Power Integrations, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter filing. The company designs high-voltage power-conversion ICs and, following its December 2010 acquisition of Qspeed Semiconductor, also sells high-voltage diodes.
Financial results and liquidity
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Revenue | $299.8 million | $215.7 million | +39% |
| Gross profit / margin | $152.5 million / 50.9% | $108.1 million / 50.1% | Margin +0.8 percentage points |
| Operating income / margin | $59.9 million / 20.0% | $28.6 million / 13.3% | Operating income more than doubled |
| Net income | $49.5 million | $23.3 million | +113% |
| Diluted EPS | $1.67 | $0.82 | +$0.85 |
| Cash from operations | $60.0 million | $45.0 million | +$15.0 million |
- Gross-margin improvement reflected higher production volume and a more favorable end-market mix, partly offset by sales of newer, lower-margin products and higher gold costs. Management said yen weakness could pressure margins in 2011.
- Cash, cash equivalents and short-term investments were $183.0 million at year-end; including long-term investments, cash and investments totaled approximately $214.8 million. Working capital was $212.1 million. Total liabilities were $79.0 million, including $29.6 million of long-term income taxes payable; no borrowings were outstanding at year-end.
- Operating cash flow was partly offset by a $33.6 million inventory increase. Inventory rose to $62.1 million from $26.2 million in 2009. Capital expenditures were $30.6 million.
- Fourth-quarter 2010 revenue was $73.0 million and net income was $8.9 million, compared with $66.1 million and $9.2 million, respectively, in fourth-quarter 2009. Q4 gross profit was $36.1 million, or approximately 49.5% of revenue.
Material changes and business developments
- Revenue growth reflected higher unit sales across the company’s major end markets and recovery in semiconductor demand; lower-power products made up a larger share of sales, limiting average selling-price growth.
- LinkSwitch increased to 37% of revenue from 33%; TinySwitch declined to 38% from 43%. Consumer rose to 38% of revenue, while communications declined to 31% from 34%.
- The company acquired an early-stage R&D business in August and acquired Qspeed assets at year-end. These transactions added technology, goodwill and product capabilities. It also invested $7.0 million in SemiSouth Laboratories and prepaid $10.0 million for technology royalties.
- Operating expenses increased to $92.6 million from $79.5 million, mainly from hiring, acquisition-related costs, product launches and higher litigation expenses. FY 2009–2010 comparisons also reflect unusually high 2008 stock-based compensation from a tender offer, including $19.3 million of accelerated expense.
Outlook, risks and contingencies
- Management’s issued first-quarter 2011 outlook: revenue of $71–77 million, gross margin of 48% plus or minus 0.5 percentage points, and operating expenses of $25 million plus or minus $0.5 million. Management expected 2011 operating expenses to rise as the company expanded R&D, sales and marketing.
- Orders are short-term and may be canceled or rescheduled. The top ten customers represented 62% of revenue; Avnet and ATM Electronic Corporation represented approximately 17% and 11%. About 95% of revenue came from outside the Americas.
- Manufacturing depends on a small number of external wafer foundries and assembly providers. The company estimated qualifying an alternative wafer source could take 12–24 months. Japanese-yen movements, supply capacity, commodity costs and production yields could affect margins and deliveries.
- The IRS is disputing tax positions related to R&D cost sharing. Unrecognized tax benefits were $29.9 million at year-end, with $3.5 million accrued for interest and penalties; resolution timing and outcome are uncertain.
- Patent litigation remains material. Fairchild appealed a final $12.9 million damages judgment in the company’s favor. Fairchild/SG also asserted Chinese patent claims seeking approximately $17 million in damages and an injunction. The filing cautions that litigation costs and adverse outcomes could materially affect results; the financial statements do not provide a clear value for potential net litigation exposure.
- Subsequent to year-end, the company authorized a $50 million share-repurchase program, established an unsecured credit facility of up to $50 million with no borrowings reported as of filing, and agreed to a SemiSouth equipment lease line of up to $15.5 million; $3.8 million had been funded under the lease line by the filing date.
Important facts for investors to verify
- Whether Q1 2011 revenue and gross-margin guidance was achieved, and whether lead times, customer orders and elevated inventory normalized.
- How yen movements, product mix, gold costs and capacity availability affected margins after year-end.
- Developments in the IRS audit and patent matters, including any recorded or potential cash obligations or recoveries.
- Acquisition and SemiSouth integration progress, spending commitments and expected returns, including use of the lease line and credit facility.
- Customer and distributor concentration, distributor sell-through and the growth in ship-and-debit credits and deferred distributor revenue.