Microchip Technology(MCHP) - 2025 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited condensed consolidated financial statements for the period ended December 31, 2024, reflect a significant decline in financial performance, including a net loss and decreased operating cash flow Condensed Consolidated Balance Sheets As of December 31, 2024, total assets slightly decreased, while total liabilities increased due to higher long-term debt, and stockholders' equity declined Condensed Consolidated Balance Sheet Highlights (in millions) | Balance Sheet Item | Dec 31, 2024 | Mar 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $2,995.8 | $3,013.0 | | Total Assets | $15,632.2 | $15,873.2 | | Total Current Liabilities | $1,330.3 | $2,519.4 | | Long-term Debt | $6,749.5 | $5,000.4 | | Total Liabilities | $9,600.7 | $9,215.4 | | Total Stockholders' Equity | $6,031.5 | $6,657.8 | Condensed Consolidated Statements of Operations For the three months ended December 31, 2024, the company reported a net loss of $53.6 million, a stark contrast to prior-year net income, driven by a 41.9% decrease in net sales Key Performance Indicators - Three Months Ended Dec 31 (in millions, except per share data) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net Sales | $1,026.0 | $1,765.7 | | Gross Profit | $561.4 | $1,120.0 | | Operating Income | $30.9 | $529.4 | | Net (Loss) Income | $(53.6) | $419.2 | | Diluted EPS | $(0.10) | $0.77 | Key Performance Indicators - Nine Months Ended Dec 31 (in millions, except per share data) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net Sales | $3,431.1 | $6,308.6 | | Gross Profit | $1,966.8 | $4,205.8 | | Operating Income | $396.6 | $2,317.5 | | Net Income | $154.1 | $1,752.2 | | Diluted EPS | $0.28 | $3.19 | Condensed Consolidated Statements of Cash Flows For the nine months ended December 31, 2024, net cash from operating activities significantly decreased to $692.2 million, with cash used in investing and financing activities Cash Flow Summary - Nine Months Ended Dec 31 (in millions) | Cash Flow Category | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $692.2 | $2,462.7 | | Net cash used in investing activities | $(231.8) | $(320.9) | | Net cash used in financing activities | $(194.1) | $(2,094.8) | | Net increase in cash and cash equivalents | $266.3 | $47.0 | Notes to Condensed Consolidated Financial Statements The notes detail segment performance declines, broad sales weakness, changes in debt structure, ongoing tax disputes, and continued capital return programs - Net sales for the Semiconductor products segment decreased to $995.0 million for the three months ended Dec 31, 2024, from $1,741.5 million in the prior year period[32] - As of December 31, 2024, the company had approximately $806.1 million of deferred revenue, primarily from Long-Term Supply Agreements (LTSAs), with remaining performance obligations of approximately $2.90 billion[37][38] - The company is challenging a Statutory Notice of Deficiency from the IRS for fiscal years 2007-2012 and 2014-2015, and a Notice of Assessment from the Malaysian Inland Revenue Board which could result in up to $410.0 million in taxes and penalties[84][85][88] - During the nine months ended December 31, 2024, the company repurchased approximately 1.0 million shares for $90.0 million, with $1.56 billion remaining available under the repurchase program[91] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant decline in revenue and profitability to a weak macroeconomic environment, leading to broad sales declines, impacted gross margins, and reduced operating cash flow Business and Macroeconomic Environment The company faced adverse macroeconomic conditions, leading to customer backlog adjustments and the decision to close its Tempe, Arizona wafer fabrication facility for cost savings - The company is experiencing a weak macroeconomic environment, leading to customer requests to push out or cancel backlog to reduce inventory[101] - Announced the decision to close the Tempe, Arizona wafer fabrication facility (Fab 2), expecting annual cash savings of approximately $90 million once completed in the September 2025 quarter[101] Results of Operations Net sales for Q3 FY25 decreased 41.9% to $1.03 billion due to broad weakness, leading to a decline in gross margin and a sharp drop in operating income Net Sales by Product Line - Q3 FY25 vs Q3 FY24 (in millions) | Product Line | Q3 FY25 | Q3 FY24 | % Change | | :--- | :--- | :--- | :--- | | Mixed-signal Microcontrollers | $533.2 | $995.2 | (46.4)% | | Analog | $272.7 | $430.6 | (36.7)% | | Other | $220.1 | $339.9 | (35.2)% | | Total Net Sales | $1,026.0 | $1,765.7 | (41.9)% | - Gross profit decreased primarily due to unfavorable sales volume and mix, an adverse impact of $24.4 million from inventory reserves, and an adverse impact of $34.1 million from unabsorbed capacity charges in Q3 FY25[131] - R&D and SG&A expenses decreased in absolute terms due to lower employee compensation costs, but increased as a percentage of net sales due to the significant revenue decline[139][142] Liquidity and Capital Resources As of December 31, 2024, the company held $586.0 million in cash, with net cash from operations significantly decreasing, capital expenditures reduced, and capital returned to shareholders - Net cash provided by operating activities decreased significantly to $692.2 million for the nine months ended Dec 31, 2024, from $2.46 billion in the prior year period[161] - Capital expenditures were reduced to $111.8 million in the first nine months of fiscal 2025, down from $245.0 million in the same period last year, as most factory expansion plans are paused[164] - In the first nine months of fiscal 2025, the company paid $730.9 million in dividends and repurchased $96.5 million of common stock[166] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rates and inflation, with fixed-rate debt mitigating immediate interest rate exposure - As of December 31, 2024, the company's $6.79 billion in debt was fixed rate, limiting exposure to interest rate fluctuations[177] - Inflation has not had a material adverse impact on operating results in recent periods[178] Controls and Procedures As of December 31, 2024, the CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[179] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[180] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal actions, with management believing their resolution, excluding certain tax disputes, will not materially affect financial position - The company's estimate of the aggregate potential liability for legal matters that is possible but not probable is approximately $25.0 million in excess of amounts accrued as of December 31, 2024[80] Risk Factors The company faces numerous risks, including adverse global economic conditions, intense competition, dependence on foreign sales, cybersecurity threats, ongoing tax disputes, and substantial debt management challenges - Operating results are impacted by global economic conditions, which can reduce net sales and profitability[191] - The company is highly dependent on foreign sales, which accounted for approximately 75% of net sales in the first nine months of fiscal 2025, exposing it to foreign political and economic risks[209] - The company continues to be a target of IT system attacks and experienced an incident in August 2024 where an unauthorized party disrupted certain servers and business operations[260][261] - The company faces risks from ongoing tax disputes with the IRS and the Malaysian Inland Revenue Board (IRB), with the latter potentially resulting in income taxes and penalties up to $410.0 million[303][304][305] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the reporting period - None[342] Other Information During the last fiscal quarter, no officers or directors adopted, modified, or terminated a Rule 10b5-1 trading arrangement - No officers or directors adopted, modified, or terminated a Rule 10b5-1 trading plan during the last fiscal quarter[345] Exhibits This section lists all exhibits filed with the Form 10-Q, including amendments to debt agreements, certifications, and XBRL data files