Monolithic Power Systems, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 6, 2015. MPS designs and sells mixed-signal analog semiconductors, primarily power-management products. It reports one operating segment and conducts most sales through distributors and customers in Asia.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $73.5 million | $60.1 million | +22.4% |
| Gross profit / margin | $39.7 million / 54.0% | $32.1 million / 53.4% | Margin +0.6 percentage points |
| Operating income / margin | $5.9 million / 8.0% | $9.1 million / 15.1% | Down from prior-year litigation benefit |
| Net income | $6.0 million | $9.0 million | -33.9% |
| Diluted EPS | $0.15 | $0.23 | Down 34.8% |
| Operating cash flow | $15.7 million | $12.0 million | +$3.7 million |
Revenue growth reflected a 29% increase in unit shipments, driven by higher demand from existing customers and new design wins, partly offset by a 5% decline in average selling prices. DC-to-DC products generated $66.3 million (90.2% of revenue, up 22.9%); lighting-control products generated $7.2 million (up 18.2%). Gross margin improved mainly on higher absorption of in-house test manufacturing overhead, partly offset by product mix and Sensima-related intangible amortization.
Liquidity, cash flow and capital
- Cash and cash equivalents were $96.0 million and short-term investments $137.8 million at March 31, 2015; together, $233.8 million, down $5.0 million from year-end. Including long-term investments, cash and investments totaled $239.2 million.
- Working capital was $269.3 million, versus $271.3 million at December 31, 2014. Current ratio was approximately 6.9x. No debt is shown on the reported balance sheet.
- Cash decreased $30.3 million during the quarter: operating activities provided $15.7 million, investing used $32.1 million, and financing used $13.9 million. Investing included $4.7 million of property and equipment purchases and net investment purchases; financing included $10.4 million of share repurchases and $5.9 million of dividends and dividend equivalents.
- Inventory rose to $53.4 million from $40.9 million, including increases in strategic wafer/die bank inventory and finished goods. Outstanding purchase commitments were $39.6 million.
- The company declared a $0.20-per-share quarterly dividend ($7.9 million total). It repurchased 203,000 shares for $10.4 million at an average $51.33 per share; $27.8 million remained under the program at quarter-end.
Changes, outlook and notable items
- Net income was lower despite revenue growth, primarily because Q1 2014 included a $9.5 million O2 Micro litigation award, recorded as a litigation benefit. Q1 2015 instead had $0.3 million of litigation expense. The prior-year comparison is therefore affected by this unusual item.
- R&D increased 2.8% to $16.0 million and SG&A increased 8.7% to $17.5 million; both declined as a percentage of revenue. Stock-based compensation rose to $9.2 million from $7.6 million.
- Management gave no specific numeric revenue or earnings guidance in the supplied filing text. It expects available cash, investments and operating cash generation to meet liquidity needs for at least the next 12 months. It described growth plans centered on new products, new markets, design wins and securing manufacturing capacity, while cautioning that semiconductor demand is cyclical and quarterly orders are difficult to forecast and may be rescheduled or cancelled.
- In April 2015, MPS settled IRS audits for tax years 2005–2007. It paid a $1.2 million tax amount and expected a further $1.1 million interest payment and $0.2 million tax payment. Management expected a one-time Q2 2015 net tax charge of approximately $2.3 million.
- The July 2014 Sensima acquisition included up to $8.9 million of contingent consideration tied to 2016 product milestones; its recorded fair value was $2.5 million at March 31, 2015. Management expected acquired in-process R&D to be completed in the first half of 2016.
- Key risks include customer and distributor concentration (the largest distributor represented 25% of Q1 revenue), geographic concentration (91% of revenue from Asia), reliance on third-party wafer, assembly and test suppliers, pricing pressure, inventory-demand mismatch, IP litigation, and foreign exchange and tax exposures. One distributor represented 26% of receivables at quarter-end.
- The company reported no material pending legal proceedings at March 31, 2015. Management concluded disclosure controls were effective at a reasonable-assurance level; it was still evaluating Sensima’s internal controls.
Important facts for investors to verify
- Whether shipment growth and new design wins can sustain revenue growth as selling prices decline and semiconductor demand fluctuates.
- Whether higher inventory and purchase commitments align with actual customer demand and available supplier capacity.
- The effect of the Q2 tax settlement charge and any subsequent changes in tax reserves or effective tax rate.
- Progress on Sensima integration, product milestones and contingent consideration; and completion of the in-process R&D project.
- Future cash returns and capital allocation, including dividend declarations and the status of the repurchase program, which was extended in April 2015 through December 31, 2015.
- Exposure to distributor concentration, Asia-related risks, illiquid auction-rate securities ($5.4 million fair value), and any developments in intellectual-property matters.