Microchip Technology Incorporated — Form 10-Q Summary
Reporting period: Quarterly period ended September 30, 2021; fiscal second quarter of fiscal 2022. Results cover the three and six months ended September 30, 2021, compared with the corresponding 2020 periods. Microchip designs, manufactures and sells embedded-control semiconductor products, including microcontrollers, analog, FPGA and memory products, and licenses technology.
Financial Performance and Position
| Metric | Three months ended September 30, 2021 | Year-over-year change | Six months ended September 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $1,649.8 million | Up 26.0% | $3,219.2 million | Up 22.9% |
| Gross profit | $1,068.3 million | Up from $807.9 million | $2,075.9 million | Up from $1,606.2 million |
| Gross margin | 64.8% | Up from 61.7% | 64.5% | Up from 61.3% |
| Operating income | $416.3 million | Up from $226.2 million | $785.1 million | Up from $444.5 million |
| Operating margin | 25.2% | Up from 17.3% | 24.4% | Up from 17.0% |
| Net income | $242.0 million | Up from $73.6 million | $494.8 million | Up from $197.2 million |
| Diluted earnings per share | $0.43 | Up from $0.14 | $0.87 | Up from $0.38 |
- Microcontroller revenue was $894.0 million for the quarter and $1,796.5 million for the six-month period, increasing 27.2% and 26.6%, respectively.
- Analog revenue was $490.9 million for the quarter and $923.0 million for the six-month period, increasing 35.7% and 26.1%, respectively.
- Semiconductor products generated $1,617.0 million of quarterly revenue and $3,159.0 million for the six-month period. Technology licensing generated $32.8 million and $60.2 million, respectively.
- Net cash provided by operating activities was $1,241.6 million for the six months, compared with $957.6 million in the prior-year period. Capital expenditures were $164.8 million, versus $15.8 million.
- Cash, cash equivalents and short-term investments totaled $255.3 million at September 30, 2021, compared with $282.0 million at March 31, 2021. Cash and cash equivalents alone were $253.3 million.
- Inventories were $713.6 million, up from $665.0 million at March 31, 2021; reported inventory days remained 112 days.
- Principal debt outstanding was $8.41 billion, including $1.81 billion drawn under the Revolving Credit Facility. Net debt carrying value was $8.20 billion. Fixed-rate debt was $6.60 billion and variable-rate debt was $1.81 billion.
- Cash dividends paid during the six months were $234.3 million. A quarterly dividend of $0.232 per share was declared on November 2, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected exceptionally strong semiconductor demand, particularly for microcontroller and analog products, as well as price increases intended to offset higher supply-chain costs.
- Gross margin improved primarily because the company operated above normal capacity in 2021, compared with unabsorbed capacity charges in 2020, and benefited from product mix, higher licensing revenue and lower excess and obsolete inventory impacts.
- Operating expenses increased as compensation reductions implemented during the early COVID-19 period were restored and investment in research and development resumed. Research and development expense increased 23.2% for the quarter and 21.8% for the six-month period.
- Interest expense declined to $64.8 million for the quarter and $137.1 million for the six-month period, primarily because of debt repayments and lower rates on variable-rate debt.
- The company recorded debt settlement losses of $85.2 million for the quarter and $85.5 million for the six-month period, related to convertible-debt settlements and repayment of the $1.0 billion 3.922% 2021 Notes.
- Capital spending increased substantially as the company expanded production capacity and added research and development equipment.
- The company completed a two-for-one forward stock split in October 2021; all share and per-share amounts in the filing were adjusted retrospectively.
Guidance, Outlook, Risks and Unusual Items
- Management expects certain wafer fabrication, assembly and test constraints to continue through calendar 2022 and possibly beyond. Lead times continued to extend, and distributor inventory was at a historically low 19 days at September 30, 2021.
- The company expects to invest approximately $350 million to $450 million in equipment and facilities during the next 12 months, funded from cash balances and operating cash flow.
- Management expects inventory days at December 31, 2021 to be between 112 and 118 days and expects above-normal factory utilization to continue if supply constraints persist.
- The Preferred Supply Program provides prioritized capacity for customers placing 12 months of non-cancellable and non-reschedulable orders, but it is not a guarantee of supply. Customer cancellation or rescheduling could create legal, financial and relationship risks.
- COVID-19-related restrictions, subcontractor disruptions, labor availability, supply shortages, higher input costs, tariffs and trade restrictions remain material risks. Approximately 78% of six-month revenue came from foreign customers, including significant exposure to China and Taiwan.
- In September 2021, the IRS issued a Statutory Notice of Deficiency covering fiscal 2007 through fiscal 2012, primarily involving transfer pricing. The company disputes the assessment and believes it has adequate reserves, but stated that an IRS victory on all assertions could materially affect financial position, results or cash flows.
- Potential legal matters include shareholder and derivative litigation related to the Microsemi acquisition, Continental arbitration concerning alleged defective ASICs, and other acquired-business litigation. The company estimated aggregate potential liability that is possible but not probable at approximately $100 million above accrued amounts.
- Goodwill was $6.67 billion and net intangible assets were $4.48 billion at September 30, 2021. No goodwill or intangible-asset impairment charges were recorded during the six-month period.
- The company believes available liquidity, operating cash flow and Revolving Credit Facility availability are sufficient for anticipated requirements for at least the next 12 months, but substantial debt service, capital spending and refinancing needs remain important risks.
- A 50-basis-point increase in interest rates would increase expected annual interest expense by approximately $9.0 million.
Important Facts for Investors to Verify
- Whether elevated demand and pricing benefits persist after supply constraints ease, and whether gross margins remain near the reported 64% level.
- The pace and effectiveness of capacity expansion, including the planned $350 million to $450 million of capital expenditures and reliance on external foundries and assembly/test contractors.
- Debt maturities and refinancing requirements, particularly the approximately $5.21 billion of expected maturities in fiscal 2024 and the potential dilution or cash requirements from convertible debt.
- The outcome and potential financial exposure from the IRS transfer-pricing notice and ongoing litigation and arbitration matters.
- Distributor inventory levels, customer cancellations or push-outs under the Preferred Supply Program, and the sustainability of current backlog and lead times.
- Changes in foreign-market demand, China and Taiwan exposure, tariffs, export controls, currency effects and COVID-19-related operating restrictions.
- The continuation of quarterly dividends and the company’s ability to fund dividends, capital investment and debt obligations from operating cash flow.