MONOLITHIC POWER SYSTEMS, INC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that have been made pursuant to and in reliance on the provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements concerning:
• the above-average industry growth of product and market areas that we have
targeted,
our plan to increase our revenue through the introduction of new products
• within our existing product families as well as in new product categories and
families,
• our belief that we may incur significant legal expenses that vary with the
level of activity in each of our current or future legal proceedings,
• the effect that liquidity of our investments has on our capital resources,
• the continuing application of our products in the computing and storage,
automotive, industrial, communications and consumer markets,
• estimates of our future liquidity requirements,
• the cyclical nature of the semiconductor industry,
• the effects of the COVID-19 pandemic on the global economy, the semiconductor
industry and our business;
• protection of our proprietary technology,
• business outlook for the remainder of 2021 and beyond,
• the factors that we believe will impact our business, operations and financial
condition, as well as our ability to achieve revenue growth,
• the percentage of our total revenue from various end markets,
• our ability to identify, acquire and integrate companies, businesses and
products, and achieve the anticipated benefits from such acquisitions and
integrations,
• the impact of various tax laws and regulations on our income tax provision,
financial position and cash flows,
• our plan to repatriate cash from our subsidiary in Bermuda ,
• our intention and ability to pay future cash dividends and dividend
equivalents, and
• the factors that differentiate us from our competitors.
In some cases, words such as "would," "could," "may," "should," "predict,"
"potential," "targets," "continue," "anticipate," "expect," "intend," "plan,"
"believe," "seek," "estimate," "project," "forecast," "will," the negative of
these terms or other variations of such terms and similar expressions relating
to the future identify forward-looking statements. All forward-looking
statements are based on our current outlook, expectations, estimates,
projections, beliefs and plans or objectives about our business and our
industry, including our expectations regarding the potential impacts of the
COVID-19 pandemic on our business. These statements are not guarantees of future
performance and are subject to risks and uncertainties. Actual events or results
could differ materially and adversely from those expressed in any such
forward-looking statements. Risks and uncertainties that could cause actual
results to differ materially include those set forth throughout this Quarterly
Report on Form 10-Q and, in particular, in the section entitled "Item 1A. Risk
Factors." Except as required by law, we disclaim any duty to, and undertake no
obligation to, update any forward-looking statements, whether as a result of new
information relating to existing conditions, future events or otherwise or to
release publicly the results of any future revisions we may make to
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Readers are
cautioned not to place undue reliance on such statements, which speak only as of
the date of this Quarterly Report on Form 10-Q. Readers should carefully review
future reports and documents that we file from time to time with the SEC , such
as our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K.
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Table of Contents Overview We are a leading semiconductor company that designs, develops and markets high-performance power solutions. Incorporated in 1997, our core strengths include deep system-level and applications knowledge, strong analog design expertise and innovative proprietary process technologies. These combined strengths enable us to deliver highly integrated monolithic products that offer energy-efficient, cost-effective, easy-to-use solutions for systems found in computing and storage, automotive, industrial, communications and consumer applications. Our mission is to reduce total energy consumption in our customers' systems with green, practical and compact solutions. We believe that we differentiate ourselves by offering solutions that are more highly integrated, smaller in size, more energy-efficient, more accurate with respect to performance specifications and, consequently, more cost-effective than many competing solutions. We plan to continue to introduce new products within our existing product families, as well as in new innovative product categories. We operate in the cyclical semiconductor industry where there is seasonal demand for certain products. We are not immune from current and future industry downturns, but we have targeted product and market areas that we believe have the ability to offer above average industry performance over the long term.
We work with third parties to manufacture and assemble our ICs. This has enabled us to limit our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths.
Following the introduction of a product, our sales cycle generally takes a number of quarters after we receive an initial customer order for a new product to ramp up. Typical lead times for orders are generally 16 to 26 weeks. These factors, combined with the fact that orders in the semiconductor industry can typically be cancelled or rescheduled without significant penalty to the customer, make the forecasting of our orders and revenue difficult. We derive most of our revenue from sales through distribution arrangements and direct sales to customers inAsia , where our products are incorporated into end-user products. Our revenue from direct or indirect sales to customers inAsia was 89% and 90% for the three months endedMarch 31, 2021 and 2020, respectively. We derive a majority of our revenue from the sales of our DC to DC converter products which serve the computing and storage, automotive, industrial, communications and consumer markets. We believe our ability to achieve revenue growth will depend, in part, on our ability to develop new products, enter new market segments, gain market share, manage litigation risk, diversify our customer base and continue to secure manufacturing capacity.
