10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 14, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to ____________.
Commission File Number: 0-21184
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0629024
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224-6199
(480) 792-7200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's
Principal Executive Offices)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, as of November 3,
2000:
COMMON STOCK, $.001 PAR VALUE: 119,260,574 SHARES
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 and March 31, 2000...........................3
Condensed Consolidated Statements of Income -
Three and Six Months Ended September 30, 2000
and September 30, 1999..........................................4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 2000 and September 30, 1999......5
Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......16
PART II. OTHER INFORMATION.
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 6. Exhibits and Reports on Form 8-K.................................18
SIGNATURES ...................................................................19
2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
(Shares and per share amounts have been restated to reflect a 3-for-2 stock
split effected September 26, 2000.)
See accompanying notes to condensed consolidated financial statements.
3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except share amounts)
(Shares and per share amounts have been restated to reflect a 3-for-2 stock
split effected September 26, 2000.)
See accompanying notes to condensed consolidated financial statements.
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
September 30,
------------------------
2000 1999
--------- ---------
Cash flows from operating activities: (Unaudited)
Net income $ 79,194 $ 43,287
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for doubtful accounts 870 222
Provision for inventory valuation 3,589 1,120
Provision for pension accrual 93 193
Depreciation and amortization 47,323 31,178
Amortization of purchased technology 1,529 150
Deferred income taxes (6,043) 1,134
Tax benefit from exercise of stock options 13,545 6,435
Increase in accounts receivable (9,695) (7,350)
(Increase) decrease in inventories (6,977) 4,582
Increase in accounts payable and
accrued liabilities 38,971 16,462
Change in other assets and liabilities 8,562 3,763
--------- ---------
Net cash provided by operating activities 170,961 101,176
--------- ---------
Cash flows from investing activities:
Capital expenditures (260,593) (74,999)
--------- ---------
Net cash used in investing activities (260,593) (74,999)
--------- ---------
Cash flows from financing activities:
Repayment of lines of credit (9,000) (26,509)
Payments on long-term debt -- (1,403)
Payments on capital lease obligations -- (305)
Proceeds from sale of stock and put options 27,608 15,157
--------- ---------
Net cash provided by (used in) financing activities 18,608 (13,060)
--------- ---------
Net (decrease) increase in cash and cash equivalents (71,024) 13,117
Cash and cash equivalents at beginning of year 188,112 30,826
--------- ---------
Cash and cash equivalents at end of year $ 117,088 $ 43,943
========= =========
See accompanying notes to condensed consolidated financial statements
5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries
(the "Company"). All intercompany balances and transactions have been eliminated
in consolidation.
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
Company's opinion, the accompanying condensed consolidated financial statements
include all adjustments of a normal recurring nature which are necessary for a
fair presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in consolidated financial
statements have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for the
year ended March 31, 2000. The results of operations for the six months ended
September 30, 2000 and 1999 are not necessarily indicative of the results to be
expected for the full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
September 30, March 31,
2000 2000
-------- --------
(unaudited)
Trade accounts receivable $ 88,011 $ 77,945
Other 372 703
-------- --------
88,383 78,648
Less allowance for doubtful accounts 3,647 2,737
-------- --------
$ 84,736 $ 75,911
======== ========
(3) INVENTORIES
The components of inventories are as follows (amounts in thousands):
September 30, March 31,
2000 2000
-------- --------
(unaudited)
Raw materials $ 10,198 $ 7,724
Work in process 34,227 35,914
Finished goods 27,818 22,873
-------- --------
72,243 66,511
Less allowance for inventory valuation 9,394 7,050
-------- --------
$ 62,849 $ 59,461
======== ========
6
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
September 30, March 31,
2000 2000
---------- ---------
(unaudited)
Land $ 11,545 $ 11,545
Building and building improvements 130,678 90,069
Machinery and equipment 624,520 479,509
Projects in process 164,674 100,293
---------- ---------
931,417 681,416
Less accumulated depreciation
and amortization 279,117 242,386
---------- ---------
$ 652,300 $ 439,030
========== =========
(5) LINES OF CREDIT
On May 31, 2000, the Company entered into a new unsecured revolving credit
facility with a syndicate of banks totaling $100.0 million, bearing interest at
LIBOR plus 0.625%. We can elect to increase the facility to $150.0 million,
subject to certain conditions set forth in the credit agreement. This facility
has a termination date of May 31, 2003. There were no borrowings against this
line of credit as of September 30, 2000. We are required to achieve certain
financial ratios and operations results to maintain this line of credit. Our
ability to fully utilize this credit facility is dependent on our being in
compliance with such covenants and ratios. The Company was in compliance with
these covenants as of September 30, 2000.
