Power Integrations, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The interim financial statements are unaudited. Power Integrations designs and markets integrated circuits and related products for high-voltage power conversion; its 2012 acquisition of Concept expanded its offering into higher-power applications, including industrial motors and renewable-energy systems.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $87.9m | $76.4m | $165.0m | $148.2m |
| Gross profit | $46.2m | $37.8m | $86.1m | $72.3m |
| Gross margin | 52.6% | 49.4% | 52.2% | 48.8% |
| Operating income | $13.3m | $9.4m | $22.4m | $18.1m |
| Net income (loss) | $13.7m | $(7.2)m | $24.6m | $0.3m |
| Diluted EPS | $0.45 | $(0.25) | $0.82 | $0.01 |
| Operating cash flow | Not separately reported by quarter | $46.2m | $49.3m |
- Revenue rose about 15% year over year in Q2 and 11% in the first half. Growth reflected the inclusion of Concept revenues for the full 2013 periods, plus increased sales in industrial and consumer applications; weaker computer-market sales partly offset growth.
- Gross margin improved, which management attributed to more favorable end-market mix and lower manufacturing costs from process, wafer-size and wiring changes. Higher acquired-intangible amortization partly offset these benefits.
- Operating expenses increased to $32.9m in Q2 and $63.7m in the first half, mainly due to Concept-related headcount and amortization, higher sales-force costs and increased product-development spending.
- Net income comparisons are materially affected by taxes: Q2 2012 included a one-time tax charge related to settlement of the IRS examination of 2003–2006 returns. The company reported a 1.3% effective tax rate in Q2 2013 and a benefit-rate of 6.2% for the first half, citing the geographic distribution of earnings and the 2012 tax law change.
Liquidity, cash flow and capital
- At June 30, 2013, cash and cash equivalents were $85.4m and short-term marketable securities were $59.6m, totaling approximately $145.1m. Working capital was $167.5m, up from $124.3m at December 31, 2012.
- First-half operating cash flow was $46.2m, compared with $49.3m a year earlier. Higher receivables, up $8.3m, were a significant use of cash; cash generation also benefited from noncash expenses and changes in payables, prepaid items and distributor deferrals.
- Investing activities used $34.3m, including $6.9m for property and equipment and net purchases of marketable securities. Financing activities provided $10.1m, mainly from employee stock-plan issuances, partly offset by $4.7m of dividends.
- No borrowings were outstanding under the $100m revolving credit facility; it expires July 5, 2015 and is subject to covenants. The company stated it was in compliance. No material change in debt was reported.
- The quarterly dividend was set at $0.08 per share for 2013. No shares were repurchased in the first half; $29.5m remained available under the repurchase authorization.
Material changes, outlook and risks
- Industrial sales rose to 35% of Q2 revenue from 28% a year earlier; consumer was 34% versus 36%, communications 21% versus 24%, and computer 10% versus 12%. International sales were 94% of revenue; Asia represented about 80% in the first half.
- Distributors accounted for 75% of first-half revenue. The top ten customers accounted for 59%, and the largest customer for 19%. Deferred distributor revenue was approximately $25.7m at quarter-end, versus $20.7m at year-end; recognition depends on distributor sell-through and reported claims.
- Management said cash from operations and existing liquidity should meet working-capital and other cash needs for at least the next 12 months. This expectation is conditional: weaker demand, pricing pressure or other deterioration could reduce cash generation. The filing gives no specific revenue or earnings guidance.
- Results remain exposed to unpredictable orders and distributor inventory, end-market cyclicality, price competition, product development and supply-chain execution, and foreign currency movements. A 10% change in the U.S. dollar versus the Japanese yen could change gross margin by approximately 0.8%–1.0%, all else equal.
- Material patent disputes remain unresolved. In the Fairchild litigation, an appeals court affirmed some infringement findings but reversed or remanded other findings, including damages; no recovery was recorded and further proceedings had no set schedule. Other U.S. and China cases, counterclaims and appeals also remain pending. The company said it could not estimate a loss or range of loss; adverse outcomes could cause monetary losses, licensing needs, injunctions or loss of technology rights.
- Trinity Capital sued over an alleged $2.4m guarantee of SemiSouth lease obligations; Power Integrations disputed the claim and said it would contest it. The IRS audit of tax years 2007–2009 was ongoing. The company also disclosed approximately $12.3m of income-tax-related contractual obligations, not expected to be due within the next year.
- The company reported effective disclosure controls at quarter-end. Concept integration into the company’s systems and control environment was ongoing; management reported no quarter-specific internal-control change that materially affected, or was reasonably likely to materially affect, internal control over financial reporting.
Important facts for investors to verify
- How much revenue growth reflects Concept versus organic growth, and whether industrial and consumer demand can offset weakness in computing and communications.
- Whether the higher gross margin is sustainable given pricing, product mix, manufacturing costs, yen exposure and acquired-intangible amortization.
- Distributor inventory, sell-through, returns and ship-and-debit claims, including the rise in deferred distributor revenue and accounts receivable.
- The causes and durability of the unusually low 2013 tax rates, the ongoing IRS audit, and possible tax consequences of foreign earnings repatriation.
- Developments and potential financial or operational effects of patent litigation and the Trinity claim; the filing provides no clear estimate of potential litigation losses.
- Whether the company continues to generate sufficient operating cash flow while funding dividends, investment and any future repurchases.