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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1996.June 30, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--------------------------------------- ---------------
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 17,
1996:July
25,1997:
Common Stock, $.001 Par Value: 51,405,40953,384,555 shares
----------------------
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and March 31, 1996..........................3
Condensed Consolidated Statements of Income -
Three Months and Nine Months Ended
December 31, 1996 and December 31, 1995.......................4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1996 and December 31, 1995.....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 5. Other Information.............................................17
Item 6. Exhibits and Reports on Form 8-K..............................18
SIGNATURES .....................................................................19
EXHIBITS
11 Computation of Net Income Per Share...........................21
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1997 and March 31, 1997.............................3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1997
and June 30, 1996............................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 1997 and June 30, 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...........................................15
Item 5. Other Information...........................................15
Item 6. Exhibits and Reports on Form 8-K............................16
SIGNATURES....................................................................17
EXHIBITS
3.1 Certificate of Amendment to Registrant's Restated Certificate
of Incorporation, as amended................................19
11 Computation of Net Income PerShare..........................20
18.1 Letter from KPMG Peat Marwick LLP re: Change in Accounting
Principles..................................................21
2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
December 31, March 31,
1996 1996
--------- ---------
(Unaudited)
Cash and cash equivalents $ 21,991 $ 31,059
Accounts receivable, net (note 4) 51,964 47,208
Inventories (note 5) 57,538 56,127
Prepaid expenses 2,872 1,808
Deferred tax asset 19,481 19,121
Other current assets 1,306 1,108
--------- ---------
Total current assets 155,152 156,431
Property, plant & equipment, net (note 6) 225,292 197,383
Other assets 5,452 4,373
--------- ---------
Total assets $ 385,896 $ 358,187ASSETS
June 30, March 31,
1997 1997
--------- ---------
(Unaudited)
Cash and cash equivalents $ 67,645 $ 42,999
Accounts receivable, net 62,587 61,102
Inventories 59,330 56,813
Prepaid expenses 1,389 1,715
Deferred tax asset 24,240 24,251
Other current assets 2,614 2,656
--------- ---------
Total current assets 217,805 189,536
Property, plant & equipment, net 252,331 234,058
Other assets 4,558 4,498
--------- ---------
Total assets $ 474,694 $ 428,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 45,670 $ 35,281
Current maturities of long-term debt 2,435 2,470
Current maturities of capital lease obligations 3,672 3,776
Accrued liabilities 46,337 36,392
Deferred income on shipments to distributors 27,390 20,441
--------- ---------
Total current liabilities 125,504 98,360
Long-term debt, less current maturities 2,926 3,616
Capital lease obligations, less current maturities 1,746 2,383
Long-term pension accrual 1,048 980
Deferred tax liability 6,169 6,169
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000
shares; no shares issued or outstanding -- --
Common stock, $.001 par value; authorized 65,000,000
shares; issued and outstanding 53,355,414 shares at
June 30, 1997; 53 53
53,196,037 shares at March 31, 1997
Additional paid-in capital 169,591 168,185
Retained earnings 167,657 149,825
Less shares of common stock held in treasury -- (1,479)
--------- ---------
Net stockholders' equity 337,301 316,584
Total liabilities and stockholders' equity $ 474,694 $ 428,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Lines of credit (note 7) $ 11,013 $ --
Accounts payable 31,867 47,165
Current maturities of long-term debt 2,528 2,734
Current maturities of capital lease obligations 3,883 2,943
Accrued liabilities 35,705 28,207
Deferred income on shipments to distributors 16,093 19,527
--------- ---------
Total current liabilities 101,089 100,576
Long-term line of credit (note 7) 26,700 21,000
Long-term debt, less current maturities 4,120 6,086
Capital lease obligations, less current maturities 3,011 6,164
Long-term pension accrual 946 690
Deferred tax liability 6,828 4,039
Stockholders' equity: (note 8)
Preferred stock, $.001 par value; authorized 5,000,000 shares;
no shares issued or outstanding -- --
Common stock, $.001 par value; authorized 65,000,000 shares;
issued 51,923,283 shares at Dectember 31, 1996; 52 52
51,581,172 shares at March 31, 1996
Additional paid-in capital 117,304 120,720
Retained earnings 133,261 98,693
Less shares of common stock held in treasury; 534,000 shares at cost (7,582) --
Foreign currency translation adjustment 167 167
--------- ---------
Net stockholders' equity 243,202 219,632
Total liabilities and stockholders' equity $ 385,896 $ 358,187
========= =========
(Shares and per share amounts have been restated to reflect a 3-for-2
stock split effected January 6, 1997.)
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 Nine Months Ended
December 31, December 31,
---------------------------- ----------------------------
(Unaudited) (Unaudited)
1996 1995 1996 1995
--------- --------- --------- ---------
Net sales $ 87,076 $ 78,069 $ 240,747 $ 213,833
Cost of sales 43,562 37,686 120,809 102,997
--------- --------- --------- ---------
Gross profit 43,514 40,383 119,938 110,836
Operating expenses:
Research and development 8,432 7,497 23,003 20,523
Selling, general and administrative 14,291 13,374 40,538 36,646
Restructuring cost -- -- 5,969 --
Write-off of in-process technology -- 11,448 1,575 11,448
--------- --------- --------- ---------
22,723 32,319 71,085 68,617
Operating income 20,791 8,064 48,853 42,219
Other income (expense):
Interest income 294 494 1,038 1,516
Interest expense (1,061) (618) (2,821) (1,793)
Other, net 186 89 281 (48)
--------- --------- --------- ---------
Income before income taxes 20,210 8,029 47,351 41,894
Income taxes 5,455 2,264 12,784 11,861
--------- --------- --------- ---------
Net income $ 14,755 $ 5,765 $ 34,567 $ 30,033
========= ========= ========= =========
Net income per common and
common equivalent share $ 0.27 $ 0.10 $ 0.64 $ 0.55
========= ========= ========= =========
Shares used in per share calculation 54,594 55,119 54,201 54,807
========= ========= ========= =========
(Shares and per share amounts have been restated to reflect a 3-for-2
stock split effected January 6, 1997.)
