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| POWI > SEC Filings for POWI > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
applications requiring more than 200 watts, which targets applications such as
main power supplies for flat-panel TVs, very high efficiency power supplies for
PCs and servers, as well as high-power LED streetlights and industrial controls.
We are applying significant research and development resources toward products
that will address additional high-power applications in the future.
The addressable market for our ICs has historically exhibited a modest growth
rate, as growth in the unit volumes of power supplies has largely been offset by
reductions in the average selling price of components in this market. Therefore,
our ability to penetrate the power supply market and gain market share is
generally the most important factor in determining the growth rate of our
revenues, income and cash flow. However, our financial results are also impacted
by external factors, particularly economic conditions and supply-chain dynamics.
Our net revenues for the fourth quarter of 2008 decreased by 21% compared with
the previous quarter, primarily as a result of weakening macroeconomic
conditions, which have caused a reduction in demand for end products that
incorporate our ICs. Due to further weakening in the global macroeconomic
environment, we expect our revenues for the first quarter of 2009 to decline
significantly compared to the fourth quarter of 2008, and we believe our
full-year revenues for 2009 are likely to be significantly less than our
revenues for 2008.
Our net revenues were $201.7 million, $191.0 million and $162.4 million in
2008, 2007 and 2006, respectively. The growth of revenue in each of these years
primarily reflects the increased penetration of our products into our
addressable markets. However, we believe that our revenue growth in 2007 and
2008 was negatively impacted by unfair competition from products that we believe
infringed several of our patents, and that in the absence of the infringing
products, our revenues would have grown more rapidly in each of those years. We
have taken action against these products by undertaking litigation against three
of our competitors, Fairchild Semiconductor, System General Corp., and BCD
Semiconductor Manufacturing Limited, as described in Part I, Item 3 of this
Annual Report on Form 10-K.
Our top ten customers, including distributors that resell to OEMs and
merchant power supply manufacturers, accounted for 60%, 62% and 58% of our net
revenues for 2008, 2007 and 2006, respectively. Our top customer, a distributor,
accounted for approximately 16%, 23%, and 23% of our net revenues for 2008, 2007
and 2006, respectively. In 2008, 2007 and 2006, international sales (meaning
sales outside of North and South America) comprised 96%, 95% and 93%,
respectively, of our net revenues.
Our gross profit, defined as net revenues less cost of revenues, was
$105.0 million, or 52% of net revenues, in 2008, compared to $103.5 million, or
54% of net revenues, in 2007 and $88.6 million, or 55% of net revenues, in 2006.
Because our industry is intensely price-sensitive, our gross margin, which is
gross profit divided by net revenues, is subject to change based on the relative
pricing of solutions that compete with ours. Also, because we purchase a large
percentage of our wafers from foundries located in Japan, our gross margin is
influenced by fluctuations in the exchange rate between the U.S. dollar and the
Japanese yen. All else being equal, a 10% change in the value of the U.S. dollar
compared to the Japanese yen would result in a corresponding change in our gross
margin of approximately one percentage point.
In recent years we have employed a number of tactics in an effort to maintain
or, when possible, improve our gross margin. These include reducing the cost of
producing our ICs through the implementation of more advanced manufacturing
processes, the migration of our testing operations to offshore sub-contractors,
and the negotiation of more favorable prices from our suppliers. We also seek to
increase the value of our products to our customers through the inclusion of
more advanced features and functionality. Finally, we have made an effort to
market our products to smaller, less price-sensitive customers. Through this
combination of methods, we have generally succeeded in improving our gross
margin in the recent past. Our gross margin may fluctuate in 2009 depending on a
variety of factors such as the intensity of competition, the cost of
manufacturing our products, the mix of high- and low-volume orders comprising
our revenue, production volume and the exchange rate between the U.S. dollar and
the Japanese yen.
Total operating expenses in 2008, 2007 and 2006 were $102.0 million,
$77.7 million and $84.8 million, respectively. The increased in operating
expenses in 2008 compared to 2007 was driven primarily by accelerated
stock-based compensation expense of $19.3 million, related to the tender offer
we conducted at the end of 2008 to repurchase outstanding "out-of-the-money"
stock options. In addition, in 2008 we had a write off of approximately
$2.0 million related to impairment of intangible assets.
