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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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 January 28,
2000:
Common Stock, $.001 Par Value: 76,595,858 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 -
December 31, 1999 and March 31, 1999..............................3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended December 31, 1999
and December 31, 1998.............................................4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1999 and December 31, 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 5. Other Information................................................17
Item 6. Exhibits and Reports on Form 8-K.................................17
SIGNATURES....................................................................18
EXHIBITS
2
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
December 31, March 31,
1999 1999
--------- ---------
ASSETS (Unaudited)
Cash and cash equivalents $ 68,492 $ 30,826
Accounts receivable, net 70,342 62,545
Inventories 58,158 67,975
Prepaid expenses 3,441 2,982
Deferred tax asset 35,709 37,129
Other current assets 1,773 1,958
--------- ---------
Total current assets 237,915 203,415
Property, plant and equipment, net 385,843 293,663
Other assets 8,373 8,152
--------- ---------
Total assets $ 632,131 $ 505,230
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term lines of credit $ 15,000 $ 1,509
Accounts payable 52,550 28,489
Current maturities of long-term debt -- 1,403
Current maturities of capital lease obligations -- 413
Accrued liabilities 50,479 49,699
Deferred income on shipments to distributors 43,383 28,607
--------- ---------
Total current liabilities 161,412 110,120
Long-term lines of credit -- 25,000
Long-term pension accrual 891 --
Deferred tax liability 11,681 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 80,822,013
and outstanding 76,519,871 shares at
December 31, 1999; issued 80,822,013 and
outstanding 76,848,236 shares at March 31, 1999 54 54
Additional paid-in capital 217,403 161,242
Retained earnings 335,757 264,281
Less shares of common stock held in treasury at
cost; 4,302,143 shares at December 31, 1999 and
3,973,778 at March 31, 1999 (95,067) (66,780)
--------- ---------
Net stockholders' equity 458,147 358,797
Total liabilities and stockholders' equity $ 632,131 $ 505,230
========= =========
(Shares and per share amounts have been restated to reflect a 3-for-2 stock
split effected February 7, 2000.)
See accompanying notes to condensed consolidated financial statements
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 129,187 $ 100,167 $ 354,918 $ 303,436
Cost of sales 61,754 49,525 171,953 152,063
--------- --------- --------- ---------
Gross profit 67,433 50,642 182,965 151,373
Operating expenses:
Research and development 12,130 10,140 33,089 31,098
Selling, general and administrative 19,534 15,382 55,476 47,503
Special (income)/charge -- -- (2,400) 5,500
--------- --------- --------- ---------
31,664 25,522 86,165 84,101
Operating income 35,769 25,120 96,800 67,272
Other income (expense):
Interest income 615 143 1,275 563
Interest expense (209) (845) (677) (2,407)
Other, net 40 38 512 586
--------- --------- --------- ---------
Income before income taxes 36,215 24,456 97,910 66,014
Income taxes 9,778 6,602 26,434 17,823
--------- --------- --------- ---------
Net income $ 26,437 $ 17,854 $ 71,476 $ 48,191
========= ========= ========= =========
Basic net income per share $ 0.35 $ 0.24 $ 0.94 $ 0.62
========= ========= ========= =========
Diluted net income per share $ 0.32 $ 0.22 $ 0.88 $ 0.60
========= ========= ========= =========
Weighted average common
shares outstanding 76,425 75,971 76,355 77,133
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding 81,516 79,788 81,074 80,729
========= ========= ========= =========
</TABLE>
(Shares and per share amounts have been restated to reflect a 3-for-2 stock
split effected February 7, 2000.)
