Non-GAAP gross margin expanded to 52.9 percent; non-GAAP earnings were $0.49 per diluted share

GAAP gross margin was 49.7%; charge related to SemiSouth results in GAAP net loss of $1.54 per share

SAN JOSE, Calif.--(BUSINESS WIRE)--October 25, 2012--Power Integrations (Nasdaq:POWI) today announced financial results for the quarter ended September 30, 2012. Net revenues for the quarter were $78.0 million, up two percent from the prior quarter and up four percent compared with the third quarter of 2011. GAAP gross margin for the quarter was 49.7 percent.

As announced earlier this week, the company’s third-quarter results include a pre-tax charge of $59.2 million stemming from the likely closure of SemiSouth Laboratories. The expected cash outflow included in the charge is $15.3 million. Including the charge, the company reported a GAAP net loss for the quarter of $44.4 million or $1.54 per share. This compares to a net loss of $0.25 per share in the prior quarter and net income of $0.25 per diluted share in the year-ago quarter. The loss in the prior quarter was driven by the settlement of the company’s tax audit for years 2003-2006, which resulted in a one-time net charge of $15.7 million in the second quarter.

In addition to its GAAP results, the company provided certain non-GAAP financial measures that, for the third quarter, exclude stock-based compensation expenses, certain acquisition-related costs and expenses, the charge related to SemiSouth, non-cash interest income, and the tax effects of these items. Non-GAAP gross margin for the third quarter was 52.9 percent. Non-GAAP net income for the quarter was $14.5 million or $0.49 per diluted share, compared with $0.49 per diluted share in the prior quarter and $0.32 per diluted share in the third quarter of 2011.

Commented Balu Balakrishnan, president and CEO of Power Integrations: “While third-quarter revenues were in line with our forecast, we expect lower revenues in the fourth quarter as global economic conditions continue to weigh on end demand across the industry. However, our gross margin expanded again in the third quarter and has improved significantly over the past year thanks to the substantial cost reductions we have achieved, plus the benefit of a more favorable end-market mix. While the impact of mix will fluctuate over time, we expect our gross margin to remain at a similar level in the fourth quarter.”

Mr. Balakrishnan continued: “While the SemiSouth outcome is disappointing, our strategic direction remains unchanged, and we continue to invest in high-power driver and switch technologies to expand our addressable market within the realm of high-voltage power conversion. For example, our acquisition of CT-Concept earlier this year added nearly half a billion dollars to our addressable market and gives us a presence in high-power markets such as industrial motors, renewable energy and electric transportation. With our first full quarter as a combined company now behind us, we believe we are on track to realizing the strategic and financial benefits we expected from the acquisition.”

Power Integrations management will hold a conference call today at 1:30 p.m. Pacific time. Members of the investment community can join the call by dialing 1-877-303-9795 from within the United States or 1-631-291-4581 from outside the U.S. The call will be available via a live and archived webcast on the investor section of the company's website, http://investors.powerint.com.

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 driver systems 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^® 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^® Clean Edge^® Green Energy Index, The Cleantech Index^®, and the Ardour Global Index^SM. 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.

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, acquisition-related expenses, amortization of acquisition-related intangible assets and the fair-value write-up of acquired inventory, the charge associated with SemiSouth, non-cash interest income, the tax effects of the above items, and the one-time tax charge described above. 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 financial measures differently, limiting their usefulness as comparative measures.

The statements in this press release relating to the company’s projected fourth-quarter financial performance and realizing the benefits of the CT-Concept acquisition 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 changes. 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; 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; and the challenges inherent in integrating and forecasting the performance of acquired businesses. 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 August 7, 2012. 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 OPERATIONS
(in thousands, except per-share amounts)


	Three Months Ended									Nine Months Ended
	September 30, 2012			June 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
NET REVENUES	$	78,045		$	76,382		$	75,063		$	226,200		$	232,009

