10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 10, 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 June 30, 2001.
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 [ ]
Number of shares of common stock, $.001 Par Value, outstanding as of August 3,
2001: 132,872,508 SHARES.
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 2001 and March 31, 2001.................................. 3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 2001 and June 30, 2000 ............... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 2001 and June 30, 2000 ............... 5
Notes to Condensed Consolidated Financial Statements -
June 30, 2001 .................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 18
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K ............................... 19
SIGNATURES ................................................................ 20
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)
(Unaudited)
Three Months Ended June 30,
---------------------------
2001 2000
--------- ---------
Net sales $ 138,894 $ 177,749
Cost of sales 69,488 81,902
--------- ---------
Gross profit 69,406 95,847
Operating expenses:
Research and development 19,534 17,434
Selling, general and administrative 21,443 26,016
--------- ---------
40,977 43,450
Operating income 28,429 52,397
Other income (expense):
Gain on sale of investment -- 1,427
Net loss in equity investment -- (208)
Interest income 1,262 4,112
Interest expense (207) (139)
Other, net 343 126
--------- ---------
Income before income taxes 29,827 57,715
Income taxes 8,054 15,583
--------- ---------
Net income $ 21,773 $ 42,132
========= =========
Basic net income per share $ 0.17 $ 0.33
========= =========
Diluted net income per share $ 0.16 $ 0.31
========= =========
Weighted average common shares outstanding 131,402 127,978
========= =========
Weighted average common and potential common
shares outstanding 137,590 137,141
========= =========
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended June 30,
---------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 21,773 $ 42,132
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for doubtful accounts 13 355
Provision for inventory valuation 1,388 1,385
Provision for pension accrual 38 48
Gain on sale of fixed assets (242) --
Gain on sale of investment -- (1,427)
Net loss in equity investment -- 208
Depreciation and amortization 27,359 22,370
Amortization of purchased technology 184 927
Deferred income taxes 2,172 (2,367)
Tax benefit from exercise of stock options 3,012 6,964
(Increase) decrease in accounts receivable 9,147 (16,652)
Increase in inventories (1,807) (2,237)
Increase (decrease) in accounts payable
and accrued liabilities (38,340) 34,753
Change in other assets and liabilities (8,621) 7,368
--------- ---------
Net cash provided by operating activities 16,076 93,827
--------- ---------
Cash flows from investing activities:
Capital expenditures (12,827) (104,464)
Proceeds from sale of assets 823 55
--------- ---------
Net cash used in investing activities (12,004) (104,409)
--------- ---------
Cash flows from financing activities:
Repayment of lines of credit -- (9,000)
Proceeds from sale of stock and put options 4,438 3,617
--------- ---------
Net cash provided by (used in) financing activities 4,438 (5,383)
--------- ---------
Net increase (decrease) in cash and cash equivalents 8,510 (15,965)
Cash and cash equivalents at beginning of period 129,909 294,407
--------- ---------
Cash and cash equivalents at end of period $ 138,419 $ 278,442
========= =========
See accompanying notes to condensed consolidated financial statements
5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited 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 unaudited 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 opinion of management, all
adjustments of a normal recurring nature which are necessary for a fair
presentation have been included. Certain information and footnote disclosures
normally included in audited consolidated financial statements have been
condensed or omitted pursuant to such Securities and Exchange Commission rules
and regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 2001. The results of operations for the three
months ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the year ended March 31, 2002.
On January 16, 2001, we merged with TelCom Semiconductor, Inc. The merger
has been accounted for as a pooling of interests. Accordingly, the condensed
consolidated financial statements have been restated to include the operations
of TelCom for all periods presented.
(2) SPECIAL CHARGES
Referring to the special charges included in the quarter ended March 31,
2001, the following updated information regarding the merger accrual, associated
with the January 16, 2001 merger with TelCom Semiconductor, Inc., and the
restructuring accrual is provided as of June 30, 2001 (amounts in thousands):
6
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
June 30, March 31,
2001 2001
------- -------
Trade accounts receivable $70,518 $79,966
Other 1,069 768
------- -------
71,587 80,734
Less allowance for doubtful accounts 4,204 4,191
------- -------
$67,383 $76,543
======= =======
(4) INVENTORIES
The components of inventories consist of the following (amounts in
thousands):
June 30, March 31,
2001 2001
-------- --------
Raw materials $ 9,093 $ 10,132
Work in process 71,482 67,065
Finished goods 38,365 43,518
-------- --------
118,940 120,715
Less allowance for inventory valuation 22,822 25,016
-------- --------
$ 96,118 $ 95,699
======== ========
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.
