Power Integrations, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited, consolidated U.S. GAAP results. Comparisons are with the corresponding 2019 periods. Financial amounts below are in U.S. dollars.
Business context and results
Power Integrations designs and markets analog and mixed-signal integrated circuits and related components for high-voltage power conversion, serving communications, computer, consumer, industrial, lighting, and other markets. It reports one operating segment.
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $121.1 million | $114.2 million | $337.6 million | $306.2 million |
| Gross profit / margin | $59.6 million / 49.2% | $58.1 million / 50.9% | $169.6 million / 50.2% | $155.2 million / 50.7% |
| Operating income / margin | $14.7 million / 12.2% | $17.5 million / 15.3% | $42.8 million / 12.6% | $33.4 million / 10.9% |
| Net income | $14.8 million | $17.1 million | $43.9 million | $35.2 million |
| Diluted EPS | $0.24 | $0.29 | $0.72 | $0.59 |
| Operating cash flow | Not separately presented for Q3 | $79.3 million | $42.3 million |
Financial position and liquidity
- At September 30, 2020, cash and cash equivalents were $232.0 million and short-term marketable securities were $211.9 million, totaling $443.9 million. Working capital was $526.7 million.
- Total assets were $876.1 million and total liabilities were $96.3 million. The filing reports no revolver borrowings outstanding; $7.4 million of the $75 million credit facility was reserved for a letter of credit. The facility expires April 30, 2022.
- Nine-month investing activities used $14.5 million, including $35.7 million for property and equipment. Financing activities used $11.5 million, including $18.5 million in dividends and $2.6 million in share repurchases.
- Management said existing cash and other liquidity, together with operating cash generation, should meet working-capital and other cash needs for at least the next 12 months.
Material changes and management commentary
- Revenue increased 6% in Q3 and 10% for the first nine months year over year. Q3 growth came mainly from communications and computer products, partly offset by weaker industrial sales; nine-month growth spanned all end markets.
- Gross margin declined 1.7 percentage points in Q3 and 0.5 points year to date, primarily because a larger share of revenue came from lower-margin end markets. Q3 operating income and net income fell year over year as operating expenses rose and margin contracted; nine-month operating income and net income increased.
- Operating expenses rose to $44.8 million in Q3 and $126.8 million year to date, mainly due to higher performance-based stock compensation and workforce-related costs. Lower travel costs and lower legal expenses partly offset increases.
- COVID-19 caused temporary shutdowns at certain assembly and test subcontractors and shipment delays, but management said mitigation measures—including higher inventories and multiple sources for most products—kept results from being materially affected. Supply-chain disruption and demand effects remain uncertain.
- Management adjusted near-term operating-expense and capital-spending plans in anticipation of continued reduced demand, while stating it planned to maintain R&D investment, dividends, and repurchases. It provided no specific numerical revenue, margin, or earnings guidance in the filing.
Risks, contingencies, and unusual items
- Customer and channel concentration is meaningful: the top ten customers represented 65% of Q3 revenue and 56% year-to-date; distributors accounted for 70% and 76%, respectively. International sales were 98% of revenue in both periods, and Asia accounted for 82% in Q3 and 80% year to date.
- COVID-19 could disrupt demand, suppliers, manufacturing, shipments, and cash flows. Other disclosed risks include short-notice order cancellations or rescheduling, reliance on third-party wafer suppliers, pricing pressure, and exposure to yen-dollar movements through supplier agreements.
- In Opticurrent litigation, a prior jury award was reduced to $1.2 million and affirmed on appeal; a company motion remains pending, and a follow-on case is ongoing. CogniPower-related proceedings are also in preliminary stages. The company said it could not estimate a loss or range of loss for ongoing litigation.
- The board approved a two-for-one stock split in August 2020; presented share and per-share figures reflect the split. The quarterly dividend was raised to $0.11 per share for Q3 and Q4 2020.
- The effective tax rate was 5.1% in Q3 and 6.4% year to date, below the 21% federal statutory rate; management attributed the difference principally to earnings in lower-tax jurisdictions, research credits, and share-based compensation tax benefits, partly offset by U.S. tax on certain foreign income.
Important facts for investors to verify
- Whether revenue growth continues and whether the unfavorable end-market mix reverses enough to improve gross margin.
- Customer, distributor, and geographic concentration, including the elevated Q3 contribution from two distributors.
- Inventory growth of $14.4 million year to date and whether it converts into sales or requires adjustments.
- COVID-19 effects on demand, subcontractor capacity, product shipments, and the company’s planned spending.
- Developments in the Opticurrent and CogniPower matters and any eventual financial or operational exposure.
- Sustainability of cash generation, dividends, and repurchases alongside elevated capital expenditures and stock-based compensation.