10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 12, 2002
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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, 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
FEBRUARY 1, 2002: 132,991,677 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 -
December 31, 2001 and March 31, 2001.......................... 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended December 31, 2001
and December 31, 2000......................................... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 2001 and
December 31, 2000............................................. 5
Notes to Condensed Consolidated Financial Statements -
December 31, 2001............................................. 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... 22
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K............................. 22
SIGNATURES................................................................ 23
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)
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
December 31,
------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 68,498 $ 130,614
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for doubtful accounts 43 885
Provision for inventory valuation 4,735 6,265
Provision for pension accrual 87 135
Gain on sale of fixed assets (240) (931)
Gain on sale of investment -- (1,427)
Net loss in equity investment -- 626
Depreciation and amortization 82,075 75,185
Amortization of purchased technology 513 2,041
Deferred income taxes 17,103 (4,482)
Tax benefit from exercise of stock options 15,488 14,392
(Increase) decrease in accounts receivable 12,000 (2,225)
Increase in inventories (1,292) (25,289)
Increase (decrease) in accounts payable and
accrued liabilities (47,655) 80,080
Change in other assets and liabilities (39,830) 6,911
--------- ---------
Net cash provided by operating activities 111,525 282,780
--------- ---------
Cash flows from investing activities:
Capital expenditures (36,257) (405,927)
Acquisition of common stock of MEAD Microelectronics,
net of cash acquired -- (1,330)
Proceeds from sale of assets 1,029 1,778
--------- ---------
Net cash used in investing activities (35,228) (405,479)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayment on) lines of credit 2,138 (9,000)
Proceeds from sale of stock and put options 37,051 31,019
--------- ---------
Net cash provided by financing activities 39,189 22,019
--------- ---------
Net increase (decrease) in cash and cash equivalents 115,486 (100,680)
Cash and cash equivalents at beginning of period 129,909 294,407
--------- ---------
Cash and cash equivalents at end of period $ 245,395 $ 193,727
========= =========
Supplemental disclosure of non-cash financing and
investing activities:
Net share settlement delivery of shares $ 10,117 $ 12,848
Net share settlement receipt of shares $ -- $ 6,610
See accompanying notes to condensed consolidated financial statements
5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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
and nine months ended December 31, 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) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
December 31, March 31,
2001 2001
-------- --------
Trade accounts receivable $ 68,386 $ 79,966
Other 345 768
-------- --------
68,731 80,734
Less allowance for doubtful accounts 4,231 4,191
-------- --------
$ 64,500 $ 76,543
======== ========
6
(3) INVENTORIES
The components of inventories consist of the following (amounts in
thousands):
December 31, March 31,
2001 2001
-------- --------
Raw materials $ 6,972 $ 9,945
Work in process 61,814 51,197
Finished goods 23,470 34,557
-------- --------
$ 92,256 $ 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.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
December 31, March 31,
2001 2001
---------- ----------
Land $ 23,685 $ 23,685
Building and building improvements 184,876 167,297
Machinery and equipment 723,265 688,096
Projects in process 207,292 225,172
---------- ----------
1,139,118 1,104,250
Less accumulated depreciation
and amortization 405,709 324,234
---------- ----------
$ 733,409 $ 780,016
========== ==========
Certain reclassifications have been made to the March 31, 2001 amounts to
properly reflect the portion of the Company's property in Puyallup, Washington
that has not been placed in service. This reclassification had no effect on the
Company's results of operations.
Depreciation and amortization expense attributed to property and equipment
was $82.1 million and $75.2 million for the nine months ended December 31, 2001
and December 31, 2000, respectively.
(5) 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 December 31, 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 December 31, 2001.
7
The Company has an additional unsecured line of credit with various
financial institutions in Asia for up to $24,600,000 (U.S. Dollar equivalent).