COST OF REVENUES		39,294			38,627			40,020			115,101			122,917

GROSS PROFIT		38,751			37,755			35,043			111,099			109,092

OPERATING EXPENSES:
Research and development		11,428			12,066			10,345			34,134			30,563
Sales and marketing		9,206			8,419			7,962			25,736			24,258
General and administrative		7,912			6,687			6,145			21,203			18,761
Charge related to SemiSouth		25,300			-			-			25,300			-
Amortization of acquisition-related intangible assets		1,123			757			28			1,908			84
Acquisition expenses		29			413			-			931			-
Total operating expenses		54,998			28,342			24,480			109,212			73,666

INCOME (LOSS) FROM OPERATIONS		(16,247	)		9,413			10,563			1,887			35,426

Charge related to SemiSouth		(33,937	)		-			-			(33,937	)
Non-cash interest income		665			623			-			1,445			-
Cost of acquisition-related currency option		-			(635	)		-			(635	)		-
Other income (expense), net		172			207			552			837			1,455

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		(49,347	)		9,608			11,115			(30,403	)		36,881

PROVISION (BENEFIT) FOR INCOME TAXES		(4,941	)		16,784			3,603			13,718			8,916

NET INCOME (LOSS)	$	(44,406	)	$	(7,176	)	$	7,512		$	(44,121	)	$	27,965

EARNINGS (LOSS) PER SHARE:
Basic	$	(1.54	)	$	(0.25	)	$	0.26		$	(1.54	)	$	0.97
Diluted	$	(1.54	)	$	(0.25	)	$	0.25		$	(1.54	)	$	0.93

SHARES USED IN PER-SHARE CALCULATION:
Basic		28,908			28,619			28,799			28,586			28,789
Diluted		28,908			28,619			29,879			28,586			30,195


SUPPLEMENTAL INFORMATION:

Stock-based compensation expenses included in:
Cost of revenues	$	271		$	256		$	128		$	772		$	584
Research and development		1,467			1,566			564			4,154			2,354
Sales and marketing		940			746			449			2,433			1,659
General and administrative		1,169			1,074			527			3,161			2,020
Total stock-based compensation expense	$	3,847		$	3,642		$	1,668		$	10,520		$	6,617

Cost of revenues includes:
Amortization of write-up of acquired inventory	$	1,597		$	1,136		$	150		$	2,813		$	360
Amortization of acquisition-related intangible assets	$	645		$	459		$	85		$	1,189		$	255

Operating expenses include:
Patent-litigation expenses	$	1,885		$	1,409		$	1,751		$	4,590		$	4,218


REVENUE MIX BY END MARKET
Communications		23	%		24	%		26	%		25	%		29	%
Computer		10	%		12	%		12	%		11	%		12	%
Consumer		36	%		36	%		39	%		37	%		37	%
Industrial		31	%		28	%		23	%		27	%		22	%

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, 2012			June 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
RECONCILIATION OF GROSS PROFIT
GAAP gross profit		$	38,751		$	37,755		$	35,043		$	111,099		$	109,092
	GAAP gross profit margin		49.7	%		49.4	%		46.7	%		49.1	%		47.0	%

Stock-based compensation included in cost of revenues			271			256			128			772			584
Amortization of write-up of acquired inventory			1,597			1,136			150			2,813			360
Amortization of acquisition-related intangible assets			645			459			85			1,189			255

Non-GAAP gross profit		$	41,264		$	39,606		$	35,406		$	115,873		$	110,291
	Non-GAAP gross profit margin		52.9	%		51.9	%		47.2	%		51.2	%		47.5	%


RECONCILIATION OF OPERATING EXPENSES
GAAP operating expenses		$	54,998		$	28,342		$	24,480		$	109,212		$	73,666

Less:	Stock-based compensation expense included in operating expenses
	Research and development		1,467			1,566			564			4,154			2,354
	Sales and marketing		940			746			449			2,433			1,659
	General and administrative		1,169			1,074			527			3,161			2,020
	Total		3,576			3,386			1,540			9,748			6,033

	Acquisition expenses		29			413			-			931			-

	Amortization of acquisition-related intangible assets		1,123			757			28			1,908			84

	Charge related to SemiSouth		25,300			-			-			25,300			-

Non-GAAP operating expenses		$	24,970		$	23,786		$	22,912		$	71,325		$	67,549


RECONCILIATION OF INCOME FROM OPERATIONS
GAAP income (loss) from operations		$	(16,247	)	$	9,413		$	10,563		$	1,887		$	35,426
	GAAP operating margin		-20.8	%		12.3	%		14.1	%		0.8	%		15.3	%

