Power Integrations, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Figures are unaudited and in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and results
Power Integrations designs and markets integrated circuits and related components for high-voltage power conversion. Its products serve consumer, communications, industrial and computer markets; the 2012 acquisition of Concept expanded the company into higher-power applications, including industrial and renewable-energy systems. The company reports one operating segment.
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $91.7 | $78.0 | $256.7 | $226.2 |
| Gross profit / margin | $48.8 / 53.2% | $38.8 / 49.7% | $134.8 / 52.5% | $111.1 / 49.1% |
| Operating income (loss) | $16.6 | $(16.2) | $39.0 | $1.9 |
| Net income (loss) | $16.7 | $(44.4) | $41.2 | $(44.1) |
| Diluted EPS | $0.54 | $(1.54) | $1.36 | $(1.54) |
| Operating cash flow | Not provided for quarter | $75.2 | $29.7 |
Financial position and liquidity
- Cash and cash equivalents were $78.1 million and short-term marketable securities were $102.1 million at September 30, 2013; together, $180.2 million, up about $85.0 million from year-end 2012.
- Working capital was $200.4 million, compared with $124.3 million at December 31, 2012. Total assets were $483.6 million and total liabilities $68.7 million.
- No borrowings were outstanding under the $100 million revolving credit facility, which expires July 5, 2015. The company reported compliance with its covenants. The filing says current liquidity and expected operating cash flow should cover projected needs for at least 12 months.
- Nine-month investing cash outflow was $81.1 million, including $11.3 million of property and equipment purchases and net purchases of marketable securities. Financing provided $20.6 million, including $27.6 million from employee stock plans, partly offset by $7.0 million of dividends.
Changes versus the prior comparable periods
- Revenue rose approximately 17.5% in Q3 and 13.5% for the first nine months. Management attributed quarterly growth to higher unit sales across all four end markets; nine-month growth also reflected the Concept acquisition and demand in industrial and consumer-appliance applications.
- Gross margin improved 3.5 percentage points in Q3 and 3.4 points year to date. Management cited cost-reduction efforts, higher production volumes, a weaker yen lowering Japanese wafer costs, and a more favorable industrial mix for the nine-month period.
- 2013 operating results compare favorably with 2012 in substantial part because 2012 included SemiSouth impairment charges: $25.3 million in operating expenses and $33.9 million in other expense. The 2012 nine-month net loss also included a tax-settlement charge; these items make year-over-year profit comparisons less representative of underlying changes.
- Industrial revenue mix increased to 35% in Q3 and 34% year to date, from 31% and 27%, respectively. Communications and consumer shares declined; computer mix was broadly stable.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management highlights unpredictable quarterly demand, short-notice order changes and pricing pressure; operating results are sensitive to product mix, production volumes, supplier costs and currency movements.
- Sales are concentrated through distributors: approximately 75% of nine-month product sales were to distributors, and the top ten customers represented 58% of nine-month revenue. International sales were 95%, with Asia accounting for most revenue. These exposures increase forecasting, customer-concentration and geographic risks.
- A 10% U.S. dollar/yen change was estimated to affect gross margin by approximately 0.8–1.0%, all else equal. The company had no open foreign-currency forward hedge program at quarter-end.
- Patent disputes with Fairchild and other parties remain unresolved. The company cannot estimate a loss or range of loss for ongoing litigation; adverse outcomes could lead to damages, injunctions, licensing costs or restrictions on products. A separate Trinity lawsuit alleges a $2.4 million SemiSouth lease guarantee; the company disputes the claim.
- The IRS audit of tax years 2007–2009 was ongoing. Long-term income taxes payable were $8.9 million on the balance sheet; management said settlement timing could not be determined and amounts were not expected to be due within a year.
- The board declared four quarterly dividends of $0.10 per share for 2014. The company did not repurchase shares during the first nine months of 2013; $29.5 million remained available under the existing authorization.
Most important facts for investors to verify
- Whether revenue growth and improved gross margins persist, especially as distributor inventories and end-market demand change.
- How much reported profit growth reflects the absence of 2012 SemiSouth impairment and tax-settlement charges rather than ongoing operating performance.
- Distributor sell-through, deferred distributor revenue and margin, and the adequacy of ship-and-debit and returns estimates.
- Developments in significant patent litigation, the Trinity claim and the IRS audit, including any change in reasonably estimable exposure.
- Liquidity, dividend capacity, and exposure to yen movements, international markets and concentrated customers.