Power Integrations, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. The company designs and markets integrated circuits and related components for high-voltage power conversion, serving communications, computer, consumer and industrial applications.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $420.7 million | $416.0 million |
| Gross profit / margin | $213.4 million / 50.7% | $214.8 million / 51.6% |
| Operating income | $217.0 million | $55.6 million |
| Net income | $193.5 million | $70.0 million |
| Diluted EPS | $6.49 | $2.32 |
| Operating cash flow | $224.5 million | $84.0 million |
- Revenue rose 1.1% year over year. Communications growth, including adoption of faster, higher-power phone chargers, was partly offset by lower consumer and industrial sales. Management cited macroeconomic, cyclical and trade-related pressures, including customer caution around global trade disputes and weaker consumer demand in China.
- Gross margin declined 0.9 percentage point, primarily because of higher wafer substrate costs. R&D, sales and marketing, and general and administrative expenses were $73.5 million, $54.3 million and $37.6 million, respectively.
- FY2019 results include a $169.0 million net gain from the ON Semiconductor settlement. The settlement drove much of the increase in operating income, net income and operating cash flow; these reported results should not be viewed as solely reflecting ordinary operating performance.
- Fourth-quarter revenue was $114.5 million, gross profit was $58.2 million, and net income was $158.3 million, including the settlement gain. Diluted EPS was $5.28.
Cash, liquidity and capital allocation
- At year-end, cash and cash equivalents were $178.7 million and short-term marketable securities were $232.4 million, totaling $411.1 million, versus $228.6 million a year earlier. Working capital was $490.9 million.
- Operating cash flow was $224.5 million; investing activities used $162.0 million, mainly for net purchases of marketable securities and $24.1 million of property and equipment. Financing activities used $17.9 million, including $20.5 million of dividends and $7.3 million of share repurchases.
- No borrowings were outstanding under the $75 million revolving credit facility at year-end; $6.2 million was reserved for a standby letter of credit. The facility runs through April 2022, subject to covenants, which the company reported it was meeting. The company said existing liquidity and expected operating cash generation should cover requirements for at least 12 months.
- The board set quarterly dividends of $0.19 per share for 2020. At year-end, $43.9 million remained available under the repurchase authorization.
Material changes, outlook and risks
- End-market mix shifted: communications represented 26% of 2019 revenue versus 20% in 2018; consumer was 35% versus 38%, and industrial was 34% versus 37%. Computer remained 5%.
- International customers accounted for approximately 97% of revenue; distributors accounted for 72%. Avnet represented 11% of revenue, down from 14% in 2018. The top ten customers collectively represented 54%.
- The company introduced InnoSwitch products incorporating gallium-nitride transistors in 2019. It is also developing newer product families, including BridgeSwitch motor-driver ICs. The filing provides no numeric revenue or earnings guidance for 2020.
- Key risks include reliance on a small number of wafer foundries and outsourced assembly providers, distributor inventory and order volatility, intense price competition, customer and end-market cyclicality, international and foreign-exchange exposure, and intellectual-property litigation. Management estimates qualifying an alternative wafer source could take 12 to 24 months.
- The ON settlement resolved the parties’ outstanding disputes for a $175 million cash payment; neither party granted the other a license. Other patent matters remained unresolved, including Opticurrent litigation. The company reported a $1.2 million reduced damages award in one Opticurrent case and said appeals were ongoing; it could not estimate losses for remaining litigation.
- The company adopted lease accounting Topic 842 in 2019, recognizing lease right-of-use assets of $9.5 million and lease liabilities of $9.0 million at year-end. Auditors issued unqualified opinions on the financial statements and internal controls; the settlement accounting was identified as a critical audit matter.
Important facts for investors to verify
- Separate recurring operating performance from the $169.0 million settlement gain, including its cash-flow and tax effects.
- Track demand, pricing and channel inventory across communications, consumer and industrial markets, and monitor distributor concentration.
- Assess supply continuity, foundry capacity and wafer-cost exposure, particularly the effects of yen-dollar movements on gross margin.
- Follow outcomes, costs and potential exposure from the remaining patent disputes, including Opticurrent and CogniPower matters.
- Confirm execution and market adoption of new products, and compare future results with the company’s stated 12-month liquidity assessment; the filing gives no numeric 2020 operating forecast.