Three Months Ended June 30,
----------------------------
1997 1996
-------- --------
(Unaudited)
Net sales $ 97,228 $ 74,161
Cost of sales 47,835 37,525
-------- --------
Gross profit 49,393 36,636
Operating expenses:
Research and development 9,210 6,920
Selling, general and administrative 16,228 12,627
Restructuring cost -- 5,969
Write-off of in-process technology -- 1,575
-------- --------
25,438 27,091
Operating income 23,955 9,545
Other income (expense):
Interest income 740 414
Interest expense (281) (759)
Other, net 13 (39)
-------- --------
Income before income taxes 24,427 9,161
Income taxes 6,595 2,475
-------- --------
Net income $ 17,832 $ 6,686
======== ========
Net income per common and
common equivalent share $ 0.32 $ 0.12
======== ========
Shares used in per share calculation 56,432 54,423
======== ========
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except share amounts)
Nine Months Ended December 31,
---------------------------------------------
Cash flows from operating activities: 1996 1995
---- ----
(Unaudited)
Net income $ 34,567 $ 30,033
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts 147 354
Provision for inventory valuation 3,640 2,213
Provision for pension accrual 925 782
Provision for restructuring cost 2,483 ---
Depreciation 29,598 20,613
Amortization of purchased technology 225 ---
Deferred income taxes 2,429 (2,254)
Compensation expense on stock options 30 45
Increase in accounts receivable (4,903) (15,477)
Increase in inventories (5,051) (13,021)
Increase (decrease) in accounts payable and accrued liabilities (7,796) 32,687
Change in other assets and liabilities (6,669) (2,337)
---------------- -----------------
Net cash provided by operating activities 49,625 53,638
---------------- -----------------
Cash flows from investing activities:
Capital expenditures (59,990) (84,826)
Sales of marketable securities --- 10,705
---------------- -----------------
Net cash used in investing activities (59,990) (74,121)
---------------- -----------------
Cash flows from financing activities:
Net proceeds from lines of credit 16,712 13,499
Proceeds from issuance of long-term debt --- 2,924
Payments on long-term debt (2,174) (2,071)
Payments on capital lease obligations (2,213) (2,507)
Repurchase of common stock (19,463) ---
Proceeds from sale of stock and put options 8,435 5,647
---------------- -----------------
Net cash provided by financing activities 1,297 17,492
---------------- -----------------
Net decrease in cash and cash equivalents (9,068) (2,991)
Cash and cash equivalents at beginning of period 31,059 32,638
---------------- -----------------
Cash and cash equivalents at end of period $ 21,991 $ 29,647
================= ==================
thousands)
Three Months Ended June 30,
---------------------------
Cash flows from operating activities: 1997 1996
-------- --------
(Unaudited)
Net income $ 17,832 $ 6,686
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts 144 171
Provision for inventory valuation (400) 2,761
Provision for pension accrual 296 305
Provision for restructuring cost -- 5,211
Depreciation and amortization 12,095 9,710
Amortization of purchased technology 75 75
Deferred income taxes 11 2
Compensation expense on stock options -- 15
(Increase)/decrease in accounts receivable (1,629) 1,685
Increase in inventories (2,117) (6,437)
Increase in accounts payable and accrued liabilities 20,334 2,369
Change in other assets and liabilities 6,953 (7,672)
-------- --------
Net cash provided by operating activities 53,594 14,881
-------- --------
Cash flows from investing activities:
Capital expenditures (30,367) (26,756)
-------- --------
Net cash used in investing activities (30,367) (26,756)
-------- --------
Cash flows from financing activities:
Net proceeds from lines of credit -- 8,100
Payments on long-term debt (725) (798)
Payments on capital lease obligations (741) (748)
Repurchase of common stock -- (4,100)
Proceeds from sale of stock and put options 2,885 935
-------- --------
Net cash provided by financing activities 1,419 3,389
-------- --------
Net increase (decrease) in cash and cash equivalents 24,646 (8,486)
Cash and cash equivalents at beginning of period 42,999 31,059
-------- --------
Cash and cash equivalents at end of period $ 67,645 $ 22,573
======== ========
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 quarter ended June 30, 1997, the Company changed its method of
accounting for inventories from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method. The change did not have a material effect on
the results of operations for the quarter. 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 will not be restated for this change as the
impact is not material.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, the accompanying financial statements include all adjustments of a
normal recurring nature which are necessary for a fair presentation of the
results for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to such rules and regulations. It is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 1996.1997. The results of operations for the ninethree
months ended December 31, 1996June 30, 1997 are not necessarily indicative of the results to be
expected for the full fiscal year.
(2) ASiC Acquisition
On June 25, 1996 the Company acquired ASiC Technical Solutions, Inc., a
fabless provider of quick turn gate array devices (the "Acquisition"). The
Acquisition was treated as a purchase for accounting purposes. The amount paid
for the Acquisition and related costs was $1,750,000. As part of the
Acquisition, Microchip allocated a substantial portion of the purchase price to
in-process research and development costs, which is consistent with the
Company's on-going treatment of research and development costs. The total
one-time write-off associated with the Acquisition was $1,575,000, with the
balance to be treated as purchased technology related to current product and
amortized over five years. The impact of the Acquisition to the Company's
reported financial data and results of operations is immaterial. Therefore,
pro-forma information illustrating the combined results after the Acquisition
has not been provided.
(3) Restructuring Charges
During the quarter ended June 30, 1996, primarily in response to
inventory correction activities at the Company's customers, the Company
implemented a series of actions to temporarily reduce production capacity,
curtail the growth of inventories and reduce operating expenses. These actions
included delaying capital expansion plans and deferring capital spending, a 15%
production cutback in wafer fabrication, a headcount reduction in early April,
1996 representing approximately 3% of the Company's worldwide employees, and a
two-week wafer fab shut down in early July, 1996. As a result of these actions,
the Company recorded a pre-tax restructuring charge of $5,969,000 in the nine
months ended December 31, 1996 to cover costs primarily related to idling part
of the Company's 5-inch wafer fab capacity, paying continuing expenses during
the wafer fab shutdown and paying severance costs associated with the April,
1996 headcount reduction.
6
(4)(2) Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
December 31, March 31,
1996 1996
--------------------------------------------------
Trade accounts receivable $ 52,508 $ 47,799
Other 1,437 1,243
--------------- ---------------
53,945 49,042
Less allowance for doubtful accounts 1,981 1,834
--------------- ---------------
$ 51,964 $ 47,208
=============== ===============
(5)June 30, March 31,
1997 1997
----------------------
Trade accounts receivable $64,153 $62,165
Other 672 1,031
------- -------
64,825 63,196
Less allowance for doubtful accounts 2,238 2,094
------- -------
$62,587 $61,102
======= =======
(3) Inventories
The Company utilizes the LIFO (last-in, first-out) accounting method
and has consistently presented its results of operations on this basis for all
periods presented.
