================================================================================
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 June 30, 2002.
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 [ ]
Number of shares of common stock, $.001 Par Value, outstanding as of August 2,
2002: 201,905,250 SHARES.
================================================================================
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 2002 and March 31, 2002...................................3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 2002
and June 30, 2001..................................................4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 2002 and
June 30, 2001......................................................5
Notes to Condensed Consolidated Financial Statements -
June 30, 2002......................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......28
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings................................................29
Item 6. Exhibits and Reports on Form 8-K.................................29
SIGNATURES ...................................................................30
2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
June 30, March 31,
2002 2002
----------- -----------
(Unaudited) (Note 1)
Cash and cash equivalents $ 284,045 $ 280,647
Accounts receivable, net 83,710 80,747
Inventories 88,747 88,615
Prepaid expenses 4,457 6,154
Deferred tax asset 99,808 83,980
Other current assets 12,188 9,033
----------- -----------
Total current assets 572,955 549,176
Property, plant and equipment, net 713,399 715,960
Goodwill 30,294 --
Intangible assets, net 5,533 --
Other assets 12,528 10,464
----------- -----------
Total assets $ 1,334,709 $ 1,275,600
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 37,604 $ 38,292
Accrued liabilities 101,406 88,506
Deferred income on shipments to distributors 48,358 40,800
----------- -----------
Total current liabilities 187,368 167,598
Pension accrual 1,137 1,091
Deferred tax liability 31,179 31,132
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 and outstanding 201,809,298 shares at June 30, 2002;
issued 200,802,633 and outstanding 200,629,908 shares at
March 31, 2002 202 201
Additional paid-in capital 473,843 459,303
Retained earnings 640,980 619,254
Less shares of common stock held in treasury at cost;
172,725 shares at March 31, 2002 -- (2,979)
----------- -----------
Net stockholders' equity 1,115,025 1,075,779
----------- -----------
Total liabilities and stockholders' equity $ 1,334,709 $ 1,275,600
=========== ===========
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)
(Unaudited)
Three Months Ended June 30,
---------------------------
2002 2001
--------- ---------
Net sales $ 159,745 $ 138,894
Cost of sales 75,848 69,488
--------- ---------
Gross profit 83,897 69,406
Operating expenses:
Research and development 21,560 19,534
Selling, general and administrative 21,941 21,443
Purchased in-process research and development 9,300 --
--------- ---------
52,801 40,977
Operating income 31,096 28,429
Other income (expense):
Interest income 1,402 1,262
Interest expense (136) (207)
Other, net (16) 343
--------- ---------
Income before income taxes 32,346 29,827
Income taxes 10,620 8,054
--------- ---------
Net income $ 21,726 $ 21,773
========= =========
Basic net income per share $ 0.11 $ 0.11
========= =========
Diluted net income per share $ 0.10 $ 0.11
========= =========
Weighted average common
shares outstanding 201,292 197,103
========= =========
Weighted average common and potential
common shares outstanding 211,527 206,385
========= =========
See accompanying notes to condensed consolidated financial statements.
4
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended June 30,
---------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 21,726 $ 21,773
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 15 13
Provision for inventory valuation 2,108 1,388
Provision for pension accrual 10 38
Gain on sale of fixed assets -- (242)
Loss on write-down of fixed assets 1,208 --
In-process research and development charge 9,300 --
Depreciation and amortization 27,228 27,543
Deferred income taxes (benefit) (8,692) 2,172
Tax benefit from exercise of stock options 8,861 3,012
(Increase) decrease in accounts receivable (1,858) 9,147
Increase in inventories (1,741) (1,807)
Increase (decrease) in accounts payable and
accrued liabilities 9,540 (38,340)
Change in other assets and liabilities 3,557 (8,621)
--------- ---------
Net cash provided by operating activities 71,262 16,076
--------- ---------
Cash flows from investing activities:
PowerSmart acquisition, net of cash acquired (50,674) --
Proceeds from sale of assets -- 823
Capital expenditures (25,264) (12,827)
--------- ---------
Net cash used in investing activities (75,938) (12,004)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of stock 8,074 4,438
--------- ---------
Net cash provided by financing activities 8,074 4,438
--------- ---------
Net increase in cash and cash equivalents 3,398 8,510
Cash and cash equivalents at beginning of period 280,647 129,909
--------- ---------
Cash and cash equivalents at end of period $ 284,045 $ 138,419
========= =========
See accompanying notes to condensed consolidated financial statements.
5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited 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 unaudited 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 opinion of management, all
adjustments of a normal recurring nature which are necessary for a fair
presentation have been included. Certain information and footnote disclosures
normally included in audited consolidated financial statements have been
condensed or omitted pursuant to such Securities and Exchange Commission rules
and regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 2002. The results of operations for the three
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending March 31, 2003 or for any other period.
Certain reclassifications have been made to conform the prior year amounts
to the current period presentation.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations and
No. 142 (SFAS 142), Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized,
but will be subject to annual impairment tests in accordance with the
statements. Other intangible assets will continue to be amortized over their
useful lives. Goodwill will be subject to impairment tests annually, or earlier
if indicators of potential impairment exist, using a fair-value-based approach.
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2003 with the
acquisition of PowerSmart, Inc.
(2) ACQUISITION OF POWERSMART, INC.
On June 5, 2002, the Company completed the acquisition of PowerSmart, Inc.
in which Microchip acquired all of PowerSmart's outstanding capital stock and
assumed certain stock options for consideration of $54.0 million in cash. The
purchase price was allocated among PowerSmart's tangible and intangible assets,
in-process research and development and goodwill based on an independent
valuation analysis performed by a firm other than the Company's independent
auditors.
The acquisition was accounted for as a purchase business combination in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 141,
and accordingly, the results of PowerSmart's operations are included in the
Company's consolidated results from the date of the acquisition. The acquisition
was not considered significant under the rules and regulations of the Securities
and Exchange Commission (Rule 3.05 of Regulation S-X).
The following table summarizes the preliminary fair values of the assets
acquired and the liabilities assumed at the date of the acquisition. The
allocation of the purchase price to these assets and liabilities was based on
preliminary estimates and is subject to adjustment.
6
(amounts in thousands)
----------------------
Current assets $ 3,315
Property and equipment 462
Other assets 1,147
In-process research and development 9,300
Core technology 5,200
Other intangible assets 400
Deferred tax assets, net 7,089
Goodwill 30,294
--------
Total assets acquired 57,207
Current liabilities (1,988)
--------
Total liabilities assumed (1,988)
--------
Net assets acquired $ 55,219
========
Assets and liabilities have been recorded at their net book value, which
approximates their fair market value at the date of the acquisition. Liabilities
assumed includes accruals of approximately $0.8 million for severance, exit and
lease termination costs related to the costs of terminating the employment of
headquarters personnel of PowerSmart, severing certain contractual obligations
entered into by PowerSmart and closing the leased facility located in Shelton,
Connecticut.
The amount paid in excess of the fair value of the net tangible assets has
been allocated to separately identifiable intangible assets based upon an
independent valuation analysis. The $9.3 million assigned to in-process research
and development was written off at the date of the acquisition in accordance
with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 Business
Combinations Accounted for by the Purchase Method."
In accordance with SFAS No. 142, goodwill related to this acquisition will
not be amortized but will be subject to periodic impairment tests. None of the
approximately $30.3 million in goodwill is expected to be deductible for tax
purposes. The core technology and other intangible assets of $5.6 million will
be amortized over their estimated useful lives of seven years.
There has been an escrow account established from the transaction proceeds
in the amount of approximately $5.2 million. The escrow account can be utilized
to offset pre-acquisition contingencies that the Company may be required to pay.
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
June 30, March 31,
2002 2002
------- -------
Trade accounts receivable $86,941 $84,336
Other 845 348
------- -------
87,786 84,684
Less allowance for doubtful accounts 4,076 3,937
------- -------
$83,710 $80,747
======= =======
7
(4) INVENTORIES
The components of inventories consist of the following (amounts in
thousands):
June 30, March 31,
2002 2002
------- -------
Raw materials $ 8,233 $ 7,187
Work in process 57,612 61,724
Finished goods 22,902 19,704
------- -------
$88,747 $88,615
======= =======
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.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
June 30, March 31,
2002 2002
---------- ----------
Land $ 23,685 $ 23,685
Building and building improvements 191,215 191,186
Machinery and equipment 732,417 722,049
Projects in process 225,763 211,098
---------- ----------
1,173,080 1,148,018
Less accumulated depreciation
and amortization 459,681 432,058
---------- ----------
$ 713,399 $ 715,960
========== ==========
Depreciation and amortization expense attributed to property and equipment
was $27.2 million and $27.5 million for the three months ended June 30, 2002 and
June 30, 2001, respectively.
