Power Integrations(POWI) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's unaudited condensed consolidated financial statements for the period ended September 30, 2021, demonstrate significant growth in revenues, profitability, and total assets, reflecting a robust financial position Condensed Consolidated Balance Sheets As of September 30, 2021, total assets increased to $1.005 billion from $903.3 million at year-end 2020, with stockholders' equity rising to $908.4 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total current assets | $703,347 | $601,232 | | Total assets | $1,004,990 | $903,339 | | Total current liabilities | $66,062 | $62,526 | | Total liabilities | $96,634 | $92,928 | | Total stockholders' equity | $908,356 | $810,411 | Condensed Consolidated Statements of Income The company reported significant year-over-year growth in Q3 2021, with net revenues increasing 46.0% to $176.8 million and net income surging 183.6% to $42.0 million Q3 Financial Performance (in thousands, except EPS) | Metric | Q3 2021 | Q3 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | $176,776 | $121,129 | +46.0% | | Gross Profit | $91,739 | $59,569 | +54.0% | | Income from Operations | $45,592 | $14,741 | +209.3% | | Net Income | $42,034 | $14,820 | +183.6% | | Diluted EPS | $0.69 | $0.24 | +187.5% | Nine Months Financial Performance (in thousands, except EPS) | Metric | Nine Months 2021 | Nine Months 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | $530,623 | $337,625 | +57.2% | | Gross Profit | $267,463 | $169,585 | +57.7% | | Income from Operations | $130,754 | $42,760 | +205.8% | | Net Income | $123,713 | $43,898 | +181.8% | | Diluted EPS | $2.01 | $0.72 | +179.2% | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash from operating activities more than doubled to $183.7 million, while investing and financing activities used $128.1 million and $52.0 million, respectively Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $183,705 | $79,273 | | Net cash used in investing activities | ($128,137) | ($14,478) | | Net cash used in financing activities | ($52,007) | ($11,471) | | Net increase in cash and cash equivalents | $3,561 | $53,324 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail accounting policies, financial components, high customer concentration, ongoing legal proceedings, and capital return programs including increased dividends and stock repurchases - The top ten customers accounted for approximately 79% of net revenues for the nine months ended September 30, 2021, up from 56% in the same period of 2020[58] Customers Representing >10% of Net Revenues | Customer | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Avnet | 27% | 18% | 29% | 14% | | Honestar Technologies Co., Ltd. | 15% | 14% | 17% | * | Geographic Net Revenues for Nine Months Ended Sep 30 (in thousands) | Region | 2021 | 2020 | | :--- | :--- | :--- | | Hong Kong/China | $344,790 | $202,642 | | Korea | $43,702 | $29,762 | | Western Europe (excl. Germany) | $27,268 | $25,565 | | Germany | $24,064 | $17,169 | | Taiwan | $20,432 | $17,811 | | Other | $70,167 | $52,715 | | Total | $530,623 | $337,625 | - The company repurchased approximately 455,000 shares for $36.2 million in the first nine months of 2021, with an additional $50.0 million authorized for repurchases in October 2021[71] - The quarterly cash dividend was raised to $0.13 per share for 2021 and further increased to $0.15 per share for Q4 2021 and all of 2022[73] - The company is involved in ongoing patent infringement lawsuits with Opticurrent, LLC and CogniPower LLC, but is currently unable to estimate a loss or range of loss[88][91][95] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q3 2021 revenue growth to robust demand and market-share gains, with improved gross margin and a strong liquidity position, while continuing R&D investments and capital returns despite minor COVID-19 supply chain disruptions Overview and Strategy The company designs and markets high-voltage power conversion ICs, pursuing a growth strategy focused on increasing penetration in existing markets and expanding its total addressable market into new applications like automotive EVs and GaN technologies - The company's growth strategy focuses on increasing penetration of its served markets and expanding its addressable market[104] - The company has expanded its served available market (SAM) from approximately $1.5 billion to over $4 billion through new product introductions, acquisitions, and targeting new applications like electric vehicles (EVs)[107] Results of Operations Net revenues grew 46% year-over-year in Q3 2021, driven by strong demand and market share gains, with gross margin improving to 51.9% due to favorable end-market mix and manufacturing efficiencies Revenue Mix by End Market | End Market | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Communications | 25% | 32% | 33% | 28% | | Computer | 11% | 9% | 9% | 6% | | Consumer | 34% | 31% | 31% | 34% | | Industrial | 30% | 28% | 27% | 32% | - Gross margin increased in Q3 2021 to 51.9% from 49.2% in Q3 2020, primarily due to a favorable end-market mix and manufacturing efficiencies[129] - R&D expenses increased slightly in Q3 2021 due to higher salary expenses from increased headcount and higher stock-based compensation[130] - Sales & Marketing expenses increased in Q3 2021 primarily due to higher commission expenses driven by increased sales[131] Liquidity and Capital Resources The company maintains strong liquidity with $548.9 million in cash and marketable securities, generating $183.7 million from operations and utilizing $36.2 million for stock repurchases and $23.5 million for dividends in the first nine months of 2021 - As of September 30, 2021, the company had $548.9 million in cash, cash equivalents, and short-term marketable securities[136] - The company has an undrawn $75.0 million revolving line of credit, extended to June 7, 2026[137][144] - In the first nine months of 2021, the company used $36.2 million to repurchase common stock and $23.5 million to pay dividends[142] - As of September 30, 2021, $55.1 million remained under the stock repurchase program, with an additional $50.0 million authorized in October 2021[149] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate fluctuations affecting its investment portfolio and foreign currency exchange risk, particularly concerning the Japanese yen due to wafer supply agreements - The company's investment portfolio is subject to interest rate risk, but a 10% change in rates would not have a material impact on the portfolio's fair market value[159] - The company's gross margin is influenced by the U.S. dollar to Japanese yen exchange rate, with a 10% change in the exchange rate resulting in an approximate 1.0% change in gross margin[162][164] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[166] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[167] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ongoing patent infringement litigation, including multiple lawsuits by Opticurrent, LLC and a case with CogniPower LLC, vigorously defending itself without current ability to estimate potential loss - The company is defending against several patent infringement lawsuits filed by Opticurrent, LLC in various U.S. District Courts[88][89][90] - The company is also involved in litigation with CogniPower LLC regarding patent infringement claims, currently stayed pending inter partes review (IPR) proceedings at the U.S. Patent and Trademark Office[91][94] Risk Factors Risk factors have not changed substantively from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020 - Risk factors have not changed substantively from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[169] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2021, the company repurchased 120,002 shares for $81.54 per share, with $55.1 million remaining under the repurchase program as of September 30, 2021, and an additional $50.0 million authorized in October 2021 Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value Remaining (In millions) | | :--- | :--- | :--- | :--- | | July 1-31, 2021 | 120,002 | $81.54 | $55.1 | | August 1-31, 2021 | — | — | $55.1 | | Sept 1-30, 2021 | — | — | $55.1 | | Total | 120,002 | | | - In the nine months ended September 30, 2021, the company repurchased a total of approximately 455,000 shares for $36.2 million[171] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and XBRL data files