10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 14, 2001
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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 DECEMBER 31, 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 February
12, 2001:
COMMON STOCK, $.001 PAR VALUE: 130,327,880 SHARES
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and March 31, 2000........................... 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended December 31, 2000
and December 31, 1999.......................................... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 2000 and December 31, 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.... 17
PART II. OTHER INFORMATION.
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)
See accompanying notes to condensed consolidated financial statements
3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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 in the
United States of America, 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 nine months ended December 31, 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):
December 31, March 31,
2000 2000
------- -------
(unaudited)
Trade accounts receivable $80,214 $77,945
Other 873 703
------- -------
81,087 78,648
Less allowance for doubtful accounts 3,721 2,737
------- -------
$77,366 $75,911
======= =======
(3) INVENTORIES
The components of inventories are as follows (amounts in thousands):
December 31, March 31,
2000 2000
------- -------
(unaudited)
Raw materials $10,705 $ 7,724
Work in process 46,426 35,914
Finished goods 30,167 22,873
------- -------
87,298 66,511
Less allowance for inventory valuation 10,450 7,050
------- -------
$76,848 $59,461
======= =======
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Inventory impairment charges establish a new cost basis for inventory and
charges are not subsequently reversed to income even if circumstances later
suggest that increased carrying amounts are recoverable.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
December 31, March 31,
2000 2000
---------- --------
(unaudited)
Land $ 11,545 $ 11,545
Building and building improvements 140,169 90,069
Machinery and equipment 662,957 479,509
Projects in process 251,213 100,293
---------- --------
1,065,884 681,416
Less accumulated depreciation and amortization 296,734 242,386
---------- --------
$ 769,150 $439,030
========== ========
Depreciation and amortization expense attributed to property and equipment
was $73.0 million and $47.5 million for the nine months ended December 31, 2000
and 1999, respectively.
(5) LINES OF CREDIT
On May 31, 2000, the Company entered into an 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 December 31, 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 December 31, 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) of 6.20% at December 31, 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 December 31, 2000, but an
allocation of $1,197,000 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
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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 nine months ended December 31, 2000, the Company made a net
delivery of 478,781 shares of its common stock in connection with a net shares
settled forward contract. During the nine months ended December 31, 1999, the
Company received 2,540,466 shares of its common stock in connection with a net
shares settled forward contract. During the nine months ended December 31, 2000,
the Company received $17,008,000 in connection with a net shares settled forward
contract. The net shares settled forward contract was the only open forward
contract of the Company as of December 31, 2000. The net shares settled forward
contract could obligate the Company to make a cash payment 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) SUBSEQUENT EVENT
On January 16, 2001, the Company completed its previously announced
acquisition of TelCom Semiconductor, Inc. in a tax-free reorganization that is
being accounted for as a pooling of interests. The Company issued approximately
9.8 million shares of its Common Stock and assumed all outstanding TelCom stock
options.
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:
RECENT DEVELOPMENT
On January 16, 2001, we completed our acquisition of TelCom Semiconductor,
Inc. TelCom designs and markets a diversified portfolio of high performance
analog and mixed-signal integrated circuits for a wide variety of applications
in the wireless communications, networking, computer and industrial markets.
Under the terms of the acquisition agreement, each share of TelCom common stock
was exchanged for 0.53 of a share of Microchip common stock. We issued 9,801,456
shares of Microchip common stock and assumed all outstanding TelCom stock
options. The acquisition was structured as a tax-free reorganization and is
being accounted for as a pooling of interests.
Since the transaction was completed following the close of our December
2000 quarter, our financial results as reported do not include the financial
results of TelCom. Future financial reports will include the combined financial
results of both entities.