These borrowings are predominantly denominated in U.S. Dollars, bearing interest
at the Singapore Interbank Offering Rate (SIBOR) of 2.45% at December 31, 2001
plus 0.5% (average) and expiring on various dates through September 2002. There
were borrowings of $2,137,500 against this line of credit as of December 31,
2001, and an allocation of $894,000 of the available line was made, relating to
import guarantees associated with the Company's business in Thailand. There are
no covenants relative to the foreign line of credit.
(6) STOCKHOLDERS' EQUITY
The Company had outstanding a net shares settled forward contract as of
December 31, 2001. In connection with this contract, the Company made a net
delivery of 381,763 shares of its common stock during the nine months ended
December 31, 2001, and a net delivery of 478,781 shares of its common stock
during the nine months ended December 31, 2000. The Company also received
$14,083,638 in connection with an early termination covering 1,100,000 of the
shares outstanding in the net shares settled forward contract during the quarter
ended December 31, 2001. At December 31, 2001, 1,073,737 shares remained
outstanding under the contract. The Company closed out the net shares settled
forward contact in its entirety on January 15, 2002 by making a cash payment of
$27,776,610. The purchased shares are held as treasury shares and are being used
to fund stock option exercises and purchases under the Company's employee stock
purchase plan.
(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 Nine Months Ended
December 31, December 31,
(Unaudited) (Unaudited)
2001 2000 2001 2000
------ ------ ------ ------
Net sales .............. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......... 49.9% 46.6% 50.0% 45.9%
------ ------ ------ ------
Gross profit ........... 50.1% 53.4% 50.0% 54.1%
Research and development 15.1% 11.1% 14.5% 10.4%
Selling, general and
administrative ......... 14.0% 13.8% 14.5% 14.1%
------ ------ ------ ------
Operating income ....... 21.0% 28.5% 21.0% 29.6%
====== ====== ====== ======
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 December 31, 2001 were $141.9 million,
approximately equal to the previous quarter's sales of $141.7 million, and a
decrease of 25.4% from net sales of $190.1 million in the quarter ended December
31, 2000. Our net sales for the nine months ended December 31, 2001 were $422.4
million, a decrease of 24.9% from our net sales of $562.3 million for the nine
months ended December 31, 2000. The decrease in net sales for the three and nine
month periods ended December 31, 2001, as compared to the three and nine month
periods ended December 31, 2000, is the result of inventory corrections at our
customers, slowing demand from end markets and overall semiconductor industry
conditions.
Net sales of our microcontroller products increased approximately 2% in the
three months ended December 31, 2001, as compared to the three months ended
September 30, 2001. The growth in net sales of our microcontroller products is
attributed to our continuing design win performance and the overall positioning
of our proprietary product offerings. Net sales of our Serial EEPROM memory
products increased approximately 3% in the three months ended December 31, 2001,
as compared to the three months ended September 30, 2001 as pricing declines of
approximately 4% were offset by growth in unit volumes and changes in product
mix. Net sales of our analog and interface products decreased approximately 18%
in the three months ended December 31, 2001 as compared to the three months
ended September 30, 2001. The decrease in net sales of our analog and interface
products can be attributed to decreased demand, primarily in the
telecommunications market.
9
Sales by product line for the three and nine months ended December 31, 2001
and 2000 were as follows (in thousands):
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 target 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 short delivery schedules. Turns orders directly correlate to
product lead times, which are currently between two and four weeks generally, as
compared to four to 12 weeks generally 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 beyond
their immediate requirements and therefore, we do not currently have the order
visibility we experienced throughout 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 fiscal years between 20% and 65%. At January 1, 2002, we
required turns orders of approximately 61% in order to achieve our revenue
target for the fourth quarter of fiscal 2002. At October 1, 2001, we required
turns orders of approximately 51% to achieve our revenue target for the third
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. During the fiscal
year ended March 31, 2001, we initially experienced price increases in our
Serial EEPROM products, but in the fourth quarter of fiscal 2001 we began
experiencing pricing and competitive pressures which resulted in price
reductions averaging approximately 10% as compared to the third quarter of
fiscal 2001. We experienced significant competitive pressures for our Serial
EEPROM products in the first half of fiscal 2002. In the third quarter of fiscal
2002 pricing of Serial EEPROM products declined by approximately 4%,
demonstrating that the Serial EEPROM market is stabilizing with easing pricing
pressure and growth in unit volume. We expect pricing of our Serial EEPROM
products to decline in the fourth quarter of fiscal 2002 by approximately the
same percentage as the decline in the third quarter of fiscal 2002.
