Microchip Technology Incorporated — Form 10-Q Summary
Reporting period: Three months ended June 30, 2022, the first quarter of fiscal 2023, compared with the three months ended June 30, 2021. The filing was dated August 2, 2022. Microchip designs, manufactures and sells embedded-control semiconductor products, including microcontrollers, analog, FPGA and memory products, and licenses semiconductor technologies.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,963.6 million | $1,569.4 million | 25.1% increase |
| Gross profit | $1,309.9 million | $1,007.6 million | 30.0% increase |
| Gross margin | 66.7% | 64.2% | 250 basis-point increase |
| Operating income | $701.3 million | $368.8 million | 90.1% increase |
| Operating margin | 35.7% | 23.5% | 12.2 percentage-point increase |
| Net income | $507.2 million | $252.8 million | 100.6% increase |
| Diluted EPS | $0.90 | $0.45 | 100.0% increase |
| Operating cash flow | $840.4 million | $629.9 million | 33.4% increase |
| Capital expenditures | $121.9 million | $86.3 million | 41.4% increase |
Net margin was approximately 25.8%, compared with approximately 16.1% in the prior-year quarter. Management attributed revenue growth primarily to strong demand, price increases implemented across products and customers, and strength in microcontroller and analog product lines. Higher factory utilization was the principal stated driver of gross-margin expansion.
- Product sales: Microcontrollers generated $1,063.0 million, analog generated $580.0 million and other products and services generated $320.6 million. Analog revenue increased 34.2% and microcontroller revenue increased 17.8% year over year.
- Customer mix: Distributor sales were $913.1 million, direct customer sales were $1,012.6 million and licensing sales were $37.9 million. Arrow Electronics represented 11% of revenue.
- Liquidity: Cash and cash equivalents were $377.1 million at June 30, 2022, compared with $317.4 million at March 31, 2022. Cash, cash equivalents and short-term investments totaled $379.1 million.
- Working capital: Accounts receivable increased to $1,145.0 million and inventories increased to $911.8 million from $854.4 million at March 31, 2022. Balance-sheet inventory was 127 days, versus 125 days at quarter-end March 31, 2022.
- Debt: Net long-term debt was $7,563.9 million. Principal debt outstanding was approximately $7.60 billion, including $1.20 billion under the revolving credit facility, $5.60 billion of senior notes and $803.5 million of convertible debt.
- Cash returns: The company paid $153.0 million in dividends and repurchased 2.9 million shares for $195.2 million. Approximately $3.38 billion remained available under the $4.00 billion repurchase authorization.
Material changes versus the prior comparable period
- Revenue increased 25.1%, with growth across all major product lines. Management cited strong demand and pricing actions, but stated that the impact of price increases could not be quantified separately.
- Gross margin improved to 66.7% from 64.2%, primarily because of higher manufacturing utilization.
- Operating expenses declined to 31.0% of sales from 40.7%, principally because acquired-intangible amortization fell to $167.6 million from $215.6 million and special items shifted from a $10.5 million charge to $16.9 million of net income.
- Research and development expense increased 12.8% to $269.0 million, while selling, general and administrative expense increased 8.4% to $188.9 million; both declined as percentages of revenue.
- Interest expense decreased to $50.3 million from $72.3 million, mainly because adoption of ASU 2020-06 eliminated convertible-debt discount amortization and debt was reduced, partly offset by higher variable borrowing rates.
- Operating cash flow increased to $840.4 million, while capital expenditures rose to $121.9 million as the company expanded manufacturing capacity.
- On April 1, 2022, Microchip adopted ASU 2020-06. The adoption increased reported convertible debt by $105.8 million, reduced additional paid-in capital by $128.3 million and increased opening retained earnings by $46.5 million.
Guidance, outlook, commentary and risks
- Management expected certain supply-chain constraints to persist through calendar 2022 and into calendar 2023. Demand continued to exceed available internal and external manufacturing capacity during the quarter.
- The company expected inventory days at September 30, 2022 to be 127 to 132 days.
- Capital expenditures were expected to be $500 million to $550 million during the next 12 months, funded from cash balances and operating cash flow.
- Management stated that existing liquidity, operating cash flow and revolver capacity should be sufficient for anticipated cash requirements for at least the next 12 months.
- The company expected to continue expanding manufacturing capacity, increasing internal assembly and test capabilities and transitioning some outsourced production in-house. Approximately 63% of sales came from products manufactured at outside wafer foundries.
- Key risks include supply-chain and foundry constraints, inflation and higher input costs, demand cyclicality, pricing pressure, distributor concentration, foreign operations, China-related economic and trade risks, COVID-19 disruptions, cybersecurity incidents, intellectual-property claims, and dependence on government-related programs.
- The company is contesting an IRS Statutory Notice of Deficiency for fiscal 2007 through fiscal 2012, primarily involving transfer pricing. Management believes the assessments lack merit, but an adverse outcome could materially affect financial position, results or cash flows.
- Legal matters include shareholder derivative litigation related to the Microsemi acquisition. The SEC investigation into Microsemi-related matters was closed in June 2022 with no further action. A July 2022 arbitration decision awarded Continental approximately $40.0 million plus interest and allowed recovery of certain future recall costs.
- As of June 30, 2022, the company estimated possible but not probable aggregate legal liabilities of approximately $100.0 million above accrued amounts.
- A 50-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $6.0 million, based on $1.20 billion of variable-rate revolver borrowings.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify whether demand remains above available capacity and whether supply constraints, lead times and foundry allocations persist.
- Assess the sustainability of the 66.7% gross margin after pricing actions, product-mix changes and capacity expansion.
- Monitor inventory growth, distributor inventory days and potential customer order cancellations or push-outs.
- Review upcoming debt maturities, refinancing plans, variable-rate exposure and the company’s ability to fund dividends, repurchases and planned capital expenditures.
- Track the IRS tax dispute, Continental arbitration obligations and remaining shareholder derivative litigation.
- Evaluate exposure to China, Taiwan, foreign exchange, sanctions, tariffs, raw-material availability and geopolitical disruptions.
- Confirm the effect of ASU 2020-06 and convertible-debt settlement elections on future diluted share counts and potential equity dilution.