Monolithic Power Systems, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Financial figures below are in U.S. dollars; amounts are in millions unless otherwise stated.
Business context
MPS designs and sells high-performance analog and power solutions, including DC-to-DC converters and lighting-control products. It operates as one reportable segment and relies on third parties for manufacturing and assembly. Most revenue comes from Asia; 89% of Q2 and first-half 2017 revenue was from customers there.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $112.2 | $94.1 | $212.6 | $178.6 |
| Gross profit / margin | $61.4 / 54.7% | $50.9 / 54.1% | $116.3 / 54.7% | $96.4 / 54.0% |
| Operating income / margin | $15.0 / 13.3% | $11.5 / 12.2% | $28.5 / 13.4% | $21.9 / 12.3% |
| Net income | $15.0 | $11.2 | $29.5 | $21.8 |
| Diluted EPS | $0.35 | $0.27 | $0.68 | $0.52 |
| Operating cash flow | Not separately presented for the quarter | $46.8 | $43.9 |
- Q2 revenue rose 19.3% year over year; first-half revenue rose 19.0%. Management attributed growth to increased unit shipments and higher average selling prices. Computing and storage and automotive were particularly strong in the first half, up 33.8% and 65.0%, respectively.
- For the six months, investing cash outflow was $73.7 million, including $20.5 million of property and equipment purchases and net purchases of short-term investments. Financing cash outflow was $15.6 million, primarily dividends and dividend equivalents of $16.8 million.
- At June 30, cash and cash equivalents were $71.1 million and short-term investments were $206.6 million, totaling $277.7 million. Working capital was $364.4 million, versus $330.1 million at December 31, 2016. Current assets were $427.2 million and current liabilities $62.8 million. The balance sheet lists no borrowings; it does include $94.3 million of total liabilities.
- Cash and cash equivalents declined $41.6 million during the first half, while short-term investments increased. MPS reported $283.0 million in cash, cash equivalents and investments, including $5.3 million of long-term auction-rate securities.
Material changes and notable items
- Gross margin improved modestly year over year, helped by lower labor and overhead costs as a percentage of revenue and, for the first half, a richer mix of higher-margin products. Higher inventory write-downs and warranty costs partly offset the improvement.
- Operating expenses increased: first-half R&D rose 11.3% and SG&A rose 22.1%. Stock-based compensation was $26.8 million for the first half, compared with $20.7 million a year earlier. Prior-year SG&A included a $2.9 million stock-compensation credit related to the former CFO’s departure.
- Inventories increased to $92.7 million from $71.5 million at year-end, reflecting strategic wafer and die-bank inventory and finished goods. Management cited higher demand and future growth needs.
- The company declared dividends of $0.20 per share for Q2, unchanged from Q2 2016. No shares were repurchased under the $50 million authorization during the first half; the full authorization remained available at June 30.
- Effective tax rates were 7.4% for Q2 and 5.4% for the first half. MPS had $15.3 million of unrecognized tax benefits at June 30; $3.9 million would affect the effective tax rate if recognized after valuation allowance.
Outlook, commentary and risks
- No specific revenue or earnings guidance for the remainder of 2017 is provided in the supplied filing text. Management said cash generated from operations, cash balances and short-term investments should meet liquidity requirements for the next 12 months.
- Management cited plans to develop new products and enter new product categories, while noting that semiconductor cyclicality, short order lead times and cancellable or reschedulable customer orders make forecasting difficult.
- Key disclosed risks include reliance on Asian markets and a limited customer base, manufacturing capacity and third-party supplier dependence, inventory-demand mismatches, product and technology competition, and intellectual-property litigation. One distributor represented 17% of both Q2 and first-half revenue. MPS reported no material pending legal proceedings at June 30.
- Cash held by international subsidiaries may incur U.S. tax if repatriated; MPS said it intended to reinvest those funds overseas. The company also highlighted illiquidity and valuation uncertainty in its remaining government-backed student-loan auction-rate securities.
- MPS adopted the new stock-compensation accounting standard in January 2017, recording a $5.1 million cumulative adjustment to retained earnings for its election to recognize forfeitures as they occur. It plans to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. The quantified deferred U.S.-distributor revenue balance was $2.8 million, with related deferred costs of $0.3 million; the company could not yet reasonably estimate the standard’s overall financial impact.
Important facts for investors to verify
- Whether revenue growth, particularly in computing and storage and automotive, continues and converts into profitable growth.
- Whether inventory growth, write-downs and warranty costs remain manageable as demand and customer orders fluctuate.
- The effects of distributor and geographic concentration, supplier capacity, and the $58.6 million in outstanding purchase commitments.
- How stock-based compensation, performance awards and share dilution affect future expenses and per-share results.
- The eventual impact of revenue-standard adoption, uncertain tax positions and the illiquid auction-rate securities.
- Whether dividends or repurchases continue; future dividends are at the Board’s discretion, and the repurchase authorization is not a commitment to buy shares.