10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 13, 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 September 30, 1997.
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
--- ---
The number of shares outstanding of the issuer's common stock, as of October 31,
1997:
Common Stock, $.001 Par Value: 53,793,058 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 per share amounts)
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
September 30,
--------------------
1997 1996
-------- --------
Cash flows from operating activities: (Unaudited)
Net income $ 37,014 $ 19,812
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts 250 61
Provision for inventory valuation (400) 3,430
Provision for pension accrual 697 622
Provision for restructuring cost -- 2,483
Depreciation and amortization 25,143 19,622
Amortization of purchased technology 150 150
Deferred income taxes (3,005) 1,620
Compensation expense on stock options -- 30
Increase in accounts receivable (4,856) (1,358)
Increase in inventories (1,577) (6,382)
Increase in accounts payable and accrued liabilities 28,376 2,718
Change in other assets and liabilities 9,631 (7,803)
-------- --------
Net cash provided by operating activities 91,423 35,005
-------- --------
Cash flows from investing activities:
Capital expenditures (78,616) (46,525)
-------- --------
Net cash used in investing activities (78,616) (46,525)
-------- --------
Cash flows from financing activities:
Net proceeds from lines of credit -- 16,700
Payments on long-term debt (1,245) (1,412)
Payments on capital lease obligations (1,497) (1,485)
Repurchase of common stock -- (19,463)
Proceeds from sale of stock and put options 7,179 5,643
-------- --------
Net cash provided by (used in) financing activities 4,437 (17)
-------- --------
Net increase (decrease) in cash and cash equivalents 17,244 (11,537)
Cash and cash equivalents at beginning of period 42,999 31,059
-------- --------
Cash and cash equivalents at end of period $ 60,243 $ 19,522
======== ========
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.
In the six months ended September 30, 1997, the Company changed its
method of accounting for inventories from the last-in, first-out (LIFO) method
to the first-in, first-out (FIFO) method. The change did not have a material
effect on the results of operations for the six months. The FIFO method is the
predominant accounting method used in the semiconductor industry. Prior to this
change, the Company's inventory costs did not differ significantly under the two
methods. Prior period results of operations have not been restated for this
change as the impact is not material.
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, 1997. The results of operations for the six
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full fiscal year.
(2) Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
September 30, March 31,
1997 1997
-------------------------
Trade accounts receivable $67,066 $62,165
Other 986 1,031
------- -------
68,052 63,196
Less allowance for doubtful accounts 2,344 2,094
------- -------
$65,708 $61,102
======= =======
6
(3) Inventories
The components of inventories are as follows (amounts in thousands):
September 30, March 31,
1997 1997
--------------------------
Raw materials $ 2,390 $ 2,310
Work in process 38,200 44,813
Finished goods 26,137 18,021
------- -------
66,727 65,144
Less allowance for inventory valuation 7,937 8,331
------- -------
$58,790 $56,813
======= =======
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in
thousands):
September 30, March 31,
1997 1997
---------------------------
Land $ 11,178 $ 10,837
Building and building improvements 55,459 51,796
Machinery and equipment 277,849 218,284
Projects in process 67,038 52,608
-------- --------
411,524 333,525
Less accumulated depreciation
and amortization 123,998 99,467
-------- --------
$287,532 $234,058
======== ========
(5) Lines of Credit
During the quarter ended September 30, 1997, the Company had an
unsecured line of credit with a syndicate of U.S. banks for up to $90,000,000,
bearing interest at the Prime Rate (8.5% at September 30, 1997) and expiring in
October, 1998. At March 31, 1997 and September 30, 1997 there were no borrowings
against the line of credit. The agreement between the Company and the syndicate
of banks required the Company to achieve certain financial ratios and operating
results. The Company was in compliance with these covenants as of September 30,
1997.
Subsequent to September 30, 1997, the Company replaced its credit
facility with a new credit agreement with a revised syndicate of U.S. banks. The
credit line was maintained at $90,000,000, with substantially the same interest
rates and covenants. The line is a revolving line of credit for a three-year
period, expiring on October 28, 2001.
