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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 June 30, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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 July
25,1997:
Common Stock, $.001 Par Value: 53,384,555 shares
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MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1997 and March 31, 1997.............................3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 1997
and June 30, 1996............................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 1997 and June 30, 1996...........5
Notes to Condensed Consolidated Financial Statements.............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................15
Item 5. Other Information...........................................15
Item 6. Exhibits and Reports on Form 8-K............................16
SIGNATURES....................................................................17
EXHIBITS
3.1 Certificate of Amendment to Registrant's Restated Certificate
of Incorporation, as amended................................19
11 Computation of Net Income PerShare..........................20
18.1 Letter from KPMG Peat Marwick LLP re: Change in Accounting
Principles..................................................21
2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
June 30, March 31,
1997 1997
--------- ---------
(Unaudited)
Cash and cash equivalents $ 67,645 $ 42,999
Accounts receivable, net 62,587 61,102
Inventories 59,330 56,813
Prepaid expenses 1,389 1,715
Deferred tax asset 24,240 24,251
Other current assets 2,614 2,656
--------- ---------
Total current assets 217,805 189,536
Property, plant & equipment, net 252,331 234,058
Other assets 4,558 4,498
--------- ---------
Total assets $ 474,694 $ 428,092
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 45,670 $ 35,281
Current maturities of long-term debt 2,435 2,470
Current maturities of capital lease obligations 3,672 3,776
Accrued liabilities 46,337 36,392
Deferred income on shipments to distributors 27,390 20,441
--------- ---------
Total current liabilities 125,504 98,360
Long-term debt, less current maturities 2,926 3,616
Capital lease obligations, less current maturities 1,746 2,383
Long-term pension accrual 1,048 980
Deferred tax liability 6,169 6,169
Stockholders' equity:
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 and outstanding 53,355,414 shares at
June 30, 1997; 53 53
53,196,037 shares at March 31, 1997
Additional paid-in capital 169,591 168,185
Retained earnings 167,657 149,825
Less shares of common stock held in treasury -- (1,479)
--------- ---------
Net stockholders' equity 337,301 316,584
Total liabilities and stockholders' equity $ 474,694 $ 428,092
========= =========
See accompanying notes to condensed consolidated financial statements
3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Three Months Ended June 30,
----------------------------
1997 1996
-------- --------
(Unaudited)
Net sales $ 97,228 $ 74,161
Cost of sales 47,835 37,525
-------- --------
Gross profit 49,393 36,636
Operating expenses:
Research and development 9,210 6,920
Selling, general and administrative 16,228 12,627
Restructuring cost -- 5,969
Write-off of in-process technology -- 1,575
-------- --------
25,438 27,091
Operating income 23,955 9,545
Other income (expense):
Interest income 740 414
Interest expense (281) (759)
Other, net 13 (39)
-------- --------
Income before income taxes 24,427 9,161
Income taxes 6,595 2,475
-------- --------
Net income $ 17,832 $ 6,686
======== ========
Net income per common and
common equivalent share $ 0.32 $ 0.12
======== ========
Shares used in per share calculation 56,432 54,423
======== ========
See accompanying notes to condensed consolidated financial statements
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended June 30,
---------------------------
Cash flows from operating activities: 1997 1996
-------- --------
(Unaudited)
Net income $ 17,832 $ 6,686
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts 144 171
Provision for inventory valuation (400) 2,761
Provision for pension accrual 296 305
Provision for restructuring cost -- 5,211
Depreciation and amortization 12,095 9,710
Amortization of purchased technology 75 75
Deferred income taxes 11 2
Compensation expense on stock options -- 15
(Increase)/decrease in accounts receivable (1,629) 1,685
Increase in inventories (2,117) (6,437)
Increase in accounts payable and accrued liabilities 20,334 2,369
Change in other assets and liabilities 6,953 (7,672)
-------- --------
Net cash provided by operating activities 53,594 14,881
-------- --------
Cash flows from investing activities:
Capital expenditures (30,367) (26,756)
-------- --------
Net cash used in investing activities (30,367) (26,756)
-------- --------
Cash flows from financing activities:
Net proceeds from lines of credit -- 8,100
Payments on long-term debt (725) (798)
Payments on capital lease obligations (741) (748)
Repurchase of common stock -- (4,100)
Proceeds from sale of stock and put options 2,885 935
-------- --------
Net cash provided by financing activities 1,419 3,389
-------- --------
Net increase (decrease) in cash and cash equivalents 24,646 (8,486)
Cash and cash equivalents at beginning of period 42,999 31,059
-------- --------
Cash and cash equivalents at end of period $ 67,645 $ 22,573
======== ========
See accompanying notes to condensed 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.
