10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on January 23, 1997
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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, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number: 0-21184
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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
(602) 786-7200
(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
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The number of shares outstanding of the issuer's common stock, as of January 17,
1996:
Common Stock, $.001 Par Value: 51,405,409 shares
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
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 share amounts)
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except share amounts)
See accompanying notes to condensed consolidated financial statements
5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of Microchip Technology Incorporated and its wholly-owned
subsidiaries (the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, the accompanying financial statements include all adjustments of a
normal recurring nature which are necessary for a fair presentation of the
results for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to such rules and regulations. It is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 1996. The results of operations for the nine
months ended December 31, 1996 are not necessarily indicative of the results to
be expected for the full fiscal year.
(2) ASiC Acquisition
On June 25, 1996 the Company acquired ASiC Technical Solutions, Inc., a
fabless provider of quick turn gate array devices (the "Acquisition"). The
Acquisition was treated as a purchase for accounting purposes. The amount paid
for the Acquisition and related costs was $1,750,000. As part of the
Acquisition, Microchip allocated a substantial portion of the purchase price to
in-process research and development costs, which is consistent with the
Company's on-going treatment of research and development costs. The total
one-time write-off associated with the Acquisition was $1,575,000, with the
balance to be treated as purchased technology related to current product and
amortized over five years. The impact of the Acquisition to the Company's
reported financial data and results of operations is immaterial. Therefore,
pro-forma information illustrating the combined results after the Acquisition
has not been provided.
(3) Restructuring Charges
During the quarter ended June 30, 1996, primarily in response to
inventory correction activities at the Company's customers, the Company
implemented a series of actions to temporarily reduce production capacity,
curtail the growth of inventories and reduce operating expenses. These actions
included delaying capital expansion plans and deferring capital spending, a 15%
production cutback in wafer fabrication, a headcount reduction in early April,
1996 representing approximately 3% of the Company's worldwide employees, and a
two-week wafer fab shut down in early July, 1996. As a result of these actions,
the Company recorded a pre-tax restructuring charge of $5,969,000 in the nine
months ended December 31, 1996 to cover costs primarily related to idling part
of the Company's 5-inch wafer fab capacity, paying continuing expenses during
the wafer fab shutdown and paying severance costs associated with the April,
1996 headcount reduction.
6
(4) Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
(5) Inventories
The Company utilizes the LIFO (last-in, first-out) accounting method
and has consistently presented its results of operations on this basis for all
periods presented.
The components of inventories are as follows (amounts in thousands):
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in
thousands):
7
(7) Lines of Credit
On October 31, 1996, the Company entered into an agreement for a line
of credit with a syndicate of U.S. Banks for up to $90,000,000. The line was
completed as a revolving line of credit for a two year period, maturing on
October 31, 1998. The current line replaces all previous lines, with no material
changes in interest rates or covenants. Lines of credit consist of the following
(amounts in thousands):
The agreement between the Company and the syndicate of U.S. banks requires the
Company to achieve certain financial ratios and operating results. The Company
was in compliance with these covenants as of December 31, 1996.
(8) Stockholders' Equity
Stock Split. On December 6, 1996, the Company's Board of Directors
declared a 3-for-2 stock split in the form of a stock dividend on the Company's
common stock, par value $.001 per share, to be effective January 6, 1997 for all
stockholders of record on December 20, 1996. All per share data and financial
information contained in this report have been restated to reflect this stock
split.
Stock Repurchase Activity. In connection with a stock repurchase
program, during the nine months ended December 31, 1996, the Company purchased a
total of 1,326,477 shares of the Company's common stock in open market
activities at a total cost of $19,463,000. Through December 31, 1996, the
Company had reissued through stock option exercises and the Company's stock
purchase plan a total of 792,477 shares of the Company's common stock held in
treasury.
