Microchip Technology Incorporated — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended December 31, 2012, representing the third quarter and first nine months of fiscal 2013. Microchip designs, manufactures and markets embedded-control semiconductors, including microcontrollers, analog and interface products, memory products, and SuperFlash technology licensing. The August 2, 2012 acquisition of Standard Microsystems Corporation (SMSC) materially affected comparability; SMSC contributed $93.9 million of third-quarter sales and $142.1 million from acquisition through December 31, 2012.
Key financial metrics
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Net sales | $416.0 million | $329.2 million | $1,151.5 million | $1,044.3 million |
| Gross profit | $200.4 million | $185.5 million | $599.4 million | $603.6 million |
| Gross margin | 48.2% | 56.4% | 52.1% | 57.8% |
| Operating income | $17.4 million | $88.1 million | $121.8 million | $302.6 million |
| Net income | $10.2 million | $77.5 million | $67.7 million | $256.1 million |
| Diluted EPS | $0.05 | $0.38 | $0.33 | $1.26 |
| Operating cash flow | Not separately provided | Not separately provided | $321.2 million | $294.0 million |
Third-quarter sales increased 26.4% year over year and 8.5% sequentially. Nine-month sales increased 10.3%. Semiconductor products generated $394.7 million of third-quarter sales, while technology licensing generated $21.3 million. Product trends included third-quarter microcontroller growth of 22.6%, analog and interface growth of 116.9%, memory decline of 22.1%, and technology licensing decline of 7.5% versus the prior-year quarter.
Profitability declined despite higher sales. Cost of sales included approximately $30.8 million of acquired-inventory valuation adjustments in the quarter and $52.5 million year to date. Lower fab and assembly capacity utilization also reduced margins; under-absorption charges were $10.5 million in the quarter and $18.8 million year to date. Operating expenses included higher R&D, SG&A, acquired-intangible amortization, and acquisition-related charges.
Material changes versus the prior comparable period
- Completed the $919.6 million SMSC acquisition, funded with cash and approximately $610.0 million of credit-facility borrowings. SMSC added substantial connectivity products and increased reliance on outside foundries and subcontractors.
- Acquired Roving Networks for approximately $20.6 million, including contingent consideration.
- Acquisition-related intangible assets increased net intangible assets to $570.8 million from $90.4 million at March 31, 2012; goodwill increased to $263.3 million from $93.5 million.
- Acquired-intangible amortization increased to $39.7 million in the quarter and $71.6 million year to date, versus $2.7 million and $8.2 million, respectively, in the prior-year periods.
- R&D increased 61.3% in the quarter and 36.6% year to date; SG&A increased 35.8% and 24.0%, respectively, primarily due to SMSC and related integration costs.
- Special charges were $2.6 million in the quarter and $25.0 million year to date, including $13.4 million of SMSC integration costs and $11.5 million of legal settlement costs related to Silicon Storage Technology.
- Cash and cash equivalents declined to $465.3 million from $635.8 million at March 31, 2012, while total investments were $1.31 billion. Total cash, cash equivalents and investments were approximately $1.772 billion.
Debt, liquidity and capital allocation
At December 31, 2012, the company had $610.0 million outstanding under a $750.0 million revolving credit facility maturing in 2016 and $361.4 million carrying value of junior convertible debentures. The debentures had $1.15 billion principal value, a 2.125% coupon, and a December 2037 maturity. The company was in compliance with credit-facility covenants.
Nine-month investing cash use was $920.8 million, primarily reflecting the $731.7 million net cash cost of SMSC and $20.6 million for other acquisitions. Capital expenditures were $36.1 million, compared with $58.6 million in the prior-year period. Financing cash flow was $428.2 million, including $610.0 million of borrowings and $204.6 million of dividends. Management expected approximately $60.0 million of capital expenditures over the following twelve months and believed available liquidity and operating cash flow were sufficient for at least twelve months.
The company paid $1.053 per share in dividends during the first nine months and declared a $0.353 per share dividend payable in March 2013. Approximately $1.710 billion of cash and investments were held by foreign subsidiaries, leaving approximately $100.0 million available for U.S. operations without repatriation-related considerations.
Guidance, outlook, risks and unusual items
- Management expected March 2013 inventory levels to decline and believed existing inventory would support competitive lead times.
- Management expected March-quarter R&D expense to be relatively flat in dollars and lower as a percentage of sales, while SG&A was expected to decrease in dollars and as a percentage of sales due to SMSC integration efficiencies.
- Further wafer-start reductions during the December quarter were expected to negatively affect March-quarter gross margin.
- Management expected a $5.6 million one-time tax benefit in the quarter ending March 31, 2013 from the retroactive extension of the U.S. research and experimentation tax credit.
- Unrecognized tax benefits were $181.4 million, up $110.9 million from March 31, 2012, primarily due to SMSC-related positions and other uncertain tax matters. The IRS was auditing fiscal 2009 and 2010.
- Auction-rate securities of $33.8 million had experienced failed auctions and were illiquid. The company recognized $0.1 million of impairment in the quarter and $0.4 million year to date, with potential for additional charges.
- Key operating risks include semiconductor cyclicality, weak economic conditions, pricing pressure, capacity utilization and yield volatility, dependence on distributors and third-party manufacturing, SMSC integration, inventory obsolescence, intellectual-property litigation, tax audits, foreign operations and Thailand-related disruption risks.
- Technology-license agreements contain indemnification provisions; the maximum specified exposure across agreements was approximately $111 million, although no related liability was recorded.
- Contingent liabilities related to the SST acquisition totaled $5.7 million at December 31, 2012 after $11.5 million of excess legal settlement costs were recognized during the year.
Most important facts for investors to verify
- Whether SMSC integration delivers expected revenue, cost synergies and margin improvement without additional restructuring or impairment charges.
- Whether acquired-inventory adjustments, intangible amortization and lower manufacturing utilization continue to depress gross margin.
- Progress in reducing the $610.0 million credit-facility balance while maintaining dividends and funding capital expenditures.
- Inventory levels, distributor sell-through, turns orders and demand in memory, consumer, automotive and industrial markets.
- Resolution and potential financial impact of IRS examinations, unrecognized tax benefits, SST-related matters and intellectual-property claims.
- Liquidity and valuation developments for the $33.8 million auction-rate securities portfolio.
- The filing text does not provide a single consolidated quantitative revenue or EPS forecast for the March 2013 quarter; the outlook is limited primarily to expense, inventory, capital-expenditure and tax commentary.