Power Integrations
2019 Annual Report
PI 2019 Annual Report Covers 8.5in11in EN.indd 1
PI 2019 Annual Report Covers 8.5in11in EN.indd 1
3/16/20 1:08 PM
3/16/20 1:08 PM
Dear Fellow Stockholders,
A year ago I wrote that while not satisfied with our 2018 results, I felt good about our prospects for 2019. I’m pleased to report
that my confidence was well founded, as we outperformed our industry peer group by a wide margin in 2019. While our
revenues grew only one percent for the year, that compares favorably to an eight-percent reduction in sales for the analog
semiconductor industry.1 Perhaps more impressively, we exited the year with strong momentum, posting record revenues of
$114 million in the fourth quarter – up 23 percent compared to the same period in 2018.
To some extent, this performance reflects a normal recovery from the cyclical downturn that began in 2018, but it was also
driven by strong, company-specific growth in our communications category, where sales grew more than 25 percent for the
full year. We achieved this growth thanks to our continuing success in the smartphone market, where adoption of faster
chargers is accelerating, and where we are winning thanks to the superior efficiency and integration of our InnoSwitch™3
products.
Ordinarily, as chargers increase in power output, they become larger in size, requiring more components and larger circuit
boards, as well as greater surface area to dissipate the heat produced by wasted energy. Our InnoSwitch3 chips alleviate this
problem, enabling designers to produce dramatically faster chargers with the sleek, highly portable form factors that
consumers expect with their mobile devices.
And as exciting as last year’s growth was, we believe it’s just the beginning. We estimate that only about 20 percent of
smartphone chargers shipped in 2019 were capable of delivering 18 watts or more; we expect this percentage to rise
dramatically in the years ahead as consumers become more aware of differences in charging speed, and as OEMs incorporate
larger batteries in their phones to support increased usage. The rollout of 5G devices – and the accompanying increase in
power-intensive functions like streaming video – is likely to reinforce the need for faster chargers.
Also driving the market to higher power levels is the proliferation of ultra-fast after-market chargers utilizing the new USB
PD charging protocol to enable compatibility with a wide range of phones and other mobile devices. These new chargers,
which are available in many retail outlets, often feature two or more output ports to charge multiple devices, and offer power
levels of 45, 65 and even 100 watts. (As a point of reference, until a few years ago a typical cellphone charger delivered just
five watts.)
These advanced chargers demand innovative semiconductor technologies, and Power Integrations is meeting that need with
our new gallium-nitride (GaN) transistors. In July 2019 we introduced new versions of our InnoSwitch3 products
incorporating our proprietary GaN switches; these new devices are capable of delivering up to 95 percent efficiency, and can
supply up to 100 watts without the need for bulky heatsinks.
Gallium nitride is a pivotal technology for the power-supply market – one that many other companies have attempted to bring
to market over the years – and we expect it to replace traditional silicon switches in a wide range of applications in the years
ahead. We have already introduced a version of our LYTSwitch™ LED drivers incorporating GaN switches, and we intend
to drive GaN technology deeper into our product portfolio in the years ahead. We are making substantial investments this
year in technology, products and manufacturing capacity to take full advantage of this important breakthrough.
As excited as we are about the opportunities in the mobile-device market, we are also encouraged by the trajectory of our
consumer business. The appliance market, which accounts for the bulk of our consumer revenues, has been heavily impacted
by tariffs and other macroeconomic factors, resulting in revenue declines in our consumer category in each of the past two
years. However, in the fourth quarter of 2019 we saw a return to growth, with revenues increasing more than 20 percent year-
over-year.
And while trade and macro issues continue to be a source of concern, the fundamentals that have made us successful in
appliances over the years remain firmly intact. We have long held a commanding market share in appliance power supplies
thanks to the reliability benefits of our highly integrated products, and we are well positioned for continued gains as
InnoSwitch products penetrate the appliance market. By eliminating optocouplers and integrating secondary-side
components, InnoSwitch not only further improves reliability but also enhances the selling price compared to the ICs we have
historically sold in this market. At the same time, we continue to benefit from rising dollar content as appliances add more
electronic features and intelligence, such as network connectivity, which increases the power level or in some cases even
necessitates an additional power supply.
1 World Semiconductor Trade Statistics, as reported by Stifel
Another continuing trend in appliances is the expansion of the middle class in emerging markets. This has obvious – and
exciting – implications for unit growth but also brings a heightened concern for energy efficiency. While efficiency has long
been an important consideration for appliance makers, it becomes even more important as comfort and convenience
appliances become affordable for hundreds of millions more people around the world.
In December the Chinese government demonstrated its concern for this problem by publishing new efficiency standards for
room air conditioners, scheduled to take effect on July 1st, 2020. The new standards should accelerate the migration of the
market away from inefficient linear power supplies and AC motors toward switching power supplies and brushless DC
motors. We are well positioned to capitalize on this transition with our AC-DC products as well as our BridgeSwitch™ motor-
drive ICs, which address brushless DC motors up to about 300 watts. We estimate the addressable market for BridgeSwitch
to be more than $300 million, comprising a wide range of appliance applications such as compressor motors, water pumps,
and the fans used in air-conditioning units such as those subject to the new China standards.
We also look for a recovery this year in our industrial category, which felt the effects of cyclical and macroeconomic softness
in 2019 but continues to benefit from trends such as the growth of renewable energy, the adoption of battery power for tools
and transportation, home and building automation, and other IoT-type applications such as smart utility meters.
And while we are still some time away from material revenues from the automotive market, we continue to invest in products
and infrastructure for electric vehicles, where high-voltage power conversion is a critical function. In October we announced
the successful qualification of a 750-volt gate driver under the AEC-Q100 automotive standard. This is our second gate-
driver product qualified for automotive use, and we have more such qualifications underway, as well as an active design
pipeline with several major automakers.
We are also excited to enter the new year without the burden of major patent litigation following the settlement of our long-
running dispute with Fairchild Semiconductor (now a subsidiary of ON Semiconductor). Following the settlement, which we
announced in October, we received a payment of $175 million from ON – with no license to any of our intellectual property
granted in return – and all outstanding litigation between the two companies has now been withdrawn. We believe this
settlement is a landmark win for our company, demonstrating the durability and the value of our intellectual property, as well
as our determination to protect it from unlawful use.
In conclusion, while trade remains a source of uncertainty and, as of this writing, the coronavirus outbreak is disrupting
economic activity around the world, we are excited about the opportunities ahead of us in 2020. Big-picture trends such as
energy efficiency, faster charging, renewable energy, smart homes, and the electrification of tools and transportation are
creating tremendous opportunities for us, while products like InnoSwitch3 and exciting new technologies like GaN continue
to demonstrate that Power Integrations is the leading innovator in the power conversion market.
Thank you for your continued support of our company – I look forward to reporting on our progress in the year ahead.
Sincerely,
Balu Balakrishnan
President and Chief Executive Officer
March 2020
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 trade tensions and 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.
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, 2019
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 000-23441
POWER INTEGRATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of Incorporation or organization)
94-3065014
(I.R.S. Employer Identification No.)
5245 Hellyer Avenue
San Jose , California
(Address of principal executive offices)
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
Trading Symbol(s)
Name of Each Exchange on Which Registered
POWI
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 x 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 x
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 x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No o
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:
Large Accelerated Filer x
Non-accelerated Filer
☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
The aggregate market value of registrant’s voting and non-voting common stock held by non-affiliates of registrant on June 28, 2019, the last
business day of the registrant’s most recently completed second fiscal quarter, was approximately $1.7 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 3, 2020: 29,538,300.
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 2020 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.
Page
ITEM 1.
BUSINESS ........................................................................................................................... 4
ITEM 1A.
RISK FACTORS................................................................................................................... 14
ITEM 1B.
UNRESOLVED STAFF COMMENTS................................................................................ 21
ITEM 2.
PROPERTIES ....................................................................................................................... 21
ITEM 3.
LEGAL PROCEEDINGS..................................................................................................... 21
ITEM 4.
MINE SAFETY DISCLOSURES ........................................................................................ 21
PART II.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .............................. 22
ITEM 6.
SELECTED FINANCIAL DATA......................................................................................... 24
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................................................................... 25
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 35
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................................... 37
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .......................................................... 70
ITEM 9A.
CONTROLS AND PROCEDURES..................................................................................... 70
ITEM 9B.
OTHER INFORMATION .................................................................................................... 73
PART III.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.............. 76
ITEM 11.
EXECUTIVE COMPENSATION ........................................................................................ 76
ITEM 12.
ITEM 13.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................................... 76
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE................................................................................................................ 77
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES........................................................ 77
PART IV.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES..................................................... 78
ITEM 16.
FORM 10-K SUMMARY .................................................................................................... 82
SIGNATURES............................................................................................................................................. 83
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 in the high-voltage power supply industry may lead to a decrease in our average selling price and
reduced sales volume of our products; if 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.
3
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 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, battery-powered tools, industrial controls, and “home-
automation,” or “internet of things” applications such as networked thermostats, power strips and security devices.
We also supply high-voltage LED drivers, which are AC-DC ICs specifically designed for lighting applications
that utilize light-emitting diodes. In 2018, we introduced a new category of power-conversion ICs, a family of
motor-driver ICs addressing brushless DC (BLDC) motors used in refrigerators, HVAC systems, ceiling fans and
other consumer-appliance and light commercial applications.
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) and silicon-carbide (SiC) MOSFETs. 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 applications
with power outputs up to approximately 500 watts, gate-driver applications of approximately
ten kilowatts and higher, and motor-drive applications up to approximately 300 watts. Through
our research and development efforts, we seek to introduce more advanced products for these
markets offering 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.
4
•
Our market-penetration strategy also includes capitalizing on the importance of energy efficiency
and renewable energy 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, solar and wind energy systems 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 more
than $4 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), the
introduction of LED-driver products, and our entry into the gate-driver market through the
acquisition of CT-Concept Technologie AG in 2012. In 2016 we introduced the SCALE-iDriverTM
family of gate-driver ICs, broadening the range of gate-driver applications we can address, and
in 2018 we introduced our BridgeSwitch™ motor-driver ICs, addressing BLDC motors, as
described above.
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 “smart” utility
meters, battery-powered lawn equipment and bicycles, and USB power receptacles (often
installed alongside traditional AC wall outlets) can incorporate our products. The increased use
of electronic intelligence and connectivity in consumer appliances has also enhanced our SAM.
Finally, we have enhanced our SAM through the development of new technologies that increase
the value (and therefore the average selling prices) of our products. 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. In 2019 we introduced new members of our InnoSwitch™ family incorporating gallium-
nitride (GaN) transistors, which enable a higher level of energy efficiency than ICs with traditional
silicon transistors.
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
5
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 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.
•
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. Also, our GaN transistor technology, introduced in 2019,
offers substantially higher levels of active-mode efficiency compared to traditional silicon-based switches, while
our BridgeSwitch motor-driver ICs enable efficiency of up to 98.5 percent, not only minimizing waste but also
eliminating the need for heatsinks in many applications, which in turn reduces cost and weight.
•
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, while our motor-driver ICs address BLDC applications
6
up to 300 watts. 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 United States 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 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; further tightening of the standards is under consideration. 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. In December 2019 the government of China published new efficiency
standards for room air conditioners, which are scheduled to take effect on July 1, 2020.
We believe we offer products that enable manufacturers to meet or exceed these regulations, and all other
such regulations of which we are aware. Our EcoSmart technology, introduced in 1998, dramatically reduces waste
in both operating and standby modes; we estimate that this technology has saved billions of dollars’ worth of
standby power worldwide since 1998. In 2010 we introduced our CapZero and SenZero IC families, which eliminate
additional sources of standby waste in some power supplies; we also offer a range of products 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
7
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 have also introduced products designed specifically for LED-lighting applications, known as
LYTSwitch ICs, as well as 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.
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, and numerous
other consumer and industrial applications, as well as LED lighting.
•
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.
•
Motor-driver products
The BridgeSwitch family of products, introduced in 2018, is a family of motor-driver ICs addressing
BLDC motor applications up to approximately 300 watts. Such applications include refrigerator compressors,
ceiling fans, air purifiers as well as pumps, fans and blowers used in consumer appliances such as dishwashers
and laundry machines.
Other Product Information
TOPSwitch, TinySwitch, LinkSwitch, DPA-Switch, EcoSmart, Hiper, Qspeed,
InnoSwitch,
BridgeSwitch, 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.
The table below provides the approximate mix of our net sales by end market:
End Market
Communications ...............................................................................
Computer...........................................................................................
Consumer ..........................................................................................
Industrial ...........................................................................................
Year Ended December 31,
2018
2019
2017
26%
5%
35%
34%
20%
5%
38%
37%
24%
5%
38%
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.
8
Market Category
Communications....... Mobile-phone chargers, routers, cordless phones, broadband modems, voice-over-IP phones, other
Primary Applications
network and telecom gear
Computer .................. Desktop PCs and monitors, servers, adapters for tablets and notebook computers, other computer
peripherals
Consumer.................. Major and small appliances, air conditioners, TV set-top boxes, digital cameras, TVs, video-game
consoles
Industrial...................
Industrial controls, LED lighting, 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 28%, 25% and 23% of our net product revenues in 2019, 2018 and 2017,
respectively, 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%, 56% and 54% of net revenues in 2019, 2018 and 2017,
respectively. In each of 2019, 2018 and 2017 one distributor accounted for more than 10% of revenues.
The following table discloses this customer’s percentage of net revenues for the respective years:
Customer
Avnet........................................................................................................
Year Ended December 31,
2018
2019
2017
11%
14%
16%
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 97% of our net revenues in
2019 and 96% in each of 2018 and 2017, 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 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-
9
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.
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 2019 we received 50 U.S. and 71 foreign patents. As of December 31,
2019, we held 501 U.S. patents and 382 foreign patents. Both U.S. and foreign patents have expiration dates ranging
from 2020 to 2039. 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.
