Power Integrations, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited. Power Integrations designs and markets integrated circuits and related components for high-voltage power conversion.
Financial performance
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Revenue | $85.3 million | $89.0 million | $167.8 million | $172.1 million |
| Gross margin | 51.6% | 54.8% | 51.4% | 55.0% |
| Operating income | $9.2 million | $14.3 million | $16.2 million | $27.1 million |
| Net income | $8.6 million | $16.7 million | $14.9 million | $29.1 million |
| Diluted EPS | $0.29 | $0.54 | $0.50 | $0.93 |
For the first half, operating cash flow was $42.7 million, versus $42.5 million a year earlier. Investing activities used $1.7 million, including $15.5 million net cash paid for the CamSemi acquisition, partly offset by net marketable-security proceeds. Financing activities used $25.8 million, primarily for $23.2 million of share repurchases and $7.0 million of dividends.
At June 30, cash and cash equivalents were $75.9 million and short-term marketable securities were $94.9 million, or $170.9 million combined. Working capital was $193.3 million. The company had no borrowings or letters of credit outstanding under its $100 million revolving credit facility, which runs to April 1, 2017. Total liabilities were $71.8 million and total assets were $499.5 million.
Changes and management commentary
- Revenue declined 4.2% in Q2 and 2.5% in H1 year over year. Management attributed the decrease mainly to weaker computer and consumer demand, partly offset by communications growth, including mobile-device chargers and CamSemi products.
- Gross margin fell 3.2 percentage points in Q2 and 3.6 points in H1. Management cited a less favorable end-market mix, higher intangible amortization, and, for H1, acquired-inventory write-up costs.
- Operating expenses rose to $34.8 million in Q2 and $70.1 million in H1, primarily reflecting additional R&D and other employee costs associated with CamSemi. Lower operating income and the absence of the prior-year tax benefit also contributed to lower reported earnings; Q2 2014 included a one-time $3.3 million tax benefit related to an IRS settlement.
- The January 2015 CamSemi acquisition cost approximately $23.3 million in total consideration. It was intended to accelerate low-power product development and expand offerings in mobility and LED lighting. Purchase-price allocation remained preliminary; pro forma results were not presented because the acquisition was not material to the statements.
- Product sales are concentrated through distributors: approximately 77% of H1 product sales went through distributors. Avnet represented 22% of Q2 and H1 revenue, compared with 20% in the comparable 2014 periods. International sales were 95% of revenue.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management said operating results are difficult to predict and cited demand, product and customer mix, pricing pressure, short order lead times, distributor inventory, and supply-chain conditions as sources of volatility. The company expected cash generated from operations and existing liquidity to cover working-capital and other cash requirements for at least 12 months, while cautioning that weaker results could affect cash generation.
Risks include significant exposure to international markets and distributors, customer and end-market concentration, competition and price erosion, foreign-exchange movements, and reliance on third-party wafer suppliers. Management estimated that a 10% change in the U.S. dollar against the Japanese yen could change gross margin by approximately 0.8 to 1.0%, all else equal. The Renesas wafer-supply contract had expired in December 2014 and was being renegotiated, with completion expected in Q3 2015.
Patent litigation with Fairchild remained material and unresolved. In one matter, a 2014 jury damages verdict of $105 million was followed by a court-ordered damages retrial scheduled for December 2015; no benefit from that verdict was recorded. In another case, a 2015 jury awarded Fairchild $2.4 million against the company; the company disputed liability and recorded no loss. The company said it could not estimate a loss or range of loss for ongoing litigation. In July 2015, after quarter-end, the board authorized an additional $30 million share-repurchase program; the filing also reported extension of the $0.12 quarterly dividend through 2015.
Management reported disclosure controls were effective as of June 30, 2015, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether weaker computer and consumer demand, lower-margin mix, and the resulting gross-margin pressure persist.
- Distributor inventory, deferred distributor revenue and margin, and ship-and-debit reserves; deferred revenue was approximately $28.3 million at June 30, up from $25.0 million at year-end.
- Progress integrating CamSemi, final purchase-price allocation, and the acquisition’s contribution to revenue, costs, and product development.
- Developments and potential financial exposure in Fairchild and other patent proceedings, including the December 2015 damages retrial.
- Wafer supply continuity and the status of the Renesas contract negotiations, as well as yen, Swiss franc, and euro exposure.
- Use of cash for repurchases and dividends, and the availability and terms of liquidity, including any changes to the repurchase authorization or dividend policy.