Power Integrations, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results. The company designs and markets integrated circuits and related components for high-voltage power conversion; its May 2012 acquisition of CT-Concept expanded its business into high-power applications.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $78.0M | $75.1M | $226.2M | $232.0M |
| Gross profit | $38.8M | $35.0M | $111.1M | $109.1M |
| Gross margin | 49.7% | 46.7% | 49.1% | 47.0% |
| Operating income (loss) | $(16.2)M | $10.6M | $1.9M | $35.4M |
| Net income (loss) | $(44.4)M | $7.5M | $(44.1)M | $28.0M |
| Diluted EPS | $(1.54) | $0.25 | $(1.54) | $0.93 |
| Operating cash flow | — | $29.7M | $60.0M |
- Q3 revenue increased 4% year over year, mainly from $6.2M of Concept revenue. Nine-month revenue fell 3%, as weaker communications, computer and consumer demand outweighed Concept’s $10.8M contribution.
- Gross margin improved on lower manufacturing costs, favorable wafer pricing, process-technology and wafer-size transitions, and end-market mix; Concept-related amortization and inventory step-up partly offset the improvement.
- The company recorded $59.2M of SemiSouth-related charges in Q3: $25.3M in operating expenses and $33.9M in other expense. Excluding this unusual charge, reported losses would have been substantially lower; the filing does not provide adjusted earnings.
- Cash, cash equivalents and marketable securities totaled $110.4M at September 30, down from $212.8M at year-end. Working capital was $130.2M, versus $217.5M at December 31, 2011. The decreases primarily reflected the Concept acquisition and IRS settlement payments.
- Operating cash flow was $29.7M for the first nine months, compared with $60.0M a year earlier. Investing used $109.0M, chiefly for Concept, the SemiSouth loan and capital spending; financing provided $14.2M, including employee stock-plan proceeds, partly offset by dividends.
- No borrowings were outstanding under the $100M revolving credit facility at quarter-end; a $15M letter of credit was outstanding. The facility has a $20M letter-of-credit sublimit and expires in July 2015.
Material changes and unusual items
- Concept acquisition: Completed May 1 for purchase consideration of approximately $130.7M, including cash acquired. The company recognized $63.5M of goodwill and $44.1M of acquired intangible assets; the purchase-price allocation remained preliminary. Concept contributed $6.2M of Q3 revenue and an estimated $1.2M loss for the quarter.
- SemiSouth impairment: The company wrote off investments, a note, lease receivables, the purchase option and other assets, and expensed a prepaid royalty after concluding SemiSouth was likely to close. It also accrued $15.3M for a contingent obligation to purchase SemiSouth intellectual property, which management estimated had no value. A $15M letter of credit supports that commitment.
- Tax settlement: The company settled IRS examination matters for 2003–2006 and paid approximately $42.4M in taxes and interest during Q3. The second-quarter provision included a $15.7M net charge after offsets. The agreement ends the intercompany royalty arrangement on October 31, 2012, which management expects to result in a substantially lower effective tax rate in future periods, and allows up to $101.9M to be repatriated without U.S. income tax; $20M had been repatriated by September 30.
- The board authorized a new $50M share-repurchase program in October 2012. The company paid $0.05 per share quarterly dividends during 2012; future dividends remain at the board’s discretion.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said operating cash generation and existing liquidity should meet working-capital and other cash needs for at least 12 months, but warned that weaker demand or pricing pressure could jeopardize operating cash flow.
- Key exposures include unpredictable quarterly demand and customer orders, intense pricing competition, product and end-market concentration, reliance on international sales (95% of nine-month revenue), distributor and customer concentration, and dependence on third-party wafer suppliers. Yen movements can affect gross margin; Swiss-franc exposure rose with the Concept acquisition.
- Numerous patent disputes remain unresolved, including litigation involving Fairchild and System General in the U.S. and China. The company cannot estimate a loss or range of loss for ongoing litigation and warns that adverse outcomes could cause significant costs, damages, injunctions or loss of technology rights. A favorable Fairchild damages judgment is on appeal; no recovery has been recorded.
- The IRS audit of tax years 2007–2009 remains ongoing. Management reported disclosure controls were effective, but Concept had not yet been fully integrated into the company’s systems and control environment.
Important facts for investors to verify
- Whether underlying demand and revenue trends improve, especially in communications, consumer and computer markets, and whether Concept delivers anticipated growth and integration benefits.
- The scale and cash-flow impact of continuing SemiSouth obligations, including whether the financing company exercises its put right and how the $15M letter of credit is resolved.
- The final Concept purchase-price allocation, acquired-business performance, and ongoing amortization and integration costs.
- Progress and potential financial impact of the 2007–2009 IRS audit, and the expected timing and effective-tax-rate effects of the 2012 settlement.
- Developments in patent litigation, supplier capacity and pricing, foreign-exchange exposure, and the company’s liquidity after the acquisition, tax settlement, dividends and authorized repurchases.