10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 9, 1999
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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, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number: 0-21184
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 86-0629024
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2355 W. CHANDLER BLVD., CHANDLER, AZ 85224-6199
(480) 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 29,
1999:
COMMON STOCK, $.001 PAR VALUE: 50,935,314 SHARES
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 and March 31, 1999............................3
Condensed Consolidated Statements of Income -
Three and Six Months Ended September 30, 1999
and September 30, 1998...........................................4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 1999 and September 30, 1998.......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 4. Submission of Matters to a Vote of Security Holders.............18
Item 6. Exhibits and Reports on Form 8-K................................18
SIGNATURES....................................................................19
EXHIBITS
3.1 By-Laws of Registrant as Amended through August 20, 1999
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,
----------------------
1999 1998
--------- ---------
Cash flows from operating activities: (Unaudited)
Net income $ 43,287 $ 30,337
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts 222 201
Provision for inventory valuation 1,120 1,316
Provision for pension accrual 193 476
Depreciation and amortization 31,178 32,336
Amortization of purchased technology 150 150
Deferred income taxes 1,134 (3,263)
Increase in accounts receivable (7,350) (7,806)
Decrease/(increase) in inventories 4,582 (6,363)
Increase in accounts payable and accrued liabilities 22,897 1,104
Change in other assets and liabilities 3,763 825
--------- ---------
Net cash provided by operating activities 101,176 49,313
--------- ---------
Cash flows from investing activities:
Capital expenditures (74,999) (24,157)
--------- ---------
Net cash used in investing activities (74,999) (24,157)
--------- ---------
Cash flows from financing activities:
Net proceeds from (repayments of) lines of credit (26,509) 23,800
Payments on long-term debt (1,403) (1,191)
Payments on capital lease obligations (305) (1,306)
Repurchase of common stock -- (57,890)
Proceeds from sale of stock and put options 15,157 7,038
--------- ---------
Net cash used in financing activities (13,060) (29,549)
--------- ---------
Net increase (decrease) in cash and cash equivalents 13,117 (4,393)
Cash and cash equivalents at beginning of period 30,826 32,188
--------- ---------
Cash and cash equivalents at end of period $ 43,943 $ 27,795
========= =========
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 Company's opinion, 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, 1999. The results of operations for the six months ended September 30, 1999
and 1998 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,
1999 1999
------- -------
(unaudited)
Trade accounts receivable $71,175 $64,335
Other 433 570
------- -------
71,608 64,905
Less allowance for doubtful accounts 1,935 2,360
------- -------
$69,673 $62,545
======= =======
(3) INVENTORIES
The components of inventories are as follows (amounts in thousands):
September 30, March 31,
1999 1999
------- -------
(unaudited)
Raw materials $ 6,611 $ 4,491
Work in process 40,156 46,947
Finished goods 22,908 26,531
------- -------
69,675 77,969
Less allowance for inventory valuation 7,402 9,994
------- -------
$62,273 $67,975
======= =======
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(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
September 30, March 31,
1999 1999
-------- --------
(unaudited)
Land $ 11,545 $ 11,545
Building and building improvements 86,030 77,600
Machinery and equipment 372,564 365,947
Projects in process 74,988 41,143
-------- --------
545,127 496,235
Less accumulated depreciation
and amortization 207,643 202,572
-------- --------
$337,484 $293,663
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(5) 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 (5.38% at September 30, 1999)
plus 0.325%, expiring in October 2000. At September 30, 1999, the Company had no
borrowings against this line of credit. The Company had utilized $25,000,000 of
the line of credit at March 31, 1999. The agreement between the Company and the
bank syndicate requires the Company to achieve certain financial ratios and
operating results. The Company was in compliance with these covenants as of
September 30, 1999.
The Company has an additional unsecured line of credit with various Taiwan
financial institutions for up to $33,200,000 (U.S. Dollar equivalent). These
borrowings are predominantly denominated in New Taiwan Dollars, bearing interest
at SIBOR (5.33% at September 30, 1999) plus 0.60%, and expiring on various dates
through October 2000. There were no borrowings against this line of credit as of
September 30, 1999, but an allocation of $2,300,000 of the available line was
made, relating to import guarantees associated with the Company's business in
Thailand. At March 31, 1999, the Company had utilized $1,509,000 of this line of
credit.
