Microchip Technology Incorporated — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2011. The source also includes fourth-quarter fiscal 2011 results; it is not a fiscal 2010 Q4 filing. Microchip develops and manufactures embedded-control semiconductors, including PIC and dsPIC microcontrollers, memory, analog and interface products, and Flash-IP licensing solutions.
Financial performance and position
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $1.487 billion | $947.7 million | +56.9% |
| Gross profit | $874.4 million | $534.2 million | +63.7% |
| Gross margin | 58.8% | 56.4% | +240 bps |
| Operating income | $474.2 million | $245.0 million | +93.6% |
| Operating margin | 31.9% | 25.8% | +610 bps |
| Net income | $419.0 million | $217.0 million | +93.1% |
| Diluted EPS | $2.15 | $1.16 | +85.3% |
| Cash flow from operations | $582.7 million | $452.0 million | +28.9% |
- Continuing-operations net income was $429.2 million, or $2.20 diluted EPS. Discontinued operations produced a $10.2 million net loss, including $9.4 million of inventory write-downs.
- Product sales were led by microcontrollers at $1.014 billion, or 68.2% of revenue. Memory sales were $221.2 million, analog and interface sales were $178.0 million, and technology licensing revenue was $72.1 million.
- Average selling prices declined approximately 1%, while semiconductor unit volume increased approximately 54%.
- R&D expense rose to $170.6 million, or 11.5% of sales, from $120.8 million. SG&A rose to $227.8 million but declined to 15.3% of sales from 17.7%.
- Cash, cash equivalents and short- and long-term investments totaled $1.708 billion at March 31, 2011. Working capital was $1.435 billion and stockholders’ equity was $1.812 billion.
- Inventory increased to $180.8 million, or 107 days, from $116.6 million, or 97 days. Management expected inventory to grow in the June 2011 quarter to support short lead times.
- Capital expenditures were $124.5 million, compared with $47.6 million in fiscal 2010. Planned capital expenditures for the following 12 months were approximately $125 million.
- Dividends paid were $256.8 million, or $1.374 per share. A $0.346 per-share quarterly dividend was declared in May 2011.
Debt and liquidity
- Microchip had $1.15 billion principal amount of 2.125% junior subordinated convertible debentures due December 2037. The carrying value was $347.3 million; estimated fair value was $1.574 billion.
- Total contractual obligations were $1.910 billion, including $1.803 billion of principal and interest on the convertible debentures.
- Operating cash flow funded dividends, capital expenditures and acquisition activity. Fiscal 2011 investing cash outflows included $112.7 million for the SST acquisition and $124.5 million of capital expenditures.
- Management stated that existing liquidity and operating cash flow should meet anticipated cash requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Fiscal 2011 results benefited from improving semiconductor conditions, market-share gains and the April 2010 acquisition of Silicon Storage Technology, Inc. (SST).
- SST contributed $228.3 million of continuing revenue for the period from April 9, 2010 through March 31, 2011. The acquisition added SuperFlash memory products, Flash-IP licensing and other businesses.
- SST was acquired for approximately $353.8 million. The transaction added $24.96 million of goodwill and $50.93 million of purchased intangible assets; the purchase-price allocation was finalized in the fourth quarter.
- Technology licensing became a separately reported segment and generated $72.1 million of revenue with $68.0 million of gross profit.
- Gross margin improved as production returned to normal or above-normal capacity, eliminating the $22.3 million of under-absorbed manufacturing costs recorded in fiscal 2010.
- Foreign customers represented approximately 80% of sales, compared with 77% in fiscal 2010. Asia increased to 56.6% of sales from 50.5%, while the Americas and Europe declined as percentages of revenue.
- Distributor sales declined to 58% of revenue from 61%; the largest distributor represented approximately 10% of sales versus 12% previously.
Outlook, commentary, risks and unusual items
- Management expected continued margin fluctuations based on capacity utilization, product mix, manufacturing yields, fixed-cost absorption, competitive pricing and economic conditions.
- The company operated its owned wafer fabs at or above normal capacity during fiscal 2011 and expected existing facilities to support future demand with modest incremental capital spending.
- Approximately 20% of fiscal 2011 sales related to products produced by outside wafer foundries. Approximately 61% of assembly and 88% of testing were performed in Thailand at year-end.
- Key risks include semiconductor cyclicality, pricing pressure, short customer lead times, distributor dependence, inventory obsolescence, manufacturing yield and capacity risks, reliance on Asian contractors and suppliers, foreign-exchange exposure, intellectual-property litigation, environmental regulation, tax audits and acquisition integration.
- At March 31, 2011, $12.5 million of auction-rate securities remained illiquid and had experienced failed auctions. The company recorded a $1.6 million fiscal 2011 impairment and warned that further impairment was possible.
- The IRS was auditing fiscal 2009 and 2010. Fiscal 2011 included a $24.4 million tax benefit from audit settlement, reserve expirations and restructuring-related items, reducing the effective tax rate to 6.8%.
- Fiscal 2011 included $1.9 million of SST-related severance and office-closure costs. No goodwill or long-lived-asset impairment charge was recorded.
- The March 2011 Japan earthquake did not directly affect company facilities or short-term material supply, but longer-term effects remained uncertain.
- Internal control over financial reporting was assessed as effective, and Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Investor verification checklist
- Verify the sustainability of the fiscal 2011 revenue and margin improvement after normalizing for SST acquisition effects and favorable capacity utilization.
- Review the SST purchase-price allocation, acquired intangible amortization, discontinued operations and integration costs.
- Assess distributor inventory, deferred income on distributor shipments of $140.0 million, price-protection exposure and the 40-day distributor inventory level.
- Evaluate liquidity relative to the $1.15 billion convertible debenture principal, the $1.574 billion estimated debt fair value and long-dated contractual obligations.
- Monitor inventory growth, manufacturing utilization, outside-foundry dependence and planned $125 million capital spending.
- Review exposure to auction-rate securities, marketable and private-company investments, and potential future impairment charges.
- Assess the effect of tax-audit outcomes, foreign earnings treated as indefinitely reinvested, and expiration of Thailand tax holidays.
- Confirm legal, intellectual-property indemnification and acquisition-related contingencies, including the $13.0 million SST contingency accrual and potential uncapped license indemnifications.