Power Integrations, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results compared with Q1 2018. The company designs and markets integrated circuits and related components for high-voltage power conversion.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $89.2 million | $103.1 million | Down 13.5% |
| Gross profit / margin | $45.5 million / 51.0% | $53.5 million / 51.9% | Margin down 0.9 percentage points |
| Operating expenses | $39.4 million | $39.6 million | Down slightly |
| Operating income / margin | $6.1 million / 6.9% | $14.0 million / 13.5% | Down 56.1% in income |
| Net income | $7.2 million | $14.2 million | Down 49.1% |
| Diluted EPS | $0.25 | $0.46 | Down $0.21 |
| Operating cash flow | $1.1 million | $15.7 million | Down $14.7 million |
Gross margin pressure primarily reflected higher wafer substrate costs. Operating expenses were broadly flat: lower stock-based compensation and G&A were partly offset by workforce expansion, product-launch promotion, and higher legal expenses.
Liquidity, capital, and balance sheet
- Cash, cash equivalents, and short-term marketable securities totaled $218.7 million at March 31, 2019, down about $9.9 million from year-end. Working capital was $290.2 million.
- No borrowings were outstanding on the $75 million revolving credit facility, which expires April 30, 2022. The company reported compliance with its covenants.
- Current assets were $341.1 million and current liabilities $50.9 million. Total liabilities were $69.2 million; stockholders’ equity was $531.3 million.
- Q1 financing included $7.3 million of share repurchases and $4.9 million of dividends, partly offset by $4.5 million from employee stock plans. About $43.9 million remained authorized for repurchases. The quarterly dividend declared for 2019 was $0.17 per share.
- Operating cash flow was constrained by a $9.3 million increase in receivables, a $4.2 million inventory increase, and a $4.2 million increase in prepaid expenses and other assets. Management cited shipment timing, market slowdown, anticipated demand, and supplier advances among the drivers.
Changes, outlook, and risks
- Management attributed lower revenue to broad-based demand declines across all end markets. Revenue fell in each reported end-market category; industrial mix rose to 38% from 36%, while consumer was 39% versus 40%.
- International sales were 97% of revenue; Asia represented 75%. Distributor sales were 78% of revenue. The top ten customers accounted for 52%; Avnet alone accounted for 13%.
- The company gave no specific revenue or earnings guidance in the provided filing. It expects international and Asia sales to remain a large portion of revenue and believes current liquidity will cover working-capital and other cash needs for at least 12 months. It cautioned that weaker demand, pricing pressure, or other factors could jeopardize positive operating cash flow.
- Key operating risks include unpredictable customer orders and cancellations, distributor dependence, demand and pricing pressure, competition, reliance on third-party wafer suppliers, Japanese-yen exposure in wafer costs, and the ability to expand into new markets. A 10% change in the U.S. dollar against the yen could change gross margin by approximately 1.0%, all else equal.
- Legal matters are significant and unresolved. A February 2019 jury awarded Opticurrent $6.7 million; the company is challenging the verdict in post-trial proceedings. Separate Fairchild patent cases include damages verdicts, appeals, and patent-review proceedings; the company says ultimate recoveries are uncertain and has recorded no benefit for those verdicts. It cannot estimate a loss or range for ongoing litigation and warns adverse outcomes could materially affect results.
- The company adopted the new lease accounting standard in Q1, recognizing right-of-use assets and lease liabilities; there was no income-statement or cash-flow impact from adoption. Q1 lease expense was $0.6 million. The effective tax rate was unusually low at 0.5%, versus 4.0% a year earlier, reflecting geographic earnings, research credits, and share-based payment tax benefits, partly offset by foreign income subject to U.S. tax.
Most important facts for investors to verify
- Whether the broad demand decline continued and whether revenue and gross margin stabilized after Q1.
- Whether receivables and inventory convert to cash, given the weak Q1 operating cash flow and reported increases in both balances.
- Developments and potential financial exposure in the Opticurrent, Fairchild, and other patent proceedings, including appeals and post-trial rulings.
- Whether the very low Q1 effective tax rate is sustainable; management notes interim rates may not reflect the full-year rate.
- Changes in customer and distributor concentration, wafer supply pricing, and yen-related cost exposure.