Power Integrations(POWI) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Power Integrations, Inc. as of June 30, 2023, including Balance Sheets, Income, Comprehensive Income, Stockholders' Equity, and Cash Flows Condensed Consolidated Balance Sheets Total assets increased to $859.5 million by June 30, 2023, driven by inventories and receivables, while cash decreased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $84,096 | $105,372 | | Inventories | $149,741 | $135,420 | | Total current assets | $550,987 | $525,073 | | Total assets | $859,457 | $840,096 | | Liabilities & Equity | | | | Total current liabilities | $64,819 | $58,376 | | Total liabilities | $91,528 | $84,880 | | Total stockholders' equity | $767,929 | $755,216 | | Total liabilities and stockholders' equity | $859,457 | $840,096 | Condensed Consolidated Statements of Income Net revenues, gross profit, and net income significantly declined for Q2 and H1 2023, reflecting challenging market conditions Condensed Consolidated Statements of Income (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $123,223 | $183,986 | $229,520 | $366,135 | | Gross Profit | $62,846 | $106,843 | $116,803 | $207,518 | | Income from Operations | $12,641 | $60,102 | $18,398 | $111,149 | | Net Income | $14,793 | $55,824 | $21,668 | $102,072 | | Diluted EPS | $0.26 | $0.96 | $0.38 | $1.72 | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly decreased to $22.8 million in H1 2023, driven by lower net income and increased inventories Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $22,766 | $141,419 | | Net cash provided by (used in) investing activities | ($19,380) | $78,075 | | Net cash used in financing activities | ($24,662) | ($310,228) | | Net Decrease in Cash and Cash Equivalents | ($21,276) | ($90,734) | | Cash and cash equivalents at end of period | $84,096 | $67,383 | Notes to Unaudited Condensed Consolidated Financial Statements Provides detailed explanations of accounting policies, financial statement components, including revenue recognition, inventories, stock-based compensation, customer concentration, and legal contingencies - Inventories increased to $149.7 million as of June 30, 2023, from $135.4 million at the end of 2022, with notable increases in raw materials and work-in-process[29] - Total stock-based compensation expense was $6.8 million for Q2 2023 and $14.1 million for H1 2023, up from $3.7 million and $12.7 million in the respective prior-year periods[45] - The company is involved in ongoing patent litigation with CogniPower LLC and Waverly Licensing LLC, but is currently unable to estimate a potential loss or range of loss for these cases[82][83][87] Top Customer Revenue Concentration | Customer | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Avnet | 25% | 30% | 25% | 31% | | Honestar Technologies Co., Ltd. | 15% | 11% | 14% | 13% | | Salcomp Group | 14% | * | 13% | * | | Flextronics Group | 12% | * | 11% | * | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, attributing revenue decline to macroeconomic headwinds and semiconductor downturn, covering revenue mix, gross margin, operating expenses, liquidity, and capital resources Overview and Strategy Power Integrations designs high-voltage power-conversion ICs, with a growth strategy focused on penetrating existing markets and expanding SAM through new technologies like GaN and electric vehicles - The company's products are used in AC-DC power supplies, high-voltage LED drivers, motor-driver ICs, and high-voltage gate drivers for industrial and automotive applications[93][94] - Growth strategy is twofold: increase penetration in current markets and expand the Served Available Market (SAM) from its current ~$4 billion by targeting higher-power applications, new technologies (like GaN), and emerging markets like electric vehicles[96][99][100] Results of Operations Q2 2023 net revenues decreased 33% to $123.2 million, with gross margin contracting to 51.0% due to unfavorable product mix and lower volumes Financial Performance Comparison (Q2 2023 vs Q2 2022) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Net Revenues | $123.2M | $184.0M | | Gross Profit | $62.8M | $106.8M | | Gross Margin | 51.0% | 58.1% | | R&D Expenses | $24.5M | $23.5M | | S&M Expenses | $17.0M | $16.0M | | G&A Expenses | $8.7M | $6.1M | - The revenue decrease was primarily driven by reduced demand and elevated inventories in the consumer and industrial end-markets, attributed to macroeconomic factors like inflation, higher interest rates, and a post-pandemic shift in consumer spending[112] Revenue Mix by End Market | End Market | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Communications | 28% | 18% | | Computer | 14% | 9% | | Consumer | 29% | 38% | | Industrial | 29% | 35% | Liquidity and Capital Resources As of June 30, 2023, the company held $346.3 million in cash and equivalents, with working capital at $486.2 million, and maintained an undrawn $75.0 million revolving credit line - The company has a $75.0 million revolving line of credit, amended in June 2023 to include SOFR as a benchmark rate and extending to June 7, 2026, with no advances outstanding as of June 30, 2023[129] - In H1 2023, the company paid $21.8 million in dividends and repurchased approximately 80,000 shares of common stock for $6.0 million[134][139] - The board declared a quarterly dividend of $0.19 per share for 2023, an increase from $0.18 per share in 2022[137] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes occurred in the company's interest rate or foreign currency exchange risk during the first six months of 2023 - There were no material changes to the company's market risk exposures, including interest rate and foreign currency exchange risk, in the first half of 2023[145] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[147] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, that would have a material effect[148] PART II. OTHER INFORMATION Item 1. Legal Proceedings Refers to Note 12 of the financial statements for details on legal proceedings, including patent infringement lawsuits - The company refers to Note 12 of the financial statements for details on its legal proceedings[149] Item 1A. Risk Factors No substantive changes occurred to the risk factors disclosed in the 2022 Annual Report on Form 10-K - Risk factors have not changed substantively from those disclosed in the 2022 Annual Report on Form 10-K[150] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2023, the company repurchased approximately 57,000 shares for $4.3 million, with $75.3 million remaining under the repurchase program Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value Remaining (in millions) | | :--- | :--- | :--- | :--- | | April 2023 | 32,061 | $75.10 | $77.1 | | May 2023 | 25,153 | $75.71 | $75.3 | | June 2023 | — | — | $75.3 | | Total | 57,214 | | $75.3 | Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading plans or other trading arrangements during Q2 2023 - No directors or officers adopted or terminated any Rule 10b5-1 trading plans during the second quarter of 2023[152] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including the Third Amendment to the Credit Agreement and CEO/CFO certifications - Key exhibits filed include the Third Amendment to the Credit Agreement and CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906[154]