Manufacturing
We contract with three foundries for the manufacture of the vast majority of our silicon wafers: (1) 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 gate-
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 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 2028, 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
10
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.
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 gate-driver products
compete with alternatives from such companies as Avago, Infineon and Semikron, as well as driver circuits made
up of discrete devices. Our motor-driver ICs compete with alternatives from such companies as ON Semiconductor,
Infineon, STMicroelectronics and Sanken Electric Company.
Generally, our products enable customers to design power converters with total bill-of-materials 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.
11
Employees
As of December 31, 2019, we employed 699 full-time personnel, consisting of 75 in manufacturing, 263
in research and development, 298 in sales, marketing and applications support, and 63 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 we file with the SEC are also available at www.sec.gov.
Our corporate governance guidelines, the charters of our board committees, and our code of business
conduct and ethics, including ethics provisions that apply to our principal executive officer, principal financial
officer, controller and senior financial officers, are also available via the investor website listed above. These items
are also available in print to any stockholder who requests them by calling (408) 414-9200. We intend to satisfy
the disclosure requirements of Form 8-K regarding an amendment to, or a waiver from, a provision of our code
of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions by posting such information on our investor
website listed above.
Power Integrations, Inc. was incorporated in California on March 25, 1988, and reincorporated in Delaware
in December 1997.
Information About Our Executive Officers
As of January 31, 2020, 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
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 .........................................................
Age
65
53
67
55
60
48
55
68
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.
12
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, Dr. 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. 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. Dr. Barsan has 40 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 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. Mr. Nayyar has also served as
a director and chairman of the audit committee for Smart Global Holdings, Inc. since September 2014.
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.
13
Item 1A. Risk Factors.
The following are important factors that could cause actual results or events to differ materially from
those contained in any forward-looking statements made by us or on our behalf. The risks and uncertainties
described below are not the only ones we face. Additional risks and uncertainties not presently known to us or
that we deem immaterial also may impair our business operations. If any of the following risks or such other
risks actually occurs, our business could be harmed.
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;
reliance on international sales activities for a substantial portion of our net revenues;
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;
fluctuations in exchange rates, particularly the exchange rate between the U.S. dollar and the Japanese
yen, the Euro and the Swiss franc;
our ability to develop and bring to market new products and technologies on a timely basis;
the lengthy timing of our sales cycle;
undetected defects and failures in meeting the exact specifications required by our products;
our ability to attract and retain qualified personnel;
the inability to adequately protect or enforce our intellectual property rights;
expenses we are required to incur (or choose to incur) in connection with our intellectual property
litigations;
continued impact of changes in securities laws and regulations, including potential risks resulting from
our evaluation of our internal controls over financial reporting;
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;
changes in environmental laws and regulations, including with respect to energy consumption and climate
change;
interruptions in our information technology systems;
uncertainties arising out of economic consequences of current and potential military actions or terrorist
activities and associated political instability;
14
•
•
•
risks associated with acquisitions and strategic investments;
our ability to successfully integrate, or realize the expected benefits from, our acquisitions; and
earthquakes, terrorists acts, pandemic or other disasters.
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 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 72%, 75% and 77% of net revenues in the years ended December 31, 2019, 2018 and
2017, 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.
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 97% of our net revenues for the year ended
December 31, 2019, and 96% in each of 2018 and 2017. 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:
•
•
•
•
•
•
tariffs, protectionist measures and other trade barriers and restrictions;
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;
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.
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
15
wafers are with Epson, Lapis, and X-FAB. Our contracts with these suppliers expire on varying dates, with the
earliest to expire in December 2025. 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.
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, 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 2020 to 2039. We cannot assure that our products will continue to compete favorably or that we will
be successful in the face of increasing competition from new products and enhancements introduced by existing
competitors or new companies entering this market. We believe our failure to compete successfully in the high-
voltage power supply business, including our ability to introduce new products with higher average selling prices,
would materially harm our operating results.
If 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
16
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%, 56% and 54% of our net revenues
in each of the years ended December 31, 2019, 2018 and 2017, 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.
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.
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.
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
17
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 and/or impose significant costs to us. 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 product warranty or liability
claims and costs associated with customer support and product recalls, delays in or cancellations or rescheduling
of orders or shipments and product returns or discounts. While we specifically exclude consequential damages in
our standard terms and conditions, certain of our contracts may not exclude such liabilities. Our liability insurance
which covers certain damages arising out of product defects may not cover all claims or be of a sufficient amount
to fully protect against such claims. Costs or payments in connection with such claims could harm our operating
results.
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.
If we are unable to adequately protect or enforce our intellectual property rights, we could lose market
share, incur costly litigation expenses, suffer incremental price erosion or lose valuable assets, any of which could
harm our operations and negatively impact our profitability. Our success depends upon our ability to continue our
technological innovation and protect our intellectual property, including patents, trade secrets, copyrights and
know-how. We are currently engaged in litigation to enforce our intellectual property rights, and associated expenses
have been, and are expected to remain, material and have adversely affected our operating results. We cannot assure
that the steps we have taken to protect our intellectual property will be adequate to prevent misappropriation, or
that others will not develop competitive technologies or products. From time to time, we have received, and we
may receive in the future, communications alleging possible infringement of patents or other intellectual property
rights of others. Costly litigation may be necessary to enforce our intellectual property rights or to defend us against
claimed infringement. The failure to obtain necessary licenses and other rights, and/or litigation arising out of
infringement claims could cause us to lose market share and harm our business.
As our patents expire, we will lose intellectual property protection previously afforded by those patents.
Additionally, the laws of some foreign countries in which our technology is or may in the future be licensed may
not protect our intellectual property rights to the same extent as the laws of the United States, thus limiting the
protections applicable to our technology.
If we do not prevail in our litigation, we will have expended significant financial resources, potentially
without any benefit, and may also suffer the loss of rights to use some technologies. We are currently involved in
a number of patent litigation matters and the outcome of the litigation is uncertain. See Note 13, Legal Proceedings
and Contingencies, in our Notes to Consolidated Financial Statements included in this Annual Report on Form
10-K. For example, 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,
18
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.
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.
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 has significantly changed 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 as initially enacted
was unclear in some respects and has required interpretations and implementing regulations by the Internal Revenue
Service, as well as state tax authorities, and the legislation has been subject to amendments and technical corrections.
Further amendments and technical corrections may occur, 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.
Changes in environmental laws and regulations may increase our costs related to obsolete products in
our existing inventory. Changing environmental regulations and the timetable to implement them continue to
impact our customers’ demand for our products. As a result there could be an increase in our inventory obsolescence
costs for products manufactured prior to our customers’ adoption of new regulations. Currently we have limited
visibility into our customers’ strategies to implement these changing environmental regulations into their business.
The inability to accurately determine our customers’ strategies could increase our inventory costs related to
obsolescence.
19
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.
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.
In the event of an earthquake, terrorist act, pandemic 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.
20
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 here by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
21
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”.
As of February 3, 2020, 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.
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 $80.0 million in October 2018, with repurchases to be executed according to pre-defined price/
volume guidelines. We did not repurchase any shares of our common stock in the fourth quarter of 2019. As of
December 31, 2019, we had $43.9 million available for future stock repurchases under our October 2018 repurchase
authorization, which has no expiration date. 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.
22
Performance Graph (1)
The following graph shows the cumulative total return on an investment of $100 in cash on December
31, 2014, through December 31, 2019, 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.
Comparison of Cumulative Five Year Total Return
$350
$300
$250
$200
$150
$100
$50
$0
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
Period Ending
Power Integrations, Inc
NASDAQ Composite
NASDAQ Electronic Components
Company/Index
Power Integrations, Inc. ...................
Nasdaq Composite ...........................
Nasdaq Electronic Components .......
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
100.00
100.00
100.00
94.93
106.96
98.12
133.73
116.45
127.26
146.13
150.96
181.19
122.28
146.67
160.26
200.11
200.49
239.78
_______________
(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.
23
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
Year Ended December 31,
(in thousands, except per share amounts)
Net revenues ........................................................................... $ 420,669
217,022
Income from operations ..........................................................
Provision (benefit) for income taxes.......................................
28,946
Net income.............................................................................. $ 193,468
2019(1)
2018
2017(2)(3)
2016(2)
2015(2)(4)
$ 415,955
55,648
(10,220)
$ 69,984
$ 431,755
57,637
32,690
$ 27,609
$ 389,668
48,874
1,054
$ 48,898
$ 344,609
38,906
179
$ 39,152
Earnings per share:
Basic.................................................................................... $
Diluted................................................................................. $
6.61
6.49
Shares used in per share calculation:
Basic....................................................................................
Diluted.................................................................................
Dividends per share
29,267
29,816
0.70
$
$
$
$
2.38
2.32
29,456
30,147
0.64
$
$
$
0.93
0.90
29,674
30,545
0.56
$
$
$
1.69
1.65
28,925
29,619
0.52
$
$
$
1.35
1.32
29,001
29,696
0.48
Consolidated Balance Sheet Data
Year Ended December 31,
(in thousands)
Cash and cash equivalents ...................................................... $ 178,690
232,398
Short-term marketable securities ............................................
2019(1)
2018
2017(2)(3)
2016(2)
2015(2)(4)
$ 134,137
94,451
$ 93,655
189,236
$ 62,134
188,323
$ 90,092
83,769
Cash, cash equivalents and short-term marketable
411,088
securities...............................................................................
490,863
Working capital.......................................................................
803,896
Total assets..............................................................................
Long-term liabilities ...............................................................
28,874
Stockholders’ equity ............................................................... $ 724,546
228,588
284,066
588,697
13,259
$ 527,072
282,891
313,483
621,074
22,341
$ 547,682
250,457
274,318
554,410
7,380
$ 503,084
173,861
203,050
486,707
6,925
$ 442,590
_______________
(1)
(2)
(3)
(4)
In October 2019 we entered into a favorable litigation settlement with ON Semiconductor Corporation
which resulted in a $169.0 million net gain (Refer to Note 13, Legal Proceedings and Contingencies, in
our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K).
In 2017 we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers,
which amended the accounting standards for revenue recognition. The standards were applied on a
retrospective basis to 2015 and 2016.
In December 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as
the Tax Cuts and Jobs Act.
In 2015 we acquired Cambridge Semiconductor Limited (CamSemi), a UK company.
24
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 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, battery-powered tools, industrial controls, and “home-
automation,” or “internet of things” applications such as networked thermostats, power strips and security devices.
We also supply high-voltage LED drivers, which are AC-DC ICs specifically designed for lighting applications
that utilize light-emitting diodes. In 2018, we introduced a new category of power-conversion ICs: a family of
motor-driver ICs addressing brushless DC (BLDC) motors used in refrigerators, HVAC systems, ceiling fans and
other consumer-appliance and light commercial applications.
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) and silicon-carbide (SiC) MOSFETs. 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 $420.7 million, $416.0 million and $431.8 million in 2019, 2018 and 2017,
respectively. In 2019 revenues increased by $4.7 million due to growth in sales into the communications end-
market, reflecting increased adoption of faster, higher-power chargers for mobile phones; this trend has resulted
in both unit growth and higher average selling prices for our products in this market. Growth in revenues from the
communications end-market was largely offset by lower sales into the consumer and industrial markets, primarily
reflecting macroeconomic, cyclical and trade-related factors that have affected the broader semiconductor industry.
In 2018 revenues decreased by $15.8 million due to weaker unit sales into the communications end-market,
reflecting weaker demand for mobile-phone chargers, as well as lower sales into the consumer market, primarily
reflecting softness in the consumer-appliance market.
Our top ten customers, including distributors that resell to OEMs and merchant power supply
manufacturers, accounted for approximately 54%, 56% and 54% of net revenues in 2019, 2018 and 2017,
respectively. In 2019, 2018 and 2017 one customer, a distributor of our products, accounted for approximately
11%, 14% and 16% of net revenues, respectively. International sales represented approximately 97% of net revenues
in 2019 and 96% in each of 2018 and 2017.
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
25
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. 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 $213.4 million or 51% of net revenues
in 2019, compared to $214.8 million or 52% of net revenues in 2018, and $213.7 million or 49% of net revenues
in 2017. Our gross margin decreased in 2019 due primarily to increased wafer substrate costs. Our gross margin
increased in 2018 primarily due to a more favorable end-market mix, particularly reflecting the growth in revenues
from the industrial end-market and the decrease in revenues from the communications end-market.
Total operating expenses in 2019 includes a net $169.0 million favorable legal settlement with ON
Semiconductor Corporation. The favorable settlement more than offset our higher salary and related expenses due
to the expansion of our workforce along with increased patent-litigation expenses and product-development costs
resulting in a $3.6 million gain for the year. Total operating expenses in 2018 and 2017 were $159.1 million and
$156.0 million, respectively. Operating expenses increased in 2018 as compared to 2017 due primarily to higher
salary and related expenses due to the expansion of our workforce, increased patent-litigation expenses and
increased stock-based compensation expense.
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 72% of our net product sales were made to distributors in 2019.
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
26
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 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.
27
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 warranty 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 an increase in cost of revenues in our consolidated statements of income. 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
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. 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, 2019, we continue to maintain a valuation allowance on our California, New Jersey
and Canada deferred tax assets as we believe that it is not more likely than not that the deferred tax assets will be
fully realized.
28
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 2019 and
2018, and concluded that no impairment existed as of December 31, 2019, and December 31, 2018.
ASC 350-10 also requires that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives, and reviewed for impairment in accordance with ASC 360-10, Accounting for
the Impairment or Disposal of Long-Lived Assets. We review long-lived assets, such as acquired intangibles and
property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge
by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
29
Results of Operations
The following table sets forth statement of income data as a percentage of net revenues for the periods
indicated:
Year Ended December 31,
2018
2019
2017
Net revenues ............................................................................................
Cost of revenues ......................................................................................
Gross profit ..............................................................................................
Operating expenses:
Research and development....................................................................
Sales and marketing ..............................................................................
General and administrative ...................................................................
Litigation settlement .............................................................................
Total operating expenses....................................................................
Income from operations...........................................................................
