Power Integrations, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The unaudited results are compared with Q1 2011. Power Integrations designs and sells high-voltage analog and mixed-signal integrated circuits and diodes, primarily for AC-DC power conversion.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $71.8 million | $76.8 million | Down about 6% |
| Gross profit / margin | $34.6 million / 48.2% | $36.4 million / 47.4% | Margin up 0.8 percentage points |
| Operating expenses | $25.9 million | $24.7 million | Up about 5% |
| Operating income / margin | $8.7 million / 12.2% | $11.7 million / 15.2% | Income down about 25% |
| Net income / margin | $7.5 million / 10.4% | $9.9 million / 12.8% | Income down about 24% |
| Diluted EPS | $0.25 | $0.33 | Down $0.08 |
| Operating cash flow | $21.6 million | $5.7 million | Up $15.9 million |
Cash flow and liquidity: Cash and cash equivalents were $147.2 million at March 31, 2012; short-term marketable securities were $66.9 million. Together these totaled approximately $214.0 million. Working capital was $248.2 million. Cash increased $7.3 million during the quarter. Investing activities used $19.5 million, including an $18.0 million loan to SemiSouth; financing activities provided $5.2 million, primarily from employee stock plans, partly offset by $1.4 million of dividends.
Debt and credit: The company reported no bank advances outstanding at quarter-end. Its unsecured credit facility was $50 million then; availability increased to $65 million on April 2, 2012. A $15 million letter of credit supported a contingent SemiSouth-related commitment. Long-term income taxes payable were $35.2 million.
Material changes and business developments
- Revenue declined mainly because of lower sales into communications, industrial and computer end markets, reflecting broader semiconductor demand trends. Gross margin improved as negotiated wafer pricing reduced manufacturing costs; lower production volumes partly offset this benefit.
- R&D expense rose to $10.6 million from $10.0 million, mainly from higher headcount and product-development spending. G&A increased to $7.1 million from $6.5 million, primarily due to Concept acquisition-related costs. Operating expenses grew despite lower revenue.
- On March 30, the company agreed to acquire Swiss-based CT-Concept Technologie AG for approximately $115.8 million, net of assumed cash. The acquisition closed May 1, after quarter-end; the price is subject to a net-asset adjustment capped at approximately $7.7 million. The filing says purchase accounting was still in progress.
- The company canceled its $30 million share-repurchase authorization in connection with the Concept transaction. It continued its quarterly dividend of $0.05 per share.
- Investment securities were reclassified from held-to-maturity to available-for-sale after the company changed its investment policy to permit sales before maturity, including to fund acquisitions and strategic investments.
Outlook, risks and contingencies
- Management expected gross margin to improve in Q2 2012 compared with Q1, citing further product-cost improvements. It did not provide numerical revenue or earnings guidance. Management believed existing liquidity and operating cash generation would meet working-capital and other cash needs for at least 12 months.
- Key risks include unpredictable quarterly demand and order timing, pricing pressure and competition, reliance on third-party wafer suppliers, Japanese-yen exposure in supplier pricing, and international sales concentration. International sales were 96% of revenue; approximately 71% of product sales were through distributors, and the top two customers accounted for about 32% of revenue.
- The IRS proposed material tax adjustments for 2003–2006 related primarily to intercompany R&D cost sharing; 2007–2009 were also under audit. The company disputed the IRS position, had recorded reserves, and warned that an adverse outcome could materially affect results. Resolution was not expected within the next year.
- Patent litigation remains significant and costly, with outcomes and potential losses not estimable from the filing. The Fairchild appeal of a prior damages award was pending. In a separate Fairchild case, an April 2012 jury verdict found infringement of two company patents and found one Fairchild patent infringed by a limited set of company products; the company stated those sales represented up to about 0.1% of revenue and planned post-trial challenges. Fairchild also filed a new complaint on May 1, 2012.
- Concentration and credit exposure relating to SemiSouth increased with the $18 million note, the existing lease-line financing, and the purchase option. The note’s reported carrying value was approximately $12.0 million after an interest discount. The company disclosed no further funding commitment at March 31.
Most important facts for investors to verify
- Whether revenue demand and operating margins recover after the Q1 decline, and whether management’s expected Q2 gross-margin improvement materializes.
- Concept’s final purchase price, purchase accounting, integration costs and contribution to results following its May 1 closing.
- The collectability and valuation of the SemiSouth note and lease receivable, and the company’s exposure under related options and commitments.
- Developments in the IRS audit and patent litigation, including any potential cash payments, damages, injunctions or restrictions on product sales.
- Distributor sell-through, price-adjustment reserves and customer concentration, which affect the timing and amount of recognized revenue.