7
6) Stockholders' Equity
Stock Repurchase Activity. In connection with a stock repurchase
program, during the year ended March 31, 1997, 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. As of June 30, 1997, the Company had reissued all of
these shares through stock option exercises and the Company's employee stock
purchase plan. Also, in connection with a stock repurchase program, during the
six months ended September 30, 1997, the Company sold put options for 350,000
shares of Common Stock at prices ranging from $29.50 to $30.86 per share. The
net proceeds from the sale of these options, in the amount of $1,606,100 for the
six months ended September 30, 1997, has been credited to additional paid-in
capital. As of September 30, 1997, the Company had outstanding put options for
400,000 shares which have expiration dates ranging from December 26, 1997 to
June 16, 1998 at prices ranging from $24.88 to $30.86 per share.
Increase to the Number of Authorized Shares. In April, 1997, the Board
of Directors approved an amendment to the Company's Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares of Common
Stock from 65,000,000 to 100,000,000. This matter was approved by the
stockholders at the 1997 annual stockholders' meeting held on July 28, 1997, and
became effective upon the filing of a certificate of amendment to the Restated
Certificate of Incorporation with the Delaware Secretary of State on July 28,
1997.
8
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain operational data as a percentage
of net sales for the periods indicated:
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
------ ------ ------ ------
Net sales .............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 49.4 50.0 49.3 50.3
------ ------ ------ ------
Gross profit ........................... 50.6 50.0 50.7 49.7
Research and development ............... 9.1 9.6 9.3 9.4
Selling, general and administrative .... 16.7 17.1 16.7 17.1
Restructuring cost ..................... -- -- -- 3.9
Write-off of in-process technology ..... -- -- -- 1.0
------ ------ ------ ------
Operating income ....................... 24.8% 23.3% 24.7% 18.3%
====== ====== ====== ======
Net Sales. The Company's net sales for the quarter ended September 30,
1997 were $103.0 million, an increase of 29.6% over net sales of $79.5 million
for the corresponding quarter of the previous fiscal year, and an increase of
6.0% from the previous quarter's net sales of $97.2 million. The Company's net
sales for the six months ended September 30, 1997 were $200.3 million, an
increase of 30.3% over net sales of $153.7 million for the corresponding period
of the previous fiscal year. 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
68.8% and 65.0% of total net sales in the three months ended September 30, 1997
and 1996, respectively. A related component of the Company's product sales
consists primarily of serial EEPROMs, along with smaller quantities of parallel
EEPROM memories and high-speed and low-voltage EPROMs. These products accounted
for 29.1% and 31.0% of net sales in the three months ended September 30, 1997
and 1996, respectively. Microcontrollers and associated application development
systems accounted for 69.3% and 63.0% of total net sales in the six months ended
September 30, 1997 and 1996, respectively. Serial EEPROMs, parallel EEPROM
memories and high speed and low-voltage EPROMs accounted for 28.7% and 32.0% of
total net sales in the six months ended September 30, 1997 and 1996,
respectively.
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 short delivery schedules. This has had the
effect of increasing turns orders as a portion of the Company's business in the
six months ended September 30, 1997, as compared to the corresponding period of
the previous fiscal year and the turns order percentage is expected to increase
in the current quarter. 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.
9
In the quarter ended September 30, 1997, the Company was unable to ship
approximately $4 million of product for which it had firm scheduled orders,
approximately the same as shipment delinquencies at the end of the two prior
fiscal quarters. These shipment delinquencies were a result of inventory mix
issues which have been exacerbated by the rapid growth in the Company's product
offerings and the low long-term order visibility. The Company anticipates that
low long-term order visibility will continue for the foreseeable future and, as
a result, the Company expects it may have shipment delinquencies at the end of
each quarter which could adversely affect quarterly operating results.
The Company's overall average selling prices for its microcontroller
products have remained relatively constant, while average selling prices of its
non-volatile memory products have declined over time. For the six months ended
September 30, 1997, the Company has continued to experience increased pricing
pressure on its non-volatile memory products due to the less proprietary nature
of these products and increased competition. There can be no assurance that
average selling prices for the Company's microcontroller 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.
