Power Integrations, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The company designs and markets integrated circuits and related components for high-voltage power conversion, including IGBT drivers for high-power applications.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $83.1 million | $77.0 million |
| Gross profit / margin | $46.0 million / 55.3% | $39.9 million / 51.7% |
| Operating expenses | $33.2 million | $30.8 million |
| Operating income | $12.7 million | $9.1 million |
| Net income | $12.4 million | $10.9 million |
| Diluted EPS | $0.40 | $0.37 |
| Cash from operations | $16.2 million | $21.6 million |
Revenue increased about 8% year over year. Gross margin improved with a more favorable end-market mix, cost reductions, higher production volumes and a weaker Japanese yen. Operating expenses rose about 8%, primarily from higher R&D headcount and engineering costs and expanded sales and application-support teams. The effective tax rate was 4.8%, versus a benefit rate of 17.3% in Q1 2013; the prior-year result included a federal R&D tax-credit benefit. The 2014 federal R&D credit had not been extended as of quarter-end.
Cash, liquidity and capital
At March 31, cash, cash equivalents and short-term marketable securities totaled $217.6 million, compared with $202.1 million at December 31, 2013. Working capital was $246.8 million, up from $227.0 million. The company had no borrowings under its $100 million revolving credit facility; the facility was extended on April 1, 2014, to April 1, 2017. No stock repurchases occurred in the quarter. The company paid approximately $3.0 million in dividends.
Operating cash flow declined year over year despite higher net income, including a $5.7 million inventory increase and a $4.0 million rise in receivables. Investing used $29.2 million, mainly for marketable securities and property and equipment. Financing provided $4.0 million, primarily from employee stock plans, partly offset by dividends.
Business changes and management commentary
Industrial, consumer and computer sales grew; communications sales fell, mainly due to lower mobile-phone charger volumes. Industrial represented 35% of revenue, consumer 37%, computer 10% and communications 18%. International sales were approximately 95% of revenue, and distributor sales accounted for 75%. Management cited lower-than-expected first-quarter sales and increased distributor inventory; distributor deferred revenue rose to approximately $29.2 million from $25.5 million at year-end.
The company expects foreign sales, particularly in Asia, to remain a large share of revenue. It believes cash from operations and existing liquidity will meet working-capital and other cash needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance. The board increased the planned third- and fourth-quarter 2014 dividend to $0.12 per share from $0.10.
Risks, contingencies and unusual items
- Patent litigation: A February 2014 jury awarded the company $105 million in a patent case against Fairchild and System General. The amount, if any, ultimately recoverable was uncertain, and no benefit was recorded in the financial statements. Further proceedings were expected in 2014. Other patent disputes remain unresolved; management could not estimate a loss or range of loss.
- Market and execution risks: Results are volatile and sensitive to end-market demand, pricing, customer order timing, product development, supply-chain capacity and inventory levels. Sales concentration, short-notice order changes and distributor channel inventory complicate forecasting.
- Geographic and currency exposure: Substantial international sales and reliance on Asian markets expose the company to economic, regulatory, credit and foreign-exchange risks. Management estimated a 10% U.S. dollar/yen movement could change gross margin by approximately 0.8%–1.0%, all else equal.
- Tax matters: The IRS audit of 2007–2009 returns remained ongoing. The company reported approximately $12.8 million in income-tax-related contractual obligations, with settlement timing uncertain and amounts not expected to be due within a year. Adoption of a new tax accounting standard reduced long-term deferred tax assets and noncurrent income taxes payable by approximately $4.3 million.
- Other legal matter: Trinity Capital sought dismissal without prejudice of its $2.4 million lease-guaranty suit on April 18, 2014.
- Post-quarter developments: The credit facility extension, dividend increase and amended executive benefit agreements occurred after March 31. The agreements provide enhanced change-of-control vesting and severance benefits; the CEO’s compensation was also increased in May.
Important facts for investors to verify
- Progress, appeals and potential collectability of the $105 million patent verdict; no proceeds were recognized in Q1.
- Whether distributor inventory and deferred revenue unwind or continue to build, and the related effect on subsequent sales and margins.
- Cash-flow conversion, especially inventory, receivables and tax-related working-capital movements.
- Customer and geographic concentration, including distributors’ end-market demand and foreign-exchange exposure.
- Developments in the IRS audit and federal R&D tax-credit legislation, and the continuing dividend and repurchase policies.