At March 31, 2000, and through May 31, 2000, the Company had an unsecured
line of credit with a syndicate of U.S. banks for up to $90,000,000, bearing
interest at LIBOR plus 0.325%. The Company had utilized $9,000,000 of this line
of credit as of March 31, 2000. The agreement between the Company and the
syndicate of banks required the Company to achieve certain financial ratios and
operating results. The Company was in compliance with these covenants as of
March 31 and May 31, 2000, respectively.
The Company has an additional unsecured line of credit with various Asian
financial institutions for up to $34,600,000 (U.S. Dollar equivalent). These
borrowings are predominantly denominated in U.S. Dollars, bearing interest at
the Singapore Interbank Offering Rate (SIBOR) 6.76% at September 30, 2000 plus
0.648% (average) and expiring on various dates through March 31, 2001. There
were no borrowings against this line of credit as of September 30, 2000, but an
allocation of $1,045,000 of the available line was made, relating to import
guarantees associated with the Company's business in Thailand. There were no
borrowings against this line of credit as of March 31, 2000, but an allocation
of $1,934,000 of the available line was made, relating to import guarantees
associated with the Company's business in Thailand.
(6) STOCKHOLDERS' EQUITY
During the six months ended September 30, 2000 and September 30, 1999, the
Company received 184,893 shares and 2,540,466 shares, respectively, in
connection with its net shares settled forward contract. During the six months
ended September 30, 2000, the Company received $17,008,000 in connection with
7
its net shares settled forward contract. The net shares settled forward contract
could obligate the Company to purchase shares of the Company's Common Stock in
the future if the price of the Company's Common Stock is below the strike price
of the instruments. The expiration date of this transaction is May 2001, with
quarterly interim settlement dates.
(7) NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
net sales for the periods indicated:
Three Months Ended Six Months Ended
September 30, September 30,
---------------- ---------------
2000 1999 2000 1999
----- ----- ----- -----
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ....................... 44.9% 48.5% 45.3% 48.8%
----- ----- ----- -----
Gross profit ........................ 55.1% 51.5% 54.7% 51.2%
Research and development ............ 9.6% 9.0% 9.5% 9.3%
Selling, general and administrative . 13.7% 16.2% 14.1% 15.9%
----- ----- ----- -----
Operating income .................... 31.8% 26.3% 31.1% 26.0%
===== ===== ===== =====
RECENT DEVELOPMENT
On October 26, 2000, we entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with TelCom Semiconductor, Inc., a
provider of a broad spectrum of high performance linear and mixed-signal
integrated circuit solutions, to merge with TelCom in a stock-for-stock
transaction. The merger is intended to qualify as a pooling of interests for
accounting purposes. Completion of the acquisition is contingent upon approval
by TelCom stockholders, the expiration or termination of the applicable waiting
period under the Hart-Scott-Rodino Anti-trust Improvements Act, and other
customary conditions. We expect this transaction to be completed during the
first calendar quarter of 2001.
We filed a current report on Form 8-K on October 30, 2000 relating to this
transaction. A copy of the Merger Agreement was filed as Exhibit 2.1 to such
Form 8-K.
Under the terms of the definitive merger agreement, if the average closing
price of our common stock for the ten trading days preceding the closing of the
transaction is between $28.30 and $32.61, we will issue a number of shares of
our common stock for each outstanding share of TelCom equal to $15.00 divided by
such 10 day average price. If our ten day average closing price prior to the
merger is less than $28.30, then each TelCom stockholder will receive .53 shares
of our Common Stock, and if the ten day average price is greater than $32.61,
then each TelCom stockholder will receive .46 shares of our Common Stock.
THE FOREGOING STATEMENT RELATED TO THE EXPECTED CLOSING OF THE MERGER WITH
TELCOM IS A FORWARD LOOKING STATEMENT. THIS STATEMENT INVOLVES RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING
BUT NOT LIMITED TO FAILURE OF THE TRANSACTION TO CLOSE DUE TO THE FAILURE TO
OBTAIN REQUIRED REGULATORY OR STOCKHOLDER APPROVALS.
