10-Q 1 e-6281.txt QUARTERLY REPORT FOR QTR ENDING 12-31-00 ================================================================================ 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 DECEMBER 31, 2000. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________. Commission File Number: 0-21184 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 (480) 792-7200 (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 February 12, 2001: COMMON STOCK, $.001 PAR VALUE: 130,327,880 SHARES ================================================================================ MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES INDEX Page ---- PART I. FINANCIAL INFORMATION. Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 2000 and March 31, 2000........................... 3 Condensed Consolidated Statements of Income - Three and Nine Months Ended December 31, 2000 and December 31, 1999.......................................... 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended December 31, 2000 and December 31, 1999...... 5 Notes to Condensed Consolidated Financial Statements............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 17 PART II. OTHER INFORMATION. Item 6. Exhibits and Reports on Form 8-K.............................. 18 SIGNATURES ................................................................ 19 2 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
December 31, March 31, 2000 2000 ----------- --------- (Unaudited) ASSETS Cash and cash equivalents $ 78,802 $ 188,112 Accounts receivable, net 77,366 75,911 Inventories 76,848 59,461 Prepaid expenses 7,113 3,523 Deferred tax asset 40,633 35,549 Other current assets 2,179 2,257 ----------- --------- Total current assets 282,941 364,813 Property, plant and equipment, net 769,150 439,030 Other assets 7,689 8,568 ----------- --------- Total assets $ 1,059,780 $ 812,411 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Short-term lines of credit $ -- $ 9,000 Accounts payable 123,539 67,861 Accrued liabilities 62,382 36,879 Deferred income on shipments to distributors 63,664 54,760 ----------- --------- Total current liabilities 249,585 168,500 Pension accrual 921 918 Deferred tax liability 19,250 18,697 Stockholders' equity: Preferred stock, $.001 par value; authorized 5,000,000 shares; no shares issued or outstanding -- -- Common stock, $.001 par value; authorized 300,000,000 shares; issued 121,233,019 and outstanding 120,235,379 shares at December 31, 2000; issued 121,233,019 and outstanding 118,361,330 shares at March 31, 2000 121 121 Additional paid-in capital 329,541 318,301 Retained earnings 488,291 366,325 Less shares of common stock held in treasury at cost; 997,640 shares at December 31, 2000 and 2,871,689 at March 31, 2000 (27,929) (60,451) ----------- --------- Net stockholders' equity 790,024 624,296 Total liabilities and stockholders' equity $ 1,059,780 $ 812,411 =========== =========
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 December 31, Nine Months Ended December 31, ------------------------------- ------------------------------ 2000 1999 2000 1999 --------- --------- --------- --------- (Unaudited) (Unaudited) Net sales $ 176,428 $ 129,187 $ 510,475 $ 354,918 Cost of sales 79,052 61,754 230,374 171,953 --------- --------- --------- --------- Gross profit 97,376 67,433 280,101 182,965 Operating expenses: Research and development 18,286 12,130 50,037 33,089 Selling, general and administrative 22,992 19,534 69,917 55,476 --------- --------- --------- --------- 41,278 31,664 119,954 88,565 Operating income before special income 56,098 35,769 160,147 94,400 Special income -- -- -- 2,400 --------- --------- --------- --------- Operating income 56,098 35,769 160,147 96,800 Other income (expense): Interest income 1,531 615 5,946 1,275 Interest expense (166) (209) (481) (677) Other, net 1,129 40 1,464 512 --------- --------- --------- --------- Income before income taxes 58,592 36,215 167,076 97,910 Income taxes 15,820 9,778 45,110 26,434 --------- --------- --------- --------- Net income $ 42,772 $ 26,437 $ 121,966 $ 71,476 ========= ========= ========= ========= Basic net income per share $ 0.36 $ 0.23 $ 1.03 $ 0.62 ========= ========= ========= ========= Diluted net income per share $ 0.34 $ 0.22 $ 0.97 $ 0.59 ========= ========= ========= ========= Weighted average common shares outstanding 119,690 114,637 118,981 114,531 ========= ========= ========= ========= Weighted average common and potential common shares outstanding 125,868 122,274 126,046 121,610 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements 4 MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended December 31, ------------------------------ 2000 1999 --------- --------- (Unaudited) Cash flows from operating activities: Net income $ 121,966 $ 71,476 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 885 451 Provision for inventory valuation 6,265 1,443 Provision for pension accrual 135 193 Gain on sale of fixed assets (931) -- Depreciation and amortization 73,030 47,549 Amortization of purchased technology 2,041 225 Deferred income taxes (4,531) 1,788 Tax benefit from exercise of stock options 14,392 8,341 Increase in accounts receivable (2,340) (8,248) (Increase) decrease in inventories (23,652) 8,374 Increase in accounts payable and accrued liabilities 81,181 24,841 Change in other assets and liabilities 4,098 14,754 --------- --------- Net cash provided by operating activities 272,539 171,187 --------- --------- Cash flows from investing activities: Proceeds from sale of assets 1,484 -- Capital expenditures (403,703) (139,729) --------- --------- Net cash used in investing activities (402,219) (139,729) --------- --------- Cash flows from financing activities: Repayment of lines of credit (9,000) (11,509) Payments on long-term debt -- (1,403) Payments on capital lease obligations -- (413) Proceeds from sale of stock and put options 29,370 19,533 --------- --------- Net cash provided by financing activities 20,370 6,208 --------- --------- Net (decrease) increase in cash and cash equivalents (109,310) 37,666 Cash and cash equivalents at beginning of period 188,112 30,826 --------- --------- Cash and cash equivalents at end of period $ 78,802 $ 68,492 ========= ========= Supplemental disclosure of non-cash financing and investing activities: Net share settlement delivery of shares $ 12,848 $ -- Net share settlement receipt of shares $ 6,610 $ 51,911
