Power Integrations, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated results; amounts below are in U.S. dollars unless stated otherwise.
Business context
Power Integrations designs and markets integrated circuits and related components for high-voltage power conversion. Its May 1 acquisition of CT-Concept Technologie AG (Concept) expanded its products into higher-power applications, including industrial motors and renewable-energy systems. The company operates as one reportable segment.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $76.4 million | $80.2 million | $148.2 million | $156.9 million |
| Gross profit | $37.8 million | $37.6 million | $72.3 million | $74.0 million |
| Gross margin | 49.4% | 46.9% | 48.8% | 47.2% |
| Operating income | $9.4 million | $13.2 million | $18.1 million | $24.9 million |
| Net income (loss) | $(7.2) million | $10.6 million | $0.3 million | $20.5 million |
| Diluted EPS | $(0.25) | $0.35 | $0.01 | $0.68 |
- Revenue declined approximately 4.7% in Q2 and 5.6% for the first half, mainly from weaker communications, computer and consumer demand; Concept partly offset the decline through industrial sales.
- Gross margin improved year over year, primarily from lower manufacturing costs, favorable wafer pricing, process-technology migration and, in Q2, product mix. Acquisition-related amortization and inventory fair-value charges partly offset these benefits.
- Operating expenses increased to $28.3 million in Q2 and $54.2 million for the half, principally from Concept-related headcount, stock compensation and intangible amortization.
- The Q2 net loss primarily reflects the IRS settlement-related tax charge. The reported effective tax rates were 174.7% for Q2 and 98.5% for the first half, versus 22.3% and 20.6% in the comparable 2011 periods.
Cash, liquidity and capital
- Cash, cash equivalents and marketable securities totaled $133.4 million at June 30, down from $212.8 million at December 31, 2011. Working capital was $127.2 million, versus $217.5 million.
- Operating activities generated $49.3 million in the first half, compared with $40.6 million a year earlier.
- Investing activities used $127.7 million, including $113.4 million for Concept, an $18.0 million loan to SemiSouth and $8.8 million of capital spending. Cash and cash equivalents declined by $66.5 million during the period.
- No borrowings were outstanding under the prior credit facility as of its July 2012 termination. A subsequent $100 million revolving facility, with a $20 million letter-of-credit sublimit, runs through July 2015 and is subject to financial covenants. The filing states the company was in compliance.
- The company paid approximately $2.9 million in dividends in the first half and had declared quarterly dividends of $0.05 per share for 2012. Its $30 million share-repurchase authorization was canceled in connection with the Concept acquisition.
Material changes and unusual items
- Concept acquisition: Purchase consideration was approximately $130.7 million, including cash acquired; the allocation was preliminary. The acquisition added $62.6 million of goodwill and $44.1 million of identifiable intangible assets. Concept contributed $4.6 million of revenue and an estimated $1.0 million loss from May 1 through June 30.
- IRS settlement: The company agreed to resolve the 2003–2006 federal tax examination. The Q2 provision included a $44.8 million gross charge, partly offset by reversals and other tax items, for a net charge of $15.7 million. A one-time payment was expected in Q3 2012. The filing gives different payment figures—approximately $42.6 million in several sections and $42.3 million in Item 5—so the exact amount is not consistent in the text.
- The settlement ends the intercompany royalty arrangement on October 31, 2012, which management expects to result in a substantially lower effective tax rate in future periods. It also permits up to $101.9 million to be repatriated from a foreign subsidiary without U.S. income tax, subject to the agreement’s terms.
- Goodwill and intangible assets rose substantially following the acquisition. Management reported no goodwill impairment indicators through June 30, 2012; the Concept purchase-price allocation remained subject to completion.
Outlook, commentary and risks
- Management said cash from operations and existing liquidity should meet projected working-capital and other cash needs for at least 12 months. No specific revenue or earnings guidance was provided.
- Management described quarterly results as volatile and difficult to forecast; customer orders can be canceled or rescheduled on short notice. It cited demand, pricing, product mix, supply-chain and macroeconomic conditions as factors affecting results.
- Key exposures include substantial international sales (94% of Q2 revenue; 95% for the half), distributor and customer concentration, intense price competition, Japanese-yen and Swiss-franc movements, outsourced wafer supply, and execution and integration risks from Concept.
- Multiple patent disputes remain unresolved. The company reported favorable April 2012 jury findings against Fairchild in one case, but damages and other post-trial matters remained unresolved; other Fairchild and China proceedings also continued. Management could not estimate a loss or range of loss for ongoing litigation.
- The company has significant SemiSouth exposure, including the $18 million note, funded lease-line exposure and a contingent $15 million IP purchase commitment secured by a letter of credit. The filing states no additional future funding commitments as of June 30.
- Management reported disclosure controls were effective at period-end. Concept had not yet been fully integrated into the company’s systems and control environment.
Most important facts for investors to verify
- Confirm the IRS settlement payment amount and timing: the filing cites both approximately $42.6 million and $42.3 million, with payment expected in Q3 2012.
- Track Concept integration, the final purchase-price allocation, acquired-asset amortization and whether expected strategic benefits materialize.
- Assess underlying operating trends apart from the one-time tax settlement, including revenue demand, gross margin and expense growth.
- Review subsequent developments in the Fairchild and other patent cases, including potential damages, injunctions and legal costs.
- Monitor SemiSouth’s credit quality and the recoverability of the note and lease-line assets, along with the contingent IP commitment.
- Evaluate the company’s liquidity after the tax payment and acquisition, and its ability to remain within the new credit facility’s covenants.