THERE ARE NUMEROUS FACTORS THAT COULD AFFECT MICROCHIP'S AND TELCOM'S
ACTUAL COMBINED FINANCIAL RESULTS, INCLUDING: DIFFICULTIES ASSOCIATED WITH
SUCCESSFULLY INTEGRATING MICROCHIP AND TELCOM'S BUSINESSES AND TECHNOLOGIES;
COSTS RELATED TO THE TRANSACTION; FAILURE OF THE COMBINED COMPANY TO RETAIN AND
HIRE KEY EXECUTIVES, TECHNICAL PERSONNEL AND OTHER EMPLOYEES; FAILURE OF THE
COMBINED COMPANY TO MANAGE ITS GROWTH AND THE DIFFICULTY OF SUCCESSFULLY
MANAGING A LARGER ORGANIZATION; FAILURE OF THE COMBINED COMPANY TO SUCCESSFULLY
MANAGE ITS CHANGING RELATIONSHIPS WITH CUSTOMERS, SUPPLIERS, VALUE ADDED
RESELLERS, AND STRATEGIC PARTNERS; THE PROGRESS AND COSTS OF THE DEVELOPMENT OF
OUR PRODUCTS AND SERVICES AND THE TIMING OF MARKET ACCEPTANCE OF THOSE PRODUCTS
AND SERVICES; FAILURE OF THE COMBINED COMPANY'S CUSTOMERS TO ACCEPT NEW PRODUCT
OFFERINGS; FAILURE TO ACHIEVE ANTICIPATED SYNERGIES IN THE MERGER; AND GENERAL
ECONOMIC AND BUSINESS CONDITIONS. A MORE DETAILED DISCUSSION OF THESE AND OTHER
CAUTIONARY STATEMENTS CAN BE FOUND IN THE JOINT PROXY STATEMENT/PROSPECTUS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BY MICROCHIP AND TELCOM ON FORM S-4
ON NOVEMBER 20, 2000.
9
NET SALES
Our net sales for the quarter ended December 31, 2000 were $176.4 million,
an increase of 37% over sales of $129.2 million for the corresponding quarter of
the previous fiscal year, and essentially flat from the previous quarter's sales
of $176.3 million. We believe we have continued to gain market share in both the
Microcontroller and Serial EEPROM memory markets during the current fiscal year.
During the nine months ended December 31, 2000, net sales of our microcontroller
and analog product lines increased to $363.7 million as compared to $287.0
million in the nine months ended December 31, 1999. During the nine months ended
December 31, 2000, net sales of our Serial EEPROM and related product lines
increased to $146.8 million as compared to $67.9 million in the nine months
ended December 31, 1999. Throughout this time period, we took advantage of
supply shortages in the Serial EEPROM marketplace, and substantially grew this
component of our business. During the quarter ended December 31, 2000, we
experienced an inventory correction at our customers and distributors. The
largest impact from this inventory correction was felt in Asia where we
recognize revenue on sales to distributors who have no, or limited, product
return rights and no price protection rights, immediately upon shipment. We
currently anticipate that this inventory correction will be completed during the
fourth quarter of fiscal 2001.
THE FOREGOING STATEMENT REGARDING THE ANTICIPATED COMPLETION OF THE
DISTRIBUTION INVENTORY CORRECTION IS A FORWARD-LOOKING STATEMENT. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: DEMAND
FOR OUR PRODUCTS AND THE PRODUCTS OF OUR CUSTOMERS; INVENTORY LEVELS AT OUR
DISTRIBUTORS AND AT OUR DISTRIBUTORS' CUSTOMERS; THE CYCLICAL NATURE OF BOTH THE
SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; CHANGES IN
PRODUCT MIX; AND THE ECONOMIC, POLITICAL AND OTHER CONDITIONS IN THE WORLDWIDE
MARKETS SERVED BY US.
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 69% of our net sales for
the three months ended December 31, 2000, and 81% of our total net sales in the
three months ended December 31, 1999. Net sales of our Microcontrollers,
associated application development systems and analog products increased 16%
over the corresponding quarter in fiscal 2000 and 27% over the corresponding
nine month period in fiscal 2000. A related component of our product sales
consists primarily of Serial EEPROM memory which accounted for 31% of our total
net sales in the three months ended December 31, 2000, and 19% of total net
sales in the three months ended December 31, 1999. Net sales of Serial EEPROM
memory products increased 126% over the same quarter in fiscal 2000 and 116%
over the same nine month period in fiscal 2000. During the current fiscal year
the Serial EEPROM component of our business has substantially increased in
dollars and as a percentage of our net sales driven primarily by supply
shortages for these products in the marketplace.