Other income ...........................................................................................
Income before income taxes ....................................................................
Provision (benefit) for income taxes........................................................
Net income...............................................................................................
100.0%
49.3
50.7
17.5
12.9
8.9
(40.2)
(0.9)
51.6
1.3
52.9
6.9
46.0%
100.0%
48.4
51.6
17.0
12.8
8.4
—
38.2
13.4
1.0
14.4
(2.4)
16.8%
100.0%
50.5
49.5
15.9
11.9
8.4
—
36.2
13.3
0.6
13.9
7.5
6.4%
Comparison of Years Ended December 31, 2019, 2018 and 2017
Net revenues. Net revenues consist of revenues from product sales, which are calculated net of returns
and allowances. In 2019 revenues increased by $4.7 million compared to 2018 as growth in the communications
end market exceeded a broad-based decline in demand across the consumer and industrial end markets. Overall,
we believe that demand for our products has been affected by a variety of factors including caution among our
customers with respect to global trade disputes and a slowdown in demand for consumer products in China. In
2018 revenues decreased by $15.8 million as compared to 2017 due mainly to weaker unit sales into the
communications end-market, reflecting weaker demand for mobile-phone chargers, as well as lower sales into the
consumer end-market, primarily reflecting softness in the consumer-appliance market. These decreases were
partially offset by growth in the industrial end-market across a broad range of applications, and by higher revenues
from the computer end-market reflecting growth in charger applications for tablets.
Our approximate net revenue mix by end-markets served in 2019, 2018 and 2017 is as follows:
End Market
Communications ......................................................................................
Computer .................................................................................................
Consumer.................................................................................................
Industrial ..................................................................................................
2019
2018
2017
26%
5%
35%
34%
20%
5%
38%
37%
24%
5%
38%
33%
Sales to customers outside of the United States were $410.0 million in 2019, compared to $400.6 million
in 2018 and $415.1 million in 2017, representing approximately 97% of net revenues in 2019 and 96% in each of
2018 and 2017. 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 77% of our net revenues in each of 2019 and 2018 and 79% in 2017. 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 72%, 75% and 77% of our net revenues in 2019, 2018 and 2017,
respectively, with direct sales to OEMs and merchant power supply manufacturers accounting for the remainder
30
in each of the corresponding years. In each of 2019, 2018 and 2017 one distributor accounted for more than 10%
of revenues.
The following table discloses this customers’ percentage of net revenues for the respective years:
Customer
Avnet........................................................................................................
2019
2018
2017
11%
14%
16%
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, 2019, 2018 and
2017:
(dollars in millions)
Gross profit.......................................... $
Gross margin.....................................
2019
Change
2018
Change
2017
213.4
50.7%
(0.7)% $
214.8
51.6%
0.5% $
213.7
49.5%
Our gross margin decreased in 2019 as compared to 2018 primarily due to increased wafer substrate costs.
Our gross margin increased in 2018 as compared to 2017 primarily due to a more favorable end-market mix,
particularly reflecting the growth in revenues from the industrial end-market and the decrease in revenues from
the communications end-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, 2019, 2018 and 2017:
(dollars in millions)
R&D expenses..................................... $
Percentage of net revenues ...............
2019
Change
2018
Change
2017
73.5
17.5%
4.1% $
70.6
17.0%
3.0% $
68.5
15.9%
R&D expenses increased in 2019 compared to 2018 due to higher salary and related expenses driven by
increased headcount as well as increased equipment related expenses. R&D expenses increased in 2018 compared
to 2017 due to higher salary and related expenses from the expansion of headcount and product development
expenses, partially offset by lower stock-based compensation expense related to performance-based stock awards.
Sales and marketing expenses. Sales and marketing (S&M) 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, 2019, 2018
and 2017:
(dollars in millions)
Sales and marketing expenses ............. $
Percentage of net revenues ...............
2019
Change
2018
Change
2017
54.3
12.9%
2.3% $
53.1
12.8%
3.3% $
51.4
11.9%
S&M expenses increased in both 2019 and 2018 due primarily to expansion of our sales force, resulting
in higher salary and related expenses. In 2019 these increases were partially offset by lower amortization of
intangibles.
31
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 management, as well as consulting, professional services, legal and auditing expenses. The
table below compares G&A expenses for the years ended December 31, 2019, 2018 and 2017:
(dollars in millions)
G&A expenses..................................... $
Percentage of net revenues ...............
2019
37.6
8.9%
Change
5.9%
$
2018
Change
2017
35.5
8.4%
(1.8)% $
36.1
8.4%
G&A expenses increased in 2019 as compared to 2018 as a result of increased expenses related to patent
litigation and higher salary and related expenses due to expansion of headcount. G&A expenses decreased in 2018
as compared to 2017 due primarily to lower stock-based compensation expense related to performance-based
awards.
Litigation settlement. Litigation settlement in fiscal 2019 represents a $169.0 million gain net of direct
legal fees due to a favorable legal settlement with ON Semiconductor Corporation, pursuant to which all outstanding
legal and administrative disputes were dismissed, withdrawn, and/or terminated. For additional details, refer to
Note 13, Legal Proceedings and Contingencies, in our Notes to Consolidated Financial Statements included in
this Annual Report on Form 10-K.
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, 2019, 2018 and 2017:
(dollars in millions)
Other income ....................................... $
Percentage of net revenues ...............
2019
Change
2018
Change
2017
5.4
1.3%
32.0% $
4.1
1.0%
54.6% $
2.7
0.6%
Other income increased in both 2019 and 2018 due primarily to an increase in interest income reflecting
an increase in our cash and investments along with higher yields earned on those balances.
Provision (benefit) for income taxes. Provision (benefit) for income taxes represents federal, state and
foreign taxes. The following table compares the provision (benefit) for income taxes for the years ended December
31, 2019, 2018 and 2017:
(dollars in millions)
Provision (benefit) for income taxes ... $
Percentage of net revenues ...............
Effective tax rate...............................
2019
Change
2018
28.9
6.9%
13.0%
383.2% $
(10.2)
(2.4)%
(17.1)%
Change
(131.3)% $
2017
32.7
7.5%
54.2%
In 2019 and 2018, the effective tax rate was lower than the then-statutory federal income-tax rates of 21%
due to the geographic distribution of our world-wide earnings in lower tax jurisdictions, the impact of federal
research tax credits and the recognition of excess tax benefits related to share-based compensation. These benefits
were partially offset by U.S. tax on foreign income, known as global intangible low-taxed income. Additionally,
in 2018 the effective tax rate was favorably impacted by revisions to our provisional estimate for the enactment
of the U.S. Tax Cuts and Jobs Act (Tax Act). The primary jurisdiction from which our foreign earnings are derived
is the Cayman Islands, which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not
material. We have not been granted any incentivized tax rates and do not operate under any tax holidays in any
jurisdiction. For additional details, refer to Note 11, Provision (Benefit) for Income Taxes, in our Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K.
32
Liquidity and Capital Resources
We had approximately $411.1 million in cash, cash equivalents and short-term marketable securities at
December 31, 2019 compared to $228.6 million at December 31, 2018, and $282.9 million at December 31, 2017.
As of December 31, 2019, 2018 and 2017, we had working capital, defined as current assets less current liabilities,
of approximately $490.9 million, $284.1 million and $313.5 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. We amended the Credit Agreement on April 30, 2018,
to extend the termination date from July 26, 2019, to April 30, 2022, with all other terms remaining the same. 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 April 30, 2022; 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,
2019, $6.2 million was reserved against the available credit in the form a standby letter of credit. As of December 31,
2019 and 2018, we had no advances outstanding under the Credit Agreement.
Our operating activities generated cash of $224.5 million, $84.0 million, and $82.0 million in the years
ended December 31, 2019, 2018 and 2017, respectively. In 2019 our cash generated from operating activities was
favorably impacted by the settlement of our patent litigation with ON Semiconductor Corporation. In each of 2018
and 2017, we primarily generated cash from operating activities in the ordinary course of business.
In 2019, our net income was $193.5 million, which included a $169.0 million gain, net of direct legal
fees, from a favorable litigation settlement, $23.3 million of stock-based compensation expenses, $19.2 million
of depreciation and $5.2 million of intangibles amortization. Sources of cash also included an $10.6 million increase
in taxes payable and accrued liabilities due primarily to increased taxes payable as result of favorable litigation
settlement. These sources of cash were partially offset by a $13.3 million increase in accounts receivable due to
increased shipments and the timing of collections, a $9.5 million increase in inventories, reflecting impact of a
market slowdown during the first half of the year and anticipation of future demand, a $6.6 million decrease in
accounts payable due to the timing of payments.
In 2018, our net income was $70.0 million, which included stock-based compensation expenses,
depreciation and intangibles amortization of $21.6 million, $18.9 million, and $5.3 million, respectively. Sources
of cash also included a $5.8 million decrease in accounts receivable due to decreased shipments and the timing of
collections. These sources of cash were partially offset by a $23.8 million increase in inventories, partially reflecting
lower-than-normal inventory levels at the beginning of the year, but also driven by lower-than-expected sales,
particularly in the latter half of the year, and a $9.9 million decrease in taxes payable and accrued liabilities due
primarily to a decrease in taxes payable related to the enactment of the Tax Act.
In 2017, our net income was $27.6 million, which included stock-based compensation expenses,
depreciation and intangibles 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.
Our investing activities in the year ended December 31, 2019 resulted in a $162.0 million net use of cash,
consisting primarily of $136.9 million from purchases of marketable securities, net of sales and maturities, and
$24.1 million for purchases of property and equipment, primarily machinery and equipment for use in the
manufacture of our products.
33
Our investing activities provided $69.1 million of cash in the year ended December 31, 2018, consisting
primarily of $94.7 million from sales and maturities of marketable securities, net of purchases, partially offset by
$24.7 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, 2017, resulted in a $34.7 million 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 for the purchase of marketable securities, net of
maturities.
Our financing activities in the year ended December 31, 2019, resulted in a net use of $17.9 million of
cash. Financing activities consisted primarily of $20.5 million for the payment of dividends to stockholders and
$7.3 million for the repurchase of our common stock, partially offset by proceeds of $9.9 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, 2018, resulted in a net use of $112.6 million of
cash. Financing activities consisted primarily of $103.2 million for the repurchase of our common stock and $18.8
million for the payment of dividends to stockholders, partially offset by proceeds of $9.4 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, 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.
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. In January 2019, our board of directors declared four quarterly cash dividends in the
amount of $0.17 per share to be paid to stockholders of record at the end of each quarter in 2019.
In October 2019, our board of directors raised the cash dividend per share with the declaration five cash
dividends, consisting of (a) a dividend in the amount of $0.02 per share to be paid to stockholders of record at the
end of the fourth quarter in 2019, which is in addition to the dividend in the amount of $0.17 per share to be paid
to stockholders of record at the end of the fourth quarter in 2019 previously declared by the board in January 2019,
and (b) a dividend in the amount of $0.19 per share to be paid to stockholders of record at the end of each quarter
in 2020. The declaration of any future cash dividend is at the discretion of the board of directors and will depend
on our financial condition, results of operations, capital requirements, business conditions and other factors, as
well as a determination that cash dividends are in the best interest of our stockholders.
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, $30.0 million authorized in each of July 2017 and January 2018,
and $80.0 million in October 2018 with repurchases to be executed according to pre-defined price/volume
guidelines. In 2017, we purchased 129,000 shares for approximately $9.2 million. In 2018, we purchased 1,572,000
shares for approximately $103.2 million. In 2019, we purchased 121,000 shares for approximately $7.3 million.
As of December 31, 2019, $43.9 million was available for future stock repurchases, which has no expiration date.
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, 2019, we had a contractual obligation related to income tax, consisting primarily of
unrecognized tax benefits of approximately $19.0 million. The tax obligation was classified as long-term income
taxes payable or recorded as contra deferred tax assets in our consolidated balance sheet.
34
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. The 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, 2019, 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 significant 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, 2019 and 2018, 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, 2019, we had the following contractual obligations and commitments, consisting
solely of non-cancelable operating lease agreements:
(in thousands)
Operating lease obligations ........... $
Total
Less than 1
Year
9,838
$
2,131
1 - 3 Years
4,236
$
4 - 5 Years
2,389
$
Over 5
Years
$
1,082
Payments Due by Period
In addition to our contractual obligations noted above we have a contractual obligation related to income
tax as of December 31, 2019, which primarily comprises unrecognized tax benefits of approximately $19.0
million, and was classified as contra deferred tax assets or long-term income taxes payable in our consolidated
balance sheet. As of December 31, 2019 we also had approximately $5.1 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 six annual installments.
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 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,
35
when necessary for the funding of acquisitions and other strategic investments. As a result of this policy, we
classify our investment portfolio as available-for-sale. We invest in high-credit quality issuers and, by policy, limit
the amount of credit exposure to any one issuer. As stated in our policy, we seek to ensure the safety and preservation
of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default
risk by investing in safe and high-credit quality securities and by constantly positioning our portfolio to respond
appropriately to a significant reduction in a credit rating of any investment issuer, guarantor or depository. The
portfolio includes only marketable securities with active secondary or resale markets to facilitate portfolio liquidity.
At December 31, 2019 and 2018, 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, 2019, or December 31, 2018, 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, 2019, 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, 2019. 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, 2019
5%
10%
24
$
48
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, 2019, and December 31, 2018, 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.
36
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, 2019 and 2018, 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, 2019, and the related notes (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, 2019
and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2019, in conformity with the accounting principles generally accepted in the United States of America.
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, 2019,
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 6, 2020 expressed an
unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, effective January 1, 2019, the Company adopted
Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), using the optional transition method.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the
financial statements that was communicated or required to be communicated to the audit committee and that (1)
relates to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any
way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
37
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which
it relates.
