Monolithic Power Systems, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results are compared with the corresponding 2019 periods. MPS designs and sells high-performance analog and power solutions across computing and storage, automotive, industrial, communications, and consumer markets; it reports one operating segment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $259.4 million | $168.8 million | $611.4 million | $461.2 million |
| Gross profit / margin | $143.0 million / 55.1% | $93.2 million / 55.2% | $337.1 million / 55.1% | $254.4 million / 55.2% |
| Operating income / margin | $60.0 million / 23.1% | $30.0 million / 17.8% | $118.9 million / 19.4% | $71.9 million / 15.6% |
| Net income / net margin | $55.6 million / 21.4% | $29.5 million / 17.5% | $121.5 million / 19.9% | $76.4 million / 16.6% |
| Diluted EPS | $1.18 | $0.64 | $2.59 | $1.68 |
- Q3 revenue rose 53.7% year over year; first-nine-month revenue rose 32.6%. Management attributed growth to increases in both unit shipments and average selling prices, with higher-priced product mix contributing to ASP gains.
- Q3 unit shipments increased 14% and average selling prices approximately 31% year over year. For the nine-month period, shipments increased 7% and average selling prices approximately 24%.
- Q3 growth was broad-based. Communications revenue increased 191.3%, consumer 59.8%, computing and storage 42.6%, automotive 16.7%, and industrial 6.2%. For the nine months, communications grew 79.0% and computing and storage 43.3%.
- Gross margin was nearly flat year over year. Management cited higher manufacturing overhead and warranty costs, and—for the nine-month period—inventory write-downs, partly offset by favorable product mix. Operating margin improved as operating expenses grew more slowly than revenue.
- Research and development expense increased 36.0% in Q3 and 18.1% year to date; selling, general and administrative expense increased 25.4% and 16.2%, respectively. Litigation expense was $1.8 million in Q3 and $6.3 million year to date, up from $0.7 million and $1.5 million in the comparable periods.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $188.2 million versus $155.3 million in 2019. Investing used $133.4 million and financing used $49.6 million; cash, cash equivalents and restricted cash increased $6.5 million.
- Capital expenditures were $44.2 million, compared with $87.1 million in the prior-year period. Net purchases of short-term investments were $88.4 million.
- At September 30, 2020, cash and cash equivalents were $179.5 million, short-term investments $372.1 million, and working capital $660.9 million. Working capital was $557.0 million at December 31, 2019. Current assets were $819.1 million and current liabilities $158.3 million.
- Total assets were $1.161 billion and stockholders’ equity $914.6 million. The balance sheet presents no borrowings; the filing does not report debt as a balance-sheet line item. Purchase commitments were approximately $215.5 million, and the outstanding one-time transition-tax liability was $18.7 million.
- Accounts receivable increased to $93.5 million from $52.7 million at year-end; inventories increased to $148.1 million from $127.5 million. Management linked the receivables increase to higher sales and the inventory increase to preparations for current demand and future growth.
- The board declared a quarterly dividend of $0.50 per share in Q3, versus $0.40 a year earlier. Cash dividends and dividend equivalents paid during the first nine months totaled $65.5 million. Future dividends remain at the board’s discretion.
Changes, outlook and risks
- Unusual Q3 demand timing: Revenue exceeded management’s expectations partly because MPS fulfilled demand delayed by prior capacity constraints and certain China-based customers pulled shipments originally scheduled for later periods into Q3. Management characterized both as non-recurring.
- COVID-19: Management said the pandemic had not materially adversely affected Q3 results or operations; facilities in China and South Korea were fully operational, with minimal disruption and no major supply-chain issues reported. Automotive revenue returned to more normal ordering levels after Q2 shutdowns. A prolonged downturn could still harm demand, operations, and financial results; the duration and effect remained uncertain.
- Liquidity outlook: Management believed existing cash, investments, and operating cash generation would meet liquidity needs for the next 12 months. The filing provides no numeric revenue or earnings guidance for the next quarter or full year.
- Concentration and execution risks: Asia generated 93% of Q3 revenue and 91% year to date. China accounted for $157.2 million of Q3 revenue. The largest distributor represented 22% of Q3 revenue and 23% year to date. Management highlighted customer concentration, semiconductor cyclicality, order cancellations and rescheduling, third-party manufacturing capacity, inventory management, and trade/export restrictions—particularly those involving China.
- Contingencies and unusual costs: MPS reported no material pending legal proceedings as of September 30, but patent and other litigation activity drove higher expense. Warranty reserves rose to $3.9 million from $1.3 million at September 30, 2019; the filing reports a $3.3 million Q3 warranty provision. No material changes in market-risk assessment were reported.
Key facts for investors to verify
- Whether the Q3 customer shipment pull-ins and previously constrained demand were genuinely non-recurring, and how subsequent orders and channel inventory developed.
- Whether the strong revenue growth continued across end markets, especially communications, and whether unit volume and product mix sustained ASP and margin performance.
- Changes in major-customer and geographic concentration, including the largest distributor’s share and China exposure.
- Manufacturing capacity, inventory and receivables trends, along with warranty claims and the adequacy of reserves.
- Developments in patent litigation, trade/export restrictions, COVID-19 effects, and the company’s ability to maintain dividends and liquidity.