See accompanying notes to condensed consolidated financial statements
4
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
December 31,
------------------------
1999 1998
--------- ---------
Cash flows from operating activities: (Unaudited)
Net income $ 71,476 $ 48,191
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts 451 216
Provision for inventory valuation 1,443 1,567
Provision for pension accrual 193 708
Depreciation and amortization 47,549 48,978
Amortization of purchased technology 225 225
Deferred income taxes 1,788 (4,594)
Increase in accounts receivable (8,248) (102)
Decrease/(increase) in inventories 8,374 (7,383)
Increase/(decrease) in accounts payable
and accrued liabilities 24,841 (15,933)
Change in other assets and liabilities 14,754 (1,689)
--------- ---------
Net cash provided by operating activities 162,846 70,184
--------- ---------
Cash flows from investing activities:
Capital expenditures (139,729) (29,680)
--------- ---------
Net cash used in investing activities (139,729) (29,680)
--------- ---------
Cash flows from financing activities:
Net proceeds from (repayments of) lines of credit (11,509) 18,800
Payments on long-term debt (1,403) (1,835)
Payments on capital lease obligations (413) (1,828)
Repurchase of common stock -- (70,324)
Proceeds from sale of stock and put options 27,874 7,456
--------- ---------
Net cash provided by (used in) financing activities 14,549 (47,731)
--------- ---------
Net increase (decrease) in cash and cash equivalents 37,666 (7,227)
Cash and cash equivalents at beginning of period 30,826 32,188
--------- ---------
Cash and cash equivalents at end of period $ 68,492 $ 24,961
========= =========
See accompanying notes to condensed consolidated financial statements
5
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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 nine months ended December 31, 1999
and 1998 are not necessarily indicative of the results to be expected for the
full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
December 31, March 31,
1999 1999
------- -------
(unaudited)
Trade accounts receivable $71,577 $64,335
Other 984 570
------- -------
72,561 64,905
Less allowance for doubtful accounts 2,219 2,360
------- -------
$70,342 $62,545
======= =======
(3) INVENTORIES
The components of inventories are as follows (amounts in thousands):
December 31, March 31,
1999 1999
------- -------
(unaudited)
Raw materials $ 6,781 $ 4,491
Work in process 35,772 46,947
Finished goods 22,680 26,531
------- -------
65,233 77,969
Less allowance for inventory valuation 7,075 9,994
------- -------
$58,158 $67,975
======= =======
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(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
December 31, March 31,
1999 1999
-------- --------
(unaudited)
Land $ 11,545 $ 11,545
Building and building improvements 101,268 77,600
Machinery and equipment 427,578 365,947
Projects in process 84,658 41,143
-------- --------
625,049 496,235
Less accumulated depreciation
and amortization 239,206 202,572
-------- --------
$385,843 $293,663
======== ========
(5) LINES OF CREDIT
The Company has an unsecured line of credit with a syndicate of U.S. banks
for up to $90,000,000, bearing interest at LIBOR (5.822% at December 31, 1999)
plus 0.325%, expiring in October 2000. At December 31, 1999 and March 31, 1999
the Company had utilized $15,000,000 and $25,000,000 of the line of credit,
respectively. 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 December 31, 1999.
The Company has an additional unsecured line of credit with various Taiwan
financial institutions for up to $26,335,000 (U.S. Dollar equivalent). These
borrowings are predominantly denominated in New Taiwan Dollars, bearing interest
at SIBOR (5.833% at December 31, 1999) plus 0.60%, and expiring on various dates
through November 2000. There were no borrowings against this line of credit as
of December 31, 1999, but an allocation of $2,303,000 of the available line was
made, relating to import guarantees associated with the Company's business in
Thailand. At March 31, 1999, the Company had utilized $1,509,000 of this line of
credit.
(6) STOCKHOLDERS' EQUITY
In April 1998, the Company completed a costless collar transaction
comprising call options on 750,000 shares priced at $17.30 and put options on
997,500 shares priced at $16.79. The expiration date of the transaction was
April 28, 1999, resulting in the Company receiving $4,660,000 in cash which was
credited to additional paid-in capital during the three month period ended June
30, 1999. Also in connection with the Company's stock repurchase program, the
Company completed a net share settled forward contract for 3,000,000 shares at
an average price of $19.49. During the nine months ended December 31, 1999, the
Company received 1,693,644 shares in conjunction with the net share settled
forward contract. During the quarter ended December 31, 1999, the Company also
received $10,243,000 in conjunction with the net share settled forward contract,
which was credited to additional paid-in capital. 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.
