Power Integrations, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited consolidated results. The company designs and markets high-voltage analog integrated circuits, principally for AC-DC power supplies; it reports as one business segment.
Financial performance and position
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2009 period unless stated otherwise.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $75.5 | $60.0 | $226.8 | $149.6 |
| Gross profit / margin | $39.0 / 51.7% | $29.1 / 48.5% | $116.4 / 51.3% | $74.3 / 49.6% |
| Operating income / margin | $15.3 / 20.1% | $11.1 / 18.4% | $49.0 / 21.6% | $17.4 / 11.5% |
| Net income / margin | $12.6 / 16.7% | $9.2 / 15.2% | $40.5 / 17.9% | $14.1 / 9.3% |
| Diluted EPS | $0.43 | $0.32 | $1.38 | $0.50 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $65.6 | $35.3 |
- Growth and margins: Revenue rose 26% in Q3 and 52% over nine months. Management attributed growth to stronger demand and increased market penetration. Gross margin improved, principally from product/end-market mix and lower unit costs as production volumes increased.
- Expenses: Nine-month operating expenses were $67.5 million versus $56.9 million. Higher staffing and development costs, including acquired R&D personnel, and higher legal expenses contributed. Q3 expenses were $23.8 million versus $18.1 million.
- Liquidity: At September 30, cash and cash equivalents were $164.1 million, short-term investments $16.0 million and long-term investments $44.0 million; together approximately $224.1 million. Working capital was approximately $208.0 million. Current assets were $249.9 million and current liabilities $41.9 million.
- Debt and obligations: The balance sheet reports no borrowings. Long-term income taxes payable were $27.5 million; management separately reported contingent tax liabilities of $28.3 million and said settlement timing was uncertain, with payment not expected within 12 months.
- Cash uses and balance-sheet changes: Nine-month investing cash use was $36.5 million, including $21.8 million of property and equipment purchases, $8.6 million for an acquisition and $6.8 million in notes to third parties. Financing cash flow was approximately neutral: $14.0 million of share repurchases, $4.2 million of dividends, offset largely by employee-plan share issuance. Inventory increased to $49.1 million from $26.2 million at year-end 2009.
Material changes versus prior period
- Despite Q3 growth, management reported that demand began slowing in mid-2010, citing macroeconomic weakness and excess inventory in the supply chain. Inventory build and distributor shipments are relevant to assessing the sustainability of reported growth and cash generation.
- Revenue mix shifted toward LinkSwitch (39% of Q3 revenue versus 32% a year earlier) and industrial end markets (22% versus 17%); TinySwitch and computer-market shares declined.
- The company acquired an early-stage R&D business in August for a stated purchase price of $11.5 million. It allocated $6.2 million to goodwill, $4.7 million to in-process R&D and $0.6 million to fixed assets; $0.3 million of acquisition costs was expensed.
- Deferred revenue from distributor sales rose to $28.7 million from $17.6 million at year-end 2009; related deferred costs rose to $13.9 million from $8.6 million. Distributor sales use sell-through revenue recognition.
Outlook, risks and unusual items
- Q4 outlook: As of October 27, 2010, management expected revenue of $67–$73 million, gross margin of 49%–50%, and operating expenses of $24–$25 million. Management expected lower margin, citing anticipated product mix, higher gold costs and yen strength.
- Demand and supply: Customer orders may be canceled or rescheduled without significant penalty. Management noted shortages and extended lead times, while warning that prior double-ordering may lead to cancellations as supply catches up. Reliance on third-party foundries and assembly suppliers, including Japanese wafer sourcing, creates capacity, cost and currency exposure.
- Customer and geographic concentration: The top ten customers represented 61% of nine-month revenue; two distributors each accounted for at least 10%. Approximately 95% of nine-month revenue was international, with Asia a major market.
- Litigation: In the Fairchild patent case, the court found willful infringement in July 2010; motions concerning enhanced damages and attorneys’ fees remained pending, and Fairchild intended to appeal. No litigation award was recognized in the financial statements. Separate patent matters include Fairchild/SG proceedings and Chinese claims seeking approximately $17 million in damages and an injunction. The company says it intends to contest the claims; outcomes are uncertain.
- Taxes: The IRS dispute concerns research-and-development cost-sharing and remains under audit for 2004–2006 after disagreement over proposed adjustments for 2002–2003. An adverse resolution could increase taxes, penalties or interest.
- Subsequent events: On October 22, the company invested $7.0 million in a private technology company, converting $5.0 million of notes to equity and paying $2.0 million additional cash; it also prepaid $10.0 million for technology royalties. It disclosed plans for up to a $10.0 million equipment lease line and a building purchase/leaseback, and a potential acquisition obligation subject to performance conditions. The potential obligation was valued at zero at September 30. The board declared quarterly 2011 dividends of $0.05 per share.
- Other: The company completed its $25 million-authorized repurchase program in the first half of 2010. Disclosure controls were reported effective at quarter-end, with no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether the Q4 revenue and margin outlook was achieved, particularly given the reported mid-year demand slowdown and inventory build.
- Distributor sell-through, deferred revenue and pricing-credit reserves, as these affect the timing and quality of recognized revenue.
- Inventory levels, foundry capacity and the effect of gold prices and yen movements on margins.
- Developments and potential financial exposure in the Fairchild/SG patent cases, Chinese litigation and IRS tax dispute.
- Terms, funding commitments and potential acquisition triggers associated with the October technology-company investment and related lease and royalty arrangements.