Power Integrations, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited. Power Integrations designs and markets analog and mixed-signal integrated circuits and related components for high-voltage power conversion.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $106.8 million | $102.9 million | $216.5 million | $192.1 million |
| Gross margin | 50.1% | 50.1% | 50.8% | 50.5% |
| Operating income | $12.9 million | $9.8 million | $28.0 million | $15.9 million |
| Net income | $13.2 million | $10.8 million | $29.1 million | $18.1 million |
| Diluted EPS | $0.44 | $0.37 | $0.96 | $0.61 |
Q2 revenue increased about 4% year over year; first-half revenue increased about 13%. Growth chiefly reflected communications and industrial demand, including higher-power mobile-phone chargers. Q2 consumer revenue was lower year over year, while first-half consumer revenue benefited from strong appliance demand in Q1. First-half gross-margin improvement was attributed primarily to a more favorable end-market mix.
Q2 operating expenses were $40.6 million, down from $41.8 million, largely due to lower legal and travel expenses. First-half operating expenses were $82.0 million, versus $81.2 million. Effective tax rates were 8.4% for Q2 and 7.0% for the first half, compared with 2.0% and 1.4%, respectively, in 2019; management cited geographic earnings mix, research credits and share-based-payment tax benefits, partly offset by U.S. tax on certain foreign income.
Cash, liquidity and capital allocation
At June 30, 2020, cash and cash equivalents were $251.3 million and short-term marketable securities were $194.6 million, totaling $445.9 million. Working capital was $512.5 million. Cash and securities increased $34.8 million from year-end 2019. Six-month operating cash flow was $63.0 million, compared with $20.5 million a year earlier; the 2020 period included a $11.6 million reduction in receivables and a $13.6 million inventory increase. Investing activities provided $17.8 million, including net proceeds from security transactions, while property and equipment purchases were $21.6 million. Financing activities used $8.3 million, including $11.9 million of dividends and $2.6 million of repurchases.
No borrowings were outstanding under the $75 million revolving credit facility; $6.2 million was reserved for a letter of credit. The facility matures April 30, 2022. The company reported no material changes in contractual commitments and no off-balance-sheet arrangements. It stated that available liquidity should meet projected needs for at least 12 months.
Outlook, risks and unusual items
- COVID-19: The pandemic caused temporary shutdowns at certain assembly and test subcontractors, delayed some shipments and created uncertain demand. Those subcontractors had resumed operations by the filing. Management reported mitigation through elevated inventory, safety stocks and multiple sourcing, and adjusted near-term operating-expense and capital-spending plans anticipating continued reduced demand. No numerical revenue or earnings guidance was provided.
- Operations and investment: Management described the business as fundamentally sound, with long-term growth prospects and ample cash. It had not reduced headcount and intended to continue R&D investment. Dividend and repurchase plans remained subject to board discretion and could be changed if conditions worsened.
- Concentration and supply risks: Distributors represented 82% of Q2 revenue and 79% of first-half revenue. Avnet accounted for 13% and 12%, respectively. The top ten customers represented 59% of Q2 revenue and 56% of first-half revenue. Wafer sourcing, order cancellations or rescheduling, pricing pressure, end-market demand and yen-dollar movements may affect results. Management estimated that, all else equal, a 10% change in the U.S. dollar against the yen could change gross margin by approximately 1.0%.
- Litigation: In the Opticurrent patent case, a jury award of $6.7 million was reduced by the court to $1.2 million; appeals were underway, with rulings expected in coming months. A related follow-on case and CogniPower litigation were also pending. The company could not estimate a loss or range of loss for the ongoing litigation and warned of potentially material adverse effects.
- Other developments: The board approved a two-for-one stock split in July 2020, payable August 18 to holders of record August 14; reported EPS is pre-split. The board also raised the third- and fourth-quarter 2020 dividend to $0.22 per pre-split share, equivalent to $0.11 post-split. Adoption of the expected-credit-loss accounting standard in Q1 had no financial-statement impact.
Important facts for investors to verify
- Whether COVID-related demand, supply-chain disruption and shipment delays affected results after June 30, 2020, and whether elevated inventory converted to sales.
- Developments and potential financial exposure in the Opticurrent and CogniPower proceedings; the filing gives no clear estimate of possible losses.
- Customer and distributor concentration, particularly Avnet’s contribution and the high share of sales routed through distributors.
- Whether the company maintained its stated liquidity position, capital-spending plans, dividends and repurchases as conditions evolved.
- Use post-split share counts and per-share comparisons when assessing subsequent disclosures; this filing’s reported EPS and share figures are pre-split.