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(7) NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
Three Months Ended Nine Months Ended
December 31, December 31,
(Unaudited) (Unaudited)
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
Net income $26,437 $17,854 $71,476 $48,191
======= ======= ======= =======
Weighted average common
shares outstanding 76,425 75,971 76,355 77,133
Dilutive effect of stock options 5,091 3,817 4,719 3,596
------- ------- ------- -------
Weighted average common and common
equivalent shares outstanding 81,516 79,788 81,074 80,729
======= ======= ======= =======
Basic net income per share $ 0.35 $ 0.24 $ 0.94 $ 0.62
======= ======= ======= =======
Diluted net income per share $ 0.32 $ 0.22 $ 0.88 $ 0.60
======= ======= ======= =======
(8) SUBSEQUENT EVENT
On January 3, 2000, the Company announced a three-for-two stock split of
its Common Stock which became effective February 7, 2000. All shares and per
share amounts have been restated to reflect this stock split.
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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 Nine Months Ended
December 31, December 31,
----------------- -----------------
1999 1998 1999 1998
----- ----- ----- -----
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ....................... 47.8% 49.4% 48.5% 50.1%
----- ----- ----- -----
Gross profit ........................ 52.2% 50.6% 51.5% 49.9%
Research and development ............ 9.4% 10.1% 9.3% 10.2%
Selling, general and
administrative ..................... 15.1% 15.4% 15.6% 15.7%
Special (income)/charge ............. -- -- (0.7%) 1.8%
----- ----- ----- -----
Operating income .................... 20.5% 25.1% 27.3% 22.2%
===== ===== ===== =====
NET SALES
Our net sales for the quarter ended December 31, 1999 were $129.2 million,
an increase of 29.0% over sales of $100.2 million for the quarter ended December
31, 1998 and an increase of 9.5% over sales of $118.0 for the quarter ended
September 30, 1999. Net sales for the nine months ended December 31, 1999 were
$354.9 million, an increase of 17.0% from sales of $303.4 million for the nine
months ended December 31, 1998.
Our microcontroller product line represents the largest component of our
net sales. Microcontrollers and associated application development systems
accounted for 81% of net sales in the quarter ended December 31, 1999 and 76% of
net sales in the quarter ended December 31, 1998. The remaining component of our
product sales consists primarily of Serial EEPROM memory products. Serial EEPROM
memory products accounted for 19% of net sales in the quarter ended December 31,
1999 and for 24% of net sales in the quarter ended December 31, 1998.
Microcontrollers and associated application development systems accounted
for 80% of our net sales in the nine months ended December 31, 1999 and 75% of
our net sales in the nine months ended December 31, 1998. The remaining
component, consisting of primarily Serial EEPROM memory products, accounted for
20% of our net sales in the nine months ended December 31, 1999 and for 25% of
our net sales for the nine months ended December 31, 1998.
Our net sales in any given quarter depend upon a combination of orders
received in that quarter for shipment in that quarter, which we refer to as
turns orders, and shipments from backlog. We have emphasized our ability to
respond quickly to customer orders as part of our competitive strategy. From
fiscal 1994 through fiscal 1999, this strategy resulted in customers placing
orders with increasingly shorter delivery schedules. This had the affect of
increasing turns orders as a portion of our business in any given quarter, and
reducing our visibility on future product shipments. The percentage of turns
orders required has decreased substantially for the first three quarters of
fiscal 2000. Despite the recent improvement in the turns orders requirement from
our business, turns orders are difficult to predict, and we may not experience
the combination of turns orders and shipments from backlog in any quarter that
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would be sufficient to achieve anticipated growth in net sales. If we do not
achieve a sufficient level of turns orders in a particular quarter, our revenues
and operating results would be adversely affected.
The overall average selling prices of our microcontroller products have
remained relatively constant, while average selling prices of our memory
products have, until recently, declined over time. While average selling prices
for microcontrollers have remained relatively constant, we have experienced, and
expect to continue to experience, pricing pressure in certain microcontroller
product lines, due primarily to competitive conditions. We may be unable to
maintain average selling prices for our microcontroller or other products as a
result of increased pricing pressure in the future, which would reduce our
operating results.
