-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L4tBgHoizW7KvJwgYAboBrJ9DFpcrbkODaAXAg+QO7wuErIzAQ7ScVynx1SZ+s9V FoXfp6Go3hcxozmTWQnnXg== 0000950147-97-000025.txt : 19970124 0000950147-97-000025.hdr.sgml : 19970124 ACCESSION NUMBER: 0000950147-97-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970123 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROCHIP TECHNOLOGY INC CENTRAL INDEX KEY: 0000827054 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 860629024 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21184 FILM NUMBER: 97509645 BUSINESS ADDRESS: STREET 1: 2355 W CHANDLER BLVD CITY: CHANDLER STATE: AZ ZIP: 85224-6199 BUSINESS PHONE: 6017867200 MAIL ADDRESS: STREET 1: 2355 WEST CHANDLER BLVD CITY: CHANDLER STATE: AZ ZIP: 85224-6199 10-Q 1 FORM 10-Q ================================================================================ 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. 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: Common Stock, $.001 Par Value: 51,405,409 shares ---------- ================================================================================ 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
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 $ 358,187 ========= ========= 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 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.)
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 ================= ==================
See accompanying notes to condensed consolidated financial statements 5 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries (the "Company"). All intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the accompanying financial statements include all adjustments of a normal recurring nature which are necessary for a fair presentation of the results for the interim periods presented. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 1996. The results of operations for the nine months ended December 31, 1996 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) 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) 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) 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 ================ ===============
7 (7) Lines of Credit On October 31, 1996, the Company entered into an agreement for a line of credit with a syndicate of U.S. Banks for up to $90,000,000. The line was completed as a revolving 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 ============== ===============
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) 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 months ended December 31, 1996, the Company purchased a total of 1,326,477 shares of the Company's common stock in open market activities at a total cost of $19,463,000. Through December 31, 1996, the Company had reissued through stock option exercises and the Company's stock purchase plan a total of 792,477 shares of the Company's common stock held in treasury. 8 Also in connection with the stock repurchase program, as of December 31, 1996, the Company held unexpired put options for 450,000 shares. The unexpired put options have expiration dates ranging from January 10, 1997 to July 10, 1997 at prices ranging from $15.00 to $21.25. The net proceeds from the sale and repurchase of put options have been credited to additional paid-in capital. For the nine months ended December 31, 1996, $770,650 was charged to additional paid-in capital due to the repurchase of put options. (9) Supplemental Cash Flow Information Cash paid for income taxes amounted to $5,340,000 and $15,560,000 during the nine months ended December 31, 1996 and 1995 respectively. Cash paid for interest amounted to $2,731,000 and $1,799,000 for each of the nine month periods ended December 31, 1996 and 1995. (10) Subsequent Events On January 16, 1997, the Company filed a registration statement on Form S-3 (Registration Statement No. 333-19919) 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 any when complete, will be used primarily to reduce outstanding indebtedness incurred by the Company to fund wafer fabrication, test capacity and repurchases of the Company's Common Stock, and for other working capital and general corporate purposes. 9 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's net sales for the quarter ended December 31, 1996 were $87.1 million, an increase of 11.5% over sales of $78.1 million for the corresponding quarter of the previous fiscal year, and an increase of 9.5% from the previous quarter's sales of $79.5 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% and 59.9% of total net sales in the quarters ending December 31, 1996 and 1995, respectively. A related component of the Company's product sales consists of serial and parallel EEPROM memories. 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% and 33.0% of net sales in the nine months 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 4.1% and 6.8% of total net sales in the nine 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, 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: 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 shipped 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% of net sales in the previous quarter. Foreign sales represented 66.4% and 65.0% of net sales 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 the 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') 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 the effect of increasing turns orders as a portion of the Company's business in any given 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 for the Company to continue growth in net sales, is expected in increase further in the fourth quarter of fiscal 1997. 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. The Company believes the future growth of its 8-bit family of microcontroller products and related memory product sales 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, the Company continued to achieve additional design wins and ship a high level of application development systems. However, there can be no assurance that any particular development system sale 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 which could adversely impact its net sales and profitability, many of which are beyond the control of the Company. 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 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 million for the quarter ended December 31, 1996 compared with $40.4 million in the corresponding quarter of the prior year and $39.8 million in the previous quarter. Gross profit as a percent of sales was 50.0% in the current quarter, 51.7% in the corresponding quarter of the prior fiscal year and 50.0% 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. The Company anticipates that its gross profit percentage will fluctuate over time, driven primarily by product mix, manufacturing 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 established at the Tempe wafer fab during fiscal 1997 and the Company plans 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 a 0.7 micron process to which it expects to transition over time. 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, 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 all of Microchip's assembly operations and a portion of its test requirements are performed by third-party contractors in order to meet product shipment requirements. Reliance on third parties involves some reduction in the Company's level of control over these portions of its business. While the Company reviews the quality, delivery and cost performance of these third-party contractors, there can be no assurance that reliance on third-party contractors will not adversely impact results in future reporting periods if any third-party contractor is unable to maintain assembly and test yields and costs at approximately their current levels. The Company owns test facilities in Kaohsiung, Taiwan, Republic of China and Chachoengsao, Thailand, near Bangkok. The Company also uses various third-party contractors in Thailand, the Philippines and other locations in Asia for 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, supply disruption, currency controls and exchange fluctuations, as well as changes in tax laws, tariff and freight rates. The Company has not experienced any significant interruptions in its foreign business operations to date. Nonetheless, the Company's business and operating results could be adversely affected if foreign operations or international air transportation were disrupted. During the fiscal quarter ended December 31, 1996, the Company began the process of bringing 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. It is anticipated that the Chachoengsao, Thailand facility will reach optimal loading by the beginning of fiscal 1998. The foregoing statement 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: delays 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, the Company has reduced selling, general 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 and 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. 