10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 5, 1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
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 July 24,
1998:
Common Stock, $.001 Par Value: 50,832,783 shares
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1998 and March 31, 1998............................3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1998
and June 30, 1997...........................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 1998 and June 30, 1997..........5
Notes to Condensed Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............10
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K...........................17
SIGNATURES...................................................................18
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)
Three Months Ended June 30,
---------------------------
1998 1997
-------- --------
(Unaudited)
Net sales $ 99,489 $ 97,228
Cost of sales 50,231 47,835
-------- --------
Gross profit 49,258 49,393
Operating expenses:
Research and development 10,216 9,210
Selling, general and administrative 16,054 16,228
Special charge 5,500 --
-------- --------
31,770 25,438
Operating income 17,488 23,955
Other income (expense):
Interest income 205 740
Interest expense (524) (281)
Other, net 330 13
-------- --------
Income before income taxes 17,499 24,427
Income taxes 4,725 6,595
-------- --------
Net income $ 12,774 $ 17,832
======== ========
Basic net income per share $ 0.24 $ 0.33
======== ========
Diluted net income per share $ 0.23 $ 0.32
======== ========
Weighted average common
shares outstanding 52,151 53,291
======== ========
Weighted average common and common
equivalent shares outstanding 54,486 56,432
======== ========
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.
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, 1998. The results of operations for the three
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for the full fiscal year.
(2) Special Charge
During the quarter ended June 30, 1998, the Company recognized a
special charge of $5,500,000 which was comprised of three elements: a $3,300,000
legal settlement with another company involving an intellectual property
dispute; a $1,700,000 write-off of products obsoleted by the introduction of
newer products; and a $500,000 charge associated with the restructuring of a
portion of the Company's sales organization.
(3) Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
June 30, March 31,
1998 1998
-------------------------
(unaudited)
Trade accounts receivable $60,581 $57,922
Other 892 790
------- -------
61,473 58,712
Less allowance for doubtful accounts 3,480 2,392
------- -------
$57,993 $56,320
======= =======
6
(4) Inventories
The components of inventories are as follows (amounts in thousands):
June 30, March 31,
1998 1998
-------------------------
(unaudited)
Raw materials $ 5,612 $ 5,795
Work in process 46,734 40,000
Finished goods 27,269 30,021
------- -------
79,615 75,816
Less allowance for inventory valuation 10,305 9,523
------- -------
$69,310 $66,293
======= =======
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in
thousands):
June 30, March 31,
1998 1998
--------------------------
(unaudited)
Land $ 11,749 $ 11,749
Building and building improvements 76,120 59,725
Machinery and equipment 345,214 322,624
Projects in process 53,778 82,528
-------- --------
486,861 476,626
Less accumulated depreciation
and amortization 164,764 150,734
-------- --------
$322,097 $325,892
======== ========
(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 LIBOR (5.66% at June 30, 1998)
plus .325% expiring in October 2000. At June 30, 1998, the Company had utilized
$45,000,000 of this line of credit. At March 31, 1998, the Company had utilized
$7,000,000 of 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 June
30, 1998.
The Company has an additional unsecured line of credit with various
Taiwan financial institutions for up to $21,340,000 (U.S. Dollar equivalent).
These borrowings are predominantly denominated in New Taiwan Dollars, bearing
interest at SIBOR (5.84% at June 30, 1998) plus .75% and expiring on various
dates through June 1999. At June 30, 1998, the Company had utilized $13,000,000
of this line of credit. At March 31, 1998, the Company had utilized $16,000,000
of this line of credit.
7
(7) Stockholders' Equity
Stock Repurchase Activity. In connection with a stock repurchase
program, during the quarter ended June 30, 1998, the Company purchased a total
of 2,222,500 shares of the Company's Common Stock in open market activities at a
total cost of $57,890,000. As of June 30, 1998, the Company had reissued 416,599
of these shares through stock option exercises and the Company's employee stock
purchase plan. Also, in connection with the stock repurchase program, during the
three months ended June 30, 1998, the Company sold put options for 500,000
shares of Common Stock at prices ranging from $22.30 to $23.75 per share. During
the quarter ended June 30, 1998, the Company repurchased put options for 50,000
shares. The net proceeds from the sale and repurchase of these options, in the
amount of $1,650,000 for the three months ended June 30, 1998, has been credited
to additional paid-in capital. As of June 30, 1998, the Company had outstanding
put options for 950,000 shares which have expiration dates ranging from October
23, 1998 to September 13, 1999 at prices ranging from $22.30 to $38.81 per
share.