Our quarterly and annual operating results are volatile and difficult to
predict. Our business is characterized by short-term orders and short customer
lead times, and a high percentage of our revenue comes from "turns business," or
orders booked and shipped within the same period. Customers typically can cancel
or reschedule orders without significant penalty. We plan our production and
inventory levels based on internal forecasts of customer demand, which is highly
unpredictable and can fluctuate substantially. As a result, our quarterly and
annual operating results may fluctuate significantly in the future.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis, we
evaluate our estimates, including those listed below. We base our estimates on
historical facts and various other assumptions that we believe to be reasonable
at the time the estimates are made. Actual results could differ from those
estimates.
Our critical accounting policies are as follows:
revenue recognition;
stock-based compensation;
estimating sales returns and allowances;
estimating distributor pricing credits;
estimating allowance for doubtful accounts;
estimating write-downs for excess and obsolete inventory;
income taxes; and
goodwill and intangible assets.
Our critical accounting policies are both important to the portrayal of our
financial condition and results of operations, and require us to make judgments
and estimates about matters that are inherently uncertain. A brief description
of these critical accounting policies is set forth below. For more information
regarding our accounting policies, see Note 2, "Summary of Significant
Accounting Policies," in our notes to consolidated financial statements.
Revenue recognition
Product revenues consist of sales to OEMs, merchant power supply
manufacturers and distributors. Shipping terms to our international OEMs and
merchant power supply manufacturers from our facility in California are
"delivered at frontier," commonly referred to as DAF. As such, title to the
product passes to the customer when the shipment reaches the destination country
and revenue is recognized upon the arrival of our product in that country.
Beginning in December 2005, shipping terms to our international OEMs and
merchant power supply manufacturers shipped from our facilities outside of the
United States are "EX Works" (EXW), meaning that title to the product transfers
to our customer and revenue is recognized upon shipment from our foreign
warehouses. Shipments to North and South American OEMs and merchant power supply
manufacturers are "FOB-point of origin," meaning that revenue is recognized upon
shipment, which is when title is passed to the customer.
Historically, between one-half and two-thirds of our total sales have been
made to distributors pursuant to agreements that allow certain rights of return
on our products held by these distributors. As a result, we defer the
recognition of revenue and the costs of revenues derived from sales to
distributors until such distributors resell our products to their customers. The
amount we defer is based on the level of actual inventory on hand at our
distributors as well as inventory that is in transit to them. The gross profit
that is deferred as a result of this policy is reflected as "deferred income on
sales to distributors" in our consolidated balance sheets.
Stock-based compensation
We adopted SFAS No. 123(R), Share-Based Payment, effective January 1, 2006.
Under the provisions of SFAS No. 123(R), we recognize the fair value of
stock-based compensation in financial statements over the requisite service
period of the individual grants, which generally equals a four year vesting
period. We have elected the modified prospective transition method for adopting
SFAS No. 123(R), under which the provisions of SFAS No. 123(R) apply to all
awards granted or modified after the date of adoption. The unrecognized expense
of awards not yet vested at the date of adoption is
recognized in our financial statements in the periods after the date of adoption
using the same value determined under the original provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. We recognize compensation expense for
the stock option awards granted subsequent to December 31, 2005 on a
straight-line basis over the requisite service period. We use estimates in
determining the fair value of these awards. Changes in these estimates could
result in changes to our compensation charges.
Estimating sales returns and allowances
Net revenue consists of product revenue reduced by estimated sales returns
and allowances. To estimate sales returns and allowances, we analyze, both when
we initially establish the reserve, and then each quarter when we review the
adequacy of the reserve, the following factors: historical returns, current
economic trends, levels of inventories of our products held by our distributor
customers, and changes in customer demand and acceptance of our products. This
reserve represents a reserve of the gross profit on estimated future returns and
is reflected as a reduction to accounts receivable in the consolidated balance
sheets. Increases to the reserve are recorded as a reduction to net revenue
equal to the expected customer credit memo and a corresponding credit is made to
cost of revenues equal to the estimated cost of the product to be returned. The
net difference, or gross profit, is recorded as an addition to the reserve.