8
Also in connection with the stock repurchase program, as of December
31, 1996, the Company held unexpired put options for 450,000 shares. The
unexpired put options have expiration dates ranging from January 10, 1997 to
July 10, 1997 at prices ranging from $15.00 to $21.25. The net proceeds from the
sale and repurchase of put options have been credited to additional paid-in
capital. For the nine months ended December 31, 1996, $770,650 was charged to
additional paid-in capital due to the repurchase of put options.
(9) Supplemental Cash Flow Information
Cash paid for income taxes amounted to $5,340,000 and $15,560,000
during the nine months ended December 31, 1996 and 1995 respectively. Cash paid
for interest amounted to $2,731,000 and $1,799,000 for each of the nine month
periods ended December 31, 1996 and 1995.
(10) Subsequent Events
On January 16, 1997, the Company filed a registration statement on Form
S-3 (Registration Statement No. 333-19919) for a public offering of 1,000,000
shares of Common Stock, plus up to 150,000 shares to cover over allotment, (the
"Registration Statement"). The Registration Statement has not yet become
effective. The net proceeds of the offering, if any when complete, will be used
primarily to reduce outstanding indebtedness incurred by the Company to fund
wafer fabrication, test capacity and repurchases of the Company's Common Stock,
and for other working capital and general corporate purposes.
9
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's net sales for the quarter ended December 31, 1996 were
$87.1 million, an increase of 11.5% over sales of $78.1 million for the
corresponding quarter of the previous fiscal year, and an increase of 9.5% from
the previous quarter's sales of $79.5 million. Net sales for the nine months
ended December 31, 1996 were $240.7 million, an increase of 12.6% over sales of
$213.8 million in the corresponding period of the previous fiscal year.
Primarily due to the Company's emphasis on higher margin products, the Company
experienced growth in sales of 8-bit microcontrollers and serial and parallel
EEPROM memories over these periods and a moderate decline in sales of its lower
margin memory and other product categories. The Company anticipates that the
sales mix of these product categories will not change substantially in future
periods.
The Company's family of 8-bit microcontrollers represents the largest
component of Microchip's total net sales. Microcontrollers and associated
application development systems accounted for 65.9% and 59.9% of total net sales
in the quarters ending December 31, 1996 and 1995, respectively. A related
component of the Company's product sales consists of serial and parallel EEPROM
memories. These products accounted for 30.5% and 35.9% of total net sales in the
quarters ended December 31, 1996 and 1995, respectively. The remaining
components of total net sales were the Company's lower margin memory and other
miscellaneous products which accounted for 3.6% and 4.2% of total net sales in
the quarters ended December 31, 1996 and 1995, respectively. Microcontrollers
and associated application development systems accounted for 64.3% and 60.2% of
total net sales in the nine months ended December 31, 1996 and 1995,
respectively. Serial and parallel EEPROM memory products accounted for 31.6% and
33.0% of net sales in the nine months ended December 31, 1996 and 1995,
respectively. The remaining components of total net sales were the Company's
lower margin memory and other miscellaneous products which accounted for 4.1%
and 6.8% of total net sales in the nine months ended December 31, 1996 and 1995,
respectively.
The Company's overall average selling prices for its embedded control
products have remained relatively constant while average selling prices of its
non-volatile memory products have declined gradually over time. During the nine
months ended December 31, 1996, the Company experienced increased pricing
pressure on its non-volatile memory products due primarily to industry inventory
correction activities. There can be no assurance that average selling prices for
the Company's embedded control or other products will not experience increased
pricing pressure in the future. An increase in pricing pressure could adversely
affect the Company's operating results. There can be no assurance that average
selling prices or operating margins for the Company's products will remain
constant in the future due to competitive and other pressures. The foregoing
statements regarding product mix, average selling prices, pricing pressures, and
operating margins are forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbors created
thereby. Actual results could differ materially because of the following
factors, among others: competition and competitive pressures on pricing and
product availability; customer inventory levels, order patterns and seasonality;
the cyclical nature of both the semiconductor industry and the markets addressed
by the Company's products; the level of orders that are received and can be
shipped in a quarter; market acceptance of the
10
products of both the Company and its customers; demand for the Company's
products; fluctuations in production yields, production efficiencies, overall
capacity utilization, changes in product mix; and absorption of fixed costs,
labor and other fixed manufacturing costs.
