Power Integrations, Inc. — Q2 2019 Form 10-Q
Business and period: The company designs and markets integrated circuits and related components for high-voltage power conversion. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the same 2018 periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $102.9 million | $109.5 million | $192.1 million | $212.6 million |
| Gross profit / margin | $51.6 million / 50.1% | $56.2 million / 51.4% | $97.0 million / 50.5% | $109.8 million / 51.6% |
| Operating income / margin | $9.8 million / 9.5% | $15.6 million / 14.3% | $15.9 million / 8.2% | $29.6 million / 13.9% |
| Net income | $10.8 million | $15.4 million | $18.1 million | $29.6 million |
| Diluted EPS | $0.37 | $0.51 | $0.61 | $0.97 |
- Revenue declined 6.0% in Q2 and 9.6% for the first half year over year. Management attributed Q2 weakness mainly to lower consumer and industrial demand, partly offset by communications and computer growth; the first-half decline reflected weaker demand across end markets amid global trade disputes.
- Gross margin fell 1.3 percentage points in Q2 and 1.1 points year to date, primarily from higher wafer substrate costs and a less favorable end-market mix. Operating expenses rose 3.0% in Q2 and 1.2% for the half; workforce and equipment-related costs and litigation expenses contributed, partly offset by lower performance-award compensation.
- Operating cash flow was $20.5 million for the first half, versus $42.4 million in 2018. Working-capital uses included a $14.5 million increase in receivables and an $8.3 million increase in inventory; management linked inventory growth to the market slowdown and anticipated demand.
- Investing activities used $43.6 million, including net purchases of marketable securities and $8.3 million of property and equipment. Financing activities used $11.5 million, including $9.9 million in dividends and $7.3 million in share repurchases.
Financial position and liquidity
- At June 30, 2019, cash and cash equivalents were $99.5 million and short-term marketable securities were $130.3 million, totaling $229.8 million. Working capital was $304.7 million.
- Total liabilities were $76.5 million; the company reported no borrowings under its $75 million revolving credit facility. The facility is scheduled to mature April 30, 2022, subject to covenants with which the company reported compliance.
- The company generated $20.5 million of operating cash flow in the first half, paid $9.9 million in dividends, and repurchased about 121,000 shares for $7.3 million. Approximately $43.9 million remained authorized under its repurchase program at quarter end.
- Management said existing liquidity and expected operating cash generation should meet working-capital and other cash needs for at least the next 12 months, while cautioning that weaker demand, pricing pressure, or other deterioration could jeopardize operating cash generation.
Outlook, risks, and notable items
- The filing provides no specific revenue, earnings, or margin guidance. Management described results as difficult to predict and subject to substantial quarterly fluctuation; customers may cancel or reschedule orders on short notice.
- Key exposures include demand and pricing in consumer and industrial markets, distributor dependence, customer concentration, reliance on third-party wafer suppliers, and currency effects. International sales were 97% of Q2 revenue; Asia accounted for 78%. The top ten customers represented 56% of Q2 revenue, and Avnet represented 10%.
- Ongoing patent disputes with Fairchild/ON Semiconductor and others create uncertain potential costs and outcomes. The company said it could not estimate a loss or range of loss for ongoing litigation. No benefits from the cited Fairchild damages verdicts had been recorded in the financial statements. After quarter end, a court denied post-trial motions in one Fairchild matter and awarded $7.1 million in prejudgment interest; further proceedings and appeals were expected. In the Opticurrent case, a jury’s $6.7 million award was reduced by the court to $1.2 million, and the company said appeals were underway.
- The company adopted the new lease standard on January 1, 2019, recognizing right-of-use assets and lease liabilities; adoption did not affect income or cash flow. At June 30, operating lease liabilities totaled $9.1 million.
- Management reported disclosure controls and procedures were effective at quarter end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand stabilizes, particularly in consumer and industrial markets, and whether elevated inventory converts into sales without write-downs.
- Whether margin pressure from wafer costs, product mix, and yen-linked supplier pricing persists.
- Cash conversion and working-capital trends, especially receivables and inventory, relative to the decline in operating cash flow.
- Developments and financial exposure in patent litigation, including the status of damages appeals and the Opticurrent proceedings.
- The continuation of dividends and repurchases given operating performance, liquidity, and capital requirements.