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MPWR > SEC Filings for MPWR > Form 10-Q on 29-Jul-2014All Recent SEC Filings

Show all filings for MONOLITHIC POWER SYSTEMS INC

Form 10-Q for MONOLITHIC POWER SYSTEMS INC


29-Jul-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events and our future performance and are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. These include statements concerning, among others:

the above-average industry growth of product and market areas that we have targeted,

our plan to increase our revenue through the introduction of new products within our existing product families as well as in new product categories and families,

our intention to exercise our purchase option with respect to our manufacturing facility in Chengdu, China,

our belief that we will continue to incur significant legal expenses that vary with the level of activity in each of our legal proceedings,

the effect of liquidity of our investments on our capital resources,

the application of our products in the communications, storage and computing, consumer and industrial markets continuing to account for our revenue,

estimates of our future liquidity requirements,

the cyclical nature of the semiconductor industry,

protection of our proprietary technology,

near term business outlook for 2014 and beyond,

the factors that we believe will impact our ability to achieve revenue growth,

the outcome of the IRS audit of our tax returns,

the percentage of our total revenue from various market segments,

our intention and ability to continue the stock repurchase program and pay future cash dividends, and

the factors that differentiate us from our competitors.

In some cases, words such as "would," "could," "may," "should," "predict," "potential," "targets," "continue," "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," "project," "forecast," "will," the negative of these terms or other variations of such terms and similar expressions relating to the future identify forward-looking statements. All forward-looking statements are based on our current outlook, expectations, estimates, projections, beliefs and plans or objectives about our business and our industry. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual events or results could differ materially and adversely from those expressed in any such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include those set forth throughout this Quarterly Report on Form 10-Q and, in particular, in the section entitled "Part II. Other Information, Item 1A. Risk Factors". Except as required by law, we disclaim any duty to and undertake no obligation to update any forward-looking statements, whether as a result of new information relating to existing conditions, future events or otherwise or to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Readers should carefully review future reports and documents that we file from time to time with the Securities and Exchange Commission, such as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.


The following management's discussion and analysis should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and six months ended June 30, 2014 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, 2013 included in our Annual Report on Form 10-K.

Overview

We are a fabless semiconductor company that designs, develops, and markets proprietary, advanced analog and mixed-signal semiconductors. Our products are used extensively in storage and computing products, network communications products, flat panel TVs, set top boxes, lighting products and a wide variety of consumer and portable electronics products, and automotive and industrial markets. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories.

We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not and will not be immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance.

We work with third parties to manufacture and assemble our integrated circuits ("ICs"). This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.

Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up. Typical lead time for orders is fewer than 90 days. These factors, combined with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer, make the forecasting of our orders and revenue difficult.

We derive most of our revenue from sales through distribution arrangements and direct sales to customers in Asia, where the products we produce are incorporated into end-user products. Our revenue from direct or indirect sales to customers in Asia was 89% and 88% for the three and six months ended June 30, 2014, respectively. We derive a majority of our revenue from the sales of our DC to DC converter product family which services the communications, storage and computing, consumer and industrial markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and successfully secure manufacturing capacity.

In July 2014, we completed the acquisition of Sensima Technology SA ("Sensima"), a company located in Switzerland that develops magnetic sensors for angle measurements as well as three-dimensional magnetic field sensing. The purchase consideration consists of an upfront cash payment of $11.7 million and a cash earn-out payment of up to $8.9 million that is contingent upon Sensima achieving certain new product development and revenue goals through 2016. In addition, key employees are eligible to receive $1.7 million of time-based restricted stock units and up to $8.0 million of performance-based restricted stock units in connection with the transaction. As our acquisition of Sensima closed in July 2014, the results of operations reported in this Quarterly Report on Form 10-Q did not include the results of operations of Sensima.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates used in the preparation of our financial statements during the three and six months ended June 30, 2014, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2013.