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. The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. In the Company's opinion, the accompanying condensed consolidated 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 consolidated financial statements have been condensed or omitted pursuant to such rules and regulations. It is suggested that these condensed consolidated 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, 2000. The results of operations for the nine months ended December 31, 2000 and 1999 are not necessarily indicative of the results to be expected for the full fiscal year. (2) ACCOUNTS RECEIVABLE Accounts receivable consists of the following (amounts in thousands): December 31, March 31, 2000 2000 ------- ------- (unaudited) Trade accounts receivable $80,214 $77,945 Other 873 703 ------- ------- 81,087 78,648 Less allowance for doubtful accounts 3,721 2,737 ------- ------- $77,366 $75,911 ======= ======= (3) INVENTORIES The components of inventories are as follows (amounts in thousands): December 31, March 31, 2000 2000 ------- ------- (unaudited) Raw materials $10,705 $ 7,724 Work in process 46,426 35,914 Finished goods 30,167 22,873 ------- ------- 87,298 66,511 Less allowance for inventory valuation 10,450 7,050 ------- ------- $76,848 $59,461 ======= ======= 6 Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable. (4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (amounts in thousands): December 31, March 31, 2000 2000 ---------- -------- (unaudited) Land $ 11,545 $ 11,545 Building and building improvements 140,169 90,069 Machinery and equipment 662,957 479,509 Projects in process 251,213 100,293 ---------- -------- 1,065,884 681,416 Less accumulated depreciation and amortization 296,734 242,386 ---------- -------- $ 769,150 $439,030 ========== ======== Depreciation and amortization expense attributed to property and equipment was $73.0 million and $47.5 million for the nine months ended December 31, 2000 and 1999, respectively. (5) LINES OF CREDIT On May 31, 2000, the Company entered into an unsecured revolving credit facility with a syndicate of banks totaling $100.0 million, bearing interest at LIBOR plus 0.625%. We can elect to increase the facility to $150.0 million, subject to certain conditions set forth in the credit agreement. This facility has a termination date of May 31, 2003. There were no borrowings against this line of credit as of December 31, 2000. We are required to achieve certain financial ratios and operations results to maintain this line of credit. Our ability to fully utilize this credit facility is dependent on our being in compliance with such covenants and ratios. The Company was in compliance with these covenants as of December 31, 2000. At March 31, 2000, and through May 31, 2000, the Company had an unsecured line of credit with a syndicate of U.S. banks for up to $90,000,000, bearing interest at LIBOR plus 0.325%. The Company had utilized $9,000,000 of this line of credit as of March 31, 2000. The agreement between the Company and the syndicate of banks required the Company to achieve certain financial ratios and operating results. The Company was in compliance with these covenants as of March 31 and May 31, 2000, respectively. The Company has an additional unsecured line of credit with various Asian financial institutions for up to $34,600,000 (U.S. Dollar equivalent). These borrowings are predominantly denominated in U.S. Dollars, bearing interest at the Singapore Interbank Offering Rate (SIBOR) of 6.20% at December 31, 2000 plus 0.648% (average) and expiring on various dates through March 31, 2001. There were no borrowings against this line of credit as of December 31, 2000, but an allocation of $1,197,000 of the available line was made, relating to import guarantees associated with the Company's business in Thailand. There were no borrowings against this line of credit as of March 31, 2000, but an allocation 7 of $1,934,000 of the available line was made, relating to import guarantees associated with the Company's business in Thailand. (6) STOCKHOLDERS' EQUITY During the nine months ended December 31, 2000, the Company made a net delivery of 478,781 shares of its common stock in connection with a net shares settled forward contract. During the nine months ended December 31, 1999, the Company received 2,540,466 shares of its common stock in connection with a net shares settled forward contract. During the nine months ended December 31, 2000, the Company received $17,008,000 in connection with a net shares settled forward contract. The net shares settled forward contract was the only open forward contract of the Company as of December 31, 2000. The net shares settled forward contract could obligate the Company to make a cash payment in the future if the price of the Company's Common Stock is below the strike price of the instruments. The expiration date of this transaction is May 2001, with quarterly interim settlement dates. (7) NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):
