Microchip Technology Inc. (NASDAQ:MCHP)

Net Operating Profit After Taxes (NOPAT)

The net operating profit after taxes displayed considerable variability over the reported periods. Starting from approximately $181 million in 2017, NOPAT increased significantly to around $429 million in 2018 and further peaked close to $696 million in 2019. A decline followed in 2020 and 2021, with values around $455 million and $489 million respectively. However, in 2022, there was a notable surge to approximately $1.62 billion, the highest level in the period under review.

Cost of Capital

The cost of capital remained relatively stable but showed a slight upward trend over the six years. It ranged from a low of about 14.15% in 2019 to a high of approximately 17.39% in 2022. The values fluctuated modestly but generally trended upwards, indicating an increasing expense associated with obtaining financing or required returns by investors.

Invested Capital

Invested capital exhibited significant changes over the years. Beginning at around $6.09 billion in 2017, it decreased to approximately $5.15 billion in 2018. However, it experienced a sharp expansion to about $14.72 billion in 2019. Afterward, a decreasing trend is observed, with capital reducing to roughly $13.73 billion in 2020, $12.64 billion in 2021, and $11.96 billion in 2022. This pattern indicates a peak in capital investment in 2019, followed by a steady reduction over the next three years.

Economic Profit

The economic profit remained negative throughout the period, reflecting that the company did not generate returns exceeding its cost of capital. Though the negative values improved from -$846 million in 2017 to -$444 million in 2018, economic profit deteriorated sharply to nearly -$1.39 billion in 2019. Subsequent years saw further declines, with the economic profit worsening to approximately -$1.62 billion in 2020 and -$1.66 billion in 2021. In 2022, a significant improvement occurred, reducing the negative figure to around -$460 million, suggesting partial recovery in value creation but still below the required cost of capital.

Overall Trends and Insights

The company's profitability as measured by NOPAT showed substantial growth with fluctuations, culminating in a strong increase in the final year. The cost of capital’s gradual rise may impose increasing pressure on profitability thresholds. Invested capital surged notably in 2019, then declined steadily, indicating possible divestment or more efficient capital usage. Despite the large NOPAT increases, persistent negative economic profit for most years implies that returns were not sufficient to cover the cost of capital until an improvement in 2022, which, while substantial, remained below breakeven. This pattern suggests challenges in achieving true economic value but hints at operational improvements or capital structure adjustments toward the end of the period.

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 financial data presents key indicators reflecting the company's economic performance and capital investment over six consecutive fiscal years. The analysis focuses on economic profit, invested capital, and economic spread ratio, providing insight into the firm's value creation and capital allocation efficiency.

Economic Profit

There is a notable fluctuation in economic profit across the years, with all figures remaining negative, indicating economic losses throughout the period. The loss magnitude decreases from a high of approximately -$846 million in 2017 to a smaller loss near -$444 million in 2018, suggesting some improvement. However, this is followed by a sharp decline again in 2019 and 2020, with losses reaching over -$1.6 billion. In 2021, the losses persist at a similar high level but significantly improve in 2022, reducing to about -$460 million, the smallest loss since 2017. This volatility points to challenges in generating returns above the cost of capital, with recent improvement indicating potential operational or financial restructuring effects.

Invested Capital

The invested capital shows a generally increasing trend from 2017 through 2019, escalating sharply from around $6.1 billion to approximately $14.7 billion. This suggests significant capital expenditures or acquisitions during this period. From 2019 onward, invested capital declines gradually to roughly $11.96 billion by 2022, possibly reflecting divestitures, asset sales, or depreciation exceeding new investments. The peak in 2019 followed by a steady decrease may indicate strategic shifts in capital allocation or optimization of asset base.

Economic Spread Ratio

The economic spread ratio remains negative throughout the examined years, signifying that the company's returns on invested capital are persistently below its cost of capital. It narrows from -13.9% in 2017 to -8.62% in 2018, indicating some improvement. However, the ratio worsens again in subsequent years, reaching -13.1% in 2021, which matches the earlier high loss periods. Notably, the ratio improves substantially in 2022 to -3.84%, corresponding with the reduction in economic losses and suggesting enhanced capital efficiency or better profitability margins during that year.

Overall, the data reflects a period of considerable financial strain, characterized by negative economic profit and spread, coupled with fluctuating levels of invested capital. The improvement in both economic profit and economic spread ratio in the most recent year may signal a turnaround or effective management actions to enhance value creation. Continued attention to capital utilization and cost of capital management appears critical for achieving positive economic profit in the future.

Adjusted Net Sales

Adjusted net sales demonstrated a consistent upward trend over the analyzed period. Starting at approximately 3.41 billion US dollars in 2017, sales increased significantly each year, reaching nearly 6.94 billion US dollars by 2022. This progression indicates steady revenue growth with a particularly notable increase between 2021 and 2022.

Economic Profit

Economic profit remained negative throughout the entire period, indicating that the company did not generate profits exceeding its cost of capital in the years examined. The negative economic profit showed considerable fluctuations, improving from -846 million US dollars in 2017 to -444 million in 2018, followed by a steep deterioration in 2019 and 2020 with values over -1.3 billion and -1.62 billion respectively. While economic profit improved somewhat in 2021 to -1.66 billion, a substantial recovery was observed in 2022, reaching a less negative figure of approximately -460 million US dollars. Despite the persistence of negative economic profit, the notable reduction in deficits towards the end of the period suggests improving profitability dynamics relative to invested capital.

Economic Profit Margin

The economic profit margin mirrored the trends in economic profit, remaining negative across all years and indicating an ongoing challenge in generating returns above the cost of capital. The margin improved from -24.83% in 2017 to -11.15% in 2018, suggesting enhanced efficiency or profitability. However, it then worsened significantly in 2019 and 2020, reaching levels around -25.9% and -30.8% respectively. From 2021 onward, the margin showed a gradual improvement, improving to approximately -30.45% in 2021 and notably improving to -6.63% in 2022. This trend reflects a positive shift in the company’s ability to create value, potentially linked to the substantial increase in net sales during the final year of the period.

Overall Insights

The financial data illustrate a company experiencing robust growth in sales with improving but still negative economic profit metrics. Despite ongoing challenges in generating positive economic profit, the marked improvement in 2022, both in absolute terms and relative margin, suggests an upward trajectory in operational performance and capital efficiency. Continued focus on sustaining sales growth while enhancing profitability will be critical to transitioning toward positive economic profit in future periods.