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Power Integrations Reports Third-Quarter Financial Results

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Power Integrations (Nasdaq: POWI) today announced financial results for the quarter ended September 30, 2014. Net revenues for the quarter were $90.1 million, up one percent from the prior quarter and down two percent compared with the third quarter of 2013. GAAP gross margin for the third quarter was 54.4 percent; operating margin was 18.7 percent. Net income for the quarter was $16.1 million or $0.52 per diluted share, compared with $0.54 per diluted share in the prior quarter and $0.54 per diluted share in the third quarter of 2013.

In addition to its GAAP results, the company provided certain non-GAAP financial measures for the third quarter that exclude stock-based compensation expenses, acquisition-related amortization expenses and the accompanying tax effects. Non-GAAP gross margin for the quarter was 55.3 percent; non-GAAP operating margin was 23.0 percent. Non-GAAP net income for the quarter was $19.8 million or $0.65 per diluted share, compared with $0.61 per diluted share in the prior quarter and $0.71 per diluted share in the third quarter of 2013.

Commented Balu Balakrishnan, president and CEO of Power Integrations: “Revenues and earnings increased sequentially, but like many of our industry peers we saw a slowdown in orders over the course of the quarter, resulting in less-than-seasonal sales growth. Revenues from the communications end-market increased by more than 20 percent sequentially, but demand was less than expected across the other end-market categories.

“While our near-term outlook reflects a tepid demand environment, our profitability and cash flow remain healthy, and our strong balance sheet enables us to further expand our share-repurchase program at an opportune moment. We continue to invest for long-term growth, and we remain optimistic about our expanding addressable market, our pipeline of innovative products, and the growing demand for energy-efficiency and renewable energy.”

Additional Highlights

  • Cash flow from operations in the third quarter was $30.6 million; cash and investments totaled $213.9 million at quarter-end, up $1.5 million from the end of the prior quarter.
  • Power Integrations repurchased approximately 359,000 shares of its common stock during the quarter for $19.5 million. As of September 30, 2014, the company had approximately $34.3 million remaining on its repurchase authorization; in October the company’s board of directors increased the amount authorized by an additional $25 million.
  • The company paid a dividend of $0.12 per share on September 30, 2014. A dividend of $0.12 per share will be paid on December 31, 2014, to stockholders of record as of November 28, 2014.
  • The company received 23 U.S. patents during the quarter and had 668 U.S. patents at quarter-end.

Financial Outlook

The company issued the following forecast for the fourth quarter of 2014:

  • Fourth-quarter revenues are expected to be $86 million plus or minus $3 million.
  • Non-GAAP gross margin is expected to be approximately 54 percent. (Excludes approximately $0.2 million of stock-based compensation and $0.6 million of amortization of acquisition-related intangibles.) GAAP gross margin is expected to be approximately 53 percent.
  • Non-GAAP operating expenses are expected to be between $29.5 million and $30 million. (Excludes approximately $3.6 million of stock-based compensation and $0.6 million of amortization of acquisition-related intangibles.) GAAP operating expenses are expected to be between $33.7 million and $34.2 million.

Conference Call Today at 1:45 p.m. Pacific Time

Power Integrations management will hold a conference call today at 1:45 p.m. Pacific time. Members of the investment community can join the call by dialing 1-647-788-4901. The call will be available via a live and archived webcast on the investor section of the company’s website, http://investors.powerint.com.

About Power Integrations

Power Integrations, Inc. is a Silicon Valley-based supplier of high-performance electronic components used in high-voltage power-conversion systems. The company’s integrated circuits and diodes enable compact, energy-efficient AC-DC power supplies for a vast range of electronic products including mobile devices, TVs, PCs, appliances, smart utility meters and LED lights. CONCEPT IGBT drivers enhance the efficiency, reliability and cost of high-power applications such as industrial motor drives, solar and wind energy systems, electric vehicles and high-voltage DC transmission. Since its introduction in 1998, Power Integrations’ EcoSmart(R) energy-efficiency technology has prevented billions of dollars’ worth of energy waste and millions of tons of carbon emissions. Reflecting the environmental benefits of the company’s products, Power Integrations’ stock is included in the NASDAQ(R) Clean Edge(R) Green Energy Index, The Cleantech Index(R), and the Ardour Global IndexSM. For more information, including design-support tools and resources, please visit www.powerint.com; visit Power Integrations’ Green Room for a comprehensive guide to energy-efficiency standards around the world.