10
We have experienced, and expect to continue to experience, moderate 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.
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 TARGET FOR THE FOURTH QUARTER OF FISCAL 2002, AVERAGE SELLING
PRICES, STABILIZATION OF THE PRICING ENVIRONMENT FOR SERIAL EEPROM PRODUCTS,
PRICING DECLINES IN SERIAL EEPROM PRODUCTS IN THE FOURTH QUARTER OF FISCAL 2002,
AND PRICING PRESSURES IN CERTAIN MICROCONTROLLER PRODUCT LINES 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; CUSTOMERS' INVENTORY LEVELS, ORDER PATTERNS AND SEASONALITY;
COMPETITION AND COMPETITIVE PRESSURES ON PRICING AND PRODUCT AVAILABILITY;
POSSIBLE DISRUPTION IN COMMERCIAL ACTIVITIES OCCASIONED BY TERRORIST ACTIVITY
AND ARMED CONFLICT, SUCH AS CHANGES IN LOGISTICS AND SECURITY ARRANGEMENTS, AND
REDUCED END-USER PURCHASES RELATIVE TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE
THE UNITED STATES, SUCH AS THE BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR
UNREST OR POLITICAL INSTABILITY; 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 approximately 60% of our net sales in each of
the three month periods ending December 31, 2001 and December 31, 2000.
Distributors accounted for approximately 61% of our net sales in the nine months
ended September 30, 2001, and approximately 63% of our net sales in the nine
months ended December 31, 2000. Our largest distributor accounted for
approximately 12% of our total net sales for the three and nine months ended
December 31, 2001. Our largest distributor accounted for approximately 13% of
our total net sales for the three months ended December 31, 2000, and 14% of our
total net sales for the nine months ended December 31, 2000. Generally, we do
not have long-term agreements with our distributors and our distributors may
terminate their relationships 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 by geography for the three and nine months ended December 31, 2001
and 2000 were as follows (in thousands):
Our sales to foreign customers have been predominately in Asia and Europe,
which we attribute to the manufacturing strength in those areas for automotive,
communications, computing, consumer and industrial control products. Americas
11
sales include sales to customers in the United States, Canada, Central America
and South America. Sales to foreign customers accounted for approximately 69% of
our net sales in the three months ended December 31, 2001 and approximately 66%
of our net sales in the three months ended December 31, 2000. Sales to foreign
customers accounted for approximately 69% of our net sales in the nine month
periods ending December 31, 2001, and approximately 68% of our net sales in the
nine months ended December 31, 2000. The majority of our foreign sales are U.S.
Dollar denominated.
We enter into hedging transactions from time to time in an attempt 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.
GROSS PROFIT
Our gross profit was $71.1 million in the three months ended December 31,
2001, and $101.6 million in the three months ended December 31, 2000. Our gross
profit was $211.4 million in the nine months ended December 31, 2001 and $304.2
million in the nine months ended December 31, 2000. Gross profit as a percent of
sales was 50.1% in the three months ended December 31, 2001, and 53.4% in the
three months ended December 31, 2000. Gross profit as a percent of sales was
50.0% in the nine months ended December 31, 2001, and 54.1% in the nine months
ended December 31, 2000.