Three Months Ended Nine Months Ended December 31, December 31, (Unaudited) (Unaudited) 2000 1999 2000 1999 -------- -------- -------- -------- Net income $ 42,772 $ 26,437 $121,966 $ 71,476 ======== ======== ======== ======== Weighted average common shares outstanding 119,690 114,637 118,981 114,531 Dilutive effect of stock options 6,178 7,637 7,065 7,079 -------- -------- -------- -------- Weighted average common and potential common shares outstanding 125,868 122,274 126,046 121,610 ======== ======== ======== ======== Basic net income per share $ 0.36 $ 0.23 $ 1.03 $ 0.62 ======== ======== ======== ======== Diluted net income per share $ 0.34 $ 0.22 $ 0.97 $ 0.59 ======== ======== ======== ========
(8) SUBSEQUENT EVENT On January 16, 2001, the Company completed its previously announced acquisition of TelCom Semiconductor, Inc. in a tax-free reorganization that is being accounted for as a pooling of interests. The Company issued approximately 9.8 million shares of its Common Stock and assumed all outstanding TelCom stock options. 8 ITEM 2. 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 Nine Months Ended December 31, December 31, (Unaudited) (Unaudited) 2000 1999 2000 1999 -------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 44.8% 47.8% 45.1% 48.4% ----- ----- ----- ----- Gross profit 55.2% 52.2% 54.9% 51.6% Research and development 10.4% 9.4% 9.8% 9.3% Selling, general and administrative 13.0% 15.1% 13.7% 15.6% Special (income)/charges -- -- -- (0.7%) ----- ----- ----- ----- Operating income 31.8% 27.7% 31.4% 27.3% ===== ===== ===== =====
RECENT DEVELOPMENT On January 16, 2001, we completed our acquisition of TelCom Semiconductor, Inc. TelCom designs and markets a diversified portfolio of high performance analog and mixed-signal integrated circuits for a wide variety of applications in the wireless communications, networking, computer and industrial markets. Under the terms of the acquisition agreement, each share of TelCom common stock was exchanged for 0.53 of a share of Microchip common stock. We issued 9,801,456 shares of Microchip common stock and assumed all outstanding TelCom stock options. The acquisition was structured as a tax-free reorganization and is being accounted for as a pooling of interests. Since the transaction was completed following the close of our December 2000 quarter, our financial results as reported do not include the financial results of TelCom. Future financial reports will include the combined financial results of both entities. THERE ARE NUMEROUS FACTORS THAT COULD AFFECT MICROCHIP'S AND TELCOM'S ACTUAL COMBINED FINANCIAL RESULTS, INCLUDING: DIFFICULTIES ASSOCIATED WITH SUCCESSFULLY INTEGRATING MICROCHIP AND TELCOM'S BUSINESSES AND TECHNOLOGIES; COSTS RELATED TO THE TRANSACTION; FAILURE OF THE COMBINED COMPANY TO RETAIN AND HIRE KEY EXECUTIVES, TECHNICAL PERSONNEL AND OTHER EMPLOYEES; FAILURE OF THE COMBINED COMPANY TO MANAGE ITS GROWTH AND THE DIFFICULTY OF SUCCESSFULLY MANAGING A LARGER ORGANIZATION; FAILURE OF THE COMBINED COMPANY TO SUCCESSFULLY MANAGE ITS CHANGING RELATIONSHIPS WITH CUSTOMERS, SUPPLIERS, VALUE ADDED RESELLERS, AND STRATEGIC PARTNERS; THE PROGRESS AND COSTS OF THE DEVELOPMENT OF OUR PRODUCTS AND SERVICES AND THE TIMING OF MARKET ACCEPTANCE OF THOSE PRODUCTS AND SERVICES; FAILURE OF THE COMBINED COMPANY'S CUSTOMERS TO ACCEPT NEW PRODUCT OFFERINGS; FAILURE TO ACHIEVE ANTICIPATED SYNERGIES IN THE MERGER; AND GENERAL ECONOMIC AND BUSINESS CONDITIONS. A MORE DETAILED DISCUSSION OF THESE AND OTHER CAUTIONARY STATEMENTS CAN BE FOUND IN THE JOINT PROXY STATEMENT/PROSPECTUS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY MICROCHIP AND TELCOM ON FORM S-4 ON NOVEMBER 20, 2000. 9 NET SALES Our net sales for the quarter ended December 31, 2000 were $176.4 million, an increase of 37% over sales of $129.2 million for the corresponding quarter of the previous fiscal year, and essentially flat from the previous quarter's sales of $176.3 million. We believe we have continued to gain market share in both the Microcontroller and Serial EEPROM memory markets during the current fiscal year. During the nine months ended December 31, 2000, net sales of our microcontroller and analog product lines increased to $363.7 million as compared to $287.0 million in the nine months ended December 31, 1999. During the nine months ended December 31, 2000, net sales of our Serial EEPROM and related product lines increased to $146.8 million as compared to $67.9 million in the nine months ended December 31, 1999. Throughout this time period, we took advantage of supply shortages in the Serial EEPROM marketplace, and substantially grew this component of our business. During the quarter ended December 31, 2000, we experienced an inventory correction at our customers and distributors. The largest impact from this inventory correction was felt in Asia where we recognize revenue on sales to distributors who have no, or limited, product return rights and no price protection rights, immediately upon shipment. We currently anticipate that this inventory correction will be completed during the fourth quarter of fiscal 2001. THE FOREGOING STATEMENT REGARDING THE ANTICIPATED COMPLETION OF THE DISTRIBUTION INVENTORY CORRECTION IS A FORWARD-LOOKING STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: DEMAND FOR OUR PRODUCTS AND THE PRODUCTS OF OUR CUSTOMERS; INVENTORY LEVELS AT OUR DISTRIBUTORS AND