During the quarter ended June 30, 1998, the Company completed two
transactions in connection with the stock repurchase program. The Company
completed a costless collar transaction for 500,000 calls priced at $25.95 and
665,000 puts priced at $25.19. The expiration date of the transaction is April
1999. Also in connection with the stock repurchase program, the Company
completed a net share settled forward contract for 2,000,000 shares of Common
Stock at an average price of $29.24. The expiration date of this transaction is
May 2000, with quarterly interim settlement dates as determined by the Company.
Also during the quarter ended June 30, 1998, the Company's Board of
Directors authorized the Company to repurchase up to 2,000,000 shares of Common
Stock and to sell up to 500,000 additional put options. The Company expects from
time to time to purchase shares of Common Stock in connection with its
authorized Common Stock repurchase plan.
(8) Net Income Per Share
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
Three Months June 30,
1998 1997
-----------------------
Net income $12,774 $17,832
======= =======
Weighted average common
shares outstanding 52,151 53,291
Dilutive effect of stock options 2,335 3,141
----------------------
Weighted average common and common
equivalent shares outstanding 54,486 56,432
======= =======
Basic net income per share $ 0.24 $ 0.33
======= =======
Diluted net income per share $ 0.23 $ 0.32
======= =======
8
(9) Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes requirements for disclosure of comprehensive
income and is effective for both interim and annual periods beginning after
December 15, 1997. Comprehensive income is defined as the change in equity from
transactions involving non-owner sources. During the quarter ended June 30,
1998, comprehensive income consists of net income of $12,774,000 and $1,204,500
of income after-taxes resulting from put option transactions.
9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth certain operational data as a percentage
of net sales for the periods indicated:
Three Months Ended June 30,
1998 1997
--------------------
Net sales................................... 100.0% 100.0%
Cost of sales............................... 50.5% 49.2%
------ -----
Gross profit................................ 49.5% 50.8%
Research and development.................... 10.3% 9.5%
Selling, general and administrative......... 16.1% 16.7%
Special charge.............................. 5.5% --
----- -----
Operating income............................ 17.6% 24.6%
===== =====
Quarter Ending June 30, 1998
During the quarter ended June 30, 1998, the Company recognized a
special charge of $5,500,000 which was comprised of three elements: a $3,300,000
legal settlement with another company involving an intellectual property
dispute; a $1,700,000 write-off of products obsoleted by the introduction of
newer products; and a $500,000 charge associated with the restructuring of a
portion of the Company's sales organization.
Net Sales
Microchip's net sales for the quarter ended June 30, 1998 were $99.5
million, an increase of 2.3% over sales of $97.2 million for the corresponding
quarter of the previous fiscal year, and an increase of 6.9% from the previous
quarter's sales of $93.1 million.
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 74% and 70% of net sales in the
three months ended June 30, 1998 and 1997, respectively. A related component of
the Company's product sales consists primarily of Serial EEPROM memories which
accounted for 26% and 30% of net sales in the three months ended June 30, 1998
and 1997, 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 been
experiencing increasing turns orders as a portion of the Company's business over
the last several years and remains highly dependent on turns orders. 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 revenues
and operating results would be adversely affected.
10
The Company's overall average selling prices for its microcontroller
products have remained relatively constant, while average selling prices of its
memory products have declined over time. During fiscal 1998 and the first
quarter of fiscal 1999, the Company continued to experience increased pricing
pressure on its memory products primarily due to the less proprietary nature of
these products and increased competition, and expects this to continue in the
future. While average selling prices for microcontrollers have remained
relatively constant, the Company has experienced, and expects to continue to
experience, increasing pricing pressure in certain microcontroller product
lines, due primarily to competitive conditions. The Company has been able to
maintain average selling prices by continuing to introduce new products with
more features and higher prices, thereby offsetting price declines in older
products. There can be no assurance that average selling prices for the
Company's microcontroller or other products can be maintained due to increased
pricing pressure in the future. An increase in pricing pressure could adversely
affect the Company's operating results.
