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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________.
Commission File Number: 0-21184
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0629024
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2355 W. Chandler Blvd., Chandler, Az 85224-6199
(480) 786-7200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's
Principal Executive Offices)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, as of July 30,
1999:
Common Stock, $.001 Par Value: 50,847,721 Shares
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<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1999 and March 31, 1999...................................3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1999
and June 30, 1998..................................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 1999 and June 30, 1998.................5
Notes to Condensed Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................9
PART II. OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.................................18
SIGNATURES....................................................................19
2
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 44,220 $ 30,826
Accounts receivable, net 66,105 62,545
Inventories 62,594 67,975
Prepaid expenses 3,504 2,982
Deferred tax asset 36,132 37,129
Other current assets 1,985 1,958
--------- ---------
Total current assets 214,540 203,415
Property, plant and equipment, net 301,225 293,663
Other assets 7,794 8,152
--------- ---------
Total assets $ 523,559 $ 505,230
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term lines of credit $ 0 $ 1,509
Accounts payable 37,988 28,489
Current maturities of long-term debt 0 1,403
Current maturities of capital lease obligations 212 413
Accrued liabilities 38,939 49,699
Deferred income on shipments to distributors 31,062 28,607
--------- ---------
Total current liabilities 108,201 110,120
Long-term lines of credit 16,000 25,000
Deferred tax liability 11,313 11,313
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000
shares; no shares issued or outstanding -- --
Common stock, $.001 par value; authorized 100,000,000 shares;
issued 53,881,342 and outstanding 50,713,716 shares at June 30, 1999; 54 54
issued 53,881,342 and outstanding 51,232,157 shares at March 31, 1999
Additional paid-in capital 197,830 161,242
Retained earnings 284,480 264,281
Less shares of common stock held in treasury at cost; 3,167,626
shares at June 30, 1999 and 2,649,185 at March 31, 1999 (94,319) (66,780)
--------- ---------
Net stockholders' equity 388,045 358,797
Total liabilities and stockholders' equity $ 523,559 $ 505,230
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Three Months Ended June 30,
--------------------------
1999 1998
--------- ---------
(Unaudited)
Net sales $ 107,710 $ 99,489
Cost of sales 52,955 50,231
--------- ---------
Gross profit 54,755 49,258
Operating expenses:
Research and development 10,307 10,216
Selling, general and administrative 16,866 16,054
Special charge -- 5,500
--------- ---------
27,173 31,770
Operating income 27,582 17,488
Other income (expense):
Interest income 242 205
Interest expense (262) (524)
Other, net 107 330
--------- ---------
Income before income taxes 27,669 17,499
Income taxes 7,470 4,725
--------- ---------
Net income $ 20,199 $ 12,774
========= =========
Basic net income per share $ 0.40 $ 0.24
========= =========
Diluted net income per share $ 0.38 $ 0.23
========= =========
Weighted average common shares outstanding 50,714 52,151
========= =========
Weighted average common and common equivalent
shares outstanding 53,787 54,486
========= =========
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended June 30,
---------------------------
1999 1998
-------- --------
(Unaudited)
Net income $ 20,199 $ 12,774
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for doubtful accounts 15 51
Provision for inventory valuation 0 797
Provision for pension accrual 151 240
Depreciation and amortization 15,712 15,758
Amortization of purchased technology 75 75
Deferred income taxes 997 (1,237)
Increase in accounts receivable (3,575) (1,724)
Decrease/(increase) in inventories 5,381 (3,814)
Increase/(decrease) in accounts payable and
accrued liabilities (1,261) 2,067
Change in other assets and liabilities 2,037 (848)
-------- --------
Net cash provided by operating activities 39,731 24,139
-------- --------
Cash flows from investing activities:
Capital expenditures (23,273) (11,963)
-------- --------
Net cash used in investing activities (23,273) (11,963)
-------- --------
Cash flows from financing activities:
Net proceeds from (repayments of) lines of credit (10,509) 35,000
Payments on long-term debt (1,403) (689)
Payments on capital lease obligations (201) (676)
Repurchase of common stock 0 (57,890)
Proceeds from sale of stock and put options 9,049 3,799
-------- --------
Net cash used in financing activities (3,064) (20,456)
-------- --------
Net increase (decrease) in cash and cash equivalents 13,394 (8,280)
Cash and cash equivalents at beginning of period 30,826 32,188
-------- --------
Cash and cash equivalents at end of period $ 44,220 $ 23,908
======== ========
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Microchip Technology Incorporated and its wholly-owned subsidiaries
(the "Company"). All intercompany balances and transactions have been eliminated
in consolidation.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to the rules and regulations
of the Securities and Exchange Commission. In the Company's opinion, the
accompanying financial statements include all adjustments of a normal recurring
nature which are necessary for a fair presentation of the results for the
interim periods presented. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to such
rules and regulations. It is suggested that these financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended March
31, 1999. The results of operations for the three months ended June 30, 1999 and
1998 are not necessarily indicative of the results to be expected for the full
fiscal year.