Impact of COVID-19 on Our Business
Our primary focus is to continue to execute our business plan and mitigate the effect of the COVID-19 pandemic on our financial position and operations, while actively taking all necessary precautions to ensure the safety of our employees, our suppliers and our customers. The pandemic did not materially and adversely impact our overall operating results or business operations during the three months endedMarch 31, 2021 . Some of the key developments and initiatives we implemented since the outbreak of the COVID-19 pandemic inMarch 2020 include, but are not limited to, the following:
? Employees:
Our top priority during the pandemic is protecting the health and safety of our
employees. As governments continue to institute new guidelines on commercial
operations, we continue to monitor new developments and work to ensure our
compliance while also maintaining business continuity for essential operations.
In the
work-from-home arrangements in accordance with local regulations. To date, we
believe these arrangements have contributed to the health and safety of our
employees and allowed us to successfully maintain business operations and
customer relations.
? Facilities and Supply Chain:
Our manufacturing facilities in
operational and have experienced minimal disruptions, as we continue to follow
the proper guidance issued by governmental authorities. In addition, we have
not experienced any major supply chain disruptions as a result of the pandemic.
? Customers:
Overall, we did not experience an adverse impact on customer demand during the
first quarter of 2021 as a result of the pandemic. Our revenue increased in all
of our end markets compared to the same period in 2020. Furthermore, there were
no significant delays in payments by our customers. However, we cannot provide
assurance that we will not experience a material and adverse impact on customer
demand for the remainder of 2021 as a result of the pandemic.
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Table of Contents
? Liquidity and Capital Resources:
Our cash and investment balances remain strong and we continue to generate
positive operating cash flows. We believe we have sufficient liquidity to
satisfy our cash needs as we manage through the current uncertain environment.
However, we will continue to monitor, evaluate and take action, as necessary,
to preserve adequate liquidity to support our business for the remainder of
2021. We are actively working with our stakeholders, including customers, suppliers and employees, to address the impact of the pandemic. We will continue to monitor the situation, to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences. However, we cannot reasonably estimate the duration and severity of the pandemic or its ultimate impact on the global economy, the semiconductor industry and our business. A prolonged economic slowdown as a result of the pandemic could materially and adversely impact our business, results of operations and financial condition for the remainder 2021 and beyond.
Cybersecurity Risk Management
We are committed to protecting our information technology ("IT") assets,
including computers, systems, corporate networks and sensitive data, from
unauthorized access or attack. We have established an internal global IT policy
handbook as well as IT security management control procedures designed to cover
the following key areas:
? Create information security awareness and define responsibilities among our
employees and business partners; ? Implement controls to identify IT risks and monitor the use of our systems and
information resources; ? Establish key policies and processes to adequately and timely respond to
security threats; ? Maintain disaster recovery and business continuity plans; and ? Ensure compliance with applicable laws and regulations regarding the management
of information security. We require all new employees to attend an IT security training orientation. In addition, on an as-needed basis, our IT team provides trainings and updates to employees related to our policies and procedures. OurIT Steering Committee , which consists of our senior management and IT team, meets on a regular basis to review initiatives and projects to improve IT security, as well as resources and budgets for our cybersecurity compliance and education efforts. Our Audit Committee of the Board of Directors, which consists of three independent members, is responsible for the oversight of our cybersecurity risk program. On a regular basis, the Audit Committee reviews reports and updates from our Chief Financial Officer about major risk exposures, their potential impact on our business operations, and management's strategies to assess, monitor and mitigate those risks. The Audit Committee also provides updates of their oversight and findings to the Board of Directors. We believe we have adequate resources and sufficient policies, procedures and oversight in place to identify and manage our IT security risks to our business operations. To date, we have not experienced any material information security breaches or incurred significant operating expenses related to information security breaches.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated financial statements in accordance with GAAP, we are required to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying disclosures. Estimates and judgments used in the preparation of our condensed consolidated financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, including demand for our products, economic conditions and other current and future events, such as the impact of the COVID-19 pandemic. As of the date of issuance of these condensed consolidated financial statements, we are not aware of any specific event or circumstance that would require our management to update the significant estimates and assumptions used in the preparation of the condensed consolidated financial statements, as compared to those disclosed in the Annual Report on Form 10-K for the year endedDecember 31, 2020 . As new events continue to evolve and additional information becomes available, any changes to these estimates and assumptions will be recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from these estimates and assumptions, and any such differences may be material to our condensed consolidated financial statements. Results of Operations
