Power Integrations, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. The company designs and markets integrated circuits and related components for high-voltage power conversion, including products for power supplies and high-power applications.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $103.8 million | $88.9 million | $286.3 million | $256.7 million |
| Gross profit | $51.2 million | $44.2 million | $141.8 million | $130.5 million |
| Gross margin | 49.3% | 49.7% | 49.5% | 50.8% |
| Operating income | $14.5 million | $11.8 million | $35.0 million | $27.9 million |
| Net income | $14.2 million | $11.5 million | $34.3 million | $26.4 million |
| Diluted EPS | $0.48 | $0.39 | $1.16 | $0.89 |
- For the nine months, operating cash flow was $70.2 million, versus $67.4 million a year earlier. Investing activities used $55.3 million and financing activities used $9.0 million.
- At September 30, cash and cash equivalents were $95.9 million and short-term marketable securities were $130.7 million. Working capital was $239.4 million. No borrowings were outstanding under the $75 million revolving credit facility.
- Total liabilities were $66.2 million; the filing reports no funded debt outstanding. The facility matures July 26, 2019, and is subject to financial covenants.
Material changes versus the prior comparable period
- Revenue rose about 17% in Q3 and 12% for the first nine months. Management attributed growth primarily to communications demand, including InnoSwitch mobile-device chargers, and consumer appliances; weaker desktop-computer power-supply demand partly offset growth.
- Gross margin declined 0.4 percentage points in Q3 and 1.3 points year to date, mainly from a less favorable end-market mix, particularly increased communications revenue from lower-margin markets.
- Operating expenses increased to $36.7 million in Q3 and $106.8 million year to date, principally due to higher stock-based compensation. Nine-month stock-based compensation was $15.2 million, up from $11.5 million.
- International sales represented 96% of revenue in 2016, versus 95% in 2015. The top ten customers accounted for 60% of Q3 revenue and 61% year to date; Avnet represented 18% and 19%, respectively.
- Cash, cash equivalents and short-term securities increased to $226.6 million from $173.9 million at year-end 2015. The company bought back approximately 146,000 shares for $6.4 million in the first nine months, compared with $53.7 million of repurchases in the comparable 2015 period.
Outlook, risks and unusual items
- Management said results are difficult to predict and can fluctuate with demand, order timing, product and customer mix, pricing, production volumes, and the yen-dollar exchange rate. It expects international, especially Asian, sales to remain a large share of revenue. No specific revenue or earnings guidance was provided.
- Management believes cash from operations and existing liquidity will meet working-capital and other cash needs for at least the next 12 months, while cautioning that weaker demand or pricing could impair cash generation.
- The company anticipates early adoption of the new revenue standard on January 1, 2017, using full retrospective application. Distributor revenue is expected to move from sell-through recognition to recognition upon shipment and transfer of control. Preliminary analysis indicated less than $1 million change in revenue for fiscal 2015 and the first nine months of 2016, but quarterly timing and seasonality may shift.
- Q3 and nine-month effective tax rates were 4.0% and 4.2%, respectively, versus the 35% statutory rate, mainly reflecting the geographic distribution of earnings and the federal R&D tax credit.
- Multiple patent disputes remain unresolved. In one Fairchild case, a December 2015 jury awarded the company $139.8 million in damages; the company had recorded no benefit, and post-trial motions remained pending. In another case, Fairchild had a $2.4 million award against the company; the company had recorded no loss, citing its defenses. The filing says outcomes and potential losses cannot currently be estimated, and litigation could be costly and disrupt operations.
- Other key risks include concentrated distributor and customer exposure, reliance on international sales, competition and pricing pressure, intellectual-property disputes, and supply-chain and foreign-exchange exposures. A 10% change in the U.S. dollar versus the yen was estimated to change gross margin by approximately 1.0%, all else equal.
Important facts for investors to verify
- Whether revenue growth continues and whether communications and consumer demand can offset weakness in computer-related demand.
- Whether mix, pricing, currency movements, and wafer-supply costs continue to pressure gross margin.
- The timing and financial-statement effects of the planned revenue-standard adoption, including any changes to quarterly revenue patterns.
- Developments in the Fairchild, ON Semiconductor, and other patent matters, including any damages, injunctions, or effects on product rights.
- Customer and distributor concentration, liquidity and covenant compliance, and the impact of performance-based stock compensation on expenses and dilution.