THE FOREGOING STATEMENTS REGARDING BOOKINGS, TURNS ORDERS, AVERAGE SELLING
PRICES AND PRICING PRESSURES ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE
LEVEL OF ORDERS THAT ARE RECEIVED AND CAN BE SHIPPED IN A QUARTER; INVENTORY MIX
AND TIMING OF CUSTOMER ORDERS; COMPETITION AND COMPETITIVE PRESSURES ON PRICING
AND PRODUCT AVAILABILITY; CUSTOMERS' INVENTORY LEVELS, ORDER PATTERNS AND
SEASONALITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE
MARKETS ADDRESSED BY OUR PRODUCTS; MARKET ACCEPTANCE OF OUR PRODUCTS AND THE
PRODUCTS OF OUR CUSTOMERS; DEMAND FOR OUR PRODUCTS; FLUCTUATIONS IN PRODUCTION
YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; OUR ABILITY TO
INCREASE WAFER FABRICATION, TEST AND ASSEMBLY CAPACITY TO MEET DEMAND; CHANGES
IN PRODUCT MIX; AND ABSORPTION OF FIXED COSTS, LABOR AND OTHER FIXED
MANUFACTURING COSTS.
Distributors accounted for 64% of our net sales to customers for the three
months ended December 31, 1999, and for 61% for the three month ended December
31, 1998. For the nine months ended December 31, 1999, distributors accounted
for 63% of our net sales to customers, and 59% for the nine months ended
December 31, 1998. Sales to foreign customers represented 67% of our net sales
in the three months ended December 31, 1999 and 71% of our net sales in the
three months ended December 31, 1998 and sales to foreign customers represented
68% of our net sales for both the nine months ended December 31, 1999 and
December 31, 1998. Our sales to foreign customers have been predominantly in
Asia and Europe, which we attribute 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. We enter
into hedging transactions from time to time to minimize exposure to currency
rate fluctuations. Although none of the countries in which we conduct
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 we conduct operations will not
adversely affect our operating results in the future.
Our quarterly operating results are affected by a wide variety of factors
that could reduce our net sales and profitability, many of which are beyond our
control. Some of the factors that may affect our operating results include:
* the level of orders that are received and can be shipped in a quarter
(turns orders)
* market acceptance of both our products and our customers' products
* customer order patterns and seasonability
* availability of manufacturing capacity and fluctuations in
manufacturing yield
* the availability and cost of raw materials, equipment and other
supplies, and
* economic, political and other conditions in the worldwide markets
served by us.
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We believe that period-to-period comparisons of our operating results are
not necessarily meaningful and that you should not rely upon any comparisons as
indications of future performance. In future periods our operating results may
fall below the expectations of public market analysts and investors, which would
likely have a negative effect on the price of our Common Stock.
GROSS PROFIT
In the three months ended December 31, 1999, our gross profit was $67.4
million, and our gross profit was $50.6 million in the three months ended
December 31, 1998. In the nine months ended December 31, 1999, our gross profit
was $183.0 million, and our gross profit was $151.4 million in the nine months
ended December 31, 1998. Gross profit as a percent of sales was 52.2% for the
quarter ended December 31, 1999 and 50.6% in quarter ended December 31, 1998.
Gross profit as a percentage of sales was 51.5% in the nine months ended
December 31, 1999 and 49.9% in the nine months ended December 31, 1998. The most
significant factor affecting gross profit percentage was the higher growth rate
of microcontrollers and associated application development systems relative to
our Serial EEPROM memory products. We continue to transition products to smaller
geometries and to larger wafer sizes to reduce future manufacturing costs. We
continue to increase our manufacturing capacity for 8-inch wafers and to
transition products to our 0.7 micron process. For fiscal 2000, we expect that
products produced on 8-inch wafers will grow from 37% as of the beginning of the
fiscal year to 55% at the end of the fiscal year. We anticipate that gross
product margins will fluctuate over time, driven primarily by the product mix of
microcontroller products and related memory products, manufacturing yields,
fixed cost absorption, wafer fab loading levels and competitive and economic
conditions.
We believe that expansion of our manufacturing capacity is important to
enable us to respond to increased sales opportunities and maintain satisfactory
delivery schedules. Our business could suffer if the expansion of manufacturing
capacity is delayed or inefficiently implemented. Other companies in the
industry have experienced difficulty in expanding manufacturing capacity,
resulting in reduced yields or delays in product deliveries. We may experience
manufacturing yield or delivery problems in the future, which could harm our
operating results.
