Business context and reporting period
Power Integrations, Inc. designs analog and mixed-signal ICs and related components for high-voltage power conversion, including AC-DC power supplies and, following its 2012 Concept acquisition, IGBT drivers for high-power applications. This Form 10-K reports the fiscal year ended December 31, 2014; fourth-quarter figures are also summarized below. Amounts are in U.S. dollars.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $348.8 million | $347.1 million |
| Gross profit / margin | $189.6 million / 54.3% | $183.2 million / 52.8% |
| Operating income / margin | $55.8 million / 16.0% | $54.1 million / 15.6% |
| Net income | $59.5 million | $57.3 million |
| Diluted EPS | $1.93 | $1.88 |
| Cash from operating activities | $85.6 million | $98.7 million |
Revenue was nearly flat year over year. Higher sales in consumer, industrial and computer applications were largely offset by weaker communications sales. Gross margin improved, which management attributed mainly to favorable end-market mix, lower Japanese yen-related wafer costs and higher production volumes. Operating expenses rose to $133.8 million from $129.2 million, principally from expanded R&D and sales-support efforts. Net income included a $3.3 million one-time tax benefit from settlement of the 2007–2009 IRS examination; the reported tax provision was a benefit of $2.7 million.
In Q4 2014, revenue was $86.6 million, gross profit $45.8 million, net income $14.4 million and diluted EPS $0.48. Q4 2013 comparatives were $90.4 million, $48.4 million, $16.0 million and $0.52, respectively.
At year-end, cash and short-term marketable securities totaled $175.3 million, down from $202.1 million; working capital was $210.8 million. Inventories increased to $64.0 million from $42.2 million, including a $21.7 million use of operating cash. The company had no borrowings under its $100 million revolving credit facility, extended to April 1, 2017, and reported compliance with its covenants. Total liabilities were $63.0 million; the filing reports no outstanding funded debt.
Material changes, outlook and notable items
- End-market mix shifted toward industrial electronics (35% of sales versus 34%) and consumer (37% versus 35%); communications declined to 18% from 21%. Computer was 10%, unchanged.
- Cash returned to shareholders included $80.8 million of share repurchases and $13.2 million of dividends. The quarterly dividend was increased to $0.12 in the second half of 2014 and extended at that rate through 2015.
- In January 2015, the company completed its acquisition of Cambridge Semiconductor Ltd. for approximately $23 million, subject to a working-capital/net-asset adjustment. A $6.6 million loan to CamSemi was outstanding at year-end. Management said the acquisition was intended to expand low-power products, especially in mobility and LED lighting.
- No specific revenue or earnings guidance is provided. Management expected operating cash flow and existing liquidity to cover working-capital and other cash needs for at least the next 12 months, and expected foreign sales to remain a substantial part of revenue.
- Material risks include customer order volatility and distributor inventory/price-adjustment exposure; the top ten customers represented 59% of revenue and distributors 75%. International sales were 95% of revenue. The company also relies on a small number of wafer foundries; the Renesas supply agreement had expired in December 2014 and was being renegotiated, with completion then expected in Q1 2015.
- Patent litigation remains significant and outcomes are uncertain. A 2014 jury awarded $105 million in damages against Fairchild, but the court ordered a new damages trial; no recovery was recorded, and an injunction ruling was pending. Other Fairchild litigation and appeals also remained unresolved. The company could not estimate a loss or range of loss for ongoing litigation.
- Approximately $144 million of foreign-subsidiary earnings were considered indefinitely reinvested outside the U.S.; potential tax on distribution was not quantified. The company maintained deferred-tax valuation allowances, including against California deferred-tax assets.
Important facts for investors to verify
- Whether inventory growth reflects planned supply coverage or weaker-than-expected demand, and how distributor inventory and ship-and-debit claims evolve.
- Progress and terms of the Renesas wafer-supply renegotiation and the company’s ability to maintain foundry capacity and yields.
- Subsequent developments, potential damages and injunction outcomes in Fairchild-related patent cases; the filing records no litigation recovery.
- CamSemi integration, the final purchase-price adjustment and expected contribution to sales or product development.
- Cash conversion and capital allocation, including the continued dividend, repurchases and liquidity after the year’s lower operating cash flow.