Gain Contingency - Refer to Note 13, Legal Proceedings and Contingencies, in the accompanying financial
statements
Critical Audit Matter Description
On October 4, 2019, the Company entered into a binding term sheet (the “Term Sheet”) with ON
Semiconductor Corporation and its wholly owned subsidiaries (collectively, “ON”) pursuant to which the parties
agreed to end all outstanding legal and administrative disputes. Pursuant to the Term Sheet, ON agreed to pay the
Company $175.0 million in cash. In addition, each party agreed to release the other party from any claims to
damages or monetary relief for certain alleged acts of patent infringement across the various patent infringement
litigations, occurring on or before June 30, 2020, and not to file any additional action for legal or equitable relief
prior to June 30, 2023 (although following that date a party may file a legal action for alleged patent infringement
occurring after June 30, 2020). Neither party granted any licenses to the other. On October 19, 2019, the parties
memorialized the terms of the Term Sheet in a definitive agreement (the “Definitive Agreement”). On October 22,
2019, the Company received ON’s payment of $175.0 million. The Company recorded a net $169.0 million
favorable litigation settlement within operating expenses for the year ended December 31, 2019 in the consolidated
statement of income.
We identified the accounting for the Definitive Agreement with ON Semiconductor Corporation to be a
critical audit matter because of the significant management judgments including the (a) identification of the elements
in the Definitive Agreement, and (b) determination of the appropriate timing of recognition of the elements in the
Definitive Agreement. Given these significant management judgments, performing audit procedures of the
Definitive Agreement involved significant auditor judgment and an increased extent of effort, including the need
for us to involve professionals with expertise in the accounting for such transactions, when performing the audit
procedures to evaluate the appropriateness of the accounting conclusions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accounting for the elements of the Definitive Agreement included the
following, among others:
• We tested the effectiveness of controls over management’s evaluation of the accounting for the settlement
including the technical evaluation of the elements of the agreement and timing of recognition of those
elements.
• We obtained and reviewed the agreement to identify the elements that exist in the agreement and evaluated
the nature of the elements that arose.
• We utilized professionals in our firm having expertise in accounting for contingencies to assist in our
evaluation of the Company’s accounting for the agreement.
• We performed audit procedures to understand the nature of the elements of the agreement including an
evaluation of the appropriateness of the recognition and timing of the amounts received.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 6, 2020
We have served as the Company's auditor since 2005.
38
POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)
ASSETS
CURRENT ASSETS:
December 31, December 31,
2019
2018
Cash and cash equivalents .............................................................................................. $
Short-term marketable securities ....................................................................................
178,690 $
232,398
Accounts receivable, net of allowance for doubtful accounts of $763 and $706 in
2019 and 2018, respectively ...........................................................................................
Inventories ......................................................................................................................
Prepaid expenses and other current assets ......................................................................
Total current assets .......................................................................................................
PROPERTY AND EQUIPMENT, net...............................................................................
INTANGIBLE ASSETS, net .............................................................................................
GOODWILL......................................................................................................................
DEFERRED TAX ASSETS ..............................................................................................
OTHER ASSETS ..............................................................................................................
24,274
90,380
15,597
541,339
116,619
16,865
91,849
2,836
34,388
Total assets ................................................................................................................... $
803,896 $
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................................................................ $
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)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value
Authorized - 140,000,000 shares
27,433 $
13,408
584
9,051
50,476
14,617
164
14,093
79,350
134,137
94,451
11,072
80,857
11,915
332,432
114,117
21,152
91,849
6,906
22,241
588,697
31,552
12,131
933
3,750
48,366
8,652
216
4,391
61,625
Outstanding - 29,430,962 and 28,888,643 shares in 2019 and 2018, respectively......
Additional paid-in capital ...............................................................................................
Accumulated other comprehensive loss .........................................................................
Retained earnings............................................................................................................
Total stockholders’ equity ............................................................................................
Total liabilities and stockholders’ equity...................................................................... $
28
152,117
(3,130)
575,531
724,546
803,896 $
28
126,164
(1,689)
402,569
527,072
588,697
The accompanying notes are an integral part of these consolidated financial statements.
39
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2019
2018
2017
(In thousands, except per share amounts)
NET REVENUES ............................................................................ $
COST OF REVENUES....................................................................
GROSS PROFIT ..............................................................................
OPERATING EXPENSES:
Research and development ............................................................
Sales and marketing.......................................................................
General and administrative............................................................
Litigation settlement .....................................................................
Total operating expenses.............................................................
INCOME FROM OPERATIONS ....................................................
OTHER INCOME............................................................................
INCOME BEFORE INCOME TAXES ...........................................
PROVISION (BENEFIT) FOR INCOME TAXES .........................
420,669
$
415,955
$
207,267
213,402
201,167
214,788
73,470
54,297
37,582
(168,969)
(3,620)
217,022
5,392
222,414
28,946
70,580
53,064
35,496
—
159,140
55,648
4,116
59,764
(10,220)
431,755
218,091
213,664
68,501
51,384
36,142
—
156,027
57,637
2,662
60,299
32,690
27,609
NET INCOME ................................................................................. $
193,468
$
69,984
$
EARNINGS PER SHARE:
Basic .............................................................................................. $
Diluted ........................................................................................... $
6.61
6.49
$
$
2.38
2.32
$
$
0.93
0.90
SHARES USED IN PER SHARE CALCULATION:
Basic ..............................................................................................
Diluted ...........................................................................................
29,267
29,816
29,456
30,147
29,674
30,545
The accompanying notes are an integral part of these consolidated financial statements.
40
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended December 31,
2018
2019
2017
Net income ....................................................................................... $
193,468
$
69,984
$
27,609
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of $0 tax in 2019,
2018 and 2017 ...............................................................................
Unrealized gain (loss) on marketable securities, net of $0 tax in
2019, 2018 and 2017 .....................................................................
Unrealized actuarial gain (loss) on pension benefits, net of tax
of $497, ($144), and ($194) in 2019, 2018 and 2017,
respectively....................................................................................
Total other comprehensive income (loss) ...................................
(518)
849
(1,772)
(1,441)
(236)
161
525
450
79
(207)
699
571
Total comprehensive income............................................................ $
192,027
$
70,434
$
28,180
The accompanying notes are an integral part of these consolidated financial statements.
41
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive Retained
Earnings
Loss
Total
Stockholders’
Equity
BALANCE AT JANUARY 1, 2017.............................
29,250 $
28 $
172,875 $
(2,710) $ 332,891 $
503,084
7,542
7,542
Cumulative-effect adjustment from adoption of ASC
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 options and 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......................
Net income ...................................................................
—
569
(129)
92
—
—
—
—
—
—
—
BALANCE AT DECEMBER 31, 2017 .......................
29,782
—
1
—
—
—
—
—
—
—
—
—
29
—
5,086
(9,188)
4,934
23,337
1,340
—
—
—
—
—
—
—
—
—
—
—
—
699
(207)
79
—
—
—
—
—
—
(16,634)
—
—
—
27,609
198,384
(2,139)
351,408
BALANCE AT DECEMBER 31, 2018 .......................
28,889
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 gain on pension benefits .............
Unrealized gain on marketable securities ....................
Foreign currency translation adjustment......................
Net income ...................................................................
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 loss on pension benefits..............
Unrealized gain on marketable securities ....................
Foreign currency translation adjustment......................
Net income ...................................................................
BALANCE AT DECEMBER 31, 2019 .......................
591
(1,572)
—
(1)
4,010
(103,153)
—
—
—
—
—
—
525
161
(236)
—
—
—
—
—
—
(18,823)
—
—
—
69,984
5,343
20,027
1,553
—
—
—
—
—
126,164
(1,689)
402,569
4,359
(7,302)
5,549
21,686
1,661
—
—
—
—
—
—
—
—
—
—
—
(1,772)
849
(518)
—
—
—
—
—
(20,506)
—
—
—
— 193,468
88
—
—
—
—
—
—
—
565
(121)
98
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28
—
—
—
—
—
—
—
—
—
—
29,431 $
28 $
152,117 $
(3,130) $ 575,531 $
The accompanying notes are an integral part of these consolidated financial statements.
42
5,087
(9,188)
4,934
23,337
1,340
(16,634)
699
(207)
79
27,609
547,682
4,010
(103,154)
5,343
20,027
1,553
(18,823)
525
161
(236)
69,984
527,072
4,359
(7,302)
5,549
21,686
1,661
(20,506)
(1,772)
849
(518)
193,468
724,546
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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 (accretion of discount) on marketable
securities.........................................................................................
Deferred income taxes....................................................................
Increase (decrease) in accounts receivable allowances..................
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 .................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................
Acquisition of technology licenses.................................................
Purchases of marketable securities.................................................
Proceeds from sales and maturities of marketable securities .........
Net cash provided by (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 IN CASH AND CASH EQUIVALENTS ............
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ............................................................................................
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......... $
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Year Ended December 31,
2018
2017
2019
193,468
$
69,984
$
27,609
19,190
5,213
249
23,347
(192)
4,019
57
(13,259)
(9,523)
(2,132)
(6,556)
10,618
224,499
(24,114)
(1,026)
(207,240)
70,334
(162,046)
9,908
(7,302)
(20,506)
—
—
(17,900)
44,553
18,918
5,267
553
21,580
227
(4,465)
(28)
5,754
(23,770)
(1,495)
1,336
(9,897)
83,964
(24,677)
(900)
(62,833)
157,551
69,141
9,353
(103,153)
(18,823)
8,000
(8,000)
(112,623)
40,482
134,137
178,690
$
93,655
134,137
18,374
6,083
360
24,677
1,100
15,838
209
(10,479)
(4,523)
(17,646)
396
20,041
82,039
(32,496)
—
(151,663)
149,443
(34,716)
10,020
(9,188)
(16,634)
5,000
(5,000)
(15,802)
31,521
62,134
93,655
4,913
—
$
$
$
Unpaid property and equipment ..................................................... $
Unpaid technology licenses............................................................ $
4,355
$
— $
1,818
100
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid (refund) for income taxes, net of refunds (Note 11)...... $
21,327
$
7,437
$
(1,571)
The accompanying notes are an integral part of these consolidated financial statements.
43
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 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, battery-powered tools, industrial controls, and “home-automation,” or
“internet of things” applications such as networked thermostats, power strips and other building-automation and
security devices. The Company also supplies high-voltage LED drivers, which are AC-DC ICs specifically
designed for lighting applications that utilize light-emitting diodes. In 2018, the Company introduced a new
category of power-conversion ICs: a family of motor-driver ICs addressing brushless DC (BLDC) motors used
in refrigerators, HVAC systems, ceiling fans and other consumer-appliance and light commercial applications.
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) and silicon-carbide (SiC) MOSFETs. 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 the high-voltage power conversion
markets. 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.
44
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 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 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
45
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.
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.
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
46
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, 2019, and December 31, 2018, the
Company’s marketable securities consisted primarily of commercial paper, corporate bonds, government securities
and/or other high-quality commercial securities.
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 $1.4 million, $1.3 million and $1.2 million in 2019,
2018 and 2017, respectively.
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, 2019, 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. In the year ended December 31, 2019, the
47
Company realized a foreign exchange transaction loss of $0.3 million and a loss of $0.1 million in each of 2018
and 2017.
The functional currencies of the Company’s other subsidiaries are the local currencies. Accordingly, all
assets and liabilities are translated into U.S. dollars at the current exchange rates as of the applicable balance sheet
date. Revenues and expenses are translated at the average exchange rate prevailing during the period. Cumulative
gains and losses from the translation of the foreign subsidiaries’ financial statements have been included in
stockholders’ equity.
Warranty
The Company generally warrants that its products will substantially conform to the published
specifications for 12 months from the date of shipment. The Company’s liability is limited to either a credit equal
to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial,
and as a result, the Company does not record a specific warranty reserve.
Advertising
Advertising costs are expensed as incurred. In 2019, advertising costs amounted to $1.4 million and were
$1.2 million and $1.3 million in each of 2018 and 2017.
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 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, 2019. 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 February 2016, the FASB amended the existing accounting standards for leases, Accounting Standards
Update (ASU) 2016-02, Leases (Topic 842). The amendments require lessees to recognize, on the balance sheet,
assets and liabilities for the rights and obligations created by leases. The accounting by lessors will remain largely
unchanged from that applied under previous U.S. GAAP. The Company adopted the new standards in the first
quarter of 2019, effective January 1, 2019, using the optional transition method, under which the new standards
were applied prospectively rather than restating the prior periods presented. The Company elected the practical
expedients under the transition guidance, which includes the use of hindsight in determining the lease term and
the practical expedient package to not reassess whether any expired or existing contracts are or contain leases, to
48
not reassess the classification of any expired or existing leases, and to not reassess initial direct costs for any
existing leases. In addition, the Company elected the practical expedient to recognize lease and non-lease
components as a single lease component. The Company has elected not to record on the balance sheet leases with
an initial term of twelve months or less. Upon adoption, the Company recognized both right-of-use assets and
corresponding lease liabilities of approximately $7.3 million and $7.2 million, respectively, on the consolidated
balance sheet. The difference between the right-of-use assets and lease liabilities was due to prepaid rent. There
was no impact on the consolidated statement of income or the consolidated statement of cash flows.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which
modifies the measurement of expected credit losses on certain financial instruments. In addition, for available-for-
sale debt securities, the standard eliminates the concept of other-than-temporary impairment and requires the
recognition of an allowance for credit losses rather than reductions in the amortized cost of the securities. The
Company is required to adopt the new standards in the first quarter of fiscal 2020, with early adoption permitted.
The amendments require a modified-retrospective approach with a cumulative-effect adjustment to retained
earnings as of the beginning of the first reporting period. The Company does not expect the standard to have a
material impact on its financial statements upon adoption.
3. COMPONENTS OF THE COMPANY’S CONSOLIDATED BALANCE SHEETS:
Accounts Receivable
(in thousands)
Accounts receivable trade................................................................................................ $
Accrued ship and debit ....................................................................................................
Allowance for stock rotation and rebate..........................................................................
Allowance for doubtful accounts.....................................................................................
