2020 Annual Report
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2020 Annual Report Dear Fellow Stockholders, At this time last year, we were just beginning to grasp the challenges that the COVID-19 pandemic would bring to our industry and to our lives. In the year since, we have moved to remote work arrangements for most of our employees, halted nearly all travel, customer visits and in-person events, weathered business interruptions at several of our suppliers, and experienced a sharp decline in demand followed by a steep recovery that is now straining supply chains across our industry. As of this writing, much of our workforce continues to work remotely as we prioritize the health of our employees and comply with local regulations. I look forward to a full return to our offices as soon as we are able to do so safely, but in the meantime I continue to be impressed with the creativity and dedication of our employees, who have not just kept our business on track but also delivered the best results in our history in 2020. Our approach to managing through the past year reflects the long-term, sustainable orientation that has always been a cornerstone of our success. While some of our industry peers reduced headcount or cut salaries in the early stages of the pandemic, we continued to invest in our people, giving normal salary raises, maintaining our generous health benefits, and expanding our workforce by four percent during the year, with the largest increase coming in research and development. (In fact, we hired a number of highly capable people let go by industry peers in the early stages of the pandemic.) We also invested in production capacity and infrastructure, spending more than $70 million in capital last year, including nearly $15 million on the construction of new facilities for our European operations and updates to our San José headquarters. We plan to invest $12-$15 million more in 2021 to complete our European facilities and to expand our San José solar array, roughly doubling our generating capacity. We also built inventory as demand softened in the early stages of the pandemic, rising to 178 days on hand at the end of the June quarter. Building inventory is something we can afford, knowing that our products have long shelf lives and are fungible across applications and customers. It brings stability to our foundry relationships, helping to preserve our capacity, and enables us to satisfy customers when demand recovers, as has happened over the past several months. Shortages of semiconductor products have been a major news story of late, affecting the supply of appliances, cars, game consoles, TVs and many other end products. In our case, inventories at our distributors are lower than normal and lead times have extended for some of our newer products, but we’ve thus far been able to keep most customers’ production lines running thanks to our timely capacity additions and our decision to build inventory last year amid falling demand. Our bias toward long-term thinking is most evident in our approach to R&D. About a decade ago we increased our R&D spending with an eye toward expanding our addressable market and developing more disruptive technologies. We did so knowing that the fruits of these efforts would take many years to be fully realized, and I am excited about the years ahead precisely because we are now beginning to see the pay-off from these long-term investments. One example is our gallium- nitride, or GaN, technology. We were the first company to ship high-voltage GaN products in high volume when we introduced GaN-based InnoSwitch™ products in 2018, and GaN-based products are now contributing meaningful revenues, with about $10M in sales in 2020—a number that we expect to double or perhaps triple in 2021. Similarly, we began development of our BridgeSwitch™ motor-driver ICs many years ago, and will see our first meaningful revenues in 2021. A few years ago we also began developing products for the automotive market, where significant revenues are likely still several years away but where the opportunity is substantial. High-voltage is pervasive in electric vehicles (EVs), not just in the drivetrain but also charging and, in next-generation vehicles, power supplies that will drive many of the subsystems in the car from the main battery. In 2020 we qualified versions of our LinkSwitch™ and InnoSwitch products for automotive use, and we continue to work closely with automakers on gate-driver products for EV drivetrains. The investments we have made will enable us to continue benefiting from many of the secular trends that helped drive our strong results in 2020. While revenues for the analog semiconductor industry grew just three percent for the year,1 our revenues grew 16 percent, with growth in all four end-market categories. The consumer category, our largest end market entering the year, grew about ten percent and finished strong, up nearly 20 percent year-over-year in the fourth quarter. Appliances were the main source of growth, reflecting robust end-market demand and share gains at a broad range of customers, as well as rising semiconductor content. Content growth is an important secular trend in appliances driven by the proliferation of new features such as network connectivity, LED lighting and advanced displays, even as tighter energy- efficiency standards challenge designers to do more with less power, which in turn drives even greater need for our products. 1According to World Semiconductor Trade Statistics In the industrial category, demand for our high-power gate-driver products was constrained last year by pandemic-driven delays in infrastructure projects. However, lower revenues in high power were offset by growth in home-and-building automation, battery-operated tools, and broad-based industrial applications, resulting in low-single-digit growth for the overall category. Going forward, we expect our industrial business to benefit from secular trends such as renewable energy, high-voltage DC transmission, electrification of transportation and tools, smart homes and buildings, and fixed USB charging receptacles. The communications category grew more than 30 percent for the year, while the smaller computer category grew even faster, up nearly 50 percent. Some of this growth, particularly in the computer category, was the result of the work-from- home and learn-from-home trends, which drove strong demand for PCs, tablets and monitors. Another key factor—one sure to endure beyond the pandemic—is the rapid adoption of advanced chargers for smartphones, tablets and notebooks. Power Integrations has demonstrated a commanding lead in terms of technology and product design for advanced chargers, and that advantage is now translating into rapid growth in market share and revenue. Not long ago, cellphone chargers were essentially commodities, and cost was the only variable that mattered. Today, OEMs are thinking strategically about chargers, either as a value-added feature or a revenue-generating accessory, and a wave of third-party after-market brands has emerged as well. We’ve seen this change coming for quite some time, and we were ready for it thanks to the R&D investments we’ve made in technologies like GaN and revolutionary products like InnoSwitch. In fact, while InnoSwitch ICs are used in a broad range of applications, their success in the high-volume smartphone market has made them the highest-selling power-supply ICs in the world, with well over a billion units shipped in the six years since their introduction. The adoption of advanced chargers for smartphones accelerated last year and shows no signs of slowing. Even as 5G phones demand higher-power chargers due to their larger batteries, many OEMs are pushing power levels even higher to offer much faster charging as a way to differentiate their products. Meanwhile, we are seeing an unprecedented wave of innovation in charger design, including an increasing number of chargers capable of powering two or more devices, and a robust pipeline of designs with our GaN products. That includes our GaN-based InnoSwitch products as well as our MinE- CAP™ ICs, which use GaN technology to reduce the size of chargers by enabling smaller input capacitors. Thanks in large part to our record revenues in 2020, we generated $126 million in cash flow from operations, and further strengthened our balance sheet, ending the year with $449 million in cash and investments. Reflecting our strong cash flow and healthy balance sheet, our board of directors has increased our quarterly dividend 37% over the past four quarters, with the payout increasing to 13 cents per share beginning in the March quarter. We also implemented a stock dividend in August 2020, which effectively resulted in a two-for-one stock split. Our strong financial position gives us ample flexibility to continue investing in our future growth while returning cash to stockholders in the years ahead. 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 2021 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: uncertainty and unexpected impacts of the COVID-19 pandemic; 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.