In the quarter ended June 30, 1997, the Company changed its method of
accounting for inventories from the last-in, first-out (LIFO) method to the
first-in, first-out (FIFO) method. The change did not have a material effect on
the results of operations for the quarter. The FIFO method is the predominant
accounting method used in the semiconductor industry. Prior to this change, the
Company's inventory costs did not differ significantly under the two methods.
Prior period results of operations will not be restated for this change as the
impact is not material.
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, 1997. The results of operations for the three
months ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full fiscal year.
6
(2) Accounts Receivable
Accounts receivable consists of the following (amounts in thousands):
June 30, March 31,
1997 1997
----------------------
Trade accounts receivable $64,153 $62,165
Other 672 1,031
------- -------
64,825 63,196
Less allowance for doubtful accounts 2,238 2,094
------- -------
$62,587 $61,102
======= =======
(3) Inventories
The components of inventories are as follows (amounts in thousands):
June 30, March 31,
1997 1997
---------------------
Raw materials $ 3,172 $ 2,310
Work in process 41,702 44,813
Finished goods 22,044 18,021
------- -------
66,918 65,144
Less allowance for inventory valuation 7,588 8,331
------- -------
$59,330 $56,813
======= =======
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following (amounts in
thousands):
June 30, March 31,
1997 1997
------------------------
Land $ 11,178 $ 10,837
Building and building improvements 55,025 51,796
Machinery and equipment 262,175 218,284
Projects in process 34,974 52,608
-------- --------
363,352 333,525
Less accumulated depreciation
and amortization 111,021 99,467
-------- --------
$252,331 $234,058
======== ========
7
(5) Lines of Credit
The Company has an unsecured line of credit with a syndicate of U.S. banks for
up to $90,000,000, bearing interest at the Prime Rate (8.50% at June 30, 1997)
and expiring in October, 1998. At March 31, 1997 and June 30, 1997 there were no
borrowings against the line of credit. The agreement between the Company and the
syndicate of banks requires the Company to achieve certain financial ratios and
operating results. The Company was in compliance with these covenants as of June
30, 1997.
(6) Stockholders' Equity
Stock Repurchase Activity. In connection with a stock repurchase program, during
the year ended March 31, 1997, the Company purchased a total of 1,326,477 shares
of the Company's Common Stock in open market activities at a total cost of
$19,463,000. As of June 30, 1997, the Company had reissued all of these shares
through stock option exercises and the Company's employee stock purchase plan.
Also, in connection with a stock repurchase program, during the quarter ended
June 30, 1997, the Company sold put options for 350,000 shares of Common Stock
at pricing per share ranging from $29.50 to $30.86. The net proceeds from the
sale of these options, in the amount of $1,606,100 for the period ended June 30,
1997, has been credited to additional paid-in capital. As of June 30, 1997, the
Company had outstanding put options for 550,000 shares which have expiration
dates ranging from July 8, 1997 to June 16, 1998 at prices ranging from $15.08
to $30.86 per share.
Increase to the Number of Authorized Shares. In April, 1997, the Board of
Directors approved an amendment to the Company's Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares of Common
Stock from 65,000,000 to 100,000,000. This matter was approved by the
stockholders at the 1997 annual stockholders' meeting held on July 28, 1997, and
became effective upon the filing of a certificate of amendment to the Restated
Certificate of Incorporation with the Delaware Secretary of State on July 28,
1997.
