Monolithic Power Systems, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; comparisons are with Q1 2019 unless otherwise noted. MPS designs and sells high-performance analog power solutions and operates as one reportable segment.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $165.8 million | $141.4 million; up 17.3% |
| Gross profit / margin | $91.4 million / 55.2% | $78.0 million / 55.2% |
| Operating income / margin | $31.0 million / 18.7% | $21.7 million / 15.4% |
| Net income | $35.8 million | $26.2 million; up 36.6% |
| Diluted earnings per share | $0.77 | $0.58 |
| Operating cash flow | $51.4 million | $38.8 million |
| Cash, cash equivalents and short-term investments | $489.3 million | $455.4 million at Dec. 31, 2019 |
| Working capital | $592.3 million | $557.0 million at Dec. 31, 2019 |
Investing activities used $64.5 million, including $54.2 million of net short-term investment purchases and $10.0 million of property and equipment purchases. Financing activities used $4.1 million, including $17.4 million in dividends and dividend equivalents, partly offset by employee stock issuance proceeds. Cash and cash equivalents were $154.9 million at quarter-end. The balance sheet reports no borrowing balance as a separate line item; total liabilities were $194.3 million.
Material changes and operating drivers
- Revenue growth reflected 5% higher unit shipments and an 11% increase in average selling prices. Computing and storage revenue rose 32.6%, communications 25.6%, industrial 18.3% and automotive 13.6%; consumer revenue declined 1.9%.
- China revenue was $105.7 million, about 64% of total revenue. Asia accounted for 90% of revenue. The largest distributor represented 23% of revenue.
- Gross margin was unchanged at 55.2%; higher-margin product mix was offset by manufacturing overhead and inventory write-downs. Cost of revenue increased 17.3%.
- Operating expenses rose 7.4%. Litigation expense increased to $2.3 million from $0.3 million, mainly related to ongoing patent litigation. Stock-based compensation was $18.6 million, up from $16.0 million.
- Other expense was $1.7 million, versus $3.3 million of other income, mainly reflecting a $3.8 million loss on deferred compensation plan investments compared with a $1.9 million gain in Q1 2019.
- The $6.5 million income tax benefit (22.2% of pre-tax income) contributed to net income; the comparable benefit was $1.1 million (4.5%). Management cited stock-compensation tax benefits and lower-tax foreign income, partly offset by GILTI tax.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said cash from operations and existing cash and short-term investments were expected to meet liquidity requirements for the next 12 months, while noting that pandemic-related uncertainty could affect liquidity and results.
- MPS reported minimal Q1 COVID-19 operational impact, no pandemic-specific demand decline, no major supply-chain issues and continued operations at its China and South Korea manufacturing facilities. It could not estimate the pandemic’s duration or ultimate effects; a prolonged slowdown could materially harm 2020 and later results.
- Key risks include semiconductor cyclicality, demand and order volatility, reliance on third-party manufacturing capacity, customer and distributor concentration, and exposure to Asia and China, including trade and export restrictions. Customers can generally cancel or reschedule orders without significant penalty.
- Purchase commitments were approximately $102.6 million. The outstanding one-time U.S. transition-tax liability was $20.7 million, payable in installments through 2025. No material pending legal proceedings were reported, although litigation expense increased and MPS disclosed ongoing patent cases. No off-balance-sheet arrangements were reported.
- The Board declared a quarterly dividend of $0.50 per share, compared with $0.40 a year earlier; future dividends remain at the Board’s discretion.
Important facts for investors to verify
- Whether subsequent filings show COVID-19 effects on demand, supply, inventory valuation or customer payments beyond the limited Q1 impact described.
- Whether China, Asia and the largest distributor remain concentrated sources of revenue, and whether export controls or trade restrictions affect sales.
- How inventory write-downs, manufacturing costs and product mix affect gross margin in later quarters.
- Developments and potential costs in the patent litigation, and the effect of stock-based compensation and deferred-compensation investment movements on reported earnings.
- Availability and liquidity of investments, the timing of purchase commitments and tax payments, and the Board’s decisions on future dividends.