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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
------------------------ ---------------
Commission File Number: 0-21184
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MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-0629024
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224-6199
(602) 786-7200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's
Principal Executive Offices)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the issuer's common stock, as of October 31,
1996:
Common Stock, $.001 Par Value: 34,030,772 shares
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1996 and March 31, 1996........................... 3
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended
September 30, 1996 and September 30, 1995....................... 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 1996 and September 30, 1995...... 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 10
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders............. 15
Item 6. Exhibits and Reports on Form 8-K................................ 16
SIGNATURES .................................................................... 17
EXHIBITS
10.1 Credit Agreement Dated as of October 31, 1996
Among Microchip Technology Incorporated, the
Banks Named Therein, Wells Fargo Bank, N.A.,
as Administrative Agent and NBD Bank, as Co-Agent............... *
11 Computation of Net Income Per Share............................. *
2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
September 30, March 31,
1996 1996
--------- ---------
(Unaudited)
Cash and cash equivalents $ 19,522 $ 31,059
Accounts receivable, net (note 4) 48,506 47,208
Inventories (note 5) 59,079 56,127
Prepaid expenses 1,798 1,808
Deferred tax asset 19,360 19,121
Other current assets 951 1,108
--------- ---------
Total current assets 149,216 156,431
Property, plant & equipment, net (note 6) 221,803 197,383
Other assets 5,283 4,373
--------- ---------
Total assets $ 376,302 $ 358,187
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Lines of credit (note 7) $ 9,425 $ --
Accounts payable 42,360 47,165
Current maturities of long-term debt 2,568 2,734
Current maturities of capital lease obligations 3,218 2,943
Accrued liabilities 35,730 28,207
Deferred income on shipments to distributors 13,063 19,527
--------- ---------
Total current liabilities 106,364 100,576
Long-term line of credit (note 7) 28,275 21,000
Long-term debt, less current maturities 4,840 6,086
Capital lease obligations, less current maturities 4,404 6,164
Long-term pension accrual 867 690
Deferred tax liability 5,898 4,039
Stockholders' equity: (note 8)
Preferred stock, $.001 par value; authorized 5,000,000 shares;
no shares issued or outstanding -- --
Common stock, $.001 par value; authorized 65,000,000 shares;
issued 34,876,469 shares at September 30, 1996; 35 35
34,387,448 shares at March 31, 1996
Additional paid-in capital 120,606 120,737
Retained earnings 118,505 98,693
Less shares of common stock held in treasury; 626,971 shares at cost (13,659) --
Foreign currency translation adjustment 167 167
--------- ---------
Net stockholders' equity 225,654 219,632
Total liabilities and stockholders' equity $ 376,302 $ 358,187
========= =========
See accompanying notes to consolidated financial statements.
3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
(Unaudited) (Unaudited)
1996 1995 1996 1995
--------- --------- --------- ---------
Net sales $ 79,510 $ 71,265 $ 153,671 $ 135,764
Cost of sales 39,722 34,307 77,247 65,311
--------- --------- --------- ---------
Gross profit 39,788 36,958 76,424 70,453
Operating expenses:
Research and development 7,651 6,741 14,571 13,026
Selling, general and administrative 13,620 12,223 26,247 23,272
Restructuring cost -- -- 5,969 --
Write-off of in-process technology -- -- 1,575 --
--------- --------- --------- ---------
21,271 18,964 48,362 36,298
Operating income 18,517 17,994 28,062 34,155
Other income (expense):
Interest income 330 531 744 1,022
Interest expense (1,001) (574) (1,760) (1,175)
Other, net 134 (173) 95 (137)
--------- --------- --------- ---------
Income before income taxes 17,980 17,778 27,141 33,865
Income taxes 4,854 5,013 7,329 9,597
--------- --------- --------- ---------
Net income $ 13,126 $ 12,765 $ 19,812 $ 24,268
========= ========= ========= =========
Net income per common and
common equivalent share $ 0.37 $ 0.35 $ 0.55 $ 0.67
========= ========= ========= =========
Shares used in per share calculation 35,895 36,654 36,117 36,442
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended September 30,
------------------------------
Cash flows from operating activities: 1996 1995
