Power Integrations, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Power Integrations designs and sells high-voltage power-conversion integrated circuits and diodes, primarily for consumer, communications, industrial-electronics and computer applications.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net revenue | $298.7 million | $299.8 million | Down 0.4% |
| Gross profit / margin | $140.6 million / 47.1% | $152.5 million / 50.9% | Margin down 3.8 percentage points |
| Operating income / margin | $43.2 million / 14.5% | $59.9 million / 20.0% | Down 27.9% |
| Net income | $34.3 million | $49.5 million | Down 30.7% |
| Diluted EPS | $1.14 | $1.67 | Down 31.7% |
| Cash from operations | $69.2 million | $60.0 million | Up 15.4% |
Fourth-quarter revenue was $66.7 million, versus $73.0 million in Q4 2010; net income was $6.3 million, versus $8.9 million. Q4 gross margin was approximately 47.3%, compared with 49.5% a year earlier.
Management attributed the FY2011 gross-margin decline mainly to higher input costs, including increased equipment depreciation, yen-related wafer costs, and higher gold and copper prices, along with less favorable product mix. Revenue softness reflected an industry-wide slowdown in the second half of 2011, particularly in communications; industrial and computer sales partly offset declines elsewhere. Operating expenses rose 5.2% to $97.4 million, with higher R&D and sales-related costs partly offset by lower G&A.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $139.8 million at year-end; short-term investments were $40.9 million and long-term investments were $32.0 million. Total cash, cash equivalents and investments were approximately $212.8 million.
- Working capital was $217.5 million, up from $212.1 million. Total liabilities were $67.0 million, including $34.4 million of long-term income taxes payable. The filing reports no outstanding bank borrowings; a $50 million credit facility was unused at year-end, apart from a $15 million letter of credit.
- Investing activities used $52.3 million, including $23.2 million for property and equipment and $8.1 million related to SemiSouth financing. Financing activities used $32.7 million, including $50 million of share repurchases and $5.7 million of dividends.
- The company repurchased 1.5 million shares for $50 million in 2011 and authorized a further $30 million repurchase program in November. The quarterly dividend was $0.05 per share; the board declared the same quarterly amount for 2012.
Business changes, outlook and risks
- Product revenue remained concentrated in three product families: LinkSwitch 42%, TinySwitch 33% and TOPSwitch 23%. Industrial electronics rose to 22% of revenue from 19%; communications declined to 28% from 31%.
- Management plans continued significant R&D investment and aims over time to grow operating expenses more slowly than revenue. It highlighted energy-efficiency requirements, LED lighting and expansion into higher-power applications as growth opportunities. The filing provides no specific revenue or earnings guidance.
- Management stated that operating cash flow and existing liquidity should cover projected working-capital and other cash needs for at least the next 12 months. Results remain difficult to forecast because customer orders are short-term and may be canceled or rescheduled.
- Material risks include customer and distributor concentration (the top ten customers represented 65% of revenue; Avnet and ATM each exceeded 10%), substantial international exposure (96% of revenue), competitive pricing, and reliance on a small number of wafer foundries and assembly suppliers. A replacement wafer source could take an estimated 12–24 months to qualify.
- The IRS proposed material adjustments to 2003–2006 taxable income concerning intercompany R&D cost-sharing; 2007–2009 were also under audit. The company disputes the IRS position. Unrecognized tax benefits totaled $34.9 million, including $4.4 million accrued for interest and penalties; the filing does not establish the ultimate amount or timing of any payment.
- Patent litigation remains active. A $12.9 million damages judgment against Fairchild was appealed; the company recorded no benefit from the award. Other proceedings include patent claims in the United States and China, with outcomes and potential losses not estimable by the company.
- SemiSouth arrangements create additional exposure: an $8.6 million lease line was substantially funded, a $2.5 million lease guaranty was issued, and a contingent commitment may require purchase of SemiSouth intellectual property for $15 million plus certain expenses. A $2.25 million loan to SemiSouth was made in February 2012.
Important facts for investors to verify
- Whether the 2011 margin and earnings decline persists, and whether input costs, currency movements and product mix improve.
- Distributor sell-through, inventory levels and price-adjustment claims; revenue from distributor sales is recognized on sell-through, not shipment.
- Developments in the IRS audit, including potential tax, interest and penalty exposure, and the timing of resolution.
- Appeal and trial outcomes in patent disputes, including any potential damages, injunctions, licensing needs or legal costs.
- SemiSouth’s financial condition and the company’s resulting lease, guaranty, IP-purchase and loan exposure.
- Foundry capacity and supply continuity, particularly given geographic concentration and the time needed to qualify alternatives.