The table below sets forth the data on the Condensed Consolidated Statements of Operations as a percentage of revenue:
Three Months Ended March 31,
2021 2020
(in thousands, except percentages)
Revenue $ 254,455 100.0 % $ 165,778 100.0 %
Cost of revenue 113,396 44.6 74,331 44.8
Gross profit 141,059 55.4 91,447 55.2
Operating expenses:
Research and development 41,892 16.5 25,956 15.7Selling, general and administrative 51,453 20.2 32,164
19.4
Litigation expense 1,628 0.6 2,341 1.4
Total operating expenses 94,973 37.3 60,461 36.5
Income from operations 46,086 18.1 30,986 18.7
Other income (expense), net 2,587 1.0 (1,714 ) (1.0 )
Income before income taxes 48,673 19.1 29,272 17.7
Income tax expense (benefit) 3,260 1.3 (6,484 ) (3.9 )
Net income $ 45,413 17.8 % $ 35,756 21.6 %
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Table of Contents Revenue
The following table summarizes our revenue by end market:
Three Months Ended March 31,
% of % of
End Market 2021 Revenue 2020 Revenue Change
(in thousands, except percentages)
Computing and storage $ 67,495 26.5 % $ 51,957 31.3 % 29.9 %
Automotive 44,867 17.6 23,312 14.1 92.5 %
Industrial 39,788 15.6 25,237 15.2 57.7 %
Communications 36,070 14.2 27,870 16.8 29.4 %
Consumer 66,235 26.1 37,402 22.6 77.1 %
Total $ 254,455 100.0 % $ 165,778 100.0 % 53.5 %
Revenue for the three months ended March 31, 2021 was $254.5 million , an
increase of $88.7 million , or 53.5%, from $165.8 million for the three months
ended March 31, 2020 . This increase was driven by higher sales in all of our
end markets. Overall unit shipments increased by 28% and average sales prices
increased by approximately 17% compared to the same period in 2020. The increase
in average sales prices was primarily driven by favorable changes in product mix
with more sales coming from products with higher unit prices.
For the three months ended March 31, 2021 , revenue from the computing and
storage market increased $15.5 million , or 29.9%, from the same period in 2020.
This increase was primarily driven by strength in the high-performance notebook
and storage markets. Revenue from the automotive market increased $21.6 million ,
or 92.5%, from the same period in 2020. This increase was primarily driven by
sales growth for infotainment, safety and connectivity applications. Revenue
from the industrial market increased $14.6 million , or 57.7%, from the same
period in 2020. This increase was primarily driven by higher sales in power
source and security products. Revenue from the communications market increased
$8.2 million , or 29.4%, from the same period in 2020. This increase was
primarily driven by increased infrastructure sales. Revenue from the
consumer market increased $28.8 million , or 77.1%, from the same period in 2020.
This increase was primarily driven by increased sales for gaming, appliances and
mobile devices.
Cost of Revenue and Gross Margin
Cost of revenue primarily consists of costs incurred to manufacture, assemble
and test our products, as well as warranty costs, inventory-related and other
overhead costs, and stock-based compensation expenses.
Three Months Ended March 31,
2021 2020 Change
(in thousands, except percentages)
Cost of revenue $ 113,396 $ 74,331 52.6 %
As a percentage of revenue 44.6 % 44.8 %
Gross profit $ 141,059 $ 91,447 54.3 %
Gross margin 55.4 % 55.2 %
Cost of revenue was $113.4 million , or 44.6% of revenue, for the three months
ended March 31, 2021 , and $74.3 million , or 44.8% of revenue, for the three
months ended March 31, 2020 . The $39.1 million increase in cost of revenue was
primarily due to a 28% increase in overall unit shipments and a 15% increase in
the average direct cost of units shipped. The increase in cost of revenue was
also driven by an increase in warranty expenses and inventory write-downs.
Gross margin was 55.4% for the three months ended March 31, 2021 , compared with
55.2% for the three months ended March 31, 2020 . The increase in gross margin
was mainly driven by a more favorable product mix, offset in part by higher
warranty expenses and inventory write-downs as a percentage of revenue.
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Table of Contents
Research and Development ("R&D")
R&D expenses primarily consist of salary and benefit expenses, bonuses,
stock-based compensation and deferred compensation for design and product
engineers, expenses related to new product development and supplies, and
facility costs.
Three Months Ended March 31,
2021 2020 Change
(in thousands, except percentages)
R&D expenses $ 41,892 $ 25,956 61.4 %
As a percentage of revenue 16.5 % 15.7 %
R&D expenses were $41.9 million , or 16.5% of revenue, for the three months ended
March 31, 2021 , and $26.0 million , or 15.7% of revenue, for the three months
ended March 31, 2020 . The $15.9 million increase in R&D expenses was primarily
due to an increase of $7.9 million in cash compensation expenses, which include
salary, benefits and bonuses, an increase of $1.9 million in new product
development expenses, an increase of $1.8 million in stock-based compensation
expenses, which were mainly associated with performance-based equity awards, and
an increase of $1.8 million in expenses related to changes in the value of the
deferred compensation plan liabilities. Our R&D headcount was 909 employees as
of March 31, 2021 , compared with 837 employees as of March 31, 2020 .