-------- --------
(Unaudited)
Net income $ 19,812 $ 24,268
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts 61 230
Provision for inventory valuation 3,430 1,207
Provision for pension accrual 622 530
Provision for restructuring cost 2,483 --
Depreciation and amortization 19,622 12,849
Amortization of purchased technology 150 --
Deferred income taxes 1,620 (647)
Compensation expense on stock options 30 30
Increase in accounts receivable (1,358) (8,528)
Increase in inventories (6,382) (7,555)
Increase in accounts payable and accrued liabilities 2,718 14,232
Change in other assets and liabilities (7,803) 3,803
-------- --------
Net cash provided by operating activities 35,005 40,419
-------- --------
Cash flows from investing activities:
Capital expenditures (46,525) (47,263)
Sales of marketable securities -- 176
-------- --------
Net cash used in investing activities (46,525) (47,087)
-------- --------
Cash flows from financing activities:
Net proceeds (repayments) from lines of credit 16,700 (501)
Proceeds from issuance of long-term debt -- 2,924
Payments on long-term debt (1,412) (1,224)
Payments on capital lease obligations (1,485) (1,670)
Repurchase of common stock (19,463) --
Proceeds from sale of stock and put options 5,643 4,829
-------- --------
Net cash provided by (used in) financing activities (17) 4,358
-------- --------
Net decrease in cash and cash equivalents (11,537) (2,310)
Cash and cash equivalents at beginning of period 31,059 32,638
-------- --------
Cash and cash equivalents at end of period $ 19,522 $ 30,328
======== ========
See accompanying notes to consolidated financial statements.
5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of Microchip Technology Incorporated and its wholly-owned
subsidiaries (the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, the accompanying financial statements include all adjustments of a
normal recurring nature which are necessary for a fair presentation of the
results for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to such rules and regulations. It is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 1996. The results of operations for the six
months ended September 30, 1996 are not necessarily indicative of the results to
be expected for the full fiscal year.
(2) ASiC Acquisition
On June 25, 1996 the Company acquired ASiC Technical Solutions, Inc., a
fabless provider of quick turn gate array devices (the "Acquisition"). The
Acquisition was treated as a purchase for accounting purposes. The amount paid
for the Acquisition and related costs was $1,750,000. As part of the
Acquisition, Microchip allocated a substantial portion of the purchase price to
in-process research and development costs, which is consistent with the
Company's on-going treatment of research and development costs. The total
one-time write-off associated with the Acquisition was $1,575,000, with the
balance to be treated as purchased technology related to current product and
amortized over five years. The impact of the Acquisition to the Company's
reported financial data and results of operations is immaterial. Therefore,
pro-forma information illustrating the combined results after the Acquisition
has not been provided.
(3) Restructuring Charges
During the quarter ended June 30, 1996, primarily in response to
inventory correction activities at the Company's customers, the Company
implemented a series of actions to temporarily reduce production capacity,
curtail the growth of inventories and reduce operating expenses. These actions
included delaying capital expansion plans and deferring capital spending, a 15%
production cutback in wafer fabrication, a headcount reduction in early April,
1996 representing approximately 3% of the Company's worldwide employees, and a
two-week wafer fab shut down in early July, 1996. As a result of these actions,
the Company recorded a pre-tax restructuring charge of $5,969,000 in the six
months ended September 30, 1996 to cover costs primarily related to idling part
of the Company's 5-inch wafer fab capacity, paying continuing expenses during
the wafer fab shutdown and paying severance costs associated with the April,
1996 headcount reduction.
6
(4) Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
September 30, March 31,
1996 1996
--------------------------
Trade accounts receivable $48,781 $47,799
Other 1,620 1,243
------- -------
50,401 49,042
Less allowance for doubtful accounts 1,895 1,834
------- -------
$48,506 $47,208
======= =======
(5) Inventories
The Company utilizes the LIFO (last-in, first-out) accounting method
and has consistently presented its results of operations on this basis for all
periods presented.