9
NET SALES
Microchip's net sales for the quarter ended September 30, 2000 were $176.3
million, an increase of 49% over sales of $118.0 million for the corresponding
quarter of the previous fiscal year, and an increase of 12% from the previous
quarter's sales of $157.7 million.
Our microcontroller and analog product lines represent the largest
component of our total net sales. Microcontrollers, associated application
development systems and analog products accounted for 70% of our net sales for
the three months ended September 30, 2000 and 81% of our total net sales in the
three months ended September 30, 1999. A related component of our product sales
consists primarily of Serial EEPROM memories which accounted for 30% of our
total net sales in the three months ended September 30, 2000 and 19% of total
net sales in the three months ended September 30, 1999.
Our net sales in any given quarter depend upon a combination of orders
received in that quarter for shipment in that quarter, which we refer to as
turns orders, and shipments from backlog. Turns orders were 20% of our net sales
for the three months ended September 30, 2000 and 45% of our net sales for the
three months ended September 30, 1999. The percentage of turns orders has
fluctuated over the last three years between 20% and 65%. In order to achieve
our projected net sales for the current quarter, we need to achieve turns orders
of approximately 23%, which is near the low point of the historical range for
net sales requirements. Over the next several quarters, we expect the level of
turns orders to return to historical normal levels of approximately 35% to 45%.
Despite the current low turns orders requirement for our business, turns orders
are difficult to predict, and we may not experience the combination of turns
orders and shipments from backlog in any quarter that would be sufficient to
achieve anticipated growth in net sales. If we do not achieve a sufficient level
of turns orders in a particular quarter, our revenues and operating results
would be adversely affected.
Historically, average selling prices in the semiconductor industry decrease
over the life of any particular product. The overall average selling prices of
our microcontroller products have remained relatively constant, while average
selling prices of our memory products had declined through the end of fiscal
2000. However, during the quarter ended June 30, 2000, prices for our memory
products increased due primarily to the dynamics of the supply and demand
environment. During the quarter ended September 30, 2000, both microcontroller
and memory product pricing remained relatively constant. We have experienced,
and expect to continue to experience, pricing pressure in certain
microcontroller product lines, due primarily to competitive conditions. We have
been able to maintain average selling prices by continuing to introduce new
products with more features and higher prices, thereby offsetting price declines
in older products. We may be unable to maintain average selling prices for our
microcontroller and memory products as a result of increased pricing pressure in
the future, which would reduce our operating results.
THE FOREGOING STATEMENTS REGARDING TURNS ORDERS, AVERAGE SELLING PRICES,
MEMORY PRODUCT PRICING AND PRICING PRESSURES ARE FORWARD LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: THE LEVEL OF ORDERS THAT ARE RECEIVED AND CAN BE SHIPPED IN A QUARTER;
INVENTORY MIX AND TIMING OF CUSTOMER ORDERS; COMPETITION AND COMPETITIVE
PRESSURES ON PRICING AND PRODUCT AVAILABILITY; CUSTOMERS' INVENTORY LEVELS,
ORDER PATTERNS AND SEASONALITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR
INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; MARKET ACCEPTANCE OF OUR
PRODUCTS AND THOSE OF OUR CUSTOMERS; DEMAND FOR THE COMPANY'S PRODUCTS;
FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY
UTILIZATION; CHANGES IN PRODUCT MIX; AND ABSORPTION OF FIXED COSTS, LABOR AND
OTHER FIXED MANUFACTURING COSTS.
10
Distributors accounted for 62% of our net sales to customers in the three
months ended September 30, 2000 and 61% in the three months ended September 30,
1999. Our largest distributor accounted for 14% of our total net sales for the
three months ended September 30, 2000 and 13% of our total net sales for the
three months ended September 30, 1999. Generally, we do not have long-term
agreements with our distributors and our distributors may terminate their
relationship with us with little or no advanced notice. The loss of, or the
disruption in the operations of, one or more of our distributors could reduce
our future net sales in a given quarter and could result in an increase in
inventory returns.