Because the reserve for sales returns and allowances is based on our judgments
and estimates, particularly as to future customer demand and level of acceptance
of our products, our reserves may not reflect actual sales returns and other
allowances. If our reserves do not reflect actual sales returns and other
allowances, our future net revenues and cost of revenues would be affected, if
our reserves were not adequate to reflect actual sales returns and other
allowances.
Estimating distributor pricing credits
Historically, between one-half and two-thirds of our total sales have been
made to distributors. Frequently, distributors need a cost lower than the
standard distribution price to win business. After the distributor ships product
to its customer under an approved transaction, the distributor submits a "ship
and debit" claim to us to adjust its cost from the standard price to the
approved lower price. After verification by us, a credit memo is issued to the
distributor to adjust the sell-in price from the standard distribution price to
the approved lower price. We maintain a reserve for these credits that appears
as a reduction to accounts receivable in our consolidated balance sheets. Any
increase in the reserve results in a corresponding reduction in our net
revenues. To establish the adequacy of our reserves, we analyze historical ship
and debit amounts and levels of inventory in the distributor channels. If our
reserves are not adequate, our net revenues could be adversely affected.
From time to time we reduce our distribution list prices. We give our
distributors protection against these price declines in the form of credits on
products they hold in inventory. These credits are referred to as "price
protection." Since we do not recognize revenue until the distributor sells the
product to its customers, we generally do not need to provide reserves for price
protection. However, in rare instances we must consider price protection in the
analysis of reserve requirements, as there may be a timing gap between a price
decline and the issuance of price protection credits. If a price protection
reserve is required, we will maintain a reserve for these credits that appears
as a reduction to accounts receivable in our consolidated balance sheets. Any
increase in the reserve results in a corresponding reduction in our net
revenues. We analyze distribution price declines and levels of inventory in the
distributor channels in determining the reserve levels required. If our reserves
do not reflect actual credits, our future net revenues would be affected, which
could be adversely affected if our reserves were not adequate to reflect actual
credits.
Estimating allowance for doubtful accounts
We maintain an allowance for losses we may incur as a result of our
customers' inability to make required payments. Any increase in the allowance
for doubtful accounts results in a corresponding increase in our general and
administrative expenses. In establishing this allowance, and in evaluating the
adequacy of the allowance each quarter, we analyze historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms. If the financial condition of one or more
of our customers deteriorates, resulting in their inability to make payments, or
if we otherwise underestimate the losses we incur as a result of our customers'
inability to pay us, we could be required to increase our allowance for doubtful
accounts which could adversely affect our operating results.
Estimating write-downs for excess and obsolete inventory
When evaluating the adequacy of our valuation adjustments for excess and
obsolete inventory, we identify excess and obsolete products and also analyze
historical usage, forecasted production based on demand forecasts, current
economic trends, and historical write-offs. This write-down is reflected as a
reduction to inventory in the consolidated balance sheets, and an increase in
cost of revenues. If actual market conditions are less favorable than our
assumptions, we may be required to take additional write-downs, which could
adversely impact our cost of revenues and operating results.
Income taxes
Income tax expense is an estimate of current income taxes payable or
refundable in the current fiscal year based on reported income before income
taxes. Deferred income taxes reflect the effect of temporary differences and
carry-forwards that are recognized for financial reporting and income tax
purposes. These deferred taxes are measured by applying currently enacted tax
laws. We recognize valuation allowances, which reduce deferred tax assets to the
amount that we estimate will be more likely than not realized, based upon
available evidence and management judgment. We limit the deferred tax assets
recognized related to certain stock based compensation of our officers to
amounts that we estimate will be deductible in future periods based upon the
provisions of the Internal Revenue Code Section 162(m). As of December 31, 2008,
we maintained a valuation allowance with respect to certain of our deferred tax
assets relating primarily to tax credits in certain non-U.S. jurisdictions, that
we believe are not likely to be realized. In the event that we determine, based
on available evidence and management judgment, that all or part of the net
deferred tax assets will not be realized in the future, we would record a
valuation allowance in the period the determination is made. In addition, the
calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of complex tax laws. Resolution of
these uncertainties in a manner inconsistent with our expectations could have a
material impact on our results of operations and financial position.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48),
which creates a single model to address accounting for uncertainty in tax
positions by prescribing a minimum recognition threshold that a tax position is
required to meet before being recognized in the financial statements. FIN 48,
which we adopted effective January 1, 2007, establishes a two-step approach for
evaluating tax positions. The first step, recognition, occurs when a company
concludes (based solely on the technical aspects of the tax matter) that a tax
position is more likely than not to be sustained upon examination by a taxing
authority. The second step, measurement, is only considered after step one has
been satisfied and measures any tax benefit at the largest amount that is deemed
more likely than not to be realized upon ultimate settlement of the uncertainty.