(2) SPECIAL CHARGES
Referring to the special charges included in the March 1999 quarter, the
following updated information is provided as of June 30, 1999 (amounts in
thousands):
Non-Cash and
Restructuring Cash Payments Remaining
Charge at June 30, 1999 Accrual
------------- ---------------- ---------
5-inch wafer fab restructuring
and Kaohsiung closure $13,650 $ 9,339 $ 4,311
Legal settlements 1,805 1,805 --
Sales infrastructure actions 350 150 200
Keeloq Acquisition 7,632 7,632 --
------- ------- -------
$23,437 $18,926 $ 4,511
======= ======= =======
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
June 30, March 31,
1999 1999
------- ---------
(unaudited)
Trade accounts receivable $67,825 $64,335
Other 514 570
------- -------
68,339 64,905
Less allowance for doubtful accounts 2,234 2,360
------- -------
$66,105 $62,545
======= =======
6
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(4) INVENTORIES
The components of inventories are as follows (amounts in thousands):
June 30, March 31,
1999 1999
-------- ---------
(unaudited)
Raw materials $ 4,477 $ 4,491
Work in process 43,344 46,947
Finished goods 24,608 26,531
------- -------
72,429 77,969
Less allowance for inventory valuation 9,835 9,994
------- -------
$62,594 $67,975
======= =======
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
June 30, March 31,
1999 1999
-------- ---------
(unaudited)
Land $ 11,545 $ 11,545
Building and building improvements 77,474 77,600
Machinery and equipment 371,301 365,947
Projects in process 58,003 41,143
-------- --------
518,323 496,235
Less accumulated depreciation
and amortization 217,098 202,572
-------- --------
$301,225 $293,663
======== ========
(6) LINES OF CREDIT
The Company has an unsecured line of credit with a syndicate of U.S. banks
for up to $90,000,000, bearing interest at LIBOR (5.167% at June 30, 1999) plus
.325%, expiring in October 2000. At June 30, 1999, the Company had utilized
$16,000,000 of this line of credit. The Company had utilized $25,000,000 of the
line of credit at March 31, 1999. The agreement between the Company and the bank
syndicate requires the Company to achieve certain financial ratios and operating
results. The Company was in compliance with these covenants as of June 30, 1999.
The Company has an additional unsecured line of credit with various Taiwan
financial institutions for up to $32,800,000 (U.S. Dollar equivalent). These
borrowings are predominantly denominated in New Taiwan Dollars, bearing interest
at SIBOR (5.66% at June 30, 1999) plus 0.60%, and expiring on various dates
through November 1999. There were no borrowings against this line of credit as
of June 30, 1999. At March 31, 1999, the Company had utilized $1,509,000 of this
line of credit.
7
<PAGE>
(7) STOCKHOLDERS' EQUITY
As of June 30, 1999, the Company had outstanding put options for 700,000
shares which have expiration dates ranging from July 29, 1999 to September 13,
1999 at prices ranging from $22.30 to $28.81 per share.
In April 1998, the Company completed a costless collar transaction for
500,000 calls priced at $25.95 and 665,000 puts priced at $25.19. The expiration
date of the transaction was April 28, 1999, resulting in the Company receiving
$4,660,000 which was credited to additional paid in capital in the three month
period ended June 30, 1999. Also in connection with the stock repurchase
program, the Company completed a net share settled forward contract for
2,000,000 shares at an average price of $29.24. During the three months ended
June 30, 1999, the Company received 838,478 shares, in conjunction with the net
share settled forward contract. The expiration date of this transaction is May
2000, with quarterly interim settlement dates.
The Company expects, from time to time, to purchase shares of Common Stock
in connection with its authorized Common Stock repurchase plan.