Foreign sales represented 69.2% of net sales in the current fiscal
quarter, 63.0% of net sales in the corresponding quarter of the previous fiscal
year and 63.1% of net sales in the previous quarter. Foreign sales represented
66.4% and 65.0% of net sales for the nine months ended December 31, 1996 and
1995 respectively. The Company's foreign sales have been predominantly in Asia,
Europe and Japan which the Company attributes to the manufacturing strength in
those areas for consumer, automotive, office automation, communications and
industrial products. The majority of foreign sales are U.S. dollar denominated.
The Company has entered into and, from time to time, will enter into hedging
transactions in order to minimize exposure to currency rate fluctuations.
Although none of the countries in which the Company conducts significant foreign
operations has had a highly inflationary economy in the last five years, there
can be no assurance that inflation rates or fluctuations in foreign currency
rates in countries where the Company conducts operations will not adversely
affect the Company's operating results in the future.
Additional Factors Affecting Operations. The Company's net sales in any
given quarter are dependent upon a combination of orders received in that
quarter for shipment in that quarter ("turns orders') and shipments from
backlog. The Company has emphasized its ability to respond quickly to customer
orders as part of its competitive strategy. This strategy, combined with current
industry conditions, is resulting in customers placing orders with relatively
short delivery schedules. This has the effect of increasing turns orders as a
portion of the Company's business in any given quarter and reducing the
Company's visibility on net sales. The percentage of turns orders has increased
in each quarter of fiscal 1997 and, in order for the Company to continue growth
in net sales, is expected in increase further in the fourth quarter of fiscal
1997. Because turns orders are more difficult to predict, there can be no
assurance that the combination of turns orders and backlog in any quarter will
be sufficient to achieve growth in net sales. If the Company does not achieve a
sufficient level of turns orders in a particular quarter, the Company's revenues
and operating results would be materially adversely affected.
The Company believes the future growth of its 8-bit family of
microcontroller products and related memory product sales will depend largely
upon the Company's success in having its current and new products designed into
high-volume customer applications. Design wins typically precede the Company's
volume shipment of products for such applications by 15 months or more. The
Company also believes that shipment levels of its proprietary application
development systems are an indicator of potential future design wins and
microcontroller sales. During the quarter ended December 31, 1996, the Company
continued to achieve additional design wins and ship a high level of application
development systems. However, there can be no assurance that any particular
development system sale will result in a product design win or that any
particular design win will result in future product sales.
The Company's operating results are affected by a wide variety of other
factors which could adversely impact its net sales and profitability, many of
which are beyond the control of the Company. These factors include the Company's
ability to design and introduce new products on a timely basis, market
acceptance of products of both the company and its customers, customer demand
for the Company's products, customer order patterns and seasonality, changes in
product mix, whether the Company's customers buy from a distributor or directly
from the Company, expansion of direct sales efforts which adversely affect
relationships with distributors, product performance and reliability, product
obsolescence, the amount of any product returns, availability and utilization of
manufacturing
11
capacity, fluctuations in manufacturing yield, the availability and cost of raw
materials, equipment and other supplies, the cyclical nature of both the
semiconductor industry and the markets addressed by the Company's products,
technological changes, competition and competitive pressures on prices, and
economic, political or other conditions in the United States, Taiwan, Thailand
and other worldwide markets served by the Company. The Company believes its
ability to continue to increase its manufacturing capacity to meet customer
demand and maintain satisfactory delivery schedules will be an important
competitive factor. As a result of the increase in fixed costs and operating
expenses related to expanding its manufacturing capacity, the Company's
operating results may be adversely affected if net sales do not increase
sufficiently to offset the increased costs. The Company's products are
incorporated into a wide variety of consumer, automotive, office automation,
communications and industrial products. A slowdown in demand for products which
utilize the Company's products as a result of economic or other conditions in
the United States or worldwide markets served by the Company could adversely
affect the Company's operating results.
