Monolithic Power Systems, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited results; comparisons are with Q1 2013 unless stated otherwise. MPS designs and sells fabless analog and mixed-signal semiconductors.
Financial results
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $60.1 million | $51.5 million; up 16.7% |
| Gross profit / gross margin | $32.1 million / 53.4% | $27.4 million / 53.2% |
| Operating income | $9.1 million | $2.3 million |
| Net income | $9.0 million | $2.5 million |
| Diluted EPS | $0.23 | $0.07 |
| Operating cash flow | $12.0 million | $6.7 million |
| Capital expenditures | $4.5 million | $3.4 million |
Gross margin improved slightly, primarily from a higher-margin product mix, partly offset by lower overhead capitalization. Research and development expense rose 28.7% to $15.6 million; SG&A rose 21.5% to $16.1 million. Stock-based compensation was $7.6 million, compared with $4.6 million in the cash-flow reconciliation for Q1 2013.
Revenue from DC-to-DC products was $53.9 million, up 16.1%; lighting-control revenue was $6.1 million, up 21.8%. China revenue was $36.9 million, compared with $26.8 million. Asia accounted for approximately 88% of revenue.
Balance sheet and liquidity
At March 31, 2014, cash and cash equivalents were $88.9 million, short-term investments $139.8 million, and long-term investments $9.8 million: $238.5 million in total cash, cash equivalents and investments. Working capital was $262.6 million. Total assets were $374.6 million and total liabilities $40.0 million. The balance sheet reports no borrowings; the filing does not describe a debt facility. Current liabilities were $30.6 million.
Cash and cash equivalents declined $12.3 million during the quarter. Investing activities used $19.2 million, including net short-term investment purchases and $4.5 million of property and equipment purchases. Financing activities used $4.8 million, reflecting $11.4 million of share repurchases partly offset by employee equity proceeds. Management said existing cash, investments and operating cash generation should meet liquidity needs for the next 12 months.
Material changes, outlook and risks
- Litigation benefit: The Supreme Court declined to hear O2 Micro’s appeal in March. MPS released the $9.5 million liability previously recorded for the award and recognized it as a Q1 litigation benefit, net of $0.5 million of final-resolution legal fees. The $8.7 million net litigation benefit materially boosted reported operating income and net income; it is not an indication of recurring operating performance.
- Repurchases: MPS repurchased 323,789 shares for $11.4 million in Q1. The $100 million program runs through June 30, 2015; $68.0 million remained authorized at quarter-end.
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management describes the semiconductor business as cyclical and seasonal, notes that orders can be canceled or rescheduled with limited notice, and plans continued product development. It expects R&D spending to rise in absolute dollars over time. Management also said it would likely exercise its approximately $1.7 million option to purchase its Chengdu manufacturing facility.
- Key exposures: Customer and geographic concentration are significant: the largest distributor represented 26% of revenue, while Asia represented approximately 88%. Risks include semiconductor cyclicality, falling selling prices, customer order volatility, third-party manufacturing capacity and yields, litigation, and foreign-currency and operational exposure in Asia.
- Tax matters: The IRS audit of 2005–2007 returns includes a disputed potential federal tax adjustment of up to $10.5 million, plus possible interest and penalties. No resolution was reached at the March 2014 Appeals meeting; another meeting was scheduled for May. MPS said it believed the audit resolution would not significantly affect its financial position, results or cash flows. Unrecognized tax benefits were $15.2 million.
- Investments and controls: The portfolio included $9.8 million of illiquid student-loan auction-rate securities, valued using significant unobservable inputs. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarter-over-quarter change in internal control over financial reporting.
Investor verification priorities
- Separate recurring operating performance from the $8.7 million net litigation benefit when assessing earnings and margins.
- Track distributor and Asian-market concentration, especially the largest distributor’s sales and receivables exposure.
- Monitor revenue trends, average selling prices, product mix, and rising R&D and SG&A costs.
- Check developments in the IRS examination, including the potential adjustment, interest and penalties, and any effect on tax reserves or cash.
- Review liquidity and valuation disclosures for auction-rate securities, and monitor planned capital spending, supplier commitments and share repurchases.