Power Integrations, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company designs and sells high-voltage analog and mixed-signal integrated circuits and diodes, primarily for AC-DC power supplies. Financial statements are unaudited.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $80.2 million | $79.9 million | $156.9 million | $151.4 million |
| Gross profit / margin | $37.6 million / 46.9% | $41.5 million / 52.0% | $74.0 million / 47.2% | $77.4 million / 51.1% |
| Operating expenses | $24.4 million | $22.7 million | $49.2 million | $43.7 million |
| Operating income / margin | $13.2 million / 16.4% | $18.8 million / 23.5% | $24.9 million / 15.8% | $33.7 million / 22.3% |
| Net income / diluted EPS | $10.6 million / $0.35 | $15.6 million / $0.53 | $20.5 million / $0.68 | $27.9 million / $0.95 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $40.6 million | $51.9 million |
- Q2 revenue grew 0.4% year over year; first-half revenue increased about 4%. Growth in industrial, computer and communication markets was partly offset by weaker consumer sales.
- Gross margin declined primarily because of higher input costs, including yen-related wafer costs and higher gold and copper prices, and product mix. LinkSwitch II products carried lower-than-average margins.
- Operating expenses rose with headcount, research and development, and sales expansion; lower patent-litigation costs partly offset the increase in Q2.
- First-half operating cash flow fell $11.2 million year over year, while net income declined. Cash and cash equivalents were $170.5 million at June 30.
Liquidity, capital and balance sheet
- Cash, cash equivalents and short- and long-term investments totaled $233.6 million, up from $214.8 million at year-end 2010. Working capital was $242.4 million.
- Total liabilities were $66.4 million, including $32.0 million of long-term income taxes payable. The filing reports no borrowings; a $50 million unsecured credit facility was available through February 2013, subject to covenants. A $0.1 million letter of credit was outstanding at June 30.
- First-half investing cash use was $33.5 million, including capital expenditures, Qspeed acquisition payments, and financing and a note receivable for SemiSouth. Financing activities provided $7.7 million, including $14.2 million from employee stock plans, offset by $4.4 million of repurchases and $2.9 million of dividends.
- The company repurchased 121,841 shares for approximately $4.4 million in Q2; $45.6 million remained under the $50 million authorization. The quarterly dividend was $0.05 per share.
Outlook, risks and unusual items
- Q3 2011 guidance: Revenue of $74–$80 million; gross margin flat to slightly lower than Q2; operating expenses approximately $25.2 million, plus or minus $0.5 million. Management expected gross margin to improve meaningfully in Q4 from cost-reduction efforts.
- Management said the Japan earthquake and tsunami had not materially affected supply and was not expected to do so in Q3. Most product lead times had returned to historical levels, but demand forecasting and customer orders remain volatile.
- Customer concentration increased: the top ten customers accounted for 66% of revenue, and two distributors accounted for 19% and 14% in Q2. International sales represented 95% of revenue; Asia represented 84%.
- Foreign exchange and commodity cost exposure are material margin risks. Management estimated that, all else equal, a 10% change in the U.S. dollar versus the yen could eventually change gross margin by approximately 1.7 percentage points. The company does not use currency hedges.
- SemiSouth commitments: The company had funded $7.9 million through a lease line and note. A July 2011 agreement also created a contingent commitment to purchase SemiSouth intellectual property for $15 million, plus certain expenses, under specified conditions; the company planned to provide a $15 million letter of credit in August. Acquisition options were extended through 2013.
- Litigation and tax: A $12.9 million Fairchild patent judgment in the company’s favor was appealed, and the company cross-appealed for higher damages; no benefit was recorded in the statements. Other patent disputes include claims against the company, including Chinese suits seeking approximately $17 million. Management could not estimate losses or ranges for ongoing litigation. The IRS proposed adjustments concerning 2003–2006 intercompany R&D cost-sharing; the company contests the position, has provided reserves, and may owe additional tax, interest or penalties. Tax years 2007–2009 were also under audit.
- Other key risks include dependence on third-party wafer foundries and assembly suppliers, pricing competition, product and market concentration, customer cancellations, intellectual-property outcomes, and execution of acquisitions. Management stated liquidity was expected to cover working capital and other cash requirements for at least 12 months.
Important facts for investors to verify
- Whether Q3 revenue and expense guidance is achieved, and whether the expected Q4 margin improvement materializes.
- Drivers and persistence of lower gross margin, especially yen exposure, materials costs and product mix.
- Distributor inventory, customer concentration, demand trends and supply availability.
- Terms, credit exposure and contingent obligations related to SemiSouth, including the $15 million IP commitment and letter of credit.
- Developments in Fairchild and other patent litigation, and potential outcomes of the IRS audit and tax dispute.