Monolithic Power Systems, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial amounts below are in millions of dollars unless stated otherwise. MPS designs and sells fabless analog and mixed-signal semiconductors; it reports one operating segment.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $65.35 | $56.51 | $174.53 | $165.60 |
| Gross profit / margin | $35.29 / 54.0% | $30.01 / 53.1% | $93.61 / 53.6% | $87.60 / 52.9% |
| Operating income / margin | $8.66 / 13.2% | $6.32 / 11.2% | $15.88 / 9.1% | $16.30 / 9.8% |
| Net income | $7.41 | $5.92 | $15.40 | $15.51 |
| Diluted EPS | $0.19 | $0.16 | $0.40 | $0.43 |
| Operating cash flow | Not separately presented | Not separately presented | $30.24 | $13.45 |
- Q3 revenue grew 15.6% year over year, driven by higher unit shipments, partly offset by lower average selling prices. DC-to-DC converters rose 16.3%; lighting-control products rose 10.7%.
- Nine-month revenue increased 5.4%. DC-to-DC converter revenue rose 6.6%, while lighting-control revenue declined 3.2%.
- Gross margin improved in both comparisons, which management attributed primarily to product mix and lower inventory reserves. Nine-month operating income and net income declined despite revenue growth, as operating expenses rose.
- Research and development expense was $37.25 million for the nine months, up 4.8%; selling, general and administrative expense was $40.94 million, up 13.4%. Year-to-date stock-based compensation was $15.08 million versus $11.33 million.
Balance sheet, liquidity and cash flow
- At September 30, cash and cash equivalents were $110.45 million and short-term investments were $93.90 million, totaling $204.35 million. Working capital was $244.59 million, versus $190.84 million at December 31, 2012.
- Total assets were $350.04 million; total liabilities were $32.71 million. The balance sheet reports no borrowings or interest-bearing debt.
- Nine-month operating cash flow of $30.24 million was offset in part by $15.42 million of property and equipment purchases; investing cash outflow was $22.38 million. Financing cash inflow was $26.83 million, principally from option exercises and employee stock purchases, partly offset by $7.97 million of share repurchases.
- Inventory increased to $42.98 million from $32.12 million at year-end; management cited strategic wafer and die-bank inventory and finished goods for anticipated demand.
- Management said existing cash, investments and expected operating cash generation would be sufficient for liquidity needs over the next 12 months. About $65.9 million of cash and short-term investments was held by international subsidiaries; repatriation could trigger U.S. tax, and the company intended to reinvest those funds abroad.
Material developments, outlook and risks
- The board authorized a $100 million repurchase program through June 30, 2015. MPS repurchased 268,000 shares for $8.0 million in Q3 at an average $29.75 per share; approximately $92.0 million remained authorized.
- Customer A accounted for 33% of Q3 revenue and 32% year to date. Approximately 91% of Q3 revenue and 90% year-to-date revenue came from Asia. China generated $40.58 million of Q3 revenue.
- Management described a cyclical business with seasonal demand, short order lead times and customer orders that may be cancelled or rescheduled. It plans new products and entry into additional product categories, but provided no specific numerical revenue or earnings guidance in the supplied filing text.
- Manufacturing is outsourced, and MPS depends on three wafer suppliers and third-party assembly and test providers. Capacity, yield, inventory, average selling-price erosion, customer concentration and Asian operating exposure are material business risks.
- MPS held $11.85 million of illiquid, government-backed student-loan auction-rate securities, with underlying maturities up to 35 years. One $2 million security was called at par and redeemed in October 2013. Fair value depends on significant unobservable assumptions.
- The IRS audit of 2005–2007 U.S. tax returns includes a proposed adjustment of up to $10.5 million, plus possible interest and penalties. The company disputed the IRS position. Unrecognized tax benefits totaled approximately $14.3 million. A French tax audit for 2009–2010 was also ongoing.
- A federal appeals court affirmed an approximately $9.1 million award of attorneys’ fees and costs against O2 Micro; rehearing was denied in October 2013. MPS had not recorded the award as income because payment had not been received.
- Management judged disclosure controls effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q3 shipment growth and improved gross margin persist despite lower average selling prices and semiconductor cyclicality.
- Customer and regional concentration, especially the largest distributor’s share of sales and the company’s reliance on Asia.
- Inventory growth, supplier capacity and the ability to meet demand without excess or obsolete inventory.
- Liquidity and valuation of auction-rate securities, and the eventual outcome and payment status of the O2 Micro award.
- Resolution of the IRS and French audits, including potential tax adjustments, and the effect of ongoing legal matters.
- Future dilution and compensation expense from equity awards, alongside the pace and price of share repurchases.