The most significant factors affecting gross profit percentage in the
periods covered by this report were:
* reduced levels of manufacturing capacity utilization in the first
three quarters of fiscal 2002
* continued cost reductions in wafer fabrication and assembly and test
manufacturing in all periods covered by this report
* the ability to maintain average selling prices for our microcontroller
products where moderate pricing pressures have been offset by new
product introductions with more features and higher selling prices
* significant competitive pricing pressures in Serial EEPROM memory
products in the first half of fiscal 2002 returning to a more normal
pricing environment in the December 2001 quarter
* fluctuations in the product mix of proprietary microcontroller and
analog products and related commodity memory products as illustrated
in the chart in Net Sales on page 10, and
* cost reductions associated with one-week plant shutdowns in each of
the first three quarters of fiscal 2002.
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 product demand. During the first three quarters of fiscal 2002 our
wafer fabs operated at approximately 70% of their capacity due to the capacity
reductions implemented in the March 2001 quarter and a one-week plant shutdown
in each of the first three quarters of fiscal 2002. Overall inventory levels
have declined from $95.7 million as of March 31, 2001 to $92.2 million as of
December 31, 2001, confirming that capacity has been reduced to a level more
aligned with market demand for the nine month period ended December 31, 2001.
Beginning with the March 2001 quarter, our overall gross margins have been
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.
12
The start-up date of our Puyallup, Washington semiconductor manufacturing
complex has been delayed until October 2003, subject to business conditions and
capacity requirements. We will need to begin facilitization work at the site
approximately 12 months prior to the expected start-up date. 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 the three and nine months
ended December 31, 2001, approximately 80% of our production was on 8-inch
wafers. 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. We anticipate that gross 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 BELIEF THAT OUR CAPACITY REDUCTION
ACTIONS HAVE ALIGNED CAPACITY WITH MARKET DEMAND, THE ANTICIPATED START-UP DATE
OF THE PUYALLUP FACILITY AND THE LEAD TIME NECESSARY TO FACILITATE THE PUYALLUP
FACILITY, OUR INTENTION TO OPERATE THE PUYALLUP FACILITY AT A MINIMUM COST
BASIS, THE TRANSITION TO HIGHER YIELDING MANUFACTURING PROCESSES TO REDUCE
FUTURE OPERATING COSTS AND THE FLUCTUATION OF GROSS MARGINS OVER TIME ARE
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF
THE FOLLOWING FACTORS, AMONG OTHERS: DEMAND FOR OUR PRODUCTS; FLUCTUATIONS IN
PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
ABSORPTION OF FIXED COSTS, LABOR AND OTHER DIRECT MANUFACTURING COSTS;
COMPETITION AND COMPETITIVE PRESSURE ON PRICING; POSSIBLE DISRUPTION IN
COMMERCIAL ACTIVITIES OCCASIONED BY TERRORIST ACTIVITY AND ARMED CONFLICT, SUCH
AS CHANGES IN LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED END-USER
PURCHASES RELATIVE TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED STATES,
SUCH AS THE BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL
INSTABILITY; 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 are performed by
third-party contractors located throughout Asia. The balance of our assembly
operations is performed at our Thailand facility. As of December 31, 2001,
approximately 50% of our assembly requirements were being performed in our
Thailand facility, as compared to approximately 33% as of December 31, 2000.
Substantially all of our test requirements were being performed in our Thailand
facility as of December 31, 2001, as compared to approximately 81% as of
December 31, 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
13
* 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
* economic slowdown in the worldwide markets served by us, 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 operations performance could suffer.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended December 31,
2001 were $21.4 million, or 15.1% of sales, compared to $21.1 million, or 11.1%
of sales for the three months ended December 31, 2000. Research and development
expenses for the nine months ended December 31, 2001 were $61.1 million, or
14.5% of sales, compared to $58.1 million, or 10.4% of sales for the nine months
ended December 31, 2000. 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. Research and development expenses include
expenditures for labor, masks, prototype wafers, and expenses for the
development of process technologies, new packages, and software to support new
products and design environments.