AT OUR DISTRIBUTORS' CUSTOMERS; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; CHANGES IN PRODUCT MIX; AND THE ECONOMIC, POLITICAL AND OTHER CONDITIONS IN THE WORLDWIDE MARKETS SERVED BY US. Our microcontroller and analog product lines represent the largest component of our total net sales. Microcontrollers, associated application development systems and analog products accounted for 69% of our net sales for the three months ended December 31, 2000, and 81% of our total net sales in the three months ended December 31, 1999. Net sales of our Microcontrollers, associated application development systems and analog products increased 16% over the corresponding quarter in fiscal 2000 and 27% over the corresponding nine month period in fiscal 2000. A related component of our product sales consists primarily of Serial EEPROM memory which accounted for 31% of our total net sales in the three months ended December 31, 2000, and 19% of total net sales in the three months ended December 31, 1999. Net sales of Serial EEPROM memory products increased 126% over the same quarter in fiscal 2000 and 116% over the same nine month period in fiscal 2000. During the current fiscal year the Serial EEPROM component of our business has substantially increased in dollars and as a percentage of our net sales driven primarily by supply shortages for these products in the marketplace. Our net sales in any given quarter depend upon a combination of orders received in that quarter for shipment in that quarter, which we refer to as turns orders, and shipments from backlog. We measure turns orders at the beginning of a quarter based on the orders needed to meet the revenue targets that we set entering the quarter. Turns orders directly correlate to product lead times which are currently between 2 and 4 weeks, as compared to 12 to 15 weeks a year ago. With current lead times between 2 and 4 weeks, customers do not place orders in advance and therefore, we do not currently have the order visibility we experienced in the recent past. Turns orders were 20% of our net sales for the three months ended December 31, 2000 and 25% of our net sales for the three months ended December 31, 1999. The percentage of turns orders has fluctuated over the last three years between 20% and 65% and is dependent on overall semiconductor industry conditions and product lead times. As of January 1, 2001, we needed to achieve turns orders of approximately 42% to achieve our projected net sales for the fourth quarter. Turns orders are difficult to predict, and we may not experience the combination of turns orders and shipments 10 from backlog in any quarter that would be sufficient to achieve anticipated growth in net sales. If we do not achieve a sufficient level of turns orders in a particular quarter, our revenues and operating results would be adversely affected. Historically, average selling prices in the semiconductor industry decrease over the life of any particular product. The overall average selling prices of our microcontroller products have remained relatively constant, while average selling prices of our memory products had declined through the end of fiscal 2000. However, during the current fiscal year, prices for our memory products increased due primarily to the dynamics of the supply and demand environment. During the current fiscal year microcontroller product pricing remained relatively constant. We have experienced, and expect to continue to experience, pricing pressure in certain microcontroller product lines, due primarily to competitive conditions. We have been able to maintain average selling prices in our microcontroller line by continuing to introduce new products with more features and higher prices, thereby offsetting price declines in older products. We also expect average selling prices for our memory products to decrease over the next several quarters. We may be unable to maintain average selling prices for our microcontroller and memory products as a result of increased pricing pressure in the future, which would reduce our operating results. THE FOREGOING STATEMENTS REGARDING TURNS ORDERS, AVERAGE SELLING PRICES, MEMORY PRODUCT PRICING AND PRICING PRESSURES ARE FORWARD LOOKING STATEMENTS. 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 OUR PRODUCTS; MARKET ACCEPTANCE OF OUR PRODUCTS AND THOSE OF OUR CUSTOMERS; DEMAND FOR OUR PRODUCTS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; CHANGES IN PRODUCT MIX; ABSORPTION OF FIXED COSTS, LABOR AND OTHER FIXED MANUFACTURING COSTS; AND GENERAL ECONOMIC CONDITIONS. Distributors accounted for 60% of our net sales in the three months ended December 31, 2000, and 64% of our net sales in the three months ended December 30, 1999. Distributors accounted for 63% of our net sales in each of the nine month periods ending December 31, 2000 and 1999. The recent decrease in the percentage of our net sales from distribution is attributable to the industry inventory correction described above, as well as increased OEM penetration through our direct sales force. Our largest distributor accounted for 13% of our total net sales for the three months ended December 31, 2000, and 16% of our total net sales for the three months ended December 31, 1999. Our largest distributor accounted for 14% of our net sales in each of the nine month periods ending December 31, 2000 and 1999. Generally, we do not have long-term agreements with our distributors and our distributors may terminate their relationship with us with little or no advanced notice. The loss of, or the disruption in the operations of, one or more of our distributors