Monotype Imaging Holdings Inc. Reports Operating Results (10-Q)

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May 04, 2010
Monotype Imaging Holdings Inc. (TYPE, Financial) filed Quarterly Report for the period ended 2010-03-31.

Monotype Imaging Holdings Inc. has a market cap of $367.1 million; its shares were traded at around $10.57 with a P/E ratio of 25.8 and P/S ratio of 3.9. TYPE is in the portfolios of Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

Research and Development. Research and development expense increased $0.6 million, or 19.3%, to $4.0 million in the three months ended March 31, 2010, from $3.4 million for the three months ended March 31, 2009. Personnel expenses, including share based compensation, increased $0.7 million in the three months ended March 31, 2010, as compared to the same period in 2009, the result of an increase in variable compensation and benefits as well as annual pay increases. A decrease in consulting expense of $0.1 million partially offset the increased personnel costs.

Loss on foreign exchange was $1.0 million and $0.7 million in the three months ended March 31, 2010 and 2009, respectively, an increase of $0.3 million primarily due to currency fluctuations. In the three months ended March 31, 2010, we recorded a loss on our foreign denominated intercompany note of $0.9 million. In the same period in 2009, intercompany note loss of $1.0 million was partially offset by volatility in the Japanese Yen, as compared to the U.S. dollar. We did not experience the same volatility in the Japanese Yen in the first quarter of 2010.

Gain on derivatives was a gain of $0.8 million and $0.4 million in the three months ended March 31, 2010 and 2009, respectively, an increase of approximately $0.4 million, primarily due to our interest rate swap instrument. In the three months ended March 31, 2010, we recorded a gain on our currency swap of $0.9 million. We recorded a loss on our interest rate swap of $0.1 million in the first quarter of 2010. In the three months ended March 31, 2009, we recorded a gain on our currency swap of $0.8 million which was partially offset by a loss on our interest rate swap of $0.4 million. Our interest rate swap matures in November 2010.

We generated $11.2 million in cash from operations during the three months ended March 31, 2010. Net income, after adjusting for depreciation and amortization, amortization of financing costs and debt discount, share based compensation, excess tax benefit on stock options, provision for doubtful accounts, deferred income taxes, unrealized currency loss on foreign denominated intercompany transactions and unrealized gain on derivatives, generated $6.9 million in cash. Accounts receivable and prepaid and other assets provided $0.6 million in cash. Due to the timing of billings and our reporting date, our December 31, 2009 receivables balance contained a few large customer balances which we have since collected. Deferred revenue provided $2.9 million in cash resulting primarily from the receipt of a large royalty prepayment. Accounts payable and accrued income taxes provided $1.1 million in cash. These were partially offset by decreases in accrued expenses and other liabilities which used $0.3 million in cash.

Cash used in financing activities for the three months ended March 31, 2010, was $7.3 million which consisted of installment payments on long-term debt of $7.7 million, partially offset by proceeds from the exercise of stock options and excess tax benefit on stock options of $0.4 million. Our outstanding debt at March 31, 2010 was $83.8 million, which is significantly lower than a year ago when the balance was $103.8 million. During the three months ended March 31, 2009, cash used in financing activities consisted primarily of payments on our long-term debt totaling $10.0 million.

On July 30, 2007, in connection with our initial public offering, we entered into our Amended and Restated Credit Agreement. The principal amount of our term loan was increased to $140.0 million payable in monthly installments of approximately $1.2 million throughout the term of the facility, which expires in July 2012. The Amended and Restated Credit Agreement provides for an additional annual mandatory principal payment based on excess cash flow, as defined by the agreement, which must be paid within five days of the delivery of our audited financial statements. Our prepayment of $5.2 million was made in March 2010. The Amended and Restated Credit Agreement is secured by substantially all of our assets and places limitations on indebtedness, liens, dividends and distributions, asset sales, transactions with affiliates and acquisitions and conduct of business, all as defined in the agreements. On October 30, 2009 we entered into a second amendment to our Amended and Restated Credit Agreement primarily to permit us to use up to $15.0 million of cash per year for acquisitions. The definition of Adjusted EBITDA was amended to permit add backs for restructuring expenses and certain non-operating and non-cash items. In connection with this amendment, we made a $5.0 million principal payment on our debt. The margin rate of prime and LIBOR borrowings were increased to 2.25% and 3.75%, respectively, which reflects a one percentage point increase to each rate. In addition we paid a fee of $0.6 million which is being amortized over the remaining life of the debt. A minimum liquidity requirement was added that requires us to maintain a minimum level of available cash of $20.0 million, including available borrowings under our line of credit.

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