Gross Profit. The Company's gross profit was $43.5 million for the
quarter ended December 31, 1996 compared with $40.4 million in the corresponding
quarter of the prior year and $39.8 million in the previous quarter. Gross
profit as a percent of sales was 50.0% in the current quarter, 51.7% in the
corresponding quarter of the prior fiscal year and 50.0% in the previous
quarter. Gross profit for the nine month period ended December 31, 1996 was
$119.9 million and 49.8% of net sales compared to $110.8 million and 51.8% of
net sales in the corresponding period of the prior fiscal year. Gross profit
percent remained at the same level as in the prior fiscal period and was down
from prior year levels, primarily as a result of reduced 5-inch wafer production
at one of the Company's wafer fabs. The Company anticipates that its cost of
sales will fluctuate over time, driven primarily by the product mix of 8-bit
microcontroller products and related memory and commodity memory products,
manufacturing yields, wafer fab loading levels and competitive and economic
conditions. The Company anticipates that its gross profit percentage will
fluctuate over time, driven primarily by product mix, manufacturing yields and
competitive and economic conditions. The Company is continuing the process of
transitioning products to smaller geometries and to larger wafer sizes. An
8-inch pilot line was established at the Tempe wafer fab during fiscal 1997 and
the Company plans to convert the Tempe fab from a 6-inch facility to an 8-inch
facility over time. In addition, the Company has begun the implementation of a
0.7 micron process to which it expects to transition over time. The foregoing
statements relating to anticipated gross margins, cost of sales, and the
transition to higher yielding manufacturing processes are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbors created thereby. Actual results could differ
materially because of the following factors, among others: fluctuations in
production yields, production efficiencies, overall capacity utilization; cost
and availability of raw materials; absorption of fixed costs, labor and other
direct manufacturing costs; the timing and success of the manufacturing process
transition; changes in product mix; competitive pressures on prices; and other
economic conditions in the United States and other worldwide markets.
The Company has consistently presented its results of operations for
all periods on the last-in first-out (LIFO) method and has assessed the net
realizable value of inventory based on LIFO costs. LIFO has the effect of
matching current costs of production with sales generated during the same
period. Production costs have generally decreased over time due to improvements
in manufacturing productivity and yields, resulting in lower cost of sales. This
downward trend in production costs has resulted in lower cost of sales on a LIFO
basis than would have been recognized had a first-in, first-out (FIFO) basis
been utilized, decreasing cost of sales $679,000 for the nine months ended
December 31, 1996. As a result of changes in sales and product mix which
affected production costs, the LIFO inventory
12
decreased and cost of sales increased by $100,000 for the three months ended
December 31, 1996 and by $250,000 and $800,000 for the three months and nine
months ended December 31, 1995, respectively.
Nearly all of Microchip's assembly operations and a portion of its test
requirements are performed by third-party contractors in order to meet product
shipment requirements. Reliance on third parties involves some reduction in the
Company's level of control over these portions of its business. While the
Company reviews the quality, delivery and cost performance of these third-party
contractors, there can be no assurance that reliance on third-party contractors
will not adversely impact results in future reporting periods if any third-party
contractor is unable to maintain assembly and test yields and costs at
approximately their current levels.
The Company owns test facilities in Kaohsiung, Taiwan, Republic of
China and Chachoengsao, Thailand, near Bangkok. The Company also uses various
third-party contractors in Thailand, the Philippines and other locations in Asia
for assembly and test. The Company's reliance on facilities in these countries,
and maintenance of substantially all of its finished goods inventory overseas,
entails certain political and economic risks, including political instability
and expropriation, supply disruption, currency controls and exchange
fluctuations, as well as changes in tax laws, tariff and freight rates. The
Company has not experienced any significant interruptions in its foreign
business operations to date. Nonetheless, the Company's business and operating
results could be adversely affected if foreign operations or international air
transportation were disrupted.