(6) LINES OF CREDIT
The Company has an unsecured revolving credit facility with a syndicate of
banks totaling $100,000,000, bearing interest at LIBOR plus 0.625%. The Company
can elect to increase the facility to $150,000,000, subject to certain
conditions set forth in the credit agreement. This facility has a termination
date of May 31, 2003. The Company had no borrowings against this line of credit
as of June 30, 2002. The credit facility requires the Company to achieve certain
financial ratios and operating results to maintain the credit facility. The
Company's ability to fully utilize this credit facility is dependent on it being
in compliance with such covenants and ratios. The Company was in compliance with
these covenants as of June 30, 2002.
The Company has an additional unsecured short-term line of credit with
various financial institutions in Asia for up to $20,000,000 (U.S. Dollar
equivalent). These borrowings are predominantly denominated in U.S. Dollars,
bearing interest at the Singapore Interbank Offering Rate (SIBOR) of 2.32% at
June 30, 2002 plus 0.5% (average) and expiring on various dates through March
2003. There were no borrowings against this line of credit as of June 30, 2002,
8
and an allocation of $888,000 of the available line was made, relating to import
guarantees associated with the Company's business in Thailand. There are no
covenants relative to the foreign line of credit.
(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
June 30,
---------------------
2002 2001
-------- --------
Net income $ 21,726 $ 21,773
Weighted average common
shares outstanding 201,292 197,103
Dilutive effect of stock options 10,235 9,282
-------- --------
Weighted average common and
potential common shares outstanding 211,527 206,385
======== ========
Basic net income per share $ 0.11 $ 0.11
======== ========
Diluted net income per share $ 0.10 $ 0.11
======== ========
(8) SUBSEQUENT EVENT
On August 7, 2002, the Company's Board of Directors authorized the Company
to repurchase up to 2,500,000 shares of its Common Stock in the open market or
in privately negotiated transactions. The timing and amount of purchases will
depend upon market conditions and corporate considerations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS
SIGNING OF DEFINITIVE AGREEMENT TO ACQUIRE SEMICONDUCTOR MANUFACTURING
FACILITY IN GRESHAM, OREGON
On July 17, 2002, we signed an agreement to acquire a semiconductor
manufacturing facility in Gresham, Oregon (Fab 4) from Fujitsu Microelectronics,
Inc., referred to as FMI, for $183.5 million in cash. The assets we would
acquire upon closing include a 196-acre campus, buildings totaling approximately
826,500 square feet (including approximately 200,000 square feet of clean room
space) and manufacturing equipment. We will pay the purchase price from our
existing cash and cash equivalent balances.
Closing of the transaction is subject to several closing conditions,
including the qualification of the facility under the State of Oregon's
Strategic Investment Program, a program that would provide a partial tax
exemption for the facility for a limited period of time. Closing of the
transaction is scheduled to occur on October 31, 2002, however, FMI has the sole
option to accelerate closing to the end of August 2002, upon completion of all
closing conditions.
We currently intend to maintain Fab 3 in Puyallup, Washington until it is
required for future production. We are currently evaluating Fab 3 to determine
if an impairment charge will be required if we close the proposed acquisition of
Fab 4. Our current net book value of the land and buildings at Fab 3 is
approximately $95 million. We will relocate the manufacturing process equipment
from Fab 3 to our wafer fabrication facilities in Chandler (Fab 1) and Tempe,
Arizona (Fab 2), to further enhance our short-term manufacturing capacity and to
reduce our currently projected capital expenditures over the next four fiscal
years that would have been necessary to increase capacity at our other wafer
fabrication facilities. Following the closing of the acquisition of Fab 4, we
currently intend to relocate certain equipment from Fab 3 to Fab 4 to create a
closer equipment match to our Fab 2 wafer fabrication facility in order to
facilitate a quicker process start at Fab 4. We currently expect that virtually
all of the equipment presently at Fab 3 will be transferred to and used in Fabs
1, 2 or 4.
THE FOREGOING STATEMENTS REGARDING THE EXPECTED CLOSING DATE OF THE
PROPOSED ACQUISITION OF FAB 4, OUR INTENTION TO MAINTAIN FAB 3 UNTIL IT IS
REQUIRED FOR OUR FUTURE PRODUCTION REQUIREMENTS, OUR EVALUATION OF FAB 3 TO
DETERMINE IF AN IMPAIRMENT CHARGE WILL BE REQUIRED IF WE CLOSE THE PROPOSED
ACQUISITION OF FAB 4, RELOCATION OF EQUIPMENT FROM FAB 3 TO OUR OTHER
MANUFACTURING FACILITIES, REDUCTION IN PLANNED CAPITAL EXPENDITURES OVER THE
NEXT FOUR YEARS, THE RELOCATION OF EQUIPMENT FACILITATING A QUICKER PROCESS
START IN FAB 4 AND OUR EXPECTATION THAT VIRTUALLY ALL OF THE EQUIPMENT AT FAB 3
WILL BE TRANSFERRED TO AND USED IN FABS 1, 2 OR 4 ARE FORWARD-LOOKING
STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING
FACTORS, AMONG OTHERS: FAILURE OF THE PROPOSED ACQUISITION OF FAB 4 TO CLOSE DUE
TO FAILURE OF THE PARTIES TO SATISFY CLOSING CONDITIONS OR OTHER FACTORS;
WHETHER FMI EXERCISES ITS OPTION TO ACCELERATE THE CLOSING DATE OF THE PROPOSED
ACQUISITION; FUTURE DEMAND FOR OUR PRODUCTS AND THE PRODUCTS OF OUR CUSTOMERS;
DELAYS IN PERMIT TRANSFERS AND/OR FACILITIZATION OF FAB 4; OUR ABILITY TO RAMP
PRODUCTS INTO VOLUME PRODUCTION AT FAB 4; AVAILABILITY OF EQUIPMENT AND OTHER
SUPPLIES; AND GENERAL INDUSTRY, ECONOMIC AND POLITICAL CONDITIONS.
10
ACQUISITION OF POWERSMART, INC.
On June 5, 2002, we completed our acquisition of PowerSmart, Inc. in which
we acquired all of PowerSmart's outstanding capital stock and assumed certain
stock options for consideration of $54.0 million in cash.
PowerSmart delivers a battery management whole product solution that
improves system runtimes with a lower system cost for the user. Included in the
whole product solution is an application tools suite designed to speed up
implementation during the user's development and production. Powersmart's
leading edge technology in battery management combined with our existing
microcontroller infrastructure will position us well to gain market share in the
office automation and consumer products markets. The acquisition is expected to
strengthen our position in battery management applications such as laptop
computers, personal digital assistants, cellular telephones, digital cameras and
camcorders, and UPS systems.
The assets acquired included in-process research and development. The value
assigned to this asset was determined by an independent valuation analysis
performed by a firm other than our independent auditors. As of the valuation
date, there were 15 projects that were considered to be in-process. The values
of the projects were determined based on analyses of cash flows to be generated
by the products that are expected to result from the in-process projects. These
cash flows were estimated by forecasting total revenues expected from these
products then deducting appropriate operating expenses, cash flow adjustments
and contributory asset returns to establish a forecast of net return on the
in-process technology. These net returns were substantially reduced to take into
account the time value of money and the risks associated with the inherent
difficulties and uncertainties in achieving commercial readiness. The above
analysis resulted in $9.3 million of value assigned to acquired in-process
research and development, which was expensed on the acquisition date in
accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No.
2 Business Combinations Accounted for by the Purchase Method." We believe the
assumptions used in valuing in-process research and development are reasonable,
but are inherently uncertain, and no assurance can be given that the assumptions
made will occur. During the quarter ended June 30, 2002, we incurred development
costs of approximately $0.2 million related to the acquired in-process research
and development, and should the projects continue to move toward
commercialization, we estimate that future expenditures could approximate $2.5
million over the next few years.
We also recorded goodwill of approximately $30.3 million, which includes
PowerSmart's and our transaction costs as well as other acquisition-related
expenses, and intangible assets of $5.6 million which will be amortized over
seven years.
