POWER INTEGRATIONS INC - Quarter Report: 2022 June (Form 10-Q)

June 30,

December 31,

Customer

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2022

☐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		94-3065014
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


5245 Hellyer Avenue
San Jose,	California	95138
(Address of Principal Executive Offices)		(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	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	POWI	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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	☒	Accelerated Filer	☐
Non-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 Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class	Shares Outstanding at August 1, 2022
Common Stock, $0.001 par value	57,180,783

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POWER INTEGRATIONS, INC.

TABLE OF CONTENTS

		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (Unaudited)	4

	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021 (Unaudited)	5

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 (Unaudited)	6

	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 (Unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (Unaudited)	8

	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION		29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 5.	Other Information	30

Item 6.	Exhibits	31

SIGNATURES		33

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. These factors include, but are not limited to: risks related to changing worldwide economic conditions which could adversely affect our operating results and financial condition, the novel coronavirus pandemic (COVID-19), which has disrupted and may continue to disrupt our operations, including our manufacturing, research and development, and sales and marketing activities, which in turn could have a material adverse impact on our business and has or could exacerbate the risks discussed below; 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 risk factors described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part I, Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. We make these forward-looking statements based upon information available on the date of this Quarterly Report on Form 10-Q, and we 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 addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

POWER INTEGRATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(In thousands)	June 30, 2022		December 31, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	67,383	$	158,117
Short-term marketable securities		260,209		372,235
Accounts receivable, net		27,980		41,393
Inventories		111,258		99,266
Prepaid expenses and other current assets		14,219		15,804
Total current assets		481,049		686,815
PROPERTY AND EQUIPMENT, net		184,245		179,824
INTANGIBLE ASSETS, net		7,684		9,012
GOODWILL		91,849		91,849
DEFERRED TAX ASSETS		19,830		16,433
OTHER ASSETS		24,347		30,554
Total assets	$	809,004	$	1,014,487
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	41,402	$	43,721
Accrued payroll and related expenses		14,569		15,492
Taxes payable		561		1,210
Other accrued liabilities		13,597		11,898
Total current liabilities		70,129		72,321
LONG-TERM INCOME TAXES PAYABLE		15,739		15,280
OTHER LIABILITIES		12,891		14,854
Total liabilities		98,759		102,455
COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 13)
STOCKHOLDERS’ EQUITY:
Common stock		24		28
Additional paid-in capital		—		162,301
Accumulated other comprehensive loss		(10,060)		(3,737)
Retained earnings		720,281		753,440
Total stockholders’ equity		710,245		912,032
Total liabilities and stockholders’ equity	$	809,004	$	1,014,487

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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POWER INTEGRATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands, except per share amounts)	2022		2021		2022		2021
NET REVENUES	$	183,986	$	180,110	$	366,135	$	353,847
COST OF REVENUES		77,143		88,797		158,617		178,123
GROSS PROFIT		106,843		91,313		207,518		175,724

OPERATING EXPENSES:
Research and development		23,507		21,741		47,185		41,768
Sales and marketing		16,045		15,290		32,381		29,413
General and administrative		6,059		9,306		15,673		19,381
Other operating expenses, net		1,130		—		1,130		—
Total operating expenses		46,741		46,337		96,369		90,562
INCOME FROM OPERATIONS		60,102		44,976		111,149		85,162
OTHER INCOME		674		173		1,228		770
INCOME BEFORE INCOME TAXES		60,776		45,149		112,377		85,932
PROVISION FOR INCOME TAXES		4,952		3,268		10,305		4,253
NET INCOME	$	55,824	$	41,881	$	102,072	$	81,679

EARNINGS PER SHARE:
Basic	$	0.97	$	0.69	$	1.75	$	1.35
Diluted	$	0.96	$	0.68	$	1.72	$	1.33

SHARES USED IN PER SHARE CALCULATION:
Basic		57,731		60,544		58,480		60,366
Diluted		58,305		61,466		59,192		61,481

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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POWER INTEGRATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021
Net income	$	55,824	$	41,881	$	102,072	$	81,679
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of $0 tax in each of the three and six months ended June 30, 2022 and 2021		(754)		(40)		(1,023)		(58)
Unrealized loss on marketable securities, net of $0 tax in each of the three and six months ended June 30, 2022 and 2021		(1,160)		(331)		(5,341)		(911)
Amortization of defined benefit pension items, net of tax of $0 and $3 in the three and six months ended June 30, 2022, respectively, and $6 and $141 in the three and six months ended June 30, 2021, respectively		23		52		41		(23)
Total other comprehensive loss		(1,891)		(319)		(6,323)		(992)
TOTAL COMPREHENSIVE INCOME	$	53,933	$	41,562	$	95,749	$	80,687

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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POWER INTEGRATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021
Common stock
Beginning balance	$	26	$	29	$	28	$	28
Common stock issued under employee stock plans		—		—		—		1
Repurchase of common stock		(2)		(1)		(4)		(1)
Ending balance		24		28		24		28

Additional paid-in capital
Beginning balance		39,684		203,051		162,301		190,920
Common stock issued under employee stock plans		—		—		3,057		3,651
Repurchase of common stock		(43,363)		(26,373)		(178,050)		(26,373)
Stock-based compensation		3,679		9,200		12,692		17,680
Ending balance		—		185,878		—		185,878

Accumulated other comprehensive loss
Beginning balance		(8,169)		(2,836)		(3,737)		(2,163)
Other comprehensive loss		(1,891)		(319)		(6,323)		(992)
Ending balance		(10,060)		(3,155)		(10,060)		(3,155)

Retained earnings
Beginning balance		789,032		653,579		753,440		621,626
Net income		55,824		41,881		102,072		81,679
Repurchase of common stock		(114,295)		—		(114,295)		—
Payment of dividends to stockholders		(10,280)		(7,867)		(20,936)		(15,712)
Ending balance		720,281		687,593		720,281		687,593

Total stockholders’ equity	$	710,245	$	870,344	$	710,245	$	870,344

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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POWER INTEGRATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	June 30,
(In thousands)	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	102,072	$	81,679
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		17,174		15,274
Amortization of intangibles		1,328		1,905
Loss on disposal of property and equipment		1,034		38
Stock-based compensation expense		12,692		17,680
Amortization of premium on marketable securities		1,867		300
Deferred income taxes		(3,282)		1,182
Increase in accounts receivable allowance for credit losses		259		91
Change in operating assets and liabilities:
Accounts receivable		13,154		(5,533)
Inventories		(11,992)		13,235
Prepaid expenses and other assets		4,075		(4,501)
Accounts payable		5,577		8,053
Taxes payable and accrued liabilities		(2,539)		(4,433)
Net cash provided by operating activities		141,419		124,970

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(27,944)		(19,294)
Proceeds from sale of property and equipment		1,202		35
Purchases of marketable securities		(20,710)		(188,753)
Proceeds from sales and maturities of marketable securities		125,527		160,083
Net cash provided by (used in) investing activities		78,075		(47,929)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock under employee stock plans		3,057		3,652
Repurchase of common stock		(292,349)		(26,374)
Payments of dividends to stockholders		(20,936)		(15,712)
Net cash used in financing activities		(310,228)		(38,434)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(90,734)		38,607
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		158,117		258,874
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	67,383	$	297,481

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unpaid property and equipment	$	2,984	$	5,070

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes, net	$	14,657	$	10,084

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:

The condensed consolidated financial statements include the accounts of Power Integrations, Inc., a Delaware corporation (the “Company”), and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

While the financial information furnished is unaudited, the condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and the financial condition of the Company at the date of the interim balance sheet in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and the notes thereto for the year ended December 31, 2021, included in its Form 10-K filed on February 7, 2022, with the Securities and Exchange Commission.

