Microchip Technology Incorporated — Fiscal 2012 Third-Quarter Form 10-Q
Business context and reporting period
The filing covers the three and nine months ended December 31, 2011, representing fiscal 2012 third quarter and year-to-date results. Microchip designs, manufactures and markets embedded-control semiconductor products, including microcontrollers, memory, analog and interface products, and licenses SuperFlash technology. Operations are reported in semiconductor products and technology licensing.
Financial performance and position
| Metric | Three months ended Dec. 31, 2011 | Year-to-date 2011 | Comparable change |
|---|---|---|---|
| Net sales | $329.2 million | $1,044.3 million | Down 10.5% and 5.7%, respectively |
| Gross profit | $183.8 million | $598.5 million | Down from $216.4 million and $648.8 million |
| Gross margin | 55.8% | 57.3% | Down from 58.8% and 58.6% |
| Operating income | $88.1 million | $302.6 million | Down from $117.5 million and $349.8 million |
| Net income | $77.5 million | $256.1 million | Down from $100.8 million and $293.4 million |
| Diluted EPS | $0.38 | $1.26 | Down from $0.51 and $1.53 |
- Quarterly operating margin was 26.8%; year-to-date operating margin was 29.0%. Net margin was approximately 23.5% for the quarter and 24.5% year to date.
- Semiconductor products generated $306.1 million of quarterly sales and $978.6 million year to date. Technology licensing generated $23.1 million and $65.7 million, respectively, with licensing revenue increasing 21.0% and 27.1% from the comparable periods.
- Microcontroller sales declined 13.6% for the quarter and 7.1% year to date. Memory sales declined 22.1% and 19.3%, while analog and interface sales declined 2.8% and 3.3%.
- Net cash provided by operating activities was $294.0 million year to date, down from $430.1 million. Capital expenditures were $58.6 million, compared with $100.1 million. Cash dividends paid were $198.9 million.
- Cash and cash equivalents were $605.7 million at December 31, 2011. Short- and long-term investments totaled $1.1646 billion, bringing cash, cash equivalents and investments to approximately $1.7704 billion.
- Inventory was $217.9 million, up from $180.8 million at March 31, 2011; reported inventory days increased to 137 from 107.
- The balance-sheet carrying value of the junior subordinated convertible debentures was $353.3 million, versus $347.3 million at March 31, 2011. The debentures have $1.15 billion principal value, a 2.125% coupon and a December 2037 maturity; estimated fair value was $1.553 billion.
- The company had no borrowings or letters of credit outstanding under its $750 million revolving credit facility, which matures in August 2016 and includes an option for up to $250 million of additional commitments.
Material changes versus the prior comparable periods
- Revenue declined primarily because of weaker global economic and semiconductor-industry conditions. Semiconductor unit volumes fell approximately 9% in both the quarter and nine-month period; semiconductor average selling prices fell approximately 4% in the quarter and were essentially flat year to date.
- Gross margin declined because of lower production levels and reduced capacity utilization, including approximately $3.9 million of under-absorbed manufacturing costs in the quarter. Product mix and inventory write-downs also affected margins.
- Research and development expense increased 4.9% for the quarter and 6.7% year to date, primarily from higher headcount costs. Selling, general and administrative expense decreased 7.2% and 5.4%, primarily from lower bonus and discretionary spending.
- The company recorded $0.7 million of special income in the 2011 periods, compared with special charges of $0.6 million for the quarter and $1.7 million year to date in 2010.
- There were no discontinued operations in 2011; the 2010 periods included losses of $1.2 million for the quarter and $5.1 million year to date.
- Cash flow from operations declined because of lower net income and unfavorable changes in operating assets and liabilities. The company also shifted its investment portfolio toward higher short-term investment balances.
Guidance, outlook, commentary and risks
- Management expected March 2012 quarter inventory levels to remain approximately flat with December 31, 2011 levels, supporting competitive lead times and low fiscal 2012 and fiscal 2013 capital expenditures.
- The company planned approximately $50 million of capital expenditures over the following twelve months and expected to fund them with existing cash and operating cash flow.
- Management believed existing liquidity and operating cash flow would meet anticipated cash requirements for at least the next twelve months. A quarterly dividend of $0.349 per share was declared for payment in March 2012, with an expected aggregate payment of approximately $67.1 million.
- Key risks include semiconductor demand cyclicality, pricing pressure, short customer order visibility, distributor dependence, excess inventory, manufacturing yield and capacity-utilization issues, reliance on Asian contractors and foundries, and competition.
- Approximately 82% of sales were to foreign customers, substantially all denominated in U.S. dollars. Thailand operations continued normally despite regional flooding, but future flooding or other business interruptions could affect production and shipments.
- The investment portfolio included $11.7 million of auction rate securities with failed auctions and limited liquidity. Management estimated fair value using market information and stated that further impairment charges could result from deteriorating credit conditions or additional auction failures.
- The IRS was auditing fiscal 2009 and 2010 tax returns. Unrecognized tax benefits increased by $13.3 million from March 31, 2011 to $71.4 million at December 31, 2011; management did not expect a material change in the next twelve months.
- Legal and intellectual-property claims are common in the semiconductor industry. The company believed pending matters would not materially affect results, but disclosed potential indemnification exposure of approximately $94 million under agreements with specified limits and had recorded $13.0 million of contingent liabilities related to the SST acquisition.
- Disclosure controls and procedures were considered effective, and no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether semiconductor demand, unit volumes and pricing stabilize or deteriorate further after the December quarter.
- Whether elevated company and distributor inventory levels lead to additional write-downs, price concessions or lower future revenue.
- The sustainability of gross margins as wafer starts, Thailand production and capacity utilization are adjusted.
- The liquidity, valuation and potential further impairment exposure of the auction rate securities and other investment holdings.
- Future cash requirements for dividends, capital expenditures, share repurchases and any acquisition or debt activity.
- The outcome of IRS audits, uncertain tax positions and SST-related contingencies.
- Potential effects of Thailand flooding, supplier or foundry disruptions, intellectual-property litigation and distributor concentration.