Power Integrations, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. Power Integrations designs and markets integrated circuits and related components for high-voltage power conversion, including IGBT drivers for high-power applications.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $97.2 million | $85.3 million | $182.5 million | $167.8 million |
| Gross profit / margin | $47.6 million / 49.0% | $44.0 million / 51.6% | $90.6 million / 49.6% | $86.3 million / 51.4% |
| Operating income / margin | $11.6 million / 12.0% | $9.2 million / 10.8% | $20.5 million / 11.2% | $16.2 million / 9.6% |
| Net income | $11.3 million | $8.6 million | $20.1 million | $14.9 million |
| Diluted EPS | $0.38 | $0.29 | $0.68 | $0.50 |
| Operating cash flow | Not separately stated for the quarter | $43.9 million | $42.7 million |
- Revenue increased approximately 14% in Q2 and 9% for the first half year over year; net income rose approximately 31% and 35%, respectively.
- Gross margin declined year over year, primarily because of a less favorable end-market mix, with more revenue from lower-margin markets. Operating expenses were nearly flat for the first half, while higher operating income reflected revenue growth and lower operating expenses as a share of sales.
- Effective tax rates were 5.0% for Q2 and 4.4% for the first half, versus 6.8% and 6.4% in 2015. Management attributed the low rates mainly to the geographic distribution of earnings and the federal R&D tax credit.
Liquidity, cash flow and capital
- At June 30, cash and cash equivalents were $105.3 million and short-term marketable securities were $96.9 million, totaling $202.2 million. Working capital was $215.0 million. Total liabilities were $61.5 million; the balance sheet showed no borrowings.
- First-half operating cash flow was $43.9 million. Investing used $18.2 million, including $4.9 million for property and equipment and net purchases of marketable securities. Financing used $10.5 million, including $7.5 million of dividends and $6.4 million of share repurchases. Cash increased $15.3 million to $105.3 million.
- The company paid $0.26 per share in dividends during the first half and repurchased approximately 146,000 shares for $6.4 million; $23.6 million remained under its repurchase authorization at June 30.
- The company said existing liquidity and expected operating cash flow should cover working-capital and other cash needs for at least 12 months. On July 27, after quarter-end, it replaced its $100 million revolving credit facility with a $75 million facility, available through July 26, 2019; no amounts were outstanding under the prior facility at June 30.
Changes, outlook and principal risks
- Management attributed revenue growth mainly to higher communications sales, supported by InnoSwitch products in mobile-device chargers, and consumer-appliance sales; lower desktop-computer power-supply demand partly offset those gains. Communications accounted for 27% of Q2 revenue versus 21% a year earlier.
- International sales represented 96% of revenue. The top ten customers accounted for 63% of Q2 revenue; distributors Avnet and Powertech represented 19% and 13%, respectively. Distributor sales were 75% of revenue.
- The filing gives no specific forward revenue or earnings guidance. Management expects foreign sales to remain a large share of revenue and believes liquidity is adequate for at least the next 12 months. It cautions that demand, orders, pricing, product and customer mix, production volumes, raw-material costs, and yen-dollar movements can cause results and gross margins to fluctuate.
- Patent litigation remains material and uncertain. A December 2015 jury awarded the company $139.8 million in damages against Fairchild, but the amount, if any, ultimately recoverable is uncertain and no benefit was recorded. Post-trial motions were pending. Separately, a $2.4 million Fairchild award against the company was not accrued because management believes it has valid defenses. The company said it cannot estimate a loss or range of loss for its ongoing litigation; adverse outcomes could materially affect results, financial condition, or operations.
- Other notable risks include concentrated distributor/customer exposure, international operations, competitive pricing and potential price erosion, intellectual-property disputes, and dependence on Japanese wafer suppliers with contractual yen exchange-rate adjustments. Management reported no material change in risk factors from the 2015 Form 10-K and stated disclosure controls were effective.
Investor verification points
- Track whether revenue growth continues and whether the mix shift that reduced gross margin reverses or persists.
- Check distributor inventories and sell-through, customer concentration, and demand in communications, consumer, and computer end markets.
- Monitor Fairchild and other patent litigation, including any rulings on the $139.8 million verdict, appeals, and potential liabilities; none of the contested amounts should be treated as settled recoveries or losses.
- Confirm cash generation, dividends, repurchases, and compliance with the new $75 million credit facility’s covenants.
- Assess exposure to foreign exchange and supply costs, and the sustainability of the unusually low effective tax rate.