POWER INTEGRATIONS INC - 10-Q Quarterly Report

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2004.

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission File Number 0-23441

POWER INTEGRATIONS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		94-3065014
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

5245 Hellyer Avenue, San Jose, California		95138
(Address of principal executive offices)		(Zip code)

(408) 414-9200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES x NO ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at April 30, 2004
Common Stock, $.001 par value		30,762,012 shares

POWER INTEGRATIONS, INC.

TABLE OF CONTENTS


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003	3

	Condensed Consolidated Statements of Income for the three months ended March 31, 2004 and 2003	4

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003	5

	Notes To Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	23

Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 2.	Changes in Securities and Use of Proceeds	25

Item 3.	Defaults upon Senior Securities	25

Item 4.	Submission of Matters to Vote of Security Holders	25

Item 5.	Other Information	25

Item 6.	Exhibits and Reports on Form 8-K	25

SIGNATURES		26

TOPSwitch, TinySwitch, LinkSwitch, DPA-Switch, EcoSmart and P I Expert are trademarks of Power Integrations, Inc.

PART I. FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

POWER INTEGRATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands)


	March 31, 2004			December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	111,048		$	110,271
Short-term investments		7,594			5,049
Accounts receivable		13,290			10,326
Inventories		21,320			23,113
Deferred tax assets		4,275			4,275
Prepaid expenses and other current assets		3,017			3,086

Total current assets		160,544			156,120
PROPERTY AND EQUIPMENT, net		51,600			51,977
INVESTMENTS		4,810			—
DEFERRED TAX ASSETS		1,598			1,598
OTHER ASSETS		1,735			1,467

	$	220,287		$	211,162

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	6,687		$	7,918
Accrued payroll and related expenses		3,518			5,310
Income taxes payable		4,190			3,717
Deferred income on sales to distributors		3,473			2,565
Other accrued liabilities		805			893
Current portion of capitalized lease obligations		—			41

Total current liabilities		18,673			20,444

STOCKHOLDERS’ EQUITY:
Common stock		30			30
Additional paid-in capital		127,252			121,474
Cumulative translation adjustment		(120	)		(120	)
Retained earnings		74,452			69,334

Total stockholders’ equity		201,614			190,718

	$	220,287		$	211,162

The accompanying notes are an integral part of these condensed consolidated financial statements.

POWER INTEGRATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(In thousands, except per share amounts)


	Three Months Ended March 31,
	2004		2003
NET REVENUES:
Product sales	$	33,601	$	28,729
License fees and royalties		564		361

Total net revenues		34,165		29,090
COST OF REVENUES		17,473		14,016

GROSS PROFIT		16,692		15,074

OPERATING EXPENSES:
Research and development		4,152		4,084
Sales and marketing		4,112		4,046
General and administrative		1,579		1,627

Total operating expenses		9,843		9,757

INCOME FROM OPERATIONS		6,849		5,317
OTHER INCOME, net		259		269

INCOME BEFORE PROVISION FOR INCOME TAXES		7,108		5,586
PROVISION FOR INCOME TAXES		1,990		1,676

NET INCOME	$	5,118	$	3,910

EARNINGS PER SHARE:
Basic	$	0.17	$	0.14

Diluted	$	0.16	$	0.13

SHARES USED IN PER SHARE CALCULATION:
Basic		30,622		28,824

Diluted		32,757		30,438

The accompanying notes are an integral part of these condensed consolidated financial statements.

POWER INTEGRATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In thousands)


	Three Months Ended March 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,118		$	3,910
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,783			1,721
Deferred rent		—			58
Provision for (reduction in) accounts receivable and other allowances		160			(25	)
Income tax benefit associated with employee stock plans		1,372			1,121
Stock compensation to non-employees		13			24
Change in operating assets and liabilities:
Accounts receivable		(3,124	)		(1,057	)
Inventories		1,793			(5,538	)
Prepaid expenses and other current assets		(252	)		128
Accounts payable		(1,231	)		416
Income taxes payable and accrued liabilities		(1,407	)		(189	)
Deferred income on sales to distributors		908			520

Net cash provided by operating activities		5,133			1,089

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,353	)		(1,381	)
Purchases of held-to-maturity investments		(14,620	)		(3,000	)
Proceeds from maturities of held-to-maturity investments		7,265			9,787

Net cash (used in) provided by investing activities		(8,708	)		5,406

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		4,393			4,042
Principal payments under capitalized lease obligations		(41	)		(60	)

Net cash provided by financing activities		4,352			3,982

NET INCREASE IN CASH AND CASH EQUIVALENTS		777			10,477
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		110,271			77,524

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	111,048		$	88,001

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	—		$	3

Cash paid for income taxes, net	$	84		$	600

The accompanying notes are an integral part of these condensed consolidated financial statements.