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. We measure turns orders at the
beginning of a quarter based on the orders needed to meet the revenue targets
that we set entering the quarter. Turns orders directly correlate to product
lead times which are currently between 2 and 4 weeks, as compared to 12 to 15
weeks a year ago. With current lead times between 2 and 4 weeks, customers do
not place orders in advance and therefore, we do not currently have the order
visibility we experienced in the recent past. Turns orders were 20% of our net
sales for the three months ended December 31, 2000 and 25% of our net sales for
the three months ended December 31, 1999. The percentage of turns orders has
fluctuated over the last three years between 20% and 65% and is dependent on
overall semiconductor industry conditions and product lead times. As of January
1, 2001, we needed to achieve turns orders of approximately 42% to achieve our
projected net sales for the fourth quarter. Turns orders are difficult to
predict, and we may not experience the combination of turns orders and shipments
10
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 current fiscal year, prices for our memory products
increased due primarily to the dynamics of the supply and demand environment.
During the current fiscal year microcontroller 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 in
our microcontroller line by continuing to introduce new products with more
features and higher prices, thereby offsetting price declines in older products.
We also expect average selling prices for our memory products to decrease over
the next several quarters. 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 OUR PRODUCTS; FLUCTUATIONS IN
PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
CHANGES IN PRODUCT MIX; ABSORPTION OF FIXED COSTS, LABOR AND OTHER FIXED
MANUFACTURING COSTS; AND GENERAL ECONOMIC CONDITIONS.
Distributors accounted for 60% of our net sales in the three months ended
December 31, 2000, and 64% of our net sales in the three months ended December
30, 1999. Distributors accounted for 63% of our net sales in each of the nine
month periods ending December 31, 2000 and 1999. The recent decrease in the
percentage of our net sales from distribution is attributable to the industry
inventory correction described above, as well as increased OEM penetration
through our direct sales force. Our largest distributor accounted for 13% of our
total net sales for the three months ended December 31, 2000, and 16% of our
total net sales for the three months ended December 31, 1999. Our largest
distributor accounted for 14% of our net sales in each of the nine month periods
ending December 31, 2000 and 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 67% of our net sales in the three
months ended December 31, 2000, and 71% of our net sales in the three months
ended December 31, 1999. Sales to foreign customers represented 69% of our net
sales in the nine months ended December 31, 2000 and 68% of our net sales in the
nine months ended December 31, 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. Sales to customers in Asia were 36% of our net sales in the three
months ended December 31, 2000 and 35% of our net sales in the three months
ended December 31, 1999. Sales to customers in Europe were 30% of our net sales
11
in each of the three months ended December 31, 2000 and December 31, 1999. We
enter into hedging transactions from time to time to minimize our 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 seasonality
* 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 December 31, 2000, our gross profit was $97.4
million, and our gross profit was $67.4 million in the three months ended
December 31, 1999. In the nine months ended December 31, 2000, our gross profit
was $280.1 million, and our gross profit was $183.0 million in the nine months
ended December 31, 1999. Gross profit as a percent of sales was 55.2% for the
quarter ended December 31, 2000, and 52.2% for the quarter ended December 31,
1999. Gross profit as a percent of sales was 54.9 % for the nine months ended
December 31, 2000, and 51.6% for the nine months ended December 31, 1999. During
the periods covered by this report, 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 products. During the current fiscal
year gross profit has also been favorably impacted by increases in average
selling prices of our memory products. We continue to transition products to
more advanced process technologies to reduce future manufacturing costs as we
transition products to our 0.7 micron and 0.5 micron processes. In the three
months ended December 31, 2000, 75% of our production was performed on 8-inch
wafers as compared to 50% in the three months ended December 31, 1999. 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.
We have currently cancelled or pushed out capital expenditures to realign
our capacity to reflect our current assessment of market conditions. The
projected start-up date of our Puyallup, Washington semiconductor manufacturing
complex has been delayed until June 2002. We will maintain the Puyallup facility
at a minimum cost basis until it is required for capacity expansion.