(8) NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
Three Months Ended June 30,
---------------------------
(Unaudited)
1999 1998
------- -------
Net income $20,199 $12,774
======= =======
Weighted average common shares outstanding 50,714 52,151
Dilutive effect of stock options 3,073 2,335
------- -------
Weighted average common and common equivalent
shares outstanding 53,787 54,486
======= =======
Basic net income per share $ 0.40 $ 0.24
======= =======
Diluted net income per share $ 0.38 $ 0.23
======= =======
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
net sales for the periods indicated:
Three Months Ended June 30,
---------------------------
1999 1998
----- -----
Net sales 100.0% 100.0%
Cost of sales 49.2% 50.5%
----- -----
Gross profit 50.8% 49.5%
Research and development 9.6% 10.3%
Selling, general and administrative 15.6% 16.1%
Special charges --% 5.5%
----- -----
Operating income 25.6% 17.6%
===== =====
NET SALES
Microchip's net sales for the quarter ended June 30, 1999 were $107.7
million, an increase of 8.3% over sales of $99.5 million for the corresponding
quarter of the previous fiscal year, and an increase of 4.5% from the previous
quarter's sales of $103.0 million.
The Company's family of 8-bit microcontrollers represents the largest
component of Microchip's total net sales. Microcontrollers and associated
application development systems accounted for 79% and 74% of total net sales in
the three months ended June 30, 1999 and 1998, respectively. A related component
of the Company's product sales consists primarily of Serial EEPROM memories
which accounted for 21% and 26% of net sales in the three months ended June 30,
1999 and 1998, respectively.
The Company's net sales in any given quarter are dependent upon a
combination of orders received in that quarter for shipment in that quarter
("turns orders") and shipments from backlog. The Company has emphasized its
ability to respond quickly to customer orders as part of its competitive
strategy. This strategy, combined with current industry conditions, results in
customers placing orders with short delivery schedules. The Company experienced
increasing turns orders as a portion of the Company's business in fiscal 1999,
as compared to the last two years, which reduced the Company's visibility of
future net sales levels. Visibility improved at the end of fiscal 1999 and
continued to improve during the three months ended June 30, 1999. Backlog for
the second quarter of fiscal 2000 grew 46% from backlog for the June 1999
quarter. However, because turns orders are difficult to predict, there can be no
assurance that the combination of turns orders and shipments from backlog in any
quarter will be sufficient to achieve anticipated growth in net sales. If the
Company does not achieve a sufficient level of turns orders in a particular
quarter, the Company's revenues and operating results would be adversely
affected.
The Company's overall average selling prices for its microcontroller
products have remained relatively constant, while average selling prices of its
memory products have declined over time. Over the last two fiscal years, the
Company experienced increased pricing pressure on its memory products, primarily
due to the less proprietary nature of these products and increased competition.
Over time, the Company expects to continue to experience declining prices for
memory products. While average selling prices for microcontrollers have remained
relatively constant, the Company has experienced, and expects to continue to
9
<PAGE>
experience, pricing pressure in certain microcontroller product lines, due
primarily to competitive conditions. There can be no assurance that average
selling prices for the Company's microcontroller or other products can be
maintained due to pricing pressure in the future which could adversely affect
the Company's operating results.
THE FOREGOING STATEMENTS REGARDING TURNS ORDERS, IMPROVED ORDER VISIBILITY,
AVERAGE SELLING PRICES AND PRICING PRESSURES ARE FORWARD LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: THE LEVEL OF ORDERS THAT ARE RECEIVED AND CAN BE SHIPPED IN A QUARTER;
INVENTORY MIX AND TIMING OF CUSTOMER ORDERS; COMPETITION AND COMPETITIVE
PRESSURES ON PRICING AND PRODUCT AVAILABILITY; CUSTOMERS' INVENTORY LEVELS,
ORDER PATTERNS AND SEASONALITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR
INDUSTRY AND THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS; MARKET ACCEPTANCE
OF THE PRODUCTS OF BOTH THE COMPANY AND ITS CUSTOMERS; DEMAND FOR THE COMPANY'S
PRODUCTS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL
CAPACITY UTILIZATION; CHANGES IN PRODUCT MIX; AND ABSORPTION OF FIXED COSTS,
LABOR AND OTHER FIXED MANUFACTURING COSTS.
