Microchip Technology Inc. (NASDAQ:MCHP)

The analysis reveals a complex pattern in economic profit over the observed period. While net operating profit after taxes (NOPAT) demonstrates significant fluctuation, economic profit consistently remains negative, though with notable changes in magnitude. The cost of capital exhibits relative stability, while invested capital undergoes substantial shifts.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced substantial growth from 2017 to 2019, increasing from US$180,568 thousand to US$695,844 thousand. A significant decline occurred in 2020, falling to US$455,414 thousand, followed by a modest increase in 2021 to US$488,868 thousand. The most substantial increase occurred in 2022, reaching US$1,620,172 thousand. This indicates considerable volatility in core operational profitability.

Cost of Capital

The cost of capital remained relatively stable between 2017 and 2019, fluctuating between 16.44% and 19.91%. It increased to 20.00% in 2021 and further to 20.53% in 2022, suggesting a rising cost of funding over the latter part of the period. These increases, while not dramatic, coincide with periods of lower economic profit.

Invested Capital

Invested capital demonstrated a decrease from 2017 to 2018, moving from US$6,087,016 thousand to US$5,149,468 thousand. A substantial increase then occurred in 2019, reaching US$14,715,398 thousand. Subsequent years saw a decline, reaching US$11,963,600 thousand in 2022. This suggests significant capital allocation and reallocation activities within the observed timeframe.

Economic Profit

Economic profit was negative throughout the entire period. The largest negative economic profit occurred in 2019, at -US$1,722,705 thousand, and 2020, at -US$1,971,744 thousand. While remaining negative, the magnitude of the loss decreased significantly in 2022 to -US$836,376 thousand. This improvement in 2022 aligns with the substantial increase in NOPAT, indicating that while the company is not generating economic profit, its performance is trending towards improvement. The negative economic profit consistently indicates that the company’s returns are not exceeding its cost of capital.

In summary, the period examined is characterized by fluctuating NOPAT, a relatively stable but increasing cost of capital, and significant shifts in invested capital. Despite substantial increases in NOPAT in later years, economic profit remained negative, though the magnitude of the loss diminished in the most recent year. This suggests that while operational performance improved, the company still faces challenges in generating returns that exceed its cost of capital.

Net Income Trend

The net income demonstrated a generally upward trajectory over the analyzed periods, beginning at 164,639 thousand US dollars in 2017. A significant rise is observed in 2018 and 2019, reaching 255,400 and 355,900 thousand US dollars respectively. The upward trend continues sharply in 2020, peaking at 570,600 thousand US dollars. There is a decline in 2021 to 349,400 thousand US dollars, followed by a substantial increase in 2022, culminating at 1,285,500 thousand US dollars. This pattern indicates volatility but overall strong growth, with the most notable surge occurring in the latest year observed.

Net Operating Profit After Taxes (NOPAT) Trend

NOPAT experienced substantial growth from 2017 through 2019, starting at 180,568 thousand US dollars and peaking at 695,844 thousand US dollars in 2019. However, a notable decrease occurred in 2020, dropping to 455,414 thousand US dollars. Subsequently, there is a modest recovery in 2021 to 488,868 thousand US dollars before a dramatic increase in 2022, reaching 1,620,172 thousand US dollars. The pattern highlights a peak in 2019, a decline amid challenging circumstances possibly in 2020, followed by remarkable recovery and growth in the most recent period.

Comparative Insights

Both net income and NOPAT demonstrate corresponding overall trends with initial growth, a dip around 2020, and a strong rebound by 2022. The magnitude of increase in 2022 is particularly pronounced for both metrics, suggesting enhanced operational efficiency and profitability. The divergence in the rates of increase across years reveals the company’s sensitivity to economic or operational factors but an overall ability to recover and expand profitability substantially.

Income Tax Provision (Benefit) Trend

The income tax provision displayed considerable volatility over the six-year period. A negative provision (benefit) was recorded in 2017 at -80,805 thousand USD, indicating a tax benefit rather than an expense. This shifted drastically to a positive tax provision of 481,900 thousand USD in 2018, suggesting a significant tax expense that year. A subsequent return to a tax benefit occurred in 2019 and 2020 with -151,400 and -420,200 thousand USD respectively. These years indicate substantial tax recoveries or credits. In 2021, the provision nearly neutralized with a small negative amount of -9,900 thousand USD, followed by an increase to a substantial tax expense of 197,000 thousand USD in 2022. Overall, the pattern reflects considerable fluctuations in taxable income, tax planning activities, or tax law impacts affecting the tax responsibility.

Cash Operating Taxes Trend

Cash operating taxes increased steadily during the period analyzed, showing a general upward trend. Beginning at 98,396 thousand USD in 2017, cash taxes paid more than quintupled by 2018 to 492,538 thousand USD, which may point to increased taxable profitability or changes in tax payment timing. However, 2019 shows a sharp drop to 17,593 thousand USD, representing a significant decrease in actual tax cash outflows. The subsequent years demonstrate recovery and growth in cash taxes paid, with amounts rising to 175,290 in 2020, then further to 205,150 in 2021, and reaching 244,410 thousand USD in 2022. This progressive increase suggests stronger cash tax payments, potentially aligned with growing earnings or changes in tax management strategies.