7
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
June 30, March 31,
2001 2001
---------- ----------
Land $ 23,685 $ 23,685
Building and building improvements 253,376 231,981
Machinery and equipment 699,014 688,096
Projects in process 139,793 160,488
---------- ----------
1,115,868 1,104,250
Less accumulated depreciation
and amortization 350,965 324,234
---------- ----------
$ 764,903 $ 780,016
========== ==========
Depreciation and amortization expense attributed to property and equipment
was $27.4 million and $22.4 million for the three months ended June 30, 2001 and
June 30, 2000, respectively.
(6) LINES OF CREDIT
The Company has an unsecured revolving credit facility with a syndicate of
banks totaling $100,000,000, bearing interest at LIBOR plus 0.625%. The Company
can elect to increase the facility to $150,000,000, subject to certain
conditions set forth in the credit agreement. This facility has a termination
date of May 31, 2003. The Company had no borrowings against this line of credit
as of June 30, 2001. The credit facility requires the Company to achieve certain
financial ratios and achieve operating results to maintain the credit facility.
The Company's ability to fully utilize this credit facility is dependent on it
being in compliance with such covenants and ratios. The Company was in
compliance with these covenants as of June 30, 2001.
The Company has an additional unsecured line of credit with various Taiwan
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) 3.95% at June 30, 2001 plus 0.585%
(average) and expiring on various dates through March 2002. There were no
borrowings against this line of credit as of June 30, 2001, but an allocation of
$954,000 of the available line was made, relating to import guarantees
associated with the Company's business in Thailand.
(7) STOCKHOLDERS' EQUITY
During the three months ended June 30, 2001, the Company made a net
delivery of 381,763 shares of its common stock 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 June 30, 2001. The net shares settled
forward contract could obligate the Company to make a delivery of common stock
in the future if the price of its common stock is below the strike price of the
instruments. The expiration date and final settlement date of this transaction
is May 2002.
8
(8) 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):
Three Months Ended
June 30,
-----------------------
2001 2000
-------- --------
Net income $ 21,773 $ 42,132
Weighted average common shares outstanding 131,402 127,978
Dilutive effect of stock options 6,188 9,163
-------- --------
Weighted average common and potential
common shares outstanding 137,590 137,141
======== ========
Basic net income per share $ 0.17 $ 0.33
======== ========
Diluted net income per share $ 0.16 $ 0.31
======== ========
9
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
June 30,
-----------------------
(unaudited)
2001 2000
---- ----
Net sales ..................................... 100.0% 100.0%
Cost of sales ................................. 50.0% 46.1%
----- -----
Gross profit .................................. 50.0% 53.9%
Research and development ...................... 14.1% 9.8%
Selling, general and administrative ........... 15.4% 14.6%
----- -----
Operating income .............................. 20.5% 29.5%
===== =====
INDUSTRY CONDITIONS
The semiconductor industry is currently facing very challenging conditions.
We, and the semiconductor industry in general, are experiencing a reduction in
demand due to continued inventory corrections at our customers and slowing of
demand from end markets. Lead times between when our customers book their orders
and when the product is to be delivered continue to be very short, and we expect
this to continue throughout fiscal 2002. Given these conditions, we are
encouraged by our performance in the June quarter, particularly the performance
of our proprietary microcontroller products.
Despite the current difficult market conditions and the short-term booking
visibility, we believe the longer-term indicators of our business continue to be
positive. We believe that the design activity of our proprietary products is
strong and that the performance of this product segment in the quarter ended
June 30, 2001, while down from the March 2001 quarter, was significantly better
than the overall industry averages. We are maintaining our research and
development initiatives, which will provide us with new manufacturing
technologies and add to our product portfolio.
Additionally, sales of development systems continue to be an excellent
indication of new customer activity. During the June 2001 quarter we shipped
approximately 6,000 development systems. As of June 30, 2001, we had made
cumulative shipments of more than 209,000 development systems, representing one
of the largest user bases of development tools in the semiconductor industry. We
also continue to see high rates of design-in activity, which we are confident
will position us favorably to return to a pattern of growth.
