10-QPeriod: Q3 FY2007

MICROCHIP TECHNOLOGY INC Quarterly Report for Q3 Ended Dec 31, 2006

Filed February 6, 2007For Securities:MCHPMCHPP

Summary

Microchip Technology Inc. reported solid financial results for the nine months ended December 31, 2006. Net sales increased by 14.8% year-over-year, reaching $781.5 million, driven by continued market share gains and increasing semiconductor content in customer products. Gross profit also saw a significant increase of 16.9% to $470.2 million, with gross margin slightly improving to 60.2% from 59.1% in the prior year period. The company's investment in research and development increased by 20.9%, reflecting its commitment to innovation and maintaining a competitive edge. The balance sheet as of December 31, 2006, shows total assets of $2.28 billion and total liabilities of $374.9 million. The company maintained a strong liquidity position with $153.3 million in cash and cash equivalents and substantial investments. A key operational highlight was the significant reduction in short-term debt by $239.5 million, underscoring effective working capital management. Microchip also continued its commitment to shareholder returns through increased dividend payments.

Key Highlights

  • 1Net sales for the nine months ended December 31, 2006, increased to $781.5 million, up 14.8% from $680.7 million in the prior year period.
  • 2Gross profit for the nine months rose to $470.2 million, a 16.9% increase year-over-year, with gross margin improving to 60.2% from 59.1%.
  • 3Operating income for the nine months was $262.5 million, a 10.7% increase compared to $236.9 million in the same period last year.
  • 4Cash and cash equivalents were $153.3 million, and total investments amounted to $1.11 billion as of December 31, 2006.
  • 5Short-term debt was significantly reduced to $29.5 million from $269.0 million at March 31, 2006.
  • 6The company declared and paid increased quarterly dividends, demonstrating a commitment to returning value to shareholders.
  • 7Research and development expenses increased by 20.9% to $85.2 million for the nine months, reflecting continued investment in new products and technologies.

Frequently Asked Questions

Microchip's sales growth is driven by continued market share gains, increasing semiconductor content in their customers' products, growing demand for flexible programmable solutions, new product offerings expanding their served available market, and general economic conditions.

The company's liquidity remains strong. While total cash, cash equivalents, and investments decreased slightly to $1.26 billion from March 31, 2006, this was primarily due to a significant paydown of short-term debt. Operating activities generated substantial cash flow.

The adoption of SFAS 123R (Share-Based Payment) starting April 1, 2006, requires the recognition of share-based compensation expense at fair value. This has resulted in increased expense in Cost of Sales, Research and Development, and Selling, General, and Administrative expenses, as well as a reclassification of excess tax benefits from operating to financing cash flows. This adoption also impacted the reported earnings per share for the periods presented.

Key risks identified include fluctuations in quarterly operating results due to demand, inventory levels, and competitive pricing; effective utilization of manufacturing capacity; dependence on 'turns orders' with limited backlog visibility; intense competition leading to pricing pressures; reliance on distributors; the need for timely new product introductions; attracting and retaining qualified personnel; dependence on contractors for manufacturing functions; supply chain risks for raw materials and equipment; industry seasonality and demand fluctuations; legal proceedings and claims; protection of intellectual property; potential business interruptions; foreign sales and operations exposure; and disruptions to IT systems.