Monolithic Power Systems, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company designs and sells high-performance analog power solutions, primarily through third-party manufacturing and distribution. Financial statements are unaudited.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $139.8 million | $112.2 million | $268.9 million | $212.6 million |
| Gross margin | 55.5% | 54.7% | 55.4% | 54.7% |
| Operating income | $24.9 million | $15.0 million | $46.9 million | $28.5 million |
| Net income | $24.2 million | $15.0 million | $46.1 million | $29.5 million |
| Diluted EPS | $0.55 | $0.35 | $1.04 | $0.68 |
| Operating cash flow | — | $41.7 million | $46.8 million |
Quarterly revenue rose 24.6% year over year; six-month revenue rose 26.5%. Management attributed growth to higher demand, with unit shipments up 12% in Q2 and 15% for the half, and average selling prices up 9% and 8%, respectively. Computing and storage and automotive were the fastest-growing Q2 end markets; communications revenue declined. Gross margin improved despite higher inventory write-downs. Q2 operating margin was 17.8%, versus 13.3% a year earlier.
Balance sheet, liquidity and cash flows
- At June 30, cash and cash equivalents were $83.1 million and short-term investments were $230.4 million, for $313.5 million combined. Working capital was $434.5 million, up from $383.3 million at year-end 2017.
- Total assets were $720.0 million and total liabilities were $140.9 million. The balance sheet presents no debt balance or borrowing line item.
- Six-month operating cash flow of $41.7 million was below the prior-year $46.8 million, despite higher net income. Receivables and inventory absorbed cash, including a $29.6 million inventory increase.
- Investing activities used $29.9 million, including $13.0 million of property and equipment purchases and net purchases of short-term investments. Financing activities used $11.1 million, primarily reflecting $21.5 million of dividends and dividend equivalents.
- The Board increased the quarterly dividend to $0.30 per share from $0.20, effective in Q1 2018. The company said it expects available cash, operating cash generation and planned repatriation of Bermuda cash to meet liquidity needs for the next 12 months.
Material changes and management commentary
- Revenue increased across all reported end markets except communications. Q2 computing and storage revenue grew 51.1% and automotive grew 58.2%; communications fell 2.5%. China accounted for $81.2 million of Q2 revenue, and 89% of Q2 revenue came from customers in Asia.
- Inventory write-downs increased by $3.8 million in Q2 and $5.1 million for the first half versus the corresponding 2017 periods. Management cited higher sales of higher-margin products and lower manufacturing overhead as factors supporting margin improvement.
- Research and development spending rose 15.7% in Q2; SG&A rose 10.4%. Both expenses increased in dollars but declined as a percentage of revenue. Stock-based compensation was $30.9 million for the first half, up from $26.8 million.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, recording a $0.4 million after-tax increase to opening retained earnings. Management stated the standard’s effect on first-half net income was $0.1 million compared with the former revenue standard.
- No numerical revenue or earnings guidance is provided in the filing. Management cited planned new-product introductions and targeted markets, while cautioning that semiconductor cyclicality, short order lead times and customer order cancellations or rescheduling make forecasting difficult.
Risks, contingencies and unusual items
- Customer and geographic concentration: the largest distributor represented 20% of revenue in both Q2 and the first half; 89% of Q2 revenue was from Asian customers. Trade tensions and tariffs, especially between the U.S. and China, could affect demand and operations.
- Supply and inventory exposure: the company depends on third-party wafer, assembly and test suppliers; management identifies manufacturing capacity constraints as a potential limit on growth. Purchase commitments were $74.9 million at June 30, up from $52.6 million at year-end.
- Tax uncertainty: the effective tax rate was 10.7% for Q2 and 7.1% for the first half. The company had a $22.0 million outstanding transition-tax liability, payable in installments through 2025, and $17.2 million of unrecognized tax benefits. It was evaluating the July 24, 2018 Ninth Circuit decision in Altera v. Commissioner for potential tax effects.
- The company reported no material pending legal proceedings at June 30, though ordinary-course intellectual-property, shareholder and other matters may entail expense. Q2 litigation expense was $0.6 million.
- The $5.2 million fair value of student-loan auction-rate securities remains illiquid and is measured using Level 3 inputs. Other risks include semiconductor cyclicality, foreign exchange, product quality and warranty claims, and the possibility that dividends may change or cease.
Important facts for investors to verify
- Whether shipment growth and higher average selling prices continue, particularly in computing and storage and automotive, and whether communications demand stabilizes.
- Inventory levels, subsequent write-downs, receivable collections and operating cash conversion, given the first-half working-capital use.
- Wafer and manufacturing capacity availability, purchase commitments and any impact from U.S.–China tariffs or trade restrictions.
- Future tax provision and cash-tax effects, including GILTI, the transition-tax installments and the Altera decision.
- Customer concentration, stock-based compensation and the sustainability of the increased dividend.