Monolithic Power Systems, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. MPS designs and sells high-performance power solutions and operates as one reportable segment. Most revenue is generated in Asia, and the company uses third parties for manufacturing and assembly.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2015 period.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $94.1 | $81.4 | $178.6 | $155.0 |
| Gross margin | 54.1% | 54.2% | 54.0% | 54.1% |
| Operating income | $11.5 | $10.1 | $21.9 | $16.0 |
| Net income | $11.2 | $7.9 | $21.8 | $13.9 |
| Diluted EPS | $0.27 | $0.19 | $0.52 | $0.34 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $43.9 | $23.3 |
- Q2 revenue increased 15.6%; management attributed growth to 10% higher unit shipments, reflecting demand from existing customers and recent design wins, and a 5% increase in average selling prices. First-half revenue rose 15.3%, driven by 15% higher shipments, partly offset by a 1% decrease in average selling prices.
- DC-to-DC products generated 89.5% of Q2 revenue; lighting-control products generated 10.5%. Q2 sales grew 15.1% and 19.9%, respectively.
- Gross margin edged down year over year. Higher warranty costs and inventory write-downs offset favorable product mix and lower labor and overhead costs as a percentage of revenue.
- First-half operating cash flow rose to $43.9 million. Investing used $38.4 million, including $18.7 million for property and equipment and net investment purchases; financing used $13.9 million, mainly dividends and dividend equivalents. Cash and cash equivalents declined $8.8 million to $82.0 million.
Financial position and liquidity
- At June 30, 2016, cash and cash equivalents were $82.0 million, short-term investments $161.8 million, and long-term investments $5.3 million; total cash, cash equivalents and investments were $249.2 million. Working capital was $297.0 million, versus $288.6 million at December 31, 2015.
- Total assets were $468.6 million and total liabilities $73.5 million. The balance sheet reports no borrowings or debt; confirm any off-balance-sheet or contractual financing exposure separately.
- About $108.2 million of cash and short-term investments were held by international subsidiaries. MPS said it intended to indefinitely reinvest these funds abroad; repatriation for U.S. use could require U.S. tax.
- Management said existing cash, investments and operating cash generation should be sufficient for liquidity needs over the next 12 months. Outstanding purchase commitments were $38.6 million.
Material changes, outlook and notable items
- Operating income and net income improved year over year, while gross margin was broadly stable. First-half net income benefited from a 5.5% effective tax rate, compared with 17.7% a year earlier; 2015 included a one-time $2.7 million tax charge related to resolution of earlier tax audits.
- First-half SG&A included a one-time $2.9 million stock-compensation credit after the former CFO’s departure and forfeiture of certain unvested awards. Stock-based compensation expense totaled $20.7 million for the first half.
- Capital spending included purchases of a previously leased Chengdu manufacturing facility and Shenzhen office units for approximately $9.1 million. A previously announced plan to spend up to $17 million on additional China office space had no related purchases or commitments in the first half.
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management describes plans to grow through new products and markets, but cautions that semiconductor cyclicality, seasonal demand, short order lead times and customer cancellation or rescheduling make forecasting difficult.
- Risks include customer and geographic concentration: Asia represented about 90% of revenue, and the largest distributor represented 24% of Q2 revenue and 22% for the first half. Two distributors accounted for 38% of accounts receivable at quarter-end.
- The company relies on outside wafer, assembly and test suppliers; capacity, yields, cost increases, inventory management and product quality could affect shipments and margins. Q2 warranty provision was $0.7 million; the reserve stood at $1.0 million, versus $0.2 million a year earlier.
- MPS reported no material pending legal proceedings at June 30, while noting ordinary-course litigation and potential intellectual-property exposure. The IRS notified MPS in May 2016 that its 2014 federal return was under examination; the opening conference was scheduled for August. Unrecognized tax benefits were $14.0 million.
- Auction-rate securities of $5.3 million remained illiquid, with underlying maturities up to 32 years. MPS also cited regulatory and export-control risks, including temporary export restrictions affecting customer ZTE through August 30, 2016.
- The board authorized a new $50 million share repurchase program through December 31, 2016; no shares were repurchased in the first half. Quarterly dividends declared were $0.20 per share. Future dividends and repurchases remain discretionary.
- Disclosure controls were judged effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Key facts for investors to verify
- Whether shipment growth, design wins and average selling prices can be sustained, and how customer demand and inventory levels evolve.
- Distributor concentration, receivable exposure and the impact of any customer or distribution-channel disruption.
- Supplier capacity, purchase commitments, inventory write-downs and warranty trends, especially given the increase in finished-goods inventory.
- Cash availability and potential tax costs if international funds must be repatriated; the liquidity and valuation of auction-rate securities.
- Results of the IRS examination and developments in unrecognized tax benefits, litigation and export restrictions affecting ZTE.
- Actual use of the repurchase authorization, future dividend decisions and the effect of equity compensation on expense and share dilution.