Power Integrations, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results. The company designs and markets analog and mixed-signal ICs and related components for high-voltage power conversion, including AC-DC supplies and high-power gate-driver applications.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $111.3 million | $101.6 million | $323.5 million | $287.2 million |
| Gross profit / margin | $55.7 million / 50.1% | $49.8 million / 49.0% | $159.6 million / 49.3% | $142.1 million / 49.4% |
| Operating income / margin | $16.1 million / 14.5% | $13.1 million / 12.9% | $43.2 million / 13.2% | $35.3 million / 12.3% |
| Net income | $16.5 million | $12.8 million | $44.5 million | $34.6 million |
| Diluted EPS | $0.54 | $0.43 | $1.46 | $1.17 |
Revenue increased about 9.5% in Q3 and 12.6% year to date; net income rose about 28.9% and 28.7%, respectively. Q3 gross margin improved on a more favorable end-market mix. Year-to-date gross margin was nearly flat: favorable mix was offset by higher wafer costs associated with the U.S. dollar’s prior decline against the Japanese yen. Operating expenses increased, principally due to workforce expansion, higher stock-based compensation, and legal costs, including ON Semiconductor litigation.
For the first nine months, operating cash flow was $54.6 million versus $70.2 million in 2016. Investing activities used $54.9 million, including $29.6 million of property and equipment purchases; financing activities used $11.1 million, including $12.5 million of dividends and $6.7 million of repurchases. Cash and cash equivalents declined $11.4 million to $50.7 million during the period.
Financial position and liquidity
At September 30, 2017, cash, cash equivalents and short-term marketable securities totaled $263.7 million; working capital was $292.6 million. Total liabilities were $62.2 million and stockholders’ equity was $562.3 million. No borrowings were outstanding under the $75 million revolving credit facility, which runs through July 2019. Management said available liquidity and operating cash generation were expected to meet working-capital and other cash needs for at least 12 months.
Changes, outlook and key risks
- Growth reflected stronger industrial and consumer demand; nine-month results also benefited from smartphone rapid-charging applications. Computer demand was weaker, and Q3 communications sales declined versus the prior year.
- International sales were 96% of revenue, and Asia represented about 78% of Q3 revenue. The top ten customers contributed 56% of Q3 revenue; Avnet alone contributed 15%.
- The company adopted ASC 606 on January 1, 2017, retrospectively. Distributor sales are now generally recognized when shipped and control transfers (“sell-in”), rather than when distributors resell products (“sell-through”). Prior-period comparisons shown in the filing were adjusted. The adoption increased December 2016 retained earnings by $15.0 million and changed reported revenue and earnings in comparative periods.
- The 2017 nine-month effective tax rate was 1.2%, reflecting earnings in lower-tax jurisdictions, research credits and $1.7 million of excess share-based-payment tax benefits. Adoption of the share-based compensation standard also produced a $7.5 million cumulative opening-retained-earnings tax benefit.
- No numerical revenue or earnings guidance was provided. Management described continued sales growth in foreign markets and expects international, particularly Asian, sales to remain significant.
- Risks include volatile demand and order timing, pricing competition, customer and geographic concentration, foreign-exchange and Japanese-yen exposure, and litigation. Management estimated that a 10% U.S.-dollar/yen move could change gross margin by about 1.0%, all else equal.
Legal matters and unusual items
The company reported a $146.5 million final judgment against Fairchild, including prejudgment interest, but recorded no benefit from the verdict. Fairchild appealed, and in September 2017 the Patent Office rejected as obvious asserted claims of the patent underlying that judgment; further proceedings and an appeal were expected. Other Fairchild-related cases and patent challenges remain pending. ON Semiconductor has asserted claims against the company, while the company also asserts its own patent claims; trials were scheduled for 2018 and 2020 in separate matters. The company cannot estimate a loss or range of loss for unsettled litigation and cautioned that adverse outcomes could materially affect results. Litigation costs also divert management and technical resources.
The filing reported approximately $17.5 million of contractual income-tax obligations, primarily unrecognized tax benefits. It also disclosed no material claims under customer indemnifications and no material change in contractual commitments from the 2016 Form 10-K.
Important facts for investors to verify
- Whether revenue growth and margins persist, given end-market mix, computer demand, wafer costs and foreign-exchange exposure.
- Whether distributor inventory, ship-and-debit adjustments and stock-rotation estimates remain consistent with reported sell-in revenue under ASC 606.
- Operating cash-flow conversion and working-capital movements, especially the increase in prepaid expenses and other assets and accounts receivable.
- Developments in Fairchild and ON Semiconductor litigation, including the patent-office decisions, appeal outcomes, potential damages and related legal expense.
- Tax-rate sustainability and the treatment of foreign earnings, unrecognized tax benefits and future repatriations.
- Customer concentration, the $46.8 million remaining repurchase authorization, dividend decisions, and continued availability of the undrawn credit facility.