Note Regarding Use of Non-GAAP Financial Measures

In addition to the company’s consolidated financial statements, which are presented according to GAAP, the company provides certain non-GAAP financial information that excludes stock-based compensation expenses recorded under Accounting Standard Codification 718-10, amortization of acquisition-related intangible assets, a 2013 gain related to asset sales, the tax effects of these items, and a tax benefit recognized in the second quarter of 2014. The company uses these non-GAAP measures in its own financial and operational decision-making processes and, with respect to one measure, in setting performance targets for employee-compensation purposes. Further, the company believes that these non-GAAP measures offer an important analytical tool to help investors understand the company’s core operating results and trends, and to facilitate comparability with the operating results of other companies that provide similar non-GAAP measures. These non-GAAP measures have certain limitations as analytical tools and are not meant to be considered in isolation or as a substitute for GAAP financial information. For example, stock-based compensation is an important component of the company’s compensation mix, and will continue to result in significant expenses in the company’s GAAP results for the foreseeable future, but is not reflected in the non-GAAP measures. Also, other companies, including companies in Power Integrations’ industry, may calculate non-GAAP measures differently, limiting their usefulness as comparative measures.

Note Regarding Forward-Looking Statements

The statements in this press release relating to the company’s projected fourth-quarter financial performance and its optimism about its expanding addressable market, pipeline of innovative products, and the growing demand for energy-efficiency and renewable energy, are forward-looking statements reflecting management’s current expectations and beliefs. These forward-looking statements are based on current information that is, by its nature, subject to rapid and even abrupt change. Due to risks and uncertainties associated with the company’s business, actual results could differ materially from those projected or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to: changes in global macroeconomic conditions, which may impact the level of demand for the company’s products; potential changes and shifts in customer demand away from end products that utilize the company’s integrated circuits to end products that do not incorporate the company’s products; the effects of competition, which may cause the company to decrease its selling prices for its products; the outcome and cost of patent litigation, which may affect sales of the company’s products or could result in higher expenses and charges than currently expected; unforeseen costs and expenses; and unfavorable fluctuations in component costs resulting from changes in commodity prices and/or the exchange rate between the U.S. dollar and the Japanese yen. In addition, new product introductions and design wins are subject to the risks and uncertainties that typically accompany development and delivery of complex technologies to the marketplace, including product development delays and defects and market acceptance of the new products. These and other risk factors that may cause actual results to differ are more fully explained under the caption “Risk Factors” in the company’s most recent Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (SEC) on July 31, 2014. The company is under no obligation (and expressly disclaims any obligation) to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by the rules and regulations of the SEC.

Power Integrations, EcoSmart and the Power Integrations logo are trademarks or registered trademarks of Power Integrations, Inc. All other trademarks are property of their respective owners.

POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per-share amounts)
Three Months Ended Nine Months Ended

September 30, 2014

June 30, 2014

September 30, 2013

September 30, 2014

September 30, 2013

NET REVENUES $ 90,144 $ 88,985 $ 91,715 $ 262,202 $ 256,677
COST OF REVENUES 41,092 40,249 42,941 118,437 121,832
GROSS PROFIT 49,052 48,736 48,774 143,765 134,845
OPERATING EXPENSES:
Research and development 13,458 14,366 12,984 41,314 38,745
Sales and marketing 10,935 11,434 10,091 33,344 29,992
General and administrative 7,155 7,813 7,984 22,614 23,784
Amortization of acquisition-related intangible assets 629 798 1,121 2,562 3,365
Total operating expenses 32,177 34,411 32,180 99,834 95,886
INCOME FROM OPERATIONS 16,875 14,325 16,594 43,931 38,959
Gain on sale of assets held for sale 497
Other income, net 381 198 82 836 367
INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 17,256

14,523

16,676 44,767 39,823
PROVISION (BENEFIT) FOR INCOME TAXES 1,145 (2,193 ) 22 (423 ) (1,406 )
NET INCOME $ 16,111 $ 16,716 $ 16,654 $ 45,190 $ 41,229
EARNINGS PER SHARE:
Basic $ 0.54 $ 0.55 $ 0.56 $ 1.50 $ 1.41
Diluted $ 0.52 $ 0.54 $ 0.54 $ 1.46 $ 1.36
SHARES USED IN PER-SHARE CALCULATION:
Basic 30,013 30,310 29,762 30,186 29,235
Diluted 30,757 31,110 30,652 31,053 30,237
SUPPLEMENTAL INFORMATION:
Stock-based compensation expenses included in:
Cost of revenues $ 131 $ 298 $ 296 $ 648 $ 824
Research and development 971 1,339 1,485 3,522 4,231
Sales and marketing 779 864 964 2,578 2,588
General and administrative 699 1,674 1,446 3,922 4,512
Total stock-based compensation expense $ 2,580 $ 4,175 $ 4,191 $ 10,670 $ 12,155
Cost of revenues includes:
Amortization of acquisition-related intangible assets $ 645 $ 645 $ 645 $ 1,935 $ 1,935
General & administrative expenses include:
Patent-litigation expenses $ 1,529 $ 1,127 $ 1,667 $ 3,842 $ 3,873
REVENUE MIX BY END MARKET
Communications 18 % 15 % 21 % 17 % 21 %
Computer 11 % 12 % 10 % 11 % 10 %
Consumer 36 % 38 % 34 % 37 % 35 %
Industrial 35 % 35 % 35 % 35 % 34 %
POWER INTEGRATIONS, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP RESULTS
(in thousands, except per-share amounts)
Three Months Ended Nine Months Ended

