Monolithic Power Systems, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited. MPS designs and sells high-performance analog and power semiconductor solutions, primarily through third-party manufacturing and distribution, across computing and storage, automotive, industrial, communications, and consumer markets.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $168.8 million | $160.0 million | $461.2 million | $428.9 million |
| Gross profit / margin | $93.2 million / 55.2% | $89.0 million / 55.6% | $254.4 million / 55.2% | $238.1 million / 55.5% |
| Operating income / margin | $30.0 million / 17.8% | $33.5 million / 20.9% | $71.9 million / 15.6% | $80.4 million / 18.7% |
| Net income | $29.5 million | $31.6 million | $76.4 million | $77.6 million |
| Diluted EPS | $0.64 | $0.71 | $1.68 | $1.75 |
| Operating cash flow | Not separately presented for the quarter | $155.3 million | $93.9 million |
Q3 revenue increased 5.5% year over year; reported unit shipments rose 6% and average selling prices were essentially flat. For the first nine months, revenue grew 7.5%, shipments rose 12%, and average selling prices declined about 2%. Growth was led by computing and storage, automotive, and industrial in Q3. Consumer revenue declined 9.4% in Q3 and 12.3% year to date; communications declined 2.0% in Q3 but rose 24.8% year to date, including strength in infrastructure and 5G-related sales.
Gross margin eased 0.4 percentage points in Q3 and 0.3 points year to date, primarily due to product mix, partly offset by lower inventory write-downs and warranty costs. Operating expenses rose faster than revenue: Q3 R&D increased 8.2% and SG&A 17.4%; year-to-date increases were 14.2% and 17.4%, respectively. Management attributed much of the increase to compensation and stock-based awards. Stock-based compensation was $21.3 million in Q3 and $60.0 million for the first nine months.
Cash, liquidity, debt, and capital allocation
- At September 30, cash and cash equivalents were $205.2 million, short-term investments $213.5 million, and long-term investments $3.3 million; combined cash and investments were $422.0 million. Working capital was $524.3 million.
- Total liabilities were $181.7 million. The filing does not report borrowings or debt; operating lease liabilities totaled $2.5 million.
- Nine-month operating cash flow was $155.3 million; investing cash outflow was $88.1 million, including $87.1 million of property and equipment purchases; financing cash outflow was $31.0 million, including $48.6 million of dividends and dividend equivalents paid. Cash, cash equivalents, and restricted cash increased $33.7 million.
- MPS purchased a Kirkland office building and land for approximately $52.9 million in March 2019. It repatriated $75 million from its Bermuda subsidiary during the first nine months, primarily to fund real estate purchases and dividends.
- The Board declared dividends of $0.40 per share for Q3, versus $0.30 a year earlier. Future dividends remain discretionary.
Material changes, outlook, and risks
- Despite revenue growth, Q3 operating income fell 10.3% and net income fell 6.5% year over year; for the first nine months, operating income fell 10.6% and net income fell 1.6%.
- Management said existing cash, investments, and operating cash generation should be sufficient for liquidity needs over the next 12 months. The filing provides no specific numerical revenue or earnings guidance for the next quarter.
- The company describes the semiconductor industry as cyclical and says the industry was experiencing a downturn. It highlights forecasting challenges because customer orders may be rescheduled or cancelled, often with limited penalty.
- Revenue is concentrated in Asia: 90% of Q3 and 89% of nine-month revenue came from customers there. China generated $105.9 million, approximately 63% of Q3 revenue. The largest distributor represented 24% of Q3 revenue and 23% year to date; the company also disclosed a major distributor receivable concentration.
- Key risks include China and broader economic conditions, U.S.-China tariffs and export restrictions, dependence on third-party wafer and assembly capacity, customer and distributor concentration, product mix and pricing pressure, and intellectual-property litigation. MPS reported no material pending legal proceedings at September 30, 2019.
- Purchase commitments were approximately $70.9 million. The outstanding one-time transition-tax liability was $20.7 million, payable in installments through 2025. The company recorded no adjustment regarding the pending Altera tax matter, citing uncertainty.
- Unusual items included a $0.7 million gain on sale of land in Q3 and nine-month interest and other income included gains from deferred-compensation investments. The nine-month effective tax rate was 4.1%, reflecting foreign income taxed at lower rates and discrete benefits, partly offset by GILTI tax.
Important facts for investors to verify
- Whether revenue growth can continue while consumer demand remains weak and gross and operating margins are under pressure.
- The extent to which rising R&D, SG&A, and performance-based stock compensation affect future earnings and share dilution.
- Exposure to China, the largest distributor, and third-party manufacturing capacity, including potential effects of trade restrictions or a semiconductor downturn.
- Whether elevated capital spending and purchase commitments translate into expected capacity or growth, and how liquidity and dividends evolve.
- Potential changes in tax expense or liabilities from GILTI, the transition tax, uncertain tax positions, and the Altera litigation.