Research and development expenses increased $0.3 million, or 1.3% for the
three months ended December 31, 2001 over the same period last year. Research
and development expenses increased $3.0 million, or 5.2% for the nine months
ended December 31, 2001 over the same period last year. Research and development
expenses increased $1.2 million, or 6.2% for the three months ended December 31,
2001 over the three months ended September 30, 2001. The primary reason for the
dollar increase in research and development costs in each of these periods was
increased labor and professional service costs associated with expanding our
technical resources.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the three months ended
December 31, 2001 were $19.9 million, or 14.0% of sales, compared to $26.2
million, or 13.8% of sales for the three months ended December 31, 2000.
Selling, general and administrative expenses for the nine months ended December
31, 2001 were $61.5 million, or 14.5% of sales, compared to $79.5 million, or
14.1% of sales in the nine months ended December 31, 2000. Selling, general and
administrative expenses include salary expenses related to field sales,
marketing and administrative personnel, advertising and promotional expenditures
and legal expenses. Selling, general and administrative expenses also include
costs related to our direct sales force and field applications engineers who
work in sales offices worldwide to stimulate demand by assisting customers in
the use and proper selection of our products. Selling, general and
administrative expenses fluctuate over time, primarily due to revenue and
operating expense investment levels.
Selling, general and administrative expenses were essentially flat for the
three months ended December 31, 2001 as compared to the September 30, 2001
quarter. Selling, general and administrative expenses decreased $6.4 million, or
24.2% for the three months ended December 31, 2001 over the same period last
year. Selling, general and administrative expenses decreased $18.0 million, or
22.7%, for the nine months ended December 31, 2001 over the same period last
14
year. The primary reason for the dollar decreases in selling, general and
administrative costs in these periods relate to reductions in bonuses and
recruitment costs and one-week plant shutdowns in each of the first three
quarters of fiscal 2002.
OTHER INCOME (EXPENSE)
Interest income in both the three and nine months ended December 31, 2001
decreased from the corresponding period of the previous fiscal year, although
average invested cash balances were higher in both periods. The decrease in
interest income was primarily driven by significantly lower interest rates
applicable to our invested cash balances during the three and nine months ended
December 31, 2001, as compared to the rates applying during the corresponding
periods of the previous fiscal year.
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 26.0% for the nine
months ended December 31, 2001, and 27.2% for the nine months ended December 31,
2000. We believe that our tax rate for the March 2002 quarter will be
approximately 24.0%, resulting primarily from higher tax credits relating to our
research and development activities. Based on our current assumptions we
anticipate that our effective tax rate for the foreseeable future will be
approximately 25.5%.
THE FOREGOING STATEMENTS REGARDING OUR ANTICIPATED FUTURE TAX RATES ARE
FORWARD-LOOKING STATEMENTS. 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 that has
converted to the Euro.
We currently conduct 97.7% of our business in Europe in U.S. Dollars and
0.2% of our business in Europe in Pounds Sterling. The balance of our net sales
in Europe is conducted in the Euro. We will monitor the potential commercial
impact of conversion of 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 STATEMENT REGARDING THE ANTICIPATED IMPACT OF THE TRANSITION
TO THE EURO CURRENCY IS A FORWARD-LOOKING STATEMENT. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: LEVELS OF SALES IN
EUROPE THAT MAY BE CONDUCTED IN THE EURO; AND FLUCTUATIONS IN CURRENCY EXCHANGE
RATES.
LIQUIDITY AND CAPITAL RESOURCES
We had $245.4 million in cash and cash equivalents at December 31, 2001, an
increase of $115.5 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
15
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, 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
December 31, 2001.
We also maintain an unsecured short-term line of credit with various
financial institutions in Asia for up to $24.6 million (U.S. dollar equivalent).
There were borrowings of $2.1 million under the foreign line of credit as of
December 31, 2001, and an allocation of $894,000 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 December 31, 2001, an aggregate of $121.6 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.