(6) STOCKHOLDERS' EQUITY
In April 1998, the Company completed a costless collar transaction
comprising call options on 500,000 shares priced at $25.95 and put options on
665,000 shares priced at $25.19. The expiration date of the transaction was
April 28, 1999, resulting in the Company receiving $4,660,000 in cash which was
credited to additional paid-in capital during the three month period ended June
30, 1999. Also in connection with the Company's stock repurchase program, the
Company completed a net share settled forward contract for 2,000,000 shares at
an average price of $29.24. During the six months ended September 30, 1999, the
Company received 1,129,096 shares in conjunction with the net share settled
forward contract. The expiration date of this transaction is May 2000, with
quarterly interim settlement dates.
The Company expects, from time to time, to purchase shares of Common Stock
in connection with its authorized Common Stock repurchase plan.
7
(7) NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
Three Months Ended Six Months Ended
September 30, September 30,
----------------- -----------------
(Unaudited) (Unaudited)
1999 1998 1999 1998
------- ------- ------- -------
Net income $23,088 $17,563 $43,287 $30,337
======= ======= ======= =======
Weighted average common
shares outstanding 50,787 50,963 50,879 51,546
Dilutive effect of stock options 3,129 2,395 2,963 2,394
------- ------- ------- -------
Weighted average common and common
equivalent shares outstanding 53,916 53,358 53,842 53,940
======= ======= ======= =======
Basic net income per share $ 0.45 $ 0.34 $ 0.85 $ 0.59
======= ======= ======= =======
Diluted net income per share $ 0.43 $ 0.33 $ 0.80 $ 0.56
======= ======= ======= =======
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
net sales for the periods indicated:
Three Months Ended Six Months Ended
September 30, September 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 48.5% 50.4% 48.8% 50.4%
----- ----- ----- -----
Gross profit 51.5% 49.6% 51.2% 49.6%
Research and development 9.0% 10.2% 9.3% 10.2%
Selling, general and administrative 16.2% 15.6% 15.9% 15.9%
Special charges -- -- -- 2.7%
----- ----- ----- -----
Operating income 26.3% 23.8% 26.0% 20.7%
===== ===== ===== =====
NET SALES
Microchip's net sales for the quarter ended September 30, 1999 were $118.0
million, an increase of 13.7% over sales of $103.8 million for the corresponding
quarter of the previous fiscal year, and an increase of 9.6% from the previous
quarter's sales of $107.7 million. Net sales for the six months ended September
30, 1999 were $225.7 million, an increase of 10.9% from sales of $203.3 million
in the corresponding period of the previous fiscal year.
The Company's microcontroller product line represents the largest component
of Microchip's total net sales. Microcontrollers and associated application
development systems accounted for 81% and 75% of total net sales in the three
months ended September 30, 1999 and 1998, respectively. The remaining component
of the Company's product sales consists primarily of Serial EEPROM memory
products which accounted for 19% and 25% of net sales in the three months ended
September 30, 1999 and 1998, respectively.
Microcontrollers and associated application development systems accounted
for 80% and 75% of net sales in the six months ended September 30, 1999 and
1998, respectively, while the remaining component consisting of primarily Serial
EEPROM memory products accounted for 20% and 25%, respectively, for the same
periods.
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. From fiscal 1994 through fiscal 1999, this strategy resulted in
customers placing orders with increasingly shorter delivery schedules. Order
visibility began to improve at the end of fiscal 1999 and continued to improve
dramatically during the six months ended September 30, 1999. Opening backlog for
the third quarter of fiscal 2000 grew 61% from opening backlog for the
immediately preceding second quarter of fiscal 2000. As a result of the strong
bookings performance experienced by the Company, the turns order percentage
dropped to 25% for the third fiscal quarter of fiscal 2000 from 65% in the
fourth quarter of fiscal 1999. Notwithstanding the recent improvement in the
turns orders requirement, turns orders are difficult to predict, and there can
be no assurance that the combination of turns orders and
9
shipments from backlog in any quarter will be sufficient to achieve anticipated
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.