could reduce our future net sales in a given quarter and could result in an increase in inventory returns. Sales to foreign customers represented 67% of our net sales in the three months ended December 31, 2000, and 71% of our net sales in the three months ended December 31, 1999. Sales to foreign customers represented 69% of our net sales in the nine months ended December 31, 2000 and 68% of our net sales in the nine months ended December 31, 1999. Our sales to foreign customers have been predominantly in Asia and Europe, which we attribute to the manufacturing strength in those areas for automotive, communications, computing, consumer and industrial control products. The majority of our foreign sales are U.S. Dollar denominated. Sales to customers in Asia were 36% of our net sales in the three months ended December 31, 2000 and 35% of our net sales in the three months ended December 31, 1999. Sales to customers in Europe were 30% of our net sales 11 in each of the three months ended December 31, 2000 and December 31, 1999. We enter into hedging transactions from time to time to minimize our exposure to currency rate fluctuations. Although none of the countries in which we conduct 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 we conduct operations will not adversely affect our operating results in the future. Our quarterly operating results are affected by a wide variety of factors that could reduce our net sales and profitability, many of which are beyond our control. Some of the factors that may affect our operating results include: * the level of orders that are received and can be shipped in a quarter (turns orders) * market acceptance of both our products and our customers' products * customer order patterns and seasonality * availability of manufacturing capacity and fluctuations in manufacturing yield * the availability and cost of raw materials, equipment and other supplies, and * economic, political and other conditions in the worldwide markets served by us. We believe that period-to-period comparisons of our operating results are not necessarily meaningful and that you should not rely upon any comparisons as indications of future performance. In future periods, our operating results may fall below the expectations of public market analysts and investors, which would likely have a negative effect on the price of our Common Stock. GROSS PROFIT In the three months ended December 31, 2000, our gross profit was $97.4 million, and our gross profit was $67.4 million in the three months ended December 31, 1999. In the nine months ended December 31, 2000, our gross profit was $280.1 million, and our gross profit was $183.0 million in the nine months ended December 31, 1999. Gross profit as a percent of sales was 55.2% for the quarter ended December 31, 2000, and 52.2% for the quarter ended December 31, 1999. Gross profit as a percent of sales was 54.9 % for the nine months ended December 31, 2000, and 51.6% for the nine months ended December 31, 1999. During the periods covered by this report, the most significant factors affecting gross profit percentage were increased 8-inch wafer production levels, continued cost reductions in wafer fabrication and assembly and test manufacturing, and a stable pricing market for microcontroller products. During the current fiscal year gross profit has also been favorably impacted by increases in average selling prices of our memory products. We continue to transition products to more advanced process technologies to reduce future manufacturing costs as we transition products to our 0.7 micron and 0.5 micron processes. In the three months ended December 31, 2000, 75% of our production was performed on 8-inch wafers as compared to 50% in the three months ended December 31, 1999. We anticipate that gross product margins will fluctuate over time, driven primarily by the product mix of microcontroller products and related memory products, manufacturing yields, fixed cost absorption, wafer fab loading levels and competitive and economic conditions. We have currently cancelled or pushed out capital expenditures to realign our capacity to reflect our current assessment of market conditions. The projected start-up date of our Puyallup, Washington semiconductor manufacturing complex has been delayed until June 2002. We will maintain the Puyallup facility at a minimum cost basis until it is required for capacity expansion. THE FOREGOING STATEMENTS RELATING TO ANTICIPATED GROSS PRODUCT MARGINS, THE TRANSITION TO HIGHER YIELDING MANUFACTURING PROCESSES, THE DELAY IN EXPANSION OF OUR MANUFACTURING CAPACITY AND THE ANTICIPATED START UP DATE OF OUR PUYALLUP 12 FACILITY ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; COST AND AVAILABILITY OF RAW MATERIALS; ABSORPTION OF FIXED COSTS, LABOR AND OTHER DIRECT MANUFACTURING COSTS; THE ABILITY TO INCREASE MANUFACTURING CAPACITY AS NEEDED; THE TIMING AND SUCCESS OF MANUFACTURING PROCESS TRANSITION; DEMAND FOR OUR PRODUCTS; COMPETITION AND COMPETITIVE PRESSURE ON PRICING; CHANGES IN PRODUCT MIX; AND OTHER ECONOMIC CONDITIONS. Currently, the majority of our assembly operations, and a portion of our test requirements, are performed by third-party contractors located throughout Asia, with the balance of the assembly and test operations performed at our Thailand facility. Approximately 33% of our assembly requirements were being performed in our Thailand facility during the three months ended December 31, 2000, as compared to 20% during the three months ended December 31, 1999. We believe that the assembly operations that we perform in our Thailand facility provide us