During the nine months ended December 31, 2001, we generated $111.5 million
of cash from operating activities, a decrease of $171.3 million from the nine
months ended December 31, 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 nine
months ended December 31, 2001 were $36.3 million, as compared to $405.9 million
for the nine months ended December 31, 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 in the nine months ended December 31, 2001 were primarily for the
addition of research and development equipment. We currently intend to spend
approximately $65 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: DEMAND FOR OUR
PRODUCTS; UTILIZATION OF CURRENT MANUFACTURING CAPACITY; MARKET ACCEPTANCE OF
OUR PRODUCTS AND OF OUR CUSTOMERS' PRODUCTS; THE CYCLICAL NATURE OF THE
SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR 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 $39.2 million for the nine
months ended December 31, 2001, as compared to $22.0 million for the nine months
ended December 31, 2000. Proceeds from lines of credit were $2.1 million for the
nine months ended December 31, 2001. Repayments on lines of credit were $9.0
million for the nine months ended December 31, 2000. Proceeds from the sale of
stock and put options were $37.1 million in the nine months ended December 31,
2001 and $31.0 million in the nine months ended December 31, 2000.
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We had outstanding a net shares settled forward contract as of December 31,
2001. In connection with this contract, we made a net delivery of 381,763 shares
of our common stock during the nine months ended December 31, 2001, and a net
delivery of 478,781 shares of our common stock during the nine months ended
December 31, 2000. We also received approximately $14.1 million in connection
with an early termination covering 1,100,000 of the shares outstanding in the
net shares settled forward contract in the quarter ended December 31, 2001. At
December 31, 2001, 1,073,737 shares remained outstanding under the contract. We
closed out the net shares settled forward contract in its entirety on January
15, 2002 by making a cash payment of approximately $27.8 million. The purchased
shares are held as treasury shares and are being used to fund stock option
exercises and purchases under our employee stock purchase plan.
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
constantly evaluate the need 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
incremental dilution to existing investors.
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS
When evaluating Microchip and its business, you should give careful
consideration to the factors listed below, in addition to the information
provided elsewhere in this Form 10-Q and in other documents that we file with
the Securities and Exchange Commission.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO FACTORS THAT COULD
REDUCE OUR NET SALES AND PROFITABILITY.
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
* possible disruption in commercial activities occasioned by terrorist
activity and armed conflict, such as changes in logistics and security
arrangements, and reduced end-user purchases relative to expectations
* impact of events outside the United States, such as the business
impact of fluctuating currency rates or unrest or political
instability
* 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.
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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.
OUR OPERATING RESULTS WILL SUFFER IF WE FAIL TO MAINTAIN MANUFACTURING
YIELDS.
The manufacture and assembly of integrated circuits, particularly
non-volatile, erasable CMOS memory and logic devices such as those that we
produce, are complex processes. These processes are sensitive to a wide variety
of factors, including the level of contaminants in the manufacturing
environment, impurities in the materials used and the performance of our
fabrication personnel and equipment. As is typical in the semiconductor
industry, we have from time to time experienced lower than anticipated
manufacturing yields. Our operating results will suffer if we are unable to
maintain yields at approximately the current levels.
INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR
PRODUCTS AND REDUCED MARKET SHARE.
The semiconductor industry is intensely competitive and has been
characterized by price erosion and rapid technological change. We compete with
major domestic and international semiconductor companies, many of which have
greater market recognition and substantially greater financial, technical,
marketing, distribution and other resources than we have with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also increasing their participation in the market for
embedded control applications. In addition, our ability to compete successfully
depends on a number of factors both within and outside our control, including:
* the quality, performance, reliability, features, ease of use, pricing
and diversity of our products
* the quality of our customer services and our ability to address the
needs of our customers
* our success in designing and manufacturing new products including
those implementing new technologies
* manufacturing capacity utilization and manufacturing yields
* hiring and retention of qualified engineering and management personnel
* adequate supplies of raw materials and other supplies at acceptable
prices
* the rate at which customers incorporate our products into their own
products
* product introductions by our competitors
* the number, nature and success of our competitors in a given market
* general market and economic conditions, and
* protection of our products and processes by effective utilization of
intellectual property laws.
