Power Integrations, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. The company designs and markets high-voltage analog integrated circuits, primarily for AC-DC power supplies. Financial statements are unaudited.
Financial performance and liquidity
Amounts below are in millions, except per-share data. Year-over-year comparisons are with the corresponding 2009 period.
| Metric | Q2 2010 | Q2 2009 | H1 2010 | H1 2009 |
|---|---|---|---|---|
| Revenue | $79.9 | $49.3 | $151.4 | $89.5 |
| Gross profit / margin | $41.5 / 52.0% | $24.2 / 49.1% | $77.4 / 51.1% | $45.1 / 50.4% |
| Operating income / margin | $18.8 / 23.5% | $5.0 / 10.1% | $33.7 / 22.3% | $6.3 / 7.0% |
| Net income | $15.6 | $4.5 | $27.9 | $4.9 |
| Diluted EPS | $0.53 | $0.16 | $0.95 | $0.18 |
| Cash from operations | Not stated separately | Not stated separately | $51.9 | $19.2 |
- Revenue rose 62% in Q2 and 69% in H1. Management attributed growth to stronger electronic-product demand and increased market penetration across major end markets.
- Gross margin improved year over year, primarily from favorable end-market mix and higher production volumes. Operating expenses rose to $22.7 million in Q2 and $43.7 million in H1, mainly reflecting higher headcount, commissions and patent-litigation costs; lower stock compensation partly offset increases.
- At June 30, cash and cash equivalents were $159.8 million; cash, cash equivalents and short- and long-term investments, including restricted cash, totaled $228.9 million. Working capital was $191.0 million. The filing reports no conventional borrowings; liabilities include $26.2 million of long-term income taxes payable.
- H1 investing activities used $25.9 million, including $13.5 million for property and equipment and $4.8 million in notes to private technology companies. Financing activities used $1.1 million net, including $14.0 million of share repurchases and $2.8 million of dividends, partly offset by employee stock-plan proceeds. Cash increased $24.8 million during H1.
Material changes and business developments
- Inventory increased to $35.7 million from $26.2 million at year-end 2009. Operating cash flow included a $9.5 million inventory use of cash, partly offset by higher deferred distributor income, payables and collections.
- Deferred distributor revenue increased to $28.5 million from $17.6 million at year-end; related deferred costs were $13.6 million versus $8.6 million. Revenue on distributor sales is recognized on sell-through.
- Distributors accounted for 68% of H1 product sales, compared with 65% a year earlier. The top ten customers represented 60% of revenue; international sales were 95% of revenue, with Asia a major market.
- The company completed its $25 million share-repurchase authorization in H1, purchasing 0.4 million shares for approximately $14.0 million. It paid two quarterly dividends of $0.05 per share and expected two further payments of similar size.
- The company entered a $11.8 million agreement to acquire assets of an early-stage research and development company, with completion expected in Q3 2010. It had advanced $1.2 million toward the purchase and provided a $1.8 million loan.
Outlook, risks and contingencies
- Management forecast Q3 2010 revenue of $78–$82 million, gross margin of approximately 51%–52%, and operating expenses of $23–$24 million. It said existing liquidity and expected operating cash generation should meet working-capital and other cash needs for at least 12 months.
- Strong demand had caused shortages of certain products and longer delivery lead times. Management was adding production capacity, while warning that industry double-ordering could lead to cancellations or rescheduling as supply catches up. Customer orders are short-term and may be canceled or changed without significant penalty.
- Key risks include customer and distributor concentration, intense price competition, reliance on third-party wafer and assembly suppliers, international exposure, yen exchange-rate effects, product-development and quality risks, and the possibility of demand or pricing deterioration.
- Patent litigation remains significant. On July 22, 2010, after quarter-end, the court found Fairchild had willfully infringed four asserted patents and invited briefing on enhanced damages and attorneys’ fees; Fairchild said it would appeal. No litigation recovery was recorded. Separate Chinese suits seek approximately $17 million in damages and injunctive relief. Litigation outcomes and costs remain uncertain.
- The IRS is auditing tax years 2004–2006 after a disputed proposed adjustment concerning the company’s R&D cost-sharing arrangement for 2002–2003. Contingent tax liabilities were $27.1 million at June 30 and were not expected to be due within 12 months; the timing and outcome of resolution are uncertain.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It also disclosed no material change in interest-rate or foreign-currency market-risk exposure.
Investor verification priorities
- Verify whether Q3 revenue, gross-margin and operating-expense guidance was achieved, and whether capacity additions eased shortages and lead times.
- Assess distributor sell-through, deferred revenue and inventory levels, including the risk that elevated shipments or lead times reflected double ordering.
- Track customer concentration, international and Asia exposure, and dependence on third-party foundries and assembly suppliers.
- Review the Fairchild appeal and damages proceedings, other patent cases, and the possible financial and operational effects of adverse outcomes.
- Monitor the IRS R&D cost-sharing audit and uncertain-tax-position exposure, and confirm the acquisition’s completion, funding and terms.