Power Integrations, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company designs and markets integrated circuits and related components for high-voltage power conversion. Financial statements are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $107.6M | $97.6M | $212.3M | $185.6M |
| Gross margin | 49.7% | 49.0% | 49.0% | 49.7% |
| Operating income | $14.2M | $11.8M | $27.1M | $22.2M |
| Net income | $13.9M | $11.4M | $28.0M | $21.8M |
| Diluted EPS | $0.46 | $0.39 | $0.92 | $0.74 |
| Operating cash flow | Not presented separately by quarter | $30.0M | $43.9M |
- Quarterly revenue rose about 10% year over year; first-half revenue rose about 14%. Management attributed growth mainly to consumer appliances and industrial applications, with first-half growth also from smartphone rapid-charging applications. Weaker desktop-computer demand partly offset growth.
- Quarterly gross margin improved on a more favorable end-market mix. First-half margin declined, primarily reflecting higher wafer costs associated with the U.S. dollar’s prior decline against the yen.
- Operating expenses increased, including from workforce expansion, higher stock-based compensation and legal costs associated with ON Semiconductor litigation. Operating expenses were $39.3M in Q2 and $76.8M for the first half.
- First-half effective tax rate was 0.3% versus 4.1% in 2016, helped by geographic earnings mix, research credits and $1.4M of excess tax benefits from share-based payments. Q2 rate was 5.2%.
Balance sheet, liquidity and capital allocation
- At June 30, cash and cash equivalents were $32.6M and short-term marketable securities were $221.3M, totaling about $254.0M, versus $250.5M at December 31, 2016. Working capital was $295.3M.
- Total liabilities were $54.5M; the company had no borrowings outstanding on its $75M revolving credit facility, which expires July 2019. Management said existing liquidity and operating cash generation should cover projected needs for at least 12 months.
- First-half operating cash flow fell to $30.0M from $43.9M, with increased receivables and prepaid expenses among the uses of cash. Investing used $56.3M, including $22.9M for property and equipment, compared with $18.2M used in the prior-year period.
- Financing used $3.2M, including $8.3M of dividends; no shares were repurchased during the first half. The board authorized an additional $30M for repurchases in July, on top of approximately $23.6M remaining under the existing authorization.
Material changes, outlook and risks
- The company early adopted ASC 606 on January 1, 2017 using full retrospective application. Distributor revenue previously recognized when distributors resold products is now generally recognized upon shipment and transfer of control. The transition increased opening retained earnings by $15.0M at December 31, 2016 and revised prior-period results; reported comparisons reflect adjusted figures.
- No specific quarterly or annual revenue or earnings guidance is provided. Management described continued growth efforts in its served markets and expects international, particularly Asian, sales to remain a large share of revenue.
- Revenue is concentrated: the top ten customers generated 57% of revenue, one distributor represented 16% in Q2 and 17% for the first half, and international sales were 96% of revenue. Demand, order timing, pricing, product mix and customer concentration can make results volatile.
- Foreign-exchange exposure includes yen-linked wafer costs; management estimated a 10% change in the dollar-yen exchange rate could change gross margin by approximately 1.0%, all else equal. The company also faces risks from competition, supply costs and global economic conditions.
- Patent litigation is significant. A Fairchild case resulted in a $146.5M judgment, including prejudgment interest, which Fairchild is appealing; no benefit from the verdict has been recorded in the financial statements. Other Fairchild matters, ON Semiconductor litigation and additional patent disputes remain pending. The company said it cannot estimate a loss or range of loss for ongoing litigation; adverse outcomes could materially affect results and operations.
- Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting. Risk factors were not substantively changed from the 2016 Form 10-K.
Investor verification priorities
- Track distributor sell-in revenue under ASC 606 against distributor inventory, sell-through and subsequent price-adjustment or return claims.
- Assess cash conversion and receivables growth alongside elevated equipment spending and the planned repurchase authorization.
- Monitor customer and geographic concentration, end-market demand, gross margin and yen-related wafer costs.
- Follow Fairchild and ON Semiconductor litigation, including appeal and trial developments, and any changes to recorded contingencies or legal expense.
- Evaluate the sustainability of the unusually low first-half tax rate, including share-based tax benefits and offshore earnings plans.