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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, 2000.
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 August 3,
2000:
COMMON STOCK, $.001 PAR VALUE: 79,157,833 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, 2000 and March 31, 2000................................ 3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 2000 and June 30, 1999.............. 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 2000 and June 30, 1999.............. 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............................... 17
SIGNATURES ................................................................. 18
2
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
ASSETS --------- ---------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 167,215 $ 188,112
Accounts receivable, net 90,050 75,911
Inventories 58,705 59,461
Prepaid expenses 5,479 3,523
Deferred tax asset 38,101 35,549
Other current assets 2,736 2,257
--------- ---------
Total current assets 362,286 364,813
Property, plant and equipment, net 521,292 439,030
Other assets 8,245 8,568
--------- ---------
Total assets $ 891,823 $ 812,411
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term lines of credit $ -- $ 9,000
Accounts payable 88,154 67,861
Accrued liabilities 48,777 36,879
Deferred income on shipments to distributors 64,166 54,760
--------- ---------
Total current liabilities 201,097 168,500
Pension accrual 905 918
Deferred tax liability 18,882 18,697
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 78,949,606 shares at June 30, 2000; 81 81
issued 80,822,013 and outstanding 78,907,553 shares at March 31, 2000;
Additional paid-in capital 330,470 318,341
Retained earnings 403,185 366,325
Less shares of common stock held in treasury at cost; 1,872,407 shares
at June 30, 2000 and 1,914,460 at March 31, 2000 (62,797) (60,451)
--------- ---------
Net stockholders' equity 670,939 624,296
Total liabilities and stockholders' equity $ 891,823 $ 812,411
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
3
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Three Months Ended June 30,
---------------------------
2000 1999
--------- ---------
(Unaudited)
Net sales $ 157,737 $ 107,710
Cost of sales 72,173 52,955
--------- ---------
Gross profit 85,564 54,755
Operating expenses:
Research and development 14,818 10,307
Selling, general and administrative 22,712 16,866
--------- ---------
37,530 27,173
Operating income 48,034 27,582
Other income (expense):
Interest income 2,471 242
Interest expense (139) (262)
Other, net 126 107
--------- ---------
Income before income taxes 50,492 27,669
Income taxes 13,632 7,470
--------- ---------
Net income $ 36,860 $ 20,199
========= =========
Basic net income per share $ 0.47 $ 0.27
========= =========
Diluted net income per share $ 0.44 $ 0.25
========= =========
Weighted average common shares outstanding 78,931 76,071
========= =========
Weighted average common and potential common
shares outstanding 84,217 80,681
========= =========
See accompanying notes to consolidated financial statements
4
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended June 30,
---------------------------
2000 1999
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net income $ 36,860 $ 20,199
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 355 15
Provision for inventory valuation 1,385 --
Provision for pension accrual 48 151
Depreciation and amortization 21,679 15,712
Amortization of purchased technology 927 75
Deferred income taxes (2,367) 997
Tax benefit from exercise of stock options 6,964 --
Increase in accounts receivable (14,494) (3,575)
(Increase) decrease in inventories (629) 5,381
Increase (decrease) in accounts payable and
accrued liabilities 32,190 (1,261)
Change in other assets and liabilities 6,306 2,037
--------- ---------
Net cash provided by operating activities 89,224 39,731
--------- ---------
Cash flows from investing activities:
Capital expenditures (103,941) (23,273)
--------- ---------
Net cash used in investing activities (103,941) (23,273)
--------- ---------
Cash flows from financing activities:
Repayment of lines of credit (9,000) (10,509)
Payments on long-term debt -- (1,403)
Payments on capital lease obligations -- (201)
Proceeds from sale of stock and put options 2,820 9,049
--------- ---------
