Monolithic Power Systems, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. MPS designs analog and mixed-signal power-management semiconductors and uses third parties to manufacture and assemble its products.
Key financial results
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $196.5 million | $218.8 million | Down 10.2% |
| Gross profit / margin | $101.6 million / 51.7% | $121.5 million / 55.5% | Margin down 3.8 percentage points |
| Operating income / margin | $13.4 million / 6.8% | $30.5 million / 13.9% | Down 56.0% |
| Net income | $13.3 million | $29.6 million | Down 55.0% |
| Diluted EPS | $0.38 | $0.78 | Down 51.3% |
| Cash from operations | $43.7 million | $48.5 million | Down $4.8 million |
FY2011 revenue was concentrated in DC-to-DC converters ($165.6 million, 84.2% of revenue); lighting controls contributed $26.5 million (13.5%) and audio amplifiers $4.4 million (2.3%). Revenue from Asia was approximately 90%. The largest customer represented 17% of revenue; the two largest distributors together accounted for approximately 27%.
Fourth quarter: Revenue was $47.5 million versus $47.1 million in Q4 2010. Gross profit was $24.9 million (52.5% margin), operating income $2.4 million, and net income $2.5 million versus $3.6 million a year earlier.
Liquidity, cash flow and balance sheet
- Year-end cash and cash equivalents were $96.4 million; short-term investments were $77.8 million and long-term investments $13.7 million. Working capital was $185.4 million, down from $195.4 million.
- Cash from operations was $43.7 million. Investing activities provided $36.2 million, primarily reflecting sales of investments; property and equipment purchases were $21.0 million. Financing used $32.0 million, primarily for $38.5 million of share repurchases.
- Total liabilities were $31.0 million, including $26.1 million of current liabilities and $4.9 million of non-current income tax liabilities. The balance sheet shows no interest-bearing borrowings.
- $42.1 million of cash and $15.0 million of short-term investments were held by international subsidiaries and were not immediately available for domestic operations. MPS said existing cash, investments and operating cash flows were expected to cover liquidity needs for the next 12 months.
- Outstanding purchase commitments were $18.6 million, mainly for wafers and assembly services. MPS reported no off-balance-sheet arrangements.
Material changes and management commentary
- Revenue and profit fell substantially from 2010. Management attributed the revenue decline mainly to lower DC-to-DC sales, including lost Korean customer business following production-capacity shortages in 2010. Audio sales also declined; lower CCFL demand partly offset growth in WLED products.
- Gross margin fell from 55.5% to 51.7%, reflecting lower selling prices, unabsorbed test-manufacturing costs and higher inventory reserves. Management also cited higher wafer and gold costs, product mix and underutilized capacity as factors affecting 2010 margin.
- Management plans to continue developing products in existing and new categories, but the filing gives no specific numerical 2012 revenue or earnings guidance. Growth depends in part on new products, market share, customer diversification and securing manufacturing capacity.
- The company completed its share repurchase program, buying back 2.49 million shares for $38.5 million in 2011. It also purchased a San Jose headquarters property for $11.0 million; its existing San Jose lease was scheduled to terminate April 18, 2012.
Risks, contingencies and unusual items
- Supply and customer concentration: MPS relies on three wafer suppliers and third-party assembly and test providers. Capacity constraints previously caused shortages and lost Korean customer business; customer orders may be rescheduled or cancelled.
- Tax examinations: An IRS revised proposed adjustment received in February 2012 reduced the maximum potential adjustment described by the company from $37.0 million to $10.5 million, plus possible interest and penalties. The company was reviewing it and intended to contest the proposed adjustments. The IRS also proposed reducing historical R&D credits.
- Litigation: A shareholder derivative action concerning executive compensation remained at a preliminary stage, with defendants seeking dismissal; a related state-court action was voluntarily dismissed. Other intellectual-property proceedings could entail substantial costs or affect product sales. Litigation expense was $3.4 million in 2011.
- Illiquid investments: MPS held $13.7 million of auction-rate securities at fair value, with $14.4 million face value; auctions had failed and short-term liquidation was considered unlikely. Valuation depends on assumptions and market conditions.
- Other exposure: The company faces semiconductor cyclicality, falling average selling prices, Asia-focused operations, foreign-exchange and China operating risks, and potential inventory obsolescence. It reported $93.5 million of undistributed foreign earnings intended to be indefinitely reinvested.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether margins and earnings stabilize after FY2011’s decline, and whether lost Korean customer business is replaced.
- Whether wafer capacity and supplier yields support demand without further lost sales or added cost.
- The resolution and potential cash impact of the IRS examination, revised proposed adjustment and R&D credit dispute.
- The recoverability and liquidity of auction-rate securities and any changes in their valuation assumptions.
- The progress and potential cost of the remaining derivative and intellectual-property litigation.
- How much of reported liquidity is accessible to U.S. operations, given funds held by international subsidiaries and planned capital needs.