The components of inventories are as follows (amounts in thousands):
December 31, March 31,
1996 1996
--------------------------------------------------
Raw materials $ 2,721 $ 2,033
Work in process 47,733 43,036
Finished goods 15,862 21,430
--------------- ---------------
66,316 66,499
Less allowance for inventory valuation 8,778 10,372
--------------- ---------------
$ 57,538 $ 56,127
=============== ===============
(6)June 30, March 31,
1997 1997
---------------------
Raw materials $ 3,172 $ 2,310
Work in process 41,702 44,813
Finished goods 22,044 18,021
------- -------
66,918 65,144
Less allowance for inventory valuation 7,588 8,331
------- -------
$59,330 $56,813
======= =======
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in
thousands):
December 31, March 31,
1996 1996
--------------------------------------------------
Land $ 10,518 $ 10,518
Building and building improvements 49,773 36,939
Machinery and equipment 201,371 185,580
Projects in process 52,685 26,389
---------------- ---------------
314,347 259,426
Less accumulated depreciation
and amortization 89,055 62,043
---------------- ---------------
$ 225,292 $ 197,383
================ ===============
June 30, March 31,
1997 1997
------------------------
Land $ 11,178 $ 10,837
Building and building improvements 55,025 51,796
Machinery and equipment 262,175 218,284
Projects in process 34,974 52,608
-------- --------
363,352 333,525
Less accumulated depreciation
and amortization 111,021 99,467
-------- --------
$252,331 $234,058
======== ========
7
(7)(5) Lines of Credit
On October 31, 1996, theThe Company entered intohas an agreement for aunsecured line of credit with a syndicate of U.S. Banksbanks for
up to $90,000,000. The line was
completed as a revolving$90,000,000, bearing interest at the Prime Rate (8.50% at June 30, 1997)
and expiring in October, 1998. At March 31, 1997 and June 30, 1997 there were no
borrowings against the line of credit for a two year period, maturing on
October 31, 1998. The current line replaces all previous lines, with no material
changes in interest rates or covenants. Lines of credit consist of the following
(amounts in thousands):
December 31, March 31,
1996 1996
--------------------------------------------------
Unsecured line of credit with a syndicate of
U.S. banks for up to $90,000,000, bearing
interest at the Prime Rate or the 30-Day
London Interbank Offered Rate (LIBOR) plus
75 basis points (8.25% and 6.41%
respectively, at December 31, 1996) expiring
October, 1998. $ 26,700 $ 21,000
Unsecured lines of credit with various
Taiwan financial institutions for up to
$14,920,000 (U.S. dollar equivalent),
borrowings predominately denominated in U.S.
Dollars, bearing interest at the NT Dollar
Prime Rate less 3.7% or the U.S. Prime Rate
less 1.3% (5% and 6.95% respectively, at
December 31, 1996), expiring on various
dates through September 1998. $ 11,013 $ ----
-------------- --------------
$ 37,713 $ 21,000
============== ===============
credit. The agreement between the Company and the
syndicate of U.S. banks requires the Company to achieve certain financial ratios and
operating results. The Company was in compliance with these covenants as of December 31, 1996.
(8)June
30, 1997.
(6) Stockholders' Equity
Stock Split. On December 6, 1996, the Company's Board of Directors
declared a 3-for-2 stock split in the form of a stock dividend on the Company's
common stock, par value $.001 per share, to be effective January 6, 1997 for all
stockholders of record on December 20, 1996. All per share data and financial
information contained in this report have been restated to reflect this stock
split.
Stock Repurchase Activity. In connection with a stock repurchase program, during
the nine monthsyear ended DecemberMarch 31, 1996,1997, the Company purchased a total of 1,326,477 shares
of the Company's common stockCommon Stock in open market activities at a total cost of
$19,463,000. Through December 31, 1996,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 a total of 792,477 shares of the Company's common stock held in
treasury.
8
plan.
Also, in connection with thea stock repurchase program, as of December
31, 1996,during the quarter ended
June 30, 1997, the Company held unexpiredsold put options for 450,000 shares. The
unexpired put options have expiration dates350,000 shares of Common Stock
at pricing per share ranging from January 10, 1997$29.50 to July 10, 1997 at prices ranging from $15.00 to $21.25.$30.86. The net proceeds from the
sale and repurchase of putthese options, havein the amount of $1,606,100 for the period ended June 30,
1997, has been credited to additional paid-in capital. ForAs of June 30, 1997, the
nine months ended December 31, 1996, $770,650 was chargedCompany had outstanding put options for 550,000 shares which have expiration
dates ranging from July 8, 1997 to additional paid-in capital dueJune 16, 1998 at prices ranging from $15.08
to $30.86 per share.
Increase to the repurchaseNumber of put options.
(9) Supplemental Cash Flow Information
Cash paid for income taxes amountedAuthorized Shares. In April, 1997, the Board of
Directors approved an amendment to $5,340,000the 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
$15,560,000
duringbecame effective upon the nine months ended December 31, 1996 and 1995 respectively. Cash paid
for interest amountedfiling of a certificate of amendment to $2,731,000 and $1,799,000 for eachthe Restated
Certificate of Incorporation with the nine month
periods ended December 31, 1996 and 1995.
(10)Delaware Secretary of State on July 28,
1997.
(7) Subsequent Events
Microchip Technology Incorporated v. Lucent Technologies Inc. On JanuaryJuly 16, 1997,
the Company filed a registration statement on Form
S-3 (Registration Statement No. 333-19919)an action for a public offeringdeclaratory relief against Lucent Technologies
Inc. ("Lucent") requesting that the Court declare, among other matters, that
Microchip does not infringe certain of 1,000,000
sharesLucent's semiconductor patents (District
of Common Stock, plus up to 150,000 shares to cover over allotment, (the
"Registration Statement")Arizona, CIV97-1502 PHX EHC). The Registration Statement has not yet become
effective. The net proceedsCompany initiated legal action so that a
determination could be made relating to the validity, enforceability and alleged
infringement of the offering, ifasserted patents. Prior to filing suit, Microchip had
engaged in good faith license negotiations with Lucent for over four years
regarding alleged infringement of certain of Lucent's semiconductor patents. The
Company investigated Lucent's claims and believes that it does not infringe any
when complete,of the asserted Lucent patents. Despite the filing, the Company intends to
continue negotiations with Lucent with the goal of obtaining a resolution of
this matter, which could include a license on commercially reasonable terms.
However, no assurances can be given that a mutually satisfactory conclusion will
be used
primarilyachieved and that protracted litigation will not ensue. Litigation could
result in substantial cost to reduce outstanding indebtedness incurred by the Company and diversion of management effort. If
unsuccessful, the Company could be forced to fund
wafer fabrication, test capacitypay royalties on past and repurchases offuture
sales. Such litigation and/or royalty payments could have a material adverse
impact on the Company's Common Stock,business and for other working capital and general corporate purposes.
9operating results.
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 June 30,
1997 1996
---------------------------
Net sales ......................... 100.0% 100.0%
Cost of sales ..................... 49.2 50.6
------ ------
Gross profit ...................... 50.8 49.4
Research and development .......... 9.5 9.3
Selling, general and administrative 16.7 17.0
Restructuring cost ................ -- 8.1
Write-off of in-process technology -- 2.1
------ ------
Operating income .................. 24.6% 12.9%
====== ======
Net Sales. The Company's net sales for the quarter ended December 31, 1996June 30, 1997 were
$87.1$97.2 million, an increase of 11.5%31.1% over sales of $78.1$74.2 million for the
corresponding quarter of the previous fiscal year, and an increase of 9.5%4.0% from
the previous quarter's sales of $79.5$93.5 million. Net sales for the nine months
ended December 31, 1996 were $240.7 million, an increase of 12.6% over sales of
$213.8 million in the corresponding period of the previous fiscal year.