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. While average selling prices for
microcontrollers have remained relatively constant, the Company has experienced,
and expects to continue to experience, pricing pressure 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 can be maintained due to pricing pressure in
the future which could adversely affect the Company's operating results.
THE FOREGOING STATEMENTS REGARDING BOOKINGS, TURNS ORDERS, AVERAGE SELLING
PRICES AND PRICING PRESSURES ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE
LEVEL OF ORDERS THAT ARE RECEIVED AND CAN BE SHIPPED IN A QUARTER; 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; THE COMPANY'S ABILITY TO INCREASE WAFER FABRICATION, TEST AND
ASSEMBLY CAPACITY TO MEET DEMAND; CHANGES IN PRODUCT MIX; AND ABSORPTION OF
FIXED COSTS, LABOR AND OTHER FIXED MANUFACTURING COSTS.
Foreign sales represented 69% and 66% of net sales in the three months
ended September 30, 1999 and 1998, respectively, and 68% and 67% for the six
months ended September 30, 1999 and 1998, 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.
ADDITIONAL FACTORS AFFECTING OPERATING RESULTS
The Company believes that future growth in net sales of its microcontroller
products and related memory products will depend largely upon the Company's
success in having its current and new products designed into future customer
applications. Design wins typically precede the Company's volume shipment of
products 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 continues to achieve a
high volume of design wins and is shipping increased numbers of application
development systems. 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,
10
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
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's products are incorporated
into a wide variety of end 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 $60.8 million and $51.5 million in the three
months ended September 30, 1999 and 1998, respectively, and $115.5 million and
$100.7 million in the six months ended September 30, 1999 and 1998,
respectively. Gross profit as a percent of sales was 51.5% and 49.6% in the
three months ended September 30, 1999 and 1998, respectively and 51.2% and 49.6%
in the six months ended September 30, 1999 and 1998, respectively. The most
significant factor affecting gross profit percentage was the continued growth of
microcontrollers and associated application development systems versus Serial
EEPROM memory products. The Company continues to transition products to smaller
geometries and to larger wafer sizes to reduce future manufacturing costs. The
Company is continuing to increase its manufacturing capacity for 8-inch wafers
and to transition products to its 0.7 micron process. For fiscal 2000, the
Company expects that products produced on 8-inch wafers will grow from 37% as of
the beginning of the period to 55% at the end of the fiscal year. The Company
anticipates that gross product margins will fluctuate over time, driven
primarily by the product mix of microcontroller products and related memory
products, manufacturing yields, fixed cost absorption, wafer fab loading levels
and competitive and economic conditions.
THE FOREGOING STATEMENTS RELATING TO ANTICIPATED GROSS PRODUCT MARGINS, AND
THE TRANSITION TO HIGHER YIELDING MANUFACTURING PROCESSES AND 8-INCH WAFER
PRODUCTION ARE FORWARD-LOOKING STATEMENTS. 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; DEMAND FOR THE COMPANY'S PRODUCTS; COMPETITION AND
COMPETITIVE PRESSURE ON PRICING; CHANGES IN PRODUCT MIX; AND OTHER ECONOMIC
CONDITIONS.
Currently the majority of Microchip's assembly operations, and a portion of
its test requirements, are performed by third-party contractors. 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.
Third-party assembly and test companies are experiencing high demand and
utilization of their current capacity which could lead to capacity shortages in
the industry. Accordingly, Microchip is in the process of implementing in-house
assembly operations during the current fiscal year and will shift a portion of
its assembly operations from third-party contractors to fill this capacity. By
the end of the current fiscal year, approximately 50% of the Company's assembly
requirements will be performed in its own facilities and the Company will
continue to be dependent on third-party contractors for the balance of its
requirements.
