Microchip Technology Incorporated — Fiscal 2012 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2012. The request references “2011 Q4,” but the supplied filing is the annual Form 10-K for fiscal 2012, including quarterly data for the fourth quarter ended March 31, 2012.
Business Context
Microchip develops, manufactures and licenses specialized semiconductors for embedded-control applications. Its portfolio includes PIC and dsPIC microcontrollers, memory products, analog and interface devices, development tools, and SuperFlash intellectual-property licensing. The company reports two segments: semiconductor products and technology licensing.
- Fiscal 2012 net sales were generated 59% through distributors and 41% through direct sales.
- Foreign customers represented approximately 82% of sales; Asia represented 55.9%, Europe 23.1% and the Americas 21.0%.
- Microcontrollers contributed 67.1% of sales, memory products 13.0%, analog and interface products 12.4%, and technology licensing 6.3%.
Financial Performance and Liquidity
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Net sales | $1,383.2 million | $1,487.2 million | Down 7.0% |
| Gross profit | $792.4 million | $874.4 million | Down 9.4% |
| Gross margin | 57.3% | 58.8% | Down 150 basis points |
| Operating income | $396.5 million | $474.2 million | Down 16.4% |
| Operating margin | 28.7% | 31.9% | Down 320 basis points |
| Net income | $336.7 million | $419.0 million | Down 19.6% |
| Diluted EPS | $1.65 | $2.15 | Down 23.3% |
| Cash flow from operations | $396.5 million | $582.7 million | Down 32.0% |
- Research and development expense increased to $182.7 million, or 13.2% of sales, from $170.6 million, or 11.5%.
- SG&A declined to $212.4 million from $227.8 million, primarily due to lower bonus costs.
- Capital expenditures were $62.4 million, down from $124.5 million. Management expected approximately $70 million of capital expenditures over the next 12 months.
- Cash, cash equivalents and investments totaled $1.788 billion at March 31, 2012, compared with $1.708 billion at March 31, 2011.
- Working capital was $1.768 billion and total assets were $3.084 billion.
- The company paid $266.2 million in dividends, or $1.390 per share, and declared a subsequent quarterly dividend of $0.35 per share.
- Inventory increased to $217.3 million from $180.8 million; reported inventory days increased to approximately 137 days. Distributor inventory declined to 31 days from 40 days.
- The company had $355.1 million of carrying value in 2.125% junior subordinated convertible debentures, with $1.15 billion principal amount due December 2037. Their fair value was approximately $1.585 billion.
- A $750 million revolving credit facility was available, with no borrowings or letters of credit outstanding at March 31, 2012. The company was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Sales weakened as global economic and semiconductor-industry conditions deteriorated. Unit volumes declined approximately 8%, while average selling prices were essentially flat.
- Microcontroller sales declined approximately 8.4%, memory sales declined approximately 19.0%, and analog and interface sales declined approximately 3.8%.
- Technology licensing revenue increased approximately 20.7% to $87.0 million, reflecting adoption of SuperFlash technology.
- Gross margin declined because production operated below normal capacity during the second half of fiscal 2012. Approximately $6.7 million of unabsorbed production costs was charged to cost of sales.
- Operating income and net income declined despite lower SG&A, primarily because of lower revenue, weaker gross margin, higher R&D spending and less favorable other income.
- Fiscal 2011 included a $10.2 million net loss from discontinued operations; fiscal 2012 had no discontinued-operations loss.
- Microchip acquired Ident Technology AG in February 2012 for approximately $39.5 million, recording approximately $17.4 million of goodwill and $18.1 million of purchased intangible assets.
- Special charges were $0.8 million in fiscal 2012, including $1.5 million expensed for a patent license, partly offset by a favorable contingent-consideration adjustment.
Outlook, Commentary, Risks and Unusual Items
- Management expected fiscal 2013 first-quarter inventory to remain approximately flat with March 31, 2012 levels to support competitive lead times and limit capital spending.
- Management stated that existing liquidity and operating cash flow should be sufficient for anticipated requirements for at least the next 12 months.
- On May 2, 2012, Microchip agreed to acquire Standard Microsystems Corporation for $37 per share in cash, representing approximately $939 million of equity value and $766 million of enterprise value. The transaction was expected to close in the second quarter of fiscal 2013, subject to shareholder, regulatory and other approvals, and was expected to be funded with existing cash and borrowings under the credit facility.
- The company also announced the acquisition of Roving Networks on April 19, 2012; management stated that the transaction was not material to financial position.
- Backlog was approximately $328.8 million at April 30, 2012, down from $544.9 million at April 30, 2011. Orders are generally cancellable or reschedulable, so backlog is not a reliable indicator of future sales.
- Key risks include semiconductor cyclicality, weak demand, pricing pressure, capacity underutilization, manufacturing yields, inventory obsolescence, distributor dependence, reliance on Asian suppliers and facilities, Thailand flooding and other business interruptions, intellectual-property claims, tax audits, foreign-market exposure and acquisition-integration risk.
- At March 31, 2012, auction-rate securities of $10.2 million remained illiquid because of failed auctions. The company recognized a net $0.3 million gain on these positions during fiscal 2012 and could incur additional impairment charges if market conditions deteriorate.
- The IRS was auditing fiscal 2009 and 2010. Gross unrecognized tax benefits were $70.5 million, and the company had approximately $1.9 billion of undistributed foreign earnings intended to remain indefinitely reinvested outside the United States.
- Potential indemnification exposure under technology licenses was approximately $98 million where contractual limits were specified; no liability was recorded because payments were not considered probable. The filing states that other pending litigation was not expected to have a material adverse effect, but outcomes remain uncertain.
- Management reported effective disclosure controls and internal control over financial reporting, and Ernst & Young issued unqualified opinions.
Investor Verification Checklist
- Verify the completion, financing, purchase accounting and integration results of the SMSC acquisition.
- Monitor revenue recovery, backlog conversion, customer and distributor inventories, and demand across microcontroller, memory and analog product lines.
- Assess whether capacity utilization and inventory normalization restore gross margin toward prior levels.
- Review liquidity after the SMSC transaction, including borrowings, leverage-ratio compliance and the effect of continued dividends.
- Evaluate the conversion and potential dilution implications of the convertible debentures.
- Track the status of IRS and other tax examinations, unrecognized tax benefits and the tax consequences of foreign earnings repatriation.
- Assess the liquidity and valuation of auction-rate securities and other investment holdings.
- Review exposure to Thailand operations, third-party foundries and assembly/test contractors, intellectual-property litigation, and acquisition-related contingencies.