Our inventories at June 30, 2001 were comparable to the March 31, 2001
levels, indicating that the necessary capacity actions have been implemented to
better match capacity with current demand. With these actions, gross margins
were approximately 50% and operating profit was in excess of 20%, providing a
solid foundation for cash generation and future investments in new products and
process technologies.
10
As we look past the current difficult conditions in our industry, we
believe that we are well-positioned for the long term with our product portfolio
of microcontrollers, high-performance linear and mixed-signal, power management
and thermal management devices, together with our complementary microperipheral
products that are enabling technologies for our customers' applications in the
automotive, communications, computing, consumer and industrial control market
segments.
THE FOREGOING STATEMENTS RELATING TO PRODUCT LEAD TIMES, CUSTOMER ORDER
PATTERNS AND VISIBILITY THROUGHOUT FISCAL 2002, POSITIVE LONG-TERM INDICATORS
FOR FUTURE GROWTH, DESIGN-IN ACTIVITY POSITIONING US FAVORABLY TO RETURN TO A
PATTERN OF GROWTH, EFFECT OF CAPACITY ACTIONS PROVIDING A SOLID FOUNDATION FOR
CASH GENERATION AND FUTURE INVESTMENTS IN NEW PRODUCTS AND PROCESS TECHNOLOGIES,
AND BEING WELL-POSITIONED FOR THE LONG-TERM ARE FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: DEMAND FOR OUR PRODUCTS AND THE PRODUCTS OF OUR CUSTOMERS; THE LEVEL OF
ORDERS THAT ARE RECEIVED AND CAN BE SHIPPED IN A QUARTER; LEVELS OF INVENTORY AT
OUR DISTRIBUTORS AND OTHER CUSTOMERS; INVENTORY MIX AND TIMING OF CUSTOMER
ORDERS; OUR TIMELY INTRODUCTION OF NEW PRODUCTS AND TECHNOLOGIES; MARKET
ACCEPTANCE OF OUR NEW PRODUCTS AND THOSE OF OUR CUSTOMERS; OUR ABILITY TO RAMP
NEW PRODUCTS INTO VOLUME PRODUCTION; COMPETITIVE PRODUCTS AND PRICING IN THE
MARKETS WE GENERALLY SERVE; OUR ABILITY TO MAINTAIN OPERATING MARGINS; AND
GENERAL INDUSTRY, ECONOMIC AND POLITICAL CONDITIONS.
NET SALES
We operate in one industry segment and engage primarily in the design,
development, manufacture and marketing of semiconductor products. We sell our
products to distributors and original equipment manufacturers, referred to as
OEMs, in a broad range of market segments, perform on-going credit evaluations
of our customers and generally require no collateral. Our net sales for the
quarter ended June 30, 2001 were $138.9 million, a decrease of 9.4% from the
previous quarter's sales of $153.4 million, and a decrease of 21.9% over net
sales of $177.7 million in the quarter ended June 30, 2000.
Our microcontroller product line represents the largest component of our
total net sales. Microcontrollers and associated application development systems
accounted for 78% of our total net sales for the three months ended June 30,
2001, and 65% of our total net sales for the three months ended June 30, 2000. A
related component of our product sales consists primarily of Serial EEPROM
memories, which accounted for 15% of our total net sales for the three months
ended June 30, 2001, and 23% of our total net sales for the three months ended
June 30, 2000. Sales of mixed-signal analog and interface products accounted for
7% of our total net sales for the three months ended June 30, 2001, and 12% of
our total net sales for the three months ended June 30, 2000.
Our net sales in any given quarter depend upon a combination of shipments
from backlog and orders received in that quarter for shipment in that quarter,
which we refer to as turns orders. 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. We have emphasized our ability to respond quickly to
customer orders as part of our competitive strategy, resulting in customers
placing orders with shorter delivery schedules. Turns orders directly correlate
to product lead times, which are currently between two and four weeks, as
compared to 12 to 15 weeks a year ago. Shorter lead times have the effect of
increasing turns orders as a percentage of our business in any given quarter and
reducing our visibility on future product shipments. With current lead times
between two and four weeks, customers do not place orders in advance and
therefore, we do not currently have the order visibility we experienced in the
first half of fiscal 2001. The percentage of turns orders in any given quarter
is dependent on overall semiconductor industry conditions and product lead
times. As such, our percentage of turns orders has fluctuated over the last
three years between 20% and 65%. At July 1, 2001, we required turns orders of
11
approximately 45% in order to achieve our projected net sales for the second
quarter of fiscal 2002. At April 1, 2001, we required turns orders of
approximately 41% to achieve our projected net sales for the first quarter of
fiscal 2002.
