Power Integrations(POWI) - 2021 Q4 - Annual Report

Part I Business Power Integrations designs and markets high-voltage power conversion ICs, expanding market penetration and SAM through a fabless model - The company designs and sells ICs for high-voltage power conversion, used in applications like AC-DC power supplies, LED drivers, motor drivers, and high-voltage gate drivers for industrial and EV markets[17][18][19] - Growth strategy focuses on increasing penetration and expanding the Served Available Market (SAM) from $1.5 billion in 2010 to over $4 billion, driven by new products for higher-power applications and EVs[21][23] - The company utilizes a fabless manufacturing model, contracting with foundries like Lapis, Epson, and X-FAB for wafer production and independent subcontractors for assembly and testing[60][61][62] Net Sales by End Market (2019-2021) | End Market | 2021 | 2020 | 2019 | | :------------- | :---- | :---- | :---- | | Communications | 30% | 30% | 26% | | Computer | 10% | 7% | 5% | | Consumer | 32% | 33% | 35% | | Industrial | 28% | 30% | 34% | - As of December 31, 2021, the company employed 773 full-time personnel, with 47% in North America and 53% offshore[74] Risk Factors The company faces significant risks from supply chain dependence, customer concentration, foreign exchange, and costly IP litigation - The COVID-19 pandemic poses a significant risk, with potential to disrupt manufacturing, R&D, and sales activities, and to reduce end-customer demand[98] - The company depends on third-party suppliers (Epson, Lapis, X-FAB) for wafers, with disruptions potentially taking 12 to 24 months to qualify alternate sources[101] - A significant portion of revenue comes from a small number of customers, primarily distributors, with the top ten accounting for 78% of net revenues in 2021[105][106] - International sales represent a substantial portion of revenue (98% in 2021), exposing the company to risks such as tariffs, trade barriers, and foreign currency fluctuations[110] - The company is engaged in costly litigation to enforce its intellectual property rights, with expenses expected to remain material and adverse outcomes potentially causing substantial damages[129][131] Unresolved Staff Comments The company reports that there are no unresolved staff comments - Not applicable[146] Properties Power Integrations owns its principal executive offices and R&D facilities, and leases various administrative and sales offices globally - The company owns its main facilities in San Jose, CA, as well as facilities in New Jersey, Germany, and Switzerland[147] - Leased facilities include administrative offices in Singapore, R&D centers in Canada, the UK, the Philippines, and Malaysia, and various sales offices worldwide[147] Legal Proceedings The company is involved in ongoing patent litigation, including cases with Opticurrent, LLC and CogniPower LLC - The company is engaged in multiple patent infringement lawsuits with Opticurrent, LLC, with one case resulting in a reduced damages award of $1.2 million, currently under appeal[363] - The company has filed a complaint against CogniPower LLC for patent infringement and intervened in a lawsuit CogniPower filed against its customers, currently stayed pending inter partes review[366] - The company states it cannot estimate a loss or range of loss for these ongoing litigations, but adverse outcomes could have a material adverse effect on its business[368] Mine Safety Disclosures The company reports that this item is not applicable - Not applicable[151] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with significant stock repurchase programs authorized by the board - Common stock trades on the Nasdaq Global Select Market under the symbol "POWI"[153] - As of December 31, 2021, $67.3 million was available for stock repurchases, fully utilized in January 2022, with an additional $100.0 million authorized for future repurchases[154] Stock Repurchases in Q4 2021 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------------------------ | :------------------------------- | :--------------------------- | | Oct 1, 2021 to Oct 31, 2021 | - | - | | Nov 1, 2021 to Nov 30, 2021 | 12,314 | $99.63 | | Dec 1, 2021 to Dec 31, 2021 | 410,991 | $88.92 | | Total | 423,305 | | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, net revenues grew 44% to $703.3 million, driven by strong demand and market share gains, with increased gross margin and cash from operations Financial Performance (2019-2021) | Metric (in millions) | 2021 | 2020 | 2019 | | :------------------- | :------- | :------- | :------- | | Net Revenues | $703.3 | $488.3 | $420.7 | | Gross Profit | $360.6 | $243.6 | $213.4 | | Gross Margin | 51.3% | 49.9% | 50.7% | | Income from Operations | $175.1 | $70.5 | $217.0 | | Net Income | $164.4 | $71.2 | $193.5 | - The 2021 revenue increase of $215.0 million was attributed to strong industry demand and market share gains, partly due to superior product availability and designs requiring fewer external components during widespread shortages[163] - The company's revenue recognition policy for distributors involves estimating variable consideration for 'ship and debit' price adjustments and stock rotation rights, with the reserve for ship and debit claims increasing by $15.2 million in 2021 due to higher distributor inventory levels[177] - The company ended 2021 with $530.4 million in cash, cash equivalents, and short-term marketable securities and working capital of $614.5 million, with an unused $75.0 million revolving line of credit[192][193] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk on investments and foreign currency exchange risk, particularly USD/JPY fluctuations impacting gross margin - Interest rate risk is related to the company's investment portfolio, with a hypothetical 10% change in interest rates from December 31, 2021, levels not having a material impact on the portfolio's fair market value[224] - Foreign currency risk exists from cash held in Swiss francs and euros, where a 5% change in the USD exchange rate against these currencies would impact pretax income by approximately $104,000 as of year-end 2021[225][226] - A significant risk comes from wafer supply agreements with Japanese suppliers, where a 10% change in the USD/JPY exchange rate is estimated to change the company's gross margin by about 1.0%[229] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021, with an unqualified opinion from Deloitte & Touche LLP - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[232][233] Consolidated Balance Sheet Highlights (December 31, 2021 vs 2020) | (In thousands) | Dec 31, 2021 | Dec 31, 2020 | | :----------------------------- | :----------- | :----------- | | Total Assets | $1,014,487 | $903,339 | | Cash and cash equivalents | $158,117 | $258,874 | | Short-term marketable securities | $372,235 | $190,318 | | Inventories | $99,266 | $102,878 | | Total Liabilities | $102,455 | $92,928 | | Total Stockholders' Equity | $912,032 | $810,411 | Consolidated Statement of Income Highlights (Year Ended Dec 31) | (In thousands, except per share) | 2021 | 2020 | 2019 | | :------------------------------- | :--------- | :-------- | :--------- | | Net Revenues | $703,277 | $488,318 | $420,669 | | Gross Profit | $360,639 | $243,590 | $213,402 | | Income from Operations | $175,058 | $70,487 | $217,022 | | Net Income | $164,413 | $71,176 | $193,468 | | Diluted EPS | $2.67 | $1.17 | $3.24 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports that this item is not applicable - Not applicable[376] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, a finding concurred by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[376] - Based on the COSO 2013 framework, management assessed internal control over financial reporting and concluded it was effective as of December 31, 2021[379] - The independent registered public accounting firm, Deloitte & Touche LLP, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[380][384] Other Information The Compensation Committee approved 2022 performance-based incentive plans (PSU and PRSU) and new base salaries for executive officers - The 2022 Performance-based Incentive Plan (PSU Plan) was approved, with payouts based on achieving targets for net revenue (40% weighting), non-GAAP operating income (30%), and strategic goals (30%)[392][394] - The 2022 Long-term Performance-Based Incentive Plan (PRSU Plan) was approved, with vesting based on the company's three-year (2022-2024) compound annual revenue growth rate relative to a specified analog semiconductor industry index[402] 2022 Executive Officer Salaries | Executive Officer | Title | 2022 Salary | | :------------------ | :-------------------------------- | :---------- | | Balu Balakrishnan | President and Chief Executive Officer | $695,000 | | Sandeep Nayyar | Chief Financial Officer | $430,000 | | Radu Barsan | Vice President, Technology | $400,000 | | David "Mike" Matthews | Vice President, Product Development | $365,000 | Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, audit committee, and code of ethics is incorporated by reference from the forthcoming 2022 proxy statement - Biographical information for executive officers is provided in Part I, Item 1 of this report[410] - All other information required by this item, including details on directors, the audit committee, and the code of ethics, is incorporated by reference from the forthcoming 2022 Proxy Statement[410] Executive Compensation All information related to executive and director compensation is incorporated by reference from the company's definitive 2022 proxy statement - Details regarding the compensation of named executive officers and directors are incorporated by reference from the 2022 Proxy Statement[411] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's definitive 2022 proxy statement - Information on security ownership and equity compensation plans is incorporated by reference from the 2022 Proxy Statement[414][415] Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive 2022 proxy statement - Details on related transactions and director independence are incorporated by reference from the 2022 Proxy Statement[416] Principal Accounting Fees and Services Information regarding the fees paid to and services provided by the principal independent registered public accounting firm is incorporated by reference from the company's definitive 2022 proxy statement - Information on principal auditor fees and services is incorporated by reference from the 2022 Proxy Statement[417] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the Form 10-K report, including corporate governance documents, compensation plans, material contracts, and certifications - The financial statements are included in Item 8, and Schedule II (Valuation and Qualifying Accounts) is also included in Item 8[421] - Exhibits filed include corporate governance documents, management compensation plans, material contracts (including wafer supply agreements with Lapis, Epson, and X-FAB), and required CEO/CFO certifications[420][423] Form 10-K Summary The company indicates that a Form 10-K summary is not provided - Not provided[437]