(7) Subsequent Events
Microchip Technology Incorporated v. Lucent Technologies Inc. On July 16, 1997,
the Company filed an action for declaratory relief against Lucent Technologies
Inc. ("Lucent") requesting that the Court declare, among other matters, that
Microchip does not infringe certain of Lucent's semiconductor patents (District
of Arizona, CIV97-1502 PHX EHC). The Company initiated legal action so that a
determination could be made relating to the validity, enforceability and alleged
infringement of the asserted patents. Prior to filing suit, Microchip had
engaged in good faith license negotiations with Lucent for over four years
regarding alleged infringement of certain of Lucent's semiconductor patents. The
Company investigated Lucent's claims and believes that it does not infringe any
of the asserted Lucent patents. Despite the filing, the Company intends to
continue negotiations with Lucent with the goal of obtaining a resolution of
this matter, which could include a license on commercially reasonable terms.
However, no assurances can be given that a mutually satisfactory conclusion will
be achieved and that protracted litigation will not ensue. Litigation could
result in substantial cost to the Company and diversion of management effort. If
unsuccessful, the Company could be forced to pay royalties on past and future
sales. Such litigation and/or royalty payments could have a material adverse
impact on the Company's business and operating results.
8
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain operational data as a percentage of net
sales for the periods indicated:
Three Months Ended June 30,
1997 1996
---------------------------
Net sales ......................... 100.0% 100.0%
Cost of sales ..................... 49.2 50.6
------ ------
Gross profit ...................... 50.8 49.4
Research and development .......... 9.5 9.3
Selling, general and administrative 16.7 17.0
Restructuring cost ................ -- 8.1
Write-off of in-process technology -- 2.1
------ ------
Operating income .................. 24.6% 12.9%
====== ======
Net Sales. The Company's net sales for the quarter ended June 30, 1997 were
$97.2 million, an increase of 31.1% over sales of $74.2 million for the
corresponding quarter of the previous fiscal year, and an increase of 4.0% from
the previous quarter's sales of $93.5 million. 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 69.8% and 61.0% of total net sales in the three months ended June 30, 1997
and 1996, respectively. A related component of the Company's product sales
consists primarily of serial EEPROMs, along with smaller quantities of parallel
EEPROM memories and high-speed and low-voltage EPROMs. These products accounted
for 28.2% and 33.0% of net sales in the three months ended June 30, 1997 and
1996, respectively. In the three months ended June 30, 1997, as compared to the
same period in the previous fiscal year, the Company increased the percentage of
net sales attributable to 8-bit microcontrollers as a result of the Company's
focus in this area. It is anticipated that this trend will continue for the
foreseeable future.
The Company's net sales in any given quarter are dependent upon a combination of
orders received in that quarter for shipment in that quarter ("turns orders")
and shipments from backlog. The Company has emphasized its ability to respond
quickly to customer orders as part of its competitive strategy. This strategy,
combined with current industry conditions, is resulting in customers placing
orders with relatively short delivery schedules. This has had the effect of
increasing turns orders as a portion of the Company's business in the three
months ended June 30, 1997, as compared to the similar period of the previous
fiscal year. During the quarter, however, the Company began to see improved
customer order backlog placement after many quarters of declining order
visibility. 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. If the Company does not achieve a
sufficient level of turns orders in a particular quarter, the Company's revenues
and operating results would be materially adversely affected.
9
In the quarter ended June 30, 1997, the Company was unable to ship $4 million of
product for which it had firm scheduled orders, approximately the same as
shipment delinquencies at the end of the prior fiscal quarter. These shipment
delinquencies were a result of inventory mix issues which have been exacerbated
by the rapid growth in the Company's product offerings and the low long-term
order visibility. While the Company experienced an improvement in customer order
backlog during the quarter, it is anticipated that low long-term order
visibility will continue for the foreseeable future and, as a result, the
Company expects it may have shipment delinquencies at the end of each quarter
which could adversely affect quarterly operating results.
