Power Integrations, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The company designs and markets integrated circuits and related components for high-voltage power conversion. Results include $6.7 million of Concept acquisition revenue; Concept was acquired in May 2012.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $77.0 million | $71.8 million |
| Gross profit / margin | $39.9 million / 51.7% | $34.6 million / 48.2% |
| Operating expenses | $30.8 million | $25.9 million |
| Operating income / margin | $9.1 million / 11.8% | $8.7 million / 12.2% |
| Net income | $10.9 million | $7.5 million |
| Diluted EPS | $0.37 | $0.25 |
| Operating cash flow | $21.6 million | $21.6 million |
Revenue increased about 7%, while net income rose about 46%. Gross margin improved primarily from lower manufacturing costs, conversion to six-inch wafers and a more favorable end-market mix, partly offset by Concept-related intangible amortization. Operating expenses increased with acquisition-related headcount, amortization and stock compensation. Operating margin declined despite higher operating income.
The $1.6 million income-tax benefit (effective rate of negative 17.3%, versus tax expense of $1.9 million and a 20.1% rate in Q1 2012) materially boosted net income. The filing attributes the unusually low rate chiefly to the 2012 federal R&D credit enacted in January 2013, geographic earnings mix and the end of a royalty arrangement.
Cash, liquidity and capital
- Cash and cash equivalents were $69.5 million at March 31, 2013; short-term marketable securities were $49.5 million, for combined cash and short-term investments of $119.0 million.
- Working capital was $144.0 million. Current assets were $191.1 million and current liabilities $47.1 million.
- Cash rose $6.1 million during the quarter. Operating cash flow of $21.6 million was offset mainly by $21.9 million of investing outflows, including net purchases of marketable securities, and supported by $6.4 million of financing cash flow.
- No borrowings were outstanding on the $100 million revolving credit facility. The facility runs to July 2015 and includes financial covenants; the company reported compliance.
- The quarterly dividend increased to $0.08 per share; the first 2013 payment was approximately $2.3 million. No shares were repurchased in Q1; $29.5 million remained under the repurchase authorization.
Changes, outlook and principal risks
- Industrial products rose to 32% of revenue from 21%, reflecting Concept and growth in LED lighting, metering and other industrial applications. Consumer, communications and computer shares declined.
- International sales were 95% of revenue; distributors accounted for 74%. The top ten customers represented 58% of revenue, and two distributors individually accounted for 19% and 10%.
- Distributor deferred revenue increased to approximately $25.1 million from $20.7 million at year-end; deferred cost was $10.6 million. Distributor inventory, price-adjustment claims and sell-through timing may affect recognized revenue and margins.
- Management said existing liquidity and expected operating cash generation should cover working-capital and other cash needs for at least 12 months. No specific revenue or earnings guidance was provided. Management cautioned that lower demand or severe pricing pressure could weaken cash generation.
- Key risks include volatile demand and quarterly results, price competition, distributor-channel visibility and concentration, reliance on international and Asian sales, foundry and supplier availability, yen-related gross-margin exposure, acquisition integration, and intellectual-property litigation. A 10% change in the dollar versus the yen could change gross margin by an estimated 0.8–1.0%, all else equal.
- Patent cases remain unresolved. On March 26, 2013, the Federal Circuit issued a mixed ruling in the Fairchild case, affirming infringement supporting an injunction but reversing or remanding other findings, including damages; no recovery is recorded and further proceedings are unscheduled. The company says it cannot estimate a loss or range for ongoing litigation. A newly filed Trinity suit alleges $2.4 million due under a SemiSouth lease guaranty; the company contests the claim.
- The IRS audit of tax years 2007–2009 remains in process. The company also maintains valuation allowances on certain deferred tax assets and reports approximately $11.4 million of unrecognized tax benefits, classified primarily as long-term.
Important facts for investors to verify
- Whether revenue and distributor sell-through sustain the Q1 increase, and whether channel inventories or claims affect future reported sales.
- How much of improved gross margin is sustainable as product mix, manufacturing costs and yen exchange rates change.
- The recurring earnings impact of the unusually favorable tax rate and the timing or outcome of the IRS audit.
- Developments, potential costs and possible business effects of the Fairchild, other patent and Trinity proceedings; no litigation loss estimate is available.
- Concept integration, acquired-intangible amortization and whether the acquisition delivers the expected higher-power-market growth.