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 net sales. If we do not achieve a
sufficient level of turns orders in a particular quarter, our net sales and
operating results will suffer.
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 have declined over time. 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 for microcontroller products by
introducing new products with more features and higher prices, thereby
offsetting price declines in older products. During the fiscal year ended March
31, 2001, we initially experienced price increases in our Serial EEPROM
memories, but in the fourth quarter of fiscal 2001 we experienced pricing and
competitive pressures which resulted in price reductions averaging approximately
10% as compared to the third quarter of fiscal 2001. Pricing for Serial EEPROM
products declined by an average of approximately 15% in the first quarter of
fiscal 2002, as compared to the fourth quarter of fiscal 2001. We expect that
pricing pressures affecting Serial EEPROM products will continue throughout
fiscal 2002. We may be unable to maintain average selling prices for our
microcontroller or other products as a result of increased pricing pressure in
the future, which would reduce our operating results.
THE FOREGOING STATEMENTS REGARDING THE LEVEL OF TURNS ORDERS REQUIRED TO
MEET OUR REVENUE TARGETS FOR THE SECOND QUARTER OF FISCAL 2002, AVERAGE SELLING
PRICES 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; DEMAND FOR
OUR PRODUCTS; 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 NEW PRODUCTS AND THOSE OF OUR CUSTOMERS; 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.
Distributors accounted for 63% of our net sales in the three months ended
June 30, 2001, and 66% of our net sales in the three months ended June 30, 2000.
Our largest distributor accounted for 12% of our total net sales for the three
months ended June 30, 2001, and 15% of our total net sales for the three months
ended June 30, 2000. 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 70% of our net sales in the three
months ended June 30, 2001, and 72% of our net sales in the three months ended
June 30, 2000. 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 31% of our net sales in the three months ended June 30,
2001, and 37% of our net sales in the three months ended June 30, 2000. Sales to
customers in Europe were 34% of our net sales in the three months ended June 30,
12
2001, and 32% of our net sales in the three months ended June 30, 2000. 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:
* demand for our products in the distribution and OEM channels
* the level of orders that are received and can be shipped in a quarter
(turns orders)
* market acceptance both of our products and our customers' products
* customer order patterns and seasonality
* disruption in the supply of wafers or assembly services
* availability of manufacturing capacity and fluctuations in
manufacturing yields
* 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
Our gross profit was $69.4 million in the three months ended June 30, 2001,
and $95.8 million in the three months ended June 30, 2000. Gross profit as a
percent of sales was 50.0% in the three months ended June 30, 2001, and 53.9% in
the three months ended June 30, 2000. The most significant factors affecting
gross profit percentage in the periods covered by this report were:
* levels of manufacturing capacity utilization
* continued cost reductions in wafer fabrication and assembly and test
manufacturing
* a stable pricing market for microcontroller products
* inventory obsolescence
* the product mix of microcontroller products and related memory
products, and
* cost reductions associated with a one-week plant shutdown in April
2001.
As of March 31, 2001, we had reduced cumulative wafer capacity at our wafer
fabs by approximately 24% in response to business conditions that resulted in
decreased demand for our products. During the June 2001 quarter our wafer fabs
operated at approximately 70% of their capacity due to the capacity reductions
taken in the March 2001 quarter and the one-week plant shutdown in April 2001.
We believe that these capacity reductions have aligned our capacity with our
current assessment of demand. Overall gross margins for our products in the
March 2001 and June 2001 quarters were negatively impacted by these actions due
to the relatively high fixed costs inherent in our wafer fabrication
manufacturing, which continue even at lower capacity levels. We expect gross
margins to remain at approximately the current level for the remainder of fiscal
2002.
13
We have currently cancelled or deferred capital expenditures to realign our
capacity to reflect our current assessment of market conditions. The start-up
date of our Puyallup, Washington semiconductor manufacturing complex has been
delayed until December 2002. We currently intend to maintain the Puyallup
facility at a minimum cost basis until it is required for capacity expansion.