2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:

Significant Accounting Policies and Estimates

No material changes have been made to the Company’s significant accounting policies disclosed in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in its Annual Report on Form 10-K, filed on February 7, 2022, for the year ended December 31, 2021.

Recent Accounting Pronouncements

The Company has considered all recent accounting pronouncements issued, but not yet effective, and does not expect any to have a material effect on the Company’s condensed consolidated financial statements.

3. COMPONENTS OF THE COMPANY’S CONDENSED CONSOLIDATED BALANCE SHEETS:

Accounts Receivable


	June 30,		December 31,
(In thousands)	2022		2021
Accounts receivable trade	$	92,444	$	87,503
Allowance for ship and debit		(59,974)		(41,599)
Allowance for stock rotation and rebate		(3,786)		(4,066)
Allowance for credit losses		(704)		(445)
Total	$	27,980	$	41,393

The Company maintains an allowance for estimated credit losses resulting from the inability of customers to make required payments. This allowance is established using estimates formulated by the Company’s management based upon factors such as the composition of the accounts receivable aging, historical losses, changes in payment patterns, customer creditworthiness and current economic trends. Receivables determined to be uncollectible are written off and deducted from the allowance.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021
Beginning balance	$	(520)	$	(425)	$	(445)	$	(427)
Provision for credit loss expense		(218)		(360)		(618)		(577)
Receivables written off		—		—		—		—
Recoveries collected		34		267		359		486
Ending balance	$	(704)	$	(518)	$	(704)	$	(518)

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POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Inventories


	June 30,		December 31,
(In thousands)	2022		2021
Raw materials	$	38,824	$	24,131
Work-in-process		22,357		31,788
Finished goods		50,077		43,347
Total	$	111,258	$	99,266

Intangible Assets


	June 30, 2022						December 31, 2021
			Accumulated						Accumulated
(In thousands)	Gross		Amortization		Net		Gross		Amortization		Net
Domain name	$	1,261	$	—	$	1,261	$	1,261	$	—	$	1,261
Developed technology		37,960		(32,567)		5,393		37,960		(31,603)		6,357
Customer relationships		16,700		(16,700)		—		16,700		(16,458)		242
Technology licenses		1,926		(896)		1,030		1,926		(774)		1,152
Total intangible assets	$	57,847	$	(50,163)	$	7,684	$	57,847	$	(48,835)	$	9,012

The estimated future amortization expense related to finite-lived intangible assets at June 30, 2022, is as follows:


	Estimated
	Amortization
Fiscal Year	(In thousands)
2022 (remaining six months)	$	1,087
2023		2,173
2024		1,279
2025		832
2026		687
Thereafter		365
Total	$	6,423

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss for the three and six months ended June 30, 2022 and 2021, were as follows:


	Unrealized Gains
	and Losses on				Defined Benefit						Foreign Currency
	Marketable Securities				Pension Items						Items				Total
	Three Months Ended				Three Months Ended						Three Months Ended				Three Months Ended
	June 30,				June 30,						June 30,				June 30,
(In thousands)	2022		2021		2022			2021			2022		2021		2022		2021
Beginning balance	$	(5,346)	$	310	$	(656)		$	(1,716)		$	(2,167)	$	(1,430)	$	(8,169)	$	(2,836)
Other comprehensive income (loss) before reclassifications		(1,160)		(331)		—			—			(754)		(40)		(1,914)		(371)
Amounts reclassified from accumulated other comprehensive loss		—		—		23	⁽¹⁾		52	⁽¹⁾		—		—		23		52
Net-current period other comprehensive income (loss)		(1,160)		(331)		23			52			(754)		(40)		(1,891)		(319)
Ending balance	$	(6,506)	$	(21)	$	(633)		$	(1,664)		$	(2,921)	$	(1,470)	$	(10,060)	$	(3,155)

(1)	This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the three months ended June 30, 2022 and 2021.

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POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Unrealized Gains
	and Losses on				Defined Benefit						Foreign Currency
	Marketable Securities				Pension Items						Items				Total
	Six Months Ended				Six Months Ended						Six Months Ended				Six Months Ended
	June 30,				June 30,						June 30,				June 30,
(In thousands)	2022		2021		2022			2021			2022		2021		2022		2021
Beginning balance	$	(1,165)	$	890	$	(674)		$	(1,641)		$	(1,898)	$	(1,412)	$	(3,737)	$	(2,163)
Other comprehensive income (loss) before reclassifications		(5,341)		(911)		—			—			(1,023)		(58)		(6,364)		(969)
Amounts reclassified from accumulated other comprehensive loss		—		—		41	⁽¹⁾		(23)	⁽¹⁾		—		—		41		(23)
Net-current period other comprehensive income (loss)		(5,341)		(911)		41			(23)			(1,023)		(58)		(6,323)		(992)
Ending balance	$	(6,506)	$	(21)	$	(633)		$	(1,664)		$	(2,921)	$	(1,470)	$	(10,060)	$	(3,155)

(1)	This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the six months ended June 30, 2022 and 2021.

4. FAIR VALUE MEASUREMENTS:

The FASB established 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 short-term marketable securities 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 fair-value hierarchy of the Company’s cash equivalents and marketable securities at June 30, 2022 and December 31, 2021, was as follows:


	Fair Value Measurement at
	June 30, 2022
			Quoted Prices in
			Active Markets for		Significant Other
			Identical Assets		Observable Inputs
(In thousands)	Total Fair Value		(Level 1)		(Level 2)
Commercial paper	$	8,795	$	—	$	8,795
Corporate securities		260,209		—		260,209
Money market funds		4,040		4,040		—
Total	$	273,044	$	4,040	$	269,004


	Fair Value Measurement at
	December 31, 2021
			Quoted Prices in
			Active Markets for		Significant Other
			Identical Assets		Observable Inputs
(In thousands)	Total Fair Value		(Level 1)		(Level 2)
Commercial paper	$	172,237	$	—	$	172,237
Corporate securities		282,540		—		282,540
Money market funds		29,793		29,793		—
Total	$	484,570	$	29,793	$	454,777

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POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company did not transfer any investments between Level 1 and Level 2 of the fair-value hierarchy in the six months ended June 30, 2022 and the twelve months ended December 31, 2021.

