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 June 30, 2004.
or
| ¨ | 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 | (I.R.S. Employer | |
| Incorporation or organization) | 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 Exchange 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 July 31, 2004 | |
| Common Stock, $.001 par value |
30,917,824 shares |
TABLE OF CONTENTS
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2
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands)
| June 30, 2004 |
December 31, 2003 |
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| ASSETS |
||||||||
| CURRENT ASSETS: |
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| Cash and cash equivalents |
$ | 119,001 | $ | 110,271 | ||||
| Short-term investments |
11,055 | 5,049 | ||||||
| Accounts receivable |
13,052 | 10,326 | ||||||
| Inventories |
19,785 | 23,113 | ||||||
| Deferred tax assets |
4,275 | 4,275 | ||||||
| Prepaid expenses and other current assets |
3,620 | 3,086 | ||||||
| Total current assets |
170,788 | 156,120 | ||||||
| PROPERTY AND EQUIPMENT, net |
51,509 | 51,977 | ||||||
| INVESTMENTS |
4,810 | — | ||||||
| DEFERRED TAX ASSETS |
1,598 | 1,598 | ||||||
| OTHER ASSETS |
1,679 | 1,467 | ||||||
| $ | 230,384 | $ | 211,162 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| CURRENT LIABILITIES: |
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| Accounts payable |
$ | 8,385 | $ | 7,918 | ||||
| Accrued payroll and related expenses |
4,312 | 5,310 | ||||||
| Income taxes payable |
5,210 | 3,717 | ||||||
| Deferred income on sales to distributors |
3,448 | 2,565 | ||||||
| Other accrued liabilities |
719 | 934 | ||||||
| Total current liabilities |
22,074 | 20,444 | ||||||
| STOCKHOLDERS’ EQUITY: |
||||||||
| Common stock |
30 | 30 | ||||||
| Additional paid-in capital |
128,921 | 121,474 | ||||||
| Cumulative translation adjustment |
(121 | ) | (120 | ) | ||||
| Retained earnings |
79,480 | 69,334 | ||||||
| Total stockholders’ equity |
208,310 | 190,718 | ||||||
| $ | 230,384 | $ | 211,162 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(In thousands, except per share amounts)
| Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||
| NET REVENUES: |
||||||||||||
| Product sales |
$ | 35,383 | $ | 29,377 | $ | 68,984 | $ | 58,106 | ||||
| License fees and royalties |
561 | 423 | 1,125 | 784 | ||||||||
| Total net revenues |
35,944 | 29,800 | 70,109 | 58,890 | ||||||||
| COST OF REVENUES |
19,392 | 14,670 | 36,865 | 28,686 | ||||||||
| GROSS PROFIT |
16,552 | 15,130 | 33,244 | 30,204 | ||||||||
| OPERATING EXPENSES: |
||||||||||||
| Research and development |
4,088 | 4,181 | 8,240 | 8,265 | ||||||||
| Sales and marketing |
3,943 | 3,919 | 8,055 | 7,965 | ||||||||
| General and administrative |
2,049 | 1,804 | 3,628 | 3,431 | ||||||||
| Total operating expenses |
10,080 | 9,904 | 19,923 | 19,661 | ||||||||
| INCOME FROM OPERATIONS |
6,472 | 5,226 | 13,321 | 10,543 | ||||||||
| OTHER INCOME, net |
131 | 387 | 390 | 656 | ||||||||
| INCOME BEFORE PROVISION FOR INCOME TAXES |
6,603 | 5,613 | 13,711 | 11,199 | ||||||||
| PROVISION FOR INCOME TAXES |
1,575 | 1,460 | 3,565 | 3,136 | ||||||||
| NET INCOME |
$ | 5,028 | $ | 4,153 | $ | 10,146 | $ | 8,063 | ||||
| EARNINGS PER SHARE: |
||||||||||||
| Basic |
$ | 0.16 | $ | 0.14 | $ | 0.33 | $ | 0.28 | ||||
| Diluted |
$ | 0.15 | $ | 0.13 | $ | 0.31 | $ | 0.26 | ||||
| SHARES USED IN PER SHARE CALCULATION: |
||||||||||||
| Basic |
30,785 | 29,173 | 30,703 | 28,999 | ||||||||
| Diluted |
32,598 | 31,126 | 32,715 | 30,793 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
| Six Months Ended June 30, |
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| 2004 |
2003 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | 10,146 | $ | 8,063 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
3,475 | 3,414 | ||||||
| Deferred rent |
— | 34 | ||||||
| Provision for accounts receivable and other allowances |
336 | 350 | ||||||
| Income tax benefit associated with employee stock plans |
1,792 | 2,623 | ||||||
| Stock compensation to non-employees |
23 | 55 | ||||||
| Change in operating assets and liabilities: |
||||||||
| Accounts receivable |
(3,062 | ) | (2,954 | ) | ||||
| Inventories |
3,328 | (4,956 | ) | |||||
| Prepaid expenses and other current assets |
(854 | ) | (199 | ) | ||||
| Accounts payable |
467 | (1,878 | ) | |||||
| Income taxes payable and accrued liabilities |
321 | (361 | ) | |||||
| Deferred income on sales to distributors |
883 | 520 | ||||||
| Net cash provided by operating activities |
16,855 | 4,711 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Purchases of property and equipment |
(2,900 | ) | (5,104 | ) | ||||
| Purchases of held-to-maturity investments |
(18,620 | ) | (6,210 | ) | ||||
| Proceeds from maturities of held-to-maturity investments |
7,804 | 17,184 | ||||||
| Net cash (used in) provided by investing activities |
(13,716 | ) | 5,870 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Net proceeds from issuance of common stock |
5,632 | 7,994 | ||||||
| Principal payments under capitalized lease obligations |
(41 | ) | (120 | ) | ||||
| Net cash provided by financing activities |
5,591 | 7,874 | ||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS |
8,730 | 18,455 | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
110,271 | 77,524 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 119,001 | $ | 95,979 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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| Cash paid for interest |
$ | — | $ | 5 | ||||
| Cash paid for income taxes, net |
$ | 155 | $ | 413 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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 Company’s 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 June 30, 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 inventory on hand at its distributors as well as inventory that is in transit to its 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 agreement and a 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 wafer foundry’s sales of its own products that incorporate the Company’s technology. The Company recognizes royalty revenue upon receipt of payment from the wafer foundry.
6
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 June 30, |
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