Comparative Insights Between Income Tax Provision and Cash Taxes

The divergence between income tax provision and cash operating taxes is notable. While provisions fluctuate between benefits and expenses, cash taxes exhibit a more consistent upward trend after 2019. The discrepancies likely reflect timing differences between accounting tax expenses and actual cash payments, deferred tax assets or liabilities, or adjustments related to tax credits or incentives. The years with tax benefits in provisions often correspond with lower cash taxes, highlighting the complexity of the tax position and cash flow impacts. The overall data suggests the company navigates fluctuating taxable income levels and tax obligations, influencing both reported tax expenses and actual cash tax payments distinctly over the period.

Total reported debt & leases

The reported debt and lease obligations exhibit a significant fluctuation over the analyzed periods. From March 2017 to March 2018, debt slightly increased from approximately 3.03 billion to 3.13 billion US dollars. This was followed by a sharp escalation in March 2019, where debt surged to nearly 10.45 billion, representing a more than threefold increase compared to the previous year. Subsequently, the total debt began a steady decline, reducing to approximately 9.62 billion in 2020, then to 9.07 billion in 2021, and further down to about 7.85 billion by March 2022. Overall, while there was a remarkable spike in debt in 2019, the trend after that showed a consistent effort toward debt reduction.

Stockholders’ equity

Stockholders’ equity showed a general upward trend with some modest fluctuations. Starting at around 3.27 billion in 2017, it remained relatively stable in 2018. In 2019, equity rose considerably to approximately 5.29 billion, continuing to increase slightly to about 5.59 billion in 2020. However, in 2021 equity decreased marginally to about 5.34 billion, before rising again to roughly 5.89 billion by 2022. This pattern suggests a broadly positive movement in equity with minor year-to-year variability.

Invested capital

Invested capital showed dynamic changes across the years analyzed. The figure decreased from approximately 6.09 billion in 2017 to around 5.15 billion in 2018. Then, a sharp increase occurred in 2019, where invested capital grew to nearly 14.72 billion, closely aligned with the spike seen in total debt and leases, possibly indicating increased borrowing or capital infusion. Following this peak, invested capital declined steadily over the next three years, dropping to about 13.73 billion in 2020, 12.64 billion in 2021, and further down to approximately 11.96 billion in 2022. This gradual reduction after the 2019 peak may reflect strategic asset sales, debt repayment, or operational adjustments.

The economic spread ratio exhibited considerable fluctuation over the observed period. Initially negative, the ratio demonstrated some improvement before declining again, ultimately showing a positive shift in the most recent year. This analysis details the observed trends in economic spread ratio, economic profit, and invested capital.

Economic Spread Ratio

The economic spread ratio began at -16.86% in 2017 and improved to -11.59% in 2018. It remained relatively stable at -11.71% in 2019, before worsening to -14.37% in 2020. A further decline to -16.13% was noted in 2021. However, a significant positive change occurred in 2022, with the ratio increasing to -6.99%. This indicates a narrowing of the gap between the cost of capital and the return generated from invested capital in the latest period.

Economic Profit

Economic profit consistently registered as negative throughout the period, indicating that the company’s returns were insufficient to cover its cost of capital. The magnitude of the economic loss varied, with the largest losses occurring in 2017 (-$1,026,385 thousand) and 2021 (-$2,039,802 thousand). A reduction in the economic loss was observed in 2022 (-$836,376 thousand), aligning with the improvement in the economic spread ratio.

Invested Capital

Invested capital increased substantially from 2017 to 2019, rising from $6,087,016 thousand to $14,715,398 thousand. Following 2019, invested capital decreased for three consecutive years, reaching $11,963,600 thousand in 2022. This decrease in invested capital may have contributed to the improved economic spread ratio in the final year, despite the continued negative economic profit.

The interplay between economic profit and invested capital is evident in the economic spread ratio. While economic profit remained negative across the entire period, the reduction in the magnitude of the loss, coupled with the decrease in invested capital, resulted in a more favorable economic spread ratio in 2022. Further investigation would be required to determine the sustainability of this trend.

The economic profit margin demonstrates a consistently negative trend over the observed period, indicating the company consistently generated economic losses. While fluctuations occur, the overall pattern reveals a concerning performance regarding value creation for investors.

Economic Profit Margin Trend

The economic profit margin began at -30.12% in 2017. A substantial improvement was noted in 2018, reaching -14.99%, suggesting a reduction in economic losses. However, this improvement was short-lived, as the margin deteriorated significantly in subsequent years, reaching -32.20% in 2019, -37.38% in 2020, and further declining to -37.51% in 2021. A notable positive shift occurred in 2022, with the margin improving to -12.05%, representing the highest value within the analyzed timeframe.

The fluctuations in economic profit margin correlate with changes in economic profit and adjusted net sales. The most substantial decline in the margin occurred between 2018 and 2020, coinciding with increases in economic losses. The improvement in 2022 is linked to a considerable reduction in the magnitude of the economic loss and a significant increase in adjusted net sales.

Relationship to Adjusted Net Sales

Adjusted net sales exhibited an increasing trend overall, rising from US$3,407,807 thousand in 2017 to US$6,938,500 thousand in 2022. Despite this revenue growth, the consistently negative economic profit suggests that the cost of capital consistently exceeded the returns generated from sales. The 2022 improvement in the economic profit margin is partially attributable to the substantial increase in adjusted net sales, but the underlying economic loss remained significant.

The persistent negative economic profit margin indicates that the company’s investments and operations have not been generating returns sufficient to cover the cost of capital. The 2022 results offer a potential turning point, but continued monitoring is crucial to determine if this improvement is sustainable and indicative of a fundamental shift in profitability.