THE FOREGOING STATEMENTS RELATING TO POWERSMART'S LEADING EDGE TECHNOLOGY
IN BATTERY MANAGEMENT COMBINED WITH OUR EXISTING MICROCONTROLLER INFRASTRUCTURE
POSITIONING US WELL TO GAIN MARKET SHARE IN THE OFFICE AUTOMATION AND CONSUMER
PRODUCTS MARKETS, THE ACQUISITION STRENGTHENING OUR POSITION IN BATTERY
MANAGEMENT APPLICATIONS AND OUR ESTIMATION OF FUTURE EXPENDITURES RELATED TO
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT PROJECTS ARE FORWARD-LOOKING
STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING
FACTORS, AMONG OTHERS: DIFFICULTIES ASSOCIATED WITH SUCCESSFULLY INTEGRATING
POWERSMART'S AND OUR BUSINESSES AND TECHNOLOGIES; FAILURE OF THE COMBINED
COMPANY TO RETAIN AND HIRE KEY EXECUTIVES, TECHNICAL PERSONNEL AND OTHER
EMPLOYEES; FAILURE OF THE COMBINED COMPANY TO SUCCESSFULLY MANAGE ITS CHANGING
RELATIONSHIP WITH CUSTOMERS, SUPPLIERS, VALUE-ADDED RESELLERS AND STRATEGIC
PARTNERS; FAILURE OF THE COMBINED COMPANY'S CUSTOMERS TO ACCEPT NEW PRODUCT
OFFERINGS; FAILURE TO ACHIEVE ANTICIPATED SYNERGIES OF THE ACQUISITION; THE
PROGRESS AND COSTS OF DEVELOPMENT OF THE COMBINED COMPANY'S PRODUCTS AND
SERVICES AND THE TIMING OF MARKET ACCEPTANCE OF THOSE PRODUCTS AND SERVICES; AND
FAILURE TO COMPLETE ANY OF THE PROJECTS CURRENTLY IN DEVELOPMENT FOR ANY
REASON, INCLUDING OUR FAILURE TO ALLOCATE MONETARY OR HUMAN RESOURCES TO SUCH
PROJECTS.
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of
net sales for the periods indicated:
Three Months Ended
June 30,
(unaudited)
-----------------
2002 2001
----- -----
Net sales .................................... 100.0% 100.0%
Cost of sales ................................ 47.5% 50.0%
----- -----
Gross profit ................................. 52.5% 50.0%
Research and development ..................... 13.5% 14.1%
Selling, general and administrative .......... 13.7% 15.4%
In-process research and development .......... 5.8% --
----- -----
Operating income ............................. 19.5% 20.5%
===== =====
11
NET SALES
We operate in one industry segment and engage primarily in the design,
development, manufacture and marketing of semiconductor products. We sell our
products to distributors and original equipment manufacturers, referred to as
OEMs, in a broad range of market segments, perform on-going credit evaluations
of our customers and generally require no collateral.
Our net sales for the quarter ended June 30, 2002 were $159.7 million, an
increase of 7.3% from the previous quarter's sales of $148.8 million, and an
increase of 15.0% from net sales of $138.9 million in the quarter ended June 30,
2001. The increase in net sales for the three month period ended June 30, 2002,
compared to the three month period ended June 30, 2001, resulted primarily from
increased demand for microcontroller and analog products in end markets.
Sales by product line for the three months ended June 30, 2002 and June 30,
2001 were as follows (in thousands):
Three Months Ended
June 30,
(Unaudited)
------------------------------------
2002 % 2001 %
-------- ----- -------- -----
Microcontrollers ............. $125,484 78.5 $107,541 77.4
Serial EEPROM products ....... 21,860 13.7 21,218 15.3
Analog and interface products 12,401 7.8 10,135 7.3
-------- ----- -------- -----
Total sales .................. $159,745 100.0% $138,894 100.0%
======== ===== ======== =====
Our microcontroller product line represents the largest component of our
total net sales. Microcontrollers and associated application development systems
accounted for approximately 79% of our total net sales for the three month
period ended June 30, 2002, and approximately 77% of our total net sales for the
three month period ended June 30, 2001. Net sales of our microcontroller
products increased approximately 16.7% in the quarter ended June 30, 2002,
compared to the quarter ended June 30, 2001, driven by increased end market
demand, our continued design win performance and continued increases in our
overall market share. 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
over time due to the proprietary nature of these products. We have experienced,
and expect to continue to experience, moderate pricing pressure in certain
microcontroller product lines, due primarily to competitive conditions. We have
been able to in the past, and expect to be able to in the future, moderate
average selling price declines in our microcontroller product lines by
introducing new products with more features and higher prices.
Sales of our Serial EEPROM products accounted for approximately 14% of our
total net sales for the three month period ended June 30, 2002, and
approximately 15% of our total net sales for the three month period ended June
30, 2001. Net sales of our Serial EEPROM products increased approximately 3.0%
in the quarter ended June 30, 2002, compared to the quarter ended June 30, 2001,
driven primarily by supply and demand conditions within the market. Serial
EEPROM product pricing responds to changes in supply and demand factors over
time, being more commodity than proprietary in nature. During the periods
12
covered by this report, we have experienced various Serial EEPROM product
pricing trends due to market conditions. We experienced significant competitive
pricing pressures in our Serial EEPROM product lines during the first half of
fiscal 2002, returning to modest pricing declines in the second half of fiscal
2002. Serial EEPROM pricing was essentially flat during the three months ended
June 30, 2002. We expect Serial EEPROM pricing to be approximately flat in the
second quarter of fiscal 2003, compared to the first quarter of fiscal 2003.
Sales of analog and interface products accounted for approximately 8% of
our total net sales for the three month period ended June 30, 2002, and
approximately 7% for the three month period ended June 30, 2001. Net sales of
our analog and interface products increased approximately 22.4% in the quarter
ended June 30, 2002, compared to the quarter ended June 30, 2001, driven
primarily by supply and demand conditions within the market and our ability to
gain market share from our competitors. Analog and interface products can be
proprietary or non-proprietary in nature. Currently, we consider approximately
40% of our analog and interface product mix to be proprietary in nature, where
prices are relatively stable, similar to the pricing stability of our
microcontroller products. The non-proprietary portion of our analog and
interface business will experience price fluctuations, driven primarily by the
current supply and demand for those products, similar to the pricing pressures
experienced in our Serial EEPROM product lines. During fiscal 2002, our analog
and interface products experienced price reductions of approximately 25%. During
the three-month period ending June 30, 2002, pricing of our analog and interface
products was essentially flat, compared to the three-month period ending March
31, 2002. We anticipate the proprietary portion of our analog and interface
products to increase over time.
We may be unable to maintain average selling prices for our microcontroller
or other products as a result of increased pricing pressure in the future, which
would adversely affect our operating results.
Our net sales in any given quarter depend upon a combination of shipments
from backlog and orders received in that quarter for shipment in that quarter,
which we refer to as turns orders. We measure turns orders at the beginning of a
quarter based on the orders needed to meet the revenue target that we set
entering the quarter. We have emphasized our ability to respond quickly to
customer orders as part of our competitive strategy, resulting in customers
placing orders with short delivery schedules. Turns orders directly correlate to
product lead times, which are currently between two and four weeks generally,
essentially unchanged from lead times a year ago. Shorter lead times generally
means that turns orders as a percentage of our business is relatively high in
any particular quarter and reduces our visibility on future product shipments.
With current lead times between two and four weeks generally, customers do not
place orders beyond their immediate requirements. The percentage of turns orders
in any given quarter is dependent on overall semiconductor industry conditions
and product lead times. As such, our percentage of turns orders has fluctuated
over the last three fiscal years between 20% and 65%. At July 1, 2002, we
required turns orders of approximately 50% in order to achieve our revenue
target for the second quarter of fiscal 2003. At April 1, 2002, we required
turns orders of approximately 57% to achieve our revenue target for the first
quarter of fiscal 2003.
Turns orders are difficult to predict, and we may not experience the
combination of turns orders and shipments from backlog in any quarter that would
be sufficient to achieve anticipated net sales. If we do not achieve a
sufficient level of turns orders in a particular quarter, our net sales and
operating results will suffer.
