Monolithic Power Systems, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. MPS designs and sells high-performance analog and power solutions, primarily integrated circuits, for computing and storage, automotive, industrial, communications, and consumer markets. It reports one operating segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $151.0 | $139.8 | $292.4 | $268.9 |
| Gross margin | 55.1% | 55.5% | 55.1% | 55.4% |
| Operating income | $20.1 | $24.9 | $41.8 | $46.9 |
| Net income | $20.7 | $24.2 | $46.9 | $46.1 |
| Diluted EPS | $0.45 | $0.55 | $1.03 | $1.04 |
- Q2 revenue increased 8.0% year over year; unit shipments rose 16%, while average selling prices declined about 5%. First-half revenue increased 8.7%, with shipments up 15% and average selling prices down about 3%.
- Q2 operating income fell about 19% and net income about 15% year over year, despite higher revenue. First-half net income was slightly higher, while operating income declined about 11%.
- Gross margin eased as sales shifted toward lower-margin products; lower inventory write-downs and warranty costs partly offset the pressure. Operating expenses rose 19.8% in Q2, led by R&D and SG&A. Stock-based compensation was $22.7 million in Q2 and $38.7 million for the first half.
- End-market results were mixed in Q2: communications grew 41.4%, industrial 17.3%, computing and storage 12.5%, and automotive 4.4%; consumer declined 8.4%. For the first half, consumer fell 13.7%, while communications grew 41.1%.
Cash flow, balance sheet, and liquidity
- For the first half, operating cash flow was $82.9 million, versus $41.7 million a year earlier; investing cash flow was negative $42.1 million and financing cash flow negative $16.7 million. Cash, cash equivalents, and restricted cash increased $24.3 million.
- Capital expenditures and property purchases drove investing outflows: purchases of property and equipment were $77.6 million, including a Kirkland office building and land purchase for about $52.3 million.
- At June 30, cash and cash equivalents were $197.0 million and short-term investments $169.5 million, totaling $366.5 million. Working capital was $497.0 million. Current assets were $585.1 million against current liabilities of $88.1 million.
- The balance sheet reports no borrowing or debt line; total liabilities were $164.0 million and stockholders’ equity $704.2 million. Property and equipment increased to $213.8 million from $150.0 million at year-end 2018.
- MPS repatriated $75 million from its Bermuda subsidiary during the first half, primarily to fund the real estate purchase and dividends. It declared dividends of $0.40 per share in Q2 ($0.80 per share for the first half).
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said existing cash, investments, and expected operating cash generation should meet liquidity needs for the next 12 months.
- Management describes the semiconductor industry as cyclical and states that the industry is experiencing a downturn. Forecasting is difficult because customer orders may be cancelled or rescheduled, sales cycles are lengthy, and typical order lead times are under 90 days.
- Key exposures include reliance on Asia (89% of Q2 revenue), China-related economic and trade conditions, tariffs and export restrictions, and a concentrated customer base: the largest distributor represented 22% of revenue. MPS also relies on third-party wafer, assembly, and test suppliers, whose capacity or yield constraints could limit shipments or pressure margins.
- Outstanding supplier and other purchase commitments were approximately $71.4 million. The 2017 Tax Act transition-tax liability was $20.7 million at June 30, payable in installments through 2025. Management reported no material pending legal proceedings and no off-balance-sheet arrangements.
- Q2 tax expense was $1.7 million (7.4% effective rate); first-half tax expense was $0.5 million (1.1%). Rates reflected foreign income taxed at lower rates, stock-compensation tax benefits, and GILTI. MPS disclosed uncertainty around tax positions and the effect of the Ninth Circuit’s June 2019 Altera decision; it had made no adjustment for that ruling.
Important facts for investors to verify
- Whether growth in unit shipments can offset continued average selling price declines and lower-margin product mix.
- Whether the consumer-market weakness, particularly in China, persists and how demand develops across MPS’s other end markets.
- Customer and geographic concentration, distributor inventory and purchasing patterns, and the largest distributor’s continued contribution.
- Supplier capacity, manufacturing costs, inventory levels, and the return and cash-flow implications of the significant property investment.
- Future operating expense and stock-based compensation trends, tax-rate variability, and the Board’s decisions on future dividends.