14 Liquidity and Capital Resources The Company had $22.0 million in cash as of December 31, 1996, a decrease of $9.1 million from the March 31, 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. banks totaling $90.0 million. As of December 31, 1996, $26.7 million had been utilized under the financing arrangements. The domestic line of credit requires the Company to achieve certain financial ratios and operating results. The Company was in compliance with these covenants as of December 31, 1996. At December 31, 1996, an aggregate of $67.2 million of these facilities was available, subject to financial covenants and ratios with which the Company is currently in compliance. The Company's ability to fully utilize these facilities is dependent on the Company remaining in compliance with such covenants and ratios. During the nine months ended December 31, 1996, the Company generated $49.6 million of cash from operating activities, a decrease of $4.0 million from the corresponding period of the previous fiscal year. The reduction in cash flow from operations was primarily due to the reduction in net income (as a result of the restructuring and write-off of in-process technology), an increase in depreciation charges and changes in accounts payable and accrued liabilities. The Company's level of capital expenditures varies from time to time as a result of actual and anticipated business conditions. Capital expenditures in the nine months ended December 31, 1996 and 1995 were $60.0 million and $84.8 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 spending approximately $140 million during the next twelve months primarily for additional capital equipment to increase capacity at its wafer fabrication facilities, to construct additional facilities and to expand test operations. 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 twelve months will provide sufficient additional manufacturing capacity to meet its needs for that period. Net cash provided by financing activities was $1.3 million and $17.5 million for the nine months ended December 31, 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 $8.4 million and $5.6 million for the nine months ended December 31, 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 million for the nine months ended December 31, 1996 and 1995, respectively. Net proceeds from lines of credit was $16.7 million and $13.5 million for the nine months ended December 31, 1996 and December 31, 1995 respectively. The Company believes that proceeds from the recently announced public offering, if and when completed, (see Item 5, "Other Information"), 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 twelve months. However, due to the capital intensive nature of the 15 semiconductor industry, the Company may seek debt financing and/or additional equity during the next twelve months. There can be no assurance that such financing will be available on acceptable terms, and any additional equity financing would result in additional dilution to existing stockholders. The foregoing statements relating (i) to the level of capital expenditures, (ii) sufficient manufacturing capacity; (iii) anticipated cash requirements; and (iv) adequacy 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 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. PART II. OTHER INFORMATION Item 5. OTHER INFORMATION 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 January 16, 1997, the Company filed a registration statement on Form S-3 (Registration Statement No. 333-19919) 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 with Lucent Technologies Inc. ("Lucent") regarding alleged infringement of certain of Lucent's semiconductor patents. The Company has investigated Lucent's claims and believes it does not infringe any of the asserted patents. Notwithstanding the Company's position, the Company and Lucent have exchanged various proposals for a patent license, but, to date, have been unable to reach an agreement. Although the outcome of the discussions with Lucent is not presently determinable, the Company believes that, should a license be necessary, the Company will be able to obtain 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 to litigation, which 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 such 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 into matters relating to the Company's disclosure on February 26, 1996 that revenues and earnings for the quarter ended March 31, 1996 would be lower than previously estimated. While the outcome of the investigation, and its effect on the Company, if any, cannot be predicted at the present 16 time, the Company does not believe that the investigation will result in a material adverse effect on the Company. The Company's operating results are affected by a wide variety 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 refer to the Registration Statement under "Risk Factors". 17 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibit 11 Computation of Net Income Per Share (b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K during the quarter ended December 31, 1996. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICROCHIP TECHNOLOGY INCORPORATED Date: January 23, 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) 19 EXHIBIT INDEX Exhibit No. Page No. ----------- -------- 11 Computation of Net Income Per Share.............21 20 EX-11 2 COMPUTATION OF NET INCOME PER SHARE MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share amounts)
Three Months Ended Nine Months Ended December 31, December 31, ------------------------------ --------------------------- 1996 1995 1996 1995 ------------ ------------ ---------- --------- Net income $ 14,755 $ 5,765 $ 34,567 $ 30,033 ============ ============ ========== ========= Weighted average shares: Common shares outstanding 51,189 50,847 51,274 50,576 Common equivalent shares representing shares issuable upon exercise of stock options(1) 3,405 4,272 2,927 4,231 ------------ ------------ ---------- --------- Total weighted average shares - primary 54,594 55,119 54,201 54,807 ============ ============ ========== ========= Incremental common equivalent shares (calculated using the higher of end of period or average market value)(2) 297 ----- 808 75 ------------ ------------ ---------- --------- Total weighted average shares - fully diluted 54,891 55,119 55,009 54,882 ============ ============ ========== ========= Primary net income per common and common equivalent share $ 0.27 $ 0.10 $ 0.64 $ 0.55 ============ ============ ========== ========= Fully diluted net income per common and common equivalent share $ 0.27 $ 0.10 $ 0.63 $ 0.55 ============ ============ ========== =========
- -------- 1 Amount calculated using the treasury stock method and fair market values for stock. 2 This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. 21 EX-27 3 ARTICLE 5 FOR 3RD QTR 10-Q
5 1000 U.S. DOLLARS 9-MOS MAR-31-1997 APR-01-1996 DEC-31-1996 1 21991 0 51964 0 57538 155152 225292 0 385896 101089 33831 0 0 52 250565 385896 240747 240747 120809 120809 0 0 2821 47351 12784 34567 0 0 0 34567 0.64 0.63
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