THE FOREGOING STATEMENTS REGARDING COMPETITIVE PRICING PRESSURE IN OUR
MICROCONTROLLER PRODUCT LINES, FUTURE AVERAGE SELLING PRICES IN OUR
MICROCONTROLLER PRODUCT LINES, SERIAL EEPROM PRICING IN THE QUARTER ENDING
SEPTEMBER 30, 2002, THE PROPRIETARY PORTION OF OUR ANALOG AND INTERFACE PRODUCT
LINES INCREASING OVER TIME, AND THE LEVEL OF TURNS ORDERS REQUIRED TO MEET OUR
REVENUE TARGET FOR THE SECOND QUARTER OF FISCAL 2003 ARE FORWARD-LOOKING
13
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; DEMAND FOR OUR PRODUCTS AND THE PRODUCTS OF OUR CUSTOMERS; THE
LEVEL AT WHICH DESIGN WINS BECOME ACTUAL ORDERS; INVENTORY MIX AND TIMING OF
CUSTOMER ORDERS; CUSTOMERS' INVENTORY LEVELS, ORDER PATTERNS AND SEASONALITY;
OUR ABILITY TO RAMP PRODUCTS INTO VOLUME PRODUCTION; COMPETITION AND COMPETITIVE
PRESSURES ON PRICING AND PRODUCT AVAILABILITY; POSSIBLE DISRUPTION IN COMMERCIAL
ACTIVITIES OCCASIONED BY TERRORIST ACTIVITY AND ARMED CONFLICT, SUCH AS CHANGES
IN LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED END-USER PURCHASES RELATIVE
TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED STATES, SUCH AS THE
BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR POLITICAL
INSTABILITY; THE CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE
MARKETS ADDRESSED BY OUR PRODUCTS; MARKET ACCEPTANCE OF OUR NEW PRODUCTS AND
THOSE OF OUR CUSTOMERS; THE FINANCIAL CONDITION OF OUR CUSTOMERS; 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 INDUSTRY, ECONOMIC AND POLITICAL CONDITIONS.
Distributors accounted for approximately 63% of our net sales in each of
the three month periods ended June 30, 2002 and June 30, 2001. Our largest
distributor accounted for approximately 12% of our total net sales in each of
the three month periods ended June 30, 2002 and June 30, 2001. Generally, we do
not have long-term agreements with our distributors and our distributors may
terminate their relationships 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 by geography for the three months ended June 30, 2002 and 2001 were
as follows (in thousands):
(Unaudited)
------------------------------------
2002 % 2001 %
-------- ----- -------- -----
Americas $ 53,414 33.4 $ 47,907 34.5
Europe 44,799 28.0 47,885 34.5
Asia 61,532 38.6 43,102 31.0
-------- ----- -------- -----
Total sales $159,745 100.0% $138,894 100.0%
======== ===== ======== =====
Our sales to foreign customers have been predominately in Asia and Europe,
which we attribute to the manufacturing strength in those areas for automotive,
communications, computing, consumer and industrial control products. Americas
sales include sales to customers in the United States, Canada, Central America
and South America. Sales to foreign customers accounted for approximately 74% of
our net sales in the three months ended June 30, 2002 and approximately 70% of
our net sales in the three months ended June 30, 2001. The majority of our
foreign sales are U.S. Dollar denominated.
We enter into hedging transactions from time to time in an attempt 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.
14
GROSS PROFIT
Our gross profit was $83.9 million in the three months ended June 30, 2002,
and $69.4 million in the three months ended June 30, 2001. Gross profit as a
percent of sales was 52.5% in the three months ended June 30, 2002, and 50.0% in
the three months ended June 30, 2001.
The most significant factors affecting gross profit percentage in the
periods covered by this report were:
* higher levels of manufacturing capacity utilization in the first
quarter of fiscal 2003
* continued cost reductions in wafer fabrication and assembly and test
manufacturing
* the ability to maintain average selling prices for our microcontroller
products where moderate pricing pressures have been offset by new
product introductions with more features and higher selling prices
* significant competitive pricing pressures in Serial EEPROM products in
the first quarter of fiscal 2002 compared to a more stable pricing
environment in the first quarter of fiscal 2003
* fluctuations in the product mix of proprietary microcontroller and
analog products and related Serial EEPROM products as illustrated in
the chart in Net Sales on page 12, and
* cost reductions associated with one-week plant shutdown in the first
quarter of fiscal 2002.
During fiscal 2002, we operated at approximately 70% of our cumulative
total Fab 1 and Fab 2 capacity due to the capacity reductions implemented in the
March 2001 quarter and one-week plant shutdowns in each quarter of fiscal 2002.
Our overall gross margins were negatively impacted by these actions due to the
relatively high fixed costs inherent in our wafer fabrication manufacturing,
which continue even at lower capacity levels. Capacity utilization in the first
quarter of fiscal 2003 increased to approximately 83%, which favorably impacted
gross margins, compared to the gross margins attained in fiscal 2002. We expect
capacity utilization in the second quarter of fiscal 2003 to be approximately
83%.
Our overall inventory levels were $88.7 million as of June 30, 2002,
compared to $88.6 million at March 31, 2002, confirming that capacity is aligned
with market demand. We maintained 107 days of inventory on our balance sheet as
of June 30, 2002, compared to 110 days as of March 31, 2002. The highest number
of days of inventory that we experienced in either fiscal 2002 or fiscal 2003
was 127 days as of September 30, 2001.
We currently intend to maintain Fab 3 at minimal operating cost until it is
required for future production. When required for production, we would expect
Fab 3 to produce 8-inch wafers. Upon commencement of operations at Fab 3, our
operating margins could suffer as production is brought on-line and depreciation
on the buildings and related equipment commences. As reported in "RECENT
DEVELOPMENTS," above at page 10, we signed an agreement to acquire a
semiconductor manufacturing facility in Gresham, Oregon (Fab 4). As a result of
the proposed acquisition of Fab 4, we are currently evaluating Fab 3 to
determine if an impairment charge will be required if we close the proposed
acquisition of Fab 4.
Fabs 1 and 2 currently utilize various manufacturing process technologies,
but predominantly utilize our 1.0 to 0.5-micron processes. We continue to
transition products to more advanced process technologies to reduce future
manufacturing costs. In fiscal 2002 and the first quarter of fiscal 2003,
approximately 80% of our production was on 8-inch wafers. We anticipate that
gross margins will fluctuate over time, driven primarily by the overall product
mix of microcontroller, analog and interface and Serial EEPROM products and
15
percentage of net sales of each of these products in a particular quarter,
manufacturing yields, fixed cost absorption, wafer fab loading levels and
competitive and economic conditions.
THE FOREGOING STATEMENTS RELATING TO OUR EXPECTED CAPACITY UTILIZATION IN
THE SECOND QUARTER OF FISCAL 2003, CONFIRMATION THAT OUR CAPACITY IS ALIGNED
WITH MARKET DEMAND, OUR INTENTION TO MAINTAIN FAB 3 UNTIL IT IS REQUIRED FOR OUR
FUTURE PRODUCTION REQUIREMENTS, FAB 3 PRODUCING 8-INCH WAFERS WHEN REQUIRED FOR
FUTURE PRODUCTION, OUR EVALUATION OF FAB 3 TO DETERMINE IF AN IMPAIRMENT CHARGE
WILL BE REQUIRED IF WE CLOSE THE PROPOSED ACQUISITION OF FAB 4, THE TRANSITION
TO HIGHER YIELDING MANUFACTURING PROCESSES TO REDUCE FUTURE OPERATING COSTS AND
THE FLUCTUATION OF GROSS MARGINS OVER TIME ARE FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: FUTURE DEMAND FOR OUR PRODUCTS AND THE PRODUCTS OF OUR CUSTOMERS;
FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY
UTILIZATION; ABSORPTION OF FIXED COSTS, LABOR AND OTHER DIRECT MANUFACTURING
COSTS; COMPETITION AND COMPETITIVE PRESSURE ON PRICING; POSSIBLE DISRUPTION IN
COMMERCIAL ACTIVITIES OCCASIONED BY TERRORIST ACTIVITY AND ARMED CONFLICT, WHICH
COULD RESULT IN CHANGES IN LOGISTICS AND SECURITY ARRANGEMENTS, AND REDUCED
END-USER PURCHASES RELATIVE TO EXPECTATIONS; IMPACT OF EVENTS OUTSIDE THE UNITED
STATES, SUCH AS THE BUSINESS IMPACT OF FLUCTUATING CURRENCY RATES OR UNREST OR
POLITICAL INSTABILITY; OUR ABILITY TO INCREASE MANUFACTURING CAPACITY AS NEEDED;
COST AND AVAILABILITY OF RAW MATERIALS; CHANGES IN PRODUCT MIX; FAILURE OF THE
PROPOSED ACQUISITION OF FAB 4 TO CLOSE DUE TO THE FAILURE OF THE PARTIES TO
SATISFY CLOSING CONDITIONS OR OTHER FACTORS; WHETHER FMI EXERCISES ITS OPTION TO
ACCELERATE THE CLOSING DATE OF THE PROPOSED ACQUISITION OF FAB 4; AND OTHER
GENERAL INDUSTRY, ECONOMIC AND POLITICAL CONDITIONS.