5. MARKETABLE SECURITIES:

Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at June 30, 2022, were as follows:


	Amortized		Gross Unrealized				Estimated Fair
(In thousands)	Cost		Gains		Losses		Market Value
Investments due in 3 months or less:
Corporate securities	$	6,316	$	—	$	(14)	$	6,302
Total		6,316		—		(14)		6,302
Investments due in 4-12 months:
Corporate securities		113,048		—		(2,253)		110,795
Total		113,048		—		(2,253)		110,795
Investments due in 12 months or greater:
Corporate securities		147,351		—		(4,239)		143,112
Total		147,351		—		(4,239)		143,112
Total marketable securities	$	266,715	$	—	$	(6,506)	$	260,209

Accrued interest receivable was $1.4 million at June 30, 2022 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.

Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at December 31, 2021, were as follows:


	Amortized		Gross Unrealized				Estimated Fair
(In thousands)	Cost		Gains		Losses		Market Value
Investments due in 3 months or less:
Commercial paper	$	89,965	$	—	$	—	$	89,965
Corporate securities		7,285		—		(3)		7,282
Total		97,250		—		(3)		97,247
Investments due in 4-12 months:
Corporate securities		25,054		—		(42)		25,012
Total		25,054		—		(42)		25,012
Investments due in 12 months or greater:
Corporate securities		251,096		21		(1,141)		249,976
Total		251,096		21		(1,141)		249,976
Total marketable securities	$	373,400	$	21	$	(1,186)	$	372,235

Accrued interest receivable was $1.5 million at December 31, 2021 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.

The following table summarizes marketable securities classified as available-for-sale (excluding cash equivalents) in a continuous unrealized loss position for which an allowance for credit losses was not recorded at June 30, 2022:


	Less Than 12 Months				12 Months or Longer				Total
	Estimated		Gross		Estimated		Gross		Estimated		Gross
	Fair Market		Unrealized		Fair Market		Unrealized		Fair Market		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
Corporate securities	$	245,800	$	(6,188)	$	10,533	$	(318)	$	256,333	$	(6,506)
Total marketable securities	$	245,800	$	(6,188)	$	10,533	$	(318)	$	256,333	$	(6,506)

In the three and six months ended June 30, 2022 and 2021, no unrealized losses on marketable securities were recognized in income.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company does not intend to sell and it is unlikely that it will be required to sell the securities prior to their anticipated recovery. The issuers are high quality (investment grade) and the decline in fair value is largely due to changes in interest rates. Additionally, the issuers continue to make timely interest payments on the marketable securities with the fair value expected to recover as they reach maturity.

6. STOCK-BASED COMPENSATION:

The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021
Cost of revenues	$	235	$	640	$	555	$	1,271
Research and development		2,323		3,159		5,378		5,550
Sales and marketing		1,177		1,725		3,125		3,339
General and administrative		(56)		3,676		3,634		7,520
Total stock-based compensation expense	$	3,679	$	9,200	$	12,692	$	17,680

Stock-based compensation expense in the three months ended June 30, 2022, was approximately $3.7 million, comprising approximately $5.3 million related to restricted stock unit (RSU) awards, a $2.1 million credit to expense related to performance-based (PSU) awards and long-term performance-based (PRSU) awards and $0.5 million related to the Company’s employee stock purchase plan. Stock-based compensation expense in the six months ended June 30, 2022, was approximately $12.7 million, comprising approximately $10.9 million related to RSUs, $0.9 million related to PSUs and PRSUs and $0.9 million related to the Company’s employee stock purchase plan.

Stock-based compensation expense in the three months ended June 30, 2021, was approximately $9.2 million, comprising approximately $4.7 million related to RSUs, $4.0 million related to PSUs and PRSUs and $0.5 million related to the Company’s employee stock purchase plan. Stock-based compensation expense in the six months ended June 30, 2021, was approximately $17.7 million, comprising approximately $10.0 million related to RSUs, $6.7 million related to PSUs and PRSUs and $1.0 million related to the Company’s employee stock purchase plan.

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 income 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 expected 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.

In February 2022, it was determined that approximately 104,000 shares subject to the PSUs granted in 2021 vested in aggregate; the shares were released to the Company’s employees and executives in the first quarter of 2022.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of PSUs outstanding as of June 30, 2022 and activity during the six months ended, is presented below:


				Weighted-Average
		Weighted-Average		Remaining	Aggregate
	Shares	Grant Date Fair		Contractual Term	Intrinsic Value
	(In thousands)	Value Per Share		(In years)	(In thousands)
Outstanding at January 1, 2022	104	$	84.47
Granted	118	$	79.93
Vested	(104)	$	84.47
Forfeited	(2)	$	79.23
Outstanding at June 30, 2022	116	$	79.94	0.50	$	8,678
Outstanding and expected to vest at June 30, 2022	75			0.50	$	5,623

PRSU Awards

The Company’s PRSU program provides for the issuance of PRSUs which will vest based on the Company’s performance measured against the PRSU program’s established performance targets. PRSUs are 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 2020, 2021 and 2022 were based on the Company’s compound annual growth rate (“CAGR”) of revenue as measured against the revenue CAGR of the analog semiconductor industry, in each case over the respective three-year performance period. Expense associated with these awards, net of estimated forfeitures, is recorded throughout the year based on an assessment of the expected achievement of the performance targets. If the performance conditions are not achieved, no compensation cost is recognized and any previously recognized compensation is reversed.

In February 2022 it was determined that approximately 135,000 shares subject to the PRSUs granted in 2019 vested in aggregate; the shares were released to the Company’s executives in the first quarter of 2022.

A summary of PRSUs outstanding as of June 30, 2022 and activity during the six months ended, is presented below:


				Weighted-Average	Aggregate
		Weighted-Average		Remaining	Intrinsic
	Shares	Grant Date Fair		Contractual Term	Value
	(In thousands)	Value Per Share		(In years)	(In thousands)
Outstanding at January 1, 2022	383	$	53.14
Granted	110	$	78.96
Vested	(135)	$	34.09
Forfeited	—		—
Outstanding at June 30, 2022	358	$	68.18	1.40	$	26,881
Outstanding and expected to vest at June 30, 2022	152			1.07	$	11,408

RSU Awards

A summary of RSUs outstanding as of June 30, 2022 and activity during the six months ended, is presented below:


				Weighted-Average	Aggregate
		Weighted-Average		Remaining	Intrinsic
	Shares	Grant Date Fair		Contractual Term	Value
	(In thousands)	Value Per Share		(In years)	(In thousands)
Outstanding at January 1, 2022	1,144	$	46.81
Granted	481	$	76.45
Vested	(433)	$	42.34
Forfeited	(40)	$	56.04
Outstanding at June 30, 2022	1,152	$	60.55	2.00	$	86,448
Outstanding and expected to vest at June 30, 2022	1,053			1.89	$	79,006

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POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC NET REVENUES:

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 market. The Company’s chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.

Customer Concentration

The Company’s top ten customers accounted for approximately 77% of net revenues for both the three and six months ended June 30, 2022, and 80% in both the corresponding periods of 2021. 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 original equipment manufacturers, or OEMs, and merchant power supply manufacturers. Sales to distributors were $133.9 million and $269.7 million in the three and six months ended June 30, 2022, respectively, and $136.4 million and $270.7 million, respectively, in the corresponding periods of 2021. Direct sales to OEMs and power-supply manufacturers accounted for the remainder.