The Company's overall average selling prices for its microcontroller products
have remained relatively constant while average selling prices of its
non-volatile memory products have declined gradually over time. During fiscal
1997, and for the three months ended June 30, 1997, the Company experienced
increased pricing pressure on its non-volatile memory products due primarily to
a worldwide industry inventory correction and the less proprietary nature of
these products. There can be no assurance that average selling prices for the
Company's microcontroller or other products will not experience increased
pricing pressure in the future. An increase in pricing pressure could adversely
affect the Company's operating results.
The foregoing statements regarding product mix, turns orders, shipment
delinquencies and pricing pressures 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: the level of orders that are received and
can be shipped in a quarter; inventory mix and timing of customer orders;
competition and competitive pressures on pricing and product availability;
customers' inventory levels, order patterns and seasonality; the cyclical nature
of both the semiconductor industry and the markets addressed by the Company's
products; market acceptance of the products of both the Company and its
customers; demand for the Company's products; fluctuations in production yields,
production efficiencies and overall capacity utilization; changes in product
mix; and absorption of fixed costs, labor and other fixed manufacturing costs.
Foreign sales represented 70.0% of net sales in the current quarter and 67.0% of
net sales in the corresponding quarter of the previous fiscal year and 66.0% of
net sales in the previous quarter. 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 have had a highly inflationary economy
in the last five years, there is 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 Operating Results. The Company believes that future
growth in net sales of its 8-bit family of microcontroller products and related
memory products 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 design wins and microcontroller sales. The Company continued to
achieve a high volume of design wins and shipped increased numbers
10
of application development systems in the three months ended June 30, 1997
compared to previous fiscal periods. There can be no assurance that any
particular development system shipment 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 other factors
that could adversely impact its net sales and profitability, many of which are
beyond the Company's control. These factors include the Company's ability to
design and introduce new products on a timely basis, market acceptance of
products of both the Company and its customers, customer order patterns and
seasonality, changes in product mix, whether the Company's customers buy from a
distributor or directly from the Company, product performance and reliability,
product obsolescence, the amount of any product returns, availability and
utilization of manufacturing capacity, fluctuations in manufacturing yield, the
availability and cost of raw materials, equipment and other supplies, the
cyclical nature of both the semiconductor industry and the markets addressed by
the Company's products, technological changes, competition and competitive
pressures on prices, and economic, political or other conditions in the United
States, and other worldwide markets served by the Company. The Company believes
its ability to continue to increase its manufacturing capacity to meet customer
demand and maintain satisfactory delivery schedules will be an important
competitive factor. As a result of the increase in fixed costs and operating
expenses related to expanding its manufacturing capacity, the Company's
operating results may be adversely affected if net sales do not increase
sufficiently to offset the increased costs. The Company's products are
incorporated into a wide variety of consumer, automotive, office automation,
communications and industrial products. A slowdown in demand for products which
utilize the Company's products as a result of economic or other conditions in
the worldwide markets served by the Company could adversely affect the Company's
operating results.
Gross Profit. The Company's gross profit was $49.4 million in the three months
ended June 30, 1997, as compared to $36.6 million in the corresponding quarter
of the prior fiscal year, and $47.0 million in the previous quarter. Gross
profit as a percent of sales was 50.8% in the current quarter, 49.4% in the
corresponding quarter of the prior fiscal year and 50.3% in the previous
quarter. 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 products manufacturing yields, wafer fab loading levels and
competitive and economic conditions. Gross profit percentage increased from the
prior period levels, primarily as a result of the percentage of net sales
attributable to 8-bit microcontrollers and improved wafer fabrication
utilization. The Company anticipates that its gross profit percentage will
fluctuate over time, driven primarily by product mix, manufacturing costs and
yields, and competitive and economic conditions. The Company is continuing the
process of transitioning products to smaller geometries and to larger wafer
sizes to reduce future manufacturing costs. Eight-inch wafer production
commenced at the Company's Tempe wafer fabrication facility in early fiscal
1998, and the Company is continuing the transition of products to its 0.7 micron
process. The foregoing statements relating to anticipated gross margins, cost of
sales, and the transition to higher yielding manufacturing processes 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 efficiency and overall capacity
utilization; cost and availability of raw materials; absorption of fixed costs,
labor and other direct manufacturing costs; the timing and success of
manufacturing process transition; changes in product mix; competitive pressures
on prices; and other economic conditions in the United States and other
worldwide markets.