Net cash used in financing activities (6,180) (3,064)
--------- ---------
Net (decrease) increase in cash and cash
equivalents (20,897) 13,394
Cash and cash equivalents at beginning of year 188,112 30,826
--------- ---------
Cash and cash equivalents at end of year $ 167,215 $ 44,220
========= =========
See accompanying notes to 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, 2000. The results of operations for the three months ended
June 30, 2000 and 1999 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):
June 30, March 31,
2000 2000
------- -------
(unaudited)
Trade accounts receivable $92,331 $77,945
Other 851 703
------- -------
93,182 78,648
Less allowance for doubtful accounts 3,132 2,737
------- -------
$90,050 $75,911
======= =======
(3) INVENTORIES
The components of inventories are as follows (amounts in thousands):
June 30, March 31,
2000 2000
------- -------
(unaudited)
Raw materials $ 8,385 $ 7,724
Work in process 37,255 35,914
Finished goods 21,220 22,873
------- -------
66,860 66,511
Less allowance for inventory valuation 8,155 7,050
------- -------
$58,705 $59,461
======= =======
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(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
June 30, March 31,
2000 2000
------- -------
(unaudited)
Land $ 11,545 $ 11,545
Building and building improvements 109,311 90,069
Machinery and equipment 560,629 479,509
Projects in process 118,468 100,293
-------- --------
799,953 681,416
Less accumulated depreciation
and amortization 278,661 242,386
-------- --------
$521,292 $439,030
======== ========
(5) LINES OF CREDIT
On May 31, 2000, the Company entered into a new unsecured revolving
credit facility with a syndicate of banks totaling $100.0 million, bearing
interest at LIBOR plus 0.625%. We can elect to increase the facility to $150.0
million, subject to certain conditions set forth in the credit agreement. This
facility has a termination date of May 31, 2003. There were no borrowings
against this line of credit as of June 30, 2000. We are required to achieve
certain financial ratios and operations results to maintain this line of credit.
Our ability to fully utilize this credit facility is dependent on our being in
compliance with such covenants and ratios. The Company was in compliance with
these covenants as of June 30, 2000.
At March 31, 2000, and through May 31, 2000, the Company had an
unsecured line of credit with a syndicate of U.S. banks for up to $90,000,000,
bearing interest at LIBOR plus 0.325%. The Company had utilized $9,000,000 of
this line of credit as of March 31, 2000. This agreement between the Company and
the syndicate of banks required the Company to achieve certain financial ratios
and operating results. The Company was in compliance with these covenants as of
March 31 and May 31, 2000, respectively.
The Company has an additional unsecured line of credit with various
Taiwan financial institutions for up to $36,400,000 (U.S. Dollar equivalent).
These borrowings are predominantly denominated in U.S. Dollars, bearing interest
at the Singapore Interbank Offering Rate (SIBOR) 7.005% at June 30, 2000 plus
0.692% (average) and expiring on various dates through March 31, 2001. There
were no borrowings against this line of credit as of June 30, 2000, but an
allocation of $981,000 of the available line was made, relating to import
guarantees associated with the Company's business in Thailand. There were no
borrowings against this line of credit as of March 31, 2000, but an allocation
of $1,934,000 of the available line was made, relating to import guarantees
associated with the Company's business in Thailand.
(6) STOCKHOLDERS' EQUITY
During the three months ended June 30, 2000 and June 30, 1999, the
Company received 123,262 shares and 1,257,717 shares, respectively, in
connection with its net shares settled forward contract. The net shares settled
forward contract could obligate the Company to purchase shares of the Company's
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Common Stock in the future if the price of the Company's Common Stock is below
the strike price of the instruments. The expiration date of this transaction is
May 2001, with quarterly interim settlement dates.
The Company expects from time to time to purchase shares of Common
Stock in connection with its authorized Common Stock repurchase plan.
