Monolithic Power Systems, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with Q1 2017 unless otherwise noted. Amounts are in U.S. dollars. MPS designs and sells high-performance power-management semiconductor solutions and operates as one reportable segment.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $129.2 million | $100.4 million; up 28.7% |
| Gross profit / margin | $71.5 million / 55.4% | $54.8 million / 54.6% |
| Operating income / margin | $22.0 million / 17.1% | $13.6 million / 13.5% |
| Net income / diluted EPS | $21.9 million / $0.49 | $14.5 million / $0.33 |
| Operating cash flow | $16.3 million | $21.9 million |
| Cash, cash equivalents and short-term investments | $307.3 million | $299.1 million at December 31, 2017 |
| Working capital | $410.8 million | $383.3 million at December 31, 2017 |
Revenue growth reflected an 18% increase in unit shipments and an 8% increase in average selling prices. Gross margin improved 0.8 percentage points, helped by product mix and lower amortization, partly offset by inventory write-downs and warranty expense. Operating cash flow declined year over year, with working-capital changes reducing cash by $23.8 million, including increases in receivables and inventory.
Investing cash outflow was $25.2 million, including $7.4 million of property and equipment purchases and $16.5 million of net short-term investment purchases. Financing provided $1.0 million; dividends and dividend equivalents paid were $8.3 million. The balance sheet reports no borrowings or other interest-bearing debt; total liabilities were $139.5 million. Management said existing cash, investments and operating cash generation should meet liquidity needs for the next 12 months.
Material changes and business mix
- Revenue increased across consumer (up 32.4%), computing and storage (up 50.2%), industrial (up 14.3%) and automotive (up 43.8%); communications declined 4.2%.
- Consumer represented 36.5% of revenue and computing and storage 24.0%. DC-to-DC products generated $119.3 million of revenue.
- Asia accounted for 88% of revenue. The largest distributor contributed 20% of revenue; another distributor contributed 10%.
- Research and development expense rose 14.4% to $21.6 million; SG&A rose 23.7% to $27.3 million. Stock-based compensation increased to $15.0 million from $11.7 million.
- Quarterly dividend declared increased from $0.20 to $0.30 per share. The filing states future dividends remain subject to board discretion.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management plans to pursue new products and product categories and identifies long-term growth opportunities in targeted markets, while cautioning that semiconductor demand is cyclical and quarterly forecasting is difficult.
- Customer orders can be cancelled or rescheduled on short notice; typical order lead times are under 90 days. Manufacturing depends on third-party suppliers, and capacity constraints have previously limited sales growth. Purchase commitments were $67.0 million at quarter-end.
- Key exposures include dependence on Asia, customer and distributor concentration, semiconductor cyclicality, supplier capacity and yields, inventory risk, competition, product quality and warranty claims, intellectual-property litigation, foreign exchange, and potential U.S.-China tariffs.
- No material pending legal proceedings were reported at March 31, 2018. Litigation expense was $0.5 million for the quarter; management warns legal costs may fluctuate and adverse intellectual-property outcomes could affect sales or require damages.
- The company adopted revenue-recognition Topic 606 on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $0.4 million net of tax; the reported Q1 revenue impact versus prior guidance was $0.2 million and the net-income impact was $0.1 million.
- The 2017 Tax Act estimates remained provisional. The quarter’s tax provision was $0.6 million (2.8% effective rate); the remaining deemed-repatriation transition-tax liability was $22.0 million, payable in installments through 2025. Management cited uncertainty as it continues evaluating the law and GILTI provisions.
- Management concluded disclosure controls were effective at a reasonable assurance level. It reported no other material change in internal control over financial reporting beyond controls implemented for Topic 606.
Investor verification points
- Assess whether shipment and selling-price growth, especially in computing and storage and automotive, is sustainable and whether communications demand recovers.
- Monitor receivables, inventory and operating cash conversion, as cash flow was below net income and working capital absorbed cash.
- Track gross margin against inventory write-downs, warranty costs, manufacturing costs and product mix; review the continuing effect of substantial stock-based compensation.
- Verify supplier capacity, the $67.0 million purchase commitments, and exposure to concentrated Asian customers and distributors.
- Review subsequent updates to Tax Act estimates, transition-tax payments, and the company’s plans for overseas cash and dividends.
- Check later filings for developments in litigation, tariffs, and the liquidity or valuation of the $5.3 million auction-rate securities position.