The components of inventories are as follows (amounts in thousands):
September 30, March 31,
1996 1996
-------------------------
Raw materials $ 2,880 $ 2,033
Work in process 46,153 43,036
Finished goods 20,594 21,430
------- -------
69,627 66,499
Less allowance for inventory valuation 10,548 10,372
------- -------
$59,079 $56,127
======= =======
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in
thousands):
September 30, March 31,
1996 1996
---------------------------
Land $ 10,518 $ 10,518
Building and building improvements 47,821 36,939
Machinery and equipment 195,645 185,580
Projects in process 46,968 26,389
-------- --------
300,952 259,426
Less accumulated depreciation
and amortization 79,149 62,043
-------- --------
$221,803 $197,383
======== ========
7
(7) Lines of Credit
Lines of credit consist of the following (amounts in thousands):
September 30, March 31,
1996 1996
---------------------------------------
Unsecured line of credit with a syndicate of
U.S. banks for up to $90,000,000, bearing
interest at the Prime Rate or the 30-Day
London Interbank Offered Rate (LIBOR) plus
75 basis points (8.25% and 6.25%
respectively, at September 30, 1996)
expiring January, 1997. $ 37,700 $ 21,000
Unsecured lines of credit with various
Taiwan financial institutions for up to
$14,920,000 (U.S. dollar equivalent),
borrowings predominately denominated in New
Taiwan Dollars, bearing interest at the
Taiwan money market rate or the U.S. Prime
Rate (6.55% and 8.25% respectively, at
September 30, 1996), expiring on various
dates through October, 1997. $ --- $ ----
----------- --------
$ 37,700 $ 21,000
=========== ========
The agreement between the Company and the syndicate of U.S. banks requires the
Company to achieve certain financial ratios and operating results. The Company
was in compliance with these covenants as of September 30, 1996.
The line of credit with the syndicate of U.S. banks converts borrowings
into a term loan at the expiration date of the line of credit, if the parties do
not mutually agree to extend the line for an additional period. The line of
credit is split into two components of $45,000,000 each, with amortization of
each component being repaid in eight quarterly payments of principal plus
interest and twenty quarterly payments of principal plus interest, respectively.
The term facilities will bear interest at the prime rate for the period of the
borrowings.
Subsequent to September 30, 1996 the Company entered into a revised
credit agreement. The line was maintained at $90,000,000 with substantially the
same interest rates and covenants, and two additional banks were added to the
syndication. The line was completed as a revolving line of credit for a two year
period, maturing on October 31, 1998.
(8) Stockholders' Equity
Stock Repurchase Activity. In connection with a stock repurchase
program, during the six months ended September 30, 1996, the Company purchased a
total of 884,318 shares of the Company's
8
common stock in open market activities at a total cost of $19,463,000. Through
September 30, 1996, the Company had reissued through stock option exercises and
the Company's stock purchase plan, a total of 257,347 shares of the Company's
common stock held in treasury.
Also in connection with the stock repurchase program, as of September
30, 1996, the Company held unexpired put options for 425,000 shares. The
unexpired put options have expiration dates ranging from October 4, 1996 to July
10, 1997 at prices ranging from $22.50 to $31.875. The net proceeds from sale
and repurchase of put options has been credited to paid-in capital. For the six
months ended September 30, 1996, $770,000 was charged to paid-in capital due to
the repurchase of put options.
(9) Supplemental Cash Flow Information
Cash paid for income taxes amounted to $2,052,000 and $13,032,000
during the six months ended September 30, 1996 and 1995 respectively. Cash paid
for interest amounted to $1,720,000 and $1,191,000 for each of the six month
periods ended September 30, 1996 and 1995.