(7) 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)
-----------------------
2000 1999
------- -------
Net income $36,860 $20,199
======= =======
Weighted average common
shares outstanding 78,931 76,071
Dilutive effect of stock options 5,286 4,610
------- -------
Weighted average common and
potential common shares outstanding 84,217 80,681
======= =======
Basic net income per share $ 0.47 $ 0.27
======= =======
Diluted net income per share $ 0.44 $ 0.25
======= =======
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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 June 30,
---------------------------
2000 1999
---- ----
Net sales ............................. 100.0% 100.0%
Cost of sales ......................... 45.8% 49.2%
----- -----
Gross profit .......................... 54.2% 50.8%
Research and development .............. 9.4% 9.6%
Selling, general and administrative.... 14.4% 15.6%
----- -----
Operating income ...................... 30.4% 25.6%
===== =====
RECENT DEVELOPMENT
On July 26, 2000, we closed the acquisition of a semiconductor
manufacturing complex located in Puyallup, Washington, from Matsushita
Semiconductor Corporation of America. The acquisition was pursuant to a Purchase
and Sale Agreement between Matsushita Semiconductor Corporation of America and
us, dated as of May 23, 2000, and as subsequently amended by a First Addendum
and Second Addendum. The Purchase and Sale Agreement, and the subsequent
amendments, were filed as Exhibits 2.1, 2.2 and 2.3 to our Current Report on
Form 8-K, filed on July 26, 2000.
Pursuant to the Purchase and Sale Agreement, we acquired, subject to
specific exclusions as set forth in the Purchase and Sale Agreement, certain of
the assets of Matsushita Semiconductor Corporation of America, consisting of
inoperative semiconductor manufacturing facilities and real property located in
Puyallup, Washington, and certain personal property located thereon or used in
connection with the facility. The total purchase price paid by us for the
acquisition was $80 million in cash. See the discussion under "Liquidity and
Capital Resources," beginning on page 14.
We will initially produce 8-inch wafers using our 0.7 and 0.5 micron
process technologies at the Puyallup facility. The facility will also house
manufacturing operations, offices, meeting rooms and support functions. We
currently intend to begin installing wafer processing equipment in November
2000, with volume production at the facility expected to begin in August 2001.
THE FOREGOING STATEMENTS RELATED TO THE TIMING OF EQUIPMENT
INSTALLATION AND THE COMMENCEMENT OF VOLUME PRODUCTION AT OUR PUYALLUP,
WASHINGTON FACILITY ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING BUT NOT LIMITED TO FUTURE DEMAND FOR OUR PRODUCTS, DELAYS IN
FACILITIZATION OF THE PUYALLUP, WASHINGTON FACILITY, AVAILABILITY OF EQUIPMENT
AND OTHER SUPPLIES, GENERAL ECONOMIC CONDITIONS, AND OTHER RISKS DETAILED IN OUR
10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2000 FILED ON JUNE 7, 2000.
NET SALES
Microchip's net sales for the quarter ended June 30, 2000 were $157.7
million, an increase of 46.4% over sales of $107.7 million for the corresponding
quarter of the previous fiscal year, and an increase of 12.0% from the previous
quarter's sales of $140.8 million.
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Our microcontroller and analog product lines represents the largest
component of our total net sales. Microcontrollers, associated application
development systems and analog products accounted for 75% of our net sales for
the three months ended June 30, 2000 and 79% of our total net sales in the three
months ended June 30, 1999. A related component of our product sales consists
primarily of Serial EEPROM memories which accounted for 25% of our total net
sales in the three months ended June 30, 2000 and 21% of total net sales in the
three months ended June 30, 1999.
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. The percentage of turns orders has
fluctuated over the last three years. Currently, we are experiencing turns
orders at the lowest point of the historical range for net sales requirements.
Despite the recent improvement in the turns orders requirement for 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 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.
Historically, average selling prices in the semiconductor industry
decrease over the life of any particular product. The overall average selling
prices of our microcontroller products have remained relatively constant, while
average selling prices of our memory products had declined through the end of
fiscal 2000. However, during the quarter ended June 30, 2000, prices for our
memory products increased due primarily to the dynamics of the supply and demand
environment. Future changes to memory pricing will be predominantly driven by
market conditions. We have experienced, and expect to continue to experience,
pricing pressure in certain microcontroller product lines, due primarily to
competitive conditions. We have been able to maintain average selling prices by
continuing to introduce new products with more features and higher prices,
thereby offsetting price declines in older products. 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 TURNS ORDERS, AVERAGE SELLING
PRICES, MEMORY PRODUCT PRICING 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.