At June 30, 2002, approximately 65% of our assembly requirements were being
performed in our Thailand facility, compared to approximately 53% as of June 30,
2001. Third-party contractors located throughout Asia perform the balance of our
assembly operations. Substantially all of our test requirements were being
performed in our Thailand facility as of June 30, 2002, compared to
approximately 95% as of June 30, 2001. We believe that the assembly and test
operations performed at our Thailand facility provide us with significant cost
savings when compared to third-party contractor assembly and test costs, as well
as increased control of these portions of the manufacturing process.
Our reliance on third parties involves some reduction in our level of
control over the portions of our business that we subcontract. While we review
the quality, delivery and cost performance of our third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain manufacturing yields, 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 at 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
* employment regulations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables
* economic slowdown in the worldwide markets served by us, and
* potentially adverse tax consequences.
16
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
Research and development expenses for the three months ended June 30, 2002
were $21.6 million, or 13.5% of sales, compared to $19.5 million, or 14.1% of
sales, for the three months ended June 30, 2001. We are committed to investing
in new and enhanced products, including development systems software, and in our
design and manufacturing process technologies. We believe these investments are
significant factors in maintaining our competitive position. We expense all
research and development costs as incurred. Research and development expenses
include expenditures for labor, masks, prototype wafers, and expenses for the
development of process technologies, new packages, and software to support new
products and design environments.
Research and development expenses increased $2.0 million, or 10.4%, for the
three months ended June 30, 2002 over the same period last year. Research and
development expenses increased $1.0 million, or 4.9%, for the three months ended
June 30, 2002 over the three months ended March 31, 2002. The primary reason for
the dollar increase in research and development costs in each of these periods
was increased labor and professional service costs associated with expanding our
technical resources. There was an unpaid one-week plant shut down for all
employees in the June 30, 2001 quarter.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the three months ended
June 30, 2002 were $21.9 million, or 13.7% of sales, compared to $21.4 million,
or 15.4% of sales, for the three months ended June 30, 2001. Selling, general
and administrative expenses include salary expenses related to field sales,
marketing and administrative personnel, advertising and promotional expenditures
and legal expenses. Selling, general and administrative expenses also include
costs related to our direct sales force and field applications engineers who
work in sales offices worldwide to stimulate demand by assisting customers in
the use and proper selection of our products.
Selling, general and administrative expenses increased $0.5 million, or
2.3%, for the three months ended June 30, 2002 over the same period last year.
Selling, general and administrative expenses increased $0.8 million, or 3.8%,
for the three months ended June 30, 2002 over the three months ended March 31,
2002. The primary reason for the dollar increase in selling, general and
administrative costs in these periods relate to increased labor costs. There was
an unpaid one-week plant shut down for all employees in the June 30, 2001
quarter.
Selling, general and administrative expenses fluctuate over time, primarily
due to revenue and operating expense levels.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
During the quarter ended June 30, 2002, purchased in-process research and
development of $9.3 million, associated with our acquisition of PowerSmart, was
written off at the date of the acquisition (June 5, 2002) in accordance with
FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 Business
Combinations Accounted for by the Purchase Method." The determination of the
$9.3 million write-off of in-process research and development is described above
under "Recent Developments - Acquisition of PowerSmart, Inc.", at page 11,
above.
There were no such costs during the quarter ended June 30, 2001.
17
OTHER INCOME (EXPENSE)
Interest income increased in the three month period ended June 30, 2002
from the corresponding period of the previous fiscal year due to significantly
higher invested cash balances. The interest rates applying on our invested cash
balances were significantly lower during the three months ended June 30, 2002,
compared to the rates applying during the corresponding period of the previous
fiscal year.
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 32.8% for the three
months ended June 30, 2002, impacted by a $9.3 million in-process research and
development charge associated with our acquisition of PowerSmart that provided
us with no income tax benefit. Without the in-process research and development
charge, our tax rate for the quarter would have been 25.5%. We had an effective
tax rate of 27.0% for the three months ended June 30, 2001. Based on our current
assumptions, we believe that our tax rate for the remainder of fiscal 2003 will
be approximately 25.5%.
As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our actual current tax
exposure, together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income within the relevant jurisdiction
and, to the extent we believe that recovery is not likely, we must establish a
valuation allowance. We have not provided for a valuation allowance because we
believe that our deferred tax assets will be recovered from future taxable
income. Should we determine that we would not be able to realize all or part of
our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made. At
June 30, 2002, our gross deferred tax asset was $99.8 million. Numerous taxing
authorities in the countries in which we do business are increasing their
scrutiny of various tax structures employed by businesses. We believe that we
maintain adequate tax reserves to offset any potential tax liabilities that may
arise upon audit in these countries. If such amounts ultimately prove to be
unnecessary, the resulting reversal of such reserves would result in tax
benefits being recorded in the period the reserves are no longer deemed
necessary. If such amounts ultimately prove to be less than an ultimate
assessment, a future charge to expense would be recorded in the period in which
the assessment is determined.
THE FOREGOING STATEMENTS REGARDING OUR TAX RATE FOR THE REMAINDER OF FISCAL
2003, THE RECOVERABILITY OF OUR DEFERRED TAX ASSET AND THE ADEQUACY OF OUR TAX
RESERVES ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY
BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: CURRENT AND FUTURE TAX LAWS AND
REGULATIONS; TAXATION RATES IN GEOGRAPHIC REGIONS WHERE WE HAVE SIGNIFICANT
OPERATIONS; RESULTS OF ANY AUDIT CONDUCTED BY THE VARIOUS TAXING AUTHORITIES IN
THE COUNTRIES IN WHICH WE DO BUSINESS; AND THE LEVEL OF OUR TAXABLE INCOME AND
WHETHER OUR TAXABLE INCOME WILL BE SUFFICIENT TO UTILIZE OUR DEFERRED TAX ASSET.
EURO CONVERSION ISSUES
We operate in the European Market and currently generate approximately
30 percent of our total net sales from customers located in Europe. Our
commercial headquarters in Europe are located in the United Kingdom, which is
18
not currently one of the 11 member states of the European Union that has
converted to the Euro.
We currently conduct 96.1% of our business in Europe in U.S. Dollars and
0.3% of our business in Europe in Pounds Sterling. The balance of our net sales
in Europe is conducted in the Euro. We will monitor the potential commercial
impact of conversion of a portion of our current business to the Euro, but we do
not currently anticipate any material impact to our business or operations based
on this transition.
THE FOREGOING STATEMENT REGARDING THE ANTICIPATED IMPACT OF THE TRANSITION
TO THE EURO CURRENCY IS A FORWARD-LOOKING STATEMENT. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: LEVELS OF SALES IN
EUROPE THAT MAY BE CONDUCTED IN THE EURO; AND FLUCTUATIONS IN CURRENCY EXCHANGE
RATES.
LIQUIDITY AND CAPITAL RESOURCES
We had $284.0 million in cash and cash equivalents at June 30, 2002, an
increase of $3.4 million from the March 31, 2002 balance. The increase in cash
and cash equivalents over this time period is primarily attributable to cash
generated from operating activities offset by the cash used in our acquisition
of PowerSmart. 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 June 30, 2002. We are
required to achieve certain financial ratios and operating results to maintain
this line of credit and were in compliance with these requirements at June 30,
2002.
We also maintain an unsecured short-term line of credit with various
financial institutions in Asia for up to $20.0 million (U.S. Dollar equivalent).
There were no borrowings under the foreign line of credit as of June 30, 2002,
but an allocation of approximately $0.9 million of the available line was made,
relating to import guarantees associated with our business in Thailand. There
are no covenants related to the foreign line of credit.
At June 30, 2002, an aggregate of $119.1 million of our credit facilities
was 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 three months ended June 30, 2002, we generated $71.3 million of
cash from operating activities, an increase of $55.2 million from the three
months ended June 30, 2001. The increase in cash flow from operations was
primarily due to a $9.3 million in-process research and development charge, the
impact of changes in accounts payable and accrued liabilities, inventories and
other assets and liabilities.