We continue to transition products to our 0.7-micron and 0.5-micron process
technologies to reduce future manufacturing costs. In fiscal 2001, products
produced on 8-inch wafers increased from approximately 55% at the beginning of
fiscal 2001 to approximately 80% at the end of fiscal 2001. In the three months
ended June 30, 2001, approximately 80% of our production was on 8-inch wafers.
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.
THE FOREGOING STATEMENTS RELATING TO OUR CURRENT ASSESSMENT OF DEMAND,
ANTICIPATED GROSS MARGIN LEVELS FOR THE REMAINDER OF FISCAL 2002, THE
ANTICIPATED START-UP DATE OF THE PUYALLUP FACILITY AND THE TRANSITION TO HIGHER
YIELDING MANUFACTURING PROCESSES 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; ABSORPTION OF FIXED COSTS, LABOR AND OTHER DIRECT MANUFACTURING
COSTS; DEMAND FOR OUR PRODUCTS; COMPETITION AND COMPETITIVE PRESSURE ON PRICING;
THE ABILITY TO INCREASE MANUFACTURING CAPACITY AS NEEDED; COST AND AVAILABILITY
OF RAW MATERIALS; CHANGES IN PRODUCT MIX; AND OTHER INDUSTRY AND ECONOMIC
CONDITIONS.
Currently, approximately half of our assembly operations, and a portion of
our test requirements, are performed by third-party contractors located
throughout Asia. The balance of our assembly and test operations is performed at
our Thailand facility. As of June 30, 2001, approximately 50% of our assembly
requirements were being performed in our Thailand facility, as compared to
approximately 40% as of June 30, 2000. Approximately 95% of our test
requirements were being performed in our Thailand facility as of June 30, 2001,
as compared to approximately 85% as of June 30, 2000. We believe that the
assembly and test operations performed at our Thailand facility provide us with
significant cost savings when compared to third-party contractor assembly and
test costs, as well as increased control of these portions of the manufacturing
process.
Our reliance on third parties involves some reduction in our level of
control over the portions of our business that we subcontract. While we review
the quality, delivery and cost performance of these third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain manufacturing yields, 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 at 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.
14
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.
Various industry experts are forecasting a continued economic slowdown in
the United States. There are recent indications that various countries in Asia
and Europe are experiencing a general economic slowdown. Because of our reliance
on foreign sales and operations, an economic slowdown in the worldwide markets
served by us may harm our business.
RESEARCH AND DEVELOPMENT
We are committed to investing in new and enhanced products, including
development systems software, and in our design and manufacturing process
technologies. 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 in
the three months ended June 30, 2001 to $19.5 million, as compared to $17.4
million in the quarter ended June 30, 2000. Our level of research and
development costs in the three months ended June 30, 2001 decreased to $19.5
million, as compared to $20.5 million in the quarter ended March 31, 2001. The
dollar investment in research and development in the three months ended June 30,
2001 increased by 12% from the quarter ended June 30, 2000, and decreased by 5%
over the quarter ended March 31, 2001. The primary reason for the dollar
increase in research and development costs in the June 2001 quarter compared to
the prior year was the increased labor cost associated with expanding our
technical resources. The primary reason for the dollar decrease in research and
development costs in the June 2001 quarter compared to the March 2001 quarter
was reduced labor costs resulting from a one-week plant shutdown in April 2001.
Research and development costs represented 14.1% of sales in the three months
ended June 30, 2001, as compared to 9.8% of sales in the quarter ended June 30,
2000, and 13.4% in the quarter ended March 31, 2001.
SELLING, GENERAL AND ADMINISTRATIVE
We decreased our level of selling, general and administrative costs to
$21.4 million in the June 30, 2001 quarter, as compared to $26.0 million in the
quarter ended June 30, 2000, and $23.1 million in the quarter ended March 31,
2001. The primary reasons for the dollar decreases in selling, general, and
administrative costs in the June 2001 quarter relate to reductions in bonuses
and recruitment costs and a one-week plant shutdown in April 2001. Selling,
general and administrative costs represented 15.4% of sales in the June 30, 2001
quarter, as compared to 14.6% of sales in the quarter ended June 30, 2000, and
15.1% of net sales in the quarter ended March 31, 2001. Selling, general and
administrative expenses fluctuate over time, primarily due to revenue and
operating expense investment levels.