Primarily due to the Company's emphasis on higher margin products, the Company
experienced growth in sales of 8-bit microcontrollers and serial and parallel
EEPROM memories over these periods and a moderate decline in sales of its lower
margin memory and other product categories. The Company anticipates that the
sales mix of these product categories will not change substantially in future
periods. The Company's family of 8-bit
microcontrollers represents the largest component of Microchip's total net
sales. Microcontrollers and associated application development systems accounted
for 65.9%69.8% and 59.9%61.0% of total net sales in the quarters ending December 31,three months ended June 30, 1997
and 1996, and 1995, respectively. A related component of the Company's product sales
consists primarily of serial andEEPROMs, along with smaller quantities of parallel
EEPROM memories.memories and high-speed and low-voltage EPROMs. These products accounted
for 30.5% and 35.9% of total net sales in the
quarters ended December 31, 1996 and 1995, respectively. The remaining
components of total net sales were the Company's lower margin memory and other
miscellaneous products which accounted for 3.6% and 4.2% of total net sales in
the quarters ended December 31, 1996 and 1995, respectively. Microcontrollers
and associated application development systems accounted for 64.3% and 60.2% of
total net sales in the nine months ended December 31, 1996 and 1995,
respectively. Serial and parallel EEPROM memory products accounted for 31.6%28.2% and 33.0% of net sales in the ninethree months ended December 31,June 30, 1997 and
1996, and 1995,
respectively. The remaining components of total net sales wereIn the Company's
lower margin memory and other miscellaneous products which accounted for 4.1%
and 6.8% of total net sales in the ninethree months ended December 31, 1996 and 1995,
respectively.
The Company's overall average selling prices for its embedded control
products have remained relatively constant while average selling prices of its
non-volatile memory products have declined gradually over time. During the nine
months ended December 31, 1996, the Company experienced increased pricing
pressure on its non-volatile memory products due primarily to industry inventory
correction activities. There can be no assurance that average selling prices for
the Company's embedded control or other products will not experience increased
pricing pressure in the future. An increase in pricing pressure could adversely
affect the Company's operating results. There can be no assurance that average
selling prices or operating margins for the Company's products will remain
constant in the future due to competitive and other pressures. The foregoing
statements regarding product mix, average selling prices, pricing pressures, and
operating margins are forward looking statements within the meaning of Section
27A of the Securities Act of 1933,June 30, 1997, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subjectcompared to the
safe harbors created
thereby. Actual results could differ materially because of the following
factors, among others: competition and competitive pressures on pricing and
product availability; customer inventory levels, order patterns and seasonality;
the cyclical nature of both the semiconductor industry and the markets addressed
by the Company's products; the level of orders that are received and can be
shippedsame period in a quarter; market acceptance of the
10
products of both the Company and its customers; demand for the Company's
products; fluctuations in production yields, production efficiencies, overall
capacity utilization, changes in product mix; and absorption of fixed costs,
labor and other fixed manufacturing costs.
Foreign sales represented 69.2% of net sales in the current fiscal
quarter, 63.0% of net sales in the corresponding quarter of the previous fiscal year, and 63.1%the Company increased the percentage of
net sales attributable to 8-bit microcontrollers as a result of the Company's
focus in the previous quarter. Foreign sales represented
66.4% and 65.0% of net salesthis area. It is anticipated that this trend will continue for the
nine months ended December 31, 1996 and
1995 respectively. The Company's foreign sales have been predominantly in Asia,
Europe and Japan which the Company attributes to the manufacturing strength in
those areas for consumer, automotive, office automation, communications and
industrial products. The majority of foreign sales are U.S. dollar denominated.
The Company has entered into and, from time to time, will enter into hedging
transactions in order to minimize exposure to currency rate fluctuations.
Although none of the countries in which the Company conducts significant foreign
operations has had a highly inflationary economy in the last five years, there
can be no assurance that inflation rates or fluctuations in foreign currency
rates in countries where the Company conducts operations will not adversely
affect the Company's operating results in theforeseeable future.
Additional Factors Affecting Operations.
The Company's net sales in any given quarter are dependent upon a combination of
orders received in that quarter for shipment in that quarter ("turns orders'orders")
and shipments from backlog. The Company has emphasized its ability to respond
quickly to customer orders as part of its competitive strategy. This strategy,
combined with current industry conditions, is resulting in customers placing
orders with relatively short delivery schedules. This has had the effect of
increasing turns orders as a portion of the Company's business in any giventhe three
months ended June 30, 1997, as compared to the similar period of the previous
fiscal year. During the quarter, and reducing the
Company's visibility on net sales. The percentage of turns orders has increased
in each quarter of fiscal 1997 and, in order forhowever, the Company began to continue growth
in net sales, is expected in increase further in the fourth quartersee improved
customer order backlog placement after many quarters of fiscal
1997.declining order
visibility. Because turns orders are more difficult to predict, there can be no
assurance that the combination of turns orders and backlog in any quarter will
be sufficient to achieve growth in net sales. If the Company does not achieve a
sufficient level of turns orders in a particular quarter, the Company's revenues
and operating results would be materially adversely affected.
9
In the quarter ended June 30, 1997, the Company was unable to ship $4 million of
product for which it had firm scheduled orders, approximately the same as
shipment delinquencies at the end of the prior fiscal quarter. These shipment
delinquencies were a result of inventory mix issues which have been exacerbated
by the rapid growth in the Company's product offerings and the low long-term
order visibility. While the Company experienced an improvement in customer order
backlog during the quarter, it is anticipated that low long-term order
visibility will continue for the foreseeable future and, as a result, the
Company expects it may have shipment delinquencies at the end of each quarter
which could adversely affect quarterly operating results.
The Company's overall average selling prices for its microcontroller products
have remained relatively constant while average selling prices of its
non-volatile memory products have declined gradually over time. During fiscal
1997, and for the three months ended June 30, 1997, the Company experienced
increased pricing pressure on its non-volatile memory products due primarily to
a worldwide industry inventory correction and the less proprietary nature of
these products. There can be no assurance that average selling prices for the
Company's microcontroller or other products will not experience increased
pricing pressure in the future. An increase in pricing pressure could adversely
affect the Company's operating results.
