Monolithic Power Systems, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. The company designs and sells high-performance power solutions and reports one operating segment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $81.4 | $68.4 | $155.0 | $128.5 |
| Gross margin | 54.2% | 54.2% | 54.1% | 53.9% |
| Operating income | $10.1 | $6.6 | $16.0 | $15.7 |
| Net income | $7.9 | $6.4 | $13.9 | $15.4 |
| Diluted EPS | $0.19 | $0.16 | $0.34 | $0.39 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $23.3 | $37.6 |
- Q2 revenue rose 19.0% year over year, driven by 24% higher unit shipments from customer demand and new design wins, partly offset by a 4% decline in average selling prices. Six-month revenue rose 20.6% on 26% higher unit shipments, with the same 4% pricing decline.
- DC-to-DC products generated 89.9% of Q2 revenue and grew 19.7%; lighting-control products grew 13.2%. China accounted for $53.5 million of Q2 revenue. Asia represented approximately 91% of revenue in both the quarter and first half.
- Q2 gross margin was flat year over year; first-half gross margin improved 0.2 percentage points, primarily from better absorption of in-house test manufacturing overhead, partly offset by lower-margin product mix.
- Q2 operating income increased despite higher R&D and SG&A spending. For the first half, net income declined 10.1%, while operating income was nearly flat.
Liquidity, cash flow and capital allocation
- At June 30, cash and cash equivalents were $80.9 million and short-term investments were $150.2 million, totaling $231.0 million. Working capital was $279.1 million, up from $271.3 million at December 31, 2014. No borrowings or debt balance are reported on the presented balance sheet.
- Total cash, cash equivalents and investments, including $5.4 million of long-term auction-rate securities, were $236.4 million. Cash and cash equivalents fell $45.4 million during the first half.
- First-half operating cash flow was $23.3 million, down from $37.6 million. Management attributed the cash use in working capital chiefly to a $24.0 million inventory increase, including strategic wafer and die-bank inventory and finished goods to meet anticipated demand.
- First-half investing cash outflow was $47.1 million, including $37.7 million of net purchases of short-term investments and $6.7 million of capital expenditures. Financing cash outflow was $21.7 million, including $18.1 million of share repurchases and $13.8 million of dividends and dividend equivalents, partly offset by equity-plan proceeds.
- The company declared dividends of $0.20 per share in each of Q1 and Q2. Its repurchase authorization was extended through December 31, 2015; $20.1 million remained available at June 30.
Material changes, outlook and risks
- Tax audit resolution: The company resolved IRS audits for 2005–2007 in April 2015. The Q2 tax provision included a one-time net charge of $2.7 million, including approximately $1.6 million in taxes and $1.1 million in interest. The company also expected to pay about $1.1 million of related interest and $0.2 million of tax for 2008–2013.
- Prior-period comparison: First-half 2014 operating results included a $9.5 million O2 Micro litigation benefit, net of additional legal fees. This makes the year-over-year decline in first-half net income less indicative of underlying operating performance. The O2 Micro matter was finally resolved after the Supreme Court declined review in March 2014.
- Management said existing cash and investments, together with operating cash generation, should meet liquidity needs for the next 12 months. It gave no specific numerical revenue or earnings guidance in the provided filing text. Management described plans to develop new products and enter new product categories, while noting the semiconductor industry’s cyclicality and difficulty forecasting orders.
- Key exposures include customer and distributor concentration (the largest distributor represented 23% of Q2 revenue and 24% for the first half), heavy Asian revenue concentration, reliance on third-party manufacturing capacity, customer order cancellations or rescheduling, pricing pressure, inventory risk, and intellectual-property litigation. The company reported no material pending legal proceedings as of June 30, though ordinary-course legal matters continue.
- The $5.4 million of student-loan auction-rate securities remained illiquid, with timing of restored liquidity uncertain. The company also had $31.9 million of outstanding purchase commitments, primarily for wafers and assembly services. It stated that market-risk assessments had not materially changed.
- Controls and procedures were assessed as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported during the quarter. Sensima’s internal controls were still under evaluation.
Important facts for investors to verify
- Whether shipment growth, design wins and product mix can sustain revenue growth despite falling average selling prices and the cyclical, order-sensitive business model.
- Whether the substantial inventory build converts to sales as anticipated, and how it affects operating cash flow, reserves and future margins.
- The ongoing revenue and receivables concentration in the largest distributor and the company’s dependence on Asian markets and third-party manufacturing capacity.
- The full cash and earnings effects of the resolved tax audits, remaining unrecognized tax benefits of $11.7 million, and potential future tax changes.
- Whether planned dividends and repurchases remain sustainable while preserving liquidity, particularly given international cash repatriation taxes and continuing capital needs.
- Developments affecting the illiquid auction-rate securities, Sensima’s contingent consideration (up to $8.9 million subject to 2016 milestones), and any new litigation or product-liability claims.