We may be unable to compete successfully in the future, which could harm
our business.
OUR OPERATING RESULTS MAY BE IMPACTED BY THE WIDE FLUCTUATIONS OF SUPPLY
AND DEMAND IN THE SEMICONDUCTOR INDUSTRY.
The semiconductor industry is characterized by wide fluctuations of supply
and demand. The industry is currently experiencing a significant economic
downturn, characterized by diminished product demand and production
over-capacity. We have sought to reduce our exposure to this industry
cyclicality by selling proprietary products, that cannot be easily or quickly
replaced, to a geographically diverse base of customers across a broad range of
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market segments. However, we have experienced substantial year-to-year
fluctuations in operating results and may, in the future, experience
period-to-period fluctuations in operating results due to general industry or
economic conditions.
WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL, AND
COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE IN OUR MARKET.
Our success depends to a significant extent upon the efforts and abilities
of our senior management, engineering and other personnel. The competition for
qualified engineering and management personnel is intense. We may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the services of
one or more of our key personnel or the inability to add key personnel could
harm our business. We have no employment agreements with any member of our
senior management team.
OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON A TIMELY
BASIS.
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 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 significant research and
development expenditures. Companies in the industry have experienced
difficulties in effecting transitions to advanced process technologies and,
consequently, have suffered reduced manufacturing yields or delays in product
deliveries. Our future operating results could be reduced if our transition to
advanced process technologies is substantially delayed or inefficiently
implemented.
WE ARE DEPENDENT ON SEVERAL THIRD-PARTY CONTRACTORS IN ASIA TO PERFORM KEY
MANUFACTURING FUNCTIONS FOR US.
We depend on several third-party contractors located throughout Asia for a
portion of the assembly and testing of our products and for a portion of the
wafer fabrication of our analog products. Although we seek to reduce our
dependence on these third-party contractors, disruption or termination of any of
these sources could harm our business and operating results. Our reliance on
third parties involves some reduction in our level of control over the portions
of our business that we subcontract. Our future operating results could suffer
if any third-party contractor were to experience financial, operations or
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production difficulties, or if they were unable to maintain manufacturing
yields, assembly and test yields and costs at approximately their current
levels.
WE MAY LOSE SALES IF OUR SUPPLIERS OF RAW MATERIALS AND EQUIPMENT FAIL TO
MEET OUR NEEDS.
Our semiconductor manufacturing operations require raw materials and
equipment that must meet exacting standards. We generally have more than one
source for these supplies, but there are only a limited number of suppliers
capable of delivering various raw materials and equipment that meet our
standards. In addition, the raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide demand for
semiconductor products increases. We have experienced supply shortages from time
to time in the past, and on occasion our suppliers have told us they need more
time than expected to fill our orders. An interruption of any raw materials or
equipment sources could harm our business.
WE ARE HIGHLY DEPENDENT ON FOREIGN SALES AND OPERATIONS, WHICH EXPOSES US
TO FOREIGN POLITICAL AND ECONOMIC RISKS.
Sales to foreign customers account for a substantial portion of our net
sales. During the three and nine months ended December 31, 2001, 69% of our net
sales were made to foreign customers. For the fiscal year ended March 31, 2001,
approximately 68% of our net sales were made to foreign customers. We purchase a
substantial portion of our raw materials and equipment from foreign suppliers.
In addition, we own assembly and test facilities located near Bangkok, Thailand.
We also use various third-party contractors located throughout Asia for a
portion of our assembly and test requirements and a portion of our analog
product wafer fabrication requirements.
INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT
LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS.
