Monolithic Power Systems, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Business context
MPS designs and sells high-performance analog power solutions for computing and storage, automotive, industrial, communications and consumer markets. It reports as one segment and relies on third parties for manufacturing and assembly. About 90% of revenue came from customers in Asia in both Q2 and the first half of 2021.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $293.3 | $186.2 | $547.8 | $352.0 |
| Gross profit | $164.2 | $102.6 | $305.3 | $194.0 |
| Gross margin | 56.0% | 55.1% | 55.7% | 55.1% |
| Operating income | $60.6 | $28.0 | $106.7 | $58.9 |
| Operating margin | 20.7% | 15.0% | 19.5% | 16.7% |
| Net income | $55.2 | $30.2 | $100.6 | $65.9 |
| Diluted EPS | $1.16 | $0.64 | $2.11 | $1.41 |
Q2 revenue increased 57.5% year over year; management attributed growth to higher sales across all end markets, 37% more unit shipments and approximately 15% higher average selling prices, mainly from product mix. First-half revenue rose 55.6%, with shipments up 32% and average selling prices up 17%. Automotive was the fastest-growing Q2 market (+173.9%, partly against pandemic-related OEM shutdowns in Q2 2020); computing and storage grew 36.9%, industrial 62.9%, communications 24.5% and consumer 59.7%.
Gross margin improved year over year, which management attributed mainly to lower manufacturing overhead and inventory write-downs as a share of revenue, and favorable mix for the first half. Operating expenses rose in dollars, including R&D (+41% in Q2) and SG&A (+40%); both declined as a share of revenue. Stock-based compensation was $32.1 million in Q2 and $60.7 million for the first half, including performance-based awards.
Cash flow and liquidity: First-half operating cash flow was $174.0 million, versus $110.7 million a year earlier. Investing used $252.2 million, including $58.3 million of property and equipment purchases and net purchases of short-term investments; financing used $38.1 million, including $52.2 million of dividends and dividend equivalents paid. Cash, cash equivalents and restricted cash declined $114.7 million to $220.3 million. At June 30, cash and cash equivalents were $220.2 million and short-term investments were $450.1 million; working capital was $767.3 million, versus $695.0 million at year-end 2020. No borrowings are presented; reported obligations include lease liabilities, tax liabilities and other accrued liabilities.
Balance sheet: Total assets were $1.373 billion and total liabilities were $285.6 million at June 30. Inventory was $177.3 million, up from $157.1 million at December 31, 2020. The current ratio was approximately 5.2, based on reported current assets and current liabilities.
Material changes and notable items
- Q2 net income rose to $55.2 million from $30.2 million; first-half net income increased to $100.6 million from $65.9 million. The prior-year first-half comparison included a $3.5 million income tax benefit, while 2021 had $11.8 million of tax expense.
- Capital spending increased: first-half property and equipment purchases were $58.3 million versus $24.5 million a year earlier.
- Quarterly dividends declared were $0.60 per share in Q2 2021, compared with $0.50 in Q2 2020; first-half dividends declared were $1.20 per share versus $1.00.
- Outstanding supplier purchase commitments were approximately $160.1 million. The company also reported a $16.8 million remaining transition-tax liability payable in installments through 2025.
- Warranty reserves were $10.9 million at June 30, compared with $1.2 million a year earlier. The filing cites higher warranty expense among factors contributing to increased cost of revenue.
Outlook, commentary and risks
The filing provides no numerical revenue or earnings guidance. Management said existing cash, investments and operating cash generation were expected to meet liquidity needs for the next 12 months, while noting uncertainty and the possibility of changing dividend payments or raising capital. It plans to continue developing new products and entering product categories and markets. Management reported no material adverse effect from COVID-19 on first-half operations, but could not assure that demand would remain unaffected for the rest of 2021.
Key risks include semiconductor cyclicality and difficult forecasting; supplier wafer capacity constraints, which management said had at times constrained sales and growth; inventory and manufacturing cost exposure; concentration in Asia and China; and dependence on distributors. The largest distributor represented 28% of Q2 revenue and 27% of first-half revenue; a second distributor represented 17% in both periods. The filing also highlights trade restrictions and tariffs, foreign-exchange exposure, competition, product quality and intellectual-property litigation risks, and evolving Chinese data-security regulation. There were no material pending legal proceedings reported at June 30. Disclosure controls were concluded to be effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether reported shipment and selling-price growth, including strong automotive growth against a pandemic-affected prior-year period, is sustainable.
- Whether wafer and other supplier capacity can support demand, and the effect of capacity constraints or higher costs on sales and margins.
- How distributor concentration, particularly the largest distributor’s share of revenue, and the company’s Asia/China exposure evolve.
- Whether inventory growth, warranty costs, purchase commitments and increased capital spending translate into returns and adequate supply without margin pressure.
- How much of reported earnings and operating cash flow is affected by stock-based compensation, tax-rate changes and other non-cash or investment-related items; and whether dividends remain supportable.