Power Integrations, Inc. — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. The company designs and markets power-conversion integrated circuits and related products, including IGBT drivers. It reports one operating segment.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $85.3 million | $82.6 million | Up 3.4% |
| Gross profit / margin | $42.9 million / 50.3% | $42.3 million / 51.2% | Margin down 0.9 percentage points |
| Operating expenses | $34.0 million | $35.3 million | Down 3.7% |
| Operating income / margin | $8.9 million / 10.4% | $7.0 million / 8.4% | Improved |
| Net income | $8.8 million | $6.3 million | Up 39.4% |
| Diluted EPS | $0.30 | $0.21 | Up $0.09 |
| Operating cash flow | $20.3 million | $17.7 million | Up $2.6 million |
Cash flow and capital returns: Investing activities used $8.8 million, including net purchases of marketable securities and $2.1 million of property and equipment. Financing activities used $6.9 million, including $6.1 million of share repurchases and $3.7 million of dividends, partly offset by employee-plan share proceeds. Cash and cash equivalents increased $4.6 million to $94.7 million.
Liquidity and debt: Cash, cash equivalents and short-term marketable securities totaled $185.2 million at March 31, up from $173.9 million at year-end. Working capital was $198.9 million. The company reported no borrowings under its $100 million revolving credit facility, which expires April 1, 2017. Total liabilities were $57.6 million; the filing reports no funded debt outstanding.
Material changes and management commentary
- Revenue growth was driven mainly by communications, including InnoSwitch mobile-device chargers, and consumer-appliance sales; lower desktop-computer power-supply demand partly offset growth.
- Gross margin declined primarily because a greater share of revenue came from lower-margin end markets. Revenue mix was 39% consumer, 32% industrial, 23% communications and 6% computer.
- Operating expenses fell mainly from lower Fairchild litigation fees and reduced salary-related expenses following CamSemi headcount rationalization.
- The effective tax rate was 3.6%, versus 5.8% a year earlier, reflecting the geographic distribution of earnings and the federal R&D tax credit.
- Management stated that operating results are difficult to predict and that cash generated from operations plus existing liquidity is expected to meet working-capital and other cash needs for at least 12 months. No specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- Litigation: The company received a $139.8 million jury damages verdict against Fairchild in a December 2015 retrial, but post-trial motions remain pending. It says it cannot predict the amount, if any, ultimately recoverable and has recorded no benefit. Other Fairchild cases remain active; the company also faces a $2.4 million Fairchild award that it disputes and has not accrued.
- Two petitions filed in March 2016 seek inter partes review of the company’s ’079 patent; the Patent Office had not acted by the filing date. A separate patent-infringement complaint was filed against the company on April 1, 2016. Outcomes of these and other proceedings are uncertain; management cannot estimate a loss or range of loss for ongoing litigation and warns legal costs or adverse outcomes could materially affect results.
- Customer and geographic concentration are significant: the top ten customers generated 62% of revenue; Avnet represented 21% and Powertech Distribution 12%. International sales were 96% of revenue, with 78% shipped to Asia.
- Other exposures include volatile demand, pricing competition, product and customer mix, foreign exchange and Japanese-yen-linked wafer costs. A 10% U.S. dollar/yen move could change gross margin by approximately 1.0%, all else equal. No foreign-currency forward contracts were open at quarter-end.
- The company declared quarterly dividends of $0.13 per share for 2016 and had $23.9 million remaining under its share-repurchase authorization at March 31.
Important facts for investors to verify
- Whether revenue growth and product traction continue, particularly in communications and consumer markets, and whether gross margin recovers from the unfavorable mix shift.
- Developments and potential financial impact of the Fairchild litigation, patent-review petitions and the Opticurrent complaint; no Fairchild verdict gain has been recognized.
- Customer and regional concentration, including distributor inventory and order patterns, and the company’s 96% international-sales exposure.
- Cash conversion and capital allocation, including the ongoing dividend, repurchases and undrawn credit facility’s April 2017 maturity.
- Future tax rates and any tax consequences if the company changes its plans for indefinitely reinvested foreign earnings.