All of Microchip's assembly operations and a portion of its product final test
requirements are performed by third-party contractors in order to meet product
shipment requirements. Reliance on third parties
11
involves some reduction in the Company's level of control over these portions of
its business. While the Company reviews the quality, delivery and cost
performance of these third-party contractors, there can be no assurance that
reliance on third-party contractors will not adversely impact results in future
reporting periods if any third-party contractor is unable to maintain assembly
and test yields and costs at approximately their current levels.
The Company owns product final test facilities in Kaohsiung, Taiwan, Republic of
China and Chachoengsao, Thailand. The Company also uses various third-party
contractors in Thailand, Taiwan, the Philippines, China and other locations in
Asia for product assembly and test. The Company's reliance on facilities in
these countries, and maintenance of substantially all of its finished goods
inventory overseas, entails certain political and economic risks, including
political instability and expropriation, labor disruption, supply disruption,
currency controls and exchange fluctuations, as well as changes in tax laws,
tariff and freight rates. Microchip currently employs the Alphatec Electronics
PCL group of companies ("Alphatec") headquartered in Bangkok, Thailand, for a
portion of its product assembly volume and product final test capacity. While
Alphatec's assembly and test operations have performed reliably for the Company
for several years, Alphatec has recently experienced difficulty in obtaining
financing in connection with some of its unrelated joint ventures involving
semiconductor fabrication facilities in Thailand. Alphatec has also recently
released information concerning a report from their independent auditors
resulting in the Alphatec Board of Directors requesting the Stock Exchange of
Thailand to immediately suspend trading in Alphatec shares. Microchip currently
has multiple sources for product assembly and test for most of its package types
and is in the process of shifting its assembly and test requirements to other
factories. Despite these actions, there can be no assurance that Microchip may
not experience short-term disruption, including possible temporary product
shortages and increased assembly and test costs, compared to those received from
the current subcontract relationship with Alphatec. The Company has not
experienced any significant interruptions in its foreign business operations to
date. Nonetheless, the Company's business and operating results could be
adversely affected if foreign operations or international air transportation
were disrupted.
During the fourth quarter of fiscal 1997, the Company commenced construction of
an additional 20,000 square foot wafer fabrication module at its Tempe, Arizona,
facility. It is anticipated that the construction will be completed during the
second quarter of fiscal 1998 and that the new wafer fabrication module will
begin 8-inch wafer production in the fourth quarter of fiscal 1998. In addition,
the Company is also expanding capacity at its Chandler wafer fabrication
facility and expects to have an additional 3,000 square feet of capacity
available in Chandler during the second quarter of fiscal 1998. The foregoing
statements regarding completion of construction and additional available
capacity 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: delays in facilitation of the expanded Tempe and Chandler wafer
fabrication facilities; production yields and efficiencies; factory absorption
rates; capacity loading; 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 its
design and manufacturing process technology, which are significant factors in
maintaining the Company's competitive position. The dollar investment in
research and development increased 33.1% in the current quarter as compared to
the corresponding quarter of the previous fiscal year and by 2.0% from the
previous quarter. 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.
12
The Company's future operating results will depend to a significant extent on
its ability to continue to develop and introduce new products on a timely basis
which can compete effectively on the basis of price and performance and which
address customer requirements. The success of new product introductions depends
on various factors, including proper new product selection, timely completion
and introduction of new product designs, development of support tools and
collateral literature that make complex new products easy for engineers to
understand and use and market acceptance of customers' end products. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing the development of new products. In addition, there can be no
assurance that any new products will receive or maintain substantial market
acceptance. If the Company were unable to design, develop and introduce
competitive products on a timely basis, its future operating results would be
adversely affected.