Total .............................................................................................................................. $
Inventories
December 31,
2019
December 31,
2018
61,036
(33,475)
(2,524)
(763)
24,274
$
$
54,055
(40,118)
(2,159)
(706)
11,072
(in thousands)
Raw materials .................................................................................................................. $
Work-in-process...............................................................................................................
Finished goods .................................................................................................................
Total .............................................................................................................................. $
Prepaid Expenses and Other Current Assets
December 31,
2019
December 31,
2018
39,058
25,982
25,340
90,380
$
$
41,138
15,612
24,107
80,857
(in thousands)
Prepaid income tax .......................................................................................................... $
Prepaid legal fees.............................................................................................................
Prepaid maintenance agreements.....................................................................................
Advance to suppliers........................................................................................................
Interest receivable............................................................................................................
Other ................................................................................................................................
Total .............................................................................................................................. $
49
December 31,
2019
December 31,
2018
5,615
16
819
3,579
1,279
4,289
15,597
$
$
3,081
181
2,047
2,157
595
3,854
11,915
Property and Equipment
(in thousands)
Land ................................................................................................................................. $
Construction-in-progress .................................................................................................
Building and improvements.............................................................................................
Machinery and equipment ...............................................................................................
Computer software and hardware and office furniture and fixtures................................
Accumulated depreciation ...............................................................................................
Total .............................................................................................................................. $
December 31,
2019
December 31,
2018
21,790
18,604
55,785
168,576
52,265
317,020
(200,401)
116,619
$
$
20,288
21,696
53,610
160,028
53,681
309,303
(195,186)
114,117
Depreciation expense for property and equipment for fiscal years ended December 31, 2019, 2018 and
2017, was approximately $19.2 million, $18.9 million and $18.4 million, respectively, and was determined using
the straight-line method over the following useful lives:
Building and improvements .................................................................................................................................... 4-40 years
2-8 years
Machinery and equipment.......................................................................................................................................
4-7 years
Computer software and hardware and office furniture and fixtures .......................................................................
Total property and equipment (excluding accumulated depreciation) located in the United States at
December 31, 2019, 2018 and 2017, was approximately $160.7 million, $167.6 million and $159.5 million,
respectively. In 2019, approximately 14% of total property and equipment (excluding accumulated depreciation)
was held in Thailand by one of the Company’s subcontractors. In each of 2018 and 2017, 12% of total property
and equipment was held in Thailand. No other country held 10% or more of total property and equipment in the
periods presented.
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the three years ended December 31, 2019:
(in thousands)
Balance at January 1, 2017........................................................... $
Other comprehensive income (loss) before reclassifications.......
Amounts reclassified from accumulated other comprehensive
loss ...............................................................................................
Other comprehensive income.......................................................
Balance at December 31, 2017.....................................................
Other comprehensive income (loss) before reclassifications.......
Amounts reclassified from accumulated other comprehensive
loss ...............................................................................................
Other comprehensive income.......................................................
Balance at December 31, 2018.....................................................
Other comprehensive income (loss) before reclassifications.......
Amounts reclassified from accumulated other comprehensive
loss ...............................................................................................
Other comprehensive loss ............................................................
Balance at December 31, 2019..................................................... $
Unrealized
Gains and
Losses on
Available-for-
Sale Securities
Defined
Benefit
Pension
Items
Foreign
Currency
Items
Total
(220) $ (1,936)
502
(207)
$
(554) $ (2,710)
374
79
—
(207)
(427)
161
—
161
(266)
849
—
849
583
197 (1)
699
(1,237)
401
124 (1)
525
(712)
(1,839)
67 (1)
(1,772)
$ (2,484)
—
79
(475)
(236)
—
(236)
(711)
(518)
197
571
(2,139)
326
124
450
(1,689)
(1,508)
—
(518)
67
(1,441)
(1,229) $ (3,130)
$
_______________
(1)
This component of accumulated other comprehensive loss is included in the computation of net periodic pension cost
for the years ended December 31, 2019, 2018 and 2017.
50
4. FAIR VALUE MEASUREMENTS:
ASC 820-10, Fair Value Measurements, clarifies that fair value is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined based on assumptions
that market participants would use in pricing an asset or liability. As a basis for considering such assumptions,
ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as
follows: (Level 1) observable inputs such as quoted prices for identical assets in active markets; (Level 2) inputs
other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3)
unobservable inputs in which there is little or no market data, which requires the Company to develop its own
assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize
the use of unobservable inputs when determining fair value.
The Company’s cash 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 commercial
paper. 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.
The fair value hierarchy of the Company’s cash equivalents and marketable securities at December 31,
2019, and 2018, was as follows:
(in thousands)
Corporate securities................................................ $
Commercial paper ..................................................
Money market funds...............................................
Total................................................................... $
(in thousands)
Corporate securities................................................ $
Commercial paper ..................................................
Money market funds...............................................
Total................................................................... $
Fair Value Measurement at
December 31, 2019
Total Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
232,398
146,955
2,983
382,336
$
$
— $
—
2,983
2,983
$
232,398
146,955
—
379,353
Fair Value Measurement at
December 31, 2018
Total Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
94,451
96,366
304
191,121
$
$
— $
—
304
304
$
94,451
96,366
—
190,817
The Company did not transfer any investments between level 1 and level 2 of the fair value hierarchy in
the years ended December 31, 2019, and 2018.
51
5. MARKETABLE SECURITIES:
Amortized cost and estimated fair market value of marketable securities classified as available-for-sale
(excluding cash equivalents) at December 31, 2019, were as follows:
(in thousands)
Investments due in 3 months or less:
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated Fair
Market Value
Corporate securities ................................................ $
Total......................................................................
$
15,934
15,934
$
18
18
Investments due in 4-12 months:
Corporate securities ................................................
Total......................................................................
71,223
71,223
Investments due in 12 months or greater:
Corporate securities ................................................
Total......................................................................
Total marketable securities..................................... $
144,658
144,658
231,815
$
269
269
302
302
589
$
— $
—
—
—
(6)
(6)
(6) $
15,952
15,952
71,492
71,492
144,954
144,954
232,398
Amortized cost and estimated fair market value of marketable securities classified as available-for-sale
(excluding cash equivalents) at December 31, 2018, were as follows:
(in thousands)
Investments due in 3 months or less:
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated Fair
Market Value
Corporate securities ......................................... $
Total ..............................................................
$
6,788
6,788
— $
—
Investments due in 4-12 months:
Corporate securities .........................................
Total ..............................................................
Investments due in 12 months or greater:
Corporate securities .........................................
Total ..............................................................
Total marketable securities.............................. $
60,123
60,123
27,806
27,806
94,717
$
—
—
2
2
2
$
(2) $
(2)
(244)
(244)
(22)
(22)
(268) $
6,786
6,786
59,879
59,879
27,786
27,786
94,451
The weighted average interest rate of investments at December 31, 2019 and 2018, was approximately
2.17% and 2.65%, respectively. As of December 31, 2019 and 2018, there were no individual securities that had
been in a continuous loss position for 12 months or greater.
6. GOODWILL AND INTANGIBLE ASSETS:
The carrying amount of goodwill as of December 31, 2019 and 2018 was $91.8 million with no changes
to goodwill in any of the respective fiscal years.
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.
The Company amortizes the cost of all intangible assets over the shorter of the estimated useful life or
the term of the developed technology, customer relationships, technology licenses and in-place leases, which range
from two to twelve years, with the exception of $1.3 million paid to acquire an internet domain name. The Company
acquired the rights to the internet domain name www.power.com, which is now the Company’s primary domain
52
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 $5.2 million, $5.3
million and $6.1 million in the years ended December 31, 2019, 2018 and 2017, respectively. During the year
ended December 31, 2019, the Company placed in service $4.7 million of in-process research and development
intangible assets. The Company does not believe there is any significant residual value associated with the following
intangible assets:
Gross
(in thousands)
Domain name............................................ $ 1,261
In-process research and development.......
—
37,960
Developed technology ..............................
20,030
Customer relationships .............................
Technology licenses..................................
1,926
Total intangible assets............................. $ 61,177
$
December 31, 2019
Accumulated
Amortization
$
December 31, 2018
Accumulated
Amortization
$
Net
— $ 1,261
—
—
12,027
(25,933)
1,932
(18,098)
1,645
(281)
(44,312) $ 16,865
Gross
$ 1,261
4,690
33,270
20,030
1,000
$ 60,251
$
Net
— $ 1,261
4,690
—
10,806
(22,464)
3,510
(16,520)
885
(115)
(39,099) $ 21,152
The estimated future amortization expense related to definite-lived intangible assets at December 31,
2019, is as follows:
Fiscal Year
2020 ................................................................................................................................................................ $
2021 ................................................................................................................................................................
2022 ................................................................................................................................................................
2023 ................................................................................................................................................................
2024 ................................................................................................................................................................
Thereafter .......................................................................................................................................................
Total.............................................................................................................................................................. $
Estimated
Amortization
(in thousands)
4,359
3,494
2,415
2,173
1,279
1,884
15,604
7. STOCK PLANS AND SHARE BASED COMPENSATION:
Stock Plans
As of December 31, 2019, 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
53
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 $120,000. At each outside director’s election, such award would consist entirely of
RSUs or entirely of stock options. The quantity of options would be calculated by dividing $120,000 by the Black-
Scholes value on the date of grant. The quantity of RSUs issued would be calculated by dividing $120,000 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 2016 Plan. As of December 31, 2019, 0.8 million awards have been issued and
approximately 1.7 million shares of common stock remain available for future grant under the 2016 Plan.
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, 2019, of the shares reserved for issuance, 3.2 million shares had been purchased and 0.3
million shares were reserved for future issuance under the Purchase Plan.
Shares Reserved
As of December 31, 2019, the Company had approximately 2.1 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, 2019, 2018 and 2017:
(in thousands)
Cost of revenues ...................................................................................... $
Research and development ......................................................................
Sales and marketing.................................................................................
General and administrative ......................................................................
Total stock-based compensation expense .............................................. $
Year Ended December 31,
2018
2019
2017
1,237
8,423
5,015
8,672
23,347
$
$
1,097
7,688
4,729
8,066
21,580
$
$
1,321
8,496
5,197
9,663
24,677
54
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, 2019:
Unrecognized Compensation
Expense for Unvested
Awards
(in thousands)
Long-term performance-based awards ...................................... $
Restricted stock units.................................................................
Purchase plan.............................................................................
Total unrecognized compensation expense ............................. $
1,693
35,276
142
37,111
Weighted Average
Remaining Recognition
Period
(in years)
2.00
2.94
0.08
Stock-based compensation expense in the year ended December 31, 2019, was approximately $23.3
million (comprising approximately $17.5 million related to restricted stock units, $4.1 million related to
performance-based awards and $1.7 million related to the Company’s Purchase Plan).
Stock-based compensation expense in the year ended December 31, 2018, was approximately $21.6
million (comprising approximately $16.6 million related to restricted stock units, $3.4 million related to
performance-based awards and $1.6 million related to the Company’s Purchase Plan).
Stock-based compensation expense in the year ended December 31, 2017, was approximately $24.7
million (comprising approximately $15.2 million related to restricted stock units, $8.2 million related to
performance-based awards and $1.3 million related to the Company’s Purchase Plan).
The Company did not grant stock options in the years ended December 31, 2019, 2018 and 2017, 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,
2019, 2018 and 2017:
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,
2018
1.94%
31%
0.89%
0.50
$17.33
2019
2.28%
37%
0.91%
0.50
$19.39
2017
0.91%
30%
0.80%
0.50
$16.74
55
A summary of stock options outstanding as of December 31, 2019, and activity during three years then
ended, is presented below:
(shares and intrinsic value in thousands)
Outstanding at January 1, 2017 .......................................
Granted ............................................................................
Exercised..........................................................................
Forfeited or expired .........................................................
Outstanding at December 31, 2017 .................................
Granted ............................................................................
Exercised..........................................................................
Forfeited or expired .........................................................
Outstanding at December 31, 2018 .................................
Granted ............................................................................
Exercised..........................................................................
Forfeited or expired .........................................................
Outstanding at December 31, 2019 .................................
Vested and Exercisable at December 31, 2019................
Weighted
Average
Exercise
Price
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
Shares
$
$
697
—
(186) $
—
511
—
(176) $
—
335
—
(168) $
—
167
167
$
$
28.62
—
27.48
—
29.03
—
22.60
—
32.41
—
25.96
—
38.88
1.30
1.30
$
$
10,051
10,051
The total intrinsic value of options exercised during the year ended December 31, 2019, 2018 and 2017,
was $8.3 million, $7.5 million and $8.9 million, respectively.
The following table summarizes the stock options outstanding at December 31, 2019:
Options Outstanding
Options Exercisable
Options
Outstanding
92
75
167
Weighted Average
Remaining
Contractual Term
(in years)
0.74
1.99
1.30
Weighted
Average
Exercise
Price
$
$
$
36.80
41.43
38.88
Options
Exercisable
92
75
167
Weighted
Average
Exercise
Price
$
$
$
36.80
41.43
38.88
(shares in thousands)
Range of Exercise Prices
$32.26 - $38.07................................
$39.49 - $42.88................................
PSU Awards
Under the performance-based awards program, the Company grants awards in the performance year in
an amount equal to twice the target number of shares to be issued if the maximum performance metrics are met.
The number of shares that are released at the end of the performance year can range from zero to 200% of the
target number depending on the Company’s performance. The performance metrics of this program are annual
targets consisting of a combination of net revenue, non-GAAP operating 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.
56
A summary of PSU awards outstanding as of December 31, 2019, and activity during the three years then
ended, is presented below:
(shares and intrinsic value in thousands)
Outstanding at January 1, 2017 ...........................................
Granted ................................................................................
Vested...................................................................................
Forfeited or canceled ...........................................................
Outstanding at December 31, 2017 .....................................
Granted ................................................................................
Vested...................................................................................
Forfeited or canceled ...........................................................
Outstanding at December 31, 2018 .....................................
Granted ................................................................................
Vested...................................................................................
Forfeited or canceled ...........................................................
Outstanding at December 31, 2019 .....................................
Outstanding and expected to vest at December 31, 2019....
