Monolithic Power Systems, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 1, 2017. The filing is an annual report, with fourth-quarter results also reported. MPS designs and sells high-performance power-management semiconductors using a fabless manufacturing model. Its products serve consumer, industrial, computing and storage, and communications markets.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $388.7 million | $333.1 million | +16.7% |
| Gross profit / margin | $210.9 million / 54.3% | $180.2 million / 54.1% | Margin +0.2 percentage points |
| Operating income / margin | $54.4 million / 14.0% | $41.1 million / 12.3% | +32.6% |
| Net income / diluted EPS | $52.7 million / $1.26 | $35.2 million / $0.86 | Net income +49.9% |
| Cash from operating activities | $107.8 million | $69.7 million | +$38.1 million |
Fourth-quarter 2016 revenue was $103.6 million, versus $86.9 million in fourth-quarter 2015; net income was $16.6 million versus $10.1 million, and diluted EPS was $0.39 versus $0.24. Q4 gross margin was approximately 54.5%, compared with approximately 54.0% a year earlier. Revenue declined from $106.5 million in Q3 2016.
At year-end, cash and cash equivalents were $112.7 million, short-term investments $155.5 million, and long-term investments $5.4 million. Working capital was $330.1 million, compared with $288.6 million in 2015. Total liabilities were $80.0 million; the balance sheet reports no borrowings or debt balance. Investing cash outflow was $55.7 million, including $37.1 million of property and equipment purchases. Financing cash outflow was $28.1 million, including $33.1 million of dividends and dividend equivalents. The company declared $0.80 per share in dividends for 2016 and made no share repurchases during the year.
Business mix and changes versus prior year
- Computing and storage revenue rose 42.4% to $80.6 million; industrial rose 35.1% to $89.6 million; consumer rose 6.0% to $153.7 million. Communications was essentially flat at $64.7 million.
- Unit shipments increased 19%, while average selling prices decreased 2%. Management attributed growth to stronger demand from existing customers and design wins with new customers.
- DC-to-DC products generated approximately 90% of revenue. Sales through distributors accounted for approximately 88% of revenue. The largest distributor represented 22% of revenue, down from 24% in 2015.
- Asia accounted for 91% of revenue. China alone contributed $245.2 million.
- Gross margin improved modestly as direct and overhead costs declined as a share of revenue. R&D rose 11.9% to $73.6 million; SG&A rose 14.8% to $83.0 million. Stock-based compensation expense was $45.0 million.
Outlook, risks and unusual items
- The filing gives no quantified revenue or earnings guidance. Management expects existing cash, investments and operating cash generation to cover liquidity needs for at least the next 12 months. It expects continued investment in R&D and product expansion.
- Key risks include semiconductor cyclicality and pricing pressure; reliance on Asian markets and a major distributor; customer order cancellations and inventory forecasting; and dependence on third-party wafer, assembly and test capacity. Management has previously experienced capacity constraints.
- Legal proceedings can generate volatile costs and create risk of damages, injunctions or restrictions on product sales. In December 2016, MPS settled a patent dispute with Silergy for $3.0 million: $0.6 million was recorded as a 2016 litigation credit, while $2.4 million for future patent licenses will be recognized over five years. The filing also describes other ordinary-course legal matters.
- Cash and short-term investments held by foreign subsidiaries totaled approximately $139.7 million; repatriation could incur U.S. tax. MPS intends to reinvest foreign earnings abroad. It also held $5.4 million of illiquid auction-rate securities, with failed auctions and underlying maturities of up to 31 years.
- The 2016 effective tax rate was 7.9%, reflecting primarily lower-tax foreign income and valuation-allowance effects. MPS reported a $27.4 million valuation allowance against deferred tax assets. The 2015 rate included a one-time $2.7 million tax-audit charge.
- U.S. export restrictions affecting customer ZTE were temporarily lifted through March 29, 2017, as disclosed in the filing. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether growth in industrial and computing and storage can continue, and whether lower selling prices or product mix affect margins.
- Exposure to Asia, China, and the largest distributor, including customer demand and collection trends.
- Availability, yields, cost and lead times from third-party manufacturers, and the level and quality of inventory.
- Progress and potential financial impact of legal matters, the Silergy license revenue recognition, and any export-control developments.
- Liquidity and investment risk, including the illiquid auction-rate securities and tax implications of repatriating overseas cash.
- Future stock-based compensation, dilution, dividend decisions and any use of the $50 million share-repurchase authorization extended through December 31, 2017.