The following customers (both of which are distributors of the Company’s products) represented 10% or more of the Company’s net revenues for the respective periods:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
Customer	2022		2021		2022		2021
Avnet	30	%	29	%	31	%	30	%
Honestar Technologies Co., Ltd.	11	%	19	%	13	%	19	%

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 consist principally of cash investments and trade receivables. The Company does not have any off-balance-sheet credit exposure related to its customers. As of June 30, 2022 and December 31, 2021, 84% and 86%, respectively, of accounts receivable were concentrated with the Company’s top ten customers.

The following customer represented 10% or more of accounts receivable at June 30, 2022 and December 31, 2021:

No other customers accounted for 10% or more of the Company’s accounts receivable in the periods presented.

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POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, for the three and six months ended June 30, 2022 and 2021, were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021
United States of America	$	7,569	$	3,819	$	14,476	$	7,919
Hong Kong/China		96,760		122,123		202,001		240,853
Taiwan		5,848		6,361		11,106		12,803
Korea		18,563		13,705		37,226		26,194
Western Europe (excluding Germany)		8,129		8,720		16,374		15,850
Japan		10,160		5,152		18,209		9,799
Germany		14,460		7,656		25,943		14,662
Other		22,497		12,574		40,800		25,767
Total net revenues	$	183,986	$	180,110	$	366,135	$	353,847

8. STOCKHOLDERS’ EQUITY:

Common Stock Shares Outstanding


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021
Beginning balance		58,778		60,363		59,913		59,910
Common stock issued under employee stock plans		275		316		724		769
Repurchased		(1,919)		(335)		(3,503)		(335)
Ending balance		57,134		60,344		57,134		60,344

Common Stock Repurchases

As of December 31, 2021, the Company had $67.3 million remaining under its stock-repurchase program. In January, February and April 2022, the Company’s board of directors authorized the use of an additional $100 million, $50 million and $75 million, respectively, for the repurchase of the Company’s common stock, with repurchases to be executed according to pre-defined price/volume guidelines. In the six months ended June 30, 2022, the Company purchased 3.5 million shares for $292.3 million, leaving no funds authorized as of June 30, 2022. Authorization of future repurchase programs is at the discretion of the board of directors and will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors.

Cash Dividends

In January 2021, the Company’s board of directors declared four cash dividends of $0.13 per share to be paid to stockholders of record at the end of each quarter in 2021. In October 2021, the Company’s board of directors raised the quarterly cash dividend with the declaration of five cash dividends of $0.15 per share (in lieu of the $0.13 per share announced in January 2021) to be paid to stockholders of record at the end of the fourth quarter in 2021 and at the end of each quarter in 2022.

In January 2022, the Company’s board of directors raised the quarterly cash dividend by an additional $0.03 per share with the declaration of four cash dividends of $0.18 per share (in lieu of the $0.15 per share announced in October 2021) to be paid to stockholders of record at the end of each quarter in 2022.

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POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the three and six months ended June 30, 2022 and 2021, cash dividends declared and paid were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands, except per share amounts)	2022		2021		2022		2021
Dividends declared and paid	$	10,280	$	7,867	$	20,936	$	15,712
Dividends declared per common share	$	0.18	$	0.13	$	0.36	$	0.26

9. 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:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands, except per share amounts)	2022		2021		2022		2021
Basic earnings per share:
Net income	$	55,824	$	41,881	$	102,072	$	81,679
Weighted-average common shares		57,731		60,544		58,480		60,366
Basic earnings per share	$	0.97	$	0.69	$	1.75	$	1.35
Diluted earnings per share: ⁽¹⁾
Net income	$	55,824	$	41,881	$	102,072	$	81,679
Weighted-average common shares		57,731		60,544		58,480		60,366
Effect of dilutive awards:
Employee stock plans		574		922		712		1,115
Diluted weighted-average common shares		58,305		61,466		59,192		61,481
Diluted earnings per share	$	0.96	$	0.68	$	1.72	$	1.33

(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 excluded the shares underlying the outstanding performance-based awards in the 2022 and 2021 calculations as the shares were not contingently issuable as of the end of the reporting periods.

In the three months ended June 30, 2022, no outstanding stock awards were determined to be anti-dilutive and therefore excluded from the computation of diluted earnings per share; in the comparable period of 2021, stock awards with approximately 0.1 million underlying shares were determined to be anti-dilutive. In the six months ended June 30, 2022 and 2021, no outstanding stock awards were determined to be anti-dilutive.

10. PROVISION FOR INCOME TAXES:

Income-tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries, adjusted for certain discrete items which are fully recognized in the period they occur. Accordingly, the interim effective tax rate may not be reflective of the annual estimated effective tax rate.

The Company’s effective tax rates for the three and six months ended June 30, 2022, were 8.1% and 9.2%, respectively, and 7.2% and 4.9%, respectively, in the corresponding periods of 2021. The effective tax rate in these periods was lower than the statutory federal income-tax rate of 21% due to the geographic distribution of the Company’s world-wide earnings in lower-tax jurisdictions and federal research tax credits. Additionally, in the three months ended

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POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2022 and 2021, the Company’s effective tax rate was favorably impacted by the recognition of excess tax benefits related to share-based payments. In the six months ended June 30, 2022 and 2021, the Company’s effective tax rate was favorably impacted by discrete items associated with the release of unrecognized tax benefits and 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.

As of June 30, 2022, the Company maintained a valuation allowance on its California deferred tax assets, New Jersey deferred tax assets, and capital losses for federal purposes, and a valuation allowance with respect to its deferred tax assets relating to tax credits in Canada.

Determining the consolidated provision for income-tax expense, income-tax liabilities and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

11. COMMITMENTS:

Supplier Agreements

Under the terms of the Company’s wafer-supply agreements with Seiko Epson Corporation ("Epson"), and ROHM Lapis Semiconductor Co., Ltd. ("Lapis"), the wafers purchased from these suppliers are priced in U.S. dollars, with mutual sharing of the impact of fluctuations in the exchange rate between the Japanese yen and the U.S. dollar on future purchases. Each year, the Company’s management and these two suppliers review and negotiate future 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 the Company and each of these suppliers on future purchases.

12. 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 May 16, 2022, the Company entered into a binding settlement agreement (the “Settlement Agreement”) with Opticurrent, LLC, pursuant to which the parties agreed to end all outstanding legal disputes. Neither party granted any licenses to the other. Pursuant to the Settlement Agreement, the Company and Opticurrent have dismissed, withdrawn, and/or terminated all legal proceedings between the parties and the Company has agreed to pay Opticurrent $2.9 million.