9
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's net sales for the quarter ended September 30, 1996 were
$79.5 million, an increase of 11.6% over sales of $71.3 million for the
corresponding quarter of the previous fiscal year, and an increase of 7.2% from
the previous quarter's sales of $74.2 million. Net sales for the six months
ended September 30, 1996 were $153.7 million, an increase of 13.2% over sales of
$135.8 million in the corresponding period of the previous fiscal year. The
Company experienced growth in sales of 8-bit microcontrollers and serial and
parallel EEPROM memories over these periods and a moderate decline in sales of
its commodity memory and other product categories. The improvements in overall
sales mix is primarily due to the Company's emphasis on higher margin products.
The Company does not expect the sales mix of its products to change
substantially in future periods.
Growth in sales continued during the quarter ended September 30, 1996,
and the Company believes that the inventory correction activities at the
Company's customers are substantially complete. The foregoing statements
relating to sales mix, growth in sales and customer inventory correction
activities are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbors created
thereby. Actual results could differ materially because of the following
factors, among others: general economic conditions in the United States and
worldwide markets served by the Company; customer inventory levels, order
patterns and seasonality; the cyclical nature of both the semiconductor industry
and the markets addressed by the Company's products; the level of orders which
are received and can be shipped in a quarter; the Company's ability to continue
to introduce new products; market acceptance of the current and new products of
both the Company and its customers; customer demand for the Company's products;
competition and competitive pressures on pricing; and product availability.
The Company's family of 8-bit microcontrollers represents the largest
component of Microchip's total net sales. Microcontrollers and associated
application development systems accounted for 65% and 61% of total net sales in
the quarters ending September 30, 1996 and 1995, respectively. A related
component of the Company's product sales consists of serial and parallel EEPROM
memories. These products accounted for 31% of net sales in each of the quarters
ended September 30, 1996 and 1995. The remaining components of total net sales
were the Company's commodity memory and other miscellaneous products which
accounted for 4% and 8% of net sales in the quarters ended September 30, 1996
and 1995, respectively. Microcontrollers and associated application development
systems accounted for 63% and 59% of total net sales in the six months ended
September 30, 1996 and 1995, respectively. Serial and parallel EEPROM memory
products accounted for 32% and 33% of net sales in the six months ended
September 30, 1996 and 1995, respectively. The remaining components of total net
sales were the Company's commodity memory and other miscellaneous products which
accounted for 5% and 8% of net sales in the six months ended September 30, 1996
and 1995, respectively.
During the past three years, the Company's overall average selling
prices for its embedded control products have remained relatively constant,
although the Company has experienced increased pricing pressure, on its
non-volatile memory products during the quarters ended June 30, 1996 and
10
September 30, 1996, which pricing pressure the Company expects to continue.
While a decrease in average selling prices could adversely affect the Company's
operating results, the Company believes that operating margins will be
maintained at historical levels as (i) the Company transitions over time to
products with higher average selling prices and (ii) the Company transitions to
higher yielding manufacturing processes. There can be no assurance that average
selling prices or operating margins for the Company's products will remain
constant in the future due to competitive and other pressures. The foregoing
statements regarding product mix, average selling prices, pricing pressures, a
transition to higher yielding manufacturing processes, using smaller geometries
and larger wafers, and operating margins are forward looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the safe harbors created thereby. Actual results could differ materially
because of the following factors, among others: competition and competitive
pressures on pricing and product availability; customer inventory levels, order
patterns and seasonality; the cyclical nature of both the semiconductor industry
and the markets addressed by the Company's products; the level of orders that
are received and can be shipped in a quarter; market acceptance of the products
of both the Company and its customers; demand for the Company's products;
fluctuations in production yields, production efficiencies, overall capacity
utilization, changes in product mix; and absorption of fixed costs, labor and
other fixed manufacturing costs.
Foreign sales represented 63% of net sales in the current fiscal
quarter, 67% of net sales in the corresponding quarter of the previous fiscal
year and 67% of net sales in the previous quarter. Foreign sales represented 65%
and 66% of net sales for the six months ended September 30, 1996 and 1995
respectively. The Company's foreign sales have been predominantly in Asia,
Europe and Japan which the Company attributes to the manufacturing strength in
those areas for consumer, automotive, office automation, communications and
industrial products. The majority of foreign sales are U.S. dollar denominated.
