Monolithic Power Systems, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. MPS is a fabless designer and seller of analog and mixed-signal semiconductors; most revenue comes from Asia, and DC-to-DC converters are its principal product family.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $56.5 million | $53.0 million | $165.6 million | $149.1 million |
| Gross margin | 53.1% | 52.5% | 52.9% | 51.4% |
| Operating income | $6.3 million | $5.1 million | $16.3 million | $11.0 million |
| Net income | $5.9 million | $5.5 million | $15.5 million | $10.8 million |
| Diluted EPS | $0.16 | $0.16 | $0.43 | $0.31 |
- Revenue grew 6.7% in Q3 and 11.1% year to date. DC-to-DC converter sales rose 10.6% and 13.2%, respectively; lighting-control sales fell 15.3% in Q3 and 1.9% year to date.
- Gross margin improved, which management attributed mainly to cost efficiencies and product mix; year-to-date improvement also reflected higher absorption of test-manufacturing overhead.
- Operating expenses were $23.7 million in Q3 and $71.3 million year to date. SG&A increased 16.6% in Q3 and 20.0% year to date, including higher personnel costs, stock compensation, professional fees and sales commissions.
- Nine-month operating cash flow was $13.5 million, down from $30.4 million. The filing cites working-capital needs, notably higher receivables and inventory. Investing cash flow was negative $46.6 million, principally from short-term investment purchases and headquarters improvements; financing cash flow was positive $14.9 million, mainly stock-option proceeds.
- At September 30, cash and equivalents were $78.2 million, short-term investments $107.3 million and long-term investments $11.8 million. Working capital was $217.7 million. Total liabilities were $30.2 million; the filing reports no debt balance.
Changes, outlook and commentary
- Total cash, cash equivalents and short-term investments increased to $185.5 million from $174.2 million at December 31, 2011, although cash and equivalents alone declined by $18.1 million. $49.4 million of cash and $17.0 million of short-term investments were held by foreign subsidiaries; repatriation could incur U.S. taxes. Management intends to reinvest these funds abroad.
- Inventory increased to $32.6 million from $20.1 million at year-end; receivables rose to $21.6 million from $15.1 million. Management linked the receivables increase to shipment timing.
- MPS said cash from operations and existing cash and short-term investments should meet liquidity needs for at least the next 12 months. The filing gives no specific numerical revenue or earnings guidance. Management expects continued product development and identifies growth as dependent in part on new products, market entry, share gains, customer diversification and securing manufacturing capacity.
- Revenue is exposed to semiconductor cyclicality, seasonality, customer order cancellations or rescheduling, and limited visibility through distributors. Approximately 88% of Q3 revenue was attributable to direct or indirect sales to Asia; the two largest distributors represented about 35% of Q3 revenue.
- Litigation expense was a net benefit of $0.2 million in Q3 and $0.3 million year to date, versus expenses of $0.7 million and $2.5 million in the comparable 2011 periods. The 2012 benefit included $0.3 million of Silergy settlement payments in Q3 and $0.9 million year to date.
- O2 Micro appealed a judgment awarding MPS approximately $9.1 million in attorneys’ fees and costs, plus interest. A separate Linear judgment for about $2.3 million was affirmed; MPS received that payment on October 5, 2012, after quarter-end, and expected to record it as a litigation credit in Q4.
- The IRS audit of 2005–2007 U.S. returns includes a revised proposed adjustment that could increase tax liabilities by up to $10.5 million, plus interest and penalties, if the IRS prevails. MPS filed a protest and said it believes its tax positions will be sustained. The French subsidiary was also under audit.
- $11.8 million of auction-rate securities remained classified as long-term investments and were illiquid; their underlying maturities extend up to 35 years. Fair value depends on significant unobservable assumptions, and failed auctions or deteriorating credit or liquidity conditions could reduce value.
- Outstanding purchase commitments were $15.7 million, primarily for wafers and assembly services. The company also said it would likely exercise a purchase option for its Chengdu facility, at an estimated cost of approximately $1.8 million.
Key facts for investors to verify
- Whether DC-to-DC demand and margin gains continue, and whether weakness in lighting-control products persists.
- Whether receivables and inventory convert to cash; nine-month operating cash flow fell substantially year over year.
- Customer and regional concentration, plus the effect of distributor inventory, cancellations and rescheduling on future shipments.
- Developments in the O2 Micro appeal, the Linear payment and remaining Silergy installments, including timing and accounting treatment.
- Outcome of the IRS and French tax audits, including potential liabilities and interest or penalties.
- Valuation and eventual liquidity of auction-rate securities, and the company’s manufacturing-capacity and purchase-commitment exposure.