On January 6, 2020, the Company filed a complaint against CogniPower LLC in the United States District Court for the District of Delaware for infringement of two of the Company’s patents and seeking a declaration of non-infringement with respect to patents that CogniPower had charged the Company’s customers with infringing, based on customer use of the Company’s products. In response, CogniPower filed a motion to dismiss the Company’s declaratory judgment claims on the basis that CogniPower had not threatened the Company directly with suit. That motion was granted, so CogniPower’s claims for infringement initially went forward separately in their lawsuit against the Company’s customers in the District of Delaware, but the Company filed a motion to intervene in that lawsuit and received a ruling allowing the Company to intervene in CogniPower’s customer lawsuit on February 1, 2021, and the parties thereafter agreed to dismiss the Company’s separate lawsuit against CogniPower. The remaining case is currently stayed, but the Company believes it has strong claims and defenses, and intends to vigorously defend itself against CogniPower’s claims against the Company’s technology, 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 the Company will prevail in the above-mentioned unsettled litigation. This litigation, whether or not determined in

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POWER INTEGRATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the Company’s 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 the Company 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.

13. 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 June 30, 2022. 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.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis has been prepared as an aid to understanding our financial condition and results of operations. It should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements and management’s discussion and analysis of our financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 7, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part II, Item 1A - “Risk Factors” and elsewhere in this report. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

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, and 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 gigawatts) such as industrial motors, solar- and wind-power systems, electric vehicles (EVs) 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 reduce the energy consumption of power converters during normal use and in “standby” operation, when the end product is not in use. In addition to the environmental benefits of reduced energy usage, our energy-saving technologies provide a number of benefits to our customers; these include helping them meet the increasingly stringent efficiency standards now in effect for many electronic products, and enabling the elimination of bulky heatsinks used to dissipate the heat produced by wasted electricity.

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 ranging from a few kilowatts up to gigawatts, and motor-drive applications up to approximately 400 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

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documentation and design-support tools and services to help customers use our products. These tools and services include our PI Expert™ design software, which we offer free of charge, and our transformer-sample service.

Our market-penetration strategy also includes capitalizing on the importance of energy efficiency 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-iDriver^TM family of 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. We have recently introduced a series of automotive-qualified versions of our products, including SCALE-iDriver, InnoSwitch™ and LinkSwitch™ ICs, targeting the EV market; we expect to introduce additional products targeting EVs in the future, and expect automotive applications to become a significant portion of our SAM over time.

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 connectivity, LED lighting and other power-consuming electronic features in consumer appliances has also enhanced our SAM.

Finally, we have expanded 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 began incorporating proprietary gallium-nitride (GaN) transistors in some our products, enabling a higher level of energy efficiency than ICs with silicon transistors. Since then, we have introduced a variety of new products utilizing GaN technology and we expect to address a wider range of applications with GaN-based products in the years ahead.

We intend to continue expanding our SAM in the years ahead through all of the means described above.

Our quarterly operating results are difficult to predict and subject to significant fluctuations. We plan our production and inventory levels based on internal forecasts of projected customer demand, which are highly unpredictable and can fluctuate substantially. Customers typically may cancel or reschedule orders on short notice without significant penalty and, conversely, often place orders with very short lead times to delivery. Also, external factors such as global economic conditions, such as the current growing inflation, higher interest rates and potential recession and supply-chain dynamics can cause our operating results to be volatile. In particular, the severe economic disruption caused by the global novel coronavirus pandemic (COVID-19) may affect the supply of and demand for our products and make our results more difficult to forecast. Furthermore, 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. 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. Changes in the prices of raw materials used in our products, such as copper and gold, can also affect our gross margin. 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 margin are impacted by the volume of units we produce.

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Recent Results

Our net revenues were $184.0 million and $180.1 million for the three months ended June 30, 2022 and 2021, respectively, and $366.1 million and $353.8 million for the six months ended June 30, 2022 and 2021, respectively. The increases for the three- and six-month periods were driven primarily by higher sales in the industrial and consumer end markets, reflecting higher demand as well as market-share gains for our products in a broad range of applications including consumer appliances and industrial applications such as home-and-building automation, electronic utility meters, battery-operated tools and broad-based industrial applications. Revenues from communications applications decreased year-over-year in the three- and six-month periods reflecting weaker demand from customers serving Chinese smartphone OEMs compared to stronger demand in the prior year periods as customers attempted to capitalize on economic sanctions affecting the mobile-phone business of a key competitor. We believe that demand for our products has been negatively affected by measures implemented in China to contain the spread of the COVID-19 virus, and is likely also being affected by a shift in consumer spending in favor of services rather than goods, as well as reduced consumer spending overall in response to inflation. As a result, we expect our third-quarter revenues to decline compared to our second-quarter revenues.

Our top ten customers, including distributors that resell to original equipment manufacturers, or OEMs, and merchant power supply manufacturers, accounted for 77% of net revenues in both the three and six months ended June 30, 2022, and 80% in both the corresponding periods of 2021. In the three and six months ended June 30, 2022 and 2021, two customers, distributors of our products, each accounted for more than 10% of our net revenues. International sales accounted for 96% of our net revenues in both the three and six months ended June 30, 2022, and 98% in both of the corresponding periods of 2021.

Our gross margin was 58.1% and 50.7% in the three months ended June 30, 2022 and 2021, respectively, and 56.7% and 49.7% in the six months ended June 30, 2022 and 2021, respectively. Our gross margin increased primarily due to favorable end-market mix, with a greater percentage of revenues coming from higher-margin end markets, as well as manufacturing efficiencies.

Total operating expenses were $46.7 million and $46.3 million in the three months ended June 30, 2022 and 2021, respectively, and $96.4 million and $90.6 million for the six months ended June 30, 2022 and 2021, respectively. The increase in operating expenses for the three and six months ended June 30, 2022 was due primarily to our litigation settlement with Opticurrent LLC, higher salary and related expenses driven by increased headcount, and product development expenses offset by lower stock-based compensation expense and receipt of a distribution from the bankruptcy liquidation of SemiSouth Laboratories, Inc., of which we were a creditor as a result of investments made in SemiSouth in 2011.

COVID-19 Pandemic

The COVID-19 pandemic has disrupted everyday life and markets worldwide, and governments around the world have imposed restrictions aimed at controlling the spread of the virus, including shelter-in-place orders, travel restrictions, business shutdowns and border closures. Beginning March 16, 2020 our San Jose headquarters location was subject to a shelter-in-place order, under which most of our employees were required to work from home; other locations around the world have also been subject to such restrictions. A large percentage of our employees continued to work remotely throughout 2021 and into 2022. However, following the relaxation of local regulations and taking into account the high vaccination rate among our employees, our San Jose headquarters reopened on April 4, 2022 with employees returning to the office. Our employee health and well-being are top priorities; we continue to monitor the situation and will adjust working conditions again should the need arise.

While we have been able to conduct our day-to-day operations effectively in spite of the restrictions caused by the pandemic, the pandemic has caused disruptions in our supply chain. While our supply of wafers from our foundry partners has not been interrupted, government-mandated closures in China, Malaysia, Sri Lanka and the Philippines have caused temporary shutdowns at our assembly and test sub-contractors at various times. These disruptions have not materially affected our results due to a variety of mitigation measures including higher-than-normal inventories of wafers and finished goods in the early stages of the pandemic, safety stocks of certain key inputs and multiple sources for components for most of our products. Although there are signs of improvement in the US and many areas around the world, the potential for disruptions caused by ongoing mitigation efforts remains a risk for our supply chain and the results of our business; for instance, we believe that recent lockdowns in China have had a negative impact on demand for our products.