The foregoing statements regarding product mix, turns orders, shipment
delinquencies and pricing pressures are forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
safe harbors created thereby. Actual results could differ materially because of
the following factors, among others: the level of orders that are received and
can be shipped in a quarter; inventory mix and timing of customer orders;
competition and competitive pressures on pricing and product availability;
customers' inventory levels, order patterns and seasonality; the cyclical nature
of both the semiconductor industry and the markets addressed by the Company's
products; market acceptance of the products of both the Company and its
customers; demand for the Company's products; fluctuations in production yields,
production efficiencies and overall capacity utilization; changes in product
mix; and absorption of fixed costs, labor and other fixed manufacturing costs.
Foreign sales represented 70.0% of net sales in the current quarter and 67.0% of
net sales in the corresponding quarter of the previous fiscal year and 66.0% of
net sales in the previous quarter. The Company's foreign sales have been
predominantly in Asia, Europe and Japan, which the Company attributes to the
manufacturing strength in those areas for consumer, automotive, office
automation, communications and industrial products. The majority of foreign
sales are U.S. Dollar denominated. The Company has entered into and, from time
to time, will enter into hedging transactions in order to minimize exposure to
currency rate fluctuations. Although none of the countries in which the Company
conducts significant foreign operations have had a highly inflationary economy
in the last five years, there is no assurance that inflation rates or
fluctuations in foreign currency rates in countries where the Company conducts
operations will not adversely affect the Company's operating results in the
future.
Additional Factors Affecting Operating Results. The Company believes thethat future
growth in net sales of its 8-bit family of microcontroller products and related
memory product salesproducts will depend largely upon the Company's success in having its
current and new products designed into high-volume customer applications. Design
wins typically precede the Company's volume shipment of products for such
applications by 15 months or more. The Company also believes that shipment
levels of its proprietary application development systems are an indicator of
potential future design wins and microcontroller sales. During the quarter ended December 31, 1996, theThe Company continued to
achieve additionala high volume of design wins and ship a high levelshipped increased numbers
10
of application development systems. However, theresystems in the three months ended June 30, 1997
compared to previous fiscal periods. There can be no assurance that any
particular development system saleshipment 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
whichthat could adversely impact its net sales and profitability, many of which are
beyond the control of the Company.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 companyCompany and its customers, customer demand
for the Company's products, customer order patterns and
seasonality, changes in product mix, whether the Company's customers buy from a
distributor or directly from the Company, expansion of direct sales efforts which adversely affect
relationships with distributors, product performance and reliability,
product obsolescence, the amount of any product returns, availability and
utilization of manufacturing
11
capacity, fluctuations in manufacturing yield, the
availability and cost of raw materials, equipment and other supplies, the
cyclical nature of both the semiconductor industry and the markets addressed by
the Company's products, technological changes, competition and competitive
pressures on prices, and economic, political or other conditions in the United
States, Taiwan, Thailand and other worldwide markets served by the Company. The Company believes
its ability to continue to increase its manufacturing capacity to meet customer
demand and maintain satisfactory delivery schedules will be an important
competitive factor. As a result of the increase in fixed costs and operating
expenses related to expanding its manufacturing capacity, the Company's
operating results may be adversely affected if net sales do not increase
sufficiently to offset the increased costs. The Company's products are
incorporated into a wide variety of consumer, automotive, office automation,
communications and industrial products. A slowdown in demand for products which
utilize the Company's products as a result of economic or other conditions in
the United States or worldwide markets served by the Company could adversely affect the Company's
operating results.
Gross Profit. The Company's gross profit was $43.5$49.4 million forin the quarterthree months
ended December 31, 1996June 30, 1997, as compared with $40.4to $36.6 million in the corresponding quarter
of the prior fiscal year, and $39.8$47.0 million in the previous quarter. Gross
profit as a percent of sales was 50.0%50.8% in the current quarter, 51.7%49.4% in the
corresponding quarter of the prior fiscal year and 50.0%50.3% in the previous
quarter. Gross profit for the nine month period ended December 31, 1996 was
$119.9 million and 49.8% of net sales compared to $110.8 million and 51.8% of
net sales in the corresponding period of the prior fiscal year. Gross profit
percent remained at the same level as in the prior fiscal period and was down
from prior year levels, primarily as a result of reduced 5-inch wafer production
at one of the Company's wafer fabs. The Company anticipates that its cost of sales will fluctuate over
time, driven primarily by the product mix of 8-bit microcontroller products and
related memory and commodity memory products manufacturing yields, wafer fab loading levels and
competitive and economic conditions. Gross profit percentage increased from the
prior period levels, primarily as a result of the percentage of net sales
attributable to 8-bit microcontrollers and improved wafer fabrication
utilization. The Company anticipates that its gross profit percentage will
fluctuate over time, driven primarily by product mix, manufacturing costs and
yields, and competitive and economic conditions. The Company is continuing the
process of transitioning products to smaller geometries and to larger wafer
sizes. An
8-inch pilot line was establishedsizes to reduce future manufacturing costs. Eight-inch wafer production
commenced at the Company's Tempe wafer fab duringfabrication facility in early fiscal
19971998, and the Company plansis continuing the transition of products to convert the Tempe fab from a 6-inch facility to an 8-inch
facility over time. In addition, the Company has begun the implementation of aits 0.7 micron
process to which it expects to transition over time.process. The foregoing statements relating to anticipated gross margins, cost of
sales, and the transition to higher yielding manufacturing processes are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbors created thereby. Actual results
could differ materially because of the following factors, among others:
fluctuations in production yields, production efficiencies,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
the manufacturing process transition; changes in product mix; competitive pressures
on prices; and other economic conditions in the United States and other
worldwide markets.
The Company has consistently presented its results of operations for
all periods on the last-in first-out (LIFO) method and has assessed the net
realizable value of inventory based on LIFO costs. LIFO has the effect of
matching current costs of production with sales generated during the same
period. Production costs have generally decreased over time due to improvements
in manufacturing productivity and yields, resulting in lower cost of sales. This
downward trend in production costs has resulted in lower cost of sales on a LIFO
basis than would have been recognized had a first-in, first-out (FIFO) basis
been utilized, decreasing cost of sales $679,000 for the nine months ended
December 31, 1996. As a result of changes in sales and product mix which
affected production costs, the LIFO inventory
12
decreased and cost of sales increased by $100,000 for the three months ended
December 31, 1996 and by $250,000 and $800,000 for the three months and nine
months ended December 31, 1995, respectively.
Nearly allAll of Microchip's assembly operations and a portion of its product final test
requirements are performed by third-party contractors in order to meet product
shipment requirements. Reliance on third parties
11
involves some reduction in the Company's level of control over these portions of
its business. While the Company reviews the quality, delivery and cost
performance of these third-party contractors, there can be no assurance that
reliance on third-party contractors will not adversely impact results in future
reporting periods if any third-party contractor is unable to maintain assembly
and test yields and costs at approximately their current levels.