Selling, General and Administrative ("SG&A")
SG&A expenses primarily include salary and benefit expenses, bonuses, stock-based compensation and deferred compensation for sales, marketing and administrative personnel, sales commissions, travel expenses, facilities costs, and professional service fees.
Three Months Ended March 31,
2021 2020 Change
(in thousands, except percentages)
SG&A expenses $ 51,453 $ 32,164 60.0 %
As a percentage of revenue 20.2 % 19.4 %
SG&A expenses were $51.5 million , or 20.2% of revenue, for the three months
ended March 31, 2021 , and $32.2 million , or 19.4% of revenue, for the three
months ended March 31, 2020 . The $19.3 million increase in SG&A expenses was
primarily due to an increase of $8.0 million in stock-based compensation
expenses, which were mainly associated with performance-based equity awards, an
increase of $5.3 million in cash compensation expenses, which include salary,
benefits and bonuses, an increase of $2.8 million in expenses related to changes
in the value of the deferred compensation plan liabilities, and an increase of
$1.6 million in commission expenses driven by higher revenue. Our SG&A headcount
was 585 employees as of March 31, 2021 , compared with 513 employees as of March
31, 2020 .
Litigation Expense
Litigation expense was $1.6 million for the three months ended March 31, 2021 ,
compared with $2.3 million for the three months ended March 31, 2020 . The
decrease was due to a decrease in litigation activity related to ongoing patent
infringement and other matters.
Other Income (Expense), Net
Other income, net, was $2.6 million for the three months ended March 31, 2021 ,
compared with other expense, net, of $1.7 million for the three months ended
March 31, 2020 . The increase was primarily due to an increase of $4.9 million in
income related to changes in the value of the deferred compensation plan
investments, which was partially offset by an increase of $0.3 million in
amortization of the premium on available-for-sale securities.
Income Tax Expense (Benefit)
The income tax provision or benefit for interim periods is generally determined
using an estimate of our annual effective tax rate and adjusted for discrete
items, if any, in the relevant period. Each quarter the estimate of the annual
effective tax rate is updated, and if our estimated tax rate changes, a
cumulative adjustment is made.
The income tax expense for the three months ended March 31,
2021 was $3.3 million , or 6.7% of pre-tax income. The effective tax rate
differed from the federal statutory rate primarily due to foreign income from
our subsidiaries in Bermuda and China being taxed at lower statutory tax rates,
and excess tax benefits from stock-based compensation. The decrease in the
effective tax rate relative to the federal statutory rate was partially offset
by the inclusion of the GILTI tax.
The income tax benefit for the three months ended March 31,
2020 was $6.5 million , or 22.2% of pre-tax income. The effective tax rate
differed from the federal statutory rate primarily due to excess tax benefits
from stock-based compensation, and foreign income from our subsidiaries in
Bermuda and China being taxed at lower statutory tax rates. The decrease in the
effective tax rate relative to the federal statutory rate was partially offset
by the inclusion of the GILTI tax.
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Table of Contents
Liquidity and Capital Resources
March 31, December 31,
2021 2020
(in thousands, except percentages)
Cash and cash equivalents $ 218,368 $ 334,944
Short-term investments 420,455 260,169
Total cash, cash equivalents and short-term investments
$ 595,113 Percentage of total assets 48.8 % 49.2 % Total current assets$ 922,430 $ 841,998 Total current liabilities (187,909 ) (146,969 ) Working capital$ 734,521 $ 695,029 As ofMarch 31, 2021 , we had cash and cash equivalents of$218.4 million and short-term investments of$420.5 million , compared with cash and cash equivalents of$334.9 million and short-term investments of$260.2 million as ofDecember 31, 2020 . As ofMarch 31, 2021 ,$103.5 million of cash and cash equivalents and$223.5 million of short-term investments were held by our international subsidiaries. For the three months endedMarch 31, 2021 , we repatriated$70 million of cash from ourBermuda subsidiary to theU.S. The proceeds will primarily be used to fund our ongoing business operations. We may repatriate additional cash from ourBermuda subsidiary to fund our expenditures in future periods. We anticipate that earnings from other foreign subsidiaries will continue to be indefinitely reinvested. The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories and other current assets, reduced by accounts payable, accrued compensation and related benefits, and other accrued liabilities. As ofMarch 31, 2021 , we had working capital of$734.5 million , compared with working capital of$695.0 million as ofDecember 31, 2020 . The$39.5 million increase in working capital was due to an$80.4 million increase in current assets, which was partially offset by a$40.9 million increase in current liabilities. The increase in current assets was primarily due to an increase in short-term investments, accounts receivable and inventories, which was partially offset by a decrease in cash and cash equivalents. The increase in current liabilities was due to an increase in accounts payable, accrued compensation and related benefits and other accrued liabilities.
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