Monolithic Power Systems, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. MPS designs and sells analog and mixed-signal semiconductors. It operates as one reportable segment and relies on third parties for wafer fabrication, assembly, and some testing.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / prior balance date | Change / context |
|---|---|---|---|
| Revenue | $51.5 million | $50.5 million | Up 2.0% year over year |
| Gross profit / margin | $27.4 million / 53.2% | $26.4 million / 52.3% | Margin improved 0.9 percentage point |
| Operating income / margin | $2.3 million / 4.5% | $3.2 million / 6.3% | Income down 28%; margin declined |
| Net income / diluted EPS | $2.5 million / $0.07 | $3.0 million / $0.08 | Net income down about 17% |
| Operating cash flow | $6.7 million | $6.2 million | Up about 8% |
| Cash and cash equivalents | $93.3 million | $75.1 million at Dec. 31, 2012 | Up $18.2 million |
| Short-term investments | $81.8 million | $85.5 million at Dec. 31, 2012 | Total cash and short-term investments: $175.0 million |
| Working capital | $206.6 million | $190.8 million at Dec. 31, 2012 | Current assets $234.4 million; current liabilities $27.8 million |
| Debt | No interest-bearing debt reported | Long-term liabilities include $5.4 million of non-current income tax liabilities |
Material changes and operating drivers
- DC-to-DC converter revenue rose 4.7% to $46.4 million, primarily on Mini-Monster demand; lighting-control revenue fell 18.1% to $5.0 million, reflecting weaker CCFL and WLED backlighting demand.
- Gross margin improved with product mix, partly offset by lower overhead capitalization. Research and development spending increased 9% to $12.1 million; selling, general and administrative expense rose 11% to $13.3 million, including higher stock-based compensation.
- Litigation expense was a net benefit of $0.3 million, versus $0.1 million expense a year earlier, largely reflecting $0.4 million received from Silergy. Total stock-based compensation increased to $4.7 million from $3.3 million.
- Cash from financing was $11.1 million, principally from employee option exercises and the employee stock purchase plan. Investing activities provided $0.3 million after investment sales and $3.4 million of equipment and software purchases.
Outlook, risks, and contingencies
- Management said existing cash, investments, and operating cash generation should meet liquidity needs for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Management’s revenue forecast led it to deem 2013 revenue-based performance targets for certain employee awards probable; this is not formal financial guidance. MPS expects to continue investing in product development and introducing products in existing and new categories.
- Business risks include semiconductor cyclicality, unpredictable customer orders and cancellations, customer and geographic concentration, and dependence on three wafer suppliers and outside assembly and test providers. One distributor represented 34% of Q1 revenue; 89% of revenue was attributable to sales to customers in Asia.
- MPS held $11.7 million of illiquid, government-backed student-loan auction-rate securities classified as long-term investments. Failed auctions could constrain liquidity or reduce fair value; management estimated a 24-month time to liquidity.
- The IRS examination of 2005–2007 U.S. tax years remains unresolved. The revised proposed adjustment could result in up to $10.5 million of federal tax, plus interest and penalties, if the IRS prevailed; the company disputes the proposed adjustment. Unrecognized tax benefits were approximately $13.7 million. A French tax audit also remained open.
- O2 Micro appealed a court judgment awarding MPS approximately $9.1 million plus interest and about $0.3 million in taxable costs. MPS had not recorded the award as income because payment had not been received. Other intellectual-property and commercial proceedings may require significant expense; the filing does not provide a clear estimate of possible losses.
- Outstanding purchase commitments were $16.4 million. MPS said it would likely exercise its option to purchase its Chengdu facility for approximately $1.8 million, but no purchase had been completed.
Important facts for investors to verify
- Whether the modest revenue growth and stronger DC-to-DC sales continue, and whether lighting-control demand stabilizes.
- How rising R&D, SG&A, and stock-based compensation affect operating margins and per-share results.
- Customer concentration, Asia exposure, and the availability and cost of outsourced manufacturing capacity.
- The collectability and timing of the O2 Micro award, remaining Silergy payments, and outcomes of other litigation.
- Developments in the IRS and French audits, and any effect on tax liabilities, cash flows, or the effective tax rate.
- The liquidity and valuation assumptions for auction-rate securities, as well as planned use of cash and the Chengdu purchase option.