During the fiscal quarter ended December 31, 1996, the Company began
the process of bringing its wholly-owned Chachoengsao, Thailand test facility,
located near Bangkok, on line for production volumes. While the Company believes
the long- term costs at this facility will be at or below existing costs for
similar activities, there may be a short-term impact to operating income in
fiscal 1997 relating to production efficiencies and yields, operation levels,
fixed cost absorption and operating cost levels. It is anticipated that the
Chachoengsao, Thailand facility will reach optimal loading by the beginning of
fiscal 1998. The foregoing statement is a forward-looking statement within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and is subject to the
safe harbors created thereby. Actual results could differ materially because of
the following factors, among others: delays in construction and facilitation of
the Chachoengsao, Thailand facility; production yields and efficiencies; factory
absorption rates; capacity loading; political instability and expropriation;
supply disruption; operating cost levels; and the rate of revenue growth.
Research and Development. The Company is committed to continued
investment in new and enhanced products, including its development systems
software and in its design and manufacturing process technology, which is a
significant factor in maintaining the Company's competitive position. The dollar
investment in research and development increased 12.5% in the current fiscal
quarter relative to the corresponding quarter of the prior fiscal year, and
increased by 10.2% compared to the investment in the immediately preceding
quarter. Research and development costs increased 12.1% in the nine month period
ended December 31, 1996 compared to the corresponding period of the prior fiscal
year. The Company will continue to invest in research and development in the
future, including an investment in process and product development associated
with the capacity expansion of the Company's fabrication facilities. The
Company's inability to complete, or delay in completing, new product
introductions and manufacturing process improvements could have a material
adverse impact on the Company's future operating results and competitive
position.
13
Selling, General and Administrative. Through expense controls and
operating efficiencies, the Company has reduced selling, general and
administrative expenses in the current fiscal quarter to 16.4% of net sales as
compared to 17.1% of net sales in the corresponding quarter of the prior fiscal
year. Selling, general and administrative expenses in the prior quarter were
17.1% of sales. Selling, general and administrative expenses were 16.8% and
17.1% of net sales in the nine month periods ended December 31, 1996 and 1995,
respectively. This has been achieved while the Company has continued to invest
significantly in incremental worldwide sales and technical support resources to
promote the Company's embedded control products. However, there can be no
assurance that revenue growth in the future will be sufficient to maintain the
current level in selling, general and administrative expenses as a percentage of
sales.
Other Income (Expense). Interest income of $294,000 in the current
fiscal quarter decreased from $494,000 in the corresponding quarter of the prior
fiscal year and from $330,000 in the previous quarter. Interest income of
$1,038,000 in the nine months ended December 31, 1996 decreased from $1,516,000
in the corresponding period of the prior fiscal year. The decrease in both
instances is attributable to lower invested cash balances.
Interest expense of $1,061,000 in the current fiscal quarter increased
from $618,000 in the corresponding quarter of the prior fiscal year and from
$1,001,000 in the previous quarter. Interest expense of $2,821,000 in the nine
months ended December 31, 1996 increased from $1,793,000 in the corresponding
period of the prior fiscal year. The increase in interest expense is related to
additional borrowings associated with the Company's capital equipment additions
and stock repurchase program. Other income represents immaterial non-operating
items. On January 16, 1997, the Company filed a registration statement for a
public offering of 1,000,000 shares of Common Stock, plus up to 150, 000 shares
to cover over allotment, (see Item 5, "Other Information"). The proceeds from
the offering, if and when completed, will be used primarily to reduce
outstanding indebtedness incurred by the Company to fund wafer fabrication,
final test capacity and repurchases of the Company's Common Stock, and for other
working capital and general corporate purposes. This will have the effect of
reducing interest expense in the next fiscal quarter and in the first quarter of
fiscal 1998. It is currently anticipated that, thereafter, due to increased
capital spending planned for fiscal 1998, borrowings and interest expense will
increase.
