Power Integrations, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited; amounts below are in millions of dollars except per-share data.
Business context
Power Integrations designs and markets analog and mixed-signal integrated circuits and related components for high-voltage power conversion. Products serve communications, consumer, industrial, computer, lighting, motor-drive and other markets. The company reports one operating segment.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $114.2 | $110.1 | $306.2 | $322.6 |
| Gross margin | 50.9% | 51.8% | 50.7% | 51.7% |
| Operating income | $17.5 | $18.0 | $33.4 | $47.6 |
| Net income | $17.1 | $17.7 | $35.2 | $47.2 |
| Diluted EPS | $0.57 | $0.59 | $1.18 | $1.56 |
| Operating cash flow | Not provided by quarter | $42.3 | $65.6 |
- Q3 revenue increased about 3.7% year over year, while net income declined about 3.2%. For the first nine months, revenue fell about 5.1%, operating income about 29.9%, and net income about 25.6%.
- Gross margin declined year over year in both periods, primarily due to higher wafer substrate costs and a less favorable end-market mix. Nine-month operating margin was 10.9%, versus 14.8% in 2018.
- At September 30, cash and cash equivalents were $80.2 and short-term marketable securities were $164.6, totaling $244.8. Working capital was $325.0. No credit-line borrowings were outstanding; $6.2 was reserved for a letter of credit under the $75.0 revolving facility.
- Nine-month investing cash use was $83.8, including net purchases of marketable securities and $14.3 of property and equipment. Financing cash use was $12.5, including $14.9 of dividends and $7.3 of share repurchases, partially offset by employee stock-plan proceeds.
- The company had no material debt outstanding. Total liabilities were $71.1 at quarter-end. Its revolving credit agreement runs through April 30, 2022.
Changes, outlook and material items
- Management attributed Q3 growth mainly to communications demand, particularly cellphone chargers; this was partly offset by weaker consumer and industrial demand amid global trade disputes. For the nine-month period, those declines outweighed communications growth.
- Operating expenses rose to $40.6 in Q3 and $121.8 for nine months, reflecting workforce and compensation growth, product-development equipment and patent-litigation costs. Management expected the ON Semiconductor settlement to reduce litigation expenses beginning in Q1 2020.
- On October 4, 2019, the company agreed to settle all outstanding disputes with ON Semiconductor and affiliates for $175.0 in cash. It received the payment October 22, after quarter-end; management expected a favorable impact on Q4 2019 results. The filing does not quantify the precise accounting or earnings impact.
- In October, the board increased the quarterly dividend to $0.19 per share for 2020 and declared an additional $0.02 per share for Q4 2019, on top of the previously declared $0.17 dividend.
- No quantified revenue or earnings guidance is provided. Management stated that cash, operating cash generation and other liquidity sources should meet working-capital and other cash needs for at least the next 12 months, while warning that weaker demand or pricing could impair operating cash generation.
Risks and contingencies
- Demand and quarterly results are volatile; customers can cancel or reschedule orders on short notice. Trade disputes, pricing pressure and changes in product, customer or end-market mix may affect sales and margins.
- The company relies on third-party wafer suppliers, including Japanese suppliers; supply availability and U.S. dollar/yen movements can affect production and gross margin. Management estimated a 10% dollar/yen change could change gross margin by about 1.0%, all else equal.
- Sales are concentrated through distributors and internationally: 97% of revenue was international in 2019, and the top ten customers represented 55% of Q3 revenue. Avnet accounted for 11% of Q3 revenue.
- The ON settlement addresses disputes between those parties, but other litigation remained, including Opticurrent matters. The company said it could not estimate a loss or range for unsettled litigation and warned of possible material adverse effects.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the $175.0 ON settlement was recognized in Q4 results, including any related legal costs or tax effects.
- Whether consumer and industrial demand, trade-related impacts and inventory levels improved after September 30.
- Whether wafer costs, end-market mix and currency movements continue to pressure gross margin.
- The status and potential exposure of remaining litigation, particularly Opticurrent proceedings.
- Whether the increased dividends and any future repurchases remain consistent with cash-flow generation and capital needs.