During the three months ended June 30, 2002, net cash used in investing
activities increased $63.9 million, to $75.9 million from $12.0 million for the
three months ended June 30, 2001. The increase was due to our acquisition of
PowerSmart and increased capital expenditures.
On August 7, 2002, our Board of Directors authorized the repurchase up to
2,500,000 shares of our common stock in the open market or in privately
negotiated transactions. The timing and amount of purchases will depend upon
market conditions and corporate considerations.
19
Our level of capital expenditures varies from time to time as a result of
actual and anticipated business conditions. Capital expenditures in the three
months ended June 30, 2002 were $25.3 million, compared to $12.8 million for the
three months ended June 30, 2001. The primary reasons for the dollar increase in
capital expenditures were to selectively increase capacity in response to market
demand and to invest in research and development equipment. We currently intend
to spend approximately $270 million during the next 12 months to invest in Fab 4
and in equipment to maintain, and selectively increase, capacity to meet our
currently anticipated needs.
We expect to generate approximately $50 million in cash from operating
activities and grow our cash balances by approximately $40 million in the
quarter ending September 30, 2002, prior to the effect of our recently announced
Stock Buy Back Program.
As discussed above at page 10, we entered into an agreement to acquire a
semiconductor manufacturing facility (Fab 4) from FMI for $183.5 million in
cash. Closing of the transaction is expected to occur by the end of October
2002, however, FMI has the sole option to accelerate closing to the end of
August 2002, upon completion of all closing conditions. We expect to finance the
proposed transaction from our existing cash balances.
We expect to finance capital expenditures through our existing cash
balances, cash flows from operations, available debt arrangements and other
sources of financing, including possible issuances 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
manufacturing capacity to meet our currently anticipated needs.
THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED LEVEL OF CAPITAL
EXPENDITURES OVER THE NEXT 12 MONTHS, THE AMOUNT OF CASH TO BE GENERATED FROM
OPERATING ACTIVITIES IN THE QUARTER ENDING SEPTEMBER 30, 2002, THE PROJECTED
GROWTH IN OUR CASH BALANCES DURING THE QUARTER ENDING SEPTEMBER 30, 2002, THE
ANTICIPATED CLOSING DATE OF THE PROPOSED ACQUISITION OF FAB 4, OUR EXPECTATION
OF FINANCING THE PROPOSED ACQUISITION OF FAB 4 FROM OUR EXISTING CASH BALANCES,
THE FINANCING AND SUFFICIENCY OF OUR CAPITAL EXPENDITURES AND THE BELIEF THAT
CAPITAL EXPENDITURES ANTICIPATED TO BE INCURRED OVER THE NEXT 12 MONTHS WILL
PROVIDE US SUFFICIENT MANUFACTURING CAPACITY TO MEET OUR CURRENTLY ANTICIPATED
NEEDS ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY
BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: FAILURE OF THE PROPOSED
ACQUISITION OF FAB 4 TO CLOSE DUE TO FAILURE OF THE PARTIES TO SATISFY THE
CLOSING CONDITIONS OR OTHER FACTORS; WHETHER FMI EXERCISES ITS OPTION TO
ACCELERATE THE CLOSING DATE OF THE PROPOSED ACQUISITION OF FAB 4; CHANGES IN
DEMAND FOR OUR PRODUCTS AND THOSE OF OUR CUSTOMERS; CHANGES IN UTILIZATION OF
CURRENT MANUFACTURING CAPACITY; MARKET ACCEPTANCE OF OUR PRODUCTS AND OF OUR
CUSTOMERS' PRODUCTS; THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE
MARKETS ADDRESSED BY OUR PRODUCTS; THE AVAILABILITY AND COST OF RAW MATERIALS,
EQUIPMENT AND OTHER SUPPLIES; THE FINANCIAL CONDITION OF OUR CUSTOMERS AND
VENDORS; UNINSURED LOSSES; AND THE ECONOMIC, POLITICAL AND OTHER CONDITIONS IN
THE WORLDWIDE MARKETS SERVED BY US.
Net cash provided by financing activities was $8.1 million for the three
months ended June 30, 2002, compared to $4.4 million for the three months ended
June 30, 2001. Proceeds from the sale of stock options were $8.1 million in the
three months ended June 30, 2002 and $4.4 million in the three months ended June
30, 2001.
We had a net shares settled forward contract outstanding as of June 30,
2001. In connection with this contract, we made a net delivery of 572,645 shares
of our common stock during the three months ended June 30, 2001. We closed out
the net shares settled forward contract in its entirety on January 15, 2002 and
made a cash payment of $27.8 million to purchase the remaining 1,610,606 shares
outstanding under the contract. The purchased shares were held as treasury
20
shares and used to fund stock option exercises and purchases under our employee
stock purchase plan through April 9, 2002.
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
constantly evaluate the need 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 financing requirements will depend on a number of factors, including demand
for our products, changes in industry conditions, product mix, and competitive
factors. There can be no assurance that such financing will be available on
acceptable terms, and any additional equity financing would result in
incremental dilution to existing stockholders.
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS
When evaluating Microchip and its business, you should give careful
consideration to the factors listed below, in addition to the information
provided elsewhere in this Form 10-Q and in other documents that we file with
the Securities and Exchange Commission.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO FACTORS THAT COULD REDUCE
OUR NET SALES AND PROFITABILITY.
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 quarterly operating results
include:
* demand for our products in the distribution and OEM channels
* the level at which design wins become actual orders
* 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
* possible disruption in commercial activities or international
transport or delivery caused by terrorist activity, armed conflict, or
unexpected increases in the price of, or decrease in the supply of,
oil, any of which could result in changes in logistics and security
arrangements, and reduced customer purchases relative to expectations
* impact of events outside of the United States, such as the business
impact of fluctuating currency rates or unrest or political
instability
* disruption in the supply of wafers or assembly and testing services
* availability of manufacturing capacity, the extent of effective use of
manufacturing capacity and fluctuations in manufacturing yields
* the availability and cost of raw materials, equipment and other
supplies
* economic, political and other conditions in the worldwide markets
served by us; and
* pricing pressures in our Serial EEPROM and commodity analog product
lines.
As conditions in the property and casualty insurance market have resulted
in decreased capacity and increased insurance rates over the last fiscal year,
our property and casualty insurance coverage levels have decreased and our
retained risk exposure from uninsured losses has increased. We have not made any
21
material change to our operations as a result of the reduced coverage.
Availability and cost of insurance coverage have generally fluctuated over time
as the insurance industry reacts to various market forces and we will consider
changes in our coverage levels based on conditions in the insurance market.
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful and that you should not rely upon any such
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.
OUR OPERATING RESULTS WILL SUFFER IF WE INEFFECTIVELY UTILIZE OUR MANUFACTURING
CAPACITY OR FAIL TO MAINTAIN MANUFACTURING YIELDS.
The manufacture and assembly of integrated circuits, particularly
non-volatile, erasable CMOS memory and logic devices such as those that we
produce, are complex processes. These processes are sensitive to a wide variety
of factors, including the level of contaminants in the manufacturing
environment, impurities in the materials used and the performance of our wafer
fabrication personnel and equipment. As is typical in the semiconductor
industry, we have from time to time experienced lower than anticipated
manufacturing yields. Our operating results will suffer if we are unable to
maintain yields at approximately the current levels.
Our operating results are also adversely affected when we operate at less
than optimal capacity as was the case throughout fiscal 2002 and the first
quarter of fiscal 2003. Lower capacity utilization results in certain costs
being charged directly to expense and lower gross margins.
WE DEPEND ON ORDERS THAT ARE RECEIVED AND SHIPPED IN THE SAME QUARTER AND
THEREFORE HAVE LIMITED VISIBILITY OF FUTURE PRODUCT SHIPMENTS.
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 emphasize our ability to respond
quickly to customer orders as part of our competitive strategy, resulting in
customers placing orders with short delivery schedules. The percentage of turns
orders in any given quarter is dependent on overall semiconductor industry
conditions and product lead times. Shorter lead times generally means that turns
orders as a percentage of our business is relatively high in any particular
quarter and reduces our visibility on future product shipments. As such, our
percentage of turns orders has fluctuated over the last three fiscal years
between approximately 20% and 65%. As of July 1, 2002, we required turns orders
of approximately 50% in order to achieve our revenue target for the second
quarter of fiscal 2003. Because turns orders are difficult to predict, increased
levels of turns orders make our net sales more difficult to forecast.
If we do not achieve a sufficient level of turns orders in a particular
quarter relative to our projections, our revenue and operating results will
suffer.
INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO PRICING PRESSURES, REDUCED SALES
OF OUR PRODUCTS AND REDUCED MARKET SHARE.
The semiconductor industry is intensely competitive and has been
characterized by price erosion and rapid technological change. We compete with
major domestic and international semiconductor companies, many of which have
greater market recognition and substantially greater financial, technical,
marketing, distribution and other resources than we with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Emerging companies are also increasing their participation in the market for
embedded control applications. We may be unable to compete successfully in the
future, which could harm our business.
22
Our ability to compete successfully depends on a number of factors both
within and outside our control, including:
* the quality, performance, reliability, features, ease of use, pricing
and diversity of our products
* the quality of our customer service and our ability to address the
needs of our customers
* our success in designing and manufacturing new products including
those implementing new technologies
* our level of manufacturing capacity utilization and manufacturing
yields
* hiring and retention of qualified engineering and management personnel
* our ability to obtain adequate supplies of raw materials and other
supplies at acceptable prices
* the rate at which customers incorporate our products into their own
products
* product introductions by our competitors
* the number, nature and success of our competitors in a given market
* general market and economic conditions, and
* protection of our products and processes by effective utilization of
intellectual property laws.
Historically, average selling prices in the semiconductor industry decrease
over the life of any particular product. The overall average selling prices of
our microcontroller and proprietary analog and interface products have remained
relatively constant, while average selling prices of our Serial EEPROM and
non-proprietary analog and interface products have declined over time. We have
experienced, and expect to continue to experience, pricing pressure in certain
of our proprietary product lines, due primarily to competitive conditions. We
have been able to moderate average selling price declines in many of our
proprietary products by continuing to introduce new products with more features
and higher prices. We experienced significant competitive pricing pressures in
our Serial EEPROM product lines during the first half of fiscal 2002, which
moderated in the third and fourth quarters of fiscal 2002 and the first quarter
of fiscal 2003.
We may be unable to maintain average selling prices for our microcontroller
or other products as a result of increased pricing pressure in the future, which
would reduce our operating results.
WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL TO BE SUCCESSFUL, AND COMPETITION
FOR QUALIFIED PERSONNEL IS INTENSE IN OUR MARKET.
Our success depends to a significant extent upon the efforts and abilities
of our senior management, engineering and other personnel. The competition for
qualified engineering and management personnel is intense. We may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the services of
one or more of our key personnel or the inability to add key personnel could
harm our business. We have no employment agreements with any member of our
senior management team.
OUR SUCCESS DEPENDS ON OUR ABILITY TO INTRODUCE NEW PRODUCTS ON A TIMELY BASIS.
Our future operating results will depend to a significant extent on our
ability to develop and introduce new products on a timely basis that 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.
23
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 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 significant R&D
expenditures. We and other companies in the industry have, from time to time,
experienced difficulties in effecting transitions to advanced process
technologies and, consequently, have suffered reduced manufacturing yields or
delays in product deliveries. Our future operating results could be adversely
affected if any transition to future process technologies is substantially
delayed or inefficiently implemented.
WE ARE DEPENDENT ON SEVERAL THIRD-PARTY CONTRACTORS IN ASIA TO PERFORM KEY
MANUFACTURING FUNCTIONS FOR US.
We depend on several third-party contractors located throughout Asia for a
portion of the assembly and testing of our products and for a portion of the
wafer fabrication of our analog products. Although we seek to reduce our
dependence on these third-party contractors, disruption or termination of any of
these sources could harm our business and operating results. Our reliance on
third parties involves some reduction in our level of control over the portions
of our business that we subcontract. Our future operating results could suffer
if any third-party contractor were to experience financial, operations or
production difficulties, or if they were unable to maintain manufacturing
yields, assembly and test yields and costs at approximately their current
levels.
WE MAY LOSE SALES IF OUR SUPPLIERS OF RAW MATERIALS AND EQUIPMENT FAIL TO MEET
OUR NEEDS.
Our semiconductor manufacturing operations require raw materials and
equipment that must meet exacting standards. We generally have more than one
source for these supplies, but there are only a limited number of suppliers
capable of delivering various raw materials and equipment that meet our
standards. In addition, the raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of
semiconductors in product applications increases. We have experienced supply
shortages from time to time in the past, and on occasion our suppliers have told
us they need more time than expected to fill our orders. An interruption of any
raw materials or equipment sources could harm our business.
OUR BUSINESS IS HIGHLY DEPENDENT ON SELLING THROUGH DISTRIBUTORS.
Sales through distributors accounted for 63% of our net sales for the
fiscal year ended March 31, 2002 and 63% of sales in the first quarter of fiscal
2003. Sales through one distributor accounted for 13% of our net sales in fiscal
2002 and 12% of our total net sales for the first quarter of fiscal 2003.
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 a disruption in the operations of, one or more of our
distributors could reduce our net sales in a given quarter and could result in
an increase in inventory returns.
24
OUR OPERATING RESULTS MAY BE IMPACTED BY THE WIDE FLUCTUATIONS OF SUPPLY AND
DEMAND IN THE SEMICONDUCTOR INDUSTRY.
The semiconductor industry is characterized by wide fluctuations of supply
and demand. In fiscal 2001 and 2002, the industry experienced a significant
economic downturn, characterized by diminished product demand and production
over-capacity. We have sought to reduce our exposure to this industry
cyclicality by selling proprietary products, that cannot be easily or quickly
replaced, to a geographically diverse base of customers across a broad range of
market segments. However, we have experienced substantial period-to-period
fluctuations in operating results and may, in the future, experience
period-to-period fluctuations in operating results due to general industry or
economic conditions.
INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT
LIABILITY FOR DAMAGES AND COULD INVALIDATE OUR PROPRIETARY RIGHTS.
As is typical in the semiconductor industry, we and our customers have from
time to time received, and may in the future receive, communications from third
parties asserting patent or other intellectual property rights on certain of our
products or technologies. In the event a third party were to make a valid
intellectual property claim and a license or other agreement was not available
on commercially reasonable terms, our operating results could be harmed. We have
in the past been, are currently, and may in the future be, involved in
litigation to defend Microchip against alleged infringement of the rights of
others or to enforce our intellectual property rights. Litigation could result
in substantial cost to us and divert our resources. An unfavorable outcome in
any such suit could harm our business, financial condition or results of
operations.
Our ability to obtain patents, licenses and other intellectual property
rights covering our products and manufacturing processes is important for our
success. To that end, we have acquired certain patents and patent licenses and
intend to continue to seek patents on our inventions and manufacturing
processes. The process of seeking patent protection can be long and expensive,
and patents may not be issued from currently pending or future applications. In
addition, our existing patents and any new patents that are issued may not be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to us. We may be subject to or may initiate interference proceedings
in the U.S. Patent and Trademark Office, which can require significant financial
and management resources. In addition, the laws of certain foreign countries do
not protect our intellectual property rights to the same extent as the laws of
the United States.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
We do not typically enter into long-term contracts with our customers and
we cannot be certain as to future order levels from our customers. When we do
enter into customer contracts, the contract is generally cancelable at the
convenience of the customer. In the event of any early termination of a contract
by one of our major customers, it is unlikely that we would be able to rapidly
replace that revenue source which would harm our financial results.
BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS.
Operations at any of our primary manufacturing facilities, or at any of our
wafer fabrication or test and assembly subcontractors, may be disrupted for
reasons beyond our control, including work stoppages, power loss, incidents of
terrorism, political instability, telecommunications failure, fire, earthquake,
floods, or other natural disasters. If operations at any of our facilities or by
any of our subcontractors are interrupted, we may not be able to shift
production to other facilities on a timely basis. If this occurs, we may
25
experience delays in shipments of products to our customers and alternate
sources for production may be unavailable on acceptable terms. This could result
in reduced revenues and profits and the cancellation of orders or loss of
customers. In addition, business interruption insurance may not be enough to
compensate us for any losses that may occur and any losses or damages incurred
by us as a result of business interruptions could significantly harm our
business.
WE ARE HIGHLY DEPENDENT ON FOREIGN SALES AND OPERATIONS, WHICH EXPOSES US TO
FOREIGN POLITICAL AND ECONOMIC RISKS.
Sales to foreign customers account for a substantial portion of our net
sales. During the fiscal year ended March 31, 2002, approximately 69% of our net
sales were made to foreign customers. During the quarter ended June 30, 2002,
approximately 74% of our net sales were made to foreign customers. We purchase a
substantial portion of our raw materials and equipment from foreign suppliers.
