Microchip Technology Incorporated — Fiscal 2024 Second-Quarter 10-Q Summary
Business context and reporting period
Microchip designs, manufactures and sells embedded-control semiconductor products, including microcontrollers, analog, FPGA, memory and related technologies, and licenses SuperFlash and other intellectual property. The filing covers the quarter and six months ended September 30, 2023, compared with the comparable 2022 periods. Results are unaudited and reported under U.S. GAAP.
Financial performance and key metrics
| Metric | Three months ended September 30, 2023 | Year-over-year change | Six months ended September 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $2,254.3 million | Up 8.7% | $4,542.9 million | Up 12.5% |
| Gross profit | $1,527.4 million | Up 9.3% | $3,085.8 million | Up 14.0% |
| Gross margin | 67.8% | Up 40 basis points | 67.9% | Up 80 basis points |
| Operating income | $885.0 million | Up 17.2% | $1,788.1 million | Up 22.8% |
| Operating margin | 39.3% | Up 290 basis points | 39.4% | Up 330 basis points |
| Net income | $666.6 million | Up 22.0% | $1,333.0 million | Up 26.5% |
| Diluted EPS | $1.21 | Up from $0.98 | $2.42 | Up from $1.88 |
| Operating cash flow | Not separately provided | — | $1,609.4 million | Down from $1,633.6 million |
Gross profit benefited primarily from product mix and higher average gross profit per unit, with a favorable impact of $130.2 million in the quarter and $396.2 million for the six months. Research and development expense increased 8.9% for the quarter and 10.0% for the six months, while selling, general and administrative expense declined 2.9% for the quarter but increased 2.3% for the six months. Acquired-intangible amortization declined to $151.4 million for the quarter and $302.9 million for the six months.
Mixed-signal microcontroller revenue increased 8.5% for the quarter and 15.1% for the six months. Analog revenue increased 8.8% and 9.0%, respectively. Distributor sales represented approximately 50% of quarterly revenue and 49% of six-month revenue. Foreign customers represented approximately 75% of quarterly revenue and 76% of six-month revenue; China demand weakened, while Americas and Europe benefited from available shipment capacity.
Liquidity, balance sheet and capital allocation
- Cash and cash equivalents were $256.6 million at September 30, 2023, compared with $234.0 million at March 31, 2023.
- Accounts receivable increased to $1,706.2 million from $1,305.3 million, primarily reflecting shipment and collection timing.
- Inventory was $1,330.9 million, broadly unchanged from $1,324.9 million; reported inventory days declined to 167 from 169.
- Total principal debt was approximately $6.10 billion, including $1.00 billion of commercial paper, $750.0 million under the 2025 Term Loan Facility and $39.0 million under the revolving facility.
- Debt maturities total $2.40 billion in fiscal 2024 and $1.67 billion in fiscal 2025. The company intends to refinance certain maturities, including the $1.40 billion of 0.972% 2024 Notes due February 2024.
- Capital expenditures were $185.5 million for the six months, compared with $232.2 million in the prior-year period. The company expects to invest $250 million to $350 million in equipment and facilities during the next 12 months.
- Share repurchases totaled $480.1 million for the six months, and approximately $2.15 billion remained available under the $4.00 billion authorization at September 30, 2023.
- Cash dividends paid during the six months totaled $431.6 million. A quarterly dividend of $0.439 per share was declared for payment in December 2023.
- Management believes existing cash, operating cash flow, revolver capacity, term-loan proceeds and commercial-paper capacity will be sufficient for anticipated requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth reflected increased capacity and the conversion of backlog, price increases, and strength across product lines.
- Profitability improved because of favorable product mix, higher average gross profit per unit, lower acquired-intangible amortization and operating leverage.
- Operating cash flow was slightly lower despite higher net income, primarily because accounts receivable increased significantly and cash inflows from long-term supply agreements are expected to decline over time.
- The company repaid or settled the 4.333% 2023 Notes, 2.670% 2023 Notes and portions of its convertible debt, while adding a $750.0 million term loan and $1.00 billion of commercial paper.
- Most factory expansion activity was paused and planned capital investment through fiscal 2025 was reduced in response to weaker macroeconomic conditions.
- The Preferred Supply Program was modified in August 2023 from 12 months of continuous backlog to six months. Certain newer orders may be cancelled or rescheduled when the planned delivery date is more than six months away.
Guidance, outlook, risks and unusual items
Management reported weakening global business conditions, customer requests to push out or cancel backlog, higher interest rates and persistent inflation. The company expects weak business conditions to continue in the December quarter. It also expects gross margins to fluctuate based on capacity utilization, product mix, manufacturing yields, fixed-cost absorption, pricing and economic conditions.
Long-term supply agreement deferred revenue was approximately $899.0 million at September 30, 2023, including $857.7 million of customer deposits. Remaining LTSA performance obligations were approximately $4.12 billion, with approximately 22% expected to be recognized over the next 12 months; timing remains uncertain and may be affected by customer orders, contract changes and manufacturing conditions.
- Malaysia tax matter: a proposed income adjustment could result in taxes of up to $360.0 million, excluding interest and penalties, if upheld through the highest applicable court. The company disputes the assessment.
- Legal matters: aggregate potential liability for legal matters considered possible but not probable was estimated at approximately $150.0 million above accrued amounts.
- Purchase commitments totaled $1.60 billion, including $586.9 million due in fiscal 2024.
- Interest-rate exposure exists on $789.0 million of variable-rate debt; a 50-basis-point increase would raise expected annual interest expense by approximately $3.9 million.
- Key operating risks include semiconductor demand cyclicality, China and geopolitical exposure, distributor and customer inventory levels, dependence on external wafer foundries and contractors, supply-chain interruptions, pricing pressure, cybersecurity, intellectual-property litigation, government-contract requirements and environmental regulations affecting Colorado expansion plans.
- The company recorded $1.1 million of intangible-asset impairment for the six months and no goodwill impairment. Debt settlement losses totaled $12.2 million for the six months.
Important facts for investors to verify
- Whether December-quarter weakness, backlog push-outs and higher distributor inventories lead to lower revenue, utilization or margins.
- The refinancing plan and cost for the $2.40 billion of fiscal 2024 maturities, particularly the February 2024 notes.
- The sustainability and timing of LTSA-related revenue and customer deposit cash flows, including potential future refunds.
- Accounts-receivable collection trends and inventory levels as demand normalizes.
- The status and potential cash impact of the Malaysian and U.S. tax disputes.
- Progress, spending and expected returns on Fab 4 and Fab 5 capacity expansions, including CHIPS Act incentives and Colorado environmental requirements.
- The pace of share repurchases and dividend increases relative to leverage, capital expenditures and debt refinancing needs.