Power Integrations, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results. The company designs and sells high-voltage analog and mixed-signal integrated circuits and diodes, principally for AC-DC power supplies.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $75.1M | $75.5M | $232.0M | $226.8M |
| Gross profit / margin | $35.0M / 46.7% | $39.0M / 51.7% | $109.1M / 47.0% | $116.4M / 51.3% |
| Operating income / margin | $10.6M / 14.1% | $15.3M / 20.1% | $35.4M / 15.3% | $49.0M / 21.6% |
| Net income | $7.5M | $12.6M | $28.0M | $40.5M |
| Diluted EPS | $0.25 | $0.43 | $0.93 | $1.38 |
- Q3 revenue was approximately 1% lower year over year; nine-month revenue rose 2.3%. Q3 net income fell about 41%, and nine-month net income fell about 31%.
- Gross margin declined in both comparisons, primarily due to higher input costs—including yen-related wafer costs and gold and copper—and less favorable product mix. Operating expenses rose year over year, notably R&D and sales and marketing spending.
- Nine-month operating cash flow was $60.0M, versus $65.6M in 2010. Investing used $45.9M; financing used $21.2M. Cash and cash equivalents declined $7.1M to $148.6M during the period.
Liquidity, capital and balance sheet
- At September 30, cash, cash equivalents and short- and long-term investments totaled $222.5M, versus $214.8M at year-end 2010. Working capital was $229.6M, up from $212.1M.
- Total liabilities were $72.1M, including $33.8M of long-term income taxes payable. The filing reports no borrowings; an unsecured credit facility permits up to $50M of advances through February 2013. A $15M letter of credit was outstanding for a contingent SemiSouth-related commitment.
- The company repurchased 1.1M shares for $35.8M in the first nine months and paid $4.3M in dividends. In November, the board authorized an additional $30M repurchase program; the February 2011 program had $14.2M remaining at September 30.
Outlook, commentary and principal risks
- Management said revenue had declined 6% from the prior quarter and expected a further decline in the subsequent quarter, primarily because of global macroeconomic factors. No quantitative revenue or earnings guidance was provided.
- Management expected gross margin to improve in Q4 2011 due to product-cost improvements, primarily silicon cost reductions; the filing cautions that margin drivers are partly outside management’s control.
- Demand is difficult to forecast, orders may be canceled or rescheduled on short notice, and customers are not bound by long-term contracts. The top ten customers represented 65% of revenue; the top two distributors represented about 31%. International sales were 96% of revenue, with substantial exposure to Asia.
- Key operating risks include price competition, product and end-market demand fluctuations, reliance on third-party wafer suppliers and assembly subcontractors, commodity and yen-dollar cost exposure, and the ability to develop and sell new products. A 10% currency move was estimated to affect gross margin by about 1.5 percentage points, all else equal.
- SemiSouth exposure: The company had invested $7M in preferred stock, prepaid $10M in royalties, and funded or deposited $8M under an equipment lease line. It also provided a $15M letter of credit backing a contingent commitment to purchase SemiSouth intellectual property for $15M plus certain expenses under specified conditions. Management assessed the separate potential acquisition put/call option’s fair value as zero.
- Legal and tax contingencies: A $12.9M Fairchild patent judgment was appealed, and the company cross-appealed seeking increased damages; the outcome and any ultimate recovery were uncertain and no litigation benefit had been recorded. Other patent disputes include Fairchild/SG proceedings and China claims seeking approximately $17M in damages. The IRS proposed adjustments for 2003–2006 related primarily to intercompany R&D cost sharing; 2007–2009 were also under audit. The company disputes the IRS position, but adverse outcomes could materially affect results and liquidity.
- The company stated that existing liquidity and cash generation were expected to meet working-capital and other cash needs for at least 12 months. It also warned that weaker demand or pricing pressure could jeopardize operating cash flow. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the anticipated Q4 revenue decline occurred and whether cost reductions improved gross margin as expected.
- Trends in product mix, wafer and assembly costs, yen exposure, and customer and distributor inventory and concentration.
- Cash generation and capital allocation after buybacks, dividends, and the additional repurchase authorization.
- Credit quality and potential further exposure related to SemiSouth, including the contingent IP purchase commitment and letter of credit.
- Developments in the IRS audit and patent litigation, including potential payments, recoveries, or operating restrictions.