Foreign sales represented 67% and 68% of net sales in the three months
ended June 30, 1999 and 1998, respectively. The Company's foreign sales have
been predominantly in Asia and Europe which the Company attributes to the
manufacturing strength in those areas for consumer, automotive, office
automation, communications and industrial products. The majority of foreign
sales are U.S. Dollar denominated. The Company has entered into and, from time
to time will enter into, hedging transactions in order to minimize exposure to
currency rate fluctuations. Although none of the countries in which the Company
conducts significant foreign operations have had a highly inflationary economy
in the last five years, there is no assurance that inflation rates or
fluctuations in foreign currency rates in countries where the Company conducts
operations will not adversely affect the Company's operating results in the
future.
ADDITIONAL FACTORS AFFECTING OPERATING RESULTS
The Company believes that future growth in net sales of its 8-bit family of
microcontroller products and related memory products will depend largely upon
the Company's success in having its current and new products designed into
high-volume customer applications. Design wins typically precede the Company's
volume shipment of products by 15 months or more. The Company also believes that
shipment levels of its proprietary application development systems are an
indicator of potential future design wins and microcontroller sales. The Company
continued to achieve a high volume of design wins and shipped increased numbers
of application development systems. There can be no assurance that any
particular development system shipment will result in a product design win or
that any particular design win will result in future product sales.
The Company's operating results are affected by a wide variety of other
factors that could adversely impact its net sales and profitability, many of
which are beyond the Company's control. These factors include the Company's
ability to design and introduce new products on a timely basis, market
acceptance of products of both the Company and its customers, customer order
patterns and seasonality, changes in product mix, whether the Company's
customers buy from a distributor or directly from the Company, product
performance and reliability, product obsolescence, the amount of any product
returns, availability and utilization of manufacturing capacity, fluctuations in
manufacturing yield, the availability and cost of raw materials, equipment and
other supplies, the cyclical nature of the semiconductor industry and the
markets addressed by the Company's products, technological changes, competition
and competitive pressures on prices, and economic, political or other conditions
in the United States, and other worldwide markets served by the Company. The
Company's products are incorporated into a wide variety of consumer, automotive,
office automation, communications and industrial products. A slowdown in demand
for products which utilize the Company's products as a result of economic or
other conditions in the worldwide markets served by the Company could adversely
affect the Company's operating results.
10
<PAGE>
GROSS PROFIT
The Company's gross profit was $54.8 million and $49.3 million in the three
months ended June 30, 1999 and 1998, respectively. Gross profit as a percent of
sales was 50.8% and 49.5% in the three months ended June 30, 1999 and 1998,
respectively. The most significant factor affecting gross profit was the
improving product mix of 8-bit microcontrollers and associated application
development systems. Gross profit was also impacted by several additional
factors, including reduced 5-inch wafer production at the Chandler, Arizona
wafer fab, increased pricing pressure on its non-volatile memory products,
increased 8-inch wafer production and the Company's ongoing cost reduction
programs. The Company continues to transition products to smaller geometries and
to larger wafer sizes to reduce future manufacturing costs. The Company is
continuing to increase its manufacturing capacity for 8-inch wafers and to
transition products to its 0.7 micron process. During fiscal 2000, the Company
expects that 50% of its products will be produced on 8-inch wafers. The Company
anticipates that gross product margins will fluctuate over time, driven
primarily by the product mix of 8-bit microcontroller products and related
memory products, manufacturing yields, fixed cost absorption, wafer fab loading
levels and competitive and economic conditions.
During the quarter ended March 31, 1999, the Company initiated the
shut-down of its 5-inch wafer production line, primarily due to the lower cost
and higher manufacturing flexibility of the Company's 6-inch and 8-inch wafer
capacity. This action will reduce the Company's production capacity by
approximately 20%. The Company intends to replace this capacity with
predominantly 8-inch wafer production over time. The Company completed the
restructure of its test operations, closing its test facility in Kaohsiung and
transferring this capacity to its more cost effective test facility in Thailand.
In order to offset the adverse cost absorption effects related to the
elimination of the 5-inch wafer production line, and the potential impact of
conversion of its test capacity to its location in Thailand, the Company
instituted a series of cost reductions in all aspects of its business. There can
be no assurance that these restructuring actions and cost reductions will
sufficiently reduce fixed manufacturing costs to enable the Company to maintain
gross profit margins. In addition, these restructuring actions could cause
execution problems, manufacturing yield problems and customer delinquency that
could adversely impact the Company's gross profit.