The Company has entered into and, from time to time, will enter into hedging
transactions in order to minimize exposure to currency rate fluctuations.
Although none of the countries in which the Company conducts significant foreign
operations has had a highly inflationary economy in the last five years, there
can be no assurance that inflation rates or fluctuations in foreign currency
rates in countries where the Company conducts operations will not adversely
affect the Company's operating results in the future.
Additional Factors Affecting Operations. The Company generally produces
standard products that can be shipped from inventory within a short time after
receipt of an order. Accordingly, the Company's net sales in any given quarter
are dependent upon a combination of shipments from backlog and orders received
in that quarter for shipment in that quarter ("turns orders"). Current industry
conditions are resulting in customers placing orders with relatively short
delivery schedules, limiting the Company's visibility on net sales in the
current and future quarters. Over the past several quarters, the Company has
been adapting its inventory levels in certain categories of inventory so that it
can shorten delivery times which it believes is an important competitive factor.
Because turns orders are more difficult to predict, there can be no assurance
that the combination of turns orders and backlog in any quarter will be
sufficient to achieve growth in net sales.
The Company believes the future growth of its 8-bit family of
microcontroller products and related memory product sales will depend largely
upon the Company's success in having its current and new products designed into
high-volume customer applications. Design wins typically precede the Company's
volume shipment of products for such applications by 15 months or more. The
Company also believes that shipment levels of its proprietary application
development systems are an indicator of potential future microcontroller sales.
During the quarter ended September 30, 1996, the Company
11
continued to achieve additional design wins and ship a high level of application
development systems. However, there can be no assurance that any particular
development system sale will result in a product design win or that any
particular design win will result in future product sales.
The Company's operating results are affected by a wide variety of
factors which could adversely impact its net sales and profitability, many of
which are beyond the control of the Company. The factors include, among others,
the Company's ability to design and introduce new products on a timely basis,
market acceptance of current and new products of both the Company and its
customers, customer order patterns and seasonality, the amount of any product
returns, industry pricing trends, availability and utilization of manufacturing
capacity, the timing and success of the transition to higher yielding
manufacturing processes using smaller geometries and larger wafers, the
availability and cost of raw materials, equipment and other supplies, the
cyclical nature of the semiconductor industry, and economic, political or other
conditions in the United States, Taiwan, Thailand or worldwide markets.
Gross Profit. The Company's gross profit was $39.8 million for the
quarter ended September 30, 1996 compared with $37.0 million in the
corresponding quarter of the prior year and $36.6 million in the previous
quarter. Gross profit as a percent of sales was 50.0% in the current quarter,
51.9% in the corresponding quarter of the prior fiscal year and 49.4% in the
previous quarter. Gross profit for the six month period ended September 30, 1996
was 76.4 million and 49.7% of net sales compared to $70.5 million and 51.9% of
net sales in the corresponding period of the prior fiscal year. Gross profit
increased sequentially primarily as a result of increased sales of 8-bit
microcontrollers and down from prior year levels as a result of reduced 5-inch
wafer production at one of the Company's wafer fabs. The Company anticipates
that its cost of sales will fluctuate over time, driven primarily by the product
mix of 8-bit microcontroller products and related memory and commodity memory
products, manufacturing yields, wafer fab loading levels and competitive and
economic conditions. The Company anticipates that its gross profit percentage
will fluctuate over time, driven primarily by product mix, manufacturing yields
and competitive and economic conditions. The Company is currently transitioning
certain products to higher yielding manufacturing processes using smaller
geometries and larger wafers which is necessary for the Company to maintain
gross profit margins. The foregoing statements relating to anticipated gross
margins and costs of sale and the manufacturing process forecasting are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbors created thereby. Actual results
could differ materially because of the following factors, among others:
fluctuations in production yields, production efficiencies, overall capacity
utilization; cost and availability of raw materials; absorption of fixed costs,
labor and other direct manufacturing costs; the timing and success of the
manufacturing process transition; changes in product mix; competitive pressures
on prices; and other economic conditions in the United States and other
worldwide markets.
