Monolithic Power Systems, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company designs and sells fabless analog and mixed-signal semiconductors, primarily DC-to-DC converters. Figures below are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $57.7 | $58.6 | $109.2 | $109.1 |
| Gross profit / margin | $30.9 / 53.6% | $31.2 / 53.2% | $58.3 / 53.4% | $57.6 / 52.8% |
| Operating income / margin | $4.9 / 8.5% | $6.8 / 11.5% | $7.2 / 6.6% | $10.0 / 9.2% |
| Net income / diluted EPS | $5.5 / $0.14 | $6.6 / $0.18 | $8.0 / $0.21 | $9.6 / $0.27 |
- Q2 revenue fell 1.5% year over year; first-half revenue was essentially flat, up 0.1%. DC-to-DC converters were 87.6% of Q2 revenue. First-half lighting-control revenue declined 10.1%.
- Gross margin improved year over year, which management attributed mainly to product mix, partly offset by lower overhead capitalization. Operating income declined as operating expenses rose.
- Q2 SG&A increased 13.4% year over year to $13.8 million; first-half SG&A rose 12.1% to $27.1 million. Higher stock-based compensation was a principal factor. Total stock-based compensation was $5.2 million in Q2 and $9.9 million for the first half.
- First-half operating cash flow was $22.2 million, versus $12.3 million a year earlier. Investing used $13.4 million, including $10.8 million for property and equipment; financing provided $17.4 million, primarily from employee stock-option exercises and stock purchases.
- At June 30, cash and cash equivalents were $101.7 million and short-term investments were $87.9 million; including $11.7 million of long-term auction-rate securities, cash and investments totaled $201.3 million. Working capital was $219.3 million. Total liabilities were $38.6 million, including $1.0 million of long-term liabilities; the filing reports no conventional debt balance.
Changes, outlook and material matters
- Despite nearly flat first-half revenue, net income declined 16.7% and diluted EPS fell from $0.27 to $0.21. First-half operating expenses increased to $51.1 million from $47.6 million, with SG&A growth and higher R&D spending weighing on operating results.
- Management said product introductions, market expansion, market-share gains, customer diversification and securing manufacturing capacity are important to growth. It emphasized that semiconductor cyclicality, short order lead times and customers’ ability to cancel or reschedule orders make revenue difficult to forecast. The filing provides no specific numerical revenue or earnings guidance.
- Management believes operating cash generation and available cash and short-term investments will meet liquidity requirements for the next 12 months. About $64.3 million of cash and short-term investments was held by international subsidiaries; repatriation to the U.S. could incur U.S. taxes, and management intended to reinvest those funds abroad.
- Customer and geographic concentration are significant: one distributor represented 31% of Q2 revenue and 32% of first-half revenue; Asia represented 91% and 90%, respectively. Three foundries supply wafers, and outstanding purchase commitments were $21.6 million at quarter-end, up from $15.5 million at year-end.
- Liquidity risk remains in $11.7 million of illiquid, government-backed student-loan auction-rate securities, valued using significant unobservable inputs. The company said continued failed auctions could constrain liquidity or reduce value.
- The IRS continued to dispute a transfer-pricing/cost-sharing matter for 2005–2007; the maximum potential federal tax adjustment if the IRS prevails was $10.5 million, plus possible interest and penalties. The company reported $13.7 million of unrecognized tax benefits and said it was contesting the matter. A French tax audit was also ongoing.
- An approximately $9.1 million attorneys’ fees and costs award against O2 Micro, plus interest and previously awarded taxable costs, remained under appeal and was not recorded as income because payment had not been received. Silergy settlement payments were completed, with no further amount due at June 30.
- After quarter-end, the board authorized repurchases of up to $100 million of common stock over two years beginning August 9, 2013. The company also adopted a deferred compensation plan effective July 1, 2013, with no company contributions or guaranteed investment returns.
- Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales stabilize or grow, particularly in DC-to-DC products, and whether weakness in lighting-control products persists.
- Whether higher SG&A and stock-based compensation continue to pressure operating margins and per-share earnings.
- Exposure to the largest distributor, Asia-based demand, and the availability and cost of wafer and assembly capacity.
- Recoverability and liquidity of auction-rate securities, and the outcome and potential financial effects of the IRS and French tax matters.
- Execution and funding of the $100 million repurchase authorization, including its effect on cash, share count and future liquidity.