September 30, 2014

June 30, 2014

September 30, 2013

September 30, 2014

September 30, 2013

RECONCILIATION OF GROSS PROFIT
GAAP gross profit $ 49,052 $ 48,736 $ 48,774 $ 143,765 $ 134,845
GAAP gross profit margin 54.4 % 54.8 % 53.2 % 54.8 % 52.5 %
Stock-based compensation included in cost of revenues 131 298 296 648 824
Amortization of acquisition-related intangible assets 645 645 645 1,935 1,935
Non-GAAP gross profit $ 49,828 $ 49,679 $ 49,715 $ 146,348 $ 137,604
Non-GAAP gross profit margin 55.3 % 55.8 % 54.2 % 55.8 % 53.6 %
RECONCILIATION OF OPERATING EXPENSES
GAAP operating expenses $ 32,177 $ 34,411 $ 32,180 $ 99,834 $ 95,886

Less: Stock-based compensation expense included in operating expenses

Research and development 971 1,339 1,485 3,522 4,231
Sales and marketing 779 864 964 2,578 2,588
General and administrative 699 1,674 1,446 3,922 4,512
Total 2,449 3,877 3,895 10,022 11,331
Amortization of acquisition-related intangible assets 629 798 1,121 2,562 3,365
Non-GAAP operating expenses $ 29,099 $ 29,736 $ 27,164 $ 87,250 $ 81,190
RECONCILIATION OF INCOME FROM OPERATIONS
GAAP income from operations $ 16,875 $ 14,325 $ 16,594 $ 43,931 $ 38,959
GAAP operating margin 18.7 % 16.1 % 18.1 % 16.8 % 15.2 %

Add: Total stock-based compensation

2,580 4,175 4,191 10,670 12,155
Amortization of acquisition-related intangible assets 1,274 1,443 1,766 4,497 5,300
Non-GAAP income from operations $ 20,729 $ 19,943 $ 22,551 $ 59,098 $ 56,414
Non-GAAP operating margin 23.0 % 22.4 % 24.6 % 22.5 % 22.0 %
RECONCILIATION OF PROVISION (BENEFIT) FOR INCOME TAXES
GAAP provision (benefit) for income taxes $ 1,145 $ (2,193 ) $ 22 $ (423 ) $ (1,406 )
GAAP effective tax rate 6.6 % -15.1 % 0.1 % -0.9 % -3.5 %
Benefit associated with tax settlement (3,331 ) (3,331 )
Tax effect of other adjustments to GAAP results (120 ) (115 ) (776 ) (783 ) (3,873 )
Non-GAAP provision for income taxes $ 1,265 $ 1,253 $ 798 $ 3,691 $ 2,467
Non-GAAP effective tax rate 6.0 % 6.2 % 3.5 % 6.2 % 4.3 %
RECONCILIATION OF NET INCOME PER SHARE (DILUTED)
GAAP net income $ 16,111 $ 16,716 $ 16,654 $ 45,190 $ 41,229
Adjustments to GAAP net income
Stock-based compensation 2,580 4,175 4,191 10,670 12,155
Amortization of acquisition-related intangible assets 1,274 1,443 1,766 4,497 5,300
Gain on sale of assets held for sale (497 )
Benefit associated with tax settlement (3,331 ) (3,331 )
Tax effect of items excluded from non-GAAP results (120 ) (115 ) (776 ) (783 ) (3,873 )
Non-GAAP net income $ 19,845 $ 18,888 $ 21,835 $ 56,243 $ 54,314
Average shares outstanding for calculation
of non-GAAP income per share (diluted) 30,757 31,110 30,652 31,053 30,237
Non-GAAP net income per share (diluted) $ 0.65 $ 0.61 $ 0.71 $ 1.81 $ 1.80
GAAP income per share $ 0.52 $ 0.54 $ 0.54 $ 1.46 $ 1.36
POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

