10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 13, 1998
================================================================================
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, 1997.
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
(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 January 30,
1998:
Common Stock, $.001 Par Value: 53,013,109 shares
-----------------------------------
================================================================================
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and March 31, 1997..............................3
Condensed Consolidated Statements of Income -
Three Months And Nine Months Ended December 31, 1997
and December 31, 1996.............................................4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1997 and December 31, 1996.........5
Notes to Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................9
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings................................................16
Item 6. Exhibits and Reports on Form 8-K.................................17
SIGNATURES ...................................................................18
EXHIBITS
10.1 Development Agreement dated as of August 29, 1997 by and
between Microchip Technology Incorporated and the City of
Chandler, Arizona
10.2 Development Agreement dated as of July 17, 1997 by and
between Microchip Technology Incorporated and the City of
Tempe, Arizona
11. Computation of Net Income Per Share..............................20
2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
See accompanying notes to condensed consolidated financial statements
3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to condensed consolidated financial statements
5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of Microchip Technology Incorporated and its wholly-owned
subsidiaries (the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
In the nine months ended December 31, 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 nine 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 was not material.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128 in the quarter ended December 31, 1997. 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 was not permitted. All prior period EPS data have been restated to
conform to Statement 128.
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 nine
months ended December 31, 1997 are not necessarily indicative of the results to
be expected for the full fiscal year.
(2) Legal Settlement With Lucent Technologies Inc.
On January 13, 1998, the Company finalized a settlement of its patent
litigation with Lucent Technologies Inc. In connection with this settlement, the
Company has recorded a $5 million charge during the quarter ended December 31,
1997. Under the terms of the settlement, Microchip made a one-time cash payment
to Lucent and has also issued to Lucent a warrant to acquire Common Stock of the
Company. The terms of the settlement also provide for the Company to make a
contingent payment to Lucent if the Company's earnings per share performance for
the three and one-half year period ending June 30, 2001 does not meet certain
targeted levels. The timing of any contingent payment may be earlier in the
event of an acquisition of the Company. It is currently anticipated that any
contingent payment required under the terms of the settlement will be expensed
in the period the amount is determined.
6
(3) Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
December 31, March 31,
1997 1997
---------------------------
(unaudited)
Trade accounts receivable $63,944 $62,165
Other 536 1,031
------- -------
64,480 63,196
Less allowance for doubtful accounts 2,427 2,094
------- -------
$62,053 $61,102
======= =======
(4) Inventories
The components of inventories are as follows (amounts in thousands):
December 31, March 31,
1997 1997
--------------------------
(unaudited)
Raw materials $ 3,163 $ 2,310
Work in process 36,948 44,813
Finished goods 27,564 18,021
------- -------
67,675 65,144
Less allowance for inventory valuation 8,933 8,331
------- -------
$58,742 $56,813
======= =======
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in
thousands):
December 31, March 31,
1997 1997
---------------------------
(unaudited)
Land $ 11,178 $ 10,837
Building and building improvements 57,175 51,796
Machinery and equipment 296,247 218,284
Projects in process 91,565 52,608
-------- --------
456,165 333,525
Less accumulated depreciation
and amortization 137,802 99,467
-------- --------
$318,363 $234,058
======== ========
7
(6) Lines of Credit
The Company has an unsecured line of credit with a syndicate of U.S.
banks for up to $90,000,000, bearing interest at the Prime Rate (8.25% at
December 31, 1997) and expiring in October, 2001. At March 31, 1997 and December
31, 1997 there were no borrowings against the line of credit. The agreement
between the Company and the syndicate of banks requires the Company to achieve
certain financial ratios and operating results. The Company was in compliance
with these covenants as of December 31, 1997. The Company also has an unsecured
short term line of credit totaling $22.3 million with certain foreign banks.