The foregoing statements regarding 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, work stoppages at customer locations, 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 Asian countries have recently experienced economic
difficulties, including high rates of loan defaults, business failures and
currency devaluations. During the quarters ended December 31, 1997 and March 31,
1998, the Company experienced weakness in the expected level of turns orders and
net sales related to its business in Asia. During the fourth fiscal quarter of
fiscal 1998, shipments to Asia were lower than the preceding quarter by
approximately 30%. During the quarter ended June 30, 1998, sales to Asia
increased by 22% from the prior quarter indicating a partial recovery in sales
for this region. The Company derives a substantial portion of its net sales from
customers in Asia 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 68.0% and 70.0% of net sales in the three
months ended June 30, 1998 and 1997, respectively. The Company's foreign sales
have been predominantly in Asia and Europe 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.
11
Implementation of New Enterprise Software System
During the current quarter, the Company is transitioning a majority of its
core business and financial systems to replace existing software systems. It is
anticipated that the implementation of these systems may adversely affect
shipment linearity and timeliness of customer invoicing for the quarter. While
the Company believes that the implementation will not materially impact the
Company's results of operations for the quarter, other companies implementing
similar systems have, in certain cases, experienced difficulties in their
implementations. The Company believes that transitioning to new business and
financial systems will be important for the Company's operating results in
future periods. However, operating results, particularly net sales, could be
adversely affected if the Company experiences difficulties in implementation.
See also "Year 2000 and Systems Conversion," below.
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 increased numbers of application development systems in
fiscal 1998 and the first quarter of fiscal 1999 compared to previous fiscal
years. 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 $49.3 million and $49.4 million in the
three months ended June 30, 1998 and 1997, respectively. Gross profit as a
percent of sales was 49.5% and 50.8% in the three months ended June 30, 1998 and
1997, respectively. Gross margins remained relatively constant during
12
the quarter ended June 30, 1998, positively affected by the product mix shift to
microcontrollers where margins are typically higher, offset by planned one-week
shutdowns taken in the Company's Taiwan and Thailand test facilities during the
quarter, and continued pricing pressure on memory products. The Company is
continuing 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 Tempe wafer fabrication facility in early fiscal
1998 and the Company is continuing the transitioning of products to its 0.7
micron process. The Company expects that 25% of its products will be produced
from 8-inch wafers during fiscal 1999. The Company anticipates that its cost of
sales and gross product margins 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.
The foregoing statements relating to anticipated gross margins, cost of
sales, 8-inch wafer production, 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 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 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 yields and costs at their current levels.
The Company's reliance on facilities in Taiwan, Thailand, the
Philippines and other foreign countries, and maintenance of substantially all of
its finished goods in 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.
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 are significant factors in maintaining
the Company's competitive position. The dollar investment in research and
development increased by 10.9% in the current quarter as compared to the
corresponding quarter of the previous fiscal year, and by 4.6% from the previous
quarter. 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
13
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 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 Company maintained its level of investment in selling, general and
administrative costs at $16.1 million in the current quarter, as compared to
$16.2 million and $16.9 million in the corresponding quarter of the previous
fiscal year and in the immediately proceeding quarter, respectively. As the
Company continues to invest in incremental worldwide sales and technical support
resources to promote the Company's embedded control products, selling, general
and administrative costs are expected to increase over time, in relation to
sales.
Other Income (Expense)
Interest income for the three months ended June 30, 1998 decreased from
the three months ended June 30, 1997 and the prior fiscal quarter, as a result
of reduced invested cash balances. Interest expense in the three months ended
June 30, 1998 increased over the three months ended June 30, 1997 and the prior
fiscal quarter, respectively, due to incremental borrowing levels associated
with a stock repurchase program. Other income represents numerous immaterial
non-operating items. The Company's interest expense could increase in the
balance of fiscal 1999 if the Company increases its borrowings, and interest
expense could 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%
and 27.0% for the three months ended June 30, 1998 and 1997, respectively, 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%. 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: current
tax laws and regulations; taxation rates in geographic regions where the Company
has significant operations; and current tax holidays available in foreign
locations.
14
Year 2000 and Systems Conversion
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the year, thus rendering them
incapable of properly managing and manipulating data that includes 21st century
dates. The Company is currently installing business and financial systems to
replace existing software systems to address the Year 2000 compliance issue.
Particular emphasis is being placed on software requirements to replace existing
systems related to the sales order process, planning, physical distribution and
accounts receivable functions which are being implemented during the quarter
ending September 30, 1998. The Company is also currently reviewing other aspects
of its computer systems, including manufacturing and product development areas.
