Power Integrations, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Power Integrations designs analog and mixed-signal ICs and other components for high-voltage power conversion. Its May 2012 acquisition of CT-Concept Technologie AG expanded its business into IGBT drivers for high-power applications.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $305.4 million | $298.7 million |
| Gross profit / margin | $150.5 million / 49.3% | $140.6 million / 47.1% |
| Operating income | $11.4 million | $43.2 million |
| Net income (loss) | $(34.4) million | $34.3 million |
| Diluted EPS | $(1.20) | $1.14 |
| Cash from operating activities | $51.8 million | $69.2 million |
- Revenue rose 2.2%, including $17.7 million from Concept; weaker communications, computer and consumer demand partly offset the acquisition contribution.
- Gross margin improved from 47.1% to 49.3%, primarily from lower manufacturing costs, favorable foundry pricing, process and wafer-size transitions, and end-market mix. Operating expenses rose to $139.2 million from $97.4 million, including $25.2 million of SemiSouth-related operating charges and acquisition-related costs.
- The $34.4 million net loss reflected $58.9 million of total SemiSouth write-offs and an $18.1 million net tax charge related to the IRS settlement. The SemiSouth charge comprised $25.2 million in operating expenses and $33.7 million in other expense.
- Q4 2012: Revenue was $79.2 million, gross profit $39.4 million, and net income $9.7 million, compared with $66.7 million, $31.6 million, and $6.3 million, respectively, in Q4 2011.
Liquidity, capital and balance sheet
- Cash, cash equivalents and short-term investments totaled $95.2 million at year-end, down from $180.7 million; working capital was $124.3 million, versus $216.1 million. The decrease principally reflected the Concept acquisition, IRS settlement payment and SemiSouth-related outlays.
- There were no borrowings under the $100 million revolving credit facility at year-end. The facility expires July 5, 2015, and is subject to financial covenants; the company reported compliance.
- Investing activities used $124.7 million, including $115.7 million for Concept, $18.0 million lent to SemiSouth, and $15.2 million paid under a SemiSouth guarantee. Financing activities used $3.6 million, including $20.5 million of share repurchases and $5.8 million of dividends.
- Quarterly dividends were $0.05 per share in 2012; in January 2013 the board declared $0.08 per share for each 2013 quarter. A $50 million repurchase authorization had $29.5 million remaining at year-end.
Changes, outlook and notable matters
- End-market mix shifted toward industrial electronics (28% of revenue versus 22% in 2011); communications declined to 24% from 28%, consumer to 36% from 38%, and computer remained 12%.
- Concept contributed $17.7 million of 2012 revenue and an estimated $3.4 million net loss, including acquired-intangible amortization and inventory-markup amortization. Management described the acquisition as complementary and expects to continue significant R&D investment, but the filing gives no quantified revenue or earnings guidance.
- The company settled the IRS examination for tax years 2003–2006, paying approximately $42.4 million in taxes and interest. The agreement ended a royalty arrangement with a foreign subsidiary and allows up to $101.9 million to be repatriated without U.S. income tax. IRS audits of 2007–2009 remained in progress.
- SemiSouth ceased operations in 2012; the company wrote off related investments, loan and royalty assets and paid $15.2 million under a guarantee. A separate Trinity Capital suit filed in February 2013 seeks $2.4 million under that guarantee; the company says it will contest the claim.
- Several patent disputes remain unresolved, including appeals and claims involving Fairchild. Management could not estimate a loss or range of loss; adverse outcomes could entail damages, licensing costs or restrictions on products. The company also reported substantial ongoing litigation costs.
- Key risks include volatile demand and pricing, no long-term customer contracts, concentrated distributors and suppliers, international exposure (95% of revenue), foreign-exchange sensitivity, and the possibility of supply interruption. A 10% U.S. dollar movement against the yen could change gross margin by approximately 0.8%–1.0%.
- Management and the auditor concluded internal control over financial reporting was effective at year-end; a portion of Concept’s controls was excluded from the assessment and audit.
Investor verification priorities
- Assess whether underlying demand and margins support growth apart from Concept’s contribution, and track the communications and consumer markets.
- Review the SemiSouth write-offs, the Trinity guarantee claim, and the status and potential costs of patent litigation.
- Verify the remaining IRS audit exposure, tax attributes and expected effects of the 2003–2006 settlement.
- Monitor cash generation, liquidity after acquisition and tax payments, credit-facility covenant compliance, and capital returns relative to investment needs.
- Check distributor sell-through, ship-and-debit reserves, customer concentration, and foundry capacity and contract-renewal risks.