THE FOREGOING STATEMENTS RELATING TO ANTICIPATED GROSS PRODUCT MARGINS, AND
THE TRANSITION TO HIGHER YIELDING MANUFACTURING PROCESSES AND 8-INCH WAFER
PRODUCTION ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: FLUCTUATIONS IN
PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
COST AND AVAILABILITY OF RAW MATERIALS; ABSORPTION OF FIXED COSTS, LABOR AND
OTHER DIRECT MANUFACTURING COSTS; THE TIMING AND SUCCESS OF MANUFACTURING
PROCESS TRANSITION; DEMAND FOR OUR PRODUCTS; COMPETITION AND COMPETITIVE
PRESSURE ON PRICING; CHANGES IN PRODUCT MIX; AND OTHER ECONOMIC CONDITIONS.
Currently, the majority of our assembly operations, and a portion of our
test requirements, are performed by third-party contractors located throughout
Asia. Our reliance on third parties involves some reduction in our level of
control over these portions of our business. While we review the quality,
delivery and cost performance of these third-party contractors, there can be no
assurance that reliance on third-party contractors will not adversely impact
results in future reporting periods if any third-party contractor is unable to
maintain assembly and test yields and costs at approximately their current
levels. Third-party assembly and test companies are experiencing high demand and
utilization of their current capacity which could lead to capacity shortages in
the industry. Accordingly, we are in the process of implementing in-house
assembly operations and will shift a portion of our assembly operations from
third-party contractors to fill this capacity during the current fiscal year. By
the end of the current fiscal year, approximately 45% of our assembly
requirements will be performed in our facilities located in
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Bangkok. The Company will continue to depend on third-party contractors for the
balance of our requirements.
THE FOREGOING STATEMENTS RELATED TO THE IMPLEMENTATION OF OUR IN-HOUSE
ASSEMBLY OPERATIONS DURING THE CURRENT FISCAL YEAR AND CAPACITY AT THIRD-PARTY
ASSEMBLY AND TEST COMPANIES ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: TIMING AND
SUCCESS OF THE TRANSITION FROM THIRD PARTY ASSEMBLY SERVICES PROVIDERS TO
IN-HOUSE ASSEMBLY OPERATIONS; DELAY IN THE FACILITATION OF OUR IN-HOUSE ASSEMBLY
OPERATIONS; DIFFICULTIES IN THE TRANSITION OF THE ASSEMBLY FUNCTION FROM THIRD
PARTIES TO OUR IN-HOUSE FACILITY; AVAILABILITY OF SUFFICIENT CAPACITY OF
THIRD-PARTIES; SUPPLY DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX;
COMPETITIVE PRESSURES ON PRICES; AND OTHER ECONOMIC CONDITIONS.
Our reliance on foreign operations, and maintenance of substantially all of
our finished goods in inventory in foreign locations exposes us to foreign
political and economic risks, including:
* political, social and economic instability
* trade restrictions and changes in tariffs
* import and export license requirements and restrictions
* difficulties in staffing and managing international operations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables, and
* potentially adverse tax consequences.
To date, we have not experienced any significant interruptions in our
foreign business operations. If any of these risks materialize, our sales could
decrease and our operations performance could suffer.
RESEARCH AND DEVELOPMENT
We are committed to continuing our investment in new and enhanced products,
including development systems software and in our design and manufacturing
process technology. We believe these investments are significant factors to
maintain 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 13.9% from
the previous quarter.
Our future operating results will depend to a significant extent on our
ability 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 our customers' end products.
Because our products are complex, we have experienced delays from time to time
in completing development of new products. In addition, our new products may not
receive or maintain substantial
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market acceptance. If we may be unable to design, develop and introduce
competitive products on a timely basis, which could reduce our future operating
results.
Our future success also depends upon our ability to develop and implement
new design and process technologies. Semiconductor design and process
technologies are subject to rapid technological change and require large
research and development expenditures. 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. We believe that our transition to
smaller geometries and to larger wafers is important for us to remain
competitive. Our future operating results could be reduced if the transition is
substantially delayed or inefficiently implemented.