THE FOREGOING STATEMENTS RELATING TO ANTICIPATED GROSS PRODUCT MARGINS,
6-INCH AND 8-INCH WAFER PRODUCTION, THE TRANSITION TO HIGHER YIELDING
MANUFACTURING PROCESSES, RESTRUCTURING OF TEST OPERATIONS, AND THE IMPACT OF
COST REDUCTIONS ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: FLUCTUATIONS IN
PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
COST AND AVAILABILITY OF RAW MATERIALS; ABSORPTION OF FIXED COSTS, LABOR AND
OTHER DIRECT MANUFACTURING COSTS; THE TIMING AND SUCCESS OF MANUFACTURING
PROCESS TRANSITION; DELAYS IN CONSTRUCTION AND FACILITIZATION OF THE EXPANSION
AREA AT THE CHACHOENGSAO, THAILAND FACILITY; DEMAND FOR THE COMPANY'S PRODUCTS;
COMPETITION AND COMPETITIVE PRESSURE ON PRICING; THE IMPACT OF COST REDUCTIONS
AND THE POSSIBLE NEED FOR FURTHER COST REDUCTIONS; CHANGES IN PRODUCT MIX; AND
OTHER ECONOMIC CONDITIONS.
Currently all of Microchip's assembly operations, and a portion of its test
requirements, are performed by third-party contractors. Reliance on third
parties involves some reduction in the Company's level of control over these
portions of its business. While the Company reviews the quality, delivery and
cost performance of these third-party contractors, there can be no assurance
11
<PAGE>
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.
Microchip intends to develop its own in-house assembly operations during the
current fiscal year and will shift a portion of its assembly operations from
third-party contractors to fill this capacity.
THE FOREGOING STATEMENT RELATED TO THE COMPANY'S INTENTION TO DEVELOP
IN-HOUSE ASSEMBLY OPERATIONS DURING THE CURRENT FISCAL YEAR IS A FORWARD-LOOKING
STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING
FACTORS, AMONG OTHERS: TIMING AND SUCCESS OF THE TRANSITION FROM THIRD PARTY
ASSEMBLY SERVICES PROVIDERS TO COMPANY-OWNED ASSEMBLY OPERATIONS; DELAY IN THE
FACILITATION OF THE COMPANY'S IN-HOUSE ASSEMBLY OPERATIONS; DIFFICULTIES IN THE
TRANSITION OF THE ASSEMBLY FUNCTION FROM THIRD PARTIES TO THE COMPANY; SUPPLY
DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX; COMPETITIVE PRESSURES ON
PRICES; AND OTHER ECONOMIC CONDITIONS.
The Company's reliance on facilities in Thailand and other foreign
countries, and maintenance of substantially all of its finished goods in
inventory overseas, entails certain political and economic risks, including
political instability and expropriation, supply disruption, currency controls
and exchange fluctuations, as well as changes in tax laws, tariff and freight
rates. To date, the Company has not experienced any significant interruptions in
its foreign business operations. Nonetheless, the Company's business and
operating results could be adversely affected if foreign operations or
international air transportation were disrupted.
RESEARCH AND DEVELOPMENT
The Company is committed to continued investment in new and enhanced
products, including its development systems software and in its design and
manufacturing process technology, which are significant factors in maintaining
the Company's competitive position. The dollar investment in research and
development in the current quarter remained constant as compared to the
corresponding quarter of the previous fiscal year, and increased by 4.5% 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.
The Company's future operating results will depend to a significant extent
on its ability to continue to develop and introduce new products on a timely
basis which can compete effectively on the basis of price and performance and
which address customer requirements. The success of new product introductions
depends on various factors, including proper new product selection, timely
completion and introduction of new product designs, development of support tools
and collateral literature that make complex new products easy for engineers to
understand and use and market acceptance of customers' end products. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing development of new products. In addition, there can be no
assurance that any new products will receive or maintain substantial market
acceptance. If the Company were unable to design, develop and introduce
competitive products on a timely basis, its future operating results would be
adversely affected.
The Company's future success will also depend upon its ability to develop
and implement new design and process technologies. Semiconductor design and
process technologies are subject to rapid technological change, requiring large
expenditures for research and development. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have suffered reduced manufacturing
yields or delays in product deliveries. The Company believes that its transition
to smaller geometries and to larger wafers will be important for the Company to
remain competitive, and operating results could be adversely affected if the
transition is substantially delayed or inefficiently implemented.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
The Company increased its level of selling, general and administrative
costs to $16.9 million in the current quarter as compared to $16.1 million and
$15.3 million in the corresponding quarters of the previous fiscal year and the
previous quarter, respectively. Selling, general and administrative costs
represented 15.6% of sales in the current fiscal quarter as compared to 16.1%
and 14.9% of sales in the corresponding quarter of the previous fiscal year and
the previous quarter, respectively. As the Company continues to invest in
incremental worldwide sales and technical support resources to promote the
Company's embedded control products, selling, general and administrative costs
are expected to rise over time.
