10-QPeriod: Q2 FY2020

MICROCHIP TECHNOLOGY INC Quarterly Report for Q2 Ended Sep 30, 2019

Filed November 6, 2019For Securities:MCHPMCHPP

Summary

Microchip Technology Inc. (MCHP) reported its financial results for the quarter ending September 30, 2019. The company experienced a decrease in net sales for the three-month period compared to the prior year, primarily due to adverse market demand influenced by general economic conditions and trade restrictions. However, for the six-month period, net sales saw a slight increase, largely attributed to the full inclusion of Microsemi's results following its acquisition in May 2018, which contributed an estimated 8% to net sales growth when timing impacts are considered. Gross profit margins significantly improved year-over-year, both for the quarter and the six-month period. This improvement was driven by the absence of a large inventory valuation adjustment related to the Microsemi acquisition that impacted the prior year's cost of sales. The company continued to invest in research and development, with R&D expenses increasing in the six-month period, primarily due to the inclusion of Microsemi's R&D costs. Selling, general, and administrative expenses remained relatively flat over the six-month period, reflecting cost synergies from the Microsemi integration. The company also highlighted ongoing efforts to remediate material weaknesses in internal controls related to income taxes and IT system access, with an expected completion by the end of fiscal 2020.

Financial Highlights

56 data points
Beta

Revenue

$1.34B

61.9% Gross Margin

Net Income

$108.90M

8.1% Net Margin

EPS (Diluted)

$0.21

Total Assets

$17.86B

Cash & Equivalents

$401.80M

Free Cash Flow

$378.30M

Financial Statements
Beta
Revenue$1.34B
Cost of Revenue$510.30M
Gross Profit$827.50M
R&D Expenses$219.80M
SG&A Expenses$172.30M
Operating Expenses$643.90M
Operating Income$183.60M
Interest Expense$129.60M
Net Income$108.90M
EPS (Basic)$0.23
EPS (Diluted)$0.21
Shares Outstanding (Basic)476.80M
Shares Outstanding (Diluted)510.60M

Key Highlights

  • 1Net sales for the three months ended September 30, 2019 decreased by 6.6% year-over-year to $1,337.8 million, primarily due to market demand challenges and trade restrictions.
  • 2Net sales for the six months ended September 30, 2019 increased by 0.6% year-over-year to $2,660.4 million, largely due to the full inclusion of Microsemi's results post-acquisition.
  • 3Gross profit margin improved significantly to 61.9% in Q3 2019 (vs. 48.1% in Q3 2018) and 61.7% for the six months ended Sep 30, 2019 (vs. 50.3% in the prior year), driven by the absence of acquisition-related inventory fair value adjustments.
  • 4Research and Development (R&D) expenses increased by 11.5% for the six months ended September 30, 2019, largely due to the inclusion of Microsemi's R&D costs.
  • 5Selling, General, and Administrative (SG&A) expenses remained stable year-over-year for the six-month period, indicating cost management and synergies from the Microsemi acquisition.
  • 6Amortization of acquired intangible assets increased substantially, reflecting the impact of the Microsemi acquisition.
  • 7The company reported material weaknesses in internal controls over financial reporting related to income tax accounting and IT system access, with remediation efforts expected to conclude by the end of fiscal year 2020.

Frequently Asked Questions

The acquisition of Microsemi, completed in May 2018, significantly impacted Microchip's financial performance. For the six months ended September 30, 2019, Microsemi's full inclusion contributed to an increase in net sales, accounting for approximately 8% of the growth when considering timing differences. The acquisition also led to a substantial increase in amortization of acquired intangible assets and R&D expenses due to the integration of Microsemi's operations and product lines.

While net sales decreased by 6.6% for the three months ended September 30, 2019, compared to the prior year, the six-month period showed a slight increase due to the Microsemi acquisition. The company cited adverse demand fluctuations, general economic conditions, and trade restrictions as key factors impacting sales in the quarter. The company's strategy includes new product offerings and programmable solutions to maintain growth, but investors should be aware of the sensitivity to global economic conditions and trade policies.

Microchip disclosed material weaknesses in its internal controls over financial reporting related to the accounting for income taxes and IT system access. The company is actively implementing remediation plans to address these issues, with an expected completion by the end of fiscal year 2020. Investors should monitor the progress of these remediation efforts, as failure to effectively address these weaknesses could impact the accuracy and timeliness of financial reporting.

Following the Microsemi acquisition, Microchip's debt levels increased significantly. The company has been actively managing this debt through voluntary prepayments and has amended its credit agreement to adjust interest rates and terms. As of September 30, 2019, outstanding borrowings were substantial, and the company's ability to service this debt depends on future performance. The company's liquidity is considered sufficient for the next 12 months, but future financing needs for capital expenditures or acquisitions may arise.