with significant cost savings, as compared to third party contractor assembly costs, as well as increased control of the manufacturing process. We are dependent on third-party contractors for the balance of our requirements. We believe that the assembly requirements that we perform in our Thailand facility provide us with significant cost savings as well as increased control of the manufacturing process. Our reliance on third parties involves some reduction in our level of control over these portions of our business. While we review 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. Our reliance on foreign operations, maintenance of substantially all of our finished goods in inventory in foreign locations, and significant foreign sales exposes us to foreign political and economic risks, including: * political, social and economic instability * trade restrictions and changes in tariffs * import and export license requirements and restrictions * difficulties in staffing and managing international operations * disruptions in international transport or delivery * fluctuations in currency exchange rates * difficulties in collecting receivables, and * potentially adverse tax consequences. To date, we have not experienced any significant interruptions in our foreign business operations. If any of these risks materialize, our sales could decrease and our operating results could suffer. RESEARCH AND DEVELOPMENT We are committed to investing in new and enhanced products, including development systems software, and in our design and manufacturing process technology. We believe these investments are significant factors in maintaining our competitive position. We expense all research and development costs as incurred. We increased our level of research and development costs to $18.3 million in the current quarter, as compared to $12.1 million in the corresponding quarter of the previous fiscal year and $16.9 million in the immediately preceding quarter. Research and development expenses were $50.0 million in the nine months ended December 31, 2000, and $33.1 million in the nine months ended December 31, 1999. The primary reason for the dollar increases in research and development costs in the periods covered by this report relates 13 to labor and recruitment costs associated with expanding our technical resources. Research and development in the current quarter increased by 50.8% as compared to the corresponding quarter of the previous fiscal year, and increased by 8.0% from the previous quarter. Our future operating results will depend to a significant extent on our ability 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 our customers' end products. Because our products are complex, we have experienced delays from time to time in completing development of new products. In addition, our new products may not receive or maintain substantial market acceptance. We may be unable to design, develop and introduce competitive products on a timely basis, which could reduce our future operating results. Our future success also depends upon our ability to develop and implement new design and process technologies. Semiconductor design and process technologies are subject to rapid technological change and require large research and development expenditures. Other companies in the industry have experienced difficulty in effecting transitions to smaller geometry processes and, consequently, have suffered reduced manufacturing yields or delays in product deliveries. We believe that our successful transition to smaller geometries is important for us to remain competitive. Our future operating results could be reduced if the transition is substantially delayed or inefficiently implemented. SELLING, GENERAL AND ADMINISTRATIVE We increased our level of selling, general and administrative costs to $23.0 million in the December 2000 quarter, as compared to $19.5 million in the corresponding quarter of the previous fiscal year, and $24.2 million in the immediately preceding quarter. Selling, general and administrative costs were $69.9 million in the nine months ended December 31, 2000, and $55.5 million in the nine months ended December 31, 1999. The primary reason for the dollar increase in selling, general and administrative costs from the previous fiscal year relates to labor and recruitment costs associated with expanding our employment base to support the growth of our business. The primary reasons for the December 2000 quarter dollar decrease in selling, general and administrative costs from the immediately preceding quarter were reductions in expenses that are revenue and profit dependent, including variable compensation, advertising and non-sales related travel. Selling, general and administrative costs represented 13.0% of sales in the December 2000 quarter, as compared to 15.1% of sales in the corresponding quarter of the previous fiscal year, and 13.7% of sales in the immediately preceding quarter. In the fourth quarter, we expect selling, general and administrative costs to remain relatively flat to the levels incurred in the three months ended December 31, 2000. We expect selling, general and administrative costs to rise in dollars and decrease as a percentage of sales over time as we continue to efficiently grow and invest in incremental worldwide sales, technical support, and administrative resources to promote our embedded control products. 