OTHER INCOME (EXPENSE)
Interest income in the three months ended June 30, 1999 increased for the
corresponding quarter of the previous fiscal year as a result of higher invested
cash balances. Interest expense in the three months ended June 30, 1999
decreased from the corresponding quarter of the previous fiscal year as a result
of lower borrowing levels of the Company's credit lines. Other income represents
numerous immaterial non-operating items.
PROVISION FOR INCOME TAXES
Provisions for income taxes reflect tax on foreign earnings and federal and
state tax on U.S. earnings. The Company had an effective tax rate of 27.0% and
27.0% for the three months ended June 30, 1999 and 1998, respectively, due
primarily to lower tax rates at its foreign locations. The Company believes that
its tax rate for the foreseeable future will be approximately 27%. THE FOREGOING
STATEMENT REGARDING THE COMPANY'S ANTICIPATED FUTURE TAX RATE IS A
FORWARD-LOOKING STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF the
FOLLOWING FACTORS, AMONG OTHERS: CURRENT TAX LAWS AND REGULATIONS; TAXATION
RATES IN GEOGRAPHIC REGIONS WHERE THE COMPANY HAS SIGNIFICANT OPERATIONS; AND
CURRENT TAX HOLIDAYS AVAILABLE IN FOREIGN LOCATIONS.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the result of various computer programs
being written using two digits rather than four to define the year, thus
potentially rendering them incapable of properly managing and manipulating data
that includes 21st century dates. The potential for Y2K issues which could
reasonably affect the Company could arise from any combination of: a) the
Company's own internal information processing and embedded systems, b) external
systems used by providers of critical goods or services to the Company, c)
customer failures resulting from Y2K problems leading to reductions in demand
from the customer, and d) Y2K issues arising within the products manufactured by
the Company.
THE COMPANY'S CURRENT STATE OF YEAR 2000 READINESS
The Company has implemented a Y2K readiness program and has, as of June 30,
1999, taken substantial efforts to reasonably insure that its operations are not
subject to substantial adverse Y2K-related impact. This program began in 1997
with a comprehensive documentation of potential sources of Y2K exposure which
could reasonably impact the Company's business. This initial source
identification phase has been completed.
13
<PAGE>
The subsequent step in the program has been to systematically analyze each
identified potential source of Y2K exposure as to its likelihood of material
effect on the Company's operations and the range of available remediation
actions. In the case of identified systems internal to the Company, analysis
generally involved performing physical tests which simulated performance of the
systems with post-year 2000 dates. For potential sources of Y2K risk which are
external to the Company, such as with the Company's external vendors and
suppliers, the Company has typically relied upon written assurances of Y2K
compliance from those various parties in lieu of physical testing by the
Company's employees. To date, the Company has not identified any Y2K issues
inherent in the products manufactured by the Company. The Company's products,
for the most part, involve hardware integrated circuits which, at the time of
sale to customers, have no inherent date sensitive features. The analysis phase
of the Y2K readiness program has been substantially completed.
The final phase of the Y2K readiness program involves the modification,
replacement or elimination of systems identified in the analysis phase as being
in need of remediation. The Company has completed the remediation process for
substantially all of its identified internal systems, with the primary effort
centered around the total replacement of information systems related to the
Company's sales order process, planning, physical distribution and finance
functions. The majority of this task was completed during the quarter ended
September 30, 1998. As of July 20, 1999, the Company had received letters of Y2K
compliance from 100% of its key EXTERNAL vendors, subcontractors and suppliers.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
The total cost associated with required modifications to become Y2K
compliant is not expected to be material to the Company's financial position.
The amount expended through June 30, 1999 was approximately $16.0 million,
primarily associated with the total replacement of the information systems
related to the Company's sales order process, planning, physical distribution
and finance functions which was completed during the quarter ended September 30,
1998. The Company had intended to replace such systems in the ordinary course of
its business and the implementation was not substantially accelerated due to the
Y2K issue. The Company believes that the cost of its Y2K readiness program, as
well as currently anticipated costs to be incurred with respect to Y2K issues of
third parties, will not exceed $16.5 million, inclusive of the costs described
above. It is anticipated that all such expenditures will be funded from
operating cash flows and absorbed as part of the Company's ongoing operations.