The use of available cash and debt to fund expected capital
expenditures in future periods, without additional capital provided from
financing activities, will result in an increase in interest expense.
Provision for Income Taxes. Provisions for income taxes reflect taxes
on foreign earnings and federal and state income taxes on U.S. earnings. The
Company had an effective tax rate of 27.0% and 28.2% for the three month periods
ended December 31, 1996 and 1995, respectively. Effective tax rates for the nine
months ended December 31, 1996 and 1995 were 27.0% and 28.3% respectively. The
Company has achieved a 27.0% effective tax rate as a result of its geographical
mix of sales and earnings, foreign tax holidays and foreign tax rates that are
lower than the U.S. Federal rate of 35%. The Company currently believes that the
tax rate for the foreseeable future will remain at approximately 27.0%, however,
there can be no assurance that the Company will maintain such a rate in the
future due to possible changes in tax laws and regulations and other factors.
14
Liquidity and Capital Resources
The Company had $22.0 million in cash as of December 31, 1996, a
decrease of $9.1 million from the March 31, 1996 balance. The Company has an
unsecured short-term line of credit totaling $14.9 million with certain foreign
banks. As of December 31, 1996, $11.0 million had been utilized under the
financing arrangements with the foreign banks. There are no covenants related to
the foreign line of credit. The Company also has an unsecured line of credit
with a syndicate of U.S. banks totaling $90.0 million. As of December 31, 1996,
$26.7 million had been utilized under the financing arrangements. The domestic
line of credit requires the Company to achieve certain financial ratios and
operating results. The Company was in compliance with these covenants as of
December 31, 1996.
At December 31, 1996, an aggregate of $67.2 million of these facilities
was available, subject to financial covenants and ratios with which the Company
is currently in compliance. The Company's ability to fully utilize these
facilities is dependent on the Company remaining in compliance with such
covenants and ratios.
During the nine months ended December 31, 1996, the Company generated
$49.6 million of cash from operating activities, a decrease of $4.0 million from
the corresponding period of the previous fiscal year. The reduction in cash flow
from operations was primarily due to the reduction in net income (as a result of
the restructuring and write-off of in-process technology), an increase in
depreciation charges and changes in accounts payable and accrued liabilities.
The Company's 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, 1996 and 1995 were $60.0 million and $84.8
million, respectively. Capital expenditures were primarily for the expansion of
production capacity and the addition of research and development equipment in
each of these periods. The Company currently anticipates spending approximately
$140 million during the next twelve months primarily for additional capital
equipment to increase capacity at its wafer fabrication facilities, to construct
additional facilities and to expand test operations. Capital expenditures will
be financed by cash flow from operations, existing cash, available debt
arrangements, proceeds from the recently announced public offering, if and when
completed, (see Item 5, "Other Information") and other sources of financing,
including debt or additional equity financing. The Company believes that the
capital expenditures anticipated to be incurred over the next twelve months will
provide sufficient additional manufacturing capacity to meet its needs for that
period.
Net cash provided by financing activities was $1.3 million and $17.5
million for the nine months ended December 31, 1996 and 1995, respectively.
Repurchases of common stock were $19.5 million for the nine month period ended
December 31, 1996. Proceeds from the sale of stock and put options was $8.4
million and $5.6 million for the nine months ended December 31, 1996 and 1995,
respectively. Proceeds from the issuance of long term debt was $2.9 million for
the nine months ended December 31, 1995. Payments on long term debt and capital
lease obligations were $4.4 million and $4.6 million for the nine months ended
December 31, 1996 and 1995, respectively. Net proceeds from lines of credit was
$16.7 million and $13.5 million for the nine months ended December 31, 1996 and
December 31, 1995 respectively.