Sales to foreign customers represented 69% of our net sales in each of the
three months ended September 30, 2000 and September 30, 1999. Our sales to
foreign customers have been predominantly in Asia and Europe, which we attribute
to the manufacturing strength in those areas for automotive, communications,
computing, consumer and industrial control products. The majority of our foreign
sales are U.S. Dollar denominated. We enter into hedging transactions from time
to time to minimize exposure to currency rate fluctuations. Although none of the
countries in which we conduct significant foreign operations have had a highly
inflationary economy in the last five years, there is no assurance that
inflation rates or fluctuations in foreign currency rates in countries where we
conduct operations will not adversely affect our operating results in the
future.
Our quarterly operating results are affected by a wide variety of factors
that could reduce our net sales and profitability, many of which are beyond our
control. Some of the factors that may affect our operating results include:
* the level of orders that are received and can be shipped in a quarter
(turns orders)
* market acceptance of both our products and our customers' products
* customer order patterns and seasonability
* availability of manufacturing capacity and fluctuations in manufacturing
yield
* the availability and cost of raw materials, equipment and other supplies,
and
* economic, political and other conditions in the worldwide markets served by
us.
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful and that you should not rely upon any comparisons as
indications of future performance. In future periods, our operating results may
fall below the expectations of public market analysts and investors, which would
likely have a negative effect on the price of our Common Stock.
GROSS PROFIT
In the three months ended September 30, 2000, our gross profit was $97.2
million, and our gross profit was $60.8 million in the three months ended
September 30, 1999. In the six months ended September 30, 2000, our gross profit
was $182.7 million, and our gross profit was $115.5 million in the six months
ended June 30, 1999. Gross profit as a percent of sales was 55.1% for the
quarter ended September 30, 2000, and 51.5% in quarter ended September 30, 1999.
The most significant factors affecting gross profit percentage were increased
8-inch wafer production levels, continued cost reductions in wafer fabrication
and assembly and test manufacturing, and a stable pricing market for
microcontroller and memory products. We continue to transition products to
smaller geometries and to larger wafer sizes to reduce future manufacturing
costs. We continue to increase our manufacturing capacity for 8-inch wafers and
to transition products to our 0.7 micron and 0.5 micron processes. We anticipate
that gross product margins will fluctuate over time, driven primarily by the
product mix of microcontroller products and related memory products,
manufacturing yields, fixed cost absorption, wafer fab loading levels and
competitive and economic conditions.
11
We believe that expansion of our manufacturing capacity is important to
enable us to respond to increased sales opportunities and maintain satisfactory
delivery schedules. Our business could suffer if the expansion of manufacturing
capacity is delayed or inefficiently implemented. Other companies in the
industry have experienced difficulty in expanding manufacturing capacity,
resulting in reduced yields or delays in product deliveries. We may experience
manufacturing yield or delivery problems in the future, which could harm our
operating results.
THE FOREGOING STATEMENTS RELATING TO ANTICIPATED GROSS PRODUCT MARGINS, THE
TRANSITION TO HIGHER YIELDING MANUFACTURING PROCESSES AND THE EXPANSION OF OUR
MANUFACTURING CAPACITY ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: FLUCTUATIONS
IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
COST AND AVAILABILITY OF RAW MATERIALS; ABSORPTION OF FIXED COSTS, LABOR AND
OTHER DIRECT MANUFACTURING COSTS; THE ABILITY TO INCREASE MANUFACTURING CAPACITY
AS NEEDED; THE TIMING AND SUCCESS OF MANUFACTURING PROCESS TRANSITION; DEMAND
FOR OUR PRODUCTS; COMPETITION AND COMPETITIVE PRESSURE ON PRICING; CHANGES IN
PRODUCT MIX; AND OTHER ECONOMIC CONDITIONS.
Currently, the majority of our assembly operations, and a portion of our
test requirements, are performed by third-party contractors located throughout
Asia. Our reliance on third parties involves some reduction in our level of
control over these portions of our business. While we review the quality,
delivery and cost performance of these third-party contractors, there can be no
assurance that reliance on third-party contractors will not adversely impact
results in future reporting periods if any third-party contractor is unable to
maintain assembly and test yields and costs at approximately their current
levels. Third-party assembly and test companies are experiencing high demand and
utilization of their current capacity which could lead to capacity shortages in
the industry. Accordingly, we have implemented in-house assembly operations and
have shifted a portion of our assembly operations from third-party contractors
to fill this capacity. Approximately 31% of our assembly requirements were being
performed in our Thailand facility during the three months ended September 30,
2000. We are dependent on third-party contractors for the balance of our
requirements.