There were no borrowings under the foreign line of credit as of December 31,
1997. There are no covenants related to the foreign line of credit.
(7) Stockholders' Equity
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. 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. During the quarter ended December 31, 1997, the
Company purchased 250,000 additional shares of the Company's Common Stock at a
total cost of $7,519,000 in connection with the stock repurchase program. All of
these shares remained in Treasury Stock as of December 31, 1997. Also, in
connection with the stock repurchase program, during the nine months ended
December 31, 1997, the Company sold put options for 700,000 shares of Common
Stock at prices ranging from $29.50 to $38.81 per share. During the quarter
ended December 31, 1997 the Company repurchased put options for 300,000 shares.
The net proceeds from the sale and repurchase of these options, in the amount of
$2,215,330 for the nine months ended December 31, 1997, has been credited to
additional paid-in capital. As of December 31, 1997, the Company had outstanding
put options for 400,000 shares which have expiration dates ranging from June
16,1998 to March 3, 1999 at prices ranging from $29.63 to $38.81 per share.
On January 30, 1998 and July 26, 1997, the Company's Board of
Director's authorized 2,500,000 shares and 1,500,000 shares, respectively, in
connection with a Common Stock repurchase plan. On July 26, 1997, the Board of
Directors also authorized the Company to sell up to 750,000 put options in
connection with the same plan. 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. As of February 3, 1998 the Company has purchased
1,210,000 shares of Common Stock at an aggregate cost of $29,791,000 and is
holding 400,000 put options at prices ranging from $29.63 to $38.81.
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 Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
----------------- ----------------
Net sales ............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................ 51.9 50.0 50.2 50.2
Gross profit ......................... 48.1 50.0 49.8 49.8
Research and development ............. 9.7 9.7 9.4 9.6
Selling, general and administrative .. 16.6 16.4 16.7 16.8
Special charges ...................... 4.8 -- 1.6 3.1
Operating income ..................... 17.0% 23.9% 22.1% 20.3%
==== ==== ==== ====
Net Sales. The Company's net sales for the quarter ended December 31,
1997 were $103.6 million, an increase of 18.9% over net sales of $87.1 million
for the corresponding quarter of the previous fiscal year, and an increase of
0.6% from the previous quarter's net sales of $103.0 million. The Company's net
sales for the nine months ended December 31, 1997 were $303.8 million, an
increase of 26.2% over net sales of $240.7 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
67.7% and 65.9% of total net sales in the three months ended December 31, 1997
and 1996, respectively. A related component of the Company's product sales
consists primarily of serial EEPROMs, which accounted for 30.5% of net sales in
each of the quarters ended December 31, 1997 and 1996. Microcontrollers and
associated application development systems accounted for 69.1% and 64.3% of
total net sales in the nine months ended December 31, 1997 and 1996,
respectively. Serial EEPROMs and other memory devices accounted for 29.3% and
31.6% of total net sales in the nine months ended December 31, 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, results in
customers placing orders with short delivery schedules. The Company has
experienced increasing turns orders as a portion of the Company's business in
the nine months ended December 31, 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 difficult to predict,
there can be no assurance that the combination of turns orders and shipments
from 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
9
revenues and operating results would be materially adversely affected. In the
quarter ended December 31, 1997, the Company experienced sequentially flat sales
primarily due to weakness in turns orders.
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. During the nine months
ended December 31, 1997, the Company continued to experience increased pricing
pressure on its non-volatile memory products due to the less proprietary nature
of these products and increased competition. While average selling prices for
microcontrollers have remained relatively constant, the Company has experienced
increasing pricing in certain microcontroller product lines due primarily to
competitive conditions. 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, average
selling prices 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.
Several countries, predominantly in Asia, have recently experienced
economic difficulties including high rates of loan defaults, business failures
and currency devaluations. During the quarter ended December 31, 1997, the
Company experienced weakness in the expected level of turns orders and net sales
related to its business in Asia. The Company derives approximately 38% of its
net sales from customers in Asia and Japan and there can be no assurance that
such economic difficulties will not continue to adversely affect the Company's
operating results in future periods.
