Microchip Technology Incorporated — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2015. The filing also presents fourth-quarter fiscal 2015 results; the requested “2014 Q4” label does not correspond to the filing period.
Business Context
Microchip develops, manufactures and sells specialized semiconductors for embedded-control applications, including microcontrollers, analog and mixed-signal devices, connectivity products, memory products and technology licenses. Fiscal 2015 results included the acquisitions of Supertex and controlling interests in ISSC. Approximately 84% of sales were to foreign customers, with China representing approximately 28% of total sales. Distributors accounted for 51% of net sales.
Key Financial Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $2.147 billion | $1.931 billion | Up 11.2% |
| Gross profit | $1.230 billion | $1.129 billion | Up 8.9% |
| Gross margin | 57.3% | 58.4% | Down 1.1 points |
| Operating income | $425.6 million | $458.9 million | Down 7.2% |
| Operating margin | 19.8% | 23.8% | Down 4.0 points |
| Net income attributable to Microchip | $369.0 million | $395.3 million | Down 6.6% |
| Diluted EPS | $1.65 | $1.82 | Down 9.3% |
| Cash flow from operations | $721.2 million | $676.6 million | Up 6.6% |
| Capital expenditures | $149.5 million | $113.1 million | Up 32.2% |
Fiscal 2015 product revenue was led by microcontrollers at $1.394 billion, or 64.9% of sales, and analog, interface and mixed-signal products at $501.0 million, or 23.3%. Memory revenue declined 1.8% to $132.3 million, while technology-licensing revenue declined 5.3% to $89.6 million.
At March 31, 2015, cash, cash equivalents and investments totaled $2.342 billion, including $607.8 million of cash and cash equivalents. Working capital was $2.311 billion. Total assets were $4.781 billion and total equity was $2.061 billion. Inventory was $279.5 million, or 111 days of inventory.
Debt increased materially. The company had $461.9 million outstanding under its revolving credit facility, $1.174 billion of senior convertible debentures and $190.9 million of junior convertible debentures at carrying value. Contractual obligations totaled $3.528 billion, including principal and interest on borrowings and convertible debentures.
Fourth-Quarter Fiscal 2015 Results
| Metric | Fourth quarter ended March 31, 2015 | Fourth quarter ended March 31, 2014 |
|---|---|---|
| Net sales | $543.2 million | $493.4 million |
| Gross profit | $313.6 million | $290.6 million |
| Operating income | $110.3 million | $126.0 million |
| Net income attributable to Microchip | $99.4 million | $111.5 million |
| Diluted EPS | $0.45 | $0.50 |
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by the Supertex and ISSC acquisitions, market-share gains and improved end-market conditions. Units sold increased approximately 11%, while average selling prices increased approximately 2%.
- Gross margin declined because fiscal 2015 included approximately $24.4 million of acquired-inventory fair-value charges and a less favorable product mix. These effects were partly offset by improved capacity utilization and lower excess-capacity charges.
- Operating income and net income declined despite higher sales because acquired-intangible amortization increased to $176.7 million from $94.5 million, R&D expense increased to $349.5 million from $305.0 million, and interest expense increased to $62.0 million from $48.7 million.
- Fiscal 2015 included a $50.6 million loss on the retirement of $575.0 million of junior convertible debentures. The company also issued $1.725 billion of 1.625% senior subordinated convertible debentures due 2025.
- The effective tax rate was negative 5.6%, compared with 8.6% in fiscal 2014, primarily because of $33.1 million of tax benefits from audit closures and expiration of tax statutes, plus a $1.8 million R&D tax-credit benefit.
- Operating cash flow increased to $721.2 million, but investing cash outflows rose to $678.3 million due primarily to the Supertex and ISSC acquisitions and higher capital expenditures.
Guidance, Outlook and Management Commentary
- Management expected inventory to increase by approximately 3 to 9 days in the June 2015 quarter from the March 2015 level to support competitive lead times and delivery performance.
- Planned capital expenditures for the following twelve months were approximately $160 million, expected to be funded through cash balances and operating cash flow.
- Management stated that existing liquidity, operating cash flow and available credit were expected to satisfy anticipated cash requirements for at least the next twelve months.
- Backlog was approximately $765.0 million at April 30, 2015, down from $813.1 million at April 30, 2014. Management cautioned that backlog is not a reliable measure of future sales because orders may be rescheduled or canceled.
- On May 7, 2015, Microchip announced an agreement to acquire Micrel for approximately $839 million of equity value, subject to shareholder, regulatory and other closing conditions. The board also increased the share-repurchase authorization to 20.0 million shares.
Risks, Contingencies and Unusual Items
- Key risks include semiconductor cyclicality, seasonality, pricing pressure, short order visibility, distributor dependence, inventory obsolescence and manufacturing-yield fluctuations.
- Approximately 39% of fiscal 2015 sales came from products manufactured at outside wafer foundries. The company also relies on Asian contractors for portions of assembly and testing.
- Foreign concentration is significant: approximately 59% of sales were in Asia, 21% in Europe, 28% in China and 14% in Taiwan. Substantially all finished-goods inventory was maintained in Thailand, exposing operations to political, flooding and infrastructure risks.
- The company was subject to IRS audits for fiscal 2011 and 2012 and maintained approximately $170.7 million of gross unrecognized tax benefits at March 31, 2015. Undistributed foreign earnings of approximately $2.8 billion were treated as permanently reinvested offshore.
- Technology-license agreements include indemnification provisions with approximately $139 million of specified aggregate potential exposure; no liability was recorded for these obligations. Pending litigation outcomes were described as uncertain but not expected to have a material adverse effect.
- Remaining convertible debt may create dilution. The junior debentures had an if-converted value exceeding principal by $545.6 million at March 31, 2015.
- No goodwill impairment was recorded in fiscal 2015 or fiscal 2014. The company recorded $1.9 million of intangible-asset impairment in fiscal 2015.
- Management and Ernst & Young reported effective internal control over financial reporting, and Ernst & Young issued an unqualified audit opinion.
Important Facts for Investors to Verify
- Confirm the final purchase price, financing, integration costs and expected synergies associated with the announced Micrel acquisition.
- Assess whether sales growth can continue excluding the contribution of Supertex and ISSC and whether the decline in operating margin stabilizes.
- Monitor debt balances, covenant compliance, convertible-debt dilution and cash availability given the company’s high foreign-cash concentration.
- Review the sustainability of the negative fiscal 2015 tax rate and separate recurring tax economics from one-time audit and reserve benefits.
- Track distributor inventory, deferred income on distributor shipments, backlog quality and customer sell-through.
- Evaluate exposure to foundry capacity, Thailand operations, foreign exchange, intellectual-property claims, tax audits and potential inventory write-downs.