11
THE FOREGOING STATEMENTS RELATED TO THE COMPANY'S IMPLEMENTATION OF
IN-HOUSE ASSEMBLY OPERATIONS DURING THE CURRENT FISCAL YEAR AND CAPACITY AT
THIRD-PARTY ASSEMBLY AND TEST COMPANIES ARE FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS:
TIMING AND SUCCESS OF THE TRANSITION FROM THIRD PARTY ASSEMBLY SERVICES
PROVIDERS TO COMPANY-OWNED ASSEMBLY OPERATIONS; DELAY IN THE FACILITATION OF THE
COMPANY'S IN-HOUSE ASSEMBLY OPERATIONS; DIFFICULTIES IN THE TRANSITION OF THE
ASSEMBLY FUNCTION FROM THIRD PARTIES TO THE COMPANY; AVAILABILITY OF SUFFICIENT
CAPACITY OF THIRD-PARTIES; SUPPLY DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT
MIX; COMPETITIVE PRESSURES ON PRICES; AND OTHER ECONOMIC CONDITIONS.
The Company's reliance on facilities in Thailand 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. To date, the Company has not experienced any significant interruptions in
its foreign business operations. 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 in the current quarter remained constant as compared to the
corresponding quarter of the previous fiscal year, and increased by 3.4% from
the previous quarter. The Company will continue to invest in research and
development, including an investment in process and product development.
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 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.
12
SELLING, GENERAL AND ADMINISTRATIVE
The Company increased its level of selling, general and administrative
costs to $19.1 million in the current quarter as compared to $16.2 million and
$16.9 million in the corresponding quarters of the previous fiscal year and the
previous quarter, respectively. Selling, general and administrative costs
represented 16.2% of sales in the current fiscal quarter as compared to 15.6% of
sales in both the corresponding quarter of the previous fiscal year and the
previous quarter. 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 rise over
time.
OTHER INCOME (EXPENSE)
Interest income in the three and six months ended September 30, 1999
increased from the corresponding periods of the previous fiscal year as a result
of higher invested cash balances. Interest expense in the three and six months
ended September 30, 1999 decreased from the corresponding periods of the
previous fiscal year as a result of lower borrowing levels of the Company's
credit lines. Other income represents numerous immaterial non-operating items.
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% for
each of the six months ended September 30, 1999 and 1998, 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. 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.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the result of various computer programs
being written using two digits rather than four to define the year, thus
potentially rendering them incapable of properly managing and manipulating data
that includes 21st century dates. The potential for Y2K issues which could
reasonably affect the Company could arise from any combination of: a) the
Company's own internal information processing and embedded systems, b) external
systems used by providers of critical goods or services to the Company, c)
customer failures resulting from Y2K problems leading to reductions in demand
from the customer, and d) Y2K issues arising within the products manufactured by
the Company.
THE COMPANY'S CURRENT STATE OF YEAR 2000 READINESS
The Company has implemented a Y2K readiness program and has, as of
September 30, 1999, taken substantial efforts to reasonably insure that its
operations are not subject to substantial adverse Y2K-related impact. This
program began in 1997 with a comprehensive documentation of potential sources of
Y2K exposure which could reasonably impact the Company's business. This initial
source identification phase has been completed.
The subsequent step in the program has been to systematically analyze each
identified potential source of Y2K exposure as to its likelihood of material
effect on the Company's operations and the range of available remediation
actions. In the case of identified systems internal to the Company, analysis
13
generally involved performing physical tests which simulated performance of the
systems with post-year 2000 dates. For potential sources of Y2K risk which are
external to the Company, such as with the Company's external vendors and
suppliers, the Company has typically relied upon written assurances of Y2K
compliance from those various parties in lieu of physical testing by the
Company's employees. To date, the Company has not identified any Y2K issues
inherent in the products manufactured by the Company. The Company's products,
for the most part, involve hardware integrated circuits which, at the time of
sale to customers, have no inherent date sensitive features. The analysis phase
of the Y2K readiness program has been substantially completed.
The final phase of the Y2K readiness program involves the modification,
replacement or elimination of systems identified in the analysis phase as being
in need of remediation. The Company has completed the remediation process for
substantially all of its identified internal systems, with the primary effort
centered around the total replacement of information systems related to the
Company's sales order process, planning, physical distribution and finance
functions. The majority of this task was completed during the quarter ended
September 30, 1998. The Company has received letters of Y2K compliance from 100%
of its key external vendors, subcontractors and suppliers.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
The total cost associated with required modifications to become Y2K
compliant is not expected to be material to the Company's financial position.