OTHER INCOME (EXPENSE)
Interest income in the three months ended June 30, 2001 decreased from the
corresponding period of the previous fiscal year as a result of lower invested
cash balances due primarily to the significant levels of capital expenditures
incurred. Additionally, the interest rates applying to our invested cash
balances were significantly lower during the three months ended June 30, 2001,
as compared to the rates applying during the corresponding period of the
previous fiscal year. We expect interest income to increase in the second
quarter of fiscal 2002 due to higher invested cash balances.
THE FOREGOING STATEMENT REGARDING OUR ANTICIPATED INTEREST INCOME IN THE
SECOND QUARTER OF FISCAL 2002 IS A FORWARD-LOOKING STATEMENT. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: ACTUAL
LEVELS OF CASH INVESTED; INTEREST RATE FLUCTUATIONS; REVENUE LEVELS; RESULTS OF
OPERATIONS; AND GENERAL ECONOMIC CONDITIONS.
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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 three
months ended June 30, 2001, and 27.0% for the three months ended June 30, 2000.
We believe that our tax rate for the foreseeable future will be approximately
27.0% due primarily to lower tax rates at our foreign locations.
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 98.0% of our business in Europe in U.S. Dollars and
0.4% 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 or operations based on this transition.
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.
LIQUIDITY AND CAPITAL RESOURCES
We had $138.4 million in cash and cash equivalents at June 30, 2001, an
increase of $8.5 million from the March 31, 2001 balance. The increase in cash
and cash equivalents over this time period is primarily attributable to cash
generated from operating activities. 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 June 30, 2001. We are
required to achieve certain financial ratios and operating results to maintain
this line of credit and were in compliance with these requirements at June 30,
2001.
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 June 30, 2001, but an allocation of $954,000 of the
available line was made, relating to import guarantees associated with our
business in Thailand. There are no covenants related to the foreign line of
credit.
At June 30, 2001, an aggregate of $133.7 million of our credit facilities
was 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.
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During the three months ended June 30, 2001, we generated $16.1 million of
cash from operating activities, a decrease of $79.3 million from the three
months ended June 30, 2000. The decrease in cash flow from operations was
primarily due to decreased 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 three
months ended June 30, 2001 were $12.8 million, as compared to $104.5 million for
the three months ended June 30, 2000. The primary reason for the dollar decrease
in capital expenditures from the prior year was the reduction in the level of
capacity expansion activities in response to reduced demand. Capital
expenditures were primarily for the addition of research and development
equipment in the June 30, 2001 quarter, and for the expansion of production
capacity and the addition of research and development equipment in each of these
periods. We currently intend to spend approximately $55 million during the next
12 months to invest in equipment to maintain, and selectively increase, capacity
to meet our currently anticipated needs.
We expect to finance capital expenditures through our existing cash
balances, 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 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; DEMAND
FOR OUR PRODUCTS; UTILIZATION OF CURRENT MANUFACTURING CAPACITY; MARKET
ACCEPTANCE OF OUR PRODUCTS AND OF OUR CUSTOMERS' PRODUCTS; 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 $4.4 million for the three
months ended June 30, 2001. Net cash used in financing activities was $5.4
million for the three months ended June 30, 2000. Repayments on lines of credit
were $9.0 million for the three months ended June 30, 2000.
We have outstanding a net shares settled forward contract and made a net
delivery of 381,763 shares of our common stock in the three months ended June
30, 2001, and received 184,893 shares of our common stock in the three months
ended June 30, 2000, in connection with this contract. The net shares settled
forward contract could obligate us to make a delivery of common stock in the
future if the price of our common stock is below the strike price of the
instruments. The final settlement date of the net shares settled forward
contract is May 2002.
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, changes in industry
conditions, product mix, 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.
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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, became effective
for us during the quarter ended June 30, 2001. The implementation of SFAS No.
133 did not have a material effect on our results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio, consisting of fixed income securities, was $138.3
million as of June 30, 2001, and $130.1 million as of March 31, 2001. 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 June 30,
2001 and March 31, 2001, 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 on 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 June 30, 2001 and March 31, 2001, 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
adverse 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, 2001.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
We filed a current report on Form 8-K dated June 6, 2001 reporting our
engagement of Ernst & Young LLP to serve as our independent auditors
for the fiscal year ending March 31, 2002. We also filed a current
report on Form 8-K dated May 16, 2001 reporting that we did not renew
the engagement of KPMG LLP as our independent auditors for the fiscal
year ending March 31, 2002.
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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: August 9, 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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