Results of Operations



The table below sets forth the data in the Condensed Consolidated Statement of
Operations as a percentage of revenue:



                             Three Months Ended June 30,                          Six Months Ended June 30,
                            2014                      2013                     2014                      2013
                         (in thousands, except percentages)                  (in thousands, except percentages)
Revenue            $   68,436       100.0 %   $ 57,714       100.0 %   $ 128,497       100.0 %   $ 109,184       100.0 %
Cost of revenue        31,337        45.8       26,786        46.4        59,301        46.1        50,871        46.6
Gross profit           37,099        54.2       30,928        53.6        69,196        53.9        58,313        53.4
Operating
expenses:
Research and
development            13,368        19.6       12,478        21.6        28,971        22.6        24,601        22.5
Selling, general
and
administrative         16,853        24.6       13,793        23.9        32,962        25.7        27,051        24.8
Litigation
expense
(benefit), net            274         0.4         (257 )      (0.4 )      (8,426 )      (6.6 )        (558 )      (0.5 )
Total operating
expenses               30,495        44.6       26,014        45.1        53,507        41.7        51,094        46.8
Income from
operations              6,604         9.6        4,914         8.5        15,689        12.2         7,219         6.6
Interest and
other income,
net                       295         0.5          218         0.4           485         0.4           208         0.2
Income before
income taxes            6,899        10.1        5,132         8.9        16,174        12.6         7,427         6.8
Income tax
provision
(benefit)                 502         0.8         (357 )      (0.6 )         759         0.6          (562 )      (0.5 )
Net income         $    6,397         9.3 %   $  5,489         9.5 %   $  15,415        12.0 %   $   7,989         7.3 %

Revenue



The following table shows our revenue by product family:



                               Three Months Ended June 30,                                           Six Months Ended June 30,
Product                     % of                       % of                                      % of                         % of
Family         2014        Revenue        2013        Revenue       Change         2014         Revenue        2013          Revenue       Change
                           (In thousands, except percentages)                                    (In thousands, except percentages)
DC to DC
products     $ 61,173          89.4 %   $ 50,536          87.6 %        21.0 %   $ 115,108          89.6 %   $  96,978           88.8 %        18.7 %
Lighting
control
products        7,263          10.6 %      7,178          12.4 %         1.2 %      13,389          10.4 %      12,206           11.2 %         9.7 %
Total        $ 68,436         100.0 %   $ 57,714         100.0 %        18.6 %   $ 128,497         100.0 %   $ 109,184          100.0 %        17.7 %

Revenue for the three months ended June 30, 2014 was $68.4 million, an increase of $10.7 million, or 18.6%, from $57.7 million for the three months ended June 30, 2013. This increase was due to higher sales of both DC to DC and lighting control products, as higher unit shipments were offset in part by lower average selling prices for these products. Revenue from our DC to DC products was $61.2 million for the three months ended June 30, 2014, an increase of $10.6 million, or 21.0%, from the same period in 2013. This increase was primarily due to higher sales of our DC to DC converters and battery charger products, offset in part by lower sales of our Mini-Monsters products. Revenue from our lighting control products was $7.3 million for the three months ended June 30, 2014, an increase of $85,000, or 1.2%, compared with the same period in 2013.

Revenue for the six months ended June 30, 2014 was $128.5 million, an increase of $19.3 million, or 17.7%, from $109.2 million for the six months ended June 30, 2013. This increase was due to higher sales of both DC to DC and lighting control products, as higher unit shipments were offset in part by lower average selling prices for these products. Revenue from our DC to DC products was $115.1 million for the six months ended June 30, 2014, an increase of $18.1 million, or 18.7%, from the same period in 2013. This increase was primarily due to higher sales of our DC to DC converters and battery charger products, offset in part by lower sales of our Mini-Monsters products. Revenue from our lighting control products was $13.4 million for the six months ended June 30, 2014, an increase of $1.2 million, or 9.7%, compared with the same period in 2013. This increase was primarily due to higher sales of our LED lighting products.

Cost of Revenue and Gross Margin



Cost of revenue consists primarily of costs incurred to manufacture, assemble
and test our products, as well as warranty costs, inventory-related expenses and
other overhead costs and stock-based compensation expenses.



