Business context and reporting period
Power Integrations, Inc. designs and markets integrated circuits and related components for high-voltage power conversion, including IGBT drivers for high-power applications. This unaudited Form 10-Q covers the three months ended March 31, 2015; comparisons are with Q1 2014. The company reports one operating segment.
Financial results and liquidity
Unless otherwise stated, amounts are in millions of dollars.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $82.6 | $83.1 |
| Gross profit / margin | $42.3 / 51.2% | $46.0 / 55.3% |
| Operating income / margin | $7.0 / 8.4% | $12.7 / 15.3% |
| Net income | $6.3 | $12.4 |
| Diluted EPS | $0.21 | $0.40 |
| Operating cash flow | $17.7 | $16.2 |
- Cash, cash equivalents and short-term marketable securities totaled $173.2 at March 31, 2015, versus $175.3 at year-end 2014. Working capital was $203.4, down from $210.8.
- Cash and cash equivalents were $85.6; short-term marketable securities were $87.6. Total liabilities were $66.7. No borrowings or letters of credit were outstanding under the $100 million revolving credit facility, which expires April 1, 2017.
- Investing activities provided $8.1 net cash, including $26.8 of marketable-security maturities and sales, partly offset by $15.4 net cash paid for CamSemi and $3.3 of capital expenditures. Financing activities used $0.8 net cash, including $3.5 of dividends and $0.8 of repurchases.
- The effective tax rate was 5.8%, compared with 4.8% a year earlier. Management attributed the low rate primarily to the geographic distribution of earnings.
Material changes versus Q1 2014
- Revenue declined $0.5 million (about 0.6%). Lower computer and industrial sales were partly offset by growth in communications and consumer markets, including CamSemi sales.
- Gross margin fell 4.1 percentage points. Management cited a less favorable end-market mix and CamSemi-related intangible amortization and inventory write-up costs.
- Operating expenses rose to $35.3 million from $33.2 million. R&D increased with CamSemi-related headcount and development costs; G&A rose due to patent-litigation fees, stock compensation and acquisition costs. Sales and marketing expense was broadly flat.
- Net income declined about 49%, reflecting lower gross profit and higher operating expenses. Operating cash flow increased to $17.7 million from $16.2 million.
- CamSemi was acquired on January 2, 2015, for approximately $23.3 million: $16.5 million paid in cash, $6.6 million applied against a loan, and $0.2 million recorded as a working-capital adjustment liability. The preliminary allocation included $11.3 million of goodwill and $9.0 million of identifiable intangibles.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects cash generated from operations and existing liquidity to meet projected working-capital and other cash needs for at least 12 months. It expects international and Asia sales to remain a large part of revenue.
- Results are difficult to predict due to short-notice order changes, distributor inventory and sell-through, pricing pressure, product and end-market mix, and economic conditions. Distributors accounted for 75% of product sales; international sales represented 96% of revenue. Avnet represented 22% of revenue.
- Foreign-exchange exposure includes yen-linked wafer supply costs and Swiss-franc and euro balances. Management estimated that a 10% U.S.-dollar/yen movement could change gross margin by approximately 0.8–1.0%, all else equal. No currency forwards were outstanding at quarter-end.
- Patent litigation remains a significant contingency. The company recorded no benefit from a $105 million jury damages verdict against Fairchild; a damages retrial was scheduled for December 2015, and the company could not estimate any eventual recovery or loss range for ongoing litigation. Another Fairchild case had a May 26, 2015 trial scheduled. Management warned that litigation could be costly and distract personnel; adverse outcomes could result in damages, injunctions or loss of technology rights.
- Other risks include customer and distributor concentration, dependence on third-party wafer and assembly suppliers, acquisition integration and valuation, inventory obsolescence, tax uncertainty, and potential demand or pricing deterioration. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
- The board extended the $0.12-per-share quarterly dividend through 2015; future dividends remain discretionary. The repurchase authorization had $22.9 million remaining at March 31, 2015.
Important facts for investors to verify
- Whether revenue and gross margin recover, and how CamSemi contributes to sales, costs and product development.
- Distributor sell-through, channel inventory and the growth in deferred distributor revenue, which was approximately $30.0 million at quarter-end versus $25.0 million at year-end 2014.
- Developments and potential financial impact of the Fairchild and other patent proceedings, including the scheduled damages retrial and trial.
- Customer concentration and demand trends in computer, industrial, communications and consumer markets.
- CamSemi’s final purchase-price allocation, acquisition integration progress, and the effect of acquisition-related amortization and inventory costs.
- Liquidity, foreign-exchange exposure, tax obligations and the sustainability of dividends and repurchases.