Microchip Technology Incorporated — Q1 Fiscal 2022 Form 10-Q
Reporting period: Three months ended June 30, 2021; comparative period ended June 30, 2020. The filing was signed August 3, 2021. Microchip designs, manufactures and sells embedded-control semiconductor products, including microcontrollers, analog, FPGA, memory and related products, and licenses embedded-memory technologies.
Financial performance and position
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $1,569.4 million | $1,309.7 million | 19.8% increase |
| Gross profit | $1,007.6 million | $798.3 million | 26.2% increase |
| Gross margin | 64.2% | 61.0% | Up 3.2 percentage points |
| Operating income | $368.8 million | $218.3 million | 68.9% increase |
| Operating margin | 23.5% | 16.7% | Up 6.8 percentage points |
| Net income | $252.8 million | $123.6 million | 104.5% increase |
| Diluted EPS | $0.89 | $0.48 | 85.4% increase |
| Operating cash flow | $629.9 million | $501.8 million | 25.5% increase |
| Capital expenditures | $86.3 million | $9.5 million | Increase of $76.8 million |
- Revenue growth reflected exceptionally strong demand across end markets. Microcontroller revenue increased 26.0% to $902.5 million, analog revenue increased 16.7% to $432.1 million, and other revenue increased 5.2% to $234.8 million.
- Semiconductor products generated $1,542.0 million of revenue and $980.2 million of gross profit; technology licensing generated $27.4 million of revenue and gross profit.
- Gross margin benefited from higher capacity utilization, favorable product mix, increased licensing revenue and the absence of the $13.9 million of unabsorbed capacity charges recorded in the prior-year quarter.
- Research and development expense rose 20.4% to $238.4 million, while selling, general and administrative expense rose 19.1% to $174.3 million, primarily reflecting restored compensation programs and increased investment.
- Amortization of acquired intangible assets declined to $215.6 million from $235.4 million. Special charges and other, net increased to $10.5 million from $0.3 million, primarily for restructuring wafer fabrication operations.
- Interest expense declined to $72.3 million from $99.1 million, primarily due to debt paydown and lower rates on variable-rate debt. The company recorded a $0.3 million loss on repayment of $1.0 billion of 3.922% 2021 Notes, versus a $26.8 million debt-settlement loss in the prior-year period.
- Cash and cash equivalents were $277.7 million at June 30, 2021, compared with $280.0 million at March 31, 2021; cash and short-term investments totaled $279.7 million.
- Accounts receivable were $1,000.7 million and inventories were $683.8 million at June 30, 2021. Balance-sheet inventory represented 111 days, compared with 112 days at March 31, 2021.
- Principal debt outstanding was $8.82 billion, including $1.96 billion drawn under the $3.57 billion revolving credit facility, $5.60 billion of senior notes and $1.26 billion of convertible debt. Net debt carrying value was $8.53 billion.
- Debt maturities are concentrated in fiscal 2024, with expected maturities of $5.36 billion, followed by $1.81 billion in fiscal 2025 and $1.20 billion in fiscal 2026.
- The company paid $113.1 million in dividends during the quarter, or $0.413 per share. A $0.437 per-share dividend was declared for payment in September 2021, expected to total approximately $120.0 million.
Material changes versus the prior comparable period
- Revenue, gross profit, operating income and net income all increased materially as demand recovered from the pandemic-affected prior-year quarter.
- Operating leverage improved substantially: gross margin increased to 64.2% and operating margin to 23.5%.
- Operating cash flow increased by $128.1 million, but investing cash use increased to $112.7 million because of capacity-related capital expenditures and other investments.
- Financing cash use was $519.5 million, including debt repayments and $113.1 million of dividends. The company issued $997.0 million of senior notes and repaid $1.0 billion of 3.922% 2021 Notes.
- Debt carrying value declined from $8.90 billion at March 31, 2021 to $8.53 billion at June 30, 2021, while current maturities declined from $1.32 billion to zero.
- Foreign customers represented approximately 79% of sales, up from 77%; Asia represented 56.5% of sales, Europe 19.7% and the Americas 23.8%.
Outlook, management commentary and risks
- Demand exceeded capacity improvements during the quarter, extending lead times. Management expects wafer fabrication, assembly and test constraints to persist through the middle of calendar 2022.
- The company expects to operate manufacturing facilities at or above normal capacity if current supply constraints continue. It expects September 30, 2021 inventory levels of approximately 106 to 112 days.
- Management intends to invest approximately $300 million to $350 million in equipment and facilities over the next 12 months, primarily to expand production capacity and bring additional assembly and test work in-house. These expenditures are expected to be funded from cash balances and operating cash flow.
- The Preferred Supply Program provides prioritized capacity beginning six months after customers place 12 months of continuous, non-cancellable and non-reschedulable orders. A significant portion of capacity was booked under the program, but the filing states that it is not a guarantee of supply.
- Management believes existing liquidity, operating cash flow and revolving-credit availability will satisfy anticipated cash requirements for at least the next 12 months.
- A 50-basis-point increase in interest rates would increase expected annual interest expense by approximately $9.8 million on the company’s $1.96 billion of variable-rate debt.
- Key risks include semiconductor demand cyclicality, supply-chain and foundry constraints, reliance on third-party assembly and test providers, COVID-19 disruptions, distributor inventory levels, foreign operations and sales, China-related trade restrictions and tariffs, competitive pricing pressure, debt refinancing, convertible-debt dilution, cybersecurity incidents, intellectual-property claims, tax audits and litigation.
- Potential legal and contingency exposure includes approximately $100 million of aggregate possible-but-not-probable liability in excess of accrued amounts. Technology-license indemnification obligations with specified limits totaled approximately $168.1 million; no related liability was recorded.
- The company reported no goodwill or intangible-asset impairment charges during the quarter. Goodwill was $6.67 billion and net intangible assets were $4.58 billion at June 30, 2021, creating ongoing impairment risk.
- On July 19, 2021, the company filed a proxy proposal to increase authorized common shares from 450 million to 900 million to facilitate a proposed two-for-one forward stock split, subject to stockholder approval.
- Disclosure controls and procedures were assessed as effective, and no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Verify whether supply constraints and extended lead times persist through mid-calendar 2022 and whether capacity investments convert into sustained revenue growth.
- Monitor gross-margin durability as product mix, capacity utilization, pricing pressure, yields and external manufacturing costs change.
- Review the company’s ability to refinance or repay the approximately $5.36 billion of fiscal 2024 maturities while maintaining dividends and planned capital expenditures.
- Assess distributor inventory, Preferred Supply Program order enforceability and the risk of future cancellations or rescheduling.
- Track demand exposure in China and Taiwan, export controls, tariffs and other geopolitical restrictions given the company’s substantial foreign sales.
- Evaluate potential dilution or cash requirements from convertible debt, particularly because several convertible instruments were eligible for conversion during July through September 2021.
- Review developments in the Microsemi shareholder and derivative litigation, Continental arbitration, French labor claims and related governmental or intellectual-property matters.
- Confirm stockholder approval and implementation details of the proposed two-for-one stock split.