SELLING, GENERAL AND ADMINISTRATIVE
During the quarter ended December 31, 1999, we increased our level of
selling, general and administrative costs to $19.5 million, as compared to $15.4
million in the quarter ended December 31, 1998 and $19.1 million in the quarter
ended September 30, 1999. Selling, general and administrative costs represented
15.1% of sales in the current fiscal quarter as compared to 15.4% and 16.2% of
sales in the corresponding quarter of the previous fiscal year and the previous
quarter respectively. We expect selling, general and administrative costs to
rise over time as we continue to invest in incremental worldwide sales and
technical support resources to promote our embedded control products.
OTHER INCOME (EXPENSE)
Interest income in the three and nine months ended December 31, 1999
increased from the corresponding periods of the previous fiscal year as a result
of higher invested cash balances. Interest expense in the three and nine months
ended December 31, 1999 decreased from the corresponding periods of the previous
fiscal year as a result of lower borrowing levels of our credit facilities.
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. Our effective tax rate for each of the nine months
ended December 31, 1999 and 1998 was 27%, due primarily to lower tax rates at
our foreign locations. We believe that our tax rate for the foreseeable future
will be approximately 27%. THE FOREGOING STATEMENT REGARDING OUR 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 WE HAVE SIGNIFICANT
OPERATIONS; AND CURRENT TAX HOLIDAYS AVAILABLE IN FOREIGN LOCATIONS.
YEAR 2000 ISSUE
The Year 2000 issue arose as a result of certain computer programs being
written using two digits rather than four to define the applicable year. To
date, we have not experienced problems complying with Year 2000 issues, nor have
we experienced any material Year 2000-related issues or had any Year
2000-related issues reported to us by our business partners. Should any Year
2000 issues occur at a later time, however, we believe they would most likely be
able to be resolved in the normal course of business.
13
<PAGE>
EURO CONVERSION ISSUES
We operate in the European Market and currently generate approximately 30%
of our total net sales from customers located in Europe. Our 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.
We currently conduct 96% of our business in Europe in U.S. Dollars and 2%
of our business in Europe in Pounds Sterling. The balance of our net sales is
conducted in currencies which will eventually be replaced by the Euro. We will
monitor the potential commercial impact of converting a portion of our current
business to the Euro, but we do not expect any material impact to our business
based on this transition.
We do 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
We had $68.5 million in cash and cash equivalents at December 31, 1999, an
increase of $37.7 million from the March 31, 1999 balance. We maintain an
unsecured line of credit with a syndicate of domestic banks totaling $90.0
million. Borrowings under the domestic line of credit as of December 31, 1999
were $15.0 million. We are required to achieve certain financial ratios and
operations results to maintain the domestic line of credit. We were in
compliance with these covenants at December 31, 1999. We also maintain an
unsecured short-term line of credit totaling $26.3 million with certain foreign
banks. There were no borrowings under the foreign line of credit as of December
31, 1999. There are no covenants related to the foreign line of credit. At
December 31, 1999, and subject to our compliance with certain financial
convenants and ratios, an aggregate of $99.0 million of these facilities was
available. We were in compliance with these financial convenants and ratios at
December 31, 1999. Our ability to fully utilize these facilities depends on our
continued compliance with such covenants and ratios.
During the nine months ended December 31, 1999, we generated $162.8 million
of cash from operating activities an increase of $92.7 million as compared to
the nine months ended December 31, 1998. The increase in cash flow from
operations was primarily due to a reduction in inventories and an increase in
accounts payable and accrued liabilities and increased profitability from the
nine months ended December 31, 1999.
Our 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, 1999 and 1998 were $139.7 million and $29.7 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. We currently intend to spend approximately $275 million
during the next 12 months for additional capital, including:
14
<PAGE>
* equipment to increase capacity at our existing wafer fabrication
facilities
* expansion of product test operations
* development of in-house assembly capability and
* incremental infrastructure to support the growth of the business.
We expect to finance capital expenditures through our cash flows from
operations, available debt arrangements and other sources of financing including
issuance of equity and debt securities depending on market conditions. We
believe that the capital expenditures anticipated to be incurred over the next
12 months will provide sufficient additional manufacturing capacity to meet our
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 OUR PRODUCTS;
MARKET ACCEPTANCE OF OUR PRODUCTS AND OF OUR CUSTOMERS' PRODUCTS; UTILIZATION OF
CURRENT MANUFACTURING CAPACITY; THE AVAILABILITY AND COST OF RAW MATERIALS,
EQUIPMENT AND OTHER SUPPLIES; AND THE ECONOMIC, POLITICAL AND OTHER CONDITIONS
IN THE WORLDWIDE MARKETS SERVED BY US.