Microchip's products, for the most part, involve hardware integrated circuit
devices manufactured by Microchip which, subsequent to their sale, are combined
with proprietary application firmware by Microchip's customers. Thus, Microchip
believes that its products have no inherent date sensitive features. At this
time, management is not able to assess the cost of Year 2000 compliance. The
Company does not anticipate that the Year 2000 issue will pose significant
operating problems. However, difficulties in the implementation of new
information systems, or a failure to fully identify and resolve all Year 2000
deficiencies in the Company's systems and products could have a material adverse
effect on the Company's results of operations.
Liquidity and Capital Resources
The Company had $23.9 million in cash and cash equivalents at June 30,
1998, a decrease of $8.3 million from the March 31, 1998 balance. The Company
has an unsecured line of credit with a syndicate of domestic banks totaling
$90.0 million. Borrowings under the domestic line of credit as of June 30, 1998
were $45.0 million. The domestic line of credit requires the Company to achieve
certain financial ratios and operating results. The Company was in compliance
with these covenants at June 30, 1998. The Company also has an unsecured short
term line of credit totaling $21.3 million with certain foreign banks.
Borrowings under the foreign line of credit as of June 30, 1998 were $13.0
million. There are no covenants related to the foreign line of credit. At June
30, 1998, an aggregate of $53.3 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 three months ended June 30, 1998, the Company generated
$24.1 million of cash from operating activities, a decrease of $29.5 million
from the three months ended June 30, 1997. The decrease in cash flow from
operations was primarily due to a special charge which decreased profitability,
a lower accounts payable balance as a result of lower capital purchases, and an
increase in inventories.
It is anticipated that the Company's investment in working capital will
continue to grow in line with sales growth. Inventory turns are expected to
remain consistent over the balance of this fiscal year reflecting the current
net sales projection. The accounts receivables balance will grow in the quarter
ending September 30, 1998, primarily due to reduced shipment linearity in the
quarter associated with the implementation of a new information system. It is
anticipated that accounts receivable balances will return to historical levels
in future quarters, in relationship to sales. See also "Implementation of New
Enterprise Software System," above.
The foregoing statements regarding inventory turns, accounts receivable
balances for the quarter ending September 30, 1998 and future quarters, and
shipment linearity 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.
15
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;
timeliness of customer invoicing; 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, work stoppages at customer
locations, 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; and difficulties in
implementing new enterprise software system.
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 three months ended June 30, 1998 and 1997 were $12.0 million and $30.4
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
$55.0 million during the next 12 months for additional capital equipment to
increase capacity at its existing wafer fabrication 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 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.
Net cash used in financing activities was $20.5 million for the three
months ended June 30, 1998. Net cash provided by financing activities was $1.4
million for the three months ended June 30, 1997. Proceeds from sale of stock
and put options were $3.8 million and $2.9 million for the three months ended
June 30, 1998 and 1997, respectively. Payments on long term debt and capital
lease obligations were $1.4 million and $1.5 million for the three months ended
June 30, 1998 and 1997, respectively. Proceeds from lines of credit were $35.0
million for the three months ended June 30, 1998. Cash expended for the purchase
of the Company's Common Stock was $57.9 million for the three months ended June
30, 1998.
On May 1, 1998, the Company's Board of Directors authorized the
repurchase of 2,000,000 shares, in connection with a Common Stock repurchase
plan. On May 1, 1998, the Board of Directors also authorized the Company to sell
up to 500,000 put options in connection with the same plan. During the quarter
ended June 30, 1998, the Company has purchased 2,222,500 shares of Common Stock
at an aggregate cost of $57,890,000 and had outstanding 950,000 put options at
prices ranging from $22.30 to $38.81. The Company expects from time to time to
purchase shares of Common Stock in connection with its authorized Common Stock
repurchase plan.
During the quarter ended June 30, 1998, the Company completed two
transactions in connection with a stock repurchase program. In April 1998, the
Company completed a costless collar transaction for 500,000 calls priced at
$25.95 and 665,000 puts priced at $25.19. The expiration date of the transaction
is April 1999. Also in connection with the stock repurchase program, the Company
completed a net share settled forward contract for 2,000,000 shares at an
average price of $29.27. The expiration date of this transaction is May 2000,
with quarterly interim settlement dates as determined by the Company. These
derivative transactions could obligate the Company to purchase shares of the
Company's Common Stock in the future if the stock price is below the strike
price of the instruments.
16
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 or other purposes. 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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
quarter ended June 30, 1998.
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: August 4, 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)