THE FOREGOING STATEMENTS RELATING TO ANTICIPATED GROSS PRODUCT MARGINS, THE
TRANSITION TO HIGHER YIELDING MANUFACTURING PROCESSES, THE DELAY IN EXPANSION OF
OUR MANUFACTURING CAPACITY AND THE ANTICIPATED START UP DATE OF OUR PUYALLUP
12
FACILITY 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, with the balance of the assembly and test operations performed at our
Thailand facility. Approximately 33% of our assembly requirements were being
performed in our Thailand facility during the three months ended December 31,
2000, as compared to 20% during the three months ended December 31, 1999. We
believe that the assembly operations that we perform in our Thailand facility
provide us with significant cost savings, as compared to third party contractor
assembly costs, as well as increased control of the manufacturing process. We
are dependent on third-party contractors for the balance of our requirements. We
believe that the assembly requirements that we perform in our Thailand facility
provide us with significant cost savings as well as increased control of the
manufacturing process. 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.
Our reliance on foreign operations, maintenance of substantially all of our
finished goods in inventory in foreign locations, and significant foreign sales
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, and
* 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 operating results could suffer.
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 expense all research and development costs as
incurred. We increased our level of research and development costs to $18.3
million in the current quarter, as compared to $12.1 million in the
corresponding quarter of the previous fiscal year and $16.9 million in the
immediately preceding quarter. Research and development expenses were $50.0
million in the nine months ended December 31, 2000, and $33.1 million in the
nine months ended December 31, 1999. The primary reason for the dollar increases
in research and development costs in the periods covered by this report relates
13
to labor and recruitment costs associated with expanding our technical
resources. Research and development in the current quarter increased by 50.8% as
compared to the corresponding quarter of the previous fiscal year, and increased
by 8.0% 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, consequently, have suffered reduced manufacturing yields or delays in
product deliveries. We believe that our successful transition to smaller
geometries 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
$23.0 million in the December 2000 quarter, as compared to $19.5 million in the
corresponding quarter of the previous fiscal year, and $24.2 million in the
immediately preceding quarter. Selling, general and administrative costs were
$69.9 million in the nine months ended December 31, 2000, and $55.5 million in
the nine months ended December 31, 1999. The primary reason for the dollar
increase in selling, general and administrative costs from the previous fiscal
year relates to labor and recruitment costs associated with expanding our
employment base to support the growth of our business. The primary reasons for
the December 2000 quarter dollar decrease in selling, general and administrative
costs from the immediately preceding quarter were reductions in expenses that
are revenue and profit dependent, including variable compensation, advertising
and non-sales related travel. Selling, general and administrative costs
represented 13.0% of sales in the December 2000 quarter, as compared to 15.1% of
sales in the corresponding quarter of the previous fiscal year, and 13.7% of
sales in the immediately preceding quarter. In the fourth quarter, we expect
selling, general and administrative costs to remain relatively flat to the
levels incurred in the three months ended December 31, 2000. We expect selling,
general and administrative costs to rise in dollars and decrease as a percentage
of sales over time as we continue to efficiently grow and invest in incremental
worldwide sales, technical support, and administrative resources to promote our
embedded control products.
14
THE FOREGOING STATEMENTS REGARDING EXPECTED LEVELS OF SELLING, GENERAL AND
ADMINISTRATIVE SPENDING ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: NET SALES
LEVELS AND OUR INVESTMENTS IN REVENUE DEPENDENT EXPENSES; THE CYCLICAL NATURE OF
BOTH THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; AND
THE ECONOMIC, POLITICAL AND OTHER CONDITIONS IN THE WORLDWIDE MARKETS SERVED BY
US.