Distributors accounted for 66% of our net sales to customers in the
three months ended June 30, 2000 and 62% in the three months ended June 30,
1999. Our largest distributor accounted for 14% of our total net sales for the
three months ended June 30, 2000 and 13% of our total net sales for the three
months ended June 30, 1999. Generally, we do not have long-term agreements with
our distributors and our distributors may terminate their relationship with us
with little or no advanced notice. The loss of, or the disruption in the
operations of, one or more of our distributors could reduce our future net sales
in a given quarter and could result in an increase in inventory returns.
Sales to foreign customers represented 72% of our net sales in the
three months ended June 30, 2000 and 67% of our net sales in the three months
ended June 30, 1999. 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
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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.
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 June 30, 2000, our gross profit was $85.6
million, and our gross profit was $54.8 million in the three months ended June
30, 1999. Gross profit as a percent of sales was 54.2% for the quarter ended
June 30, 2000 and 50.8% in quarter ended June 30, 1999. The most significant
factors affecting gross profit percentage were increased 8-inch wafer production
levels, continued cost reductions in wafer fabrication, assembly and test
manufacturing, a stable pricing market for microcontroller products, and pricing
increases for 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 and 0.5 micron processes. 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,
THE TRANSITION TO HIGHER YIELDING MANUFACTURING PROCESSES AND THE EXPANSION OF
OUR MANUFACTURING CAPACITY 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 ABILITY TO INCREASE MANUFACTURING CAPACITY
AS NEEDED; THE TIMING AND SUCCESS OF MANUFACTURING PROCESS TRANSITION; DEMAND
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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 have shifted a portion of our assembly
operations from third-party contractors to fill this capacity. Approximately 40%
of our assembly requirements were being performed in our Thailand facility
during the three months ended June 30, 2000. We are dependent on third-party
contractors for the balance of our requirements.
THE FOREGOING STATEMENTS RELATED TO 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, or
* 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 investing in new and enhanced products, including
development systems software, and in our design and manufacturing process
technology. We believe these investments are significant factors in maintaining
our competitive position. Research and development in the current quarter
increased by 43.8% as compared to the corresponding quarter of the previous
fiscal year, and increased by 18.7% 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
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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 market acceptance. 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
We increased our level of selling, general and administrative costs to
$22.7 million in the current quarter as compared to $16.9 million in the first
quarter of the previous fiscal year and $21.2 million in the immediately
preceding quarter. Selling, general and administrative costs represented 14.4%
of sales in the current fiscal quarter as compared to 15.6% of sales in the
first quarter of the previous fiscal year and 15.1% of sales in the immediately
preceding quarter. Effective April 1, 2000, we terminated our contractual
relationships with predominately all manufacturers' representatives in the
Americas. During the quarter ended June 30, 2000, we added additional resources
to our direct sales force focusing on the Americas territories. This transition
was completed without affecting operating results, however, there can be no
assurance that we can retain qualified personnel to support our sales efforts.
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 months ended June 30, 2000 increased from
the corresponding quarter of the previous fiscal year as a result of higher
invested cash balances related to our secondary offering completed in March of
2000. Interest expense in the three months ended June 30, 2000 decreased from
the corresponding quarter of the previous fiscal year as a result of lower
borrowing levels of our credit facilities. The net of our interest income and
expense will decrease over the remaining quarters of this fiscal year as our
invested cash balances decrease to fund our capital expansion. Other income
represents numerous immaterial non-operating items.
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PROVISION FOR INCOME TAXES
Provisions for income taxes reflect tax on foreign earnings and federal
and state tax on U.S. earnings. We had an effective tax rate of 27.0% for the
three months ended June 30, 2000 and 27.0% for the three months ended June 30,
1999, 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.
EURO CONVERSION ISSUES
We operate in the European Market and currently generate approximately
one third 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 11 member states of the European Union converting to a
common currency.
