Business context and reporting period
Power Integrations, Inc. designs and markets analog and mixed-signal components for high-voltage power conversion, including products for power supplies, lighting, motors, industrial systems and electric vehicles. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the same 2020 periods. The company reports as one segment.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Figures compare 2021 with 2020.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $176.8 | $121.1 | $530.6 | $337.6 |
| Gross profit / margin | $91.7 / 51.9% | $59.6 / 49.2% | $267.5 / 50.4% | $169.6 / 50.2% |
| Operating income / margin | $45.6 / 25.8% | $14.7 / 12.2% | $130.8 / 24.6% | $42.8 / 12.6% |
| Net income / margin | $42.0 / 23.8% | $14.8 / 12.2% | $123.7 / 23.3% | $43.9 / 12.9% |
| Diluted EPS | $0.69 | $0.24 | $2.01 | $0.72 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $183.7 | $79.3 |
- Revenue increased 46% in Q3 and 57% for the first nine months. Management attributed growth to strong semiconductor demand and market-share gains across consumer, mobile-device charging and industrial applications.
- Gross margin improved 2.7 percentage points in Q3, mainly on favorable end-market mix and manufacturing efficiencies, partly offset by equipment-related charges. The nine-month margin rose 0.2 points; efficiencies were largely offset by less favorable mix and higher equipment expenses.
- Operating expenses were $46.1 million in Q3 and $136.7 million for nine months, up from $44.8 million and $126.8 million, respectively. Increases reflected headcount, compensation and performance-based stock compensation, plus product-development materials and equipment costs.
- Effective tax rates were 8.2% for Q3 and 6.1% for nine months, versus 5.1% and 6.4%. Lower-than-statutory rates reflected geographic earnings mix, research credits and share-based payment tax benefits; the 2021 nine-month rate also benefited from release of an unrecognized tax benefit.
- Nine-month operating cash flow was $183.7 million. Capital expenditures were $30.3 million, implying operating cash flow less capital expenditures of approximately $153.4 million. Cash and cash equivalents increased $3.6 million to $262.4 million; cash, cash equivalents and short-term marketable securities totaled $548.9 million.
- Working capital was $637.3 million at September 30, up from $538.7 million at year-end 2020. Total liabilities were $96.6 million. No borrowings were outstanding under the $75 million revolving credit facility, extended to June 2026.
Material changes versus prior period
- Net income rose 184% in Q3 and 182% for nine months, while diluted EPS increased to $0.69 and $2.01, respectively.
- Cash from operations more than doubled year over year for the nine-month period. Inventory declined $11.1 million, compared with a $14.4 million increase in the prior-year period.
- Capital returns increased: the company repurchased approximately 455,000 shares for $36.2 million in the first nine months, versus $2.6 million in the prior-year period, and paid $23.6 million in dividends versus $18.5 million.
- Customer concentration increased: the top ten customers represented 76% of Q3 revenue and 79% of nine-month revenue, compared with 65% and 56%. Avnet represented 27% and 29%, respectively; Honestar represented 15% and 17%.
Outlook, risks, contingencies and unusual items
- Guidance: The filing does not provide specific financial guidance. Management described strong demand and long-term growth prospects, and expects to continue investing in R&D and other growth-supporting functions.
- Supply chain and COVID-19: Pandemic-related disruptions caused temporary shutdowns at some assembly and test subcontractors, although wafer supply had not been interrupted and mitigation measures limited reported impact. Further restrictions remain a risk. The company depends on third-party wafer suppliers and faces broader semiconductor supply-chain uncertainty.
- Commercial risks: Demand, orders and pricing can fluctuate; customers may cancel or reschedule orders on short notice, and the company lacks long-term customer contracts. Distributor sales were 72% of Q3 revenue and 75% for nine months. Asia accounted for 80% and 83% of revenue, respectively.
- Litigation: In the Opticurrent patent case, a jury award was reduced to $1.2 million; an appeal concerning the judgment was pending. Follow-on Opticurrent matters and CogniPower litigation were also ongoing. The company said it could not estimate a loss or range for the ongoing litigation and warned adverse outcomes could be material.
- Capital allocation: In October 2021, after quarter-end, the board authorized an additional $50 million for repurchases and raised the quarterly dividend to $0.15 per share for Q4 2021 and 2022. These programs remain subject to board discretion and business conditions.
- Other exposures: The company reported approximately $20.9 million of contractual tax obligations, primarily unrecognized tax benefits. It had no open foreign-currency forward hedge program. Management estimated a 10% U.S. dollar/yen change could change gross margin by approximately 1.0%, all else equal.
- Management stated that disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting. The company believed available liquidity and operating cash generation would meet requirements for at least the next 12 months.
Most important facts for investors to verify
- Whether elevated demand and market-share gains persisted, and whether revenue growth translated into sustained margins and cash generation.
- How semiconductor supply constraints, subcontractor disruptions and wafer-supplier capacity affect production, inventory and customer deliveries.
- Exposure to major distributors and customers, particularly Avnet, and the high concentration of sales in Asia.
- Progress and potential financial or operational consequences of the Opticurrent and CogniPower litigation.
- The sustainability of the unusually low effective tax rate and the impact of share-based compensation on reported earnings and dilution.
- Execution and funding of repurchases and increased dividends alongside capital spending and growth investments.