MOST REASONABLY LIKELY WORST CASE SCENARIO(S)
Having reasonably determined that the Company's own hardware and software
systems will be substantially Y2K compliant and that its products inherently
have no date code-related issues, management believes that the worst case
scenarios would most likely involve massive, simultaneous Y2K-related
disruptions from the Company's key external raw material suppliers and/or
service providers. For these worst case scenarios to have maximum adverse impact
on the Company, the vendors in question would either need to be sole-source
providers or their peer companies, who would otherwise be potential
second-source suppliers, would also need to undergo similar Y2K-related
disruption. Examples on the material supplier side would include extended and
substantial disruptions of the Company's key raw material suppliers of silicon
wafers, leadframes, specialty chemicals and gasses. Examples on the service
provider side would include extended, substantial disruptions of the Company's
third-party semiconductor assembly firms, telecommunications and
datacommunications services, airfreight and delivery services, or the worldwide
banking system. Examples on the customer side would include Y2K problems
encountered by such customer adversely impacting that customer's business and
reducing the customer's purchases from the Company. The Company believes that
such massive and simultaneous disruptions of the supply of basic goods and
services due to Y2K-related issues are highly unlikely to occur.
14
<PAGE>
CONTINGENCY PLANS
The Company has developed contingency plans for selected areas, such as
qualification of alternative suppliers, diesel electrical generation for major
factories and computing resources and redundant data communication methods. The
Company is currently reviewing a contingency plan to place inventory in
strategic locations to meet customer demands. Additionally, the Company believes
that the steps it has taken to assess its own hardware and software systems and
those of its key vendors and suppliers are adequate to ensure minimal disruption
to its business processes. In the event of random, unforeseen Y2K problems (such
as the failure of specific pieces of process equipment, or the temporary
inability of certain vendors to provide materials or services) the Company
believes that these types of issues will most likely be able to be resolved in
the normal course of business, including the potential use of alternate
suppliers, in most cases.
THE FOREGOING STATEMENTS RELATED TO MATERIALITY OF Y2K COSTS, THE COSTS TO
ADDRESS Y2K ISSUES AND THE FUNDING AND ABSORPTION OF SUCH COSTS, WORST-CASE
SCENARIO(S) AND CONTINGENCY PLANS ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE
FAILURE TO CORRECTLY TIMELY IDENTIFY AND CORRECT Y2K PROBLEMS, EITHER BY THE
COMPANY OR ITS KEY SUPPLIERS OR CUSTOMERS.
EURO CONVERSION ISSUES
The Company operates in the European Market and currently generates
approximately 30% of its net sales from customers located in Europe. The
Company's commercial headquarters in Europe are located in the United Kingdom,
which is not currently one of the eleven member states of the European Union
converting to a common currency.
The Company currently conducts 96% of its business in Europe in U.S.
Dollars and 2% of its business in Europe in Pounds Sterling. The balance of its
net sales are conducted in currencies which will eventually be replaced by the
Euro. The Company will be monitoring the potential commercial impact of
converting a portion of its current business to the Euro, but does not expect
any material impact to its business based on this transition.
The Company does not currently anticipate any material impact to its
business related to Euro matters from information technology, derivative
transactions, tax issues and accounting software issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $44.2 million in cash and cash equivalents at June 30,
1999, an increase of $13.4 million from the March 31, 1999 balance. The Company
has an unsecured line of credit with a syndicate of domestic banks totaling
$90.0 million. Borrowings under the domestic line of credit as of June 30, 1999
were $16.0 million. The domestic line of credit requires the Company to achieve
certain financial ratios and operating results. The Company was in compliance
with these covenants at June 30, 1999. The Company also has an unsecured short
term line of credit totaling $32.8 million with certain foreign banks. There
were no borrowings under the foreign line of credit as of June 30, 1999. There
are no covenants related to the foreign line of credit. At June 30, 1999, an
aggregate of $106.8 million of these facilities was available, subject to
financial covenants and ratios with which the Company was in compliance. The
Company's ability to fully utilize these facilities is dependent on the Company
remaining in compliance with such covenants and ratios.