Add:	Total stock-based compensation		3,847			3,642			1,668			10,520			6,617
	Amortization of write-up of acquired inventory		1,597			1,136			150			2,813			360
	Amortization of acquisition-related intangible assets		1,768			1,216			113			3,097			339
	Acquisition expenses		29			413			-			931			-
	Charge related to SemiSouth		25,300			-			-			25,300			-

Non-GAAP income from operations		$	16,294		$	15,820		$	12,494		$	44,548		$	42,742
	Non-GAAP operating margin		20.9	%		20.7	%		16.6	%		19.7	%		18.4	%


RECONCILIATION OF PROVISION FOR INCOME TAXES
GAAP provision for income taxes		$	(4,941	)	$	16,784		$	3,603		$	13,718		$	8,916
	GAAP effective tax rate		10.0	%		174.7	%		32.4	%		-45.1	%		24.2	%

One-time charge associated with tax settlement			-			15,749			-			15,749			-
Tax effect of other adjustments to GAAP results			(6,873	)		(405	)		85			(7,582	)		(544	)

Non-GAAP provision for income taxes		$	1,932		$	1,440		$	3,518		$	5,551		$	9,460
	Non-GAAP effective tax rate		11.7	%		9.0	%		27.0	%		12.2	%		21.4	%


RECONCILIATION OF NET INCOME (LOSS) PER SHARE (DILUTED)
GAAP net income (loss)		$	(44,406	)	$	(7,176	)	$	7,512		$	(44,121	)	$	27,965

Adjustments to GAAP net income (loss)
	Stock-based compensation		3,847			3,642			1,668			10,520			6,617
	Amortization of write-up of acquired inventory		1,597			1,136			150			2,813			360
	Amortization of acquisition-related intangible assets		1,768			1,216			113			3,097			339
	Acquisition expenses		29			413			-			931			-
	Non-cash interest income		(665	)		(623	)		-			(1,445	)		-
	Cost of acquisition-related currency option		-			635			-			635			-
	Charge related to SemiSouth		59,237			-			-			59,237			-
	One-time charge associated with tax settlement		-			15,749			-			15,749			-
	Tax effect of items excluded from non-GAAP results		(6,873	)		(405	)		85			(7,582	)		(544	)

Non-GAAP net income		$	14,534		$	14,587		$	9,528		$	39,834		$	34,737

Average shares outstanding for calculation
	of non-GAAP income per share (diluted)		29,809			29,792			29,879			29,740			30,195

Non-GAAP net income per share (diluted)		$	0.49		$	0.49		$	0.32		$	1.34		$	1.15

GAAP income (loss) per share		$	(1.54	)	$	(0.25	)	$	0.25		$	(1.54	)	$	0.93

POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)


	September 30, 2012		June 30, 2012		December 31, 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	74,747	$	73,360	$	139,836
Short-term marketable securities		35,605		60,068		40,899
Accounts receivable		11,106		17,966		9,396
Inventories		46,928		48,555		52,010
Deferred tax assets		892		893		892
Prepaid expenses and other current assets		17,659		7,758		7,068
Total current assets		186,937		208,600		250,101

MARKETABLE SECURITIES		-		-		32,041
PROPERTY AND EQUIPMENT, net		90,355		91,738		88,241
INTANGIBLE ASSETS, net		49,580		51,422		8,852
GOODWILL		78,278		77,354		14,786
DEFERRED TAX ASSETS		7,410		7,120		12,387
OTHER ASSETS		4,042		43,380		26,511
Total assets	$	416,602	$	479,614	$	432,919

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	19,697	$	21,108	$	16,532
Accrued payroll and related expenses		6,258		6,650		5,911
Taxes payable		1,168		37,936		-
Deferred taxes		1,634		1,961		-
Deferred income on sales to distributors		10,437		11,270		7,883
Other accrued liabilities		17,583		2,514		2,305
Total current liabilities		56,777		81,439		32,631

