POWER INTEGRATIONS, INC. 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
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
that time we have expanded our SAM to more than
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
introduced the SCALE-iDriverTM 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 (
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 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
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Recent Results
Our net revenues were
Our top ten customers, including distributors that resell to original equipment
manufacturers, or OEMs, and merchant power supply manufacturers, accounted for
77% and 79% of net revenues in the three months ended
Our gross margin was 55.3% and 48.6% in the three months ended
Total operating expenses were
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
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
While the continuing pandemic brings a greater-than-normal level of uncertainty
with respect to the 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
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in
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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
Results of Operations
The following table sets forth certain operating data as a percentage of net revenues for the periods indicated.
Three Months Ended
March 31,
2022 2021
Net revenues 100.0 % 100.0 %
Cost of revenues 44.7 51.4
Gross profit 55.3 48.6
Operating expenses:
Research and development 13.0 11.5
Sales and marketing 9.0 8.1
General and administrative 5.3 5.8
Total operating expenses 27.3 25.4
Income from operations 28.0 23.2
Other income 0.3 0.3
Income before income taxes 28.3 23.5
Provision for income taxes 2.9 0.6
Net income 25.4 % 22.9 %
Comparison of the Three Months Ended
Net revenues. Net revenues consist of revenues from product sales, which are
calculated net of returns and allowances. Net revenues for the three months
ended
Revenues from industrial, consumer and computer applications increased substantially compared to the prior-year period, reflecting market-share gains for our products in a broad range of applications including consumer appliances,
adapters for notebook computers and a range of industrial applications including home-and-building automation, electronic utility meters, battery-operated tools and broad-based industrial applications. Revenues from communications applications decreased year-over-year reflecting very strong demand in the prior-year period from the cellphone market, as customers attempted to capitalize on economic sanctions affecting the mobile-phone business of a key competitor.
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Our revenue mix by end market for the three months endedMarch 31, 2022 and 2021 was as follows: Three Months Ended March 31, End Market 2022 2021 Communications 26 % 38 % Computer 10 % 8 % Consumer 35 % 29 % Industrial 29 % 25 %
International sales, consisting of sales outside of
Sales to distributors accounted for 75% and 77% in the three months ended
The following customers represented 10% or more of our net revenues for the
respective periods:
Three Months Ended
March 31,
Customer 2022 2021
Avnet 31 % 31 %
Honestar Technologies Co., Ltd. 16 % 18 %
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 months ended
Three Months Ended
March 31,
(dollars in millions) 2022 2021
Net revenues $ 182.1 $ 173.7
Gross profit $ 100.7 $ 84.4
Gross margin 55.3 % 48.6 %
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 new products until such products are released to
production. The table below compares R&D expenses for the three months ended
Three Months Ended
March 31,
(dollars in millions) 2022 2021
R&D expenses $ 23.7 $ 20.0 Headcount (at period end) 306 279
R&D expenses increased for the three months ended
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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 months
ended
Three Months Ended
March 31,
(dollars in millions) 2022 2021
Sales and marketing expenses
297 266
S&M expenses increased in the three months ended
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 months ended
Three Months Ended
March 31,
(dollars in millions) 2022 2021
G&A expenses $ 9.6 $ 10.1
Headcount (at period end) 70 71
G&A expenses decreased for the three months ended
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 months ended
Three Months Ended
March 31,
(dollars in millions) 2022 2021
Other income $ 0.6 $ 0.6 Provision for income taxes. Provision for income taxes represents federal, state
and foreign taxes. The table below compares income-tax expense for the three
months ended
Three Months Ended
March 31,
(dollars in millions) 2022 2021
Provision for income taxes
10.4 % 2.4 %
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 months ended
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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
We have a Credit Agreement with
Cash From Operating Activities
Operating activities generated
Operating activities generated
Cash From Investing Activities
Our investing activities in the three months ended
Our investing activities provided
Cash From Financing Activities
Our financing activities in the three months ended
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Our financing activities in the three months ended
Dividends
In
In
Stock Repurchases
As of
Contractual Commitments
As of
As of
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
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.
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Off-Balance-Sheet Arrangements
As of
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.
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