15
<PAGE>
During the three months ended June 30, 1999, the Company generated $39.7
million of cash from operating activities an increase of $15.6 million as
compared to the three months ended June 30, 1998. The increase in cash flow from
operations was primarily due to a reduction in inventories and increased
profitability for the three months ended June 30, 1999.
The Company's level of capital expenditures varies from time to time as a
result of actual and anticipated business conditions. Capital expenditures in
the three months ended June 30, 1999 and 1998 were $23.3 million and $12.0
million, respectively. Capital expenditures were primarily for the expansion of
production capacity and the addition of research and development equipment in
each of these periods. The Company currently intends to spend approximately
$150.0 million during the next 12 months for additional capital equipment to
increase capacity at its existing wafer fabrication facilities, to expand
product test operations and to develop in-house assembly capability. The Company
expects to finance capital expenditures through cash flows from operations,
available debt arrangements and other sources of financing. The Company believes
that the capital expenditures anticipated to be incurred over the next 12 months
will provide sufficient additional manufacturing capacity to meet its currently
anticipated needs.
THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED LEVEL OF CAPITAL
EXPENDITURES OVER THE NEXT 12 MONTHS AND THE FINANCING OF SUCH CAPITAL
EXPENDITURES ARE FORWARD LOOKING STATEMENTS. ACTUAL CAPITAL EXPENDITURES COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE CYCLICAL
NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY THE COMPANY'S
PRODUCTS; MARKET ACCEPTANCE OF THE PRODUCTS OF BOTH THE COMPANY AND ITS
CUSTOMERS; UTILIZATION OF CURRENT MANUFACTURING CAPACITY; DELAYS IN CONSTRUCTION
AND FACILITIZATION OF THE EXPANSION AREA AT THE CHACHOENGSAO, THAILAND FACILITY;
THE AVAILABILITY AND COST OF RAW MATERIALS, EQUIPMENT AND OTHER SUPPLIES; AND
THE ECONOMIC, POLITICAL AND OTHER CONDITIONS IN THE MARKETS SERVED BY THE
COMPANY.
Net cash used in financing activities was $3.1 million and $20.5 million
for the three months ended June 30, 1999 and 1998, respectively. Proceeds from
sale of stock and put options were $9.0 million and $3.8 million for the three
months ended June 30, 1999 and 1998, respectively. Payments on long term debt
and capital lease obligations were $1.6 million and $1.4 million for the three
months ended June 30, 1999 and 1998, respectively. Repayments on lines of credit
were $10.5 million for the three months ended June 30, 1999. Net proceeds from
lines of credit were $35.0 million for the three months ended June 30, 1998.
Cash expended for the purchase of the Company's Common Stock was $57.9 million
for the three months ended June 30, 1998.
The Company had outstanding 700,000 put options at prices ranging from
$22.30 to $28.81 as of June 30, 1999. The Company also has outstanding a net
share settled forward contact and received 838,478 shares in the three months
ended June 30, 1999 in connection with this transaction. See Note 8 to
"Consolidated Financial Statements." The net share settled forward contract
could obligate the Company to purchase shares of the Company's Common Stock in
the future if the price of the Company's Common Stock is below the strike price
of the instruments.
The Company expects from time to time to purchase shares of Common Stock in
connection with its authorized stock re-purchase program. The Company will also
have cash requirements associated with the restructuring activities described
above estimated to be approximately $4.6 million in the current quarter.
16
<PAGE>
The Company believes that its existing sources of liquidity combined with
cash generated from operations will be sufficient to meet the Company's
currently anticipated cash requirements for at least the next 12 months.
However, the semiconductor industry is capital intensive. In order to remain
competitive, the Company must continue to make significant investments in
capital equipment, for both production and research and development. The Company
may seek additional equity or debt financing during the next 12 months for the
capital expenditures required to maintain or expand the Company's wafer
fabrication and product test facilities or other purposes. The timing and amount
of any such capital requirements will depend on a number of factors, including
demand for the Company's products, product mix, changes in industry conditions,
market conditions and competitive factors. There can be no assurance that such
financing will be available on acceptable terms, and any additional equity
financing could result in additional dilution to existing investors.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date: August 3, 1999 By: /s/ C. Philip Chapman
----------------------- -------------------------------------------
C. Philip Chapman
Vice President, Chief Financial Officer
and Secretary (Duly Authorized Officer, and
Principal Financial and Accounting Officer)
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