Power Integrations, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Financial statements are unaudited. The company designs and markets analog and mixed-signal integrated circuits and related components for high-voltage power conversion.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $110.1 million | $111.3 million | $322.6 million | $323.5 million |
| Gross profit / margin | $57.0 million / 51.8% | $55.7 million / 50.1% | $166.8 million / 51.7% | $159.6 million / 49.3% |
| Operating income | $18.0 million | $16.1 million | $47.6 million | $43.2 million |
| Net income | $17.7 million | $16.5 million | $47.2 million | $44.5 million |
| Diluted EPS | $0.59 | $0.54 | $1.56 | $1.46 |
| Operating cash flow | Not provided for the quarter | $65.6 million | $54.6 million |
Revenue declined about 1.1% in Q3 and 0.3% for the nine-month period year over year. Nine-month net income increased about 6%, with gross-margin improvement contributing: management attributed the higher margin to end-market mix and cost reductions. Nine-month operating expenses rose to $119.2 million from $116.5 million, primarily reflecting workforce expansion and product-development costs, partly offset by lower stock-based compensation.
Balance sheet, cash flow and capital allocation
- At September 30, cash, cash equivalents and short-term marketable securities totaled $248.3 million, down approximately $34.6 million from year-end 2017. Working capital was $298.3 million.
- Total liabilities were $73.3 million; no borrowings were outstanding under the $75 million revolving credit facility, extended to April 2022. The company reported compliance with its covenants.
- Nine-month operating cash flow was $65.6 million. Investing activities provided $69.3 million, mainly from net sales and maturities of marketable securities, partly offset by $19.1 million of property and equipment purchases. Financing used $80.0 million, including $74.4 million for repurchases and $14.2 million in dividends.
- The company repurchased approximately 1.1 million shares during the nine months, completing then-authorized programs. In October 2018, the board authorized an additional $80 million for repurchases. The 2018 quarterly dividend was $0.16 per share.
Management commentary, outlook and risks
- Lower communications and consumer sales, including cellphone-charger, residential-networking and appliance demand, were largely offset by industrial growth and computer-related demand. Management cited U.S. tariffs and customer caution about global trade disputes as factors affecting demand.
- International sales represented about 96% of revenue; Asia accounted for about 77% in the period. Sales through distributors represented 76% of revenue. Avnet contributed 14% of revenue, and the top ten customers represented 57% of nine-month revenue.
- No specific revenue or earnings guidance is provided. Management believes operating cash generation and existing liquidity should meet working-capital and other cash needs for at least 12 months, but cautions that weaker demand, pricing pressure or other factors could impair cash generation.
- Key operating exposures include unpredictable customer orders, competition and pricing pressure, reliance on third-party wafer suppliers, product and end-market mix, and foreign exchange. The company estimates that, all else equal, a 10% change in the U.S. dollar versus the yen could change gross margin by approximately 1.0%.
- Patent litigation remains a significant contingency. A $146.5 million Fairchild damages judgment was vacated on appeal in July 2018 and remanded; the company intends to pursue damages. Patent-review proceedings have also challenged claims underlying litigation, with appeals and further proceedings pending. The company says it cannot estimate a loss or range for the ongoing litigation; adverse outcomes could materially affect results. Other disclosed disputes include claims involving Fairchild, ON Semiconductor and Opticurrent.
- The effective tax rate was 7.6% in Q3 and 6.3% for the nine months, versus 2.6% and 1.2% in 2017. Tax Act accounting remained incomplete, including evaluation of GILTI; the company included an estimated 2018 GILTI impact in its annual tax-rate calculation.
- The company is evaluating adoption of the new lease-accounting standard, required in fiscal 2019. Management reported disclosure controls were effective at quarter-end and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether margin improvement and industrial/computer demand can offset continued weakness in communications and consumer markets.
- Inventory growth of $17.1 million during the nine months and the company’s stated decision to build inventory amid extended lead times and limited availability of competing products.
- Progress and potential financial exposure from Fairchild, ON Semiconductor, Opticurrent and related patent-review proceedings; no litigation loss estimate is available.
- Customer and distributor concentration, including Avnet’s 14% revenue contribution and the top ten customers’ 57% share of nine-month revenue.
- Use of the new $80 million repurchase authorization, ongoing dividends, and liquidity after capital returns.
- Final tax-accounting effects, including GILTI, and the effect of yen-linked wafer-supply pricing on gross margin.