Power Integrations, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company designs and markets integrated circuits and related components for high-voltage power conversion. Results are unaudited.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $109.7 million | $89.2 million | Up 23% |
| Gross profit / margin | $56.5 million / 51.5% | $45.5 million / 51.0% | Margin up 0.5 percentage points |
| Operating income / margin | $15.1 million / 13.8% | $6.1 million / 6.9% | Operating income up 147% |
| Net income | $15.9 million | $7.2 million | Up 120% |
| Diluted EPS | $0.53 | $0.25 | Up 112% |
| Operating cash flow | $26.4 million | $1.1 million | Up $25.3 million |
- Revenue growth was driven mainly by consumer products, including comfort appliances, and communications products, including higher-power mobile chargers. Consumer represented 41% of revenue and communications 22%.
- Gross-margin improvement reflected a more favorable end-market mix. Operating expenses rose to $41.4 million from $39.4 million, but declined as a share of revenue to 37.7% from 44.1%.
- The effective tax rate was 5.8%, versus 0.5%, and remained well below the 21% statutory federal rate. Management cited lower-tax foreign earnings, research credits and share-based payment tax benefits, partly offset by U.S. tax on foreign income.
- Cash and cash equivalents were $190.5 million; short-term marketable securities were $232.2 million. Together, these totaled $422.6 million, up approximately $11.5 million from year-end. Working capital was $506.0 million.
- Capital expenditures were $11.6 million. Financing used $2.1 million net, including $5.6 million of dividends and $2.0 million of share repurchases, partly offset by employee stock-plan proceeds.
- Total liabilities were $83.6 million. No borrowings were outstanding under the $75 million revolving credit facility; $6.2 million was reserved for a letter of credit. The facility expires April 30, 2022.
Material changes and management commentary
- Q1 revenue and profitability increased substantially year over year. Management attributed the higher gross margin to end-market mix and higher operating income to revenue growth and operating expenses growing more slowly than sales.
- Cash from operations improved markedly, helped by net income, lower receivables and higher accounts payable. Inventory increased $6.3 million as the company built stock to support anticipated demand and mitigate supply disruption.
- COVID-19 had not materially affected reported results through the quarter, according to management. Shelter-in-place measures shifted many employees to remote work; some assembly and test subcontractors temporarily shut down, delaying shipments, but had partially or fully resumed. The company reported no wafer-supply interruption.
- Management expected the pandemic-driven downturn could reduce future demand and disrupt suppliers, manufacturing, logistics and customer shipments. It increased certain safety stocks, slowed hiring and adjusted near-term operating and capital-spending plans, while stating it intended to continue R&D investment, dividends and repurchases. It warned those capital-return plans could change if conditions worsen.
- The company said existing cash, operating cash generation and other liquidity sources should meet working-capital and other cash needs for at least 12 months. It gave no specific revenue or earnings guidance in the provided filing text.
- In April 2020, after quarter-end, the board raised planned Q2–Q4 dividends to $0.21 per share from the previously announced $0.19.
Risks, contingencies and unusual items
- COVID-19 is identified as a significant risk to demand, operations, supply chains, shipments, cash flows and financial condition. The company relies on third-party wafer suppliers and has no long-term customer contracts; customers may cancel or reschedule orders on short notice.
- Customer and distribution concentration is notable: the top ten customers accounted for 55% of revenue, and two distributors each accounted for 11%. Distributors generated 76% of sales. International sales were 98% of revenue, with Asia a major manufacturing and sales region.
- Opticurrent litigation remains unsettled. A jury award of $6.7 million was reduced by the court to $1.2 million; the company is appealing and is defending a follow-on suit. The company could not estimate a loss or range of loss for ongoing litigation. It also disclosed a newly filed patent dispute with CogniPower, in preliminary stages.
- Wafer agreements with Japanese suppliers share certain yen/U.S. dollar exchange-rate effects. The company estimated that a 10% dollar/yen change could affect gross margin by approximately 1.0%, all else equal.
- Unrealized losses on available-for-sale securities were $0.6 million at March 31, 2020; the company reported no credit-loss allowance and said it did not expect or intend to sell the securities before recovery.
Important facts for investors to verify
- Whether COVID-19 causes sustained demand declines, further shipment delays or supplier and subcontractor interruptions.
- Whether elevated inventory converts to sales without excess or obsolescence, and whether the Q1 margin improvement persists.
- Progress and potential financial exposure from the Opticurrent and CogniPower matters; the filing says the outcome and loss range are uncertain.
- Revenue and receivables concentration among distributors, and the company’s ability to forecast end-customer demand.
- Cash-flow durability and capital allocation, including the increased dividend and ongoing repurchase authorization.