The foregoing statements regarding product mix, turns orders, shipment
delinquencies and pricing pressures 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: the level of orders that are received and
can be shipped in a quarter; inventory mix and timing of customer orders;
competition and competitive pressures on pricing and product availability;
customers' inventory levels, order patterns and seasonality; the cyclical nature
of both the semiconductor industry and the markets addressed by the Company's
products; market acceptance of the products of both the Company and its
customers; demand for the Company's products; fluctuations in production yields,
production efficiencies and overall capacity utilization; changes in product
mix; and absorption of fixed costs, labor and other fixed manufacturing costs.
Foreign sales represented 68.0% of net sales in the current quarter and
63.0% of net sales in the corresponding quarter of the previous fiscal year and
70.0% of net sales in the previous quarter. Foreign sales represented 69.0% and
65.0% for six months ended September 30, 1997 and 1996, 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 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 the
Company conducts operations will not adversely affect the Company's operating
results in the future.
Several countries, predominantly in Asia, have recently experienced
economic difficulties including high rates of loan defaults, business failures
and currency devaluations. To date, the Company has not experienced any material
impact to its business from such economic issues. However, the Company derives
approximately 35% of its net sales from customers in Asia and Japan and there
can be no assurance that such economic difficulties will not adversely affect
the Company's operating results in the future.
10
Additional Factors Affecting Operating Results. The Company believes
that future growth in net sales of its 8-bit family of microcontroller products
and related memory products 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. The Company
continued to achieve a high volume of design wins and shipped significant
numbers of application development systems in the three months ended September
30, 1997. There can be no assurance that any particular development system
shipment 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 that could adversely impact its net sales and profitability, many of
which are beyond the Company's control. 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 order
patterns and seasonality, changes in product mix, whether the Company's
customers buy from a distributor or directly from the Company, product
performance and reliability, product obsolescence, the amount of any product
returns, availability and utilization of manufacturing 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, 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 worldwide markets served by the Company could adversely affect the Company's
operating results.
Gross Profit. The Company's gross profit was $52.1 million in the three
months ended September 30, 1997, as compared to $39.8 million in the
corresponding quarter of the prior fiscal year, and $49.4 million in the
previous quarter. Gross profit as a percent of sales was 50.6% in the current
quarter, 50.0% in the corresponding quarter of the prior fiscal year and 50.8%
in the previous quarter. Gross profit for the six months ended September 30,
1997 was $101.5 million as compared to $76.4 million for the corresponding
period of the previous fiscal year. Gross profit as a percent of sales were
50.7% and 49.7% for those periods, respectively. The Company anticipates that
its cost of sales and gross profit percentage will fluctuate over time, driven
primarily by the product mix of 8-bit microcontroller products and related
memory products manufacturing yields, wafer fab loading levels and competitive
and economic conditions. Gross profit percentage increased from the prior period
levels, primarily as a result of the percentage of net sales attributable to
8-bit microcontrollers and improved wafer fabrication utilization. The Company
continues the process of transitioning products to smaller geometries and to
larger wafer sizes to reduce future manufacturing costs. Eight-inch wafer
production commenced at the Company's Tempe wafer fabrication facility in early
fiscal 1998, and the Company is continuing the transition of products to its 0.7
micron process. The Company expects that 20% of it's production will come from
eight-inch wafers during the quarter ended December 31, 1997. 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
11
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 efficiency
and overall capacity utilization; cost and availability of raw materials;
absorption of fixed costs, labor and other direct manufacturing costs; the
timing and success of manufacturing process transition; changes in product mix;
competitive pressures on prices; and other economic conditions in the United
States and other worldwide markets.