The Company has consistently presented its results of operations for
all periods on the last-in first-out (LIFO) method and has assessed the net
realizable value of inventory based on LIFO costs. LIFO has the effect of
matching current costs of production with sales generated during the same
period. Production costs have generally decreased over time due to improvements
in manufacturing productivity and yields, resulting in lower cost of sales. This
downward trend in production costs has resulted in lower cost of sales on a LIFO
basis than would have been recognized had a first-in, first-out (FIFO) basis
been utilized, decreasing cost of sales $779,000 for the six months ended
September 30, 1996. As a result of changes in sales and product mix which
affected production costs, the LIFO inventory decreased and cost of sales
increased by $100,000 for the three months ended September 30, 1996 and by
$250,000 and $500,000 for the three months and six months ended September 30,
1995, respectively.
12
The Company relies on the assembly and test capability of third-party
contractors in order to meet rising product shipment requirements. Such reliance
on third-parties involves some reduction in the Company's level of control over
the assembly and test portion of its business. While the Company reviews the
availability, quality, delivery and cost performance of these third-party
contractors, there can be no assurance that such reliance on third-party
contractors will not adversely impact results in future reporting periods if any
third-party contractor is unable to maintain availability, assembly and test
yields and cost at approximately their current level.
During the second half of fiscal 1997, the Company expects to bring its
wholly-owned Chacheongsao, Thailand test facility (located near Bangkok) on line
for production volumes. While the Company believes the long term costs at this
facility will be at or below existing costs for similar activities, there may be
a short term impact to gross profit margins in fiscal 1997 relating to
production efficiencies and yields, operation levels, fixed cost absorption and
operating cost levels. It is anticipated that the Chacheongsao, Thailand
facility will reach optimal loading by the beginning of fiscal 1998. The
foregoing statement is a forward-looking statement within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and is subject to the safe harbors created
thereby. Actual results could differ materially because of the following
factors, among others: delays in construction and facilitation of the
Chacheongsao, Thailand facility; production yields and efficiencies; factory
absorption rates; capacity loading; political instability and expropriation;
supply disruption; operating cost levels; and the rate of revenue growth.
Research and Development. The Company is committed to continued
investment in new and enhanced products, including its development systems
software and in its design and manufacturing process technology, which is a
significant factor in maintaining the Company's competitive position. The dollar
investment in research and development increased 13.5% in the current fiscal
quarter relative to the corresponding quarter of the prior fiscal year, and
increased by 10.6% compared to the investment in the immediately proceeding
quarter. Research and development costs increased 11.9% in the six month period
ended September 30, 1996 compared to the corresponding period of the prior
fiscal year. The Company will continue to invest in research and development in
the future, including an investment in process and product development
associated with the capacity expansion of the Company's fabrication facilities.
The Company's inability to complete, or delay in completing, new product
introductions and manufacturing process improvements could have a material
adverse impact on the Company's future operating results and competitive
position.
Selling, General and Administrative. Through expense controls and
operating efficiencies, the Company has maintained selling, general and
administrative expenses in the current fiscal quarter at 17.1% of sales as
compared to 17.2% of sales in the corresponding quarter of the prior fiscal
year. Selling, general and administrative expenses in the prior quarter were
17.0% of sales. Selling, general and administrative expenses were 17.1% of net
sales in both six month periods ended September 30, 1996 and 1995. This has been
achieved while the Company has continued to invest significantly in incremental
worldwide sales and technical support resources to promote the Company's
embedded control products. However, there can be no assurance that revenue
growth in the future will be sufficient to maintain the current level in
selling, general and administrative expenses as a percentage of sales.
Other Income (Expense). Interest income of $330,000 in the current
fiscal quarter decreased from $531,000 in the corresponding quarter of the prior
fiscal year and from $414,000 in the previous quarter. Interest income of
$744,000 in the six months ended September 30, 1996 decreased from $1,022,000 in
the corresponding period of the prior fiscal year. The decrease in both
instances is attributable to lower invested cash balances.
