10-QPeriod: Q3 FY2016

MICROCHIP TECHNOLOGY INC Quarterly Report for Q3 Ended Dec 31, 2015

Filed February 5, 2016For Securities:MCHPMCHPP

Summary

Microchip Technology Inc. (MCHP) reported its financial results for the quarter and nine months ended December 31, 2015. The company's strategy continues to focus on being a worldwide leader in specialized semiconductor products for embedded control applications. The acquisition of Micrel in August 2015 contributed to revenue growth, though overall net sales saw a slight decrease of 0.2% sequentially due to general economic and semiconductor industry conditions, but an increase of 2.2% year-over-year. The acquisition of Atmel, announced in January 2016, is expected to close in the second quarter of calendar year 2016 and represents a significant strategic move for Microchip. Despite some revenue headwinds, the company is actively managing its operations, including capacity utilization and inventory levels. R&D expenses and SG&A expenses saw increases, largely due to the Micrel acquisition. The company maintains a strong liquidity position, with significant cash, cash equivalents, and investments. Management anticipates using existing cash and credit facilities to finance the upcoming Atmel acquisition, with plans to repurchase shares issued in connection with the deal. Investors should note the company's ongoing commitment to new product development and its strategy of both organic growth and strategic acquisitions.

Financial Statements
Beta
Revenue$540.34M
Cost of Revenue$247.63M
Gross Profit$292.72M
R&D Expenses$97.02M
SG&A Expenses$76.27M
Operating Expenses$216.59M
Operating Income$76.13M
Interest Expense$27.51M
Net Income$61.21M
EPS (Basic)$0.15
EPS (Diluted)$0.14
Shares Outstanding (Basic)406.59M
Shares Outstanding (Diluted)435.95M

Key Highlights

  • 1Net sales for the quarter ended December 31, 2015, were $540.3 million, a slight decrease of 0.2% from the previous quarter but a 2.2% increase compared to the same quarter in the prior year.
  • 2The acquisition of Micrel, completed in August 2015, was a primary driver for the year-over-year net sales increase, particularly in the Analog, Interface, and Mixed Signal Products segment.
  • 3Microcontrollers remain the largest product line, accounting for approximately 59.7% of net sales in the quarter, though sales in this segment saw a decrease compared to the prior year due to economic conditions.
  • 4The company announced a definitive agreement to acquire Atmel for approximately $3.56 billion, expected to close in Q2 2016, which is its largest acquisition to date.
  • 5Gross profit margin decreased to 54.2% for the quarter, down from 57.1% in the prior year, impacted by acquisition-related inventory fair value adjustments and other factors.
  • 6R&D expenses increased by 9.4% for the quarter, primarily due to additional costs from the Micrel acquisition.
  • 7Microchip Technology ended the period with $2.397.9 million in cash, cash equivalents, and investments, demonstrating a strong liquidity position, and plans to finance the Atmel acquisition using a combination of foreign cash, new borrowings, and newly issued stock.

Frequently Asked Questions

The company experienced a slight year-over-year increase in net sales for the quarter ended December 31, 2015, driven by the acquisition of Micrel. However, overall sales were relatively flat sequentially due to challenging economic and semiconductor industry conditions. The upcoming acquisition of Atmel is a significant strategic event that is expected to reshape the company's future performance and market position, though it also introduces integration risks and requires substantial financing.

The acquisition of Micrel, completed in August 2015, contributed to revenue growth, particularly in the Analog, Interface, and Mixed Signal Products segment. However, it also led to an increase in R&D and SG&A expenses, as well as acquisition-related costs that impacted gross margins in the short term.

Microchip faces several risks, including intense competition leading to pricing pressures, dependence on global economic conditions and semiconductor industry cycles, potential integration challenges with its upcoming Atmel acquisition, and reliance on third-party foundries and contractors. Managing debt levels and potential fluctuations in currency exchange rates are also ongoing concerns.

The company plans to finance the acquisition of Atmel using approximately $2.175 billion from cash, cash equivalents, short-term and long-term investments held by foreign subsidiaries, approximately $782 million from additional borrowings under its existing credit agreement, and approximately $485 million in newly issued shares of its common stock. The structure is intended to be tax-efficient for utilizing foreign cash.