Microchip Technology Incorporated — Form 10-Q Summary
Business Context and Reporting Period
Microchip designs, manufactures and markets embedded-control semiconductors, including microcontrollers, memory, analog and interface products, and licenses Flash technology. The filing covers the three months ended June 30, 2011, the first quarter of fiscal 2012, compared primarily with the three months ended June 30, 2010. Results are unaudited.
- Semiconductor products generated $353.9 million of sales and $200.1 million of gross profit.
- Technology licensing generated $20.6 million of sales and $19.7 million of gross profit.
- Foreign customers represented approximately 82% of sales; Asia represented 55.0% of total sales.
- Distributors represented approximately 59% of sales, and the largest distributor represented approximately 10%.
Key Financial Metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $374.5 million | $357.1 million | Up 4.9% |
| Gross profit | $219.7 million | $207.4 million | Up 5.9% |
| Gross margin | 58.7% | 58.1% | Up 0.6 percentage points |
| Operating income | $116.9 million | $109.2 million | Up 7.0% |
| Operating margin | 31.2% | 30.6% | Up 0.6 percentage points |
| Net income | $99.3 million | $89.6 million | Up 10.9% |
| Diluted EPS | $0.49 | $0.47 | Up $0.02 |
| Operating cash flow | $83.3 million | $133.3 million | Down $50.0 million |
- Research and development expense increased to $45.3 million, or 12.1% of sales, from $40.5 million, or 11.4%.
- Selling, general and administrative expense was $57.6 million, or 15.4% of sales, compared with $57.2 million, or 16.0%.
- The effective tax rate was 12.8%, compared with 12.7% from continuing operations in the prior-year quarter.
- Capital expenditures were $27.2 million, compared with $34.1 million.
- The company paid $65.9 million in dividends, or $0.346 per share.
Financial Position, Debt and Liquidity
| Balance-sheet item | June 30, 2011 | March 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $651.4 million | $703.9 million |
| Short-term investments | $866.4 million | $539.6 million |
| Long-term investments | $199.6 million | $464.8 million |
| Total cash, cash equivalents and investments | $1.717 billion | $1.708 billion |
| Inventories | $202.5 million | $180.8 million |
| Current liabilities | $328.1 million | $340.3 million |
| Convertible debentures carrying value | $349.1 million | $347.3 million |
The company has $1.15 billion principal amount of 2.125% junior subordinated convertible debentures due December 2037. Their estimated fair value was $1.572 billion at June 30, 2011. The carrying value reflects substantial debt discount and non-cash interest amortization. No conversion conditions had been met at quarter-end, but the instruments contributed approximately 9.9 million potential shares to diluted EPS.
Management stated that existing liquidity and expected operating cash flow should be sufficient to meet anticipated requirements for at least the next 12 months. The company expects approximately $75 million of capital expenditures over the next 12 months. It reported no material changes in contractual obligations and no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by market-share gains and semiconductor conditions in microcontrollers and analog products. Silicon average selling prices increased approximately 4%, while unit volume declined approximately 2%.
- Microcontroller sales increased approximately 4.3%; memory sales decreased approximately 7.0%; analog and interface sales increased approximately 2.4%; and technology licensing revenue increased approximately 34.4%.
- Revenue was down 1.4% from the immediately preceding quarter, primarily due to general economic and semiconductor conditions, including effects associated with the March 2011 Japan earthquake.
- Gross margin and operating margin improved modestly despite higher R&D spending and no special charges in the current quarter. The prior-year quarter included $0.5 million of SST-related severance and office-closure charges.
- Net income benefited from the absence of the prior-year $2.3 million loss from discontinued operations related to product lines acquired with SST.
- Operating cash flow declined substantially, primarily because of increases in accounts receivable, inventories and other operating assets and liabilities.
- Inventory increased to $202.5 million, or 119 days, from $180.8 million, or 107 days, at March 31, 2011. Distributor inventory increased to 43 days from 40 days.
- The company reclassified investment holdings between short- and long-term categories without materially changing total investments. It recognized a $0.4 million impairment charge on auction-rate securities and a $0.6 million impairment charge on certain marketable equity securities.
Guidance, Outlook, Commentary and Risks
- Management expected inventory levels to increase during the September 2011 quarter to support competitive lead times and delivery performance.
- Management expected approximately $75 million of capital expenditures during the following 12 months, funded through cash balances and operating cash flow.
- A quarterly dividend of $0.347 per share was declared for payment in September 2011, expected to total approximately $66.3 million. Future dividends remain subject to board approval and business conditions.
- Gross margins may fluctuate with product mix, capacity utilization, manufacturing yields, fixed-cost absorption, competitive pricing and economic conditions.
- Key operating risks include semiconductor cyclicality, pricing pressure, demand volatility, distributor inventory and sell-through, inventory obsolescence, reliance on Asian manufacturing and third-party foundries, supply disruptions, and the uncertain longer-term effects of the Japan earthquake.
- The company held $12.1 million of auction-rate securities with multiple failed auctions. Their valuation depends on management estimates and could decline further, although management did not expect the holdings to impair near-term liquidity.
- The IRS was auditing fiscal 2009 and 2010. Management reported adequate tax reserves and did not believe unrecognized tax benefits would materially change in the next 12 months.
- Legal proceedings and intellectual-property claims are considered ordinary-course matters, but outcomes are uncertain. Technology license indemnification exposure could reach approximately $94 million if all specified limits were fully triggered; no related liability was recorded.
Most Important Facts to Verify
- Whether revenue and margins sustain the quarter’s improvement amid lower unit volumes, pricing pressure and semiconductor cyclicality.
- Whether the higher inventory balance and planned inventory growth convert into sales without increased obsolescence or write-downs.
- Whether operating cash flow recovers from the $83.3 million quarterly level after working-capital investment.
- The liquidity and valuation of the $12.1 million auction-rate-security portfolio and any potential additional impairment.
- The economic effect of the $1.15 billion convertible-debenture obligation, including dilution if conversion conditions are met.
- Progress and outcomes of IRS audits and other tax examinations.
- Exposure to manufacturing, foundry, assembly and test disruptions, particularly in Thailand and other Asian locations.
- Whether the planned $75 million of capital expenditures and ongoing dividends remain consistent with cash generation and business conditions.