The Company owns product final test facilities in Kaohsiung, Taiwan, Republic of
China and Chachoengsao, Thailand, near Bangkok.Thailand. The Company also uses various third-party
contractors in Thailand, Taiwan, the Philippines, China and other locations in
Asia for product assembly and test. The Company's reliance on facilities in
these countries, and maintenance of substantially all of its finished goods
inventory overseas, entails certain political and economic risks, including
political instability and expropriation, labor disruption, supply disruption,
currency controls and exchange fluctuations, as well as changes in tax laws,
tariff and freight rates. Microchip currently employs the Alphatec Electronics
PCL group of companies ("Alphatec") headquartered in Bangkok, Thailand, for a
portion of its product assembly volume and product final test capacity. While
Alphatec's assembly and test operations have performed reliably for the Company
for several years, Alphatec has recently experienced difficulty in obtaining
financing in connection with some of its unrelated joint ventures involving
semiconductor fabrication facilities in Thailand. Alphatec has also recently
released information concerning a report from their independent auditors
resulting in the Alphatec Board of Directors requesting the Stock Exchange of
Thailand to immediately suspend trading in Alphatec shares. Microchip currently
has multiple sources for product assembly and test for most of its package types
and is in the process of shifting its assembly and test requirements to other
factories. Despite these actions, there can be no assurance that Microchip may
not experience short-term disruption, including possible temporary product
shortages and increased assembly and test costs, compared to those received from
the current subcontract relationship with Alphatec. The Company has not
experienced any significant interruptions in its foreign business operations to
date. Nonetheless, the Company's business and operating results could be
adversely affected if foreign operations or international air transportation
were disrupted.
During the fourth quarter of fiscal quarter ended December 31, 1996,1997, the Company began
the processcommenced construction of
bringingan additional 20,000 square foot wafer fabrication module at its wholly-owned Chachoengsao, Thailand test facility,
located near Bangkok, on line for production volumes. While the Company believes
the long- term costs at this facility will be at or below existing costs for
similar activities, there may be a short-term impact to operating income in
fiscal 1997 relating to production efficiencies and yields, operation levels,
fixed cost absorption and operating cost levels.Tempe, Arizona,
facility. It is anticipated that the Chachoengsao, Thailandconstruction will be completed during the
second quarter of fiscal 1998 and that the new wafer fabrication module will
begin 8-inch wafer production in the fourth quarter of fiscal 1998. In addition,
the Company is also expanding capacity at its Chandler wafer fabrication
facility will reach optimal loading byand expects to have an additional 3,000 square feet of capacity
available in Chandler during the beginningsecond quarter of fiscal 1998. The foregoing
statements regarding completion of construction and additional available
capacity are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbors created thereby.
Actual results could differ materially because of the following factors, among
others: delays in facilitation of the expanded Tempe and Chandler wafer
fabrication facilities; production yields and efficiencies; factory absorption
rates; capacity loading; supply disruption; operating cost levels; and the rate
of revenue growth.
Research and Development. The Company is committed to continued investment in
new and enhanced products, including its development systems software and its
design and manufacturing process technology, which are significant factors in
maintaining the Company's competitive position. The dollar investment in
research and development increased 33.1% in the current quarter as compared to
the corresponding quarter of the previous fiscal year and by 2.0% 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.
12
The Company's future operating results will depend to a significant extent on
its ability to continue to develop and introduce new products on a timely basis
which can compete effectively on the basis of price and performance and which
address customer requirements. The success of new product introductions depends
on various factors, including proper new product selection, timely completion
and introduction of new product designs, development of support tools and
collateral literature that make complex new products easy for engineers to
understand and use and market acceptance of customers' end products. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing the development of new products. In addition, there can be no
assurance that any new products will receive or maintain substantial market
acceptance. If the Company were unable to design, develop and introduce
competitive products on a timely basis, its future operating results would be
adversely affected.
The Company's future success will also depend upon its ability to develop and
implement new design and process technologies. Semiconductor design and process
technologies are subject to rapid technological change, requiring large
expenditures for research and development. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have suffered reduced manufacturing
yields or delays in product deliveries. The Company believes that its transition
to smaller geometries and to larger wafers will be important for the Company to
remain competitive, and operating results could be adversely affected if the
transition is substantially delayed or inefficiently implemented.
Selling, General and Administrative. Through expense controls and operating
efficiencies, the Company has reduced selling, general and administrative
expenses in the current fiscal quarter to 16.7% of sales, as compared to 17.0%
of sales in the corresponding period of the previous fiscal year, and compared
to 16.8% in the previous quarter. This has been achieved while the Company has
continued to invest significantly in incremental worldwide sales and technical
support resources to promote the Company's embedded control products. However,
there can be no assurance that revenue growth in the future will be sufficient
to continue to reduce the current level of selling, general and administrative
expenses as a percentage of sales.
Other Income (Expense). Interest expense in the three months ended June 30, 1997
decreased over the same period of the previous fiscal year due to lower
borrowings associated with the Company's capital equipment additions. Interest
income in the three months ended June 30, 1997 increased from the same period of
the previous fiscal year, primarily as a result of investing the proceeds of the
Company's equity offering completed in the fourth quarter of fiscal 1997. Other
income represents numerous immaterial non-operating items. The Company's
interest expense could increase in fiscal 1998 if the Company increases its
borrowings and interest expense would be adversely impacted by increased
interest rates.
Provision for Income Taxes. Provisions for income taxes reflect tax on foreign
earnings and federal and state tax on U.S. earnings. The Company had an
effective tax rate of 27.0% for each of the three months ended June 30, 1997 and
1996, due primarily to lower tax rates at its foreign locations. The Company
believes that its tax rate for the foreseeable future will be approximately
27.0%. The foregoing statement regarding the Company's anticipated future tax
rate is a forward-looking statement within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and is subject to the safe harbors created thereby.
Actual results could differ materially because of the following factors, among
others: delaystaxation rates in construction and facilitation of
the Chachoengsao, Thailand facility; production yields and efficiencies; factory
absorption rates; capacity loading; political instability and expropriation;
supply disruption; operating cost levels; and the rate of revenue growth.
Research and Development. The Company is committed to continued
investment in new and enhanced products, including its development systems
software and in its design and manufacturing process technology, which is a
significant factor in maintaining the Company's competitive position. The dollar
investment in research and development increased 12.5% in the current fiscal
quarter relative to the corresponding quarter of the prior fiscal year, and
increased by 10.2% compared to the investment in the immediately preceding
quarter. Research and development costs increased 12.1% in the nine month period
ended December 31, 1996 compared to the corresponding period of the prior fiscal
year. The Company will continue to invest in research and development in the
future, including an investment in process and product development associated
with the capacity expansion of the Company's fabrication facilities. The
Company's inability to complete, or delay in completing, new product
introductions and manufacturing process improvements could have a material
adverse impact on the Company's future operating results and competitive
position.