The Company's future success will also depend upon its ability to develop and
implement new design and process technologies. Semiconductor design and process
technologies are subject to rapid technological change, requiring large
expenditures for research and development. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have suffered reduced manufacturing
yields or delays in product deliveries. The Company believes that its transition
to smaller geometries and to larger wafers will be important for the Company to
remain competitive, and operating results could be adversely affected if the
transition is substantially delayed or inefficiently implemented.
Selling, General and Administrative. Through expense controls and operating
efficiencies, the Company has reduced selling, general and administrative
expenses in the current fiscal quarter to 16.7% of sales, as compared to 17.0%
of sales in the corresponding period of the previous fiscal year, and compared
to 16.8% in the previous quarter. 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 continue to reduce the current level of selling, general and administrative
expenses as a percentage of sales.
Other Income (Expense). Interest expense in the three months ended June 30, 1997
decreased over the same period of the previous fiscal year due to lower
borrowings associated with the Company's capital equipment additions. Interest
income in the three months ended June 30, 1997 increased from the same period of
the previous fiscal year, primarily as a result of investing the proceeds of the
Company's equity offering completed in the fourth quarter of fiscal 1997. Other
income represents numerous immaterial non-operating items. The Company's
interest expense could increase in fiscal 1998 if the Company increases its
borrowings and interest expense would be adversely impacted by increased
interest rates.
Provision for Income Taxes. Provisions for income taxes reflect tax on foreign
earnings and federal and state tax on U.S. earnings. The Company had an
effective tax rate of 27.0% for each of the three months ended June 30, 1997 and
1996, due primarily to lower tax rates at its foreign locations. The Company
believes that its tax rate for the foreseeable future will be approximately
27.0%. The foregoing statement regarding the Company's anticipated future tax
rate 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: taxation rates in geographic regions where the Company has significant
operations; and current tax holidays available in foreign locations.
13
Liquidity and Capital Resources
The Company had $67.6 million in cash and cash equivalents at June 30, 1997, an
increase of $24.6 million from the June 30, 1996 balance. The Company has an
unsecured line of credit with a syndicate of domestic banks totaling $90.0
million. There were no borrowings under the domestic line of credit as of June
30, 1997. The domestic line of credit requires the Company to achieve certain
financial ratios and operating results. The Company was in compliance with these
covenants at June 30, 1997. The Company also has an unsecured short term line of
credit totaling $24.9 million with certain foreign banks. There were no
borrowings under the foreign line of credit as of June 30, 1997. There are no
covenants related to the foreign line of credit.
At June 30, 1997, an aggregate of $114.9 million of these facilities was
available, subject to financial covenants and ratios with which the Company was
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 three months ended June 30, 1997, the Company generated $53.6 million
of cash from operating activities, an improvement of $38.7 million from the
three months ended June 30, 1996. The improvement in cash flow from operations
was primarily due to increased profitability, the impact of increases in
accounts payable and accrued expenses and an increase in depreciation expense.
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 three
months ended June 30, 1997 and 1996, were $30.4 million and $26.8 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 intends to spend approximately
$135.0 million during the next 12 months for additional capital equipment to
increase capacity at its existing wafer fabrication facilities, to construct
additional facilities and to expand product test operations. The Company expects
capital expenditures will be financed by cash flow from operations, available
debt arrangements and other sources of financing. The Company believes that the
capital expenditures anticipated to be incurred over the next 12 months will
provide sufficient additional manufacturing capacity to meet its currently
anticipated needs.
Net cash provided by financing activities was $1.4 million and $3.4 million for
the three months ended June 30, 1997 and 1996 respectively. Proceeds from sale
of stock and put options were $2.9 million and $0.9 million for the three months
ended June 30, 1997 and 1996, respectively. Payments on long term debt and
capital lease obligations were $1.5 million for each of the three months ended
June 30, 1997 and 1996. Proceeds from lines of credit were $8.1 million for the
three months ended June 30, 1996. Cash expended for the purchase of the
Company's Common Stock was $4.1 million for the three months ended June 30,
1996.