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While the continuing pandemic brings a greater-than-normal level of uncertainty with respect to the supply of and demand for our products, we believe our business is fundamentally sound with strong, long-term growth prospects. We have increased headcount and intend to continue investing in research and development and other functions necessary to support our future growth. We also intend to continue our cash dividend and stock-repurchase programs; however, if the economy deteriorates or our business outlook changes, our board of directors may choose to suspend or alter these programs at its discretion. For additional discussion regarding COVID-19 business risks refer to Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.

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 (“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.

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. There have been no material changes to our critical accounting policies and estimates disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in each case in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 7, 2022.

Results of Operations

The following table sets forth certain operating data as a percentage of net revenues for the periods indicated.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	41.9		49.3		43.3		50.3
Gross profit	58.1		50.7		56.7		49.7
Operating expenses:
Research and development	12.8		12.1		12.9		11.8
Sales and marketing	8.7		8.5		8.8		8.3
General and administrative	3.3		5.1		4.3		5.5
Other operating expenses, net	0.6		—		0.3		—
Total operating expenses	25.4		25.7		26.3		25.6
Income from operations	32.7		25.0		30.4		24.1
Other income	0.3		0.1		0.3		0.2
Income before income taxes	33.0		25.1		30.7		24.3
Provision for income taxes	2.7		1.8		2.8		1.2
Net income	30.3	%	23.3	%	27.9	%	23.1	%

Comparison of the three and six months ended June 30, 2022 and 2021

Net revenues. Net revenues consist of revenues from product sales, which are calculated net of returns and allowances. Net revenues for the three and six months ended June 30, 2022, were $184.0 million and $366.1 million, respectively, and $180.1 million and $353.8 million for the corresponding periods of 2021, respectively.

The increases for the three- and six-month periods were driven primarily by higher sales into the industrial and consumer end markets, reflecting higher demand as well as market-share gains for our products in a broad range of applications including consumer appliances and industrial applications such as home-and-building automation, electronic utility meters, battery-operated tools and broad-based industrial applications. Revenues from communications applications

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decreased year-over-year in the three- and six-month periods reflecting weaker demand from customers serving Chinese smartphone OEMs compared to stronger demand in the prior year periods, as customers attempted to capitalize on economic sanctions affecting the mobile-phone business of a key competitor.

Our revenue mix by end market for the three and six months ended June 30, 2022 and 2021, was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
End Market	2022		2021		2022		2021
Communications	18	%	35	%	22	%	37	%
Computer	9	%	8	%	10	%	8	%
Consumer	38	%	31	%	36	%	30	%
Industrial	35	%	26	%	32	%	25	%

International sales, consisting of sales outside of the United States of America based on “bill to” customer locations, were $176.4 million and $351.7 million in the three and six months ended June 30, 2022, respectively, and $176.3 million and $345.9 million, respectively, in the corresponding periods of 2021. Although power converters using our products are distributed to end markets worldwide, most are manufactured in Asia. As a result, sales to this region represented 76% and 78% of our net revenues in the three and six months ended June 30, 2022, respectively, and 85% in both the corresponding periods of 2021. We expect international sales, and sales to the Asia region in particular, to continue to account for a large portion of our net revenues in the future.

Sales to distributors accounted for 73% and 74% in the three and six months ended June 30, 2022, respectively, and 76% and 77%, respectively, in the corresponding periods of 2021. Direct sales to OEMs and power-supply manufacturers accounted for the remainder.

The following customers represented 10% or more of our net revenues for the respective periods:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
Customer	2022		2021		2022		2021
Avnet	30	%	29	%	31	%	30	%
Honestar Technologies Co., Ltd.	11	%	19	%	13	%	19	%

No other customers accounted for 10% or more of our net revenues in these periods.

Gross profit. Gross profit is net revenues less cost of revenues. Our cost of revenues consists primarily of costs associated with 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 facilities, amortization of acquired intangible assets, and overhead associated with the management of our supply chain. Gross margin is gross profit divided by net revenues. The table below compares gross profit and gross margin for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in millions)	2022			2021			2022			2021
Net revenues	$	184.0		$	180.1		$	366.1		$	353.8
Gross profit	$	106.8		$	91.3		$	207.5		$	175.7
Gross margin		58.1	%		50.7	%		56.7	%		49.7	%

Our gross margin increased primarily due to favorable end-market mix, with a greater percentage of revenues coming from higher-margin end markets, as well as manufacturing efficiencies.

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 technologies and new products. We also record R&D expenses for prototype wafers related to

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new products until such products are released to production. The table below compares R&D expenses for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollars in millions)	2022		2021		2022		2021
R&D expenses	$	23.5	$	21.7	$	47.2	$	41.8
Headcount (at period end)		306		281		306		281

R&D expenses increased for the three and six months ended June 30, 2022, as compared to the corresponding periods of 2021, primarily due to higher salary and related expenses driven by increased headcount and increased product development expenses. These increases were partially offset by reduced stock-based compensation expense related to performance-based 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 intangible assets and facilities expenses, including expenses associated with our regional sales and support offices. The table below compares S&M expenses for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollars in millions)	2022		2021		2022		2021
Sales and marketing expenses	$	16.0	$	15.3	$	32.4	$	29.4
Headcount (at period end)		298		266		298		266

S&M expenses increased in the three and six months ended June 30, 2022, as compared to the corresponding periods of 2021, due to higher salary and related expenses stemming from higher headcount and increased travel and tradeshow related expenses.

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 audit expenses. The table below compares G&A expenses for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollars in millions)	2022		2021		2022		2021
G&A expenses	$	6.1	$	9.3	$	15.7	$	19.4
Headcount (at period end)		76		68		76		68

G&A expenses decreased for the three and six months ended as compared to the corresponding periods of 2021, due to lower stock-based compensation expense related to performance-based awards.

Other operating expenses, net. Other operating expenses, net were $1.1 million in the three and six months ended June 30, 2022. This amount consisted of a $2.9 million expense stemming from the settlement of our litigation with Opticurrent LLC (refer to Note 12, Legal Proceedings and Contingencies, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q), offset by receipt of a $1.7 million distribution related to SemiSouth Laboratories, Inc.’s bankruptcy liquidation of which we were a creditor as a result of investments made in SemiSouth in 2011.

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 table below compares other income for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(dollars in millions)	2022		2021		2022		2021
Other income	$	0.7	$	0.2	$	1.2	$	0.8

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Other income increased for the three and six months ended June 30, 2022 as compared to the corresponding periods of 2021, primarily due to gains on foreign currency exchange.

Provision for income taxes. Provision for income taxes represents federal, state and foreign taxes. The table below compares income-tax expense for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in millions)	2022			2021			2022			2021
Provision for income taxes	$	5.0		$	3.3		$	10.3		$	4.3
Effective tax rate		8.1	%		7.2	%		9.2	%		4.9	%

Income-tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for certain discrete items which are fully recognized in the period in which they occur. Accordingly, the interim effective tax rate may not be reflective of the annual estimated effective tax rate.

