Microchip Technology Incorporated — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018. The request references 2017 Q4; the filing is an annual report that includes unaudited fourth-quarter fiscal 2018 and fiscal 2017 information.
Business Context and Reporting Period
Microchip develops, manufactures and sells specialized semiconductor products for embedded-control applications, including microcontrollers, analog and mixed-signal devices, connectivity products, memory products and technology-licensing solutions. The company reports semiconductor products and technology licensing segments.
Fiscal 2018 sales were geographically concentrated outside the United States, with approximately 85% generated from foreign customers, including approximately 30% from China. Distributors represented 54% of fiscal 2018 sales. Microchip had 14,234 employees at March 31, 2018.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $3,980.8 million | $3,407.8 million | 16.8% increase |
| Gross profit | $2,420.7 million | $1,757.2 million | 37.8% increase |
| Gross margin | 60.8% | 51.6% | Up 9.2 percentage points |
| Operating income | $936.3 million | $275.8 million | Increase |
| Operating margin | 23.5% | 8.1% | Up 15.4 percentage points |
| Net income attributable to Microchip | $255.4 million | $164.6 million | Increase |
| Diluted EPS | $1.03 | $0.71 | Increase |
| Cash flow from operations | $1,419.6 million | $1,059.5 million | Increase |
| Capital expenditures | $206.8 million | $75.3 million | Increase |
Fourth-quarter fiscal 2018 net sales were $1,002.3 million, gross profit was $615.1 million, operating income was $244.1 million, net income attributable to Microchip was $146.7 million and diluted EPS was $0.58. Fourth-quarter results included significant tax and investment-related items described below.
At March 31, 2018, cash, cash equivalents and short-term investments totaled $2,196.6 million. Inventories were $476.2 million, or 112 days of inventory. Working capital was $1,338.9 million and total assets were $8,257.2 million.
Principal debt outstanding was $4,481.3 million, consisting primarily of convertible debt. Net debt reported on the balance sheet, after discounts and issuance costs, was $3,068.3 million. No borrowings were outstanding under the credit facility at March 31, 2018, which had approximately $3.122 billion of capacity at that date.
Microchip paid $337.5 million in dividends during fiscal 2018 and declared a quarterly dividend of $0.3635 per share in May 2018. No share repurchases occurred during fiscal 2018.
Material Changes Versus the Prior Comparable Period
- Net sales increased 16.8%; excluding specified revenue-recognition effects related to Atmel distributors and acquired-channel inventory, management reported a 14.0% increase, driven primarily by favorable economic and semiconductor conditions, higher volume and approximately 6% contribution from average selling price and product/geographic mix.
- Microcontroller revenue increased approximately 22.0% to $2,619.1 million and represented 65.9% of sales. Analog, interface, mixed-signal and timing revenue increased 7.1% to $952.0 million.
- Gross margin improved principally because fiscal 2017 included approximately $186.7 million of acquired-inventory fair-value charges, while fiscal 2018 benefited from favorable mix, manufacturing efficiencies and lower inventory-related charges.
- Research and development expense decreased 2.9% to $529.3 million, and selling, general and administrative expense decreased 9.5% to $452.1 million, reflecting acquisition-related synergies and lower personnel and share-based compensation costs.
- Amortization of acquired intangible assets increased to $485.5 million from $337.7 million, primarily because Atmel in-process research and development assets began amortizing.
- Operating cash flow increased to $1,419.6 million. The increase in capital expenditures supported capacity expansion, research and development equipment and increased internal assembly and test capabilities.
- Cash and short-term investments increased by $786.3 million, while inventory increased 14.1% and distributor inventory increased to 36 days from 33 days.
Guidance, Outlook, Commentary and Risks
- Management expected June 2018 inventory days to range from six days below to four days above March 2018 levels and believed existing inventory supported competitive lead times.
- Management expected to spend approximately $225.0 million on capital expenditures during the following 12 months, funded through cash balances and operating cash flow.
- On March 1, 2018, Microchip agreed to acquire Microsemi for $68.78 per share in cash, representing approximately $8.35 billion of equity value and approximately $10.15 billion of enterprise value. Closing was expected in late May or early June 2018, subject to regulatory, stockholder and other customary conditions.
- The Microsemi transaction was expected to require approximately $10.15 billion of funding from cash, revolving borrowings and new debt. JPMorgan committed to provide up to a $5.0 billion senior secured term loan and a $625.0 million bridge facility, subject to definitive documentation and customary conditions. Management expected approximately $8.0 billion of additional debt, materially increasing leverage and interest obligations.
- On May 18, 2018, the company entered into an amended credit agreement providing approximately $3.8 billion of revolving capacity, including approximately $3.6 billion maturing in 2023.
- Tax reform produced a provisional fiscal 2018 tax expense of $481.9 million and a 65.4% effective tax rate. This included a $644.7 million one-time transition-tax expense, partially offset by deferred-tax remeasurement and foreign tax-credit benefits. The company expects to pay the transition tax over eight years.
- ASC 606 became effective April 1, 2018. The company expected adoption to eliminate approximately $334 million of deferred distributor income and increase retained earnings by approximately $219 million to $259 million, subject to final adjustments. Future revenue may be more affected by distributor inventory levels because revenue will generally be recognized upon shipment to distributors.
- Material risks include acquisition execution and integration, substantially higher post-acquisition leverage, debt refinancing and covenant compliance, semiconductor cyclicality, pricing pressure, reliance on external foundries and Asian contractors, manufacturing yields, distributor inventory and returns, foreign operations and China exposure, intellectual-property claims, tax audits, environmental and business-interruption risks, and customer or supplier concentration risks.
- Contingencies included a Continental arbitration claim alleging approximately $227.7 million of damages related to airbag-control-unit recalls. Management stated that the ultimate resolution of pending matters was not expected to materially affect financial position, cash flows or results, but disclosed approximately $100 million of possible-but-not-probable liability above accrued amounts.
Most Important Facts for Investors to Verify
- Final closing, financing terms, purchase accounting and integration results for the Microsemi acquisition.
- Post-acquisition debt balances, interest expense, leverage ratios, covenant headroom and ability to generate sufficient cash flow for debt service and dividends.
- Final tax-reform measurements, including the $644.7 million provisional transition tax and future cash payment schedule.
- Actual ASC 606 adoption effects compared with the estimated $219 million to $259 million increase in retained earnings and changes in distributor-related revenue timing.
- Fourth-quarter and subsequent-quarter demand, distributor inventory levels, backlog quality and the proportion of sales dependent on turns orders.
- Gross-margin sustainability after the nonrecurring acquired-inventory effects in fiscal 2017, including product mix, pricing, capacity utilization and manufacturing yields.
- Resolution and potential exposure from the Continental arbitration, other litigation, tax audits and indemnification obligations.