                                  Three Months Ended June 30,                          Six Months Ended June 30,
                             2014                2013          Change            2014               2013           Change
                              (in thousands, except percentages)                  (in thousands, except percentages)
Cost of revenue         $       31,337        $   26,786           17.0 %   $       59,301       $    50,871           16.6 %
Cost of revenue as a
percentage of revenue             45.8 %            46.4 %                            46.1 %            46.6 %
Gross profit            $       37,099        $   30,928           20.0 %   $       69,196       $    58,313           18.7 %
Gross margin                      54.2 %            53.6 %                            53.9 %            53.4 %


Gross profit as a percentage of revenue, or gross margin, was 54.2% for the three months ended June 30, 2014, compared to 53.6% for the three months ended June 30, 2013. The increase in gross margin was primarily due to higher absorption of in-house test manufacturing overhead, compared to the same period in 2013. This increase was partially offset by a higher provision for inventory reserve.

Gross margin was 53.9% for the six months ended June 30, 2014, compared to 53.4% for the six months ended June 30, 2013. The increase in gross margin was primarily due to cost improvements and increased sales of higher margin products, compared to the same period in 2013. This increase was partially offset by a higher provision for inventory reserve.

Research and Development



Research and development expenses consist of salary and benefit expenses and
stock-based compensation expenses for design and product engineers, expenses
related to new product development, and related facility costs.



                                 Three Months Ended June 30,                          Six Months Ended June 30,
                             2014               2013          Change            2014               2013           Change
                              (in thousands, except percentages)                 (in thousands, except percentages)
Research and
development ("R&D")     $       13,368        $  12,478            7.1 %   $       28,971       $    24,601           17.8 %
R&D as a percentage
of revenue                        19.6 %           21.6 %                            22.6 %            22.5 %

R&D expenses were $13.4 million, or 19.6% of revenue, for the three months ended June 30, 2014 and $12.5 million, or 21.6% of revenue, for the three months ended June 30, 2013. The increase in R&D expenses was primarily due to an increase in stock-based compensation expenses associated with the performance-based and market-based equity awards, higher salary and benefits expenses, and an increase in new product development expenses. This increase was partially offset by a decrease in accrued bonuses. Our R&D headcount was 463 employees as of June 30, 2014, compared with 438 employees as of June 30, 2013.

R&D expenses were $29.0 million, or 22.6% of revenue, for the six months ended June 30, 2014 and $24.6 million, or 22.5% of revenue, for the six months ended June 30, 2013. The increase in R&D expenses was primarily due to an increase in stock-based compensation expenses associated with the performance-based and market-based equity awards, an increase in the year-over-year accrued bonuses, higher salary and benefits expenses, and an increase in new product development expenses.

Selling, General and Administrative

Selling, general and administrative expenses include salary and benefit expenses and stock-based compensation expenses for sales, marketing and administrative personnel, sales commissions, travel expenses, related facilities costs, and outside legal and accounting fees.

                                  Three Months Ended June 30,                          Six Months Ended June 30,
                             2014                2013          Change            2014               2013           Change
                              (in thousands, except percentages)                  (in thousands, except percentages)
Selling, general and
administrative
("SG&A")                $       16,853        $   13,793           22.2 %   $       32,962       $    27,051           21.9 %
SG&A as a percentage
of revenue                        24.6 %            23.9 %                            25.7 %            24.8 %

SG&A expenses were $16.9 million, or 24.6% of revenue, for the three months ended June 30, 2014 and $13.8 million, or 23.9% of revenue, for the three months ended June 30, 2013. The increase in SG&A expenses was primarily due to an increase in stock-based compensation expenses associated with the performance-based and market-based equity awards, an increase in commission expenses due to higher revenue, an increase in professional service fees primarily due to the acquisition of Sensima, and higher salary and benefits expenses. This increase was partially offset by a decrease in accrued bonuses. Our SG&A headcount was 256 employees as of June 30, 2014, compared with 251 employees as of June 30, 2013.