September 30, 2014

June 30, 2014

December 31, 2013

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 60,720 $ 79,060 $ 92,928
Short-term marketable securities 153,144 133,354 109,179
Accounts receivable 10,381 16,443 12,389
Inventories 56,958 51,269 42,235
Deferred tax assets 2,103 2,011 2,059
Prepaid expenses and other current assets 8,773 13,590 18,632
Total current assets 292,079 295,727 277,422
PROPERTY AND EQUIPMENT, net 96,506 91,368 90,141
INTANGIBLE ASSETS, net 36,873 36,960 40,334
GOODWILL 80,599 80,599 80,599
DEFERRED TAX ASSETS 9,472 8,904 9,449
OTHER ASSETS 3,887 4,031 3,476
Total assets $ 519,416 $ 517,589 $ 501,421
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 24,777 $ 22,802 $ 20,772
Accrued payroll and related expenses 8,834 8,786 8,900
Taxes payable 2,753 2,054 2,266
Deferred taxes 1,103 1,110 943
Deferred income on sales to distributors 18,744 19,128 15,727
Other accrued liabilities 2,224 1,701 1,810
Total current liabilities 58,435 55,581 50,418
LONG-TERM LIABILITIES
Income taxes payable 2,722 2,397 6,885
Deferred taxes 4,397 4,647 5,273
Other liabilities 2,229 2,301 2,159
Total liabilities 67,783 64,926 64,735
STOCKHOLDERS’ EQUITY:
Common stock 29 30 30
Additional paid-in capital 203,076 216,337 223,660
Accumulated other comprehensive loss (474 ) (190 ) (470 )
Retained earnings 249,002 236,486 213,466
Total stockholders’ equity 451,633 452,663 436,686
Total liabilities and stockholders’ equity $ 519,416 $ 517,589 $ 501,421
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended Nine Months Ended

Sept. 30, 2014

June 30, 2014

Sept. 30, 2013

Sept. 30, 2014

Sept. 30, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,111 $ 16,716 $ 16,654 $ 45,190 $ 41,229
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 4,002 3,876 4,094 11,849 12,062
Amortization of intangible assets 1,349 1,518 1,842 4,723 5,526
Loss on disposal of property and equipment 11 170 17
Gain on sale of assets held for sale (497 )
Stock-based compensation expense 2,580 4,175 4,191 10,670 12,155
Amortization of premium on marketable securities 481 421 221 1,296 472
Deferred income taxes (917 ) (3,729 ) (2,418 ) (782 ) (4,806 )
Increase (decrease) in accounts receivable allowances 90 26 75 (127 )
Excess tax benefit from employee stock plans (224 ) (213 ) (437 )
Tax benefit associated with employee stock plans 451 364 815
Change in operating assets and liabilities:
Accounts receivable 5,972 (22 ) 646 1,933 (7,648 )
Inventories (5,693 ) (3,294 ) 2,938 (14,639 ) 4,359
Prepaid expenses and other assets 4,655 3,475 (3,603 ) 9,955 1,595
Accounts payable 639 782 (505 ) 2,509 2,952
Taxes payable and other accrued liabilities 1,486 881 3,088 (3,257 ) 2,608
Deferred income on sales to distributors (384 ) 1,285 1,827 3,017 5,311
Net cash provided by operating activities 30,609 26,235 29,001 73,087 75,208
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,509 ) (5,420 ) (4,358 ) (17,394 ) (11,250 )
Proceeds from sale of property and equipment 36
Proceeds from sale of assets held for sale 959
Other assets (1,261 ) (1,261 )
Purchases of marketable securities (20,518 ) (51,048 ) (45,269 ) (96,271 )
Proceeds from maturities of marketable securities - - 8,600 - 25,450
Net cash used in investing activities (29,288 ) (5,420 ) (46,806 ) (63,924 ) (81,076 )
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 3,237 2,822 12,889 13,104 27,638
Repurchase of common stock (19,527 ) (25,731 ) (45,258 )
Payments of dividends to stockholders (3,595 ) (3,026 ) (2,392 ) (9,654 ) (7,046 )
Excess tax benefit from employee stock plans 224 213 - 437 -
Net cash provided by (used in) financing activities (19,661 ) (25,722 ) 10,497 (41,371 ) 20,592
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,340 ) (4,907 ) (7,308 ) (32,208 ) 14,724
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 79,060 83,967 85,426 92,928 63,394
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 60,720 $ 79,060 $ 78,118 $ 60,720 $ 78,118

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