Monolithic Power Systems, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. MPS designs and sells fabless analog and mixed-signal semiconductors, principally DC-to-DC converters. Financial statements are unaudited.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $51.6 million | $55.7 million | $96.1 million | $105.9 million |
| Gross profit / margin | $26.6 million / 51.4% | $32.4 million / 58.2% | $48.9 million / 50.8% | $61.7 million / 58.3% |
| Operating income | $4.0 million | $6.8 million | $6.0 million | $13.1 million |
| Net income / diluted EPS | $3.5 million / $0.10 | $6.4 million / $0.17 | $5.4 million / $0.15 | $12.8 million / $0.33 |
| Operating cash flow | Not separately provided | Not separately provided | $21.5 million | $22.8 million |
All amounts in dollars; income-statement and cash-flow amounts are shown in millions. Q2 operating and net margins were 7.8% and 6.7%, respectively; for the six-month period they were 6.2% and 5.6%.
Liquidity, balance sheet and capital allocation
- At June 30, cash and cash equivalents were $97.7 million and short-term investments were $65.6 million. Working capital was $176.8 million, versus $195.4 million at December 31, 2010. Current assets were $207.8 million and current liabilities $31.0 million.
- The balance sheet presents no borrowings or debt line item. Total liabilities were $36.0 million; stockholders’ equity was $227.1 million.
- Six-month investing cash inflow was $60.6 million, chiefly reflecting short-term investment redemptions; financing cash outflow was $32.8 million, mainly from $38.5 million of share repurchases.
- MPS completed its $70 million repurchase authorization by June 2011, buying 4.39 million shares from August 2010 through June 2011. Shares outstanding were 33.47 million at June 30.
- MPS held $17.2 million in auction-rate securities at fair value ($18.1 million face value), classified as long-term and illiquid. Management said liquidity timing was uncertain and intended to hold them; the underlying maturities extend up to 36 years.
Changes versus prior comparable periods
- Revenue declined 7.3% in Q2 and 9.3% in the first half year over year. Management attributed the decrease chiefly to lost Korean customers after 2010 capacity shortages; audio revenue also fell, while first-half lighting-control sales declined.
- DC-to-DC converters remained the largest product family, accounting for 82.9% of Q2 revenue. Q2 revenue fell 6.1% in that family, 8.7% in lighting control and 24.5% in audio.
- Gross margin fell 6.8 percentage points in Q2 and 7.5 points for the six-month period. MPS cited lower selling prices, product mix, higher inventory reserves and product costs.
- Operating income and net income declined year over year despite lower R&D, SG&A and litigation expenses. Litigation expense fell 57.9% in Q2 and 53.8% in the first half.
- Operating cash flow was $1.2 million lower year over year for the first half. Cash rose to $97.7 million from $48.0 million at year-end, while short-term investments fell from $129.7 million to $65.6 million.
Outlook, risks and unusual items
- Management said operating cash generation plus existing cash and short-term investments should meet liquidity needs for at least 12 months. The filing provides no clear numerical revenue or earnings guidance.
- Key operating risks include semiconductor cyclicality, short customer order lead times and cancellations, dependence on two wafer suppliers and third-party assembly/test providers, and capacity constraints that previously contributed to lost Korean business. About 91% of Q2 revenue came from Asia; the largest distributor represented 16% of revenue.
- The IRS proposed adjustments to the company’s 2000–2007 tax positions involving a cost-sharing agreement. The largest proposed methodology could increase federal and state tax liabilities by up to $37 million, plus interest and penalties, if the IRS prevailed. The IRS also proposed reducing research and development tax credits. MPS disputed the positions and said it would contest them.
- Ongoing intellectual-property litigation may require significant expense and management resources; outcomes are described as uncertain. Q2 litigation costs were $0.9 million.
- After quarter-end, MPS funded an $11 million purchase of a San Jose headquarters property on August 4, 2011. Its existing headquarters lease was scheduled to terminate April 18, 2012. MPS also accrued $2.5 million for final Chengdu facility construction costs.
- At the June annual meeting, stockholders rejected the advisory executive-compensation vote. The company also reported that its prior proxy disclosure of director Douglas McBurnie’s 2010 attendance was incorrect; it recalculated attendance at 78%.
Important facts for investors to verify
- Whether revenue and gross margins recover, particularly after the capacity-related loss of Korean customers and the decline in average selling prices.
- Current wafer-supply capacity, customer concentration, and any continuing effects of prior shortages.
- The status and potential financial impact of the IRS examinations, including the proposed tax adjustment of up to $37 million and the R&D credit dispute.
- The liquidity, valuation assumptions and credit exposure of the auction-rate securities.
- Legal developments, expected litigation costs, and the financial effect of the headquarters purchase and remaining Chengdu construction costs.