Power Integrations, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report; selected fourth-quarter results are also summarized below. Power Integrations designs and sells integrated circuits and other components for high-voltage power conversion. In 2018 it introduced BridgeSwitch motor-driver ICs.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $416.0 million | $431.8 million |
| Gross profit / gross margin | $214.8 million / 51.6% | $213.7 million / 49.5% |
| Operating income / margin | $55.6 million / 13.4% | $57.6 million / 13.3% |
| Net income | $70.0 million | $27.6 million |
| Diluted EPS | $2.32 | $0.90 |
| Cash from operations | $84.0 million | $82.0 million |
- FY2018 investing activities provided $69.1 million, primarily reflecting net sales and maturities of marketable securities; capital expenditures were $24.7 million.
- Financing activities used $112.6 million, including $103.2 million of share repurchases and $18.8 million of dividends.
- At year-end, cash, cash equivalents and short-term marketable securities totaled $228.6 million, versus $282.9 million a year earlier. Working capital was $284.1 million.
- Total liabilities were $61.6 million; no revolving-credit borrowings were outstanding at year-end. The company had a $75 million revolving facility, extended to April 2022, and reported compliance with its covenants.
- Fourth-quarter revenue was $93.3 million, compared with $108.2 million in Q4 2017; net income was $22.7 million versus a $16.9 million loss. The prior-year quarter included a substantial tax charge related to U.S. tax reform.
Material changes versus the prior period
- Annual revenue declined $15.8 million, or about 3.7%, as weaker mobile-phone charger demand reduced communications sales and consumer-appliance softness weighed on consumer sales. Industrial growth and higher tablet-charger sales partly offset the declines.
- End-market mix shifted toward industrial (37% of revenue, up from 33%) and away from communications (20%, down from 24%); consumer was 38% and computer 5%.
- Gross margin increased to 51.6% from 49.5%, primarily due to the more favorable end-market mix. Operating income decreased despite higher gross profit as operating expenses rose.
- Net income rose substantially, but the comparison was heavily affected by taxes: FY2018 recorded a $10.2 million income-tax benefit, while FY2017 included a $37.5 million tax-reform charge. The FY2018 effective tax rate was negative 17.1%.
- Inventories increased to $80.9 million from $57.1 million, which management attributed partly to rebuilding from unusually low beginning levels and partly to lower-than-expected sales, especially in the second half.
- Share repurchases increased to $103.2 million from $9.2 million in 2017; year-end authorization remaining was $51.2 million. The quarterly dividend was raised to $0.17 per share for 2019 from $0.16 in 2018.
Outlook, commentary and risks
- The filing gives no specific revenue or earnings guidance. Management said operating cash generation and existing liquidity should meet working-capital and other cash needs for at least the next 12 months.
- Management cited customer caution related to global trade disputes, weaker global smartphone sales and slower Chinese consumer demand as factors affecting recent demand.
- Key risks include demand cyclicality, pricing and competitive pressure, distributor-channel visibility and inventory exposure, and customer and geographic concentration. Distributors accounted for 75% of FY2018 revenue; international sales represented about 96%, and Avnet accounted for 14%.
- Production depends on three wafer foundries and outsourced assembly and testing. The company estimates qualifying an alternative wafer source could take 12–24 months; supply interruptions or yield problems could affect sales and margins.
- Patent litigation remains material and its outcomes are uncertain. A 2018 Fairchild jury verdict awarded $24.3 million, but post-trial proceedings and appeals remained pending, and no benefit was recorded. A separate prior $146.5 million Fairchild judgment had its damages award vacated on appeal and was remanded. The company could not estimate losses or a range of loss for ongoing litigation.
- Other notable items: FY2018 includes a $9.7 million income-tax benefit from revisions to the Tax Act accounting; the company reported $18.6 million of unrecognized tax benefits. No goodwill impairment was recorded. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether demand stabilizes in communications and consumer markets, and whether industrial growth can continue to offset weakness.
- Whether the higher gross margin is sustainable amid pricing pressure, product-mix changes, and yen-related wafer costs.
- Inventory levels, channel inventory and distributor order patterns following the year-end build.
- Future cash allocation, including repurchases, dividends, capital spending and any use of the credit facility.
- Developments and potential financial exposure in Fairchild, ON Semiconductor and other patent proceedings, including whether any litigation proceeds are ultimately recognized.
- Tax-rate sustainability and realization of deferred tax assets, including the effects of U.S. tax reform and GILTI.