In addition, we own product assembly and testing facilities located near
Bangkok, Thailand. We also use various third-party contractors located
throughout Asia for a portion of our assembly and testing and a portion of our
analog product wafer fabrication requirements.
Our reliance on foreign operations, maintenance of substantially all of our
finished goods in inventory at 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
* employment regulations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables
* economic slowdown in the worldwide markets served by us, and
* potentially adverse tax consequences.
If any of these risks materialize, our sales could decrease and our
operating results could suffer.
WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION, WHICH MAY FORCE US TO
INCUR SIGNIFICANT EXPENSES.
We must comply with many different federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing processes.
Although we believe that our activities conform to presently applicable
environmental regulations, our failure to comply with present or future
regulations could result in the imposition of fines, suspension of production or
a cessation of operations. Any such regulation could require us to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. Any failure by us to control the use of or adequately
restrict the discharge of hazardous substances could subject us to future
liabilities. Environmental problems may occur that could subject us to future
costs or liabilities.
In 1993, TelCom Semiconductor, Inc., with whom we merged in January 2001,
acquired the semiconductor manufacturing operations of Teledyne, Inc. previously
conducted at TelCom's Mountain View, California facility. The semiconductor
manufacturing operations conducted by Teledyne at the facility allegedly
26
contaminated the soil and groundwater of the facility, and the groundwater of
properties located down-gradient of the facility. Although TelCom was
indemnified by Teledyne against, among other things, any liabilities arising
from any such contamination, and although we should be able to benefit from this
indemnification as a successor to TelCom's business, we cannot assure you that
claims will not be made against us or that such indemnification will be
available or will provide meaningful protection at the time any such claim is
brought. To the extent that we are subject to a claim that is not covered by the
indemnity from Teledyne or as to which Teledyne is unable to provide
indemnification, our financial condition or operating results could suffer.
OUR FAILURE TO SUCCESSFULLY INTEGRATE BUSINESSES, PRODUCTS OR TECHNOLOGIES WE
ACQUIRE COULD DISRUPT OR HARM OUR ONGOING BUSINESS.
On June 5, 2002, we completed our acquisition of PowerSmart. We have from
time to time acquired, and may in the future acquire, additional complementary
businesses, products and technologies. Achieving the anticipated benefits of an
acquisition depends, in part, upon whether the integration of the acquired
business, products or technology is accomplished efficiently and effectively. In
addition, successful acquisitions in the semiconductor industry may be more
difficult to accomplish than in other industries because such acquisitions
require, among other things, integration of product offerings, manufacturing
operations and coordination of sales and marketing and R&D efforts. These
difficulties can become more challenging due to the need to coordinate
geographically separated organizations, the complexities of the technologies
being integrated, and the necessities of integrating personnel with disparate
business background and combining two different corporate cultures. The
integration of operations following an acquisition also requires the dedication
of management resources may distract attention from the day-to-day business and
may disrupt key R&D, marketing or sales efforts. The inability of our management
to successfully integrate any future acquisition could harm our business.
Furthermore, products acquired in connection with acquisitions may not gain
acceptance in our markets, and we may not achieve the anticipated or desired
benefits of such transaction.
POWERSMART DEPENDED ON THIRD-PARTY WAFER MANUFACTURERS FOR ALL OF ITS PRODUCT
REQUIREMENTS. ANY INABILITY OR UNWILLINGNESS OF POWERSMART'S WAFER SUPPLIERS TO
MEET THESE MANUFACTURING REQUIREMENTS WOULD SIGNIFICANTLY DELAY OUR ABILITY TO
PRODUCE AND SHIP POWERSMART PRODUCTS.
While Microchip has historically manufactured virtually all of its own
wafers, PowerSmart purchased its wafers primarily from two outside foundries.
Each of these foundries also fabricates wafers for other semiconductor
companies, including some of our competitors. One of the foundries used by
PowerSmart is a direct competitor of ours. During fiscal 2003, we expect to
continue to rely on these wafer suppliers to supply a substantial portion of the
wafers that are required to support the business that we acquired from
PowerSmart. We may be unable to acquire wafers from these foundries if they
experience manufacturing failures, yield shortfalls or other situations when
demand exceeds capacity or for other reasons. In such case, we may not be able
to qualify additional manufacturing sources for existing PowerSmart products on
a timely manner or at all, and such arrangements, if any, may not be on
favorable terms to us.
Although current market conditions in the semiconductor industry indicate
that there is sufficient manufacturing capacity at outside foundries, a
significant increase in demand for PowerSmart products during fiscal 2003 could
result in wafers being in short supply and prevent us from having an adequate
supply to meet our customer requirements and meet requested delivery dates for
customers of our PowerSmart products.
27
RECENTLY ENACTED AND PROPOSED CHANGES IN SECURITIES LAWS AND RELATED REGULATIONS
COULD RESULT IN INCREASED COSTS TO US.
Recently enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules proposed by the SEC, Nasdaq and the NYSE, could result in increased costs
to us as we evaluate the implications of any new rules and respond to their
requirements. The new rules could make it more difficult for us to obtain
certain types of insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact of
these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, on committees of our board
of directors, or as executive officers. We are presently evaluating and
monitoring developments with respect to new and proposed rules and cannot
predict or estimate the amount of the additional costs we may incur or the
timing of such costs.
THE FUTURE TRADING PRICE OF OUR COMMON STOCK COULD BE SUBJECT TO WIDE
FLUCTUATIONS IN RESPONSE TO A VARIETY OF FACTORS.
The market price of our common stock has fluctuated significantly in the
past and is likely to fluctuate in the future. The future trading price of our
common stock could be subject to wide fluctuations in response to a variety of
factors, many of which are beyond our control, including:
* quarterly variations in our operating results and the operating
results of other semiconductor companies
* actual or anticipated announcements of technical innovations or new
products by us or our competitors
* changes in analysts' estimates of our financial performance or
buy/sell recommendations
* general conditions in the semiconductor industry, and
* worldwide political, economic and financial conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many high
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may harm the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio, consisting of fixed income securities, was $272.8
million as of June 30, 2002, and $247.6 million as of March 31, 2002. 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 June 30,
2002 and March 31, 2002, 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 on 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 June 30, 2002 and March 31, 2002, the effect on our financial position
and results of operations would not be material.
28
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
adverse 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, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MICROCHIP TECHNOLOGY INCORPORATED V. U.S. PHILIPS CORPORATION, ET AL.
(DISTRICT OF ARIZONA, 01-CV-2090-PGR); U.S. PHILIPS CORPORATION V. ATMEL
CORPORATION, ET AL. (SOUTHERN DISTRICT OF NEW YORK, 01-CV-9178-LAP). As reported
in our annual report on Form 10-K for the fiscal year ended March 31, 2002 and
filed June 3, 2002, on October 26, 2001, we filed an action in federal district
court in Arizona for declaratory relief against U.S. Philips Corporation and
Philips Electronics North America Corp. requesting that the Court declare, among
other matters, that we do not infringe Philips' U.S. Patent Nos. 4,689,740 and
5,559,502. We initiated legal action so that a determination could be made
relating to the validity, enforceability and alleged infringement of, and our
license to, the Philips' patents. Prior to filing suit, we had engaged in good
faith licensing negotiations with Philips for several years, but the discussions
had reached a point of impasse when Philips substantially increased its royalty
demands. In response to our filing the declaratory judgment action in Arizona,
Philips filed an action against us in federal district court in New York,
alleging infringement of the `740 patent and seeking unspecified damages and
injunctive relief. Despite the litigation, it is possible that discussions
between the parties could resume for the purpose of resolving this matter by
agreement, which could include a new license on commercially reasonable terms.
The litigation is in pre-trial stages. We intend to litigate this matter
vigorously. We currently believe that the outcome of this matter will not have a
material adverse effect on our consolidated financial position or results of
operations. However, the final outcome of this matter is inherently uncertain,
and should the outcome be adverse to us, we may be required to pay damages and
other expenses and may be subjected to injunctive relief. The litigation, even
if resolved in our favor, may also result in diversion of management attention
and significant legal fees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 10.1 Description of Registrant's Management Incentive
Compensation Plan
Exhibit 99.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None.
29
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: August 9, 2002 By: /s/ Gordon W. Parnell
------------------------------------
Gordon W. Parnell
Vice President and Chief Financial
Officer (Duly Authorized Officer,
and Principal Financial and
Accounting Officer)
30