The Company believes that proceeds from the recently announced public
offering, if and when completed, (see Item 5, "Other Information"), combined
with cash generated from operations and borrowings under its bank line of credit
will be sufficient to meet the Company's currently anticipated cash requirements
for at least the next twelve months. However, due to the capital intensive
nature of the
15
semiconductor industry, the Company may seek debt financing and/or additional
equity during the next twelve months. There can be no assurance that such
financing will be available on acceptable terms, and any additional equity
financing would result in additional dilution to existing stockholders. The
foregoing statements relating (i) to the level of capital expenditures, (ii)
sufficient manufacturing capacity; (iii) anticipated cash requirements; and (iv)
adequacy and availability of capital resources, are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the safe harbors created thereby. Actual results could differ materially
because of the following factors, among others: future operating results; the
cyclical nature of both the semiconductor industry and the markets addressed by
the Company's products; customer demand for the Company's products; the
availability of equipment and other supplies; the amount and timing of cash
flows generated from operations; and economic conditions in the United States
and other worldwide markets.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
On December 6, 1996, the Company's Board of Directors declared a
3-for-2 stock split in the form of a stock dividend on the Company's Common
Stock, par value $.001 per share to be effective January 6, 1997 for all
stockholders of record on December 20, 1996. All per share data and financial
information contained in this Report have been restated to reflect this stock
split.
On January 16, 1997, the Company filed a registration statement on Form
S-3 (Registration Statement No. 333-19919) for a public offering of 1,000,000
shares of Common Stock, plus up to 150,000 shares to cover over allotment, (the
"Registration Statement"). The Registration Statement has not yet become
effective. The net proceeds of the offering, if and when completed, will be used
primarily to reduce outstanding indebtedness incurred by the Company to fund
wafer fabrication, final test capacity and repurchases of the Company's Common
Stock, and for other working capital and general corporate purposes. The Common
Stock to be sold under the Registration Statement cannot be sold, nor may offers
to buy be accepted, prior to the time the Registration Statement becomes
effective.
The Company is currently in discussions with Lucent Technologies Inc.
("Lucent") regarding alleged infringement of certain of Lucent's semiconductor
patents. The Company has investigated Lucent's claims and believes it does not
infringe any of the asserted patents. Notwithstanding the Company's position,
the Company and Lucent have exchanged various proposals for a patent license,
but, to date, have been unable to reach an agreement. Although the outcome of
the discussions with Lucent is not presently determinable, the Company believes
that, should a license be necessary, the Company will be able to obtain a
license with Lucent on commercially reasonable terms. However, no assurances can
be given that a mutually satisfactory conclusion will be achieved. In such
event, the Company may be subject to litigation, which could result in
substantial cost to the Company and diversion of management effort. If
unsuccessful, the Company could be forced to pay royalties on past and future
sales. Any such litigation and/or royalty payments could have a material adverse
impact on the Company's business and operating results.
The Securities and Exchange Commission is presently conducting a
private, non-public investigation into matters relating to the Company's
disclosure on February 26, 1996 that revenues and earnings for the quarter ended
March 31, 1996 would be lower than previously estimated. While the outcome of
the investigation, and its effect on the Company, if any, cannot be predicted at
the present
16
time, the Company does not believe that the investigation will result in a
material adverse effect on the Company.
The Company's operating results are affected by a wide variety of
factors which could adversely impact its net sales and profitability, many of
which are beyond control of the Company. For a complete description of those
factors, please refer to the Registration Statement under "Risk Factors".
17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 11 Computation of Net Income Per Share
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K
during the quarter ended December 31, 1996.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date: January 23, 1997 By: /s/ C. Philip Chapman
--------------------- -----------------------------------
C. Philip Chapman
Vice President, Chief Financial Officer
and Secretary (Duly Authorized Officer, and
Principal Financial and Accounting Officer)
19
EXHIBIT INDEX
Exhibit No. Page No.
----------- --------
11 Computation of Net Income Per Share.............21
20