Power Integrations, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018. Power Integrations designs and markets analog and mixed-signal integrated circuits and related components for high-voltage power conversion. Its unaudited interim statements are prepared under U.S. GAAP; interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $109.5 million | $107.6 million | $212.6 million | $212.3 million |
| Gross profit | $56.2 million | $53.4 million | $109.8 million | $103.9 million |
| Gross margin | 51.4% | 49.7% | 51.6% | 49.0% |
| Operating income | $15.6 million | $14.2 million | $29.6 million | $27.1 million |
| Net income | $15.4 million | $13.9 million | $29.6 million | $28.0 million |
| Diluted EPS | $0.51 | $0.46 | $0.97 | $0.92 |
- Operating cash flow for the first half was $42.4 million, compared with $30.0 million in the prior-year period. Capital expenditures were $10.5 million, versus $22.9 million.
- Cash, cash equivalents and short-term marketable securities totaled $246.7 million at June 30, down $36.2 million from year-end 2017. Working capital was $288.6 million, down $24.9 million.
- Total liabilities were $66.2 million and stockholders’ equity was $521.8 million. No borrowings were outstanding under the $75 million revolving credit facility; it was extended to April 30, 2022.
- First-half financing used $67.2 million net, including $63.4 million for repurchases of approximately 0.9 million shares and $9.5 million in dividends. About $11 million remained authorized for repurchases at quarter-end. The 2018 quarterly dividend was set at $0.16 per share.
Changes versus the prior comparable period
- Q2 revenue rose modestly, primarily from higher industrial sales, especially high-power gate-driver applications. First-half revenue was essentially flat: industrial, computer and consumer growth was offset by weaker communications sales, including cellphone chargers and residential networking.
- Gross margin improved in both periods, primarily due to a more favorable end-market mix and cost reductions.
- Operating expenses increased: first-half expense was $80.2 million versus $76.8 million, reflecting workforce growth, merit increases, product development and higher legal costs related to ON Semiconductor litigation.
- First-half operating cash flow improved, aided by collections of receivables; inventory increased $11.7 million, reflecting anticipated demand.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects international sales, particularly sales tied to Asia, to remain a large portion of revenue and believes existing liquidity and operating cash generation should meet working-capital and other cash needs for at least 12 months.
- Management cautions that results are volatile and difficult to predict. Risks include uncertain customer demand and short-notice order changes, distributor dependence, customer and end-market concentration, pricing pressure, competition, reliance on third-party wafer suppliers, and yen-dollar movements affecting gross margin. A 10% currency move could change gross margin by approximately 1.0%, all else equal.
- Top ten customers represented about 59% of Q2 revenue and 58% of first-half revenue; Avnet alone represented 14% and 15%, respectively. Approximately 97% of Q2 and 96% of first-half revenue was international.
- Patent litigation is material and uncertain. In July 2018, the Federal Circuit affirmed infringement findings against Fairchild but vacated a $146.5 million judgment and remanded damages proceedings. The company recorded no benefit from that verdict and says it cannot estimate a loss or range for ongoing litigation. Related patent claims are also subject to IPR proceedings, including an adverse PTO ruling the company is appealing. The filing warns litigation could be costly and divert management and technical resources.
- The company’s accounting for some Tax Act effects remained incomplete. It had recorded a provisional $35.3 million transition-tax estimate in 2017 and continued evaluating GILTI tax treatment. First-half 2018 effective tax rate was 5.5%, compared with 0.3% in the prior-year period.
- Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting. No material changes to risk factors or contractual commitments were reported.
Important facts for investors to verify
- Whether industrial-market strength and improved product mix continue to offset weakness in communications and any broader demand slowdown.
- Inventory growth, distributor concentration and the company’s ability to forecast sales given short lead times and order cancellations or rescheduling.
- Further developments in Fairchild and ON Semiconductor litigation, including damages remand proceedings, patent appeals and potential costs or liabilities.
- Cash deployment through repurchases and dividends, and how it affects liquidity if operating cash flow weakens.
- Final accounting for Tax Act and GILTI provisions, as well as exposure to supplier pricing and yen-dollar fluctuations.