Shares
$
99
$
88
(99) $
(9) $
$
79
$
89
(79) $
(63) $
26
$
$
93
(26) $
(32) $
61
$
61
Weighted
Average Grant-
Date Fair Value
Per Share
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
— $
— $
5,999
5,999
46.25
63.99
46.25
63.99
63.99
62.87
63.99
62.87
62.87
70.11
62.87
70.11
70.11
The grant-date fair value of PSU awards released, which were fully vested, in the years ended December 31,
2019, 2018 and 2017 were approximately $1.6 million, $5.1 million and $4.6 million, respectively.
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 2019, 2018 and 2017 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.
57
A summary of PRSU awards outstanding as of December 31, 2019, and activity during the three years
then ended, is presented below:
(shares and intrinsic value in thousands)
Outstanding at January 1, 2017 ..........................................
Granted ...............................................................................
Vested .................................................................................
Forfeited or canceled ..........................................................
Outstanding at December 31, 2017 ....................................
Granted ...............................................................................
Vested .................................................................................
Forfeited or canceled ..........................................................
Outstanding at December 31, 2018 ....................................
Granted ...............................................................................
Vested .................................................................................
Forfeited or canceled ..........................................................
Outstanding at December 31, 2019 ....................................
Outstanding and expected to vest at December 31, 2019...
$
$
Shares
150
71
—
(37) $
$
184
$
72
(38) $
(5) $
$
213
$
72
(70) $
(71) $
144
$
58
Weighted
Average Grant-
Date Fair Value
Per Share
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
1.50
2.00
$
$
14,203
5,768
47.65
63.00
—
51.59
52.80
59.90
52.45
43.26
55.48
68.17
43.26
63.00
64.05
The grant-date fair value of PRSU awards released, which were fully vested, in the year ended
December 31, 2019 and 2018 were approximately $3.0 million and $2.0 million, respectively.
RSU Awards
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.
58
A summary of RSU awards outstanding as of December 31, 2019, and activity during the three years then
ended, is presented below:
(shares and intrinsic value in thousands)
Outstanding at January 1, 2017 ...........................................
Granted ................................................................................
Vested...................................................................................
Forfeited...............................................................................
Outstanding at December 31, 2017 .....................................
Granted ................................................................................
Vested...................................................................................
Forfeited...............................................................................
Outstanding at December 31, 2018 .....................................
Shares
$
718
$
558
(284) $
(44) $
$
948
$
275
(296) $
(32) $
895
$
Granted ................................................................................
291
$
Vested...................................................................................
(301) $
Forfeited...............................................................................
(25) $
Outstanding at December 31, 2019 .....................................
Outstanding and expected to vest at December 31, 2019....
$
860
801
Weighted
Average Grant-
Date Fair Value
Per Share
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
1.58
1.50
$
$
85,037
79,192
47.54
60.82
46.52
50.89
55.51
62.85
53.78
59.43
58.19
69.79
56.19
63.43
62.66
The grant-date fair value of RSUs vested in the years ended December 31, 2019, 2018 and 2017, was
approximately $16.9 million, $15.9 million and $13.2 million, respectively.
8. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC NET REVENUES:
Customer Concentration
The Company's top ten customers accounted for approximately 54%, 56% and 54% of revenues in 2019,
2018 and 2017, 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 2019, 2018
and 2017 were $304.6 million, $313.9 million and $330.9 million, respectively. Direct sales to OEMs and power-
supply manufacturers accounted for the remainder.
In each of 2019, 2018 and 2017 one distributor accounted for more than 10% of revenues. The following
table discloses this customer’s percentage of net revenues for the respective years:
Customer
Avnet........................................................................................................
Year Ended December 31,
2018
2019
2017
11%
14%
16%
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, 2019 and December 31, 2018, 63% and 64% of accounts
receivable were concentrated with the Company’s top ten customers, respectively.
59
The following customers represented 10% or more of accounts receivable:
Customer
Powertech Distribution Ltd..............................................................................................
Avnet................................................................................................................................
December 31,
2019
December 31,
2018
10%
*
11%
17%
_______________
*
Total customer accounts receivable was less than 10% of net accounts receivables.
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,
2018
2017
2019
10,662
237,341
36,297
30,395
36,025
15,496
20,197
34,256
420,669
$
$
15,315
218,752
43,081
33,877
49,834
19,897
14,403
20,796
415,955
$
$
16,647
227,335
50,307
38,012
48,230
20,769
11,558
18,897
431,755
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, $30.0 million and $110.0 million in 2015, 2017, and 2018,
respectively, with repurchases to be executed according to pre-defined price/volume guidelines. In 2017, 2018 and
2019 the Company purchased approximately 129,000, 1,572,000 and 121,000 shares, respectively, for
approximately $9.2 million, $103.2 million and $7.3 million, respectively. As of December 31, 2019, the Company
had $43.9 million available for future stock repurchases, which has no expiration date. 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:
First Quarter............................................................................................. $
Second Quarter ........................................................................................ $
Third Quarter ........................................................................................... $
Fourth Quarter ......................................................................................... $
0.17
0.17
0.17
0.19
$
$
$
$
0.16
0.16
0.16
0.16
$
$
$
$
0.14
0.14
0.14
0.14
Year Ended December 31,
2018
2017
2019
60
The Company paid a total of approximately $20.5 million, $18.8 million and $16.6 million in cash
dividends during 2019, 2018 and 2017, respectively.
In January 2019, the Company’s board of directors declared a $0.17 per share quarterly dividend for each
quarter in 2019. In October 2019, the Company’s board of directors raised the cash dividends per share with the
declaration of five cash dividends, consisting of (a) a dividend in the amount of $0.02 per share to be paid to
stockholders of record at the end of the fourth quarter in 2019, which is in addition to the dividend in the amount
of $0.17 per share to be paid to stockholders of record at the end of the fourth quarter in 2019 previously declared
by the Board in January 2019, and (b) a dividend in the amount of $0.19 per share to be paid to stockholders of
record at the end of each quarter in 2020. 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.
A summary of the earnings per share calculation is as follows:
(in thousands, except per share amounts)
Basic earnings per share:
Year Ended December 31,
2018
2019
2017
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............................................................... $
193,468
29,267
6.61
193,468
29,267
549
29,816
6.49
$
$
$
$
69,984
29,456
2.38
69,984
29,456
691
30,147
2.32
$
$
$
$
27,609
29,674
0.93
27,609
29,674
871
30,545
0.90
_______________
(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 2019, 2018 and 2017 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, 2019, 2018, and 2017, no outstanding stock awards were determined
to be anti-dilutive and therefore were excluded from the computation of diluted earnings per share.
61
11. PROVISION (BENEFIT) FOR INCOME TAXES:
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 income before income taxes ........................................................ $
Year Ended December 31,
2018
2017
2019
82,692
139,722
222,414
$
$
(6,529) $
66,293
59,764
$
(6,944)
67,243
60,299
The components of the provision (benefit) for income taxes are as follows:
(in thousands)
Current provision (benefit):
Federal ................................................................................................ $
State ....................................................................................................
Foreign................................................................................................
Deferred provision (benefit):
Federal ................................................................................................
State ....................................................................................................
Foreign................................................................................................
Total ................................................................................................. $
Year Ended December 31,
2018
2017
2019
18,293
184
1,293
19,770
9,683
—
(507)
9,176
28,946
$
$
(6,382) $
4
938
(5,440)
(4,593)
—
(187)
(4,780)
(10,220) $
35,311
4
1,483
36,798
(3,640)
—
(468)
(4,108)
32,690
62
The provision (benefit) for income taxes differs from the amount that would result by applying the
applicable federal income tax rate to income before income taxes, as follows:
Year Ended December 31,
2019
2018
2017
Provision (benefit) computed at Federal statutory rate............................
Business tax credits..................................................................................
Stock-based compensation.......................................................................
Foreign income taxed at different rate.....................................................
GILTI inclusion........................................................................................
U.S. Tax Act - transition tax ....................................................................
U.S. Tax Act - deferred tax asset and liability adjustment.......................
Valuation allowance.................................................................................
Other ........................................................................................................
Total ......................................................................................................
21.0%
(2.4)
(0.2)
(12.7)
6.2
0.1
—
0.8
0.2
13.0%
21.0 %
(9.1)
(2.2)
(25.0)
10.6
(16.2)
—
2.8
1.0
(17.1)%
35.0%
(5.7)
(5.0)
(37.3)
—
54.1
8.1
2.2
2.8
54.2%
The Company’s effective tax rate is impacted by the geographic distribution of the Company’s world-
wide earnings in lower-tax jurisdictions, federal research tax credits and the recognition of excess tax benefits
related to share-based payments. These benefits were partially offset by foreign income subject to U.S. tax, known
as global intangible low-taxed income. The Company’s primary jurisdiction where foreign earnings are derived is
the Cayman Islands, which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not
material. The Company has not been granted any incentivized tax rates and does not operate under any tax holidays
in any jurisdiction. Additionally, in 2018 the Company’s effective tax rate was favorably impacted by revisions to
the Tax Act resulting in a $9.7 million income tax benefit. In 2017 our effective tax rate was also impacted by a
$37.5 million charge resulting from the enactment of the Tax Act.
The components of the net deferred income tax assets (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.....................................................................................................................
Other ................................................................................................................................
Net deferred tax assets ..................................................................................................... $
December 31,
2019
2018
$
3,099
18,968
1,644
157
899
1,000
(20,822)
4,945
(2,273)
—
(2,273)
2,672
$
3,695
18,052
3,050
157
3,144
—
(19,955)
8,143
(1,423)
(30)
(1,453)
6,690
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
63
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, 2019, the Company continues to maintain a valuation allowance primarily as a result
of capital losses for federal purposes, and on its California, New Jersey and Canada deferred tax assets as the
Company believes that it is not more likely than not that the deferred tax assets will be fully realized.
As of December 31, 2019, the Company had utilized all of its federal research and development tax credit
carry-forwards. As of December 31, 2019, the Company had California research and development tax credit carry-
forwards of approximately $27.5 million (there is no expiration of research and development tax credit carry-
forwards for the state of California) and California net operating losses of $24.6 million which will begin to expire
in 2031. As of December 31, 2019, the Company had Canadian scientific research and experimental development
tax credit carry-forwards of approximately $3.1 million and New Jersey research and experimental development
tax credit carry-forwards of approximately $0.7 million, which will start to expire in 2030 and 2026, respectively.
The Tax Act signed into law on December 22, 2017, generally allows companies to repatriate accumulated
foreign earnings without incurring additional U.S. federal taxes beginning after December 31, 2017. Accordingly,
the Company has not provided for U.S. taxes on its undistributed earnings of foreign subsidiaries. The determination
of the future tax consequences of the remittance of these earnings is not practicable.
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, 2017.............................................................................. $
Gross Increase for Tax Positions of Current Year ........................................................................................
Gross Decrease for Tax Positions of Prior Years .........................................................................................
Unrecognized Tax Benefits Balance at December 31, 2017........................................................................
Gross Increase for Tax Positions of Current Year ........................................................................................
Gross Decrease for Tax Positions of Prior Years .........................................................................................
Unrecognized Tax Benefits Balance at December 31, 2018........................................................................
Gross Increase for Tax Positions of Current Year ........................................................................................
Gross Decrease for Tax Positions of Prior Years .........................................................................................
Unrecognized Tax Benefits Balance at December 31, 2019........................................................................ $
Unrecognized
Tax Benefits
15,393
1,699
(409)
16,683
1,994
(70)
18,607
1,379
(937)
19,049
The Company's total unrecognized tax benefits as of December 31, 2019, 2018 and 2017, were $19.0
million, $18.6 million and $16.7 million, respectively. An income tax benefit of $10.6 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,
2019 and 2018, which have been recorded in long-term income taxes payable in the accompanying consolidated
balance sheets.
64
As of December 31, 2019, 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 are currently no pending income tax audits.
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. On July 24, 2018, the U.S. Ninth Circuit Court of Appeals reversed the U.S. Tax Court’s decision Altera
Corp. v. Commissioner; the reversal was subsequently withdrawn. On June 7, 2019, the Ninth Circuit Court of
Appeals overturned the U.S. Tax Court decision. 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. LEASES AND COMMITEMENTS:
Facilities and Leases
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’s leases consist of operating leases for administrative office spaces, research-and-
development facilities, design centers and sales offices in various countries around the world. The Company
determines if an arrangement is a lease at inception. Some lease agreements contain lease and non-lease components,
which are accounted for as a single lease component. Total lease expense was $2.5 million, $2.2 million and $2.0
million in the years ended December 31, 2019, 2018 and 2017, respectively, while short-term and variable lease
expenses were not material during these periods.
Balance sheet information related to leases was as follows:
Balance Sheet Classification
(In thousands)
Right-of-use assets
Operating lease assets
Lease liabilities
Current operating lease liabilities
Non-current operating lease liabilities Other liabilities...............................................................................
Other assets .................................................................................... $
Other accrued liabilities ................................................................. $
Total .......................................................................................................................................................... $
December 31,
2019
9,521
1,954
7,031
8,985
Initial lease terms are determined at commencement and may include options to extend or terminate the
lease when it is reasonably certain the Company will exercise the option. Remaining lease terms range from one
to nine years, some of which include options to extend for up to six years, and some of which include options to
terminate within one year. Leases with an initial term of twelve months or less are not recorded on the balance
sheet. As the Company’s leases do not provide an implicit rate, the present value of future lease payments is
determined using the Company’s incremental borrowing rate based on information available at commencement
date.
Lease term and discount rate
Weighted average remaining lease term.......................................................................................................
Weighted average discount rate....................................................................................................................
December 31,
2019
4.8 years
3.9%
65
Supplemental cash flows information related to leases was as follow:
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases.............................................................................................. $
Right-of-use assets obtained in exchange for new operating lease obligations ........................................... $
Year-ended
December 31,
2019
2,964
4,884
Future minimum lease payments under all non-cancelable lease agreements as of December 31, 2019,
are as follows:
(In thousands)
2020.............................................................................................................................................................. $
2021..............................................................................................................................................................