The amount expended through September 30, 1999 was approximately $16.1 million,
primarily associated with the total replacement of the information systems
related to the Company's sales order process, planning, physical distribution
and finance functions which was completed during the quarter ended September 30,
1998. The Company had intended to replace such systems in the ordinary course of
its business and the implementation was not substantially accelerated due to the
Y2K issue. The Company believes that the cost of its Y2K readiness program, as
well as currently anticipated costs to be incurred with respect to Y2K issues of
third parties, will not exceed $16.5 million, inclusive of the costs described
above. It is anticipated that all such expenditures will be funded from
operating cash flows and absorbed as part of the Company's ongoing operations.
MOST REASONABLY LIKELY WORST CASE SCENARIO(S)
Having reasonably determined that the Company's own hardware and software
systems will be substantially Y2K compliant and that its products inherently
have no date code-related issues, management believes that the worst case
scenarios would most likely involve massive, simultaneous Y2K-related
disruptions from the Company's key external raw material suppliers and/or
service providers. For these worst case scenarios to have maximum adverse impact
on the Company, the vendors in question would either need to be sole-source
providers or their peer companies, who would otherwise be potential
second-source suppliers, would also need to undergo similar Y2K-related
disruption. Examples on the material supplier side would include extended and
substantial disruptions of the Company's key raw material suppliers of silicon
wafers, leadframes, specialty chemicals and gasses. Examples on the service
provider side would include extended, substantial disruptions of the Company's
third-party semiconductor assembly firms, telecommunications and
datacommunications services, airfreight and delivery services, or the worldwide
banking system. Examples on the customer side would include Y2K problems
encountered by such customer adversely impacting that customer's business and
reducing the customer's purchases from the Company. The Company believes that
such massive and simultaneous disruptions of the supply of basic goods and
services due to Y2K-related issues are highly unlikely to occur.
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CONTINGENCY PLANS
The Company believes that the steps it has taken to assess its own hardware
and software systems and those of its key vendors and suppliers are adequate to
ensure minimal disruption to its business processes. In addition, the Company
has developed contingency plans for selected areas, such as qualification of
alternative suppliers, diesel electrical generation for major factories and
computing resources and redundant data communication methods. The Company
believes that the steps it has taken to assess its own hardware and software
systems and those of its key vendors and suppliers are adequate to ensure
minimal disruption to its business processes. In the event of random, unforeseen
Y2K problems (such as the failure of specific pieces of process equipment, or
the temporary inability of certain vendors to provide materials or services),
the Company believes that these types of issues will most likely be resolved in
the normal course of business, including the potential use of alternate
suppliers, in most cases.
THE FOREGOING STATEMENTS RELATED TO MATERIALITY OF Y2K COSTS, THE COSTS TO
ADDRESS Y2K ISSUES AND THE FUNDING AND ABSORPTION OF SUCH COSTS, WORST-CASE
SCENARIO(S) AND CONTINGENCY PLANS ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE
FAILURE TO CORRECTLY TIMELY IDENTIFY AND CORRECT Y2K PROBLEMS, EITHER BY THE
COMPANY OR ITS KEY SUPPLIERS OR CUSTOMERS.
EURO CONVERSION ISSUES
The Company operates in the European Market and currently generates
approximately 30% of its total net sales from customers located in Europe. The
Company's commercial headquarters in Europe are located in the United Kingdom,
which is not currently one of the eleven member states of the European Union
converting to a common currency.
The Company currently conducts 96% of its business in Europe in U.S.
Dollars and 2% of its business in Europe in Pounds Sterling. The balance of its
net sales are conducted in currencies which will eventually be replaced by the
Euro. The Company will be monitoring the potential commercial impact of
converting a portion of its current business to the Euro, but does not expect
any material impact to its business based on this transition.