Net cash provided by financing activities was $14.5 million for the nine
months ended December 31, 1999. Net cash used in financing activities was $47.7
million for the nine months ended December 31, 1998. Proceeds from sale of stock
and put options were $27.9 million and $7.5 million for the nine months ended
December 31, 1999 and 1998, respectively. Payments on long term debt and capital
lease obligations were $1.8 million and $3.7 million for the nine months ended
December 31, 1999 and 1998, respectively. Repayments on lines of credit were
$11.5 million for the nine months ended December 31, 1999. Net proceeds from
lines of credit were $18.8 million for the nine months ended December 31, 1998.
Cash expended for the purchase of our Common Stock was $70.3 million for the
nine months ended December 31, 1998.
We have outstanding a net share settled forward contract and received
1,693,644 shares in the nine months ended December 31, 1999 in connection with
this transaction. During the quarter ended December 31, 1999, we also received
$10,243,000 in conjunction with the net share settled forward contact, which was
credited to additional paid-in capital. See Note 6 to "Condensed Consolidated
Financial Statements." The net share settled forward contract could obligate us
to purchase shares of our Common Stock in the future if the price of our Common
Stock is below the strike price of the instruments.
On January 3, 2000, the Company announced a three-for-two stock split of
its Common Stock which became effective February 7, 2000. All shares and per
share amounts have been restated to reflect this stock split.
We expect from time to time to purchase shares of our Common Stock in
connection with our authorized stock repurchase program.
We believe that our existing sources of liquidity, combined with cash
generated from operations, will be sufficient to meet our currently anticipated
cash requirements for at least the next 12 months. However, the semiconductor
industry is capital intensive. To remain competitive, we must continue to make
significant investments in capital equipment, for both production and research
and development. We may seek additional equity or debt financing during the next
12 months for the capital expenditures required to maintain or expand our wafer
fabrication and product test facilities or for other purposes.
15
<PAGE>
There can be no assurance that such financing will be available on acceptable
terms. With respect to the foregoing, on December 8, 1999 we filed a
registration statement for 1,100,000 shares of Common Stock. Any additional
equity financing could result in additional dilution to existing investors.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
Subsequent to the issuance of our September 30, 1999 condensed consolidated
financial statements, management has determined that certain special
(income)/charge items should have been recorded in the quarter ending September
30, 1999 as discussed below.
We finalized a settlement relating to patent and licensing matters during
the quarter ended December 31, 1997. Under the terms of the settlement, we made
a cash payment and issued a warrant to acquire shares of Common Stock. The terms
of the payment also provided for us to make a contingent payment if our earnings
per share performance for the three and one-half period ending June 30, 2001 did
not meet certain targeted levels. Based on the estimate of earnings per share
for the measurement period as of March 31, 1999 we provided appropriate reserves
to meet this liability. Due to the sale of the warrant by the holder the
associated reserve became unnecessary and we recorded a special income of
$3,900,000. Additionally we recorded a special charge related to other legal
issues in the amount of $1,500,000. The consolidated adjustment, net of tax, has
increased net income by $1,752,000 or $0.02 per diluted common share outstanding
for the three and six months ended September 30, 1999. The financial information
contained herein has been restated to incorporate all relevant information.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
We filed a current report on Form 8-K on October 12, 1999 to report
the adoption of an Amended and Restated Preferred Shares Rights Agreement
between us and Norwest Bank, Minnesota, N.A., as Rights Agent, effective
October 11, 1999 (the "Amended Rights Agreement"). The Amended Rights
Agreement was filed as Exhibit 4.1 to the current report on Form 8-K.
We also filed a current report on Form 8-K on January 14, 2000 to
report:
* a 3-for-2 stock split in the form of a stock dividend, and
* our results for the quarter ended December 31, 1999.
17
<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: February 11, 2000 By: /s/ C. Philip Chapman
----------------- ------------------------------------
C. Philip Chapman
Vice President, Chief Financial
Officer and Secretary (Duly
Authorized Officer, and Principal
Financial and Accounting Officer)
18
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