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Microchip (MCHP) Prices $1.4 Billion of Senior Notes Due 2024

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Microchip Technology Incorporated (MCHP - Free Report) recently announced the pricing of $1.4 billion worth senior secured notes slated to mature in Feb 15, 2024. The notes bear annual interest of 0.972%. Subject to customary closing conditions, the offering of senior notes is anticipated to close on Dec 17, 2020.

The company intends to utilize the net proceeds from the same for repayment of considerably all amounts unpaid under its term loans pertaining to Amended and Restated Credit Agreement dated as of May 29, 2018, as amended.

The semiconductor company also plans to utilize borrowings under its revolving credit facility to pay associated fees and expenses of the offering and the residual balance of its outstanding term loans.

Per the terms, the notes will be sold only to qualified institutional buyers compliant with Rule 144A under the Securities Act of 1933, as amended.

Moreover, Microchip, in another press release, announced that it has commenced an offering of senior secured notes worth $1 billion. The company plans to use the net proceeds from the offering in repayment of outstanding term loans pertaining to Amended and Restated Credit Agreement dated May 29, 2018, as amended.

We believe the latest offerings will boost the company’s financial flexibility and help meet its financial obligations in an efficient way. Moreover, it provides ample scope to deploy capital for long-term growth opportunities and reward higher returns to stockholders.

Microchip’s latest senior notes offering amid the coronavirus-led economic and business uncertainties bode well. Notably, companies with improved liquidity can tide over these volatile times and Microchip’s latest initiatives are reflective of the same.

Balance Sheet & Cash Flow

As of Sep 30, 2020, Microchip’s cash and short-term investments totaled $370.3 million, compared with $380.2 million as of Jun 30, 2020.

As of Sep 30, 2020, total debt (long-term plus current portion) amounted to $9.18 billion compared with $9.33 billion as of Jun 30, 2020. Notably, the company paid down $331.1 million of debt during the second quarter of fiscal 2021.

Cash flow from operating activities was $455.8 million compared with $501.8 million reported in the prior quarter.

Notably, on Nov 5, 2020, Microchip’s board of directors announced a cash dividend of 36.85 cents, up from prior quarterly dividend payment of 36.8 cents per share. The dividend was payable Dec 4, 2020, to shareholders as on Nov 21, 2020.

Offering to Boost Financial Flexibility

Debt to Capital & Liquidity

As of Sep 30, 2020, Microchip’s had a net debt of $8.81 billion. Notably, total debt to total capital of 60% is lower than the prior quarter's figure of 62.9%. Further, times interest earned is 1.5X, compared with the prior quarter's figure of 1.4X.

The latest senior notes offerings are expected to provide Microchip ample liquidity and financial strength to survive amid the coronavirus crisis.

Other Noteworthy Factors

Microchip’s near-term prospects look promising as it is well-positioned to benefit from dominance of its 8, 16 and 32-bit microcontrollers. Strategic acquisitions have expanded the product portfolio, which augurs well for the long term.

The company, currently carrying a Zacks Rank #3 (Hold), is also gaining from recovery in demand across industrial and automotive end-markets, courtesy of reopening of economies and easing shelter-in-place guidelines.

Further, solid uptick in medical end-market on hospital equipment demand remains a tailwind. These factors are expected to drive revenues in the quarters ahead and instill investors’ optimism in the stock.

Notably, shares of Microchip have rallied 35.2% year to date compared with the industry’s growth of 32.1%.

Nevertheless, normalizing demand trends across computing and data center end-markets is concerning.

Key Picks

MACOM Technology Solutions Holdings, Inc. (MTSI - Free Report) , Inphi Corporation (IPHI - Free Report) , and Semtech Corporation (SMTC - Free Report) are better-ranked stocks in the same industry as Microchip. While MACOM Technology sports a Zacks Rank #1 (Strong Buy), Inphi and Semtech carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for MACOM Technology, Inphi and Semtech is currently projected at 30.94%, 37.55% and 12.5%, respectively.

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