The Company does not currently anticipate any material impact to its
business related to Euro matters from information technology, derivative
transactions, tax issues and accounting software issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $43.9 million in cash and cash equivalents at September 30,
1999, an increase of $13.1 million from the March 31, 1999 balance. The Company
has 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, 1999. 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 September 30, 1999. The Company also has an unsecured
short term line of credit totaling $33.2 million with certain foreign banks.
There were no borrowings under the foreign line of credit as of September 30,
1999. There are no covenants related to the foreign line of credit. At September
30, 1999, an aggregate of $120.9 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.
15
During the six months ended September 30, 1999, the Company generated
$101.2 million of cash from operating activities an increase of $51.9 million as
compared to the six months ended September 30, 1998. The increase in cash flow
from operations was primarily due to a reduction in inventories and an increase
in accounts payable and accrued liabilities and increased profitability for the
six months ended September 30, 1999.
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, 1999 and 1998 were $75.0 million and $24.2
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 $190
million during the next 12 months for additional capital equipment to increase
capacity at its existing wafer fabrication facilities, to expand product test
operations, to develop in-house assembly capability and add incremental
infrastructure to support the growth of the business. The Company expects to
finance capital expenditures through cash flows 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 OVER THE NEXT 12 MONTHS AND THE FINANCING OF SUCH CAPITAL
EXPENDITURES ARE FORWARD LOOKING STATEMENTS. 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 MARKETS SERVED BY THE COMPANY.
Net cash used in financing activities was $13.1 million and $29.6 million
for the six months ended September 30, 1999 and 1998, respectively. Proceeds
from sale of stock and put options were $15.1 million and $7.0 million for the
six months ended September 30, 1999 and 1998, respectively. Payments on long
term debt and capital lease obligations were $1.7 million and $2.5 million for
the six months ended September 30, 1999 and 1998, respectively. Repayments on
lines of credit were $26.5 million for the six months ended September 30, 1999.
Net proceeds from lines of credit were $23.8 million for the six months ended
September 30, 1998. Cash expended for the purchase of the Company's Common Stock
was $57.9 million for the six months ended September 30, 1998.
The Company has outstanding a net share settled forward contract and
received 1,129,096 shares in the six months ended September 30, 1999 in
connection with this transaction. See Note 6 to "Condensed Consolidated
Financial Statements." The net share settled forward contract could obligate the
Company to purchase shares of the Company's Common Stock in the future if the
price of the Company's Common Stock is below the strike price of the
instruments.
The Company expects from time to time to purchase shares of Common Stock in
connection with its authorized stock repurchase program.
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
16
wafer fabrication and product test facilities or for 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, market 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.
17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on August
20, 1999 (the "Meeting").
(b) Steve Sanghi, Albert J. Hugo-Martinez, L.B. Day, Matthew W. Chapman
and Wade Meyercord were elected as Directors of the Meeting.
(c) The results of the vote on the matters voted upon at the meeting were
as follows:
(i) ELECTION OF DIRECTORS:
For Withheld
--- --------
Steve Sanghi 46,108,139 117,443
Albert J. Hugo-Martinez 46,108,139 117,443
L.B. Day 46,108,139 117,443
Matthew W. Chapman 46,108,139 117,443
Wade Meyercord 45,760,864 464,708
(ii) RATIFICATION OF PROPOSAL TO AMEND THE COMPANY'S EMPLOYEE STOCK
PURCHASE PLAN TO INCREASE THE NUMBER OF SHARES RESERVED
THEREUNDER:
For Against Abstain
--- ------- -------
45,124,925 1,061,188 39,459
(iii) RATIFICATION OF APPOINTMENT OF KPMG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING MARCH 31, 2000:
For Against Abstain
--- ------- -------
46,107,454 71,276 46,842
The foregoing matters are described in more detail in the Registrant's
definitive proxy statement dated July 14, 1999 relating to the Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 3.1 - By-Laws of Registrant as amended through August 20, 1999
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on October 12, 1999 to
report the adoption of an Amended and Restated Preferred Shares Rights
Agreement between the Company and Norwest Bank, Minnesota, N.A., as Rights
Agent, effective October 11, 1999 (the "Amended Rights Agreement"). The
Amended Rights Agreement was filed as Exhibit 4.1 to the current report on
Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date: November 8, 1999 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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