13
Selling, General and Administrative. Through expense controls and
operating efficiencies,geographic regions where the Company has reduced selling, generalsignificant
operations; and administrative expenses in the current fiscal quarter to 16.4% of net sales as
compared to 17.1% of net sales in the corresponding quarter of the prior fiscal
year. Selling, general and administrative expenses in the prior quarter were
17.1% of sales. Selling, general and administrative expenses were 16.8% and
17.1% of net sales in the nine month periods ended December 31, 1996 and 1995,
respectively. This has been achieved while the Company has continued to invest
significantly in incremental worldwide sales and technical support resources to
promote the Company's embedded control products. However, there can be no
assurance that revenue growth in the future will be sufficient to maintain the
current level in selling, general and administrative expenses as a percentage of
sales.
Other Income (Expense). Interest income of $294,000 in the current
fiscal quarter decreased from $494,000 in the corresponding quarter of the prior
fiscal year and from $330,000 in the previous quarter. Interest income of
$1,038,000 in the nine months ended December 31, 1996 decreased from $1,516,000
in the corresponding period of the prior fiscal year. The decrease in both
instances is attributable to lower invested cash balances.
Interest expense of $1,061,000 in the current fiscal quarter increased
from $618,000 in the corresponding quarter of the prior fiscal year and from
$1,001,000 in the previous quarter. Interest expense of $2,821,000 in the nine
months ended December 31, 1996 increased from $1,793,000 in the corresponding
period of the prior fiscal year. The increase in interest expense is related to
additional borrowings associated with the Company's capital equipment additions
and stock repurchase program. Other income represents immaterial non-operating
items. On January 16, 1997, the Company filed a registration statement for a
public offering of 1,000,000 shares of Common Stock, plus up to 150, 000 shares
to cover over allotment, (see Item 5, "Other Information"). The proceeds from
the offering, if and when completed, will be used primarily to reduce
outstanding indebtedness incurred by the Company to fund wafer fabrication,
final test capacity and repurchases of the Company's Common Stock, and for other
working capital and general corporate purposes. This will have the effect of
reducing interest expense in the next fiscal quarter and in the first quarter of
fiscal 1998. It is currently anticipated that, thereafter, due to increased
capital spending planned for fiscal 1998, borrowings and interest expense will
increase.
The use of available cash and debt to fund expected capital
expenditures in future periods, without additional capital provided from
financing activities, will result in an increase in interest expense.
Provision for Income Taxes. Provisions for income taxes reflect taxes
on foreign earnings and federal and state income taxes on U.S. earnings. The
Company had an effective tax rate of 27.0% and 28.2% for the three month periods
ended December 31, 1996 and 1995, respectively. Effective tax rates for the nine
months ended December 31, 1996 and 1995 were 27.0% and 28.3% respectively. The
Company has achieved a 27.0% effective tax rate as a result of its geographical
mix of sales and earnings, foreign tax holidays andavailable in foreign tax rates that are
lower than the U.S. Federal rate of 35%. The Company currently believes that the
tax rate for the foreseeable future will remain at approximately 27.0%, however,
there can be no assurance that the Company will maintain such a rate in the
future due to possible changes in tax laws and regulations and other factors.
14locations.
13
Liquidity and Capital Resources
The Company had $22.0$67.6 million in cash asand cash equivalents at June 30, 1997, an
increase of December 31, 1996, a
decrease of $9.1$24.6 million from the March 31,June 30, 1996 balance. The Company has an
unsecured short-term line of credit totaling $14.9 million with certain foreign
banks. As of December 31, 1996, $11.0 million had been utilized under the
financing arrangements with the foreign banks. There are no covenants related to
the foreign line of credit. The Company also has an
unsecured line of credit with a syndicate of U.S.domestic banks totaling $90.0
million. As of December 31, 1996,
$26.7 million had been utilizedThere were no borrowings under the financing arrangements.domestic line of credit as of June
30, 1997. 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, 1997. The Company also has an unsecured short term line of
credit totaling $24.9 million with certain foreign banks. There were no
borrowings under the foreign line of credit as of December 31, 1996.June 30, 1997. There are no
covenants related to the foreign line of credit.
At December 31, 1996,June 30, 1997, an aggregate of $67.2$114.9 million of these facilities was
available, subject to financial covenants and ratios with which the Company is currentlywas
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 ninethree months ended December 31, 1996,June 30, 1997, the Company generated $49.6$53.6 million
of cash from operating activities, a decreasean improvement of $4.0$38.7 million from the
corresponding period of the previous fiscal year.three months ended June 30, 1996. The reductionimprovement in cash flow from operations
was primarily due to increased profitability, the reduction in net income (as a resultimpact of the restructuring and write-off of in-process technology), an increase in
depreciation charges and changesincreases in
accounts payable and accrued liabilities.expenses and an increase in depreciation expense.
The Company's level of capital expenditures varies from time to time as a result
of actual and anticipated business conditions. Capital expenditures in the ninethree
months ended December 31,June 30, 1997 and 1996, and 1995 were $60.0$30.4 million and $84.8$26.8 million,
respectively. Capital expenditures were primarily for the expansion of
production capacity and the addition of research and development equipment in
each of these periods. The Company currently anticipates spendingintends to spend approximately
$140$135.0 million during the next twelve12 months primarily for additional capital equipment to
increase capacity at its existing wafer fabrication facilities, to construct
additional facilities and to expand product test operations. CapitalThe Company expects
capital expenditures will be financed by cash flow from operations, existing cash, available
debt arrangements proceeds from the recently announced public offering, if and when
completed, (see Item 5, "Other Information") and other sources of financing,
including debt or additional equity financing. The Company believes that the
capital expenditures anticipated to be incurred over the next twelve12 months will
provide sufficient additional manufacturing capacity to meet its needs for that
period.currently
anticipated needs.
Net cash provided by financing activities was $1.3$1.4 million and $17.5$3.4 million for
the ninethree months ended December 31,June 30, 1997 and 1996 and 1995, respectively.
Repurchases of common stock were $19.5 million for the nine month period ended
December 31, 1996. Proceeds from the sale
of stock and put options was $8.4were $2.9 million and $5.6$0.9 million for the ninethree months
ended December 31,June 30, 1997 and 1996, and 1995,
respectively. Proceeds from the issuance of long term debt was $2.9 million for
the nine months ended December 31, 1995. Payments on long term debt and
capital lease obligations were $4.4 million and $4.6$1.5 million for each of the ninethree months ended
December 31, 1996June 30, 1997 and 1995, respectively. Net proceeds1996. Proceeds from lines of credit was
$16.7 million and $13.5were $8.1 million for the
ninethree months ended December 31,June 30, 1996. Cash expended for the purchase of the
Company's Common Stock was $4.1 million for the three months ended June 30,
1996.