SG&A expenses were $33.0 million, or 25.7% of revenue, for the six months ended June 30, 2014 and $27.1 million, or 24.8% of revenue, for the six months ended June 30, 2013. The increase in SG&A expenses was primarily due to an increase in stock-based compensation expenses associated with the performance-based and market-based equity awards, an increase in accrued bonuses, an increase in professional service fees primarily due to the acquisition of Sensima, and an increase in commission expenses due to higher revenue.


Litigation Expense (Benefit), Net

Net litigation expense was $0.3 million for the three months ended June 30, 2014, compared to net litigation benefit of $(0.3) million for the three months ended June 30, 2013. Net litigation benefit for the three months ended June 30, 2013 included $0.4 million of proceeds received in connection with the settlement from Silergy Corporation. In addition, we incurred higher expenses in other litigation matters for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Net litigation benefit was $(8.4) million for the six months ended June 30, 2014, compared to net litigation benefit of $(0.6) million for the six months ended June 30, 2013. The increase in net litigation benefit was primarily due to the recognition of the $9.5 million award from the O2 Micro litigation, partially offset by $0.5 million of additional legal fees incurred in connection with the final resolution of the litigation for the six months ended June 30, 2014. Net litigation benefit for the six months ended June 30, 2013 included $0.8 million of proceeds received in connection with the settlement from Silergy Corporation. The increase in net litigation benefit for the six months ended June 30, 2014 was partially offset by higher expenses we incurred in other litigation matters, compared to the six months ended June 30, 2013.

Interest and Other Income, Net

For the three months ended June 30, 2014, interest and other income, net, was $0.3 million, compared with $0.2 million for the three months ended June 30, 2013. The increase in interest and other income, net, was primarily due to higher foreign exchange gains and interest income.

For the six months ended June 30, 2014, interest and other income, net, was $0.5 million, compared with $0.2 million for the six months ended June 30, 2013. The increase in interest and other income, net, was primarily due to higher foreign exchange gains and interest income.

Income Tax Provision ( Benefit )

The income tax provision for the three and six months ended June 30, 2014 was $0.5 million, or 7.3% of pre-tax income, and $0.8 million, or 4.7% of the pre-tax income, respectively. This differs from the federal statutory rate primarily because our foreign income was taxed at lower rates, and because of the benefit that we realized as a result of stock options exercises and the releases of RSUs and changes in our valuation allowance.

The income tax benefit for the three and six months ended June 30, 2013 was $(0.4) million, or (7.0%) of the pre-tax income, and $(0.6) million, or (7.6%) of the pre-tax income, respectively. This differs from the federal statutory rate primarily because our foreign income was taxed at lower rates, and because of the benefit that we realized from the release of an income tax reserve where the statute of limitations expired and from stock option exercises and releases of RSUs.

Liquidity and Capital Resources



                                                            June 30,         December 31,
                                                              2014               2013
                                                                   (In thousands)
Cash and cash equivalents                                 $     107,863     $      101,213
Short-term investments                                          133,012            125,126
Total cash, cash equivalents and short-term investments   $     240,875     $      226,339
Percentage of total assets                                         62.3 %             61.4 %

Total current assets                                      $     306,297     $      292,086
Total current liabilities                                       (41,970 )          (38,489 )
Working capital                                           $     264,327     $      253,597

As of June 30, 2014, we had cash and cash equivalents of $107.9 million and short-term investments of $133.0 million, compared with cash and cash equivalents of $101.2 million and short-term investments of $125.1 million as of December 31, 2013. As of June 30, 2014, $74.5 million of cash and cash equivalents and $17.0 million of short-term investments were held by our international subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.


The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories, prepaid expenses and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other current liabilities.

As of June 30, 2014, we had working capital of $264.3 million, compared with working capital of $253.6 million as of December 31, 2013. The $10.7 million increase in working capital was due to a $14.2 million increase in current assets, partially offset by a $3.5 million increase in current liabilities. The increase in current assets was primarily due to an increase in cash and short-term investments, partially offset by a decrease in accounts receivable. The increase in current liabilities was primarily due to an increase in accounts payable and accrued compensation and related benefits, partially offset by a decrease in accrued liabilities.

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