LONG-TERM LIABILITIES
Income taxes payable		7,560		7,364		34,368
Deferred taxes		3,926		4,185		-
Pension liability		663		622		-

Total liabilities		68,926		93,610		66,999

STOCKHOLDERS' EQUITY:
Common stock		29		29		28
Additional paid-in capital		188,587		181,203		158,646
Accumulated other comprehensive income		287		145		50
Retained earnings		158,773		204,627		207,196
Total stockholders' equity		347,676		386,004		365,920
Total liabilities and stockholders' equity	$	416,602	$	479,614	$	432,919

POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Three Months Ended									Nine Months Ended
	Sept. 30, 2012			June 30, 2012			Sept. 30, 2011			Sept. 30, 2012			Sept. 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(44,406	)	$	(7,176	)	$	7,512		$	(44,121	)	$	27,965
Adjustments to reconcile net income (loss) to cash provided by operating activities
Depreciation		3,799			3,895			3,865			11,426			11,337
Amortization of intangible assets		1,843			1,290			243			3,322			729
Charge related to SemiSouth		59,237			-			-			59,237			-
Gain on sale of property and equipment		-			-			-			(1	)		(41	)
Stock-based compensation expense		3,847			3,642			1,668			10,520			6,617
Amortization of premium on marketable securities		171			258			396			738			1,255
Non-cash interest income		(665	)		(623	)		-			(1,445	)		-
Deferred income taxes		(745	)		5,161			(47	)		4,089			779
Increase (decrease) in accounts receivable allowances		35			(14	)		(110	)		21			(74	)
Excess tax benefit from stock options exercised		(86	)		(276	)		(32	)		(560	)		(729	)
Tax benefit (deficiency) associated with employee stock plans		(118	)		749			288			1,413			1,826
Change in operating assets and liabilities:
Accounts receivable		6,825			1,964			(2,150	)		1,489			(4,542	)
Inventories		1,626			4,958			2,269			15,745			10,184
Prepaid expenses and other assets		(14,169	)		1,528			(225	)		(11,335	)		2,823
Accounts payable		1,047			2,310			3,170			4,842			(1,090	)
Taxes payable and other accrued liabilities		(37,039	)		8,180			3,423			(28,255	)		4,891
Deferred income on sales to distributors		(833	)		1,897			(883	)		2,554			(1,904	)
Net cash provided by (used in) operating activities		(19,631	)		27,743			19,387			29,679			60,026

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(3,427	)		(1,283	)		(3,710	)		(12,181	)		(16,229	)
Proceeds from sale of property and equipment		-			-			-			2			2,249
Other assets		-			-			(463	)		-			(1,271	)
Acquisitions		(2,360	)		(113,360	)		-			(115,720	)		(6,914	)
Increase in financing lease receivables		(37	)		-			(157	)		(420	)		(7,978	)
Collections of financing lease receivables		228			-			109			527			314
Loan to SemiSouth		-			-			-			(18,000	)		(3,000	)
Collection of note to SemiSouth		-			-			3,000			-			3,000
Purchases of marketable securities		-			-			(19,761	)		-			(31,269	)
Proceeds from maturities of marketable securities		24,320			6,403			8,545			36,788			15,175
Net cash provided by (used in) investing activities		18,724			(108,240	)		(12,437	)		(109,004	)		(45,923	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock		3,656			7,864			3,972			17,977			18,218
Repurchase of common stock		-			-			(31,435	)		-			(35,819	)
Payments of dividends to stockholders		(1,448	)		(1,438	)		(1,435	)		(4,301	)		(4,320	)
Excess tax benefit from stock options exercised		86			276			32			560			729
Net cash provided by (used in) financing activities		2,294			6,702			(28,866	)		14,236			(21,192	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,387			(73,795	)		(21,916	)		(65,089	)		(7,089	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		73,360			147,155			170,494			139,836			155,667

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	74,747		$	73,360		$	148,578		$	74,747		$	148,578

CONTACT:
Power Integrations, Inc.
Joe Shiffler, 408-414-8528
jshiffler@powerint.com

		Power Integrations
		(Registrant)

October 25, 2012		/s/ SANDEEP NAYYAR
(Date)		Sandeep Nayyar
		Chief Financial Officer