Foreign sales represented 71.0% of net sales in the current quarter and
69.0% of net sales in the corresponding quarter of the previous fiscal year and
68.0% of net sales in the immediately proceeding quarter. Foreign sales
represented 70.0% and 66.4% of net sales for the nine months ended December 31,
1997 and 1996, respectively. The Company's foreign sales have been predominantly
in Asia, Europe and Japan, which the Company attributes to the manufacturing
activity 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.
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
10
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 December
31, 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 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 markets served by the Company
could adversely affect the Company's operating results.
Gross Profit. The Company's gross profit was $49.8 million in the three
months ended December 31, 1997, as compared to $43.5 million in the
corresponding quarter of the prior fiscal year, and $52.1 million in the
immediately preceding quarter. Gross profit as a percent of sales was 48.1% in
the current quarter, 50.0% in the corresponding quarter of the prior fiscal year
and 50.6% in the immediately preceding quarter. Gross profit for the nine months
ended December 31, 1997 was $151.3 million as compared to $119.9 million for the
corresponding period of the previous fiscal year. Gross profit as a percent of
sales was 49.8% in both these periods. Gross profit margins during the quarter
decreased from the prior period levels, primarily as a result of a change in
expected sales mix of lower margin memory products versus higher margin
microcontroller products, heightened pricing pressure in Asia, lower utilization
of Microchip's wafer fabrication facility during the quarter and increased
product obsolescence reserves for slow moving inventory. 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 25% of its production will come from
eight-inch wafers during the quarter ending March 31, 1998. The Company
anticipates that its cost of sales and gross profit percentage will fluctuate
over time, driven primarily by the mix of 8-bit microcontroller products and
related memory products, manufacturing yields, wafer fab loading levels and
competitive and economic conditions. 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
11
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.
All of Microchip's assembly operations 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 this
portion 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 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, People's Republic
of China and other locations in Asia for product assembly. 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 to other factories and test requirements to its owned
facilities. 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 second quarter of fiscal 1998, construction was completed on
a 20,000 square foot wafer fabrication module at the Company's Tempe, Arizona
facility. It is anticipated that this module will begin wafer production in the
first quarter of fiscal 1999. In addition, the Company also expanded capacity at
its Chandler wafer fabrication facility by adding an additional 3,000 square
feet of capacity during the second quarter of fiscal 1998. The foregoing
statements regarding additional available capacity and commencement of wafer
production 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.
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
12
process technology, which are significant factors in maintaining the Company's
competitive position. The dollar investment in research and development
increased 18.7% in the current quarter as compared to the corresponding quarter
of the previous fiscal year and by 6.7% from the previous quarter. The dollar
investment in research and development increased by 24.3% in the nine months
ended December 31, 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 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. The level of selling, general and
administrative expenses in the current fiscal quarter was essentially flat at
16.6% of sales, as compared to 16.4% of sales in the corresponding period of the
previous fiscal year. Selling, general and administrative expenses were 16.7% of
sales in the nine month period ended December 31, 1997, as compared to 16.8% for
the corresponding period in the prior fiscal year.
Other Income (Expense). Interest expense in the three months ended
December 31, 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 December 31, 1997 increased from the
same period of the previous year and decreased from the previous fiscal quarter
primarily as a result of changes in invested cash balances. Other income
represents numerous immaterial non-operating items. The Company's interest
expense will increase in the fourth quarter of fiscal 1998 as the Company
increases its borrowings due to purchases of shares of Common Stock in
connection with the Company's share repurchase plan. 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 December 31, 1997
and 1996 and each of the nine months ended September 30, 1997
13
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 $41.8 million in cash and cash equivalents at December
31, 1997, a decrease of $1.2 million from the March 31, 1997 balance. The
Company has an unsecured line of credit with a syndicate of U.S. banks totaling
$90.0 million. The line is a revolving line of credit, expiring on October 28,
2001. There were no borrowings under the line of credit as of December 31, 1997.
The line of credit requires the Company to achieve certain financial ratios and
operating results. The Company was in compliance with these covenants at
December 31, 1997. The Company also has an unsecured short term line of credit
totaling $22.3 million with certain foreign banks. There were no borrowings
under the foreign line of credit as of December 31, 1997. There are no covenants
related to the foreign line of credit.
