Power Integrations, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The company designs and markets analog and mixed-signal integrated circuits and related components for high-voltage power conversion, including AC-DC power supplies and high-voltage gate drivers.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $103.1 million | $104.7 million | Down 1.5% |
| Gross profit / margin | $53.5 million / 51.9% | $50.5 million / 48.2% | Margin up 3.7 percentage points |
| Operating expenses | $39.6 million | $37.6 million | Up 5.4% |
| Operating income / margin | $14.0 million / 13.5% | $12.9 million / 12.3% | Operating income up 8.1% |
| Net income | $14.2 million | $14.1 million | Up 0.7% |
| Diluted EPS | $0.46 | $0.47 | Down $0.01 |
| Cash from operations | $15.7 million | $5.9 million | Up $9.8 million |
Gross-margin improvement chiefly reflected a more favorable end-market mix. Operating expenses rose with workforce expansion, merit increases and higher related compensation costs, including stock-based compensation. The 2018 effective tax rate was 4.0%, versus a benefit rate of 5.0% in the prior-year quarter; management cited earnings in lower-tax jurisdictions, research credits, share-based payment tax benefits and estimated GILTI tax effects.
Cash, liquidity and capital allocation
- Cash, cash equivalents and short-term marketable securities totaled $257.7 million at quarter-end, down about $25.2 million from December 31, 2017. Working capital was $301.5 million, down about $12.0 million.
- Operating cash flow was $15.7 million. Investing activities provided $45.4 million, primarily from $52.4 million of security sales and maturities, offset partly by $6.5 million of capital expenditures and a $0.5 million technology-license purchase.
- Financing activities used $33.4 million, including $33.3 million for repurchases of approximately 498,000 shares and $4.8 million of dividends, partly offset by employee stock-plan proceeds.
- No borrowings were outstanding under the $75 million revolving credit facility at March 31, 2018. The agreement expires July 26, 2019; the company reported compliance with its covenants. Total liabilities were $70.6 million.
- The company expects existing liquidity and operating cash generation to meet working-capital and other cash needs for at least 12 months. The board declared four 2018 quarterly dividends of $0.16 per share; $41.1 million remained available under the repurchase program at quarter-end.
Material changes, outlook and risks
- Revenue declined mainly because of weaker communications demand, particularly for cell-phone charging and networking power supplies. Industrial and consumer sales partly offset the decline. Communications represented 19% of revenue versus 28% a year earlier; industrial rose to 36% from 31%, and consumer to 40% from 37%.
- Sales are concentrated through distributors: distributors accounted for 77% of revenue, and Avnet represented 16%. The top ten customers accounted for 58% of revenue; international sales were 96% of the total.
- The filing provides no specific numerical revenue or earnings guidance. Management noted that quarterly results are difficult to predict; customers can cancel or reschedule orders on short notice, and demand, pricing, product mix, supplier capacity, materials costs and the yen-dollar exchange rate can affect results. A 10% dollar-yen movement could change gross margin by approximately 1.0%, all else equal.
- Litigation remains a material uncertainty. A $146.5 million judgment against Fairchild, including interest, was not recorded as a benefit; appeals and patent-validity proceedings continued, and the company could not estimate a loss or range of loss for ongoing litigation. Other patent cases include claims against the company, including a Taiwan claim seeking about $1.0 million. Management warned that litigation may be costly and could adversely affect operations or proprietary rights.
- Accounting for the 2017 U.S. Tax Act was incomplete. The company had recorded provisional estimates in 2017, including a $35.3 million transition tax and $4.9 million deferred-tax remeasurement, and had not finalized its GILTI accounting or policy choice.
- Inventory increased $6.1 million during the quarter, which management attributed to anticipated demand. The company depends on third-party wafer suppliers and has no long-term customer contracts. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether communications demand stabilizes and industrial and consumer growth offsets continued weakness; monitor end-market mix and distributor orders.
- Whether inventory growth converts to sales without excess or obsolete stock, and whether gross-margin gains persist as pricing, mix and currency conditions change.
- Developments in Fairchild and other patent litigation, including the appeal and patent challenges affecting the unrecorded $146.5 million judgment.
- Final Tax Act and GILTI accounting, and any resulting changes to the effective tax rate or tax liabilities.
- Cash deployment through repurchases and dividends, liquidity and credit-facility covenant compliance, and customer and supplier concentration.