Monolithic Power Systems, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. MPS designs and sells fabless analog and mixed-signal semiconductors, principally for computing, consumer electronics, communications, and industrial markets. Figures below are in millions of dollars except per-share amounts and percentages.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $53.0 | $65.8 | $149.1 | $171.8 |
| Gross profit / margin | $27.8 / 52.5% | $36.0 / 54.7% | $76.7 / 51.4% | $97.7 / 56.9% |
| Operating income / margin | $5.1 / 9.5% | $13.4 / 20.4% | $11.0 / 7.3% | $26.5 / 15.4% |
| Net income | $5.5 | $13.2 | $10.8 | $26.0 |
| Diluted EPS | $0.16 | $0.35 | $0.31 | $0.68 |
| Operating cash flow | Not separately provided | Not separately provided | $30.4 | $38.3 |
For the nine months, capital expenditures were $18.8 million. Cash and cash equivalents were $93.0 million at September 30, 2011; short-term investments were $67.9 million and working capital was $178.0 million. Total liabilities were $30.1 million. The balance sheet reports no borrowings; it lists $5.0 million of non-current income tax liabilities. Cash, cash equivalents, and short- and long-term investments totaled approximately $176.6 million, including illiquid auction-rate securities described below.
Changes versus prior periods
- Q3 revenue declined 19.6% year over year; nine-month revenue declined 13.2%. Management attributed the reduction mainly to lower DC-to-DC converter sales, including business lost from Korean customers after capacity shortages and product shortages in 2010.
- Q3 gross margin fell 2.2 percentage points year over year; nine-month margin fell 5.5 points. MPS cited lower selling prices, product mix, higher inventory reserves, and higher product costs.
- Net income declined to $5.5 million in Q3 from $13.2 million, and to $10.8 million for nine months from $26.0 million. Operating expenses were broadly stable in Q3, but lower revenue and gross margin reduced operating income.
- Nine-month operating cash flow decreased to $30.4 million from $38.3 million. Cash increased by $45.0 million over the period, aided by $46.4 million of investing cash inflows, while financing used $32.2 million, principally for share repurchases.
- Product-family revenue declined year over year in the quarter: DC-to-DC converters 19.5%, lighting controls 14.4%, and audio amplifiers 60.3%. DC-to-DC converters remained about 84% of revenue.
Outlook, risks, and unusual items
- Outlook and liquidity: The filing gives no specific numerical revenue or earnings guidance. Management said operating cash generation and existing cash and short-term investments should meet liquidity needs for at least the next 12 months. It also cautioned that semiconductor cyclicality, short order lead times, and customer cancellations make revenue difficult to forecast.
- Manufacturing and customer exposure: MPS relies on third parties for wafer production, assembly, and testing; it identifies supplier capacity constraints and dependence on two wafer suppliers as risks. Approximately 90% of Q3 revenue was attributable to sales to customers in Asia. The two largest distributors represented approximately 31% of Q3 revenue, and one customer represented 21%.
- Tax examination: The IRS proposed adjustments concerning a 2004 cost-sharing agreement. Under the largest proposed methodology, potential federal and state tax liabilities could increase by up to $37.0 million, plus interest and penalties. MPS disputes the position and plans to contest it; the amount and outcome are uncertain. The IRS also proposed reducing certain historical R&D credits.
- Legal matters: Two shareholder derivative suits filed in September 2011 allege fiduciary-duty breaches related to approval of 2010 executive compensation. They were at a preliminary stage, with no responses or discovery reported. MPS also faces ordinary-course intellectual-property litigation; management said outcomes and potential material effects could not be assessed.
- Investments: MPS held $15.7 million of auction-rate securities at fair value, with $16.4 million face value. These securities remained illiquid, with timing of renewed liquidity unclear; management estimated it could take about two years. The company also highlighted potential credit risk in two securities and sensitivity of valuations to collateral, liquidity, and market conditions. Management reported no impairment of U.S. Treasury or agency holdings following the U.S. sovereign credit-rating downgrade.
- Capital allocation and facilities: The company repurchased 2.49 million shares for $38.5 million during 2011 and reported completing its $70 million repurchase authorization by June. It purchased its San Jose headquarters for $11.0 million in August. Vendor purchase commitments were $13.8 million at quarter-end.
Most important facts for investors to verify
- Whether revenue and gross margins stabilize after the declines, particularly in DC-to-DC converters and Korean customer accounts.
- Whether manufacturing capacity, product costs, and inventory reserves improve, and whether suppliers can meet demand at acceptable yields and prices.
- The eventual IRS audit outcome, including the proposed exposure of up to $37.0 million plus interest and penalties and the separate R&D credit adjustments.
- The recoverability and timing of liquidity for the auction-rate securities, as well as any changes in their valuation or credit risk.
- Developments in the shareholder derivative and intellectual-property cases and any resulting costs or business restrictions.
- Whether the reported 12-month liquidity assessment remains appropriate as operating performance, capital spending, and working capital change.