14 THE FOREGOING STATEMENTS REGARDING EXPECTED LEVELS OF SELLING, GENERAL AND ADMINISTRATIVE SPENDING ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: NET SALES LEVELS AND OUR INVESTMENTS IN REVENUE DEPENDENT EXPENSES; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; AND THE ECONOMIC, POLITICAL AND OTHER CONDITIONS IN THE WORLDWIDE MARKETS SERVED BY US. OTHER INCOME (EXPENSE) Interest income in the three months ended December 31, 2000 increased from the corresponding period of the previous fiscal year as a result of higher invested cash balances due primarily to our secondary offering completed in March 2000. Interest expense in the three and nine months ended December 31, 2000 decreased from the corresponding periods of the previous fiscal year as a result of lower borrowing levels of our credit facilities. Our interest income will decrease in the last quarter of this fiscal year as our invested cash balances decrease to fund our capital expansion. Other income includes gains on the sale of fixed assets of $0.9 million as well as numerous immaterial non-operating items. PROVISION FOR INCOME TAXES Provisions for income taxes reflect tax on foreign earnings and federal and state tax on U.S. earnings. We had an effective tax rate of 27.0% for the nine months ended December 31, 2000 and 27.0% for the nine months ended December 31, 1999, due primarily to lower tax rates at our foreign locations. We believe that our tax rate for the foreseeable future will be approximately 27.0%. THE FOREGOING STATEMENT REGARDING OUR ANTICIPATED FUTURE TAX RATE IS A FORWARD-LOOKING STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: CURRENT TAX LAWS AND REGULATIONS; TAXATION RATES IN GEOGRAPHIC REGIONS WHERE WE HAVE SIGNIFICANT OPERATIONS; AND CURRENT TAX HOLIDAYS AVAILABLE IN FOREIGN LOCATIONS. EURO CONVERSION ISSUES We operate in the European Market and currently generate approximately one third of our total net sales from customers located in Europe. Our commercial headquarters in Europe are located in the United Kingdom, which is not currently one of the 11 member states of the European Union converting to a common currency. We currently conduct 98.5% of our business in Europe in U.S. Dollars and 0.6% of our business in Europe in Pounds Sterling. The balance of our net sales in Europe is conducted in currencies which will eventually be replaced by the Euro. We will monitor the potential commercial impact of converting a portion of our current business to the Euro, but we do not currently anticipate any material impact to our business based on this transition. We do not currently anticipate any material impact to our business related to Euro matters from information technology, derivative transactions, tax issues and accounting software issues. THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED IMPACT OF THE TRANSITION TO THE EURO CURRENCY ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: LEVELS OF SALES IN EUROPE THAT MAY BE CONDUCTED IN THE EURO CURRENCY; AND FLUCTUATIONS IN CURRENCY EXCHANGE RATES. 15 LIQUIDITY AND CAPITAL RESOURCES We had $78.8 million in cash and cash equivalents at December 31, 2000, a decrease of $109.3 million from the March 31, 2000 balance. The decrease in cash and cash equivalents over this time period is primarily attributable to capital expenditures to increase our production capacity. We maintain an unsecured revolving credit facility with a syndicate of banks totaling $100.0 million. We can elect to increase the facility to $150.0 million, subject to certain conditions set forth in the credit agreement. This facility has a termination date of May 31, 2003. There were no borrowings against this line of credit as of December 31, 2000. We are required to achieve certain financial ratios and operations results to maintain this line of credit. We also maintain an unsecured short-term line of credit totaling $34.6 million with certain foreign banks. There were no borrowings under the foreign line of credit as of December 31, 2000. There are no covenants related to the foreign line of credit. At December 31, 2000, an aggregate of $133.4 million of our credit facilities were available, subject to financial covenants and ratios with which we were in compliance. Our ability to fully utilize our credit facilities is dependent on our remaining in compliance with such covenants and ratios. During the nine months ended December 31, 2000, we generated $272.5 million of cash from operating activities, an increase of $101.3 million from the nine months ended December 31, 1999. The increase in cash flow from operations was primarily due to increased profitability and the impact of changes in accounts payable and accrued liabilities, depreciation and other assets and liabilities. Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions. Capital expenditures in the nine months ended December 31, 2000 were $403.7 million, as compared to $139.7 million for the nine months ended December 31, 1999. Capital expenditures were primarily for the expansion of production capacity, including the purchase of the Puyallup, Washington semiconductor manufacturing complex, and the addition of research and development equipment in each of these periods. We currently intend to spend approximately $125 million during the next 12 months for additional capital, including: * equipment to maintain and selectively increase capacity at our existing wafer fabrication facilities * facilitization of the Puyallup, Washington semiconductor manufacturing complex, and * expansion of product test operations. We expect to finance capital expenditures through our existing cash balances, including cash acquired from the acquisition of Telcom Semiconductor, Inc., our cash flows from operations, available debt arrangements and other sources of financing, including issuance