Monolithic Power Systems, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. MPS designs energy-efficient power-management semiconductor solutions and uses a fabless manufacturing model. Its principal product family is DC-to-DC power ICs.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $333.1 million | $282.5 million |
| Gross profit / margin | $180.2 million / 54.1% | $152.6 million / 54.0% |
| Operating income / margin | $41.1 million / 12.3% | $35.3 million / 12.5% |
| Net income | $35.2 million | $35.5 million |
| Diluted EPS | $0.86 | $0.89 |
| Operating cash flow | $69.7 million | $74.1 million |
- FY2015 revenue grew 17.9%; management attributed growth to 17% higher unit shipments and a 1% increase in average selling prices. DC-to-DC products generated $299.7 million, or 90% of revenue; lighting-control products generated $33.3 million.
- Fourth-quarter revenue was $86.9 million, operating income $11.8 million, net income $10.1 million and diluted EPS $0.24. Q4 revenue was below Q3’s $91.2 million; it was up from $75.7 million in Q4 2014.
- At year-end, cash and cash equivalents were $90.9 million and short-term investments $144.1 million, totaling $235.0 million; working capital was $288.6 million. Total liabilities were $62.8 million, and the balance sheet reports no borrowings or other debt.
- FY2015 investing cash flow was negative $57.2 million, including $16.0 million of property and equipment purchases. Financing cash flow was negative $46.7 million, including $32.3 million of share repurchases and $30.0 million of dividends and dividend equivalents paid.
- Annual dividends declared rose to $0.80 per share from $0.45 in 2014. Stock repurchases totaled 645,000 shares for $32.3 million in 2015.
Material changes versus FY2014
- Revenue increased 17.9%, while gross margin edged up from 54.0% to 54.1%. Operating income rose 16.3%, but operating margin declined from 12.5% to 12.3%.
- Net income decreased slightly despite higher operating income. The effective tax rate rose to 17.2% from 2.5%, including a one-time $2.7 million net tax charge related to resolution of IRS audits.
- FY2014 included an $8.0 million net litigation benefit, principally the recognition of a $9.5 million O2 Micro award. FY2015 instead recorded $1.0 million of litigation expense.
- R&D expense increased 12.3% to $65.8 million; SG&A increased 8.3% to $72.3 million. Stock-based compensation was $41.6 million, up from $33.5 million.
- Operating cash flow declined $4.4 million, with a $22.2 million increase in inventory a significant use of cash. Cash and cash equivalents fell by $35.4 million, while the investment portfolio shifted toward short-term investments.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management expects to develop products in existing and new categories, expand into new markets, and continue substantial R&D investment; it expects R&D expense to increase in absolute dollars over the foreseeable future.
- Management believes operating cash flow, cash balances and short-term investments will meet liquidity requirements for the next 12 months. It also disclosed plans for up to $17 million of additional office-space purchases in China in 2016 and a new $50 million repurchase authorization through December 31, 2016.
- Business is concentrated in Asia (91% of FY2015 revenue), with one distributor responsible for 24% of revenue. MPS also depends on third-party wafer, assembly and testing capacity, and customer orders can be rescheduled or cancelled on short notice.
- Risks include semiconductor cyclicality, pricing pressure, inventory forecasting and obsolescence, customer and distributor concentration, manufacturing-capacity constraints, China and foreign-exchange exposure, intellectual-property disputes, and dependence on specialized personnel. MPS held $5.4 million of illiquid auction-rate securities at year-end.
- The Sensima acquisition’s contingent consideration was reduced from $2.5 million to zero in Q4 2015 and credited to SG&A because management did not expect the 2016 milestones to be achieved. The maximum contractual payment could be $8.9 million if the conditions are met.
- No material pending legal proceedings were reported as of December 31, 2015, but legal expenses and intellectual-property litigation remain ongoing risks. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
- CFO Meera Rao announced plans to retire effective March 31, 2016; she was to remain available in an advisory capacity during the transition.
Important facts for investors to verify
- Whether shipment growth and new design wins continue, and whether the product mix sustains gross margins as selling prices face pressure.
- Inventory growth, its relation to customer demand and any subsequent write-downs or excess channel inventory.
- Distributor concentration, receivable exposure, and the effect of any customer or distributor changes.
- The cash-flow and earnings effects of stock compensation, dividends, repurchases, planned China property spending, and any future tax payments to repatriate foreign funds.
- Developments in the auction-rate securities’ liquidity and valuation, tax positions, Sensima milestones, and any new litigation or manufacturing-capacity constraints.