At December 31, 1997, an aggregate of $112.3 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 nine months ended December 31, 1997, the Company generated
$125.3 million of cash from operating activities, an improvement of $75.7
million from the nine months ended December 31, 1997. The improvement in cash
flow from operations was primarily due to increased profitability, the impact of
increases in accounts payable and accrued expenses, changes in other assets and
liabilities 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 nine months ended December 31, 1997 and 1996, were $123.4 million and $60.0
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
$25.0 million during the balance of this fiscal year and approximately $60.0
million during the 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 currently
anticipates capital expenditures will be financed by cash flow from operations,
available debt arrangements and other sources of 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 during the remainder of this fiscal year and during the
next fiscal year 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
14
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
markets served by the Company.
Net cash used in financing activities was $3.1 million for the nine
months ended December 31, 1997. Net cash provided by financing activities was
$1.3 million for the nine months ended December 31, 1996. Proceeds from sale of
stock and put options were $9.3 million and $8.4 million for the nine months
ended December 31, 1997 and 1996, respectively. Payments on long term debt and
capital lease obligations were $4.9 million and $4.4 million for the nine months
ended December 31, 1997 and 1996 respectively. Proceeds from lines of credit
were $16.7 million for the nine months ended December 31, 1996. Cash expended
for the purchase of the Company's Common Stock was $7.5 million and $19.5
million for the nine months ended December 31, 1997 and December 31, 1996,
respectively.
On January 30, 1998 and July 26, 1997, the Company's Board of Directors
authorized 2,500,000 shares and 1,500,000 shares, respectively, in connection
with a Common Stock repurchase plan. On July 26, 1997, the Board of Directors
also authorized the Company to sell up to 750,000 put options in connection with
the same plan. 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. As of February 3, 1998 the Company has purchased 1,210,000
shares of Common Stock at an aggregate cost of $29,791,000 and is holding
400,000 put options at prices ranging from $29.63 to $38.81.
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.
15
PART II. OTHER INFORMATION.
Item 1. LEGAL PROCEEDINGS.
Microchip Technology Incorporated v. Lucent Technologies Inc. (District
of Arizona, CIV97-1502 PHX EHC) On January 13, 1998, the Company finalized a
settlement of its patent litigation with Lucent Technologies Inc. In connection
with this settlement the Company recorded a $5 million charge during the quarter
ended December 31, 1997. Under the terms of the settlement, Microchip made a
one-time cash payment to Lucent and also issued to Lucent a warrant to acquire
Common Stock of the Company. The terms of the settlement also provide for the
Company to make a contingent payment to Lucent if the Company's earnings per
share performance for the three and one-half year period ending June 30, 2001
does not meet certain targeted levels. The timing of any contingent payment may
be earlier in the event of an acquisition of the Company. It is currently
anticipated that any contingent payment required under the terms of the
settlement will be expensed in the period the amount is determined. See also
Footnote 2 to the Condensed Consolidated Financial Statements, above.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Development Agreement dated as of August 29, 1997 by
and between Microchip Technology Incorporated and the
City of Chandler, Arizona
10.2 Development Agreement dated as of July 17, 1997 by and
between Microchip Technology Incorporated and the City
of Tempe, Arizona
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, 1997.
17
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 13, 1998 By: /s/ C. Philip Chapman
------------------ --------------------------------------------
C. Philip Chapman
Vice President, Chief Financial Officer
and Secretary (Duly Authorized Officer, and
Principal Financial and Accounting Officer)
18
EXHIBIT INDEX
Exhibit No. Page No.
----------- --------
10.1 Development Agreement dated as of August 29, 1997 by and
between Microchip Technology Incorporated and the City of
Chandler, Arizona
10.2 Development Agreement dated as of July 17, 1997 by and
between Microchip Technology Incorporated and the City of
Tempe, Arizona
11. Computation of Net Income Per Share.........................20
19