Monolithic Power Systems, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited results are compared with the corresponding 2013 periods. MPS designs and markets analog and mixed-signal semiconductors; it operates as one reportable segment and is fabless.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $68.4 million | $57.7 million | $128.5 million | $109.2 million |
| Gross margin | 54.2% | 53.6% | 53.9% | 53.4% |
| Operating income | $6.6 million | $4.9 million | $15.7 million | $7.2 million |
| Net income | $6.4 million | $5.5 million | $15.4 million | $8.0 million |
| Diluted EPS | $0.16 | $0.14 | $0.39 | $0.21 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $37.6 million | $22.2 million |
- Q2 revenue increased 18.6% year over year, driven mainly by DC-to-DC products, up 21.0%; lighting-control revenue rose 1.2%. First-half revenue increased 17.7%.
- Gross margin improved modestly, attributed to better test-overhead absorption in Q2 and cost improvements and product mix for the first half; higher inventory reserves partly offset gains.
- First-half net income growth was substantially affected by an $9.5 million O2 Micro litigation award recognized as a litigation benefit after the Supreme Court declined review. The company also incurred $0.5 million in final-resolution legal fees. Q2 itself recorded $0.3 million of net litigation expense.
- First-half operating expenses included $16.0 million of stock-based compensation, versus $9.9 million in the prior-year period. SG&A rose 21.9% for the half, faster than revenue.
Financial position and capital allocation
- At June 30, cash and cash equivalents were $107.9 million, short-term investments $133.0 million, and long-term investments $9.8 million: $250.7 million in total cash, cash equivalents and investments. Working capital was $264.3 million, up from $253.6 million at year-end 2013.
- Total liabilities were $52.0 million, primarily current liabilities and tax liabilities; the filing reports no borrowings or debt balance. Current liabilities were $42.0 million.
- First-half investing cash outflow was $16.4 million, including $6.0 million in property and equipment purchases and net purchases of short-term investments. Financing cash outflow was $14.4 million, including $23.8 million in share repurchases, partly offset by equity-plan proceeds.
- The company repurchased 646,000 shares for $23.8 million during the first half; $55.6 million remained under its $100 million authorization, which runs through June 30, 2015. It began a quarterly dividend program and declared $0.15 per share for Q2, totaling $5.8 million, paid July 15.
- Management said existing cash, investments and operating cash generation should meet liquidity needs for the next 12 months. About $74.5 million of cash and $17.0 million of short-term investments were held internationally; repatriating funds for U.S. use could incur U.S. taxes.
Outlook, risks and unusual items
- No quantitative revenue, earnings or margin guidance is provided. Management expects to pursue new products and markets, while noting semiconductor cyclicality, seasonality, short order lead times, and customer cancellation or rescheduling make forecasts difficult.
- In July 2014, after quarter-end, MPS acquired Sensima Technology SA, a magnetic-sensor developer. Consideration included $11.7 million upfront cash, up to $8.9 million contingent cash earn-out, and employee awards of $1.7 million in time-based RSUs and up to $8.0 million in performance-based RSUs. Sensima’s results are not included in this quarter; purchase accounting remained incomplete at filing.
- Customer and geographic concentration are notable: Asia represented 89% of Q2 revenue, and one distributor accounted for 26%; that distributor also represented 33% of accounts receivable at quarter-end. MPS depends on third-party wafer, assembly and test providers and reported $26.5 million of outstanding purchase commitments.
- The investment portfolio included $9.8 million of illiquid student-loan auction-rate securities, valued using Level 3 assumptions. The IRS examination of 2005–2007 returns includes a potential federal tax adjustment of up to $10.5 million, plus interest and penalties; management believes the audits are unlikely to have a material impact. Unrecognized tax benefits totaled $15.5 million.
- Other disclosed risks include industry competition and declining average selling prices, inventory and supply constraints, intellectual-property litigation, foreign-exchange and Asia-related risks, and dependence on key personnel. Management reported disclosure controls effective at reasonable assurance and no material quarter changes in internal control over financial reporting.
Important facts for investors to verify
- How much of first-half earnings improvement reflects recurring operations versus the one-time O2 Micro litigation benefit.
- Whether revenue growth, gross-margin improvement and product demand persist, particularly given lower average selling prices and distributor concentration.
- Cash conversion and inventory exposure, supplier capacity and the increase in purchase commitments.
- Liquidity and valuation risks associated with auction-rate securities, and the status and possible outcome of the IRS audit.
- Sensima’s final purchase accounting, contingent consideration and subsequent contribution to results; also the sustainability of dividends and repurchases.