THE FOREGOING STATEMENTS RELATED TO CAPACITY AT THIRD-PARTY ASSEMBLY AND
TEST COMPANIES ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: AVAILABILITY OF
SUFFICIENT CAPACITY OF THIRD-PARTIES; SUPPLY DISRUPTION; LABOR UNREST; CHANGES
IN PRODUCT MIX; COMPETITIVE PRESSURES ON PRICES; AND OTHER ECONOMIC CONDITIONS.
Our reliance on foreign operations, and maintenance of substantially all of
our finished goods in inventory in foreign locations exposes us to foreign
political and economic risks, including:
* political, social and economic instability
* trade restrictions and changes in tariffs
* import and export license requirements and restrictions
* difficulties in staffing and managing international operations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables, or
* potentially adverse tax consequences.
To date, we have not experienced any significant interruptions in our
foreign business operations. If any of these risks materialize, our sales could
decrease and our operations performance could suffer.
12
RESEARCH AND DEVELOPMENT
We are committed to investing in new and enhanced products, including
development systems software, and in our design and manufacturing process
technology. We believe these investments are significant factors in maintaining
our competitive position. We increased our level of research and development
costs to $16.9 million in the current quarter as compared to $10.7 million in
the corresponding quarter of the previous fiscal year and $14.8 million in the
immediately preceding quarter. The primary reason for the dollar increase in
research and development costs relates to labor and recruitment costs associated
with expanding our technical resources. Research and development in the current
quarter increased by 59.0% as compared to the corresponding quarter of the
previous fiscal year, and increased by 14.3% from the previous quarter.
Our future operating results will depend to a significant extent on our
ability to develop and introduce new products on a timely basis which can
compete effectively on the basis of price and performance and which address
customer requirements. The success of new product introductions depends on
various factors, including:
* proper new product selection
* timely completion and introduction of new product designs
* development of support tools and collateral literature that make
complex new products easy for engineers to understand and use, and
* market acceptance of our customers' end products.
Because our products are complex, we have experienced delays from time to
time in completing development of new products. In addition, our new products
may not receive or maintain substantial market acceptance. We may be unable to
design, develop and introduce competitive products on a timely basis, which
could reduce our future operating results.
Our future success also depends upon our ability to develop and implement
new design and process technologies. Semiconductor design and process
technologies are subject to rapid technological change and require large
research and development expenditures. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have suffered reduced manufacturing
yields or delays in product deliveries. We believe that our transition to
smaller geometries and to larger wafers is important for us to remain
competitive. Our future operating results could be reduced if the transition is
substantially delayed or inefficiently implemented.
SELLING, GENERAL AND ADMINISTRATIVE
We increased our level of selling, general and administrative costs to
$24.2 million in the current quarter as compared to $19.1 million in the
corresponding quarter of the previous fiscal year and $22.7 million in the
immediately preceding quarter. The primary reason for the dollar increase in
selling, general and administrative costs relates to labor and recruitment costs
associated with expanding our employment base to support the growth of our
business. Selling, general and administrative costs represented 13.7% of sales
in the current fiscal quarter as compared to 16.2% of sales in the corresponding
quarter of the previous fiscal year and 14.4% of sales in the immediately
preceding quarter. We expect selling, general and administrative costs to rise
over time as we continue to invest in incremental worldwide sales and technical
support resources to promote our embedded control products.
13
OTHER INCOME (EXPENSE)
Interest income in the three months ended September 30, 2000 increased from
the corresponding periods of the previous fiscal year as a result of higher
invested cash balances due primarily to our secondary offering completed in
March 2000. Interest expense in the three and six months ended September 30,
2000 decreased from the corresponding periods of the previous fiscal year as a
result of lower borrowing levels of our credit facilities. The net of our
interest income and expense will decrease over the remaining quarters of this
fiscal year as our invested cash balances decrease to fund our capital
expansion. Other income represents numerous immaterial non-operating items.