OTHER INCOME (EXPENSE)
Interest income in the three months ended December 31, 2000 increased from
the corresponding period 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 nine months ended December 31,
2000 decreased from the corresponding periods of the previous fiscal year as a
result of lower borrowing levels of our credit facilities. Our interest income
will decrease in the last quarter of this fiscal year as our invested cash
balances decrease to fund our capital expansion. Other income includes gains on
the sale of fixed assets of $0.9 million as well as 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 nine
months ended December 31, 2000 and 27.0% for the nine months ended December 31,
1999, due primarily to lower tax rates at our foreign locations. We believe that
our tax rate for the foreseeable future will be approximately 27.0%. 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 98.5% of our business in Europe in U.S. Dollars and
0.6% of our business in Europe in Pounds Sterling. The balance of our net sales
in Europe 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.
THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED IMPACT OF THE TRANSITION
TO THE EURO CURRENCY ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: LEVELS OF SALES IN
EUROPE THAT MAY BE CONDUCTED IN THE EURO CURRENCY; AND FLUCTUATIONS IN CURRENCY
EXCHANGE RATES.
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LIQUIDITY AND CAPITAL RESOURCES
We had $78.8 million in cash and cash equivalents at December 31, 2000, a
decrease of $109.3 million from the March 31, 2000 balance. The decrease in cash
and cash equivalents over this time period is primarily attributable to capital
expenditures to increase our production capacity. 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
December 31, 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 December
31, 2000. There are no covenants related to the foreign line of credit. At
December 31, 2000, an aggregate of $133.4 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.
During the nine months ended December 31, 2000, we generated $272.5 million
of cash from operating activities, an increase of $101.3 million from the nine
months ended December 31, 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 nine
months ended December 31, 2000 were $403.7 million, as compared to $139.7
million for the nine months ended December 31, 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 $125 million during the next 12 months for
additional capital, including:
* equipment to maintain and selectively increase capacity at our
existing wafer fabrication facilities
* facilitization of the Puyallup, Washington semiconductor manufacturing
complex, and
* expansion of product test operations.
We expect to finance capital expenditures through our existing cash
balances, including cash acquired from the acquisition of Telcom Semiconductor,
Inc., 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 AND SUFFICIENCY 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.
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Net cash provided by financing activities was $20.4 million for the nine
months ended December 31, 2000. Net cash provided by financing activities was
$6.2 million for the nine months ended December 31, 1999. Proceeds from sale of
stock and put options were $29.4 million, including $17.0 million related to our
net shares settled forward contract, in the nine months ended December 31, 2000
and $19.5 million for the nine months ended December 31, 1999. Payments on
long-term debt and capital lease obligations were $1.8 million for the nine
months ended December 31, 1999. Repayments on lines of credit were $9.0 million
for the nine months ended December 31, 2000 and $11.5 million for the nine
months ended December 31, 1999.
We have outstanding a net shares settled forward contract and made a net
delivery of 478,781 shares of our common stock in the nine months ended December
31, 2000 and received 2,540,466 shares of our common stock in the nine months
ended December 31, 1999 in connection with this contract. During the nine months
ended December 31, 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 make a
cash payment in the future if the price of the our Common Stock is below the
strike price of the instruments.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and
Similar Financial Instruments for Hedging Activities," to establish accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
This new standard, as amended by related SFAS Nos. 137 and 138, will be
effective for the Company for its fiscal year ending March 31, 2002. The Company
is currently evaluating the impact of SFAS No. 133.
SAB 101
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC and, as
amended, will be effective for the Company in the fourth quarter of 2000. We do
not expect the implementation of SAB 101 to have a material effect on our
results of operation.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our investment portfolio, consisting of fixed income securities, was $81.2
million as of December 31, 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 December
31, 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 December 31, 2000 and March 31, 2000, the effect on our financial
position and results of operations 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
We filed a current report on Form 8-K dated October 26, 2000 relating
to our entering into an Agreement and Plan of Reorganization with TelCom
Semiconductor, Inc. The Agreement and Plan of Reorganization was filed as
Exhibit 2.1 to the current report on Form 8-K.
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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: February 14, 2001 By: /s/ Gordon W. Parnell
-----------------------------------
Gordon W. Parnell
Vice President and Chief Financial
Officer (Duly Authorized Officer,
and Principal Financial and
Accounting Officer)
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