13
Interest expense of $1,001,000 in the current fiscal quarter increased
from $574,000 in the corresponding quarter of the prior fiscal year and from
$759,000 in the previous quarter. Interest expense of $1,760,000 in the six
months ended September 30, 1996 increased from $1,175,000 in the corresponding
period of the prior fiscal year. The increase in interest expense is related to
additional borrowings associated with the Company's capital equipment additions
and stock repurchase program. Other income represents immaterial non-operating
items. The Company anticipates its interest expense may increase in fiscal 1997
as the Company increases its borrowings. In addition, interest expense could be
adversely impacted by an increase in interest rates.
The use of available cash and debt to fund expected capital
expenditures in future periods, without additional capital provided from
financing activities, will result in an increase in interest expense.
Provision for Income Taxes. Provisions for income taxes reflect taxes
on foreign earnings and federal and state income taxes on U.S. earnings. The
Company had an effective tax rate of 27.0% and 28.2% for the three month periods
ended September 30, 1996 and 1995, respectively. Effective tax rates for the six
months ended September 30, 1996 and 1995 were 27.0% and 28.3% respectively. The
Company currently believes that the tax rate for the foreseeable future will
remain at approximately 27.0%, however, there can be no assurance that the
Company will maintain such a rate of 27.0% in the future due to possible changes
in tax laws and regulations and other factors.
Liquidity and Capital Resources
The Company had $19.5 million in cash as of September 30, 1996, a
decrease of $11.5 million from the March 31, 1996 balance. The Company has an
unsecured short-term line of credit totaling $14.9 million with certain foreign
banks. There were no borrowings under the line of credit with the foreign banks
as of September 30, 1996. There are no covenants related to the foreign line of
credit. The Company also has an unsecured line of credit with a syndicate of
U.S. banks totaling $90.0 million. As of September 30, 1996, $37.7 million had
been utilized under the financing arrangements. The domestic line of credit
requires the Company to achieve certain financial ratios and operating results.
The Company was in compliance with these covenants as of September 30, 1996.
Subsequent to September 30, 1996 the Company entered into a revised
credit agreement. The line was maintained at $90.0 million at substantially the
same interest rates and covenants, adding two additional banks to the
syndication. The line was completed as a revolving line of credit for a two year
period, maturing on October 31, 1998.
At September 30, 1996, an aggregate of $67.2 million of these
facilities was available, subject to financial covenants and ratios with which
the Company is currently in compliance. The Company's ability to fully utilize
these facilities is dependent on the Company remaining in compliance with such
covenants and ratios.
During the six months ended September 30, 1996, the Company generated
$35.0 million of cash from operating activities, a decrease of $5.4 million from
the corresponding period of the previous fiscal year. The reduction in cash flow
from operations was primarily due to the reduction in net income, (as a result
of the restructuring and write-off of in process technology) an increase in
depreciation charges and changes in accounts payable and accrued liabilities.
14
The Company's level of capital expenditures varies from time to time as
a result of actual and anticipated business conditions. Capital expenditures in
the six months ended September 30, 1996 and 1995 were $46.5 million and $47.3
million, respectively. Capital expenditures were primarily for the expansion of
production capacity and the addition of research and development equipment in
each of these periods. The Company currently anticipates spending approximately
$100 million during the next twelve months primarily for additional capital
equipment to increase capacity at its wafer fabrication facilities, to construct
additional facilities and to expand test operations. Capital expenditures will
be financed by cash flow from operations, existing cash, available debt
arrangements and other sources of financing, including debt or equity financing.
The Company believes that the capital expenditures anticipated to be incurred
over the next twelve months will provide sufficient additional manufacturing
capacity to meet its needs for that period.
Net cash provided by financing activities was zero and $4.4 million for
the six months ended September 30, 1996 and 1995, respectively. Repurchase of
common stock was $19.5 million for the six month period ended September 30,
1996. Proceeds from sale of stock and put options were $5.6 million and $4.8
million for the six months ended September 30, 1996 and 1995, respectively.