PROVISION FOR INCOME TAXES
Provisions for income taxes reflect tax on foreign earnings and federal and
state tax on U.S. earnings. We had an effective tax rate of 27.0% for the six
months ended September 30, 2000 and 27.0% for the six months ended September 30,
1999, due primarily to lower tax rates at our foreign locations. We believe that
our tax rate for the foreseeable future will be approximately 27%. THE FOREGOING
STATEMENT REGARDING OUR ANTICIPATED FUTURE TAX RATE IS A FORWARD-LOOKING
STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING
FACTORS, AMONG OTHERS: CURRENT TAX LAWS AND REGULATIONS; TAXATION RATES IN
GEOGRAPHIC REGIONS WHERE WE HAVE SIGNIFICANT OPERATIONS; AND CURRENT TAX
HOLIDAYS AVAILABLE IN FOREIGN LOCATIONS.
EURO CONVERSION ISSUES
We operate in the European Market and currently generate approximately one
third of our total net sales from customers located in Europe. Our commercial
headquarters in Europe are located in the United Kingdom, which is not currently
one of the 11 member states of the European Union converting to a common
currency.
We currently conduct 97.8% of our business in Europe in U.S. Dollars and
0.5% of our business in Europe in Pounds Sterling. The balance of our net sales
is conducted in currencies which will eventually be replaced by the Euro. We
will monitor the potential commercial impact of converting a portion of our
current business to the Euro, but we do not currently anticipate any material
impact to our business based on this transition. We do not currently anticipate
any material impact to our business related to Euro matters from information
technology, derivative transactions, tax issues and accounting software issues.
LIQUIDITY AND CAPITAL RESOURCES
We had $117.1 million in cash and cash equivalents at September 30, 2000, a
decrease of $71 million from the March 31, 2000 balance. We maintain an
unsecured revolving credit facility with a syndicate of banks totaling $100.0
million. We can elect to increase the facility to $150.0 million, subject to
certain conditions set forth in the credit agreement. This facility has a
termination date of May 31, 2003. There were no borrowings against this line of
credit as of September 30, 2000. We are required to achieve certain financial
ratios and operations results to maintain this line of credit. We also maintain
an unsecured short-term line of credit totaling $34.6 million with certain
foreign banks. There were no borrowings under the foreign line of credit as of
September 30, 2000. There are no covenants related to the foreign line of
credit. At September 30, 2000, an aggregate of $133.6 million of our credit
facilities were available, subject to financial covenants and ratios with which
we were in compliance. Our ability to fully utilize our credit facilities is
dependent on our remaining in compliance with such covenants and ratios.
14
During the six months ended September 30, 2000, we generated $171.0 million
of cash from operating activities, an increase of $69.8 million from the six
months ended September 30, 1999. The increase in cash flow from operations was
primarily due to increased profitability and the impact of changes in accounts
payable and accrued liabilities, depreciation and other assets and liabilities.
Our level of capital expenditures varies from time to time as a result of
actual and anticipated business conditions. Capital expenditures in the six
months ended September 30, 2000 were $260.6 million, as compared to $75.0
million for the six months ended September 30, 1999. Capital expenditures were
primarily for the expansion of production capacity, including the purchase of
the Puyallup, Washington semiconductor manufacturing complex, and the addition
of research and development equipment in each of these periods. We currently
intend to spend approximately $425 million during the next 12 months for
additional capital, including:
* equipment to increase capacity at our existing wafer fabrication
facilities
* facilitization and start-up of the Puyallup, Washington semiconductor
manufacturing complex
* expansion of product test operations
* development of in-house assembly capability, and
* incremental infrastructure to support the growth of the business.
We expect to finance capital expenditures through our cash flows from
operations, available debt arrangements and other sources of financing including
issuance of equity and debt securities depending on market conditions. We
believe that the capital expenditures anticipated to be incurred over the next
12 months will provide sufficient additional manufacturing capacity to meet our
currently anticipated needs.
THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED LEVEL OF CAPITAL
EXPENDITURES OVER THE NEXT 12 MONTHS AND THE FINANCING OF SUCH CAPITAL
EXPENDITURES ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE CYCLICAL NATURE
OF THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; MARKET
ACCEPTANCE OF OUR PRODUCTS AND OF OUR CUSTOMERS' PRODUCTS; DEMAND FOR OUR
PRODUCTS; UTILIZATION OF CURRENT MANUFACTURING CAPACITY; THE AVAILABILITY AND
COST OF RAW MATERIALS, EQUIPMENT AND OTHER SUPPLIES; AND THE ECONOMIC, POLITICAL
AND OTHER CONDITIONS IN THE WORLDWIDE MARKETS SERVED BY US.
