Power Integrations, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2021, compared with the same period in 2020. Power Integrations designs and markets analog and mixed-signal integrated circuits and related components for high-voltage power conversion. It reports one operating segment.
Financial highlights
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $173.7 million | $109.7 million | +58.4% |
| Gross profit / margin | $84.4 million / 48.6% | $56.5 million / 51.5% | Margin down 2.9 percentage points |
| Operating income / margin | $40.2 million / 23.2% | $15.1 million / 13.8% | +166% |
| Net income / margin | $39.8 million / 22.9% | $15.9 million / 14.5% | +150.5% |
| Diluted EPS | $0.65 | $0.26 | +$0.39 |
| Cash from operations | $58.1 million | $26.4 million | +$31.7 million |
All dollar amounts are U.S. dollars. Capital expenditures were $11.1 million, implying operating cash flow less capital expenditures of approximately $47.1 million. Cash, cash equivalents and short-term marketable securities totaled $491.3 million at March 31, 2021, up from $449.2 million at December 31, 2020. Working capital was $579.8 million. Total liabilities were $90.9 million; no borrowings were outstanding on the $75 million revolving credit facility. The facility expires April 30, 2022.
Material changes and management commentary
- Revenue growth reflected strong demand across semiconductor markets. Communications and computer revenue nearly tripled collectively, supported by demand for advanced mobile-device chargers, market-share gains, and work-from-home and learn-from-home trends.
- All end-market categories grew, but mix shifted toward lower-margin markets, reducing gross margin. Communications rose to 38% of revenue from 22%; consumer fell to 29% from 41%; industrial fell to 25% from 33%; and computer rose to 8% from 4%.
- Operating expenses increased to $44.2 million from $41.4 million, mainly from higher salaries, headcount and stock-based compensation. Expenses declined as a share of revenue to 25.4% from 37.7%.
- Top ten customers represented 79% of revenue versus 55% a year earlier. Avnet and Honestar Technologies accounted for 31% and 18% of revenue, respectively. Sales to distributors were 77% of revenue; international sales were 98%.
- Management said demand was strong and the business had sound long-term growth prospects, while noting that future demand remained uncertain. The company planned continued R&D and other growth investments. The filing gives no numerical revenue or earnings guidance.
Liquidity, capital allocation and unusual items
- The company generated $58.1 million in operating cash flow. Cash dividends paid were $7.8 million; the quarterly dividend was raised to $0.13 per share for 2021. No shares were repurchased in Q1. At quarter-end, $41.3 million remained under the existing repurchase authorization; the board authorized an additional $50 million in April 2021.
- The effective tax rate was 2.4%, versus 5.8% in Q1 2020, aided by lower-tax jurisdictions, research credits, share-based-payment tax benefits and a discrete release of an unrecognized tax benefit. The low quarterly rate may not represent the full-year rate.
- COVID-19-related subcontractor shutdowns in 2020 had delayed some shipments, but affected subcontractors had resumed operations by year-end. Management reported operations continued effectively and said the company’s wafer supply had not been interrupted.
Risks, contingencies and outlook considerations
- Customer and distributor concentration increased; Avnet represented 58% of accounts receivable at March 31, 2021. Customers may cancel or reschedule orders on short notice, and the company has no long-term customer contracts.
- The company relies on third-party wafer suppliers and outsourced assembly and testing. It cites competition, pricing pressure, product and end-market mix, raw-material costs, and yen-dollar movements as factors that can affect margins. A 10% change in the U.S. dollar versus the yen could change gross margin by approximately 1.0%, all else equal.
- Patent litigation remains unresolved. In the Opticurrent matter, a $6.7 million jury award was reduced to $1.2 million; execution is stayed pending appeal. A related follow-on case is stayed. The company is also involved in CogniPower litigation. It cannot estimate a loss or range of loss for the ongoing matters and warns adverse outcomes could be material.
- Management believes current liquidity will meet working-capital and other cash needs for at least 12 months. This outlook depends on operating results and could be affected by demand, pricing, supply-chain or broader economic deterioration.
Important facts for investors to verify
- Whether elevated demand and the communications/computer mix persist, and whether gross margin stabilizes after the Q1 decline.
- Whether customer concentration, especially Avnet’s share of revenue and receivables, changes in subsequent quarters.
- Developments and potential financial exposure in the Opticurrent and CogniPower cases.
- Future wafer availability, outsourced manufacturing capacity, and sensitivity of margins to yen-dollar exchange rates.
- Future cash use for dividends, repurchases, capital investment and growth initiatives; no formal numerical guidance was provided.