Microchip Technology Incorporated — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended September 30, 2010, within fiscal 2011. Microchip designs, manufactures and markets embedded-control semiconductor products, including microcontrollers, memory, analog and interface products, and, following the April 8, 2010 acquisition of Silicon Storage Technology, Inc. (SST), Flash technology licensing. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | $382.3 million, up 68.7% | $739.4 million, up 76.2% |
| Gross profit / margin | $225.0 million / 58.9% | $432.4 million / 58.5% |
| Operating income / margin | $123.1 million / 32.2% | $232.4 million / 31.4% |
| Net income | $103.1 million | $192.6 million |
| Diluted EPS | $0.54 | $1.01 |
| Operating cash flow | Not separately provided | $291.4 million |
Compared with the prior-year periods, net income increased from $44.5 million to $103.1 million for the quarter and from $71.9 million to $192.6 million for the six months. Gross-margin expansion reflected higher capacity utilization, SST licensing and SuperFlash revenue, lower inventory write-down effects, and the absence of prior-year under-absorption charges. R&D was $43.7 million for the quarter and $84.3 million for six months; SG&A was $57.6 million and $114.8 million, respectively.
At September 30, 2010, cash and cash equivalents were $423.7 million, short-term investments were $955.0 million, and long-term investments were $190.2 million, for total cash, cash equivalents and investments of approximately $1.57 billion. Total assets were $2.81 billion and stockholders' equity was $1.64 billion.
Investing cash outflows were $254.8 million for the six months, including $112.7 million for the SST acquisition and $65.9 million of capital expenditures. Financing cash outflows were $105.1 million, primarily reflecting $127.4 million of dividends. Cash and cash equivalents declined by $68.4 million to $423.7 million during the six months.
Debt consisted primarily of $1.15 billion principal amount of 2.125% junior subordinated convertible debentures due December 2037. The carrying value was $344.1 million, versus an estimated fair value of $1.26 billion. The conversion price was approximately $29.62 per share at September 30, 2010; no conversion conditions had been met.
Material changes versus the prior comparable period
- Revenue growth was driven by improving semiconductor conditions, market-share gains in microcontrollers and analog products, and SST contributions of $60.2 million for the quarter and $114.9 million from April 9 through September 30.
- SST added memory and licensing revenue and contributed $10.3 million of continuing earnings for the quarter and $17.4 million from April 9 through September 30.
- Product mix shifted: microcontrollers represented 67.2% of quarterly sales versus 81.2% a year earlier; memory products represented 16.2% versus 8.5%; technology licensing represented 4.5% of sales.
- Foreign customers represented approximately 81% of quarterly sales and 80% of six-month sales, compared with 78% and 77%, respectively, in the prior-year periods. Asia represented 58.3% of quarterly sales.
- Inventory increased to $166.6 million from $116.6 million at March 31, 2010, while reported inventory days remained 97. Deferred income on distributor shipments increased to $132.3 million from $98.9 million.
- On May 21, 2010, Microchip sold certain acquired SST businesses to Greenliant; on July 8, 2010, it granted a limited license for certain Serial NOR-Flash products. SST's SuperFlash Memory and RF businesses were instead integrated into continuing operations.
Outlook, commentary, risks and unusual items
- Management expected to spend approximately $85 million on equipment and facilities during the following 12 months and expected existing cash and operating cash flow to fund these needs.
- Management believed liquidity was sufficient for anticipated requirements for at least the next 12 months. A $0.343 quarterly dividend was paid in September; dividends of approximately $64.1 million and $64.3 million were scheduled for December 2 and December 27, including an accelerated dividend.
- Management expected gross margins to fluctuate with capacity utilization, product mix, yields, fixed-cost absorption, pricing and economic conditions. Pricing pressure remains a risk, particularly for Serial EEPROM and non-proprietary analog products.
- Discontinued operations produced losses of $1.7 million for the quarter and $4.0 million for six months. Assets held for sale were $1.1 million at September 30.
- SST integration remained incomplete; many SST internal controls were being maintained separately, with transition expected by the end of fiscal 2011. The preliminary purchase-price allocation remained subject to revision, including goodwill, intangible assets and contingencies.
- Auction-rate securities had a September 30 fair value of $13.3 million and continued to experience failed auctions. The company recorded approximately $0.4 million of impairment in the quarter and $0.8 million for six months and warned that further impairments were possible.
- Marketable equity securities were valued at $41.4 million against a $49.3 million cost basis. A 30% change in their prices would have changed portfolio value by approximately $12.4 million.
- The company faces semiconductor-cycle, demand, pricing, manufacturing-yield, supplier, distributor, foreign-operation, intellectual-property, litigation, tax-audit, environmental and acquisition-integration risks. The IRS was auditing fiscal 2006 through 2008; unrecognized tax benefits increased by $40.6 million after the SST acquisition.
Most important facts for investors to verify
- Whether SST integration delivers expected revenue, licensing growth, synergies and margin benefits, and whether the purchase-price allocation changes materially.
- The sustainability of the 58.9% quarterly gross margin and the effect of capacity utilization, product mix and semiconductor pricing.
- Future cash requirements from dividends, approximately $85 million of planned capital expenditures, acquisitions and the $1.15 billion convertible debentures.
- The liquidity and valuation of the remaining auction-rate securities and marketable and non-marketable equity investments.
- Distributor inventory, deferred distributor income, sell-through trends and potential pricing concessions or product returns.
- Outcomes of IRS and other tax examinations, intellectual-property matters, indemnification obligations and the $13.0 million acquisition-date SST contingent liability.