Our effective tax rates for the three and six months ended June 30, 2022, were 8.1% and 9.2%, respectively, and 7.2% and 4.9%, respectively, in the corresponding periods of 2021. The effective tax rate in these periods was lower than the statutory federal income-tax rate of 21% due to the geographic distribution of our world-wide earnings in lower-tax jurisdictions and the impact of federal research tax credits. Additionally, in the three months ended June 30, 2022 and 2021, our effective tax rate was favorably impacted by the recognition of excess tax benefits related to share-based payments. In the six months ended June 30, 2022 and 2021, our effective tax rate was favorably impacted by discrete items associated with the release of unrecognized tax benefits and recognition of excess tax benefits related to share-based payments. These benefits were partially offset by U.S. tax on foreign income, known as global intangible low-taxed income. 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.

Liquidity and Capital Resources

As of June 30, 2022, we had $327.6 million in cash, cash equivalents and short-term marketable securities, a decrease of approximately $202.8 million from $530.4 million as of December 31, 2021. As of June 30, 2022, we had working capital, defined as current assets less current liabilities, of $410.9 million, a decrease of approximately $203.6 million from $614.5 million as of December 31, 2021.

We have a Credit Agreement with Wells Fargo Bank, National Association (the "Credit Agreement") that provides us with a $75 million revolving line of credit to use for general corporate purposes with a $20 million sub-limit for the issuance of standby and trade letters of credit. The Credit Agreement was amended on June 7, 2021, to provide an alternate borrowing rate as a replacement for LIBOR and extend the termination date from April 30, 2022, to June 7, 2026, 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 June 7, 2026; all advances under the revolving line of credit will become due on such date, or earlier in the event of a default. No advances were outstanding under the agreement as of June 30, 2022.

Cash From Operating Activities

Operating activities generated $141.4 million of cash in the six months ended June 30, 2022. Net income for this period was $102.1 million; we also incurred depreciation, non-cash stock-based compensation expense, premium amortization on marketable securities and intangibles amortization of $17.2 million, $12.7 million, $1.9 million and $1.3 million, respectively. Sources of cash also included a $13.2 million decrease in accounts receivable due to the timing of collections, a $5.6 million increase in accounts payable (excluding payables related to property and equipment) and a

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$4.1 million decrease in prepaid expenses and other assets. These sources of cash were partially offset by a $12.0 million increase in inventories and a $2.5 million decrease in taxes payable and accrued liabilities.

Operating activities generated $125.0 million of cash in the six months ended June 30, 2021. Net income for this period was $81.7 million; we also incurred non-cash stock-based compensation expense, depreciation, intangibles amortization, and deferred income taxes of $17.7 million, $15.3 million, $1.9 million, and $1.2 million, respectively. Sources of cash also included a $13.2 million decrease in inventory reflecting strong demand for the period and a $8.1 million increase in accounts payable (excluding payables related to property and equipment) due to the timing of payments. These sources of cash were partially offset by a $5.5 million increase in accounts receivable due to increased customer shipments, a $4.5 million increase in prepaid expenses and other assets, primarily due to prepaid income taxes, and a $4.4 million decrease in taxes payable and accrued liabilities.

Cash From Investing Activities

Our investing activities in the six months ended June 30, 2022, generated $78.1 million of cash, primarily consisting of $104.8 million from sales and maturities of marketable securities, net of purchases, offset by $27.9 million for purchases of property and equipment, primarily production-related machinery and equipment, partially offset by proceeds of $1.2 million from the sale of an office building.

Our investing activities in the six months ended June 30, 2021, resulted in a $47.9 million net use of cash, primarily consisting of $28.7 million for the purchase of marketable securities, net of sales and maturities, and $19.3 million for purchases of property and equipment, primarily production-related machinery and equipment as well as construction of a new office building in Switzerland.

Cash From Financing Activities

Our financing activities in the six months ended June 30, 2022, resulted in a $310.2 million net use of cash, consisting of $292.3 million for the repurchase of our common stock and $20.9 million for the payment of dividends to stockholders, partially offset by $3.1 million from the issuance of shares through our employee stock purchase plan.

Our financing activities in the six months ended June 30, 2021, resulted in a $38.4 million net use of cash, consisting of $26.4 million for the repurchase of our common stock and $15.7 million for the payment of dividends to stockholders, partially offset by $3.7 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.

Dividends

In January 2021, our board of directors raised the quarterly cash dividend by an additional $0.02 per share with the declaration of four cash dividends of $0.13 per share to be paid to stockholders of record at the end of each quarter in 2021. In October 2021, our board of directors raised the quarterly cash dividend again with the declaration of five cash dividends of $0.15 per share (in lieu of the $0.13 per share announced in January 2021) to be paid to stockholders of record at the end of the fourth quarter in 2021 and at the end of each quarter in 2022.

In January 2022, our board of directors raised the quarterly cash dividend by an additional $0.03 per share with the declaration of four cash dividends of $0.18 per share (in lieu of the $0.15 per share announced in October 2021) to be paid to stockholders of record at the end of each quarter in 2022. A dividend payout of $10.7 million and $10.3 million occurred on March 31, 2022 and June 30, 2022, respectively. 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 interests of our stockholders.

Stock Repurchases

As of December 31, 2021, we had $67.3 million remaining under our stock-repurchase program. In January, February and April 2022, our board of directors authorized the use of an additional $100 million, $50 million and $75 million, respectively, for the repurchase of our common stock, with repurchases to be executed according to pre-defined price/volume guidelines. In the six months ended June 30, 2022, we repurchased 3.5 million shares of our common stock for $292.3 million, leaving no funds authorized as of June 30, 2022. Authorization of future repurchase programs is at the discretion of the board of directors and will depend on our financial condition, results of operations, capital requirements, business conditions and other factors.

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Contractual Commitments

As of June 30, 2022, we had a contractual obligation related to income tax, which consisted primarily of unrecognized tax benefits of approximately $22.3 million. A portion of the tax obligation is classified as long-term income taxes payable and a portion is recorded in deferred tax assets in our condensed consolidated balance sheet.

As of June 30, 2022, there were no material changes in our contractual commitments from those reported in our Annual Report on Form 10-K for the year ended December 31, 2021.

Other Information

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. Current U.S. tax laws generally allow companies to repatriate accumulated foreign earnings without incurring additional U.S. federal taxes. Accordingly, as of June 30, 2022, our worldwide cash and marketable securities are available to fund capital allocation needs, including capital and internal investments, acquisitions, stock repurchases and/or dividends without incurring additional U.S. federal income taxes.

If our operating results deteriorate in future periods, either as a result of a decrease in customer demand or pricing pressures from our customers or our competitors, or for other reasons, our ability to generate positive cash flow from operations may be jeopardized. In that case, we may be forced to use our cash, cash equivalents and short-term investments, use our current financing or seek additional financing from third parties to fund our operations. We believe that cash generated from operations, together with existing sources of liquidity, will satisfy our projected working capital and other cash requirements for at least the next 12 months.

Recent Accounting Pronouncements

Information with respect to this item may be found in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has not been a material change in our exposure to foreign currency exchange and interest rate risks from that described in our Annual Report on Form 10-K for the year ended December 31, 2021.