of equity and debt securities depending on market conditions. We believe that the capital expenditures anticipated to be incurred over the next 12 months will provide sufficient additional manufacturing capacity to meet our currently anticipated needs. THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED LEVEL OF CAPITAL EXPENDITURES OVER THE NEXT 12 MONTHS AND THE FINANCING AND SUFFICIENCY OF SUCH CAPITAL EXPENDITURES ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; MARKET ACCEPTANCE OF OUR PRODUCTS AND OF OUR CUSTOMERS' PRODUCTS; DEMAND FOR OUR PRODUCTS; UTILIZATION OF CURRENT MANUFACTURING CAPACITY; THE AVAILABILITY AND COST OF RAW MATERIALS, EQUIPMENT AND OTHER SUPPLIES; AND THE ECONOMIC, POLITICAL AND OTHER CONDITIONS IN THE WORLDWIDE MARKETS SERVED BY US. 16 Net cash provided by financing activities was $20.4 million for the nine months ended December 31, 2000. Net cash provided by financing activities was $6.2 million for the nine months ended December 31, 1999. Proceeds from sale of stock and put options were $29.4 million, including $17.0 million related to our net shares settled forward contract, in the nine months ended December 31, 2000 and $19.5 million for the nine months ended December 31, 1999. Payments on long-term debt and capital lease obligations were $1.8 million for the nine months ended December 31, 1999. Repayments on lines of credit were $9.0 million for the nine months ended December 31, 2000 and $11.5 million for the nine months ended December 31, 1999. We have outstanding a net shares settled forward contract and made a net delivery of 478,781 shares of our common stock in the nine months ended December 31, 2000 and received 2,540,466 shares of our common stock in the nine months ended December 31, 1999 in connection with this contract. During the nine months ended December 31, 2000, we received $17.0 million in connection with our net shares settled forward contract. See Note 6 to "Condensed Consolidated Financial Statements." The net shares settled forward contract could obligate us to make a cash payment in the future if the price of the our Common Stock is below the strike price of the instruments. We believe that our existing sources of liquidity combined with cash generated from operations will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months. However, the semiconductor industry is capital intensive. In order to remain competitive, we must continue to make significant investments in capital equipment for both production and research and development. We may seek additional equity or debt financing during the next 12 months for the capital expenditures required to maintain or expand our wafer fabrication and product assembly and test facilities, or other purposes. The timing and amount of any such capital requirements will depend on a number of factors, including demand for our 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 SFAS 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Similar Financial Instruments for Hedging Activities," to establish accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. This new standard, as amended by related SFAS Nos. 137 and 138, will be effective for the Company for its fiscal year ending March 31, 2002. The Company is currently evaluating the impact of SFAS No. 133. SAB 101 In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC and, as amended, will be effective for the Company in the fourth quarter of 2000. We do not expect the implementation of SAB 101 to have a material effect on our results of operation. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our investment portfolio, consisting of fixed income securities, was $81.2 million as of December 31, 2000, and $189.6 million as of March 31, 2000. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market rates were to increase immediately and uniformly by 10% from the levels of December 31, 2000 and March 31, 2000, the decline in the fair value of our investment portfolio would not be material. Additionally, we have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize an adverse impact in income or cash flows. We have international operations and are thus subject to foreign currency rate fluctuations. To date, our exposure related to exchange rate volatility has not been significant. If the foreign currency rates fluctuate by 15% from the rates at December 31, 2000 and March 31, 2000, the effect on our financial position and results of operations would not be material. During the normal course of our business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements and foreign currency fluctuations, as we discuss in this Item 3, and collectability of accounts receivable. We constantly assess these risks and have established policies and procedures to protect against the advserse affects of these other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future. We believe that our market risk, as discussed in this Item 3, has not materially changed from March 31, 2000. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. (b) Reports on Form 8-K. We filed a current report on Form 8-K dated October 26, 2000 relating to our entering into an Agreement and Plan of Reorganization with TelCom Semiconductor, Inc. The Agreement and Plan of Reorganization was filed as Exhibit 2.1 to the current report on Form 8-K. 18 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: February 14, 2001 By: /s/ Gordon W. Parnell ----------------------------------- Gordon W. Parnell Vice President and Chief Financial Officer (Duly Authorized Officer, and Principal Financial and Accounting Officer) 19