POWER INTEGRATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BASIS OF PRESENTATION:

The condensed consolidated financial statements include the accounts of Power Integrations, Inc. (the “Company”), a Delaware corporation, and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated.

While the financial information furnished is unaudited, the condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. Certain reclassifications were made to the prior year financial information to conform to the current period presentation. The condensed consolidated financial statements should be read in conjunction with the Power Integrations, Inc. consolidated financial statements and the notes thereto for the year ended December 31, 2003 included in its Form 10-K filed on March 10, 2004 with the Securities and Exchange Commission.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents and Short-Term and Long-Term Investments

The Company considers cash invested in highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. Investments in highly liquid financial instruments with maturities greater than three months but not longer than twelve months from the balance sheet date are classified as short-term investments. Investments in highly liquid financial instruments with maturities greater than twelve months from the balance sheet date are classified as long-term investments. As of March 31, 2004, the Company’s short-term and long-term investments consisted of U.S. government backed securities, municipal bonds, corporate commercial paper and other high quality commercial securities, which were classified as held-to-maturity and were valued using the amortized cost method, which approximates fair market value.

Revenue Recognition

Product revenues consist of sales to original equipment manufacturers, or OEMs, merchant power supply manufacturers and distributors. Shipping terms to OEMs and merchant power supply manufacturers are delivered at frontier, which is commonly referred to as DAF. Title to the product passes to the customer when the shipment reaches the destination country and revenue is recognized upon the arrival of our product in that country. Sales to distributors are made under terms allowing certain rights of return and protection against subsequent price declines on the Company’s products held by the distributors. As a result of the Company’s distributor agreements, the Company defers the recognition of revenue and the proportionate costs of revenues derived from sales to distributors until such distributors resell the Company’s products to their customers. The Company evaluates the amounts to defer based on the level of actual distributors’ inventory on hand as well as inventory that is in transit to the distributors. The gross profit that is deferred as a result of this policy is reflected as “deferred income on sales to distributors” in the accompanying condensed consolidated balance sheets.

The Company has a wafer supply and technology license agreement with an unaffiliated wafer foundry. The wafer supply agreement, which expires in June 2005, is renewable. In connection with the technology license agreement, the Company is entitled to receive a royalty on the foundry’s sales of its own products that incorporate the Company’s technology. The Company recognizes royalty revenue upon receipt of payment from the foundry.

POWER INTEGRATIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Expense related to employee ownership programs through stock options

The Company has elected to follow Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for employee stock options rather than the alternative fair value accounting allowed by SFAS No. 123, “Accounting for Stock Based Compensation.” APB No. 25 provides that expense relative to the Company’s employee ownership programs through stock options is measured based on the intrinsic value of stock options granted on the date of the grant and the Company recognizes expense in its statement of income using the straight-line method over the vesting period for fixed awards. Under SFAS No. 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options. Had expense related to employee ownership programs through the Company’s stock option plans been determined under a fair value method consistent with SFAS No. 123, “Accounting for Stock Based Compensation,” and related interpretations, the Company’s net income would have been reduced to the following pro forma amounts (in thousands, except per share information):


	Three Months Ended March 31,
	2004			2003
Net income as reported	$	5,118		$	3,910
Deduct: Total stock-based employee stock ownership expense determined under fair-value-based method for all awards, net of tax		(4,291	)		(4,173	)

Pro forma net income (loss)	$	827		$	(263	)

Basic earnings (loss) per share:
As reported	$	0.17		$	0.14

Pro forma	$	0.03		$	(0.01	)

Diluted earnings (loss) per share:
As reported	$	0.16		$	0.13

Pro forma	$	0.03		$	(0.01	)

The fair value of stock options granted is established on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

Three Months
Ended

March 31,

Risk-free interest rates

Expected volatility rates