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 at the date of purchase are classified as short-term investments. We generally hold securities until maturity; however, they may be sold under certain circumstances, including, but not limited to, when necessary for the funding of acquisitions and other strategic investments, and therefore 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. Our portfolio includes only marketable securities with active secondary or resale markets to facilitate portfolio liquidity. As of June 30, 2022 and December 31, 2021, we held primarily cash equivalents and short-term investments with fixed interest rates.

Our investment securities are subject to market interest rate risk and will vary in value as market interest rates fluctuate. We monitor our investments per our above-mentioned investment policy; therefore, if market interest rates were to increase or decrease by 10% from interest rates as of June 30, 2022 or December 31, 2021, 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 Unaudited Condensed Consolidated Financial Statements, for a tabular presentation of our available-for-sale investments and the expected maturity dates.

Foreign Currency Exchange Risk. As of June 30, 2022, our primary transactional currency was U.S. dollars; in addition, we hold cash in Swiss francs and euro. We maintain cash denominated in Swiss francs and euro to fund the

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operations of our Swiss subsidiary. The foreign exchange rate fluctuation between the U.S. dollar versus the Swiss franc and euro is recorded in other income in our condensed consolidated statements of income.

We have sales offices in various other foreign countries in which our expenses are denominated in the local currency, primarily Asia and Western Europe. 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. From time to time we may enter into foreign currency hedging contracts to hedge certain foreign currency transactions. As of June 30, 2022 and December 31, 2021, we did not have an open foreign currency hedge program utilizing foreign currency forward exchange contracts.

Two of our major suppliers, Epson and Lapis, 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 on future purchases. Each year, our management and these two suppliers review and negotiate future 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 on future purchases. Nevertheless, as a result of these supplier agreements, our gross margin is influenced by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. All else being equal, a 10% change in the value of the U.S. dollar compared to the Japanese yen would result in a corresponding change in our gross margin of approximately 1.5%; this sensitivity may increase or decrease depending on the percentage of our wafer supply that we purchase from some of our Japanese suppliers and could subject our gross profit and operating results to the potential for material fluctuations.

ITEM 4. CONTROLS AND PROCEDURES

Limitation on Effectiveness of Controls

Any control system, no matter how well designed and operated, can provide only reasonable assurance as to the tested objectives. The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. The inherent limitations in any control system include the realities that judgments related to decision-making can be faulty, and that reduced effectiveness in controls can occur because of simple errors or mistakes. Due to the inherent limitations in a cost-effective control system, misstatements due to error may occur and may not be detected.

Evaluation of Disclosure Controls and Procedures

Management is required to evaluate our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (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 Quarterly Report on Form 10-Q, 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. 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information with respect to this item may be found in Note 12, Legal Proceedings and Contingencies, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.

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ITEM 1A. RISK FACTORS

Except as discussed below, there have been no material changes to the risks described in Part I Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021, which are incorporated herein by reference in this report.

Risks Related to Our Business

We face risks related to changing worldwide economic conditions which could adversely affect our operating results and financial condition. The US and global economies are facing growing inflation, higher interest rates and potential recession. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, adverse changes in economic conditions could harm our operating results and financial conditions in a variety of ways. For example, regional or global economic downturns could adversely affect demand for our products, as could reductions in consumer spending stemming from inflation. This in turn could adversely affect our revenue and potentially result in write-offs of excess or obsolete inventory. Inflation could also drive increases in our costs of revenue and operations, which we may not be able to successfully pass along to our customers. For additional information regarding these and other risks related to adverse changes in macroeconomic conditions, we refer you to the risk factors disclosed in Part I Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

As of December 31, 2021, we had $67.3 million available for future repurchases to be executed according to predefined price/volume guidelines. In January, February and April 2022, our board of directors authorized the use of an additional $100 million, $50 million and $75 million, respectively, for the repurchase of our common stock with repurchases to be executed according to pre-defined price/volume guidelines.

In the six months ended June 30, 2022, we repurchased 3.5 million of our shares for $292.3 million, leaving no funds authorized as of June 30, 2022.

Issuer Purchases of Equity Securities

The following table summarizes repurchases of our common stock during the second quarter of fiscal 2022:


				Total Number of	Approximate Dollar Value that May Yet be
				Shares Purchased	Repurchased
	Total	Average		as Part of	Under the
	Number of	Price Paid		Publicly Announced	Plans or Program
Period	Shares Purchased	Per Share		Plans or Programs	(In millions)
April 1, 2022 to April 30, 2022	957,650	$	82.28	957,650	$	78.9
May 1, 2022 to May 31, 2022	961,156	$	82.06	961,156		—
June 1, 2022 to June 30, 2022	—		—	—		—
Total	1,918,806			1,918,806

All of the shares repurchased were pursuant to our publicly announced repurchase program.

ITEM 5. OTHER INFORMATION

Executive Officer Benefit Agreements

Effective August 1, 2022, we entered into letter agreements with each of Yang Chiah Yee, vice president worldwide sales, and Sunny Gupta, vice president operations, pursuant to which they have been deemed “senior executives” within the meaning of their executive officer benefits agreements, thus affording them the additional benefits thereunder as further described in our Proxy Statement for our 2022 Annual Meeting of Stockholders under the caption “Compensation of Executive Officers -- Employment, Severance and Change of Control Agreements — Executive Officer Benefits Agreements”.

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ITEM 6. EXHIBITS

		Incorporation by Reference
EXHIBIT NUMBER	Exhibit Description	Form	File Number	Exhibit/Other Reference	Filing Date	Filed Herewith

3.1	Restated Certificate of Incorporation	10-K	000-23441	3.1	2/29/2012
3.2	Amended and Restated Bylaws	8-K	000-23441	3.1	4/26/2013
4.2	Reference is made to Exhibits 3.1 to 3.2
10.1*	Executive Officer Benefits Agreement, dated as of August 1, 2022, between Power Integrations, Inc. and Sunil Gupta					X
10.2*	Executive Officer Benefits Agreement, dated as of August 1, 2022, between Power Integrations, Inc. and Yang Chiah Yee					X
10.3†	Amendment Number Eight to the Amended and Restated Wafer Supply Agreement between Power Integrations International, Ltd. and Lapis Semiconductor Co., Ltd., effective as of July 26, 2017					X
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
32.2**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
101.INS	XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.					X
101.SCH	Inline XBRL Taxonomy Extension Schema Document					X

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		Incorporation by Reference
EXHIBIT NUMBER	Exhibit Description	Form	File Number	Exhibit/Other Reference	Filing Date	Filed Herewith

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document					X
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

All references in the table above to previously filed documents or descriptions are incorporating those documents and descriptions by reference thereto.

†	Portions of this exhibit have been omitted as being immaterial and the type of information that Power Integrations, Inc. treats as private or confidential.

*	Indicates a management contract or compensatory plan or arrangement.

The certifications attached as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

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.

		POWER INTEGRATIONS, INC.

Dated:	August 4, 2022	By:	/s/ SANDEEP NAYYAR
			Sandeep Nayyar
			Chief Financial Officer
			(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)