2022..............................................................................................................................................................
2023..............................................................................................................................................................
2024..............................................................................................................................................................
Thereafter .....................................................................................................................................................
Total future minimum lease payments....................................................................................................
Less imputed interest....................................................................................................................................
Total ........................................................................................................................................................ $
December 31,
2019
2,131
2,313
1,923
1,690
699
1,082
9,838
(853)
8,985
Purchase Obligations
At December 31, 2019, 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.
On October 4, 2019, the Company entered into a binding term sheet (the “Term Sheet”) with ON
Semiconductor Corporation and its wholly owned subsidiaries Fairchild Semiconductor International, Inc.,
Fairchild Semiconductor Corporation, Fairchild (Taiwan) Corporation, and Semiconductor Components Industries,
LLC (collectively, “ON”) pursuant to which the parties agreed to end all outstanding legal and administrative
disputes. Pursuant to the Term Sheet, ON agreed to pay the Company $175.0 million in cash. In addition, each
party agreed to release the other party from any claims to damages or monetary relief for certain alleged acts of
patent infringement across the various patent infringement litigations, occurring on or before June 30, 2020, and
not to file any additional action for legal or equitable relief prior to June 30, 2023 (although following that date a
party may file a legal action for alleged patent infringement occurring after June 30, 2020). Neither party granted
any licenses to the other. On October 19, 2019, the parties memorialized the terms of the Term Sheet in a definitive
agreement (the “Definitive Agreement”). On October 22, 2019, the Company received ON’s payment of $175.0
million. Subject to the Definitive Agreement, the Company and ON have dismissed, withdrawn, and/or terminated
all legal proceedings between the parties. The Company recorded a net $169.0 million favorable litigation settlement
within operating expenses for the year ended December 31, 2019 in the consolidated statement of income.
66
On April 1, 2016, Opticurrent, LLC filed a complaint against the Company in the United States District
Court for the Eastern District of Texas. In its complaint, Opticurrent alleges that the Company has infringed and
is infringing one patent pertaining to transistor switch devices. The Company filed a motion to transfer the case
to California, which the Court granted, and the case was assigned to a new judge in San Francisco following the
transfer. On December 21, 2018, the Court granted the Company’s challenge to Opticurrent’s damages expert but
denied the Company’s motion for summary judgment. Following a trial in February 2019, a jury issued a finding
of direct infringement by the Company but found that the Company did not induce infringement, and awarded
Opticurrent damages of $6.7 million. The Company challenged those findings in post-trial proceedings, and the
Court granted one of the Company’s post-trial motions, reducing the damages award to $1.2 million. The Company
believes it has strong defenses, and intends to vigorously defend itself against Opticurrent’s claims through appeals,
which are currently under way, with briefing completed and oral argument to follow in the coming months.
On June 19, 2019, Opticurrent, LLC filed a follow-on lawsuit accusing more of the Company’s products
of infringing the same claim of the same patent asserted in the parties’ prior litigation, as described above. The
Company believes it has strong defenses, and intends to vigorously defend itself against Opticurrent’s claims, with
appeals to follow if necessary.
On January 6, 2020, the Company filed a complaint against CogniPower LLC for infringement of two of
the Company’s patents and seeking a declaration of non-infringement with respect to three patents that CogniPower
had charged the Company’s customers with infringing. The case is in its preliminary stages, and no schedule has
been set for the case at this time, but the Company believes it has strong claims and defenses, and intends to
vigorously defend itself against CogniPower’s infringement claims, with appeals to follow if necessary.
The Company is unable to predict the outcome of legal proceedings with certainty, and there can be no
assurance that 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. 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, 2019, 2018 and 2017. At December 31, 2019, the projected benefit obligation
was $14.8 million, the plan assets were $8.2 million and the net pension liability was $6.6 million. As of
December 31, 2018, the projected benefit obligation was $10.2 million, the plan assets were $6.4 million, and the
net pension liability was $3.8 million. The Company has recorded the unfunded amount as a liability in its
consolidated balance sheet at December 31, 2019 and 2018, under the other liabilities caption. The Company
expects to make contributions to the Pension Plan of approximately $0.4 million during 2020. The unrealized
actuarial loss on pension benefits, net of tax, at December 31, 2019, 2018 and 2017 was $2.5 million, $0.7 million
and $1.2 million, respectively. These amounts were reflected in Note 3 under the caption accumulated other
comprehensive loss.
67
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.
15. 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 Credit Agreement was amended
on April 30, 2018, to extend the termination date from July 26, 2019, to April 30, 2022, with all other terms
remaining the same. The Company’s ability to borrow under the revolving line of credit is conditioned upon the
Company’s compliance with specified covenants, including reporting and financial covenants, primarily a minimum
cash requirement and a debt to earnings ratio. The Credit Agreement terminates on April 30, 2022; 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,
2019, $6.2 million was reserved against the available credit in the form a standby letter of credit. The Company
was compliant with all covenants and had no advances outstanding under the Credit Agreement.
16. 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, 2019 and 2018.
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.
(in thousands, except per share data)
Dec. 31,
2019 (1)
Net revenues........................................... $114,457
Gross profit ............................................
58,225
Net income ............................................. $158,291
Earnings per share
Basic................................................. $
Diluted.............................................. $
5.38
5.28
$
$
0.58
0.57
$
$
0.37
0.37
Shares used in per share calculation
Three Months Ended
(unaudited)
Sept. 30,
June 30, Mar. 31,
Dec. 31,
Sept. 30,
June 30, Mar. 31,
2019
2019
2019
2018
2018
2018
2018
$114,159
$102,865
$ 89,188
$ 93,307
$110,085
$109,482
$103,081
58,131
51,572
45,474
48,005
57,005
56,234
53,544
$ 17,099
$ 10,845
$
$
$
7,233
$ 22,736
$ 17,667
$ 15,381
$ 14,200
0.25
0.25
$
$
0.78
0.77
$
$
0.60
0.59
$
$
0.52
0.51
$
$
0.48
0.46
Basic.................................................
Diluted..............................................
29,427
30,005
29,385
29,866
29,297
29,702
28,951
29,446
29,164
29,651
29,365
29,998
29,505
30,183
29,799
30,552
_______________
(1)
In October 2019 the Company entered into a favorable litigation settlement with ON Semiconductor
Corporation which resulted in a $169.0 million net gain (Refer to Note 13, Legal Proceedings and
Contingencies, in our Notes to Consolidated Financial Statements included in this Annual Report on Form
10-K).
68
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:
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Deductions(1)
Balance at End
of Period
Year ended December 31, 2017.......................... $
Year ended December 31, 2018.......................... $
Year ended December 31, 2019.......................... $
38,075
39,486
40,118
$
$
$
273,492
242,068
230,278
$
$
$
(272,081) $
(241,436) $
(236,921) $
39,486
40,118
33,475
_______________
(1)
Deductions relate to ship and debit credits issued which adjust the sales 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.
69
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 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, 2019, 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, 2019, our internal control over financial reporting was effective.
70
The effectiveness of Power Integrations' internal control over financial reporting as of December 31,
2019, 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 2019,
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, 2019, 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, 2019, 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,
2019, of the Company and our report dated February 6, 2020 expressed an unqualified opinion on those consolidated
financial statements and included an explanatory paragraph relating to the Company’s adoption of Accounting
Standards Update (ASU) 2016-02, Leases (Topic 842).
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 6, 2020
72
Item 9B. Other Information.
Compensation Matters
On February 4, 2020, 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”).
2020 Performance-based Incentive Plan
Approved the 2020 Performance-based Incentive Plan (the “2020 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 2020 PSU Plan’s established
net revenue targets, non-GAAP operating income targets and strategic goals, each as established by the
Compensation Committee. The 2020 target net revenue and non-GAAP operating income levels are intended to
have difficulty in attainment levels consistent with the Company’s 2019 PSU Plan.
The portion of the performance stock units granted under the 2020 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 2020 to be filed with the Securities and Exchange
Commission (“SEC”). “Non-GAAP operating income” means operating income for 2020 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 2020 PSU Plan:
No payout will be made under the net revenue component of the 2020 PSU 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 2020
PSU 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 2020 PSU Plan up to 100% of the net
revenue component of the target when actual net revenue equals target net revenue in the 2020 PSU 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 payout under the net revenue
component of the 2020 PSU Plan.
Non-GAAP Operating Income Component of the 2020 PSU Plan:
No payout will be made under the non-GAAP operating income component of the 2020 PSU Plan if the
Company’s 2020 actual non-GAAP operating income does not exceed at least the established minimum amount
of non-GAAP operating income as set forth in the 2020 PSU Plan. To the extent 2020 actual non-GAAP operating
73
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 2020 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 2020 PSU Plan. If 2020 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 payout under the
non-GAAP operating income component of the 2020 PSU Plan.
Strategic Goals Component of the 2020 PSU Plan:
Each of the five goals in the strategic goals component of the 2020 PSU Plan is assigned a weighting
percentage, which percentages range from 2% to 14%, and which collectively add up to 30%. If the Company’s
2020 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 2020 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 2020 PSU Plan up to 100% of the amount for that goal when actual performance
equals target performance for that goal in the 2020 PSU Plan. To the extent 2020 actual performance for a goal is
better than the established target for the goal, then the payout for performance above target increases 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
2020 PSU Plan.
2020 Target Performance Stock Units
Approved the 2020 target performance stock units for the Officers as follows:
Executive Officer
Balu Balakrishnan
Sandeep Nayyar
Radu Barsan
David “Mike” Matthews
Ben Sutherland
Title
President and Chief Executive Officer..............................................
Chief Financial Officer .....................................................................
Vice President, Technology...............................................................
Vice President, Product Development ..............................................
Vice President, Worldwide Sales ......................................................
2020 Target PSUs
7,500
2,500
2,200
1,700
1,700
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 2020 PSU Plan.
2020 Restricted Stock Unit Grants
Approved restricted stock units, referred to as “RSUs,” grants to the following Officers:
Executive Officer
Balu Balakrishnan
Sandeep Nayyar
Radu Barsan
David “Mike” Matthews
Ben Sutherland
Title
President and Chief Executive Officer..............................................
Chief Financial Officer .....................................................................
Vice President, Technology...............................................................
Vice President, Product Development ..............................................
Vice President, Worldwide Sales ......................................................
2020 RSU Grants
22,000
9,000
7,800
6,000
6,000
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.
74
2020 Long-term Performance-Based Incentive Plan
Approved the 2020 Long-term Performance-Based Incentive Plan (“2020 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 revenue performance as against the 2020
PRSU Plan’s established three year (years 2020, 2021 and 2022) compound annual growth rate (“CAGR”) of
revenue as measured against a specified index of the analog semiconductor industry CAGR (the “Index”). The
level of performance of the Company’s three-year revenue CAGR as against the Index is intended to have a difficulty
in attainment level consistent with the Company’s 2019 PRSU Plan. The portion of the performance stock units
that will vest will be calculated based on the Company’s actual three-year revenue CAGR as compared to the Index
and awarded in early 2023 upon approval by the Compensation Committee. In the event of any mergers, acquisitions
or divestitures, or any patent or other litigation settlements or judgments, during the performance period, the
Company’s target three-year revenue CAGR as against the Index shall be adjusted based on a revised plan approved
by the Board of Directors.
No payout will be made in early 2023 under the 2020 PRSU Plan if the Company’s actual three-year
revenue CAGR does not exceed at least the established minimum amount as measured against the Index as set
forth in the 2020 PRSU Plan. To the extent the Company’s actual three-year revenue CAGR exceeds at least the
established minimum amount as measured against the Index as set forth in the 2020 PRSU Plan, the payout increases
linearly from zero at the minimum CAGR performance level as measured against the Index as set forth in the 2020
PRSU Plan up to 100% when the Company’s actual three-year revenue CAGR equals the target at the specified
level as set forth in the 2020 PRSU Plan. If the Company’s actual three-year revenue CAGR exceeds the target,
then the payout for performance above target increases linearly from the target amount up to a maximum of 200%
of the target when the Company’s actual three-year revenue CAGR equals or exceeds the established amount to
achieve the maximum payout as set forth in the 2020 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 2020 PRSU Plan.
2020 Target PRSUs
Approved the target 2020 PRSUs for the Officers as follows:
Executive Officer
Balu Balakrishnan
Sandeep Nayyar
Radu Barsan
David “Mike” Matthews
Ben Sutherland
Title
President and Chief Executive Officer .............................................
Chief Financial Officer .....................................................................
Vice President, Technology ..............................................................
Vice President, Product Development ..............................................
Vice President, Worldwide Sales ......................................................
2020 Target PRSUs
22,000
3,000
2,600
2,000
2,000
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 2020 PRSU Plan.
2020 Salaries
Approved the 2020 salaries for the Officers, to be effective at the end of March 2020, as follows:
Executive Officer
Balu Balakrishnan
Sandeep Nayyar
Radu Barsan
David “Mike” Matthews
Ben Sutherland
Title
President and Chief Executive Officer..............................................
Chief Financial Officer .....................................................................
Vice President, Technology...............................................................
Vice President, Product Development ..............................................
Vice President, Worldwide Sales ......................................................
2020 Salary
$640,000
$395,000
$370,000
$335,000
$335,000
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 set
forth under the caption “Information About our Executive Officers” in 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, 2019, 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, if any, will be set
forth under the caption “Delinquent Section 16(a) Reports.”
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.
76
Table of Contents
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.
77
Item 15. Exhibits, Financial Statement Schedules
(a)
PART IV
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 Description of Power Integrations, Inc.