Tax positions that fail to qualify for initial recognition are recognized in the
first subsequent interim period that they meet the more likely than not
standard, when they are resolved through negotiation or litigation with the
taxing authority or upon the expiration of the statute of limitations. The
application of tax laws and regulations is subject to legal and factual
interpretation, judgment and uncertainty. Tax laws and regulations themselves
are subject to change as a result of changes in fiscal policy, changes in
legislation, evolution of regulations and court rulings. Therefore, the actual
liability for U.S. or foreign taxes may be materially different from our
estimates, which could result in the need to record additional tax liabilities
or potentially to reverse previously recorded tax liabilities.
California Assembly Bill 1452. On September 30, 2008, California enacted
Assembly Bill 1452 which among other provisions, suspends net operating loss
deductions for 2008 and 2009 and extends the carryforward period of any net
operating losses not utilized due to such suspension; adopts the federal 20-year
net operating loss carryforward period; phases-in the federal two-year net
operating loss carryback periods beginning in 2011 and limits the utilization of
tax credits to 50 percent of a taxpayer's taxable income. This change in law did
not have a material impact to our effective tax rate or tax provision in the
fourth quarter, but will result in approximately $0.3 million of cash tax
obligations for the year ended December 31, 2008.
Emergency Economic Stabilization Act of 2008. The "Emergency Economic
Stabilization Act of 2008," which contains the "Tax Extenders and Alternative
Minimum Tax Relief Act of 2008", was signed into law on October 3, 2008. Under
the Act, the research credit was retroactively extended for amounts paid or
incurred after December 31, 2007 and before January 1, 2010. The effects of the
change in the tax law were recognized in our fourth quarter, which is the
quarter in which the law was enacted. As a result of the reinstatement of the
federal research credit, we recorded a benefit of approximately $1.0 million
(net of reserves in accordance with FIN 48) in the fourth quarter of 2008.
Goodwill and intangible assets
As of December 31, 2007 we recorded goodwill in the amount of $1.8 million as
a result of our acquisition of Potentia Semiconductor Corporation. In accordance
with SFAS No. 142, Goodwill and Other Intangible Assets, we evaluate goodwill
for impairment on an annual basis, or as other indicators exist for a potential
impairment. The provisions of SFAS No. 142 require that we perform a two-step
impairment test. In the first step, we compare the implied fair value of our
single reporting unit to its carrying value, including goodwill. If the fair
value of our reporting unit exceeds the carrying amount no impairment adjustment
is required. If the carrying amount of our reporting unit exceeds the fair
value, step two will be completed to measure the amount of goodwill impairment
loss, if any exists. If the carrying value of our single reporting unit's
goodwill exceeds its implied fair value, then we record an impairment loss equal
to the difference, but not in excess of the carrying amount of the goodwill. We
evaluated goodwill for impairment in 2008, and deemed that no impairment existed
as of December 31, 2008.
SFAS No 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We review long-lived assets, such as acquired
intangibles and property and equipment, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. We measure recoverability of assets to be held and used by a
comparison of the carrying amount of an asset to estimate undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, we recognize an impairment charge
by the amount by which the carrying amount of the asset exceeds the fair value
of the asset. As a result of our ongoing monitoring of asset impairment we
performed an analysis of intangible assets in the fourth quarter of 2008, as a
result of this analysis we concluded that three of our intangible assets were
impaired. We recorded an impairment charge of $2.0 million, as of December 31,
2008. The impairment charge is reflected in a separate caption in our
consolidated statement of income line item "Intangible asset impairment". Please
see note 8 of our notes to consolidated financial statements for further
details.
Results of Operations
The following table sets forth certain operating data in dollars, as a
percentage of total net revenues and the increase (decrease) over prior periods
for the periods indicated (in thousands).
. . .
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