Power Integrations, Inc. — Q3 2015 Form 10-Q
Business context and period. The unaudited filing covers the three and nine months ended September 30, 2015. Power Integrations designs and markets integrated circuits and related components for high-voltage power conversion. It reports one operating segment. Results are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $88.9m | $90.1m | $256.7m | $262.2m |
| Gross profit / margin | $44.2m / 49.7% | $49.1m / 54.4% | $130.5m / 50.8% | $143.8m / 54.8% |
| Operating income | $11.8m | $16.9m | $27.9m | $43.9m |
| Net income | $11.5m | $16.1m | $26.4m | $45.2m |
| Diluted EPS | $0.39 | $0.52 | $0.89 | $1.46 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $67.4m | $73.1m |
Q3 revenue declined about 1% year over year; operating income fell about 30% and net income about 29%. For the first nine months, revenue declined about 2%, while net income fell about 41%. Gross margin contracted 4.7 percentage points in Q3 and 4.0 points for the nine-month period. Management attributed the margin decline mainly to less favorable end-market mix, higher intangible amortization and, for the nine-month period, CamSemi acquisition-related inventory write-up.
Liquidity, cash flow and capital allocation
- At September 30, cash and cash equivalents were $59.7m and short-term marketable securities were $91.2m, totaling approximately $151.0m, down $24.3m from year-end 2014. Working capital was $168.1m, down from $210.8m.
- Nine-month operating cash flow was $67.4m. Investing activities used $11.0m, including $15.5m net cash paid for CamSemi, $10.4m for a San Jose building and $7.6m for property and equipment. Financing activities used $57.3m, including $53.7m of repurchases and $10.5m of dividends.
- No borrowings or letters of credit were outstanding under the $100m revolving credit facility, which expires April 1, 2017. The company reported compliance with its covenants.
- The company repurchased approximately 1.3m shares for $53.7m in the first nine months; the then-current authorization was exhausted at September 30. In October, the board authorized a further $30m repurchase. Quarterly dividends were $0.12 per share in 2015; future dividends remain discretionary.
Business developments and material changes
- Revenue weakness reflected lower unit sales in computer products, amid reduced desktop power-supply demand, and in industrial markets amid broad-based sector softness. Higher communications sales, including mobile-device chargers and CamSemi products, partly offset the declines.
- End-market revenue mix shifted: communications increased to 26% of Q3 revenue from 18%; computer declined to 7% from 11%; industrial declined to 31% from 35%; consumer was unchanged at 36%.
- CamSemi was acquired on January 2, 2015 for approximately $23.3m in total consideration, including $16.7m cash and application of a $6.6m loan. The acquisition adds low-power products, particularly for mobility and LED lighting. Purchase-price allocation remained preliminary.
- Operating expenses increased to $32.4m in Q3 from $32.2m and to $102.5m for nine months from $99.8m, mainly reflecting CamSemi-related R&D headcount. Nine-month G&A also reflected higher Fairchild patent-litigation costs.
- International sales represented 95% of revenue in both 2015 comparison periods; Asia represented approximately 80%. Distributors accounted for 75% of Q3 and 76% of nine-month revenue. The top ten customers represented 64% of Q3 and 61% of nine-month revenue.
Outlook, risks and contingencies
- No quantified revenue, earnings or margin guidance is provided. Management said operating results are difficult to predict and may fluctuate with customer demand, pricing, product and end-market mix, production volumes, and supply-chain conditions. It expects international and Asia sales to remain a large share of revenue.
- Management believed operating cash flow and available liquidity would meet projected working-capital and other cash needs for at least 12 months, while warning that a deterioration in demand, pricing or other conditions could jeopardize positive operating cash flow.
- Key exposures include intense price competition, dependence on distributors and short-notice customer orders, end-market cyclicality, concentration among customers, reliance on third-party wafer suppliers, and foreign-exchange effects. Management estimated a 10% change in the U.S. dollar against the yen could change gross margin by approximately 0.8–1.0%, all else equal.
- Patent litigation with Fairchild remains material and outcomes are uncertain. A prior $105m jury damages award was subject to a new damages trial scheduled for December 2015; no benefit from that award was recorded. A separate $2.4m jury award to Fairchild was contested and no loss was recorded. The company stated it could not estimate a loss or range of loss for ongoing litigation. On October 21, 2015, it filed another patent-infringement complaint against Fairchild.
- The nine-month 2014 tax result included a one-time $3.3m benefit from settlement of an IRS examination, affecting year-over-year net income comparability. The 2015 effective tax rate was 6.1%, primarily reflecting the geographic distribution of earnings.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It was evaluating the impact of the new revenue-recognition standard, with adoption required in Q1 2018.
Most important facts for investors to verify
- Whether weak computer and industrial demand, as well as the reduced gross margin, continued after September 30.
- Distributor inventories, sell-through, and the adequacy of reserves for ship-and-debit claims, returns and price adjustments; deferred distributor revenue was approximately $28.4m at quarter-end.
- Progress integrating CamSemi, the final purchase-price allocation, and whether expected product and market benefits materialize.
- Developments, legal costs and potential financial outcomes in the Fairchild litigation, including the damages retrial and unrecorded verdicts.
- Cash use following the October repurchase authorization, continued dividend decisions, and liquidity/covenant headroom under the credit facility.
- Customer and supplier concentration, foreign-exchange exposure, and any effect on product supply, margins or revenue.