We currently conduct 98% of our business in Europe in U.S. Dollars and
1% 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 currently anticipate any material impact to
our business based on this transition. We do not currently anticipate any
material impact to our business related to Euro matters from information
technology, derivative transactions, tax issues and accounting software issues.
LIQUIDITY AND CAPITAL RESOURCES
We had $167.2 million in cash and cash equivalents at June 30, 2000, a
decrease of $20.9 million from the March 31, 2000 balance. During the fiscal
year ended March 31, 2000, and through May 31, 2000, we maintained an unsecured
line of credit with a syndicate of domestic banks totaling $90.0 million.
Borrowings under the domestic line of credit as of March 31, 2000 were $9.0
million. We were required to achieve certain financial ratios and operations
results to maintain the domestic line of credit. We were in compliance with
these covenants at March 31, 2000. We also maintain an unsecured short-term line
of credit totaling $36.4 million with certain foreign banks. There were no
borrowings under the foreign line of credit as of March 31, 2000. There are no
covenants related to the foreign line of credit.
On May 31, 2000, we entered into a new unsecured revolving credit
facility with a syndicate of banks totaling $100.0 million. We can elect to
increase the facility to $150.0 million, subject to certain conditions set forth
in the credit agreement. This facility has a termination date of May 31, 2003.
This facility replaces the $90.0 million line of credit described above. There
were no borrowings against this line of credit as of June 30, 2000. We are
required to achieve certain financial ratios and operations results to maintain
this line of credit. At June 30, 2000, an aggregate of $135.4 million of our
credit facilities were available, subject to financial covenants and ratios with
which we were in compliance. Our ability to fully utilize our credit facilities
is dependent on our remaining in compliance with such covenants and ratios.
During the three months ended June 30, 2000, we generated $89.2 million
of cash from operating activities, an increase of $49.5 million from the three
months ended June 30, 1999. The increase in cash flow from operations was
primarily due to increased profitability and the impact of changes in accounts
payable and accrued liabilities, depreciation and other assets and liabilities.
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Our 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, 2000 were $103.9 million, as compared to $23.3 million for
the three months ended June 30, 1999. 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 $510 million during the next 12 months for additional capital,
including:
* equipment to increase capacity at our existing wafer fabrication
facilities
* acquisition, facilitization and start-up of the Puyallup, Washington
semiconductor manufacturing complex
* 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 RESULTS 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; DEMAND FOR OUR
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 used in financing activities was $6.2 million for the three
months ended June 30, 2000 and $3.1 million for the three months ended June 30,
1999. Proceeds from sale of stock and put options were $2.8 million in the three
months ended June 30, 2000 and $9.0 million for the three months ended June 30,
1999. Payments on long-term debt and capital lease obligations were $1.6 million
for the three months ended June 30, 1999. Repayments on lines of credit were
$9.0 million for the three months ended June 30, 2000 and $10.5 million for the
three months ended June 30, 1999.
We have outstanding a net shares settled forward contract and received
123,262 shares in the three months ended June 30, 2000 and 1,257,717 shares in
the three months ended June 30, 1999 in connection with this transaction. See
Note 6 to "Consolidated Financial Statements." The net shares settled forward
contract could obligate us to purchase shares of our Common Stock in the future
if the price of the our Common Stock is below the strike price of the
instruments.
We expect from time to time to purchase shares of Common Stock in
connection with our authorized stock purchase program. We will also have cash
requirements associated with our purchase and facilitization of the Puyallup
semiconductor manufacturing complex, which is described under "Recent
Developments" at page 9, above.
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. In order to remain competitive, we must continue
to make significant investments in capital equipment for both production and
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research and development. We may seek additional equity or debt financing during
the next 12 months for the capital expenditures required to acquire, maintain or
expand our 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 our products, product mix, changes in industry
conditions and competitive factors. There can be no assurance that such
financing will be available on acceptable terms, and any additional equity
financing could result in additional dilution to existing investors.
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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, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date: August 4, 2000 By: /s/ Gordon Parnell
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Gordon Parnell
Vice President and Chief Financial Officer
(Duly Authorized Officer, and
Principal Financial and Accounting Officer)
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