Our ability to obtain patents, licenses and other intellectual property
rights covering our products and manufacturing processes is important for our
success. To that end, we have acquired certain patents and patent licenses and
intend to continue to seek patents on our inventions and manufacturing
processes. The process of seeking patent protection can be long and expensive,
and patents may not be issued from currently pending or future applications. In
addition, our existing patents and any new patents that are issued may not be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to us. We may be subject to or may initiate interference proceedings
in the U.S. Patent and Trademark Office, which can require significant financial
and management resources. In addition, the laws of certain foreign countries do
not protect our intellectual property rights to the same extent as the laws of
the United States.
As is typical in the semiconductor industry, we and our customers have from
time to time received, and may in the future receive, communications from third
parties asserting patents or other intellectual property rights on certain of
our products or technologies. In the event a third party were to make a valid
intellectual property claim and a license of other agreement was not available
on commercially reasonable terms, our operating results could be harmed. We have
in the past been, are currently, and may in the future be, involved in
litigation to defend Microchip against alleged infringement of the rights of
others or to enforce our intellectual property rights. Litigation could result
in substantial cost to us and divert our resources. An unfavorable outcome in
any such suit could harm our business, financial condition or results of
operations.
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OUR MANUFACTURING FACILITIES MAY BE SUBJECT TO DISRUPTION FOR REASONS
BEYOND OUR CONTROL.
Operations at any of our primary manufacturing facilities, or at any of our
wafer fabrication or test and assembly subcontractors, may be disrupted for
reasons beyond our control, including fire, earthquake, floods, other natural
disasters, or work stoppages. If operations at any of our facilities or by any
of our subcontractors are interrupted, we may not be able to shift production to
other facilities on a timely basis. If this occurs, we may experience delays in
shipments of products to our customers and alternate sources for production may
be unavailable on acceptable terms. This could result in reduced revenues and
profits and in the cancellation of orders or loss of customers.
WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION, WHICH MAY FORCE US TO
INCUR SIGNIFICANT EXPENSES.
We must comply with many different federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing processes.
Although we believe that our activities conform to presently applicable
environmental regulations, our failure to comply with present or future
regulations could result in the imposition of fines, suspension of production or
a cessation of operations. Any such regulation could require us to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. Any failure by us to control the use of or adequately
restrict the discharge of hazardous substances could subject us to future
liabilities. Environmental problems may occur that could subject us to future
costs or liabilities.
In 1993, TelCom acquired the semiconductor manufacturing operations of
Teledyne, Inc. previously conducted at TelCom's Mountain View, California
facility. The semiconductor manufacturing operations conducted by Teledyne at
the facility allegedly contaminated the soil and groundwater of the facility,
and the groundwater of properties located down-gradient of the facility.
Although TelCom was indemnified by Teledyne against, among other things, any
liabilities arising from any such contamination, and although we should be able
to benefit from this indemnification as a successor to TelCom's business, we
cannot assure you that claims will not be made against us or that such
indemnification will be available or will provide meaningful protection at the
time any such claim is brought. To the extent that we are subject to a claim
that is not covered by the indemnity from Teledyne or as to which Teledyne is
unable to provide indemnification, our financial condition or operating results
could suffer.
THE FUTURE TRADING PRICE OF OUR COMMON STOCK COULD BE SUBJECT TO WIDE
FLUCTUATIONS IN RESPONSE TO A VARIETY OF FACTORS.
The market price of our common stock has fluctuated significantly in the
past and is likely to fluctuate in the future. The future trading price of our
common stock could be subject to wide fluctuations in response to a variety of
factors, many of which are beyond our control, including:
* quarterly variations in our operating results and the operating
results of other semiconductor companies
* actual or anticipated announcements of technical innovations or new
products by us or our competitors
* changes in analysts' estimates of our financial performance or
buy/sell recommendations
* general conditions in the semiconductor industry, and
* worldwide economic and financial conditions.
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In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many high
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may harm the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio, consisting of fixed income securities, was $238.0
million as of December 31, 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 December
31, 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 December 31, 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Microchip Technology Incorporated 1993 Stock Option Plan, as
amended through October 26, 2001.
(b) Reports on Form 8-K.
None.
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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 __, 2002 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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