Net cash provided by financing activities was $18.6 million for the six
months ended September 30, 2000. Net cash used in financing activities was $13.1
million for the six months ended September 30, 1999. Proceeds from sale of stock
and put options were $27.6 million, including $17.0 million related to our net
shares settled forward contract, in the six months ended September 30, 2000 and
$15.2 million for the six months ended September 30, 1999. Payments on long-term
debt and capital lease obligations were $1.7 million for the six months ended
September 30, 1999. Repayments on lines of credit were $9.0 million for the six
months ended September 30, 2000 and $26.5 million for the six months ended
September 30, 1999.
We have outstanding a net shares settled forward contract and received
184,893 shares in the six months ended September 30, 2000 and 2,540,466 shares
in the six months ended September 30, 1999 in connection with this transaction.
During the six months ended September 30, 2000, we received $17.0 million in
connection with our net shares settled forward contract. See Note 6 to
"Condensed Consolidated Financial Statements." The net shares settled forward
contract could obligate us to purchase shares of our Common Stock in the future
if the price of the our Common Stock is below the strike price of the
instruments.
15
We believe that our existing sources of liquidity combined with cash
generated from operations will be sufficient to meet our currently anticipated
cash requirements for at least the next 12 months. However, the semiconductor
industry is capital intensive. In order to remain competitive, we must continue
to make significant investments in capital equipment for both production and
research and development. We may seek additional equity or debt financing during
the next 12 months for the capital expenditures required to maintain or expand
our wafer fabrication and product assembly and test facilities, or other
purposes. The timing and amount of any such capital requirements will depend on
a number of factors, including demand for our products, product mix, changes in
industry conditions and competitive factors. There can be no assurance that such
financing will be available on acceptable terms, and any additional equity
financing could result in additional dilution to existing investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our investment portfolio, consisting of fixed income securities, was $119.6
million as of September 30, 2000, and $189.6 million as of March 31, 2000. These
securities, like all fixed income instruments, are subject to interest rate risk
and will decline in value if market interest rates increase. If market rates
were to increase immediately and uniformly by 10% from the levels of September
30, 2000 and March 31, 2000, the decline in the fair value of our investment
portfolio would not be material. Additionally, we have the ability to hold our
fixed income investments until maturity and, therefore, we would not expect to
recognize an adverse impact in income or cash flows.
We have international operations and are thus subject to foreign currency
rate fluctuations. To date, our exposure related to exchange rate volatility has
not been significant. If the foreign currency rates fluctuate by 15% from the
rates at September 30, 2000 and March 31, 2000, the effect on our financial
position and results of operation would not be material.
During the normal course of our business, we are routinely subjected to a
variety of market risks, examples of which include, but are not limited to,
interest rate movements and foreign currency fluctuations, as we discuss in this
Item 3, and collectability of accounts receivable. We constantly assess these
risks and have established policies and procedures to protect against the
advserse affects of these other potential exposures. Although we do not
anticipate any material losses in these risk areas, no assurance can be made
that material losses will not be incurred in these areas in the future.
We believe that our market risk, as discussed in this Item 3, has not
materially changed from March 31, 2000.
16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) We held our Annual Meeting of Stockholders on August 18, 2000 (the
"Meeting").
(b) Steve Sanghi, Albert J. Hugo-Martinez, L.B. Day, Matthew W. Chapman
and Wade F. Meyercord were elected as Directors at the Meeting.
