Power Integrations, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited. Power Integrations designs and markets integrated circuits and related components for high-voltage power conversion, including IGBT drivers for high-power applications.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $89.0m | $87.9m | $172.1m | $165.0m |
| Gross profit / margin | $48.7m / 54.8% | $46.2m / 52.6% | $94.7m / 55.0% | $86.1m / 52.2% |
| Operating income | $14.3m | $13.3m | $27.1m | $22.4m |
| Net income | $16.7m | $13.7m | $29.1m | $24.6m |
| Diluted EPS | $0.54 | $0.45 | $0.93 | $0.82 |
Q2 revenue rose about 1% year over year and six-month revenue about 4%. Gross margin improved in both periods, driven by favorable end-market mix, higher production volumes and a weaker Japanese yen that lowered wafer costs. Operating expenses increased, mainly from R&D investment and expanded sales and application-support teams; lower legal fees reduced G&A.
Cash flow, liquidity and capital allocation
- Six-month operating cash flow was $42.5m, versus $46.2m a year earlier. Investing used $34.6m, primarily for $24.8m of marketable securities and $9.9m of property and equipment. Financing used $21.7m, including $25.7m of share repurchases and $6.1m of dividends.
- Cash, cash equivalents and short-term marketable securities totaled $212.4m at June 30, 2014. Working capital was $240.1m. The company had no borrowings or letters of credit outstanding on its $100m revolving credit facility, extended to April 1, 2017.
- Inventory increased to $51.3m from $42.2m at year-end. Deferred distributor revenue was approximately $31.6m, up from $25.5m. Management attributed the distributor inventory increase to lower-than-expected Q1 sales and anticipated higher second-half sales.
- The company repurchased 515,600 shares for $25.7m during Q2; $53.8m remained authorized for future repurchases. Q3 and Q4 2014 dividends were increased to $0.12 per share.
Material changes, outlook and risks
- Revenue growth came from consumer, industrial and computer markets, including appliances, LED lighting and desktop computers; communications revenue declined, principally on lower residential-networking sales. International sales were 95% of revenue, and distributors accounted for 77% of six-month net revenue. Avnet alone represented 20%.
- A one-time $3.3m tax benefit from settling the IRS examination of 2007–2009 returns contributed to the reported Q2 tax benefit and net income. The settlement also permits up to $5m to be repatriated without additional U.S. income tax. The company reported a negative 15.1% Q2 effective tax rate.
- No specific revenue or earnings guidance was provided. Management expected continued sales growth in foreign businesses and said existing liquidity and operating cash generation should meet working-capital and other cash requirements for at least 12 months. It also noted that deterioration in demand or severe pricing pressure could jeopardize operating cash generation.
- Litigation remains material and uncertain. A February 2014 jury verdict awarded the company $105m in a patent case against Fairchild/SG, but the company recorded no benefit and could not estimate ultimate recovery. Other patent disputes remain active; adverse outcomes could involve damages, injunctions, licensing costs or restrictions on products. Management said it could not estimate a loss or range of loss for ongoing litigation.
- Key exposures include volatile customer demand and short order lead times, distributor inventory and price-adjustment estimates, intense pricing competition, customer and geographic concentration, dependence on third-party wafer suppliers, and currency movements. A 10% change in the U.S. dollar versus the yen was estimated to affect gross margin by approximately 0.8–1.0%. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether distributor inventory and deferred revenue unwind as expected, and whether anticipated second-half demand materializes.
- How much of earnings growth reflects ongoing operations versus the one-time IRS settlement benefit.
- The status, potential recovery and possible downside exposure from the company’s patent litigation, particularly the unrecorded $105m verdict.
- Future gross-margin sensitivity to product mix, production volumes, yen exchange rates and wafer-supplier pricing.
- Whether share repurchases and higher dividends remain consistent with investment needs, liquidity and the $100m credit-facility covenants.