10-QPeriod: Q2 FY2018

MICROCHIP TECHNOLOGY INC Quarterly Report for Q2 Ended Sep 30, 2017

Filed November 7, 2017For Securities:MCHPMCHPP

Summary

Microchip Technology Inc. reported a solid increase in net sales for the three and six months ended September 30, 2017, compared to the prior year, driven by favorable economic and semiconductor industry conditions, and market share gains. Net sales grew by 16.2% and 18.8% for the respective periods. The company's microcontroller segment remains its largest, showing robust growth. Gross profit margins significantly improved to 60.7% and 60.4% for the three and six-month periods, respectively, a substantial increase from 47.1% and 45.4% in the prior year. This improvement is largely attributed to the absence of acquisition-related inventory fair value adjustments that impacted the prior year's results, alongside ongoing cost reductions and a favorable product mix. Financially, Microchip demonstrated strong operational cash flow generation, increasing to $695.1 million for the six months ended September 30, 2017. The company maintains a healthy liquidity position with $1,843.9 million in cash, cash equivalents, and investments as of September 30, 2017. Strategic investments in new products and process technologies continue, with R&D expenses representing 13.2% and 13.3% of net sales for the respective periods. Management expresses confidence in their ability to meet financial obligations and fund anticipated capital expenditures through existing liquidity and operating cash flows.

Financial Highlights

56 data points
Beta

Revenue

$1.01B

60.7% Gross Margin

Net Income

$189.20M

18.7% Net Margin

EPS (Diluted)

$0.39

Total Assets

$8.06B

Cash & Equivalents

$826.40M

Free Cash Flow

$350.10M

Financial Statements
Beta
Revenue$1.01B
Cost of Revenue$398.05M
Gross Profit$614.10M
R&D Expenses$133.60M
SG&A Expenses$114.30M
Operating Expenses$388.70M
Operating Income$225.40M
Interest Expense$49.50M
Net Income$189.20M
EPS (Basic)$0.41
EPS (Diluted)$0.39
Shares Outstanding (Basic)466.60M
Shares Outstanding (Diluted)489.60M

Key Highlights

  • 1Net sales increased by 16.2% year-over-year for the three months ended September 30, 2017, reaching $1,012.1 million, and by 18.8% for the six-month period, totaling $1,984.3 million.
  • 2Gross profit margin significantly improved to 60.7% for the quarter and 60.4% for the six-month period, up from 47.1% and 45.4% in the comparable prior-year periods, respectively.
  • 3The microcontroller segment continues to be the largest revenue driver, accounting for approximately 65.5% of net sales for the six-month period.
  • 4Operating cash flow showed a strong increase, reaching $695.1 million for the six months ended September 30, 2017, up from $446.1 million in the prior year.
  • 5The company maintained a strong liquidity position with $1,843.9 million in cash, cash equivalents, and investments as of September 30, 2017.
  • 6R&D expenses, while decreasing in absolute terms due to acquisition synergies, remain a significant investment, representing 13.3% of net sales for the six-month period.
  • 7Amortization of acquired intangible assets increased substantially due to the Atmel acquisition, impacting operating expenses.

Frequently Asked Questions

The substantial improvement in gross profit margin is primarily attributed to the absence of significant acquisition-related inventory fair value adjustments, which negatively impacted the prior year's cost of sales. Additionally, ongoing cost reductions in manufacturing, more efficient techniques, and a favorable product mix contributed to the margin expansion.

Microchip Technology Inc. reported strong net cash provided by operating activities and maintained a substantial amount of cash, cash equivalents, and investments. While the company has significant debt, it expects its existing liquidity and operating cash flows to be sufficient to meet its anticipated cash requirements for at least the next 12 months. They also have a credit facility available for additional liquidity needs.

The Atmel acquisition, completed in April 2016, has had a notable impact. While it contributed to increased net sales and market share, it also led to higher amortization of acquired intangible assets and increased interest expenses due to associated debt. The company has realized synergies from the acquisition, leading to reductions in R&D and SG&A expenses due to integration efforts.

Historically, Microchip deferred revenue recognition until the distributor sold the product to their end customer, due to distributor pricing and return rights. However, the company is preparing to adopt new revenue recognition standards (ASU 2014-09) effective April 1, 2018, which will require a portion of revenue to be recognized upon sale to the distributor, based on estimates of returns and allowances.