14, 2018
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ BALU BALAKRISHNAN
Balu Balakrishnan
President, Chief Executive Officer
(Principal Executive Officer)
/s/ SANDEEP NAYYAR
Sandeep Nayyar
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
/s/ ALAN D. BICKELL
Alan D. Bickell
Director
/s/ NICHOLAS E. BRATHWAITE
Nicholas E. Brathwaite
Director
/s/ E. FLOYD KVAMME
E. Floyd Kvamme
Director and Chairman of the Board
/s/ STEVEN J. SHARP
Steven J. Sharp
Director
/s/ BALAKRISHNAN S. IYER
Balakrishnan S. Iyer
Director
/s/ WILLIAM GEORGE
William George
Director
/s/ WENDY ARIENZO
Wendy Arienzo
Director
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Board of Directors
Corporate Officers
Corporate Information
E. Floyd Kvamme (Chairman)
Partner Emeritus
Kleiner, Perkins, Caufield & Byers
Wendy A. Arienzo
Vice President, Operations
FUJIFILM Dimatix, Inc.
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
(cid:15)(cid:32)(cid:30)(cid:36)(cid:43)(cid:1)(cid:20)(cid:28)(cid:52)(cid:36)(cid:41)(cid:32)(cid:45)
(cid:6)(cid:51)(cid:32)(cid:30)(cid:48)(cid:47)(cid:36)(cid:49)(cid:32)(cid:1)(cid:23)(cid:36)(cid:30)(cid:32)(cid:1)(cid:17)(cid:45)(cid:32)(cid:46)(cid:36)(cid:31)(cid:32)(cid:41)(cid:47)(cid:1142)
(cid:19)(cid:32)(cid:41)(cid:32)(cid:46)(cid:28)(cid:46)(cid:1)(cid:6)(cid:39)(cid:32)(cid:30)(cid:47)(cid:45)(cid:42)(cid:41)(cid:36)(cid:30)(cid:46)(cid:1)(cid:4)(cid:42)(cid:45)(cid:43)(cid:42)(cid:45)(cid:28)(cid:47)(cid:36)(cid:42)(cid:41)
Steven J. Sharp
Former Chairman and CEO TriQuint
Semiconductor, Inc., Retired
Balu Balakrishnan
President and
Chief Executive Officer
Corporate Counsel
Cooley LLP
Palo Alto, CA
Doug Bailey
Vice President,
Marketing
Radu Barsan
Vice President,
Technology
Mike Matthews
Vice President,
Product Development
Sandeep Nayyar
Vice President, Finance
Chief Financial Officer
Raja Petrakian
Vice President,
Operations
Ben Sutherland
Vice President,
Worldwide Sales
Clifford J. Walker
Vice President,
Corporate Development
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
©2018 Power Integrations. Power Integrations and the Power Integrations logo are registered trademarks of Power Integrations, Inc. All rights reserved.