On July 26, 1996, the Company's Board of Directors authorized a share repurchase
plan which permits the Company to purchase up to 1,500,000 shares of its Common
Stock and to sell up to 750,000 put options. Based on the price of Microchip's
stock and other pertinent factors, the Company may from time to time purchase
shares on the open market or sell put options. See Footnote 6 to the Company's
Condensed Consolidated Financial Statements.
The Company believes that its existing sources of liquidity combined with cash
generated from operations will be sufficient to meet the Company's currently
anticipated cash requirements for at least the next 12 months. However, the
semiconductor industry is capital intensive. In order to remain competitive, the
Company must continue to make significant investments in capital equipment, for
both
14
production and research and development. The Company may seek additional equity
or debt financing during the next 12 months for the capital expenditures
required to maintain or expand the Company's wafer fabrication and product test
facilities. The timing and amount of any such capital requirements will depend
on a number of factors, including demand for the Company's products, product
mix, changes in industry conditions and competitive factors. There can be no
assurance that such financing will be available on acceptable terms, and any
additional equity financing could result in additional dilution to existing
investors.
Recent Accounting Pronouncements. In February, 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 128,
"Earnings per Share" ("Statement 128"). Statement 128 establishes standards for
computing and presenting earnings per share ("EPS"), and supersedes APB Opinion
No. 15. Statement 128 replaces primary EPS with basic EPS and requires dual
presentation of basic and diluted EPS. Statement 128 is effective for annual and
interim periods ending after December 15, 1997. Earlier adoption is not
permitted. After adoption, all prior period EPS data shall be restated to
conform to Statement 128. Basic and diluted EPS, as calculated under Statement
128 would have been $0.33 and $0.32 for the three months ended June 30, 1997.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Microchip Technology Incorporated v. Lucent Technologies Inc. On July 16, 1997,
the Company filed an action for declaratory relief against Lucent Technologies
Inc. ("Lucent") requesting that the Court declare, among other matters, that
Microchip does not infringe certain of Lucent's semiconductor patents (District
of Arizona, CIV 97-1502 PHX EHC). The Company initiated legal action so that a
determination could be made relating to the validity, enforceability and alleged
infringement of the asserted patents. Prior to filing suit, Microchip had
engaged in good faith license negotiations with Lucent for over four years
regarding alleged infringement of certain of Lucent's semiconductor patents. The
Company investigated Lucent's claims and believes that it does not infringe any
of the asserted Lucent patents. Despite the filing, the Company intends to
continue negotiations with Lucent with the goal of obtaining a resolution of
this matter, which could include a license on commercially reasonable terms.
However, no assurances can be given that a mutually satisfactory conclusion will
be achieved and that protracted litigation will not ensue. Litigation could
result in substantial cost to the Company and diversion of management effort. If
unsuccessful, the Company could be forced to pay royalties on past and future
sales. Such litigation and/or royalty payments could have a material adverse
impact on the Company's business and operating results.
Item 5. OTHER INFORMATION
On July 28, 1997, the Company held its annual meeting of stockholders (the
"Meeting"). Among other matters acted upon at the Meeting, the stockholders
approved an amendment to the Company's Restated Certificate of Incorporation, as
amended, to increase the authorized Common Stock of the Company from 65,000,000
shares, $0.001 par value per share, to 100,000,000 shares. The amendment became
effective upon the filing of a certificate of amendment to the Restated
Certificate of Incorporation with the Delaware Secretary of State on July 28,
1997.
15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 3.1. Certificate of Amendment to Registrant's
Restated Certificate of Incorporation, as
amended
Exhibit 11 Computation of Net Income Per Share
Exhibit 18.1 Letter from KPMG Peat Marwick LLP re: Change
in Accounting Principles
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
quarter ended June 30, 1997.
16
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: August 11, 1997 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.
- ----------- --------
3.1 Certificate of Amendment to Registrant's Restated
Certificate of Incorporation, as amended....................19
11 Computation of Net Income Per Share.........................20
18.1 Letter from KPMG Peat Marwick LLP re: Change in
Accounting Principles.......................................21
18