(c) The results of the vote on the matters voted upon at the Meeting were
as follows:
(i) ELECTION OF DIRECTORS:
For Withheld/Abstain
--- ----------------
Steve Sanghi 70,004,428 2,290,705
Albert J. Hugo-Martinez 70,003,274 2,291,859
L.B. Day 70,002,724 2,292,409
Matthew W. Chapman 70,004,232 2,290,901
Wade F. Meyercord 70,003,821 2,291,312
(ii) APPROVAL OF AMENDMENT TO OUR RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK, PAR VALUE $0.001 PER SHARE (THE "COMMON STOCK")
FROM 100,000,000 TO 300,000,000:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
63,252,540 8,947,899 94,694 -0-
(iii) APPROVAL OF AMENDMENT TO THE MICROCHIP 1993 STOCK OPTION PLAN TO
EXTEND ITS TERM:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
60,830,810 1,720,360 138,566 9,605,397
(iv) APPROVAL OF AMENDMENT TO THE MICROCHIP EMPLOYEE STOCK PURCHASE
PLAN TO INCREASE BY 200,000 THE NUMBER OF SHARES OF COMMON STOCK
RESERVED FOR ISSUANCE THEREUNDER:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
61,520,916 1,045,135 123,685 9,605,397
(v) APPROVAL OF AMENDMENT TO THE MICROCHIP EMPLOYEE STOCK PURCHASE
PLAN TO EXTEND ITS TERM:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
61,299,695 1,258,639 131,402 9,605,397
(vi) RATIFICATION OF APPOINTMENT OF KPMG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING MARCH 31, 2001:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
71,920,921 250,702 123,510 -0-
The foregoing matters are described in more detail in our definitive proxy
statement dated July 7, 2000 relating to the Meeting.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.1 Agreement and Plan of Reorganization, dated as of October
26, by and among Microchip Technology Incorporated, a
Delaware Corporation, Matchbox Acquisition Corp., a Delaware
Corporation, and TelCom Semiconductor, Inc., a Delaware
Corporation. [Incorporated by reference to Exhibit 2.1 to
registrant's Current Report on Form 8-K filed on October 30,
2000]
3.1 Certificate of Amendment to the Restated Certificate of
Incorporation of Microchip Technology Incorporated.
10.1 Modification Agreement dated as of August 31, 2000 to the
Credit Agreement dated as of May 31, 2000 by and among
Registrant, the Banks named therein, Bank One, NA, as LC
Issuer and Administrative Agent, Wells Fargo Bank, National
Association, as Syndication Agent and Bank of America, N.A.,
as Documentation Agent.
10.2 Restated Microchip Technology Incorporated Employee Stock
Purchase Plan, as amended through August 18, 2000.
10.3 Microchip Technology Incorporated 1997 Nonstatutory Stock
Option Plan, as amended through August 18, 2000.
10.4 Microchip Technology Incorporated 1993 Stock Option Plan, as
amended through August 18, 2000.
(b) Reports on Form 8-K.
We filed a current report on Form 8-K on July 26, 2000 to report the
acquisition of a semiconductor manufacturing complex located in
Puyallup, Washington, from Matsushita Semiconductor Corporation of
America. The Purchase and Sale Agreement between Microchip Technology
Incorporated and Matsushita Semiconductor Corporation of America,
dated as of May 23, 2000, and the subsequent amendments, were filed as
Exhibits 2.1, 2.2 and 2.3 to the current report on Form 8-K.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date: November __, 2000 By: /s/ Gordon Parnell
--------------------- ------------------------------------
Gordon Parnell
Vice President and Chief Financial
Officer (Duly Authorized Officer,
and Principal Financial and
Accounting Officer)
19
EXHIBIT INDEX
Exhibit No.
- -----------
2.1 Agreement and Plan of Reorganization, dated as of October 26, by and
among Microchip Technology Incorporated, a Delaware corporation,
Matchbox Acquisition Corp., a Delaware corporation, and TelCom
Semiconductor, Inc., a Delaware corporation. [Incorporated by
reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K
filed on October 30, 2000]
3.1 Certificate of Amendment to the Restated Certificate of Incorporation
of Microchip Technology Incorporated
10.1 Modification Agreement dated as of August 31, 2000 to the Credit
Agreement dated as of May 31, 2000 by and among Registrant, the Banks
named therein, Bank One, NA, as LC Issuer and Administrative Agent,
Wells Fargo Bank, National Association, as Syndication Agent and Bank
of America, N.A., as Documentation Agent
10.2 Restated Microchip Technology Incorporated Employee Stock Purchase
Plan, as amended through August 18, 2000
10.3 Microchip Technology Incorporated 1997 Nonstatutory Stock Option Plan,
as amended through August 18, 2000
10.4 Microchip Technology Incorporated 1993 Stock Option Plan, as amended
through August 18, 2000
20