Proceeds from the issuance of long term debt were $2.9 million for the six
months ended September 30, 1995. Payments on long term debt and capital lease
obligations were $2.9 million for each of the six months ended September 30,
1996 and 1995. Net proceeds from lines of credit was $16.7 million for the six
months ended September 30, 1996. Repayments on the lines of credit was $0.5
million for the six months ended September 30, 1995.
The Company believes that its existing sources of liquidity combined
with cash generated from operations and additional borrowings under its bank
line of credit will be sufficient to meet the Company's currently anticipated
cash requirements for at least the next twelve months. However, due to the
capital intensive nature of the semiconductor industry, the Company expects to
seek debt financing and/or additional equity during the next twelve months.
There can be no assurance that such financing will be available on acceptable
terms, and any additional equity financing would result in additional dilution
to existing stockholders. The foregoing statements relating (i) to the level of
capital expenditures, (ii) sufficient manufacturing capacity; (iii) anticipated
cash requirements; and (iv) adequacy and availability of capital resources, are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbors created thereby. Actual results
could differ materially because of the following factors, among others: future
operating results; the cyclical nature of both the semiconductor industry and
the markets addressed by the Company's products; customer demand for the
Company's products; the availability of equipment and other supplies; the amount
and timing of cash flows generated from operations; and economic conditions in
the United States and other worldwide markets.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS.
(a) The Annual Meeting of Stockholders of the Company was held on July 26,
1996 (the "Meeting").
(b) Steve Sanghi, Albert J. Hugo-Martinez, Jon H. Beedle and L.B. Day were
elected as Directors at the Meeting.
15
(c) The results of the vote on the matters voted upon at the Meeting were
as follows:
(i) Election of Directors:
For Withheld/Abstain
--- ----------------
Steve Sanghi 29,943,449 113,560
Albert J. Hugo-Martinez 29,945,189 111,820
Jon H. Beedle 29,932,588 124,421
L.B. Day 29,944,396 112,613
(ii) Approval of Amendment to the Microchip 1993 Stock Option Plan
to (i) increase from 3,000 to 5,000 the number of shares of
Common Stock for which options are automatically granted
following the election of directors at each annual meeting of
stockholders and (ii) increase from 8,000 to 10,000 the number
of shares of Common Stock of which options are automatically
granted following a director's initial appointment or election
to the Board of Directors:
For Against Withheld/Abstain Broker Non-Votes
--- ------- ---------------- ----------------
24,893,006 4,714,535 71,717 377,751
(iii) Ratification of Appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending
March 31, 1997:
For Against Abstain
--- ------- -------
29,958,563 58,308 40,138
The foregoing matters are described in more detail in the Registrant's
definitive proxy statement dated June 17, 1996 relating to the Meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.1 Credit Agreement Dated
as of October 31, 1996
Among Microchip Technology
Incorporated, the Banks
Named Therein, Wells Fargo
Bank, N.A., as
Administrative Agent and
NBD Bank, as Co-Agent.
Exhibit 11 Computation of Net Income
Per Share
(b) Reports on Form 8-K.
The registrant did not file any reports on
Form 8-K during the quarter ended September
30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROCHIP TECHNOLOGY INCORPORATED
Date:November 13, 1996 By:/s/ C. Philip Chapman
---------------------- -----------------------------
C. Philip Chapman
Vice President, Chief Financial Officer
and Secretary (Duly Authorized Officer, and
Principal Financial and Accounting Officer)
17
EXHIBIT INDEX
Exhibit No. Page No.
----------- --------
10.1 Credit Agreement Dated as of October 31, 1996,
Among Microchip Technology Incorporated,
the Banks Named Therein, Wells Fargo Bank, N.A.,
as Administrative Agent and NBD Bank,
as Co-Agent...................................................... *
11 Computation of Net Income Per Share.............................. *
_________________
* Included in manually signed original
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