On July 26, 1996, the Company's Board of Directors authorized a share repurchase
plan which permits the Company to purchase up to 1,500,000 shares of its Common
Stock and December 31, 1995 respectively.to sell up to 750,000 put options. Based on the price of Microchip's
stock and other pertinent factors, the Company may from time to time purchase
shares on the open market or sell put options. See Footnote 6 to the Company's
Condensed Consolidated Financial Statements.
The Company believes that proceeds from the recently announced public
offering, if and when completed, (see Item 5, "Other Information"),its existing sources of liquidity combined with cash
generated from operations and borrowings under its bank line of credit will be sufficient to meet the Company's currently
anticipated cash requirements for at least the next twelve12 months. However, due to the capital intensive
nature of the
15
semiconductor industry is capital intensive. In order to remain competitive, the
Company must continue to make significant investments in capital equipment, for
both
14
production and research and development. The Company may seek additional equity
or debt financing and/or additional
equity during the next twelve months.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 wouldcould result in additional dilution to existing
stockholders. The
foregoing statements relating (i)investors.
Recent Accounting Pronouncements. In February, 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 128,
"Earnings per Share" ("Statement 128"). Statement 128 establishes standards for
computing and presenting earnings per share ("EPS"), and supersedes APB Opinion
No. 15. Statement 128 replaces primary EPS with basic EPS and requires dual
presentation of basic and diluted EPS. Statement 128 is effective for annual and
interim periods ending after December 15, 1997. Earlier adoption is not
permitted. After adoption, all prior period EPS data shall be restated to
the level of capital expenditures, (ii)
sufficient manufacturing capacity; (iii) anticipated cash requirements;conform to Statement 128. Basic and (iv)
adequacydiluted EPS, as calculated under Statement
128 would have been $0.33 and availability of capital resources, are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the safe harbors created thereby. Actual results could differ materially
because of the following factors, among others: future operating results; the
cyclical nature of both the semiconductor industry and the markets addressed by
the Company's products; customer demand$0.32 for the Company's products; the
availability of equipment and other supplies; the amount and timing of cash
flows generated from operations; and economic conditions in the United States
and other worldwide markets.three months ended June 30, 1997.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION1. LEGAL PROCEEDINGS
Microchip Technology Incorporated v. Lucent Technologies Inc. On December 6, 1996, the Company's Board of Directors declared a
3-for-2 stock split in the form of a stock dividend on the Company's Common
Stock, par value $.001 per share to be effective January 6, 1997 for all
stockholders of record on December 20, 1996. All per share data and financial
information contained in this Report have been restated to reflect this stock
split.
On JanuaryJuly 16, 1997,
the Company filed a registration statement on Form
S-3 (Registration Statement No. 333-19919)an action for a public offering of 1,000,000
shares of Common Stock, plus up to 150,000 shares to cover over allotment, (the
"Registration Statement"). The Registration Statement has not yet become
effective. The net proceeds of the offering, if and when completed, will be used
primarily to reduce outstanding indebtedness incurred by the Company to fund
wafer fabrication, final test capacity and repurchases of the Company's Common
Stock, and for other working capital and general corporate purposes. The Common
Stock to be sold under the Registration Statement cannot be sold, nor may offers
to buy be accepted, prior to the time the Registration Statement becomes
effective.
The Company is currently in discussions withdeclaratory relief against Lucent Technologies
Inc. ("Lucent") requesting that the Court declare, among other matters, that
Microchip does not infringe certain of Lucent's semiconductor patents (District
of Arizona, CIV 97-1502 PHX EHC). The Company initiated legal action so that a
determination could be made relating to the validity, enforceability and alleged
infringement of the asserted patents. Prior to filing suit, Microchip had
engaged in good faith license negotiations with Lucent for over four years
regarding alleged infringement of certain of Lucent's semiconductor patents. The
Company has investigated Lucent's claims and believes that it does not infringe any
of the asserted Lucent patents. NotwithstandingDespite the Company's position,filing, the Company and Lucent have exchanged various proposals for a patent license,
but,intends to
date, have been unable to reach an agreement. Although the outcome of
the discussionscontinue negotiations with Lucent is not presently determinable,with the Company believes
that, shouldgoal of obtaining a license be necessary, the Company will be able to obtainresolution of
this matter, which could include a license with Lucent on commercially reasonable terms.
However, no assurances can be given that a mutually satisfactory conclusion will
be achieved. In such
event, the Company may be subject toachieved and that protracted litigation whichwill not ensue. Litigation could
result in substantial cost to the Company and diversion of management effort. If
unsuccessful, the Company could be forced to pay royalties on past and future
sales. Any suchSuch litigation and/or royalty payments could have a material adverse
impact on the Company's business and operating results.
The Securities and Exchange Commission is presently conducting a
private, non-public investigation intoItem 5. OTHER INFORMATION
On July 28, 1997, the Company held its annual meeting of stockholders (the
"Meeting"). Among other matters relatingacted upon at the Meeting, the stockholders
approved an amendment to the Company's disclosure on February 26, 1996 that revenues and earnings forRestated Certificate of Incorporation, as
amended, to increase the quarter ended
March 31, 1996 would be lower than previously estimated. While the outcomeauthorized Common Stock of the investigation, and its effect onCompany from 65,000,000
shares, $0.001 par value per share, to 100,000,000 shares. The amendment became
effective upon the Company, if any, cannot be predicted at
the present
16
time, the Company does not believe that the investigation will result infiling of a material adverse effect on the Company.
The Company's operating results are affected by a wide varietycertificate of factors which could adversely impact its net sales and profitability, many of
which are beyond control of the Company. For a complete description of those
factors, please referamendment to the Registration Statement under "Risk Factors".
17Restated
Certificate of Incorporation with the Delaware Secretary of State on July 28,
1997.
15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.8-K
(a) ExhibitsExhibits.
Exhibit 3.1. Certificate of Amendment to Registrant's
Restated Certificate of Incorporation, as
amended
Exhibit 11 Computation of Net Income Per Share
Exhibit 18.1 Letter from KPMG Peat Marwick LLP re: Change
in Accounting Principles
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
quarter ended December 31, 1996.
18June 30, 1997.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrantregistrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date: January 23,August 11, 1997 By: /s/ C. Philip Chapman
------------------------------------ -----------------------------------
C. Philip Chapman
Vice President, Chief Financial
Officer and Secretary (Duly
Authorized Officer, and Principal
Financial and Accounting Officer)
1917
EXHIBIT INDEX
Exhibit No. Page No.
- ----------- --------
3.1 Certificate of Amendment to Registrant's Restated
Certificate of Incorporation, as amended....................19
11 Computation of Net Income Per Share.............21
20Share.........................20
18.1 Letter from KPMG Peat Marwick LLP re: Change in
Accounting Principles.......................................21
18