Common Stock
4.2 Reference is made to Exhibits 3.1 to 3.2
10.1*
10.2*
10.3*
10.4*
10.5*
Form of Indemnity Agreement for directors
and officers
Power Integrations, Inc. Compliance Policy
Regarding IRC Section 409A
1997 Employee Stock Purchase Plan, as
amended
Forms of agreement under 1997 Employee
Stock Purchase Plan
1997 Outside Directors Stock Option Plan
10.6* Amendment No. 1 to the Power
Integrations, Inc. 1997 Outside Directors
Stock Option Plan, effective as of January
27, 2009
Incorporation by Reference
File
Number
000-23441
000-23441
Exhibit/
Appendix
Reference
3.1
3.1
Filing Date
2/29/2012
4/26/2013
Filed
Herewith
X
333-35421
10.1
9/11/1997
000-23441
10.63
3/2/2009
Form
10-K
8-K
S-1
10-K
DEF14A
000-23441
Appendix B
3/25/2016
S-1
10-Q
10-K
333-35421
000-23441
000-23441
10.5
10.3
10.62
9/11/1997
8/6/2009
3/2/2009
10.7* Amendment No. 2 to the Power
10-Q
000-23441
10.2
5/6/2010
Integrations, Inc. 1997 Outside Directors
Stock Option Plan, effective as of April 12,
2010
10.8*
10.9*
Forms of agreement under 1997 Outside
Directors Stock Option Plan
Form of Director Option Grant Agreement
S-1
10-Q
333-35421
000-23441
10.4
10.9
9/11/1997
5/6/2009
10.10* Director Equity Compensation Program
10.11*
Forms of Stock Option Agreements to be
used in Director Equity Compensation
Program
10.12* Outside Director Cash Compensation
10.13*
10.14*
10.15*
10.16*
Arrangements
2007 Equity Incentive Plan, as amended and
restated
Forms of Option Agreements under the
2007 Equity Incentive Plan
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
X
X
10-Q
000-23441
10.5
11/7/2008
10-Q
000-23441
10.2
8/7/2012
Schedule TO
000-23441
99.(D)(4)
12/3/2008
10-Q
000-23441
10.1
5/6/2010
10-K
000-23441
10.29
2/22/2013
78
Exhibit
Number
10.17*
10.18*
10.19*
10.20*
10.21*
Exhibit Description
Form of Long Term Performance Stock Unit
Notice and Agreement under the 2007
Equity Incentive Plan
Power Integrations, Inc. Amended and
Restated 2016 Incentive Award Plan
Form of Restricted Stock Unit Grant Notice
and Agreement under the 2016 Incentive
Award Plan
Form of Performance Stock Unit Notice and
Agreement under the 2007 Equity Incentive
Plan
Form of Long Term Performance Stock Unit
Notice and Agreement under the 2007
Equity Incentive Plan
10.22† Wafer Supply Agreement between us and
ZMD Analog Mixed Signal Services GmbH
& Co. KG, dated as of May 23, 2003
Incorporation by Reference
File
Number
Exhibit/
Appendix
Reference
000-23441
10.84
Filed
Herewith
Filing Date
2/10/2015
000-23441
10.1
7/25/2019
000-23441
10.25
2/8/2017
Form
10-K
10-Q
10-K
10-K
000-23441
10.26
2/8/2017
10-K
000-23441
10.27
2/8/2017
10-Q
000-23441
10.32
8/7/2003
10.23† Amended and Restated Wafer Supply
10-Q
000-23441
10.31
8/7/2003
Agreement between us and OKI Electric
Industry Co., Ltd., dated as of April 1, 2003
10.24† Amendment Number One to the Amended
8-K
000-23441
10.22
4/18/2006
and Restated Wafer Supply Agreement
between us and OKI Electric Industry Co.,
Ltd., effective as of August 11, 2004
10.25 Amendment Number Two to the Amended
10-Q
000-23441
10.5
8/8/2008
and Restated Wafer Supply Agreement
between Power Integrations International,
Ltd. and OKI Electric Industry Co., Ltd.,
effective as of April 1, 2008
10.26 Amendment Number Three to the Amended
10-Q
000-23441
10.6
8/8/2008
and Restated Wafer Supply Agreement
between Power Integrations International,
Ltd. and OKI Electric Industry Co., Ltd.,
effective as of June 9, 2008
10.27† Amendment Number Four to the Amended
10-Q
000-23441
10.2
11/7/2008
and Restated Wafer Supply Agreement
between Power Integrations International,
Ltd. and OKI Electric Industry Co., Ltd.,
dated September 15, 2008
10.28† Amendment Number Five to the Amended
10-K
000-23441
10.61
3/2/2009
and Restated Wafer Supply Agreement
between Power Integrations International,
Ltd. and OKI Semiconductor Co., Ltd.,
effective as of November 14, 2008
10.29† 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
10.30† Amendment Number Seven to the Amended
and Restated Wafer Supply Agreement
between Power Integrations International,
Ltd. and OKI Semiconductor Co., Ltd.,
effective as of August 8, 2016
10-K
000-23441
10.32
2/11/2016
10-Q
000-23441
10.1
11/1/2016
10.31† Amendment Number Eight to the Amended
10-Q
000-23441
10.1
10/26/2017
and Restated Wafer Supply Agreement
between Power Integrations International,
Ltd. and OKI Semiconductor Co., Ltd.,
effective as of July 26, 2017
79
Exhibit
Number
Exhibit Description
10.32†† Amendment Number Nine to the Amended
and Restated Wafer Supply Agreement,
between Power Integrations International,
Ltd. and Lapis Semiconductor Co., Ltd.
(formerly OKI Semiconductor Co., Ltd.),
effective as of February 6, 2019
10.33† Wafer Supply Agreement, between Seiko
Epson Corporation and Power Integrations
International, Ltd. effective as of April 1,
2005
Incorporation by Reference
File
Number
Exhibit/
Appendix
Reference
000-23441
10.2
Form
10-Q
Filed
Herewith
Filing Date
4/25/2019
10-Q
000-23441
10.1
11/7/2008
10.34† Amendment Number One to the Wafer
10-Q
000-23441
10.1
5/6/2009
Supply Agreement between Power
Integrations International, Ltd. and Seiko
Epson Corporation, with an effective date of
December 19, 2008
10.35† 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
10.36† 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
10.37† Development Addendum to Wafer Supply
Agreement, dated September 22, 2013,
between Seiko Epson Corporation and
Power Integrations International Ltd
10.38† Amendment Number Four to Wafer Supply
Agreement, effective as of April 1, 2015, by
Power Integrations International Ltd. and
Seiko Epson Corporation
10.39† Amendment Number Five to Wafer Supply
Agreement, effective as of November 2,
2015, by Power Integrations International
Ltd. and Seiko Epson Corporation
10.40† Amendment Number Six to Wafer Supply
Agreement, effective as of December 8,
2015, by Power Integrations International
Ltd. and Seiko Epson Corporation
10.41† Amendment Number Seven to Wafer
Supply Agreement, effective as of October
3, 2016, by Power Integrations International
Ltd. and Seiko Epson Corporation
10.42† Amendment Number Eight to Wafer Supply
Agreement, effective as of November 8,
2016 by Power Integrations International
Ltd. and Seiko Epson Corporation
10.43† Amendment Number One to the Amended
and Restated Wafer Supply Agreement
between Power Integrations International,
Ltd. and XFAB Dresden GmbH & Co. KG,
effective as of July 20, 2005
10.44† Wafer Supply Agreement, made and entered
into as of October 1, 2010, by and between
Power Integrations International, Ltd., and
X-FAB Semiconductor Foundries AG
10.45† 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-Q
000-23441
10.1
11/1/2013
10-K
000-23441
10.38
2/11/2016
10-K
000-23441
10.39
2/11/2016
10-K
000-23441
10.40
2/11/2016
10-K
000-23441
10.46
2/8/2017
10-K
000-23441
10.47
2/8/2017
10-K
000-23441
10.66
2/26/2010
10-Q
000-23441
10.2
5/8/2012
10-Q/A
000-23441
10.2
9/19/2014
80
Incorporation by Reference
File
Number
Exhibit/
Appendix
Reference
000-23441
10.52
Form
10-K
Filed
Herewith
Filing Date
2/13/2019
Exhibit
Number
Exhibit Description
10.46† Amendment Number Two to the Wafer
Supply Agreement, effective as of
December 1, 2018, between Power
Integrations International, Ltd., and X-FAB
Semiconductor Foundries GmbH (formerly
X-FAB Semiconductor Foundries AG)
10.47 Credit Agreement, dated July 27, 2016, by
10-Q
000-23441
10.1
7/29/2016
10.48
10.49*
10.50*
10.51*
10.52*
and between Power Integrations Inc. and
Wells Fargo Bank, National Association
First Amendment to Credit Agreement,
dated April 30, 2018 by and between Power
Integrations, Inc. and Wells Fargo Bank,
National Association
2019 Executive Officer Compensation
Arrangements and 2019 Performance Based
Incentive Plan
2018 Executive Officer Cash Compensation
Arrangements and 2018 Performance Based
Incentive Plan
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
10.53* Amended and Restated Chief Executive
Officer Benefits Agreement, dated as of
May 1, 2014, between Power Integrations,
Inc. and Balu Balakrishnan
10-Q
000-23441
10.1
7/26/2018
10-K
000-23441
Item 9B
2/13/2019
10-K
000-23441
Item 9B
2/14/2018
10-Q
000-23441
10.6
8/6/2010
10-K
000-23441
10.48
2/22/2013
10-Q
000-23441
10.3
5/5/2014
10.54* Amended and Restated Executive Officer
10-Q
000-23441
10.5
5/5/2014
Benefits Agreement, dated as of May 1,
2014, between Power Integrations, Inc. and
Cliff Walker
10.55* Amended and Restated Executive Officer
10-Q
000-23441
10.6
5/5/2014
Benefits Agreement, dated as of May 1,
2014, between Power Integrations, Inc. and
Doug Bailey
10.56* Amended and Restated Executive Officer
10-Q
000-23441
10.7
5/5/2014
Benefits Agreement, dated as of May 1,
2014, between Power Integrations, Inc. and
Ben Sutherland
10.57* Amended and Restated Executive Officer
10-Q
000-23441
10.8
5/5/2014
Benefits Agreement, dated as of May 1,
2014, between Power Integrations, Inc. and
Sandeep Nayyar
10.58* Amended and Restated Executive Officer
10-Q
000-23441
10.10
5/5/2014
Benefits Agreement, dated as of May 1,
2014, between Power Integrations, Inc. and
Mike Matthews
10.59* Amended and Restated Executive Officer
10-Q
000-23441
10.11
5/5/2014
10.60*
Benefits Agreement, dated as of May 1,
2014, between Power Integrations, Inc. and
Radu Barsan
Executive Officer Benefits Agreement,
dates as of April 23, 2015, between Power
Integrations, Inc. and Raja Petrakian
10.61†† ON Semiconductor Corporation Settlement
Agreement
10.62†† ON Semiconductor Corporation Term Sheet
21.1 List of subsidiaries
10-Q
000-23441
10.1
7/31/2015
X
X
X
81
Exhibit
Number
Exhibit Description
Form
Incorporation by Reference
File
Number
Exhibit/
Appendix
Reference
Filing Date
Filed
Herewith
23.1 Consent of Independent Registered Public
Accounting Firm
Power of Attorney (see signature page)
24.1
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
104
Linkbase Document
The cover page from this Annual Report on
Form 10-K, formatted in Inline XBRL.
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.
†† Portions of this exhibit have been omitted as being immaterial and would be competitively harmful if
disclosed.
* 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.
82
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 6, 2020
By:
/s/ SANDEEP NAYYAR
POWER INTEGRATIONS, INC.
Sandeep Nayyar
Chief Financial Officer (Duly Authorized
Officer, Principal Financial Officer and Chief
Accounting Officer)
83
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 6, 2020
By:
/s/ BALU BALAKRISHNAN
Dated: February 6, 2020
Dated: February 6, 2020
Dated: February 6, 2020
Dated: February 6, 2020
Dated: February 6, 2020
Dated: February 6, 2020
Dated: February 6, 2020
Balu Balakrishnan
President, Chief Executive Officer
(Principal Executive Officer)
By:
/s/ SANDEEP NAYYAR
Sandeep Nayyar
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
By:
/s/ NICHOLAS E. BRATHWAITE
Nicholas E. Brathwaite
By:
By:
By:
By:
By:
Director
/s/ STEVEN J. SHARP
Steven J. Sharp
Director
/s/ BALAKRISHNAN S. IYER
Balakrishnan S. Iyer
Director
/s/ WILLIAM GEORGE
William George
Director and Chairman of the Board
/s/ WENDY ARIENZO
Wendy Arienzo
Director
/s/ NECIP SAYINER
Necip Sayiner
Director
84
William L. George (Chairman)
Balu Balakrishnan
Corporate Counsel
Cooley LLP
Palo Alto, CA
Transfer Agent
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Independent Auditors
Deloitte & Touche LLP
San Jose, CA
Investor Information
For additional information about
Power Integrations, visit:
www.power.com
Investor Relations
Investor Relations Department
Power Integrations, Inc.
5245 Hellyer Avenue
San Jose, CA 95138
ir@power.com
Former Executive Vice President
ON Semiconductor Corp., Retired
President and
Chief Executive Officer
Wendy A. Arienzo
Vice President, Operations
FUJIFILM Dimatix, Inc.
Balu Balakrishnan
President and
Chief Executive Officer
Power Integrations, Inc.
Nicholas E. Brathwaite
Partner, Riverwood Capital LLC
Anita Ganti
Former Senior Vice President,
Product Engineering Services
Wipro Limited
Balakrishnan S. Iyer
Former Senior Vice President and
Chief Financial Officer
Conexant Systems, Inc., Retired
Necip Sayiner
Executive Vice President
Renesas Electronics Corporation
Steven J. Sharp
Former Chairman and CEO
TriQuint Semiconductor, Inc.,
Retired
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
Power Integrations, Inc. 5245 Hellyer Avenue, San Jose, CA 95138 www.power.com
©2020 Power Integrations. Power Integrations and the Power Integrations logo are registered trademarks of Power Integrations, Inc. All rights reserved.
PI 2019 Annual Report Covers 8.5in11in EN.indd 2
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Board of DirectorsCorporate OfficersCorporate Information