All of Microchip's assembly operations and a portion of its product
final 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 product final test facilities in Kaohsiung, Taiwan,
Republic of China and Chachoengsao, Thailand. The Company also uses various
third-party contractors in Thailand, Taiwan, the Philippines, Republic of China
and other locations in Asia for product 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, labor disruption,
supply disruption, currency controls and exchange fluctuations, as well as
changes in tax laws, tariff and freight rates. Microchip currently employs the
Alphatec Electronics PCL group of companies ("Alphatec") headquartered in
Bangkok, Thailand, for a portion of its product assembly. Alphatec's assembly
operations have performed reliably for the Company for several years, however,
Alphatec has experienced difficulty in obtaining financing in connection with
some of its unrelated joint ventures involving semiconductor fabrication
facilities in Thailand. Microchip currently has multiple sources for product
assembly and test for most of its package types and has shifted a significant
portion of its assembly and test requirements to other factories. Despite these
actions, there can be no assurance that Microchip may not experience short-term
disruption, including possible temporary product shortages and increased
assembly and test costs, compared to those received from the current subcontract
relationship with Alphatec. 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 fourth quarter of fiscal 1997, the Company commenced
construction of an additional 20,000 square foot wafer fabrication module at its
Tempe, Arizona, facility. Construction was completed during the second quarter
of fiscal 1998 and it is anticipated that the additional wafer fabrication
module will begin wafer production in the fourth quarter of fiscal 1998. In
addition, the Company also expanded capacity at its Chandler wafer fabrication
facility and added an additional 3,000 square feet of capacity during the second
quarter of fiscal 1998. The foregoing statements regarding completion of
construction and additional available capacity 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: delays in facilitation of the
expanded Tempe and Chandler wafer fabrication facilities; production yields and
efficiencies; factory absorption rates; capacity loading; supply disruption;
operating cost levels; and the rate of revenue growth.
12
Research and Development. The Company is committed to continued
investment in new and enhanced products, including its development systems
software and its design and manufacturing process technology, which are
significant factors in maintaining the Company's competitive position. The
dollar investment in research and development increased 22.6% in the current
quarter as compared to the corresponding quarter of the previous fiscal year and
by 1.8% from the previous quarter. The dollar investment in research and
development increased by 27.6% in the six months ended September 30, 1997 as
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 future operating results will depend to a significant
extent on its ability to continue 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
customers' end products. Because of the complexity of its products, the Company
has experienced delays from time to time in completing the development of new
products. In addition, there can be no assurance that any new products will
receive or maintain substantial market acceptance. If the Company were unable to
design, develop and introduce competitive products on a timely basis, its future
operating results would be adversely affected.
The Company's future success will also depend upon its ability to
develop and implement new design and process technologies. Semiconductor design
and process technologies are subject to rapid technological change, requiring
large expenditures for research and development. Other companies in the industry
have experienced difficulty in effecting transitions to smaller geometry
processes and to larger wafers and, consequently, have suffered reduced
manufacturing yields or delays in product deliveries. The Company believes that
its transition to smaller geometries and to larger wafers will be important for
the Company to remain competitive, and operating results could be adversely
affected if the transition is substantially delayed or inefficiently
implemented.
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 16.7% of sales, as
compared to 17.1% of sales in the corresponding period of the previous fiscal
year. Selling, general and administrative expenses were 16.7% in the previous
quarter. Selling, general and administrative expenses were 16.7% of sales in the
six month period ending September 30, 1997, as compared to 17.1% for the
corresponding period in the prior fiscal year. 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 continue to reduce the current level of selling, general and
administrative expenses as a percentage of sales.
Other Income (Expense). Interest expense in the three months ended
September 30, 1997 decreased over the same period of the previous fiscal year
due to lower borrowings associated with the Company's capital equipment
additions, and was essentially in line with interest expense for the previous
quarter. Interest income in the three months ended September 30, 1997 increased
from the same period of the previous year and from the previous fiscal quarter
primarily as a result of investing the proceeds of the Company's equity offering
completed in the fourth quarter of fiscal 1997. Other income represents numerous
immaterial non-operating items. The Company's interest expense could increase in
fiscal 1998
13
if the Company increases its borrowings and interest expense would be adversely
impacted by increased interest rates.
Provision for Income Taxes. Provisions for income taxes reflect tax on
foreign earnings and federal and state tax on U.S. earnings. The Company had an
effective tax rate of 27.0% for each of the three months ended September 30,
1997 and 1996 and each of the six months ended September 30, 1997 and 1996, due
primarily to lower tax rates at its foreign locations. The Company believes that
its tax rate for the foreseeable future will be approximately 27.0%. The
foregoing statement regarding the Company's anticipated future tax rate 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: taxation
rates in geographic regions where the Company has significant operations; and
current tax holidays available in foreign locations.
Liquidity and Capital Resources
The Company had $60.2 million in cash and cash equivalents at September
30, 1997, an increase of $17.2 million from the March 31, 1997 balance. During
the quarter, the Company had an unsecured line of credit with a syndicate of
domestic banks totaling $90.0 million. There were no borrowings under the
domestic line of credit as of September 30, 1997. The domestic line of credit
required the Company to achieve certain financial ratios and operating results.
The Company was in compliance with these covenants at September 30, 1997. The
Company also has an unsecured short term line of credit totaling $23.6 million
with certain foreign banks. There were no borrowings under the foreign line of
credit as of September 30, 1997. There are no covenants related to the foreign
line of credit.
Subsequent to September 30, 1997, the Company replaced its credit
facility with a new credit agreement with a revised syndicate of U.S. banks. The
credit line was maintained at $90,000,000, with substantially the same interest
rates and covenants. The line is a revolving line of credit for a three-year
period, expiring on October 28, 2001.
At September 30, 1997, an aggregate of $113.6 million of these
facilities was available, subject to financial covenants and ratios with which
the Company was 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 six months ended September 30, 1997, the Company generated
$91.4 million of cash from operating activities, an improvement of $56.4 million
from the six months ended September 30, 1996. The improvement in cash flow from
operations was primarily due to increased profitability, the impact of increases
in accounts payable and accrued expenses and an increase in depreciation
expense.
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 six months ended September 30, 1997 and 1996, were $78.6 million and $46.5
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 intends to spend approximately
$60.0 million during the balance of this fiscal year and approximately $65.0
million for the first six months of next fiscal year for additional capital
equipment to increase capacity at its existing wafer fabrication facilities, to
construct additional facilities and to expand product test operations. The
Company expects capital expenditures will be financed by cash flow from
operations, available debt arrangements and other sources of
14
financing. The Company believes that the capital expenditures anticipated to be
incurred over the next 12 months will provide sufficient additional
manufacturing capacity to meet its currently anticipated needs. The foregoing
statements regarding the anticipated level of capital expenditures over the next
12 months 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 capital expenditures could differ materially because of the
following factors, among others: the cyclical nature of the semiconductor
industry and the markets addressed by the Company's products; market acceptance
of the products of both the Company and its customers; utilization of current
manufacturing capacity; the availability and cost of raw materials, equipment
and other supplies; and the economic, political and other conditions in the
United States and other worldwide markets served by the Company.
Net cash provided by financing activities was $4.4 million for the six
months ended September 30, 1997. Proceeds from sale of stock and put options
were $7.2 million and $5.6 million for the six months ended September 30, 1997
and 1996, respectively. Payments on long term debt and capital lease obligations
were $2.7 million and $2.9 million for the six months ended September 30, 1997
and 1996 respectively. Proceeds from lines of credit were $ 16.7 million for the
six months ended September 30, 1996. Cash expended for the purchase of the
Company's Common Stock was $19.5 million for the six months ended September 30,
1996.
On July 26, 1996, the Company's Board of Directors authorized a share
repurchase plan which permits the Company to purchase up to 1,500,000 shares of
its Common Stock and to sell up to 750,000 put options. Based on the price of
Microchip's stock and other pertinent factors, the Company may from time to time
purchase shares on the open market or sell put options. See Footnote 6 to the
Company's Condensed Consolidated Financial Statements.
The Company believes that its existing sources of liquidity combined
with cash generated from operations will be sufficient to meet the Company's
currently anticipated cash requirements for at least the next 12 months.
However, the semiconductor industry is capital intensive. In order to remain
competitive, the Company must continue to make significant investments in
capital equipment, for both production and research and development. The Company
may seek additional equity or debt financing during the next 12 months for the
capital expenditures required to maintain or expand the Company's wafer
fabrication and product test facilities. The timing and amount of any such
capital requirements will depend on a number of factors, including demand for
the Company's products, product mix, changes in industry conditions and
competitive factors. There can be no assurance that such financing will be
available on acceptable terms, and any additional equity financing could result
in additional dilution to existing investors.
Recent Accounting Pronouncements. In February, 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No.
128, "Earnings per Share" ("Statement 128"). Statement 128 establishes standards
for computing and presenting earnings per share ("EPS"), and supersedes APB
Opinion No. 15. Statement 128 replaces primary EPS with basic EPS and requires
dual presentation of basic and diluted EPS. Statement 128 is effective for
annual and interim periods ending after December 15, 1997. Earlier adoption is
not permitted. After adoption, all prior period EPS data shall be restated to
conform to Statement 128. Proforma basic and diluted EPS, as calculated under
Statement 128 would have been $0.36 and $0.34 for the three months ended
September 30, 1997 and $0.69 and $0.65 for the six months ended September 30,
1997.
15
PART II. OTHER INFORMATION.
Item 1. LEGAL PROCEEDINGS.
Microchip Technology Incorporated v. Lucent Technologies Inc. (District
of Arizona, CIV97-1502 PHX EHC) On October 30, 1997, Lucent Technologies Inc.
("Lucent") filed its answer to, and a counterclaim against the Company in
response to, the Company's action for declaratory relief filed against Lucent on
July 16, 1997. Lucent's answer, among other matters, admits that the court has
jurisdiction to address the matters raised in the Company's action. The
counterclaims asserted by Lucent allege infringement by the Company of eight
Lucent patents, seven of which the Company has sought declaratory judgement
relief from the court in this action. The counterclaim seeks permanent
injunction relief from the court in this action. The counterclaim seeks
permanent injunctive relief and damages, including treble damages for willful
infringement. The Company believes that it does not infringe any of the asserted
Lucent patents and will defend the counterclaim vigorously. Prior to initiating
this action, Microchip had engaged in good faith license negotiations with
Lucent for over four years regarding alleged infringement of certain of Lucent's
semiconductor patents. Despite the continuing litigation, the Company intends to
continue negotiations with Lucent with the goal of obtaining a resolution of
this matter, which could include a license on commercially reasonable terms.
However, no assurances can be given that a mutually satisfactory conclusion will
be achieved and that protracted litigation will not ensue. Litigation 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 and be subject to an injunction. Such litigation the grant of an
injunction, and/or royalty payments could have a material adverse impact on the
Company's business and operating results.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Stockholders of the Company was held on July 28, 1997
(the "Meeting").
(b) Steve Sanghi, Albert J. Hugo-Martinez, Jon H. Beedle, L.B. Day and Matthew
W. Chapman were elected as Directors at the Meeting.
16
(c) The results of the vote on the matters voted upon at the Meeting were as
follows:
(i) Election of Directors:
For Withheld/Abstain
--- ----------------
Steve Sanghi 47,611,063 52,179
Albert J. Hugo-Martinez 47,611,220 52,022
Jon H. Beedle 47,610,844 52,398
L.B. Day 47,609,140 54,102
Matthew W. Chapman 47,609,070 54,172
(ii) Approval of Amendment to the Company's Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares
of Common Stock, par value $0.001 per share (the "Common Stock") from
65,000,000 to 100,000,000:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
46,916,258 717,745 29,239 0
(iii)Approval of Amendment to the Microchip 1993 Stock Option Plan to
increase by 2,000,000 the number of shares of Common Stock reserved
for issuance thereunder:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
35,868,682 11,606,004 37,311 151,245
(iv) To approve an amendment to the Company's Employee Stock Purchase Plan
to increase by 300,000 the number of shares of Common Stock reserved
for issuance thereunder:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
39,644,096 7,835,877 32,024 151,245
(v) Ratification of Appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year ending March 31, 1998.
For Against Abstain
--- ------- -------
47,635,265 8,034 19,943
The foregoing matters are described in more detail in the Registrant's
definitive proxy statement dated June 20, 1997 relating to the Meeting.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Credit Agreement Dated as of October 28, 1997 Among Microchip
Technology Incorporated, the Banks Named Therein, Bank One,
Arizona